April 2012
The winds of change are upon us....





While the pleasant skies and signs of spring are a common sight for us now, the winds remind us to prepare as we head out.  Looking out the window, you can be tempted to be the first one out in your summer shorts, only to be brought back in when the cool air swirls around you. There are many investment vehicles, accounts and services that look to be of benefit to you.  Once we review and assess your tolerances and priorities and weigh in your needs, we can determine which would be best.  It is best to be prepared in that foray.


When it rains, you need that raincoat.  For that bright sunlight, you need that sunscreen.  For all your investments decisions, we need to meet.


Be well and thank you for letting us be of service,


Peter, Richard, Claudio and Joanna

A Penny Saved is a Penny Earned


"Find a penny, pick it up and if you do it, it will bring good luck."


As of 2013, a penny will bring more than good luck, it will bring a collector's item as well - that's because the 2012 federal budget calls to eliminate the production of this venerable coin. First introduced in 1858 the penny costs the government approximately 1.5 cents to print however, its elimination may result in further price hikes as retailers round their prices up to the nearest nickel. The final penny is set to roll off the production line in the fall of 2012.


This coupled with the decision to raise the age that Canadians can claim Old Age Security (OAS) from age 65 to age 67 means that personal savings will have to increase in order to keep up with these changes.


While Canadians are heeding their federal government's advice and saving more than in the past, our personal savings rate is still a far cry from the 20% level of the early 1980's. In fact we are saving a lot less than the 10% rule when it comes to retirement savings. That well-worn advice to save a tenth of income to build up a reserve for retirement has been blatantly disregarded since the mid 1990's, when our savings rate began its plummet.


The resulting gap between what people should squirrel away for their golden years and what is being saved has left both financial experts and governments in a state of constant uneasiness and apprehension.


Despite this concern, the federal budget of 2012 does not strive to put more savings in the hands of Canadians; instead its focus is to put more savings in the hands of the federal government by reducing government spending.


To do this, the budget proposes the elimination of approximately 19,200 federal government jobs as well as the deferral of $3.5 billion in national defense funding over the next seven years. However, perhaps the most impactful budget measure is the increase in the age that Canadians can receive OAS from age 65 to age 67. Although this measure was not unexpected, its implementation will have a significant impact on the retirement plans of those born after 1958. Even Canadians born before 1958 will be affected as they will now have the option to defer receipt of OAS for up to five years in return for a larger annual pension payment.


The budget's aim is certainly expense control, driven largely by the recent experience of many European countries that continue to struggle with staggering debt levels. While these countries have implemented their own austerity measures, by and large they have been implemented too late. The budget's intent is to implement austerity measures now, before Canada's debt load reaches European levels.  Despite this intent, the budget does provide Canadians with spending flexibility as it calls for an increase to the traveler's exemption to $200 from $50 for Canadians who are out of the country for 24 hours. The budget also proposes to increase the exemption for travelers who are out of the country for 48 hours or more to $800.


Over the past few years the federal government has implemented many measures aimed at helping Canadians save more and borrow smarter. These actions range from the creation of new savings accounts such as the Tax Free Savings Account and Registered Disability Savings Plans to the lowering of mortgage amortization periods to 30 years from 35 years for government-backed insured mortgages with loan-to-value ratios of more than 80%.


The intent of these measures is clear, Canadians must improve their personal balance sheets in order to attain their goals and improve their fortunes, the release of the 2012 federal budget is a clear indication that the federal government intends to put into practice that which they have been preaching.

The 10-year mortgage: Is it the right time to go long?

by Roma Luciw - Globe and Mail March 2012


When our mortgage came up for renewal about a year ago, my husband and I did what many couples do and debated whether to go variable or fixed. What we never seriously considered was locking in to a fixed rate for a decade - that option wasn't even on the table.


What a difference a year makes.


A surge of interest in the 10-year mortgage has dramatically altered the home-owner mortgage debate, which has traditionally been a choice between two five-year products - the fixed and variable, says mortgage broker Vince Gaetano of MonsterMortgage.ca. "The reality is that consumers are now smarter and have more foresight. There is considerable understanding that we are at the bottom of the rate cycle."


He says inquiries about the 10-year fixed mortgage rate picked up in January, when it first dipped below 4 per cent.


Now, he is seeing a "record" amount of interest in this product. "Nearly 60 per cent of our clients are currently choosing it, compared with around 5 per cent in previous years," Mr. Gaetano says.


Although interest rates are expected to remain at their current low for the next several months, the Bank of Canada has indicated that a hike is on the horizon. And with Canadian households saddled with record debt, Bank of Canada Governor Mark Carney has repeatedly expressed concern about how people will be able to make their payments once borrowing costs rise.


The 10-year mortgage is "of considerable interest to people who are carrying a high debt load," Mr. Gaetano says. The certainty of knowing that that their mortgage rate is secure for the next 10 years is most appealing to them, he added. In his 22 years in the mortgage business, he has never seen the 10-year mortgage rate below 4.5 per cent. "This is a tremendous opportunity."


Robert McLister, the editor of the Canadian Mortgage Trends blog, says the spread between five and 10-year mortgage rates is as tight as he can recall. "The premium you are paying to know what your rate is going to be for 10 years is exceptionally reasonable on a historical basis."


As of late last week, people with good credit could secure a 10-year fixed mortgage for roughly 3.85 per cent to 3.89 per cent. But there are indications that at least some lenders are feeling the squeeze of the ulta-low rates and could soon pull back.


Mr. Gaetano has in the past been a vocal supporter of the variable-rate mortgage. Not any more. "The reality is that that train has left the station. It is a dinosaur. Unless we see discounted variables like what we used to see at prime minus 80 [8/10ths of a per cent], there is no good reason to consider the variable."


He believes home owners considering a four- or five-year fixed mortgage should be careful about setting themselves up for renewing at higher rates in 2016 and 2017, when he expects mortgage rates will be 60 to 70 per cent higher. "I think people are fully aware that their income is not going to be rising by that much," he says.


Mr. Gaetano is concerned that people are not sufficiently prepared for what a rise in interest rates will mean to their mortgage payments. "With rates this low, any increment will be a dramatic increase from what they are paying today and it will be a shock."


York University finance professor Moshe Milevsky says the longer the amortization of your mortgage and the time period over which you plan to make mortgage payments, the more attractive the 10-year rate looks when compared to the 5-year fixed.


His advice? "If you want to go with the 10-year, try your best to scrimp and save to shorten the amortization period."

Deduct and Save  


The deadly combination of lower interest rates, a higher cost of living, the erosion of government and privately funded pensions coupled with longer life-spans has caused many of us to take a harder look at ways to make our money work harder.


One avenue that is available to all Canadians is tax planning. And while the tax filing deadline for the 2011 tax year is fast approaching, it is never too late to start a tax plan. Tax planning after all is about flexibility and taking control of your cash flow and expenses in order to realize tax savings.


There are three basic ways to reduce your taxes, with each method possibly having several variations. You can reduce your income, increase your deductions, and take advantage of tax credits. Let's take a look at each.


Reduce your income

Canada has a graduated tax system; meaning that the more you make the larger percentage the government requires you to pay tax on. For instance the 2012 federal tax brackets begin at 15% for the first $42,707 of income and increases to 29% once income is over $132,406. Determining the tax bracket that you fall into is the first step in tax planning, the second step is determining the tax bracket of your spouse or partner (if applicable).


Once these rates have been determined decisions such as investment ownership, the optimal account type to hold interest, dividend, or capital gains paying investments and the amount of income to be split between spouses can be made.  


Increase tax deductions

Perhaps the best understood tax deduction is also amongst the least utilized. Unlike other account types such as the Tax Free Savings Account (TFSA) and Registered Education Savings Plan (RESP) the Registered Retirement Savings Plan (RSP) offers savers a tax deduction for the value of the contribution made into it. Yet despite this immediate tax saving the vast majority of Canadians either do not contribute to their RSP or do not contribute enough.


Other deductions that parents may take advantage of are child-care expenses which are deductible provided the expense is eligible and the child is under the age of 16.  For children six and under, $7,000 per child per year is the maximum a parent can claim, while the claim for kids aged seven to 16 is $4,000 total.


Tax Credits

While tax deductions reduce income tax, tax credits reduce income tax payable. On this front the disability tax credit is often the most under used. To qualify, a T2201 form must be filled out by a "qualified practitioner" such as a family doctor, physiotherapist or psychologist.


Once approved by CRA the disability tax credit, can be applied retroactively to when the condition first occurred, and can impact a parent's child tax benefit by up to $2,575 a year in addition to the tax savings associated with the credit.

On the federal front, the children's art credit as well as a children's fitness credit, introduced in 2007, are "non-refundable credits" worth 15% of the cost of programs, to a maximum of $500 per child. On top of that, certain provinces, including Ontario, Manitoba and Saskatchewan, offer their own credits for fitness and arts programs.


Many tax credits can also be transferred between spouses, family members or even combined. Examples are credits for students such as the tuition, education and textbook credits can be transferred to a spouse, a parent, or even a grandparent once the credits are used to reduce the student's tax payable to zero. These credits can also be carried forward so the student can use them later when he or she starts earning money.


The filing and collecting of tax information has become a rite of passage into adulthood for many Canadians. However, many undertake this adventure without the proper plan in place. The Canadian tax system while complex can also be navigated successfully resulting in significant savings to those who have structured their expenses and savings with tax in mind.

Issue: 16
Financial Markets
In This Issue
A Penny Saved is a Penny Earned
The 10-year mortgage: Is it the right time to go long?
Deduct and Save
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Peter Bailey
Worldsource Financial Management
272 Lawrence Avenue West, Suite 203
Toronto, Ontario M5M 4M1