Tis’ the season for resolutions! Earlier this week, I overhead two young women contemplate taking the stairs to make up for all of the sugar they had indulged in over the holidays:
“Let’s take the stairs, I ate way too much this holiday”
“Ohh emm gee, you didn’t eat as much as I did! I’m going to the gym everyday this year”
On the contrary, a friend of mine mentioned yesterday that he loves looking forward to the “Christmas Binge” every year and it got me thinking about how it’s expected that we will eat and drink too much over the holidays with the anticipation of new year resolutions around the corner. Just one more butter tart and I’ll work it off in January…
Funny how every year, the most common resolutions tend be something along the lines of being healthier (aka losing weight), quitting something and being more disciplined with money. While I can’t necessarily help you with the first two, I can certainly steer you towards making smarter financial decisions. Here are 10 things you can do to simplify your finances, reduce your taxes and protect your family’s financial security in 2014.
1. Simplify Your Financial Life
Some people, over time, open many accounts at several different financial institutions (FI) – consider the benefits of consolidating your accounts at a single FI to reduce multiple monthly statements, reduce meetings & avoid duplication of fees & investment holdings.
View your accounts online, transfer funds & pay bills from the convenience of your computer.
Pre-authorize Bill Payments and Electronic Fund Transfers
Save time and shorten your to-do list by setting up automatic bill payments online.
Pay Yourself First
One of the best financial tips of all is to save through a Pre-Authorized Contribution (PAC) plan. You can set up a PAC plan for RRSP, TFSA, RESP & stock savings plan contributions – it’s as if you could lose two pounds every month by having someone else go to the gym for you.
Switch to eStatements
Many financial institutions, utilities, and phone & cable companies offer this feature to reduce your paperwork & help the environment.
Keep a Binder with All Your Financial Documents
This could include things like financial statements, tax slips, Family Snapshot® outputs, retirement projection, Will, Power of Attorney and so on. Keep it in a safe place like a fireproof lockbox.
2. Save Taxes with Family Income-Splitting Strategies
With Canada’s graduated tax rates, the more you earn, the higher your tax rate. If you’re a high-income earner, you may be able to reduce your family’s overall taxes by transferring some of your income to lower-income family members, who are taxed at a lower rate.
Here are some key income splitting strategies:
Prescribed Rate Loan Strategy
With this strategy, you loan money to a low-income family member, who uses the money to invest. So long as the family member pays you annual interest, the investment income is taxable to them, not you, at their lower rate. With the CRA prescribed rate on such loans at a generational low of 1% from January 1 to March 31, 2014, now is an excellent time to consider this strategy.
Tax-Free Savings Account (TFSA )
You can essentially transfer income that otherwise may have been taxable at your high rate by gifting money to family members aged 18+ to contribute to their TFSAs. All the investment income earned in your family’s TFSAs grows tax-free. It is not taxed back to you, even though you provided funds for their contributions.
You can gift money to children under the age of 18 tax-efficiently through a properly structured family trust. The capital gains income earned on assets held in a family trust is taxable to your children or grandchildren at their lower tax rate, when used for their benefit. If you loan money to the family trust at the CRA’s prescribed rate, each child can potentially earn up to $10,000 interest income, $20,000 capital gains or $30,000+ of Canadian eligible dividend income tax-free annually from the trust (varies by province).
By adding lower-income adult family members (excluding spouses) as shareholders of your business (directly or through a family trust), you can pay them dividends that are taxable at their lower rates. In addition, your family members could potentially each use the $750,000 capital gains exemption should you sell the business.
3. Reduce Risk and Taxes by Reviewing the Asset Mix in Your Investment Portfolio
How you allocate your portfolio assets among the different asset classes (stocks, bonds and cash) is a key factor in determining your after-tax investment returns and level of risk. Everyone has an ideal asset mix based on factors such as return objectives, income needs and risk tolerance. Make sure you review your asset mix with us regularly to address changing market conditions and whenever there’s a significant change in your personal situation.
For more tips on tax-efficient investing, click here for the full report.
4. Use Credit Wisely
Firstly, if you already have debt, consider whether the interest is tax-deductible. If it is not, then speak to your banker or financial planner as there may be a way you can restructure your loan and your assets to reduce your interest costs or make the interest tax-deductible.
5. Protect Your Family’s Financial Future with Adequate Insurance
We’ve all heard the horror stories about people who didn’t have adequate insurance when tragedy struck. But we still tend to procrastinate when it comes to insurance. We also tend to think we’re better covered than we actually are.
Resolve this year to make sure you are adequately covered to protect yourself and family by booking a complimentary insurance assessment – the outcome will either be the identification of a gap, a strategic opportunity or confirmation that you’re covered – all of which are more than worth your time.
To read more about the various types of insurance your assessment should include and why (life insurance, living benefits & business insurance) click to here to read the full report.
6. Ensure Your Wishes are Followed with an Up-To-Date Will and Power of Attorney (POA )
A recent study by the Canadian Federation of Independent Business (CFIB) revealed that 46% of Canadians do not have a Will. Even among those that do, many have out-of-date Wills that do not reflect their current wishes or family situation. What’s more, many have “simple” Wills that can result in higher taxes and family disharmony.
Also, don’t forget the importance of having a Power of Attorney (POA, or Mandate in Quebec) for both medical and financial affairs. There is a higher probability of becoming disabled than dying before age 65, so having a POA is critical.
For more tips regarding your Will, Executor & POA, click here to download the full report.
7. Ensure Your Wishes Are Followed with Appropriate Account Structures and Beneficiary Designations
List every one of your accounts including any accounts through your employer (employer pension, stock savings plan, etc.) and ask yourself these two key questions: “How is this account legally owned?” and “Who is the beneficiary?”
Read the entire report to explore various considerations regarding the legal ownership of your accounts and who your beneficiaries are by clicking here.
8. Help Important Charitable Causes Achieve Better Financial Health
A great way to take your charitable giving to the next level and get your entire family involved in philanthropy is to create a charitable foundation. The days when only the ultra-wealthy were able to set up charitable foundations are gone. You can start your own family charitable foundation for as little as $25,000, which, after the tax credits, will actually only cost you about $14,000 (varies by province). You can name your own foundation, for example, after your family surname or a friend or family member who has passed away.
Speak to us if you want more information on how to set up your own foundation or donate your money more tax effectively (for instance, with stock or insurance instead of cash).
9. Get a Family Snapshot® or Financial Plan Prepared
It’s the million-dollar question: “Will I have enough to retire comfortably?”
You may already have significant savings through an RRSP and/or a company pension plan, and seem on track to your retirement goals but with today’s longer lifespans, inflation, taxes, health-care costs and lifestyle expectations, you may need more than you think. If you’re a business owner, you may have other considerations like converting the equity in your business into a satisfying retirement income.
A Family Snapshot® summarizes your financial life on one sheet of paper, making it simple for you to understand where you stand now and, with annual updates, how you are progressing from year to year. It provides a quick retirement and insurance projection, as well as a Wealth Management Opportunities Report of some of the top tax, estate and retirement planning strategies specifically applicable to your family.
Read more about the Family Snapshot® here.
10. Get Educated about Special Strategies for High-Net- Worth Families that You May Not Know About
If you have investable assets of at least $1 million, request your complimentary copy of the publication titled Family Wealth Management — Ten Strategies to Build and Protect Your Family’s Wealth. This guide highlights strategies for families who face unique financial challenges due to having more financial resources than the average Canadian family.
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Dian and her team can help you make – and keep – your 2014 financial resolutions. Get started today by contacting Dian directly at 416.842.4234 or firstname.lastname@example.org. Learn more at www.dianchaaban.com
This article is supplied by Dian Chaaban, an Investment Advisor with RBC Dominion Securities Inc. Member CIPF.
This article is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. Interest rates, market conditions, special offers, tax rulings and other investment factors are subject to change. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. Insurance products are offered through RBC Wealth Management Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. When providing life insurance products in all provinces except Quebec, Investment Advisors are acting as Insurance Representatives of RBC Wealth Management Financial Services Inc. In Quebec, Investment Advisors are acting as Financial Security Advisors of RBC Wealth Management Financial Services Inc. RBC Wealth Management Financial Services Inc. is licensed as a financial services firm in the province of Quebec. ®Registered trademarks of Royal Bank of Canada. Used under licence. ©2013 Royal Bank of Canada. All rights reserved.® The Family Snapshot is a registered trademark of Royal Bank of Canada.