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September 18, 2018 | The 5 Steps

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Wars cost a boatload of money. So 101 years ago this week Ottawa dreamed up a way to finance WW1. “Let’s tax what people earn!” said the federal finance minister, a dude with a fetching mustache named Sir Thomas White. “Capital idea!” replied Prime Minister Robert Borden, a Tory from NS. And thus, income tax was born.

The rate ranged between 2% and 25% for households earning over $6,000 and was pegged at 4% for single men bringing in at least $2,000. Yes, it was always intended to be temporary. But as things turned out, the tax didn’t really get rolling until a few months before the war ended. And it was such a money machine! Just like the HST these days. So once the mechanism was in place, it would never be dismantled.

Today the top marginal rate is 53%, and the federal government still doesn’t collect enough to pay its bills. So it runs a deficit. That’s added to the debt, which this week sits at $659 billion (and grows by $49 million per day). So you can pretty much count on higher taxes going forward. After all, we have a pipeline to pay for.

“From time to time you mention some ways families can save tax,” says Jason, who earns $220,000 along with his wife and thinks he’s being raped by the system. “Can you give me just the top five things to do? This is insane.”

J got a promotion and recently started earning $165,000, while Peg makes $55,000 as a dental office admin. No kids. No pets. No pensions. A mortgage. A Jetta and, in their late thirties, way too little saved.

So, here are five concrete, immediate things you can do to whittle away at your tax bill while seriously starting to invest more of the household cash flow.

To start, imagine if you could invest money inside an RRSP, receive a big tax deduction, then somehow arrange to remove the money later without having to pay all the tax back? Well, you can do exactly that with a spousal plan. In any family where a big income disparity exists, this is Strategy No. 1.

In this case Jason can make the max RRSP contribution ($26,500) and put it into a spousal for Peg. He pays $12,353 less in income tax and after three years the funds become his spouse’s property. She can withdraw them at her marginal tax rate (29% as opposed to 44%). Or, if she’s not working, effectively tax-free. Bingo.

Now, consider setting up a joint non-registered investment account. Also called a ‘cash’ account, this is where you earn investment returns in the form of lowly-taxed capital gains and dividends. By making it joint (instead of Jason’s name) the returns can be split evenly between the two spouses – so half of the investment income is taxed in her hands. In that case Peg would get to keep 86% of the profit on assets that grew in value.

By the way, a joint NR account is a must for estate planning. If one of you is carried off by an antelope (happens) then the funds automatically become the property of the others spouse. No lawyers. No will. No probate. No tax.

Thirdly, Jason could loan Peg money for her to invest. The CRA has a “prescribed loan rate” which is a ridiculous 2%. So all she needs to do is pay him that amount of interest on an annual basis. All of the investment gains are hers – none is attributed back to him for tax purposes (even though that’s where the money came from) – and Peg can even deduct the 1% interest paid from her taxable income. Sweet.

Of course, these lovebirds should also be organizing their regular expenses to save tax. In many marriages people get it all wrong – having the main wage-earner invest and the other person buy the kibble. Nope. In this case J should pay all expenses and P should invest all of her after-tax income. That way the gains made on those investments will be taxed at a lower rate. How does that not make sense?

And, fifth, make sure your TFSAs are filled, and stay brimmed – and Jason can give Peg the money to do that. There will be no attribution back to him for the funds he hands over which she can then invest for taxless gains. They just need to ensure the TFSA is invested by her directly after she receives the gift, then make each other the “successor holder” on the accounts. More antelope protection.

Of course there are lots of other things this couple can do, but this is a great start. Besides we need some space left in this blog to diss realtors…

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Today (September 18th) is supposed to be The Beginning of The End for the Dark Times for real estate buyers, at least in the Big Smoke. After seven years of fighting the federal competition cops over keeping MLS data secret from consumers (and losing), Toronto realtors woke up to this statement on Monday:

Matthew Boswell, Interim Commissioner of Competition, issued the following statement today regarding the Toronto Real Estate Board’s (TREB) compliance with the Competition Tribunal’s June 2016 order addressing their anti-competitive conduct:

“Following the Supreme Court’s recent decision not to hear TREB’s appeal, the Bureau understands that TREB will implement the Competition Tribunal’s Order on September 18, 2018. The Order requires TREB to end its anti-competitive practices, thereby giving home buyers and sellers in Canada’s largest real estate market access to a greater range of innovative service options, delivered through greater competition among TREB’s members.

We will be closely watching to ensure that the letter and spirit of the Tribunal’s order is adhered to, so that consumers can finally benefit from the competition and innovation they have been waiting for.”

So, there you have it. In the hours and days to come, password-protected sites will be springing up all over, providing consumers with vital stats they could not see before. Days-on-market. Sold histories. Listing and re-listing dates. The whole nine yards.

Will it make a difference to the market? Maybe. Informed consumers are less likely to be lured into blind auctions, bully offers, bidding wars and other high-stress situations where arrogant rock star realtors and greedy vendors intimidate buyers and squeeze prices higher. At least, that’s the hope. Finally. But I’m watching.

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September 18th, 2018

Posted In: The Greater Fool

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