The Numbers Game

Bailout, Recession, Depression.....Oh My!

2008-10-07T08:47:00.000-07:00

So now it's done...finally. The $700 billion bailout package in the USA is done. It went from a three page document to over 100 pages but at least it's in place. Will it work? The jury is still out on that. As I have written in previous articles, it will take some time to see if it was enough. Hopefully, it will start to put some confidence back into the credit market. In case you haven't followed the details, this package has a few interesting wrinkles.

First, the package comes in three stages. The first releases $250 billion to purchase debt securities that have no market. It covers mortgages, credit card debt and auto loan, to mention a few items. The second stage is a second $100 billion that can be authorized by the President. The third stage of $350 billion must be authorized by congress.

Secondly, any financial institution using these funds must issue stock warrants to the government. Warrants are a financial item that allows an investor to purchase shares at a fixed price in a future period. The idea is that if the financial institution makes money by shedding their bad loans, the US government will be able to make some money on their shares.

A third provision raises the FDIC deposit guarantee from $100,000 to $250,000 as a temporary measure until December 31, 2009. This is designed to assure depositors that their fund are guaranteed to help forestall a run on a bank.

There are many, many more items in this bill but these three items are the meat of it, in my opinion. Is this enough to stop the slide? By itself, no. But that is not all that is happening. Around the world, national banks are moving in to make sure that there is enough money to stop banks from failing. The US has also announced a measure that will help businesses acquire short term loans to cover their operating costs, when they are having a problem getting the funds from their banks. I am sure that there will be more to come to stay tuned to this.

Are We Going Into Recession?

Probably. At least, we are having a big economic slowdown. Until confidence is restored, the domino will continue to fall. But over the years, national economies have learned much from previous tough economic time and we may weather this one better than others. Recessions are a fact of the economy. We've had them before and we will have them again. Governments can only do so much. No nation is big enough to rule world commerce. So until the lemmings stop jumping off of the cliff, we are going to have problems. As I have said before, it's all about confidence.

Are We Going To Have A Depression?

I doubt it. That being said, there are a lot of things conspiring together to raise concern. The subprime mortgage crisis, the rising cost of oil and the world food shortage are merging together and could create the perfect storm. Let's hope that we can head this one off at the pass.

So Now What?

Now, we wait. For the small investor, I would suggest that you look at your portfolio, dump the dogs, hold the quality stocks and keep an eye out for bargains. There are a lot of undervalued stocks of quality out there right now. Keep your eyes open.

If you are just trying to keep your head above water, try keeping your debt load low. Right now, interest rates are low but a little bird told me that they may be going up again. The last thing you need in a tough economy is larger debt payments.

If you are a homeowner, don't sell unless you have to. The inventory of unsold real estate is driving prices down and probably will for the foreseeable future. If you have a low rate mortgage, if could be time to lock in.

And as I have mentioned before, become a valuable person at your place of work. If downsizing happens, you want to be one of the people left standing. Try doing a bit extra at your job and perhaps show your boss that you have skills in other areas as well as being very good at what you do. If you are a small business person, start a campaign to keep in touch with your existing customers as well as attracting new ones. It is far cheaper to keep an existing customer than find a new one. Keep close touch with your financial statements and watch for unusual increases in costs or drop in revenue. Finding problems fast will allow you the time to fix the problem before it overwhelms you.

For My Canadians Clients and Friends

No matter what you hear during the current election campaign, Canada is not having the same problems as the USA. We don't have a subprime mortgage crisis, our housing market is not in free fall and the Canadian banking system is strong and sound. Beware of politicians doing their Chicken Little impersonation, screaming the sky is falling and yelling "FIRE!!" in a crowded theatre. This is not the time to panic. Yes, we have a problem. Yes, we need to be vigilant. But please, don't let the economic problems become a self-fulfilling prophecy. Canada is a small nation in a big world and we can't change the habits or actions of other countries. Our fundamentals are sound and we are in better shape to take a hit then most. Shoveling money off the back of the truck is not the way to solve this problem.

Credit Crunch: It's Not Just For Breakfast Anymore!

2008-10-01T08:22:00.000-07:00

In my last article, I discussed the subprime mortgage problem and how we got into this global credit mess. And now that we are actually here, let's examine what governments are trying to do about it, whether it will work and what might happen if it doesn't. I know, this is all very depressing but knowledge is power so you should know what is happening.

A Crisis of Confidence

First, credit is all about confidence. People and businesses loan money if they believe that they are going to get paid back. You must have confidence that the borrower has the ability to repay the loan. And here lies the root of the problem. The banks have been badly burned with their mortgage loans. They are owed large amounts of money. They also own large amounts of assets that are decreasing in value very quickly...ie. houses they can't sell. Banks have not only stopped or reduced lending to businesses and individuals, they have also stopped lending to each other.

Traditionally, when a bank has their cash tied up in loans, they have more value in their assets than in the loan. Also, they are usually getting cash by way of their mortgage payments. When a bank is short of cash to loan out or meet their current obligations, they will borrow the money from a bank than has cash available. Investment banks on Wall Street, such as Lehman Brothers, Bear Sterns, etc., often fill this roll, either loaning the money to the bank, buying the assets from the bank or even buying the loans. Right now, this is not happening. At least, not happening as much as is needed to keep the system functioning smoothly. The system has lost confidence due to the large amount of bad mortgage loans.

Even banks that are in good shape are afraid to loan out their money. They have lost confidence in the ability of the borrower to pay them back. The system is structured that when this happens, a chain reaction follows:

A business can not get a loan
The business can't pay their suppliers or employees
To reduce costs, employees are laid off.
The supplier doesn't get paid so they can't pay their employees.
People without jobs can't buy goods and services.
Businesses don't sell good and services, so they go out of business.
More people are without jobs and can't pay their bills.
Businesses that have failed and people without jobs don't pay taxes.
Public service employees are laid off. Government projects are put on hold.
More people lose jobs and more businesses fail.

Recession, Depression and The Bailout

This is how an economy get into recession and eventually, depression. Governments right now are desperately try to stop this before the dominoes start to fall. In Europe, governments have been nationalizing banks and financial institutions, trying to stop failing institutions from causing a ripple effect. The USA has done the same thing with Freddie Mac and Fanny Mae, that nation's two largest guarantors of mortgages. And then there the big $700 billion bail out in front of the US Congress right now. The idea is that these funds will be used to "buy up" the bad debt so that banks will again start lending money to each other.

At this writing, the first congressional vote on this package had failed. The main reason for this is political. Members of congress have been getting an earful from the voters. There is a theory out there that many congressmen believed that they had to vote against the package so that their constituents would see what would happen. What happened was the stock market had one on its biggest one day falls in history. I, for one, believe that some kind of package will go through, probably this week.

Naturally, the question is, will it work? That will remain to be seen. The other question would be, is it enough? Probably not, but it might be enough to put confidence back into the system and oil up the credit system gears. Let's all hope so because this is as much about Main Street as Wall Street. Who caused it and why it happened are questions for a later date. When the house is on fire, you put the fire out before you try to find out why it happened.

In his work, "A Life of Reason", George Santayana wrote, "Those who cannot learn from history are doomed to repeat it". This is what appears to be at work here. At the beginning of the Great Depression of the 1930's, the stock market crashed in 1929, ruining the fortunes and lives of many individuals and businesses. One of the main reasons attributed to this was that too many people were into the market on margin, or credit. Many assumed that the market would keep rising forever. They would buy stock on credit and after it went up, they would sell their stock, pay off the broker and pocket the profit. Due to problems in the economy of those days, the market began to go down and people panicked, selling off their shares to pay the debt. That caused the market to fall even faster and the prices crashed. Replace the words, "stock market", with "real estate market", and your can see the similarities.

So Now What?

For the time being, there is not much to do but watch, and watch carefully. Sudden moves right now, before the current scenario has played out, could be disastrous for the small investor. One provision of the US bailout package appears to be an increase in the FDIC limit from $100,000 to $250,000. This means that bank deposits are guaranteed by the US federal government to $250,000. Hopefully, this may cool the idea of everyone pulling their money out of their bank. That would make the problem even greater. So for now, here are three things I would suggest:

Keep your self as liquid as possible. Right now, cash is king. But if you own stock in major corporations and they have sunk like a rock, don't sell out too quickly.
Don't move. If you can, stay in your happy home. This is not a great time to sell.
Stay out of real estate for now. I doubt that prices have bottomed out. However, if you can afford it, there are bargains to be had. But don't do it with big debt.
Be indispensable at work. Try and be the last person standing if your company is downsizing. Try and have more than one skill that your company can use.

One final note. We will be writing more articles on this and other financial subjects in the near future and if you like what you read, I would suggest that you subscribe to this blog. You can do this two way. If you are into RSS and have a reader, look on the right side of the page to subscribe. If you prefer, you can subscribe by email. Just put your email address in the box shown on the right side of the page and click on "Subscribe me!". Be assured that your email will remain confidential and not available to anyone else.

Subprime Mortgages and The Economy:...YIKES!!!

2008-09-19T10:06:00.000-07:00

Since I started to write this post, a lot has happened with the US financial crisis and it's still playing out.

Lately, we've had a lot of questions about understanding what the heck is going on with the US economy and the subprime mortgage crisis. It's a complicated mess but i will try and give you a quick look at what happened and what is going on here. The whole thing is a tale of greed and stupidity.

Many of the problems are things fairly unique to the United States. Most Canadian mortgages are insured by CMHC. If we do have a problem, it would be people drawing down on their home equity. But that's not quite the same problem so what I will address here is the situation in the USA.

THE SUB PRIME MORTGAGE

Basically, what happened was that people who had no business getting a mortgage, got one. It is called a subprime mortgage. You could qualify if you had a pulse. Now this is all fine and dandy as long as the value of housing keep going up and people keep making money. But it didn't. Several things conspired at once to knock the pins from under this house of cards. First, many of these mortgages were based on interest only payments for the first year or so. As such, the new home owner could only build equity if the price of the house went up. None of their payments went into the principal. And even if it did, the amount of principal being paid in the first years of a mortgage is minimal at best. Secondly, interest rates started to go up. Not a lot, but enough to make the mortgage payment rise. And finally, there was the price of oil. As soon as oil stated to go up, so did the price of everything else. This meant less money available for housing. I suppose that we should add on to that the other things that many of these first time home owners didn't consider such as property tax, maintenance, utilities,etc, etc.

When it came time for the mortgage to be renewed, the mortgage payment was going to go up, and Mrs. and Mrs. Home Owner found that they just didn't have enough left over to make the new amount. First, they tried to sell their house but found out that a lot of other people were trying to sell too. As is the case with everything else, when there is more supply than demand, the price goes down. Suddenly, Mr. and Mrs. Home Owner have a $350,000 mortgage on a $275,000 house. If they sell, they lose $75,000. They don't have $75,000 so they just walk away and give the house back to the bank or mortgage company.

THE BANKS AND MORTGAGE COMPANIES

So now the banks and mortgage companies have a lot of unpaid mortgage loans and a big inventory of houses that no one wants to buy. Here are a few examples. In Cleveland, Ohio, there is a subdivision that as of two months ago, was 80% vacant. In Las Vegas, housing prices have dropped by 44% and they haven't reached the bottom yet. Very few places in the USA have not been touched by this crisis.

How did this happen? Well, there are several villains here and enough blame to go around. So here we go.

The Builders

It seems that everyone thought that the housing boom would go on forever. Housing prices kept going up so the builders kept building. Then, sales started to have a slight slow down in some markets. In some cases, builders actually set up their own mortgage companies. Where did they get the money to do that? Well, they sold their paper to the investment banks. Investment banks also loan money to other banks on the basis of their securities, such as mortgages. These baking names may ring a bell...Bear Sterns...Lehman Brothers..Citi Bank. Other mortgage companies got into the game like Countrywide. Things were going crazy. People who should never qualify for a mortgage were getting loans of 125% of the property's equity.

The Banks and Mortgage Companies, Especially Wall Street

Greed makes people make funny decisions. Once again, supposedly intelligent people ignored history. And this time, it was a world wide banking problem. Banks in many countries couldn't wait to get in on the gravy train and lap up some excess profits. But as the new home owners began to default, the mortgages were higher than the value of the housing assets that backed the debt. Several months ago, the news was all about the banks taking big write down on their bad mortgage debt. That means that they parked some of their money to cover their exposure to bad loans. Here's a list of some:

Company	Business Type	Loss (Billion USD)
UBS AG	bank	$37.7 bln ^[1] ^[2]^[3]
Citigroup	bank	$39.1 bln ^[4] ^[5] ^[6]^[7]
Merrill Lynch	investment bank	$29.1 bln ^[8] ^[9]^[10]
Morgan Stanley	investment bank	$11.5 bln ^[11] ^[12]^[13]
Crédit Agricolea>	bank	$4.8 bln ^[14]
HSBCa>	bank	$20.4 bln ^{[15]^[16]^[17]}
Bank of America	bank	$7.95 bln ^{[18]^[19]^[20]}
CIBCa>	bank	$3.2 bln ^[21]
Deutsche Bank	bank	$7.7 bln ^{[22] ^[23]^[24]^[25]^[26]}
Mizuho Financial Group	bank	$5.5 bln ^[27]
Barclays Capital	investment bank	$3.1 bln ^[28]
Bear Stearnsa>	investment bank	$2.6 bln ^{[29] ^[30]}
Royal Bank of Scotland	bank	$15.2 bln ^{[31]^[32]^[33]^[34]^[35]}
Washington Mutual	savings and loan	$2.4 bln ^{[36] ^[37]}
Swiss Re	re-insurance	$2.04 bln ^{[38]^[39]}
Lehman Brothers	investment bank	$3.93 bln ^[40]^[41]
LBBW	bank	$1.1 bln ^[42]
JP Morgan Chase	bank	$5.5 bln ^[43] ^[12]^[44]
Goldman Sachs	investment bank	$1.5 bln ^[45] ^[11]
Freddie Mac	mortgage GSE	$4.3 bln ^[46]
Credit Suisse	bank	$9.0 bln ^[47]^[48]
Wells Fargo	bank	$2.9 bln ^[49]^[50]
Wachovia	bank	$11.1 bln ^[51]^[52]^[53]^[54]
RBC	bank	$1.2 bln ^[55] ^[56]^[57]
Fannie Mae	mortgage GSE	$0.896 bln ^[58]
MBIA	bond insurance	$3.3 bln ^[59]
Hypo Real Estate	bank	$0.580 bln ^[60]
Ambac Financial Group	bond insurance	$3.5 bln ^[61] ^[62] ^[63]
Commerzbank	bank	$1.1 bln ^[64]
Société Générale	bank	$3.0 bln ^[65] ^[66]
BNP Paribas	bank	$0.870 bln ^[67] ^[68]
WestLB	bank	$2.74 bln ^[69]^[70]
American International Group	insurance	$11.1 bln ^[71]^[72]
BayernLB	bank	$6.7 bln ^[73]
Natixis	bank	$1.75 bln ^[74]
Countrywide	mortgage bank	$4.0 bln ^[75]^[76]
DZ Bank	bank	$2.1 bln ^[77]
Fortis	bank	$2.3 bln ^[78]
ICICI Bank	bank	$0.264 bln ^[79]
IKB Deutsche Industriebank	bank	$3.45 bln ^[80]
Aozora Bank	bank	$0.397 bln ^[81]
Dresdner Bank	bank	$3.49 bln^[82]^[83]
HBOS	bank	$7.06 bln ^[84]^[85]^[86]
Lloyds TSB	bank	$1.32 bln ^[87]
Bank of China	bank	$2.0 bln ^[26]
ICBC	bank	$0.448 bln ^[88]

That's a lot of money folks and now the weight of it all had trickled down to the entire US banking system.

The New Home Buyer

Yes, Mr. and Mrs. America...you're to blame too. The entire culture of "I want it now" has played into this problem. No down payment, big loans, not thinking about other expenses..these have all sucked you in and ultimately, your should have known better. Sorry, but the big, bad world doesn't owe you a thing and the buck always stops with you. Sure, you had help. Sure, you were sold a phony bill of good. But at the end of it all, you are the ones that got sold on this pipe dream and you should know better. Because you didn't, you are paying the price.

THE WEIGHT OF IT ALL

Now, you may be wondering how all of this plays into the banking crisis happening right now in the States. It goes like this. The US banking system is quite unlike the Canadian system. All over the US are many small banks, some with only a few branches and localized to their own communities. There are also near-banks called Savings and Loans, or Thrift banks. Banks borrow money from other banks on their debt to pay for their day to day operations, etc. Inter-bank credit is the basis of all banking. It is not unusual for a bank to have loaned out ten times their deposit base, selling their loans or borrowing against them from other banks to finance their debt. Unfortunately, the value of the assets that is backing the debt has shrunk, as we noted earlier. Housing that is backing mortgage debt has fallen drastically in price so the value of the assets is less than the debt. This creates a liquidity problem. Banks need cash for their depositors, investment certificates etc when they come due. And right now, banks are afraid to loan money to other banks because of the mortgage debt on their books. Now, banks don't have the money to loan to their business customers for lines of credit. In some cases, banks have been calling in or reducing lines of credit for their smaller customer.

Most businesses need credit from banks to survive. They sell on credit and use a credit line from the bank to pay their bills until they get paid. So when they can't get credit and their customer can't get credit, it starts a chain reaction. Their clients can't pay them so they can't pay their bills, so the next guy can't pay his..etc. There's no money for supplies and payroll. Now, some guy can't pay his bills or his mortgage. And to top it all off, the skyrocketing price of oil has put up the price of just about everything.

THE US GOVERNMENT BAIL OUT PACKAGE

As of this morning, there is a tentitive deal in the US government to provide an emergency funding package to the tune of $700 billion. The principal is that the government will buy up the bad loans from the banks so that they will be able to ease their credit redtrictions. Will it work? Is it enough? No one knows for sure but without it, the entire US financial systems, and therefore the world system, is in very big trouble. This is all about confidence. Banks have to believe that they can get their money back if they lend it and the subprime mortgage loans are the sticking point in this mess. By getting a lot of these loans out of the way for now, the US government hopes that the money will start to flow again.

There has been some resistance to the plan in Washington as many congressmen and senators have been getting an earful from their constituents. They don't want the government to create more debt to bail out greedy bankers. I suppose you can't blame them, but there isn't much choice in the matter. Whether the US voter knows it or not, this problem, unsolved, will eventually trickle down to them and make their lives miserable. Main Street has to bail our Wall Street and America isn't very happy about it. This money is all supposed to be a loan but for now, the government debt will balloon and the US taxpayer is ultimately on the hook if the loans don't get paid.

THE CANADIAN VIEW

Can it happen here. Sure, but it's not likely. The Canadian banking system is smaller, more centralized and better funded than the US system. The conservative banking practices that many of us in Canada get angry about are now serving us well. By not having a subprime market of any size, the bottom is unlikely to fall out of the housing market. Right now, home prices are shrinking but not at the rate of our brethren to the south. We may see some pain from the US crisis but if the bail out works, we should get by relatively unscathed. If it doesn't, the whole world's banking system may have trouble so we shall see. For now, north of the US border is a better place to be for home owners. I would suggest that you don't draw down your equity. Watch your spending. And make sure that you can afford the payments for a long term before you get that equity loan.

Stay tuned...this one isn't over just yet

Canadian Budget 2007

2007-03-19T14:14:00.000-07:00

The Canadian federal government today brought down the 2007 budget. There are a number of changes for individual and business taxes plus some other items that we will address after examining the documents further.

Here are a few high lites:

Tax Items

Families

* A $2,000 child tax credit will provide up to $310 per child in tax relief.

* Increase in the spousal and other amounts will provide up to $209 in tax relief, ending the marriage penalty.

* Increase in the age limit to 71 from 69 for registered retirement savings plans and registered pensions.

* Eliminate the $4,000 limit on annual contributions to registered education savings plans (RESPs), increase the lifetime contribution limit to $50,000 from $42,000, and extend RESP eligibility to more part-time studies.

* Increase the maximum annual Canada Education Savings Grant to $500 from $400.

* The public transit tax credit will be extended to new electronic fare products and weekly passes used on an ongoing basis.

Business

* A two-year incentive for investments in manufacturing and processing equipment—50-per-cent straight-line write-off on new investments before 2009.

* The capital cost allowance rate for buildings used in manufacturing and processing will increase to 10 per cent from 4 per cent.

* Other capital cost allowance rates will also be increased and, together, will take Canada’s tax rate on new business investment from fifth-lowest in the Group of Seven (G7) to third-lowest.

* The lifetime capital gains exemption for farmers, fishers and small business owners will be increased to $750,000 from $500,000.

* Long-haul truck drivers’ deduction for meal expenses rises to 80 per cent from 50 per cent.

* Ensuring corporations pay their fair share of taxes by providing new resources to the Canada Revenue Agency to detect and close down tax avoidance through offshore tax havens.

Budget 2007 proposes a number of measures to help Canadian businesses , including:

* An independent review of Canada’s competition policy.

* A 20-per-cent reduction in paper burden for companies, including small businesses.

* $60 million over two years to streamline the regulatory review of large natural resource projects.

* A Global Commerce Strategy to advance Canadian business in global markets.

* A one-time $600-million payment to establish new, cost-shared savings accounts for farmers once agreement is reached with provinces and territories.

* Immediate one-time $400-million payment to farmers to address rising costs of production.

* A plan to create a Canadian advantage in global capital markets.

After we complete our analysis of the budget, we will be posting further opinions on certain issues.

Click on the title of this document to go to the government's budget pages.

Tax Department Back In Business on March 15th

2007-03-12T17:15:00.000-07:00

Good news for those of you with tax refunds. CRA has announced that online services will be back up and running on Thursday, March 15th. We will be filing all returns that we have completed just as soon as the system is up. Keep in mind that there will probably be a rush at the beginning of filing so there may be some delay.

The following is the CRA update posted today.

Update: March 12, 2007

Canada Revenue Agency (CRA) Commissioner Michel Dorais today announced the Agency's timeline to bring services back on line.

"We have begun to bring some of our systems into production," reported Mr. Dorais. "We expect to have all of our taxpayer services, including EFILE, NETFILE, Change My Address and return processing back into full service no later than on Thursday March 15th, 2007."

The CRA is bringing back some of its temporary employees tomorrow morning to begin processing all outstanding files.

The security of taxpayer information is paramount for the CRA. The security and privacy of taxpayer data was protected and was never at risk during this preventive suspension of online services. A malfunctioning software patch is the cause of this service interruption.

CRA appreciates the patience and understanding of taxpayers during this interruption and is making every effort to restore full services as soon as possible.

Please check the CRA Web site at www.cra.gc.ca/update on a regular basis to see which services are available.

Some Answers To Some Questions

2007-03-10T10:33:00.000-08:00

It is your right as a Canadian taxpayer to be just as confused as all of the other taxpayers. In keeping with that maxim, the Canada Revenue Agency has provided a "Frequently Asked Question" section regarding the current filing problems.

Rather that redundantly list all of text here, just click on the title above and you will be taken directly to the CRA website section with this information

Tax Problems Update - 2

2007-03-10T05:52:00.000-08:00

Here is the latest update from the Canada Revenue Agency regarding their problems with their computer database and tax filings:

Update: March 9, 2007

Commissioner of the Canada Revenue Agency (CRA) Michel Dorais reported today that the CRA is making further progress in its efforts to resolve the computer database problem that prompted the Agency to suspend most online services for individual taxpayers earlier this week.

"Our solution is working and in the past 24 hours we have successfully restored several databases," said CRA Commissioner Michel Dorais. "CRA employees will be working through the weekend to continue to restore the rest, and we expect to make good progress."

"Once we complete this phase of our recovery plan," said Mr. Dorais, "we will work out the schedule to bring online services for individual taxpayers back online."

The Agency confirms that all online services for business are still functioning. The CRA would like to remind businesses that all payments must be made as required on the prescribed dates. Installment payments by individuals are due as usual on March 15.

We are also attaching an article from CTV news on the subject for more background.

Computer glitch taxing Canada Revenue systems

Updated Fri. Mar. 9 2007 10:02 PM ET

CTV.ca News Staff

More than one million tax returns have been filed this year, but they are sitting on hold while Canada Revenue Agency technicians work around the clock on an unexplained computer glitch that was discovered last weekend.

Many agency employees have been sent home while others work around the clock to restore its electronic filing system after an unprecedented shut down.

The Canada Revenue Agency says the department is making progress with the system, but other sources report it could be late into next week before Canadians can even think about filing their taxes.

"We've made some really good progress and in the last 24 hours, we have resolved a number of issues," CRA spokesperson Jacqueline Couture told CTV Newsnet Friday afternoon.

"We're still in the process of restoring and testing the databases."

Meanwhile, Liberal MP Judy Sgro called on Revenue Minister Carol Skelton to return to Ottawa and attend to the problem.

"Millions of Canadians are waiting to file their tax returns and are depending on a timely refund of the money that is owed them by this government," Sgro said in a statement released Friday.

"Meanwhile, as her department is reeling in crisis, the Minister responsible is in Saskatchewan for a photo-op with the Prime Minister."

Skelton joined Prime Minister Stephen Harper as he announced an injection of $1 billion for Canadian farmers.

Skelton told reporters the computers are being slowly brought back online and tested.

"We've been monitoring day by day and hour by hour,'' she said. "Some of our people, I'm getting worried about them, because . . . some people have been working around the clock.''

Harper said the federal government is doing everything it can to fix the problems plaguing Revenue Canada, which occurred at the busiest time of year.

"All I can say is we're obviously ... on the backs of the department to get on with fixing this problem as soon as possible," Harper told reporters.

"This is a major administrative problem. It's going to be a few days until it is fixed but we're confident at this point that it can be fixed in a way that will not disrupt the deadlines for tax-filing," he said.

The prime minister said that he was assured by his top officials that they understood the gravity of the matter and that they were working round-the-clock to resolve the problem.

However, the Liberals are demanding the income tax filing deadline of April 30 be extended to accommodate for the inconvenience to taxpayers.

Revenue Canada has said that Canadians who owe taxes from last year are still responsible for mailing payment on time. For those paying quarterly, the next payment is due on March 15 and there will be no extension.

In addition to being unable to process electronically filed tax returns the Canada Revenue Agency is also unable to process mail-in applications because the information cannot be uploaded to their databases.

"Just as when you send your information online and it's put into the database, when we receive a paper copy that information also has to be inputted into our database," Couture said on Friday.

"They are still accepting the paper copies, it just means that it's at the same place as if you were Netfiling it, it can't be put into our database," she said.

Couture explained that Canadians who filed with Netfile before the system failed should have received a confirmation number, which ensures their information was received.

She also stressed that security protecting the sensitive data was not corrupted during the glitch.

"There is no risk. It really was an internal problem when we did some routine updates and maintenance on the weekend. For some reason, one of the databases sort of threw it off and one of the interconnections wasn't being made."

"It is definitely an internal problem. It's not a virus; there was no piracy or illegal activity done on our files."

For those client who are waiting to file, we make two suggestions:

Get your taxes completed. There is no good reason to wait so if you have all of your documentation and are ready for your return to be completed, get the information to us as soon as possible. We will complete your return and have it ready to file just as soon as the CRA systems are up and ready.
Sign up for our email updates. On this page, you will note a place where you can sign up for notification of updates to this page. In this way, you will be notified about any information about this problem as soon as we know.

We are continuing to monitor this situation and will keep giving you timely updates. Please check back.

Tax Problems Update

2007-03-09T08:33:00.000-08:00

The following message was posted on the CRA website late yesterday:

Update: March 8, 2007

The Commissioner of the CRA, Michel Dorais, today confirmed that the cause of the problem has been identified and a solution is being implemented. "After identifying the problem and the solution," said Mr. Dorais, "we now have a clear recovery strategy that we have gradually started to put in place."

This phased approach to system recovery will enable the Agency to better understand and predict the date of return to full service delivery.

Mr. Dorais also confirmed that the system problem, which has caused a temporary halt to the processing of income tax returns for individuals, does not directly affect any of the CRA's services for businesses, such as My Business Account or the processing of corporate income tax returns. There are no problems with employer remittances of payroll deductions, Goods and Services Tax / Harmonized Sales Tax (GST/HST) remittances, or the Business Number registration system

Please continue to check back to this site for further updates. Also, you can click on the title of this post to go directly to the CRA website.

Tax Problems

2007-03-08T06:57:00.000-08:00

Canada Revenue Agency (CRA) isn't working. Okay, they are working but not much else is. CRA has a messed up data base. The result is that individual tax payers can't file their taxes, even by paper. The following the the official notice posted on the CRA web site:

Online services - Update

The Canada Revenue Agency (CRA) is experiencing electronic system difficulties that prevent the public from accessing some electronic services for personal returns such as NETFILE, TELEFILE and EFILE. We have temporarily shut down public access to electronic services to ensure the integrity of taxpayer information.

The CRA has a team working to restore its systems to normal operations but it will be a matter of days before the system problems are completely resolved. The security and integrity of taxpayer data has not been compromised. This problem is not the result of illegal activity, computer hackers or a virus.

We have now traced the source of the problem to software maintenance conducted on March 4, 2007. We are currently working to bring all systems back online gradually.

Facts for Taxpayers

Currently, you cannot file your personal return electronically by NETFILE, TELEFILE or EFILE. Until the problem is resolved, we cannot process returns filed on paper, or returns filed electronically before the system interruption. Refunds will be delayed until processing is resumed.
We expect that all benefit payments, including the March 20 Universal Child Care Benefit and Canada Child Tax Benefit and the April 5 Goods and Services Tax / Harmonized Sales Tax Credit, will be made on time and without interruption.
If you have already filed your income tax return electronically, the CRA will be able to determine whether the filing of your return was affected by this problem.
It is too soon to speculate on whether the filing deadline will be extended. The CRA fully expects to restore all services well in advance of the filing deadline.
Existing My Account users may still view their tax information, but are not able to process any transactions.
Electronic services for businesses, including My Business Account, are not directly impacted.. There are no problems with employer remittances of payroll deductions, Goods and Services Tax/ Harmonized Sales Tax (GST/HST) remittances, or the Business Number registration system.
While the system problem affects the processing of many incoming payments, GST payments can still be processed. You can continue to make your payments as follows:
- In person at your financial institution.
- Online using your financial institution's Internet or telephone banking service.
- By sending your payment to the CRA by mail.

We will continue to provide updates as information becomes available. We appreciate your continuing patience while we resolve this matter.

In other words, nothing is working. There has been talk that the filing deadline might be extended but don't count on this. We advise you to get your taxes ready to file as soon as you can so that the filing can happened when the services are restored. Naturally, this means that you can't get your refund until the system is fixed.

There is no indication that any of the tax information is compromised. From information that we have been aware of for some time, we believe that this is a problem related to the 10 year program in place to migrate the CRA data base.

Here is a story posted on the CBC web site regarding the problem:

Tax department says online tax filing fix is a 'major' one

Last Updated: Wednesday, March 7, 2007 | 12:15 PM ET

CBC News

The Canada Revenue Agency says it now knows what caused the problems that led it to shut down its computer system for income tax filing, but warns it will still be days before it's fixed.

"Today is better than yesterday," CRA commissioner Michel Dorais told CBC News Wednesday. "We worked throughout the night and I'm pleased to say today that we've diagnosed the problem exactly."

Dorais said the problem began shortly after 20 maintenance operations were carried out on the weekend. On Monday, the tax department noticed "some irregularities" in its databases and quickly shut down all online access to Efile, Netfile and My Account. Dorais called it an infrastructure problem and said the data is completely secure.

"The databases are intact," he said. "It's not a virus. It's not an intrusion."

Dorais said the fix is a major one, involving 75 separate databases that handle individual returns. He said the databases are being gradually brought online but warned that the fix won't be immediate.

"We're hoping to solve the problem and to fix it fairly quickly," he said. But the databases that allow the e-filing of returns are "the biggest and most complex … so will be the last to come online."

So there you have it. Please come back to this page for further information. We will do our best to keep you up to date on the progress.

It's RRSP Season

2007-01-16T10:21:00.000-08:00

Once again, it is RRSP season - the time where we all scramble to make last year's RRSP contributions to get the tax deduction. However, making RRSP contributions is not just about reducing taxation, it is about planning for a dream. That dream is financial independence.

One day you may want to take it easy, enjoy life. This does not mean you have to quit working, but it will mean getting out of the rat race and doing the things you have been putting off – taking up a hobby, traveling the world, spending more time with children and grandchildren or just spending more time at the cottage.

The RRSP is one vehicle that can help you save money in a tax effective manner to live your dream. When looking at contributing to an RRSP, it's important to understand the details regarding RRSPs. The rules governing all RRSPs are set out in the Federal Income Tax Act and are administered by Canada Revenue Agency. Below we have tried to summarize some of the key aspects you should know about RRSPs.

RRSP Contribution Maximums
• in 2006, the dollar limit is $18,000
• in 2007, the dollar limit is $19,000
• in 2008, the dollar limit is $20,000
• in 2009, the dollar limit is $21,000
• in 2010, the dollar limit is $22,000

Your allowable RRSP contribution for the current year is the lower of:

• 18% of your earned income from the previous year, or

• The maximum annual contribution limit for the taxation year, or

• The remaining limit after any company sponsored pension plan contributions.

Earned income includes salary or wages, alimony received, and rental income, among other income sources, but does not include items such as investment income. You can find the exact amount you can contribute to your RRSP for the current year on the Notice of Assessment you receive from Canada Revenue Agency after they process your previous year's tax return.

Company Pension Plan or Deferred Profit Sharing Plan
As a member of a company-sponsored registered pension plan or deferred profit sharing plan, the amount that you can contribute to your RRSP must be reduced by the total value of the pension credits you earned for the year.

This amount is referred to as a pension adjustment (PA) and it is reported on the T4 slip (Statement of Remuneration Paid) that you receive from your employer.

Annual Contribution Deadline
To be eligible for an RRSP deduction in a specific taxation year, you can make contributions anytime during the year, or up to 60 days into the following year. However, we would recommend that you make your RRSP contribution as soon as possible.

Carry-Forwards
If you can't make your maximum contribution one year, you can make up that portion of the contribution in later years by carrying it forward. The amount of your unused contribution limit is shown on your federal Notice of Assessment. You may also choose to delay claiming your current year's RRSP tax deduction. To take the deduction in a later year, you must make sure that your allowable deduction limit has not been reached. You may even consider taking a loan to bring your RRSP contributions up to date depending on your tax situation for 2006.

Over Contributing to your Plan
If you make an RRSP contribution beyond your maximum allowable amount for a year it is considered an over-contribution. There is a lifetime allowance of $2,000 for over-contributions. These contributions must be used before any new contributions are applied.

Home Buyer's Plan
The Home Buyer's Plan allows you to borrow funds from your RRSP to purchase your first home. Here are some of the key facts:

• You and your spouse can each borrow up to $20,000.

• The funds must have been on deposit at least 90 days before you withdrew them.

• At least 1/15 of the funds must be repaid each year, beginning two years after the funds were withdrawn.

• A signed agreement to buy or build a qualifying home is required.

• You can only participate in the program once.

Lifelong Learning Plan
The Lifelong Learning Plan allows you to pay for training or education with RRSP funds. Here are some of the key facts:

• You can withdraw up to $10,000 per calendar year to finance full-time training or post-secondary education.

• The student can be you or your spouse, but not your children.

• If the student meets disability requirements, then the training/education can be on a part-time basis.

• The total amount that can be withdrawn is $20,000 with withdrawals over a maximum of four consecutive years.

• Amounts that are withdrawn are not subject to taxes on withdrawal.

• At least 10% of the amount borrowed must be repaid each year, over a maximum period of 10 years.

Separation or Divorce
During separation or divorce, either you or your spouse can transfer existing RRSPs to the other, without being subject to tax, provided that:

• You are living apart when property and assets are settled; and

• You have a written separation agreement or a court order.

Death of a Plan Holder
In the event of death, the proceeds of your RRSP are distributed to whoever was named as your beneficiary or to your estate, if no beneficiary has been designated. This designation can be specified in either your RRSP or in your will. Quebec residents must make the designation by will or marriage contract for most plans.

The proceeds of the RRSP will remain tax-sheltered if one of these situations applies:

• Your surviving spouse is the beneficiary, and the proceeds are transferred into an RRSP or a Registered Retirement Income Fund(RRIF) in his/her name;

• You have no surviving spouse, but you have children or grandchildren who are minors named as your beneficiaries. They are dependent on your estate for financial support and will have the proceeds transferred to a term annuity registered in their names; or

• Children or grandchildren, regardless of age, who are financially dependent because of physical or mental infirmity. The RRSP proceeds will be transferred to an RRSP or RRIF registered in their names, or used to purchase an annuity.

In all other situations, the balance of the RRSP at the date of death is included as income on the plan holder's final tax return.

Making RRSP contributions and managing the investments properly is a very important aspect of your financial plan. Great care and attention should be made to how your RRSP is invested based on your tolerance for risk and time horizon. This year, we are reviewing all of our clients RRSP portfolios and making recommendations on how to manage them effectively to live your dream.

Merry Christmas

2006-12-21T07:05:00.000-08:00

To All Of Our Clients and Friends

We wish you a very Merry Christmas
and a Happy New Year in 2007

Missed In All The Fuss.

2006-11-09T12:29:00.000-08:00

The biggest fuss in Canadian financial politics lately has been the repeal of tax exempt status for income trusts. But at the same time, a little tax-saving nugget for seniors has been glossed over.

Income splitting has long been a contentious issue for many tax payers. The issue of who gets taxed for what in a couple's income can amount to thousands of dollars in taxes. This issue get quite serious for seniors where, in many cases, one partner has been earning the majority of the income. If one partner has a large pension and the other very little income, the majority of their joint income will be taxed in the hands of the person making the largest income. Here's an example:

Let's say Jim is 65 years old and has a pensionable earning of $75,000. Jan has earnings of $10,000. Their joint tax would be around $17,000. But under the new income splitting rules for items that are eligible for the pension deduction, Jim could assign up to 60% of this income to be taxed in the hands of Jan. This would lower Jim's tax brackets and the total saving would be around $4,000.

Okay, before you run to your calculators, this is a very rough example but it does indicate just what is at stake here. This is quite a bit of tax money.

Please be aware that this legislation is not yet passed and will not kick in until 2007. Also, remember that we are dealing with a minority government and who knows if it will ever get passed into law. Time will tell.

More Tax Goodies

The Canadian finance minister, Jim Flaherty, has announced that a new "economic statement" will be coming on November 23rd and has hinted at new tax cuts. As soon as we have more info, we will be publishing it here. Stay tuned or even better, you can subscribe by RSS feed or email to this blog and get notified of updates.

Heads Up!! GST Rates Change July 1, 2006

2006-06-21T05:58:00.000-07:00

In case you forgot, the GST rate charged by the federal government changes this July from 7% to 6%. If you use computer software, remember to change the GST rate. In some Canadian provinces, that means changes to the HST (Harmonized Sales Tax). Either way, if you don't change, you will be charging your customer's too much.

If you are in the business of retail, you may be using point-of-sale software program or cash registers. All of these must be changed too.

For more information, click on the title of this article to go directly to the CRA website articles.

CPP CHANGES?

The Globe and Mail and other new sources are reporting that the federal goverment may be planning to reduce the contribution rate for GST. Click Here to Read The Article

2006 Canadian Federal Budget

2006-05-03T10:05:00.000-07:00

Yesterday, May 2nd, 2006, the Conservative Canadian Federal Government brought down it’s first budget since they were elected. This budget contains quite a number of tax changes, both corporate and personal.

An interesting wrinkle is that many of these changes combine tax changes enacted by the previous Liberal government. Many of these changes came into effect on January 1st and, for the most part, the new government’s changes come into effect as of July 1st. Rather than give you all the gory details, we will summarize the total tax changes for 2006. If you wish more detail, you can contact us at info@marsh-assoc.com or go to the Federal government’s Department of Finance (yes, this is a link) web site for the full budget.

Here are a few highlights:

Goods and Services Tax (GST)

Effective July, 1, 2006, the GST will be reduced from 7% to 6%. For people wanting to make major purchases like homes or vehicles, you can receive the 1% discount now if you contract to receive the home or vehicle but not take possession until July 1st.

Child Care

Effective July 2006, families will receive as Universal Child Care Benefit of $100 per month for each child under the age of 6 years. This amount is taxable in the hands of the lower income spouse.

Personal Income Tax

The current personal tax exemption will be increased through a blended formula to an average of $8,869 for the 2006 taxation year. For 2005, the exemption was $8,648. By 2008, the government plans to increase the exemption to $10,000.

Taxation of dividends will decrease by approximately 5% for the highest tax brackets.

The Child Disability Benefit will increase from $2,044 to $2,300 as of July 1, 2006.

Student bursaries, fellowships and scholarships will not be taxable for the 2006 taxation year. Students will also receive a Textbook Tax Credit of $65 a month for full time student and $20 a month for part time students. This credit is non-refundable like tuition fees.

Tradespeople will receive a new $500 deduction on tolls pruchased of over $1,000.

Parents can receive a physical fitness tax credit of up to $500 for enrolling their child under 16 years of age in a program of physical activity.

The pension income tax credit is increased from $1,00 to $2,000.

A new Employment Tax Credit will begin this year, giving employed taxpayers a credit on the first $500 of Employment income, effective July 1, 2006. This credit will be increased to $1,000 for 2007 and subsequent years.

A new credit will be available for people using public transit

Donations of publicly traded securities to charitable organizations and ecologically-sensitive land will be no longer attract any capital gains tax.

Business and Corporate Tax

Incorporated businesses in Canada are taxed at two different levels. Businesses classified as Small Business are taxed at a lower rate on their Active Business Income (ABI). A small business must be a Canadian Controlled private corporation with ABI of $300,00 or less. ABI is income from actively operating a business and does not include income from investments and rent of property (among other things).

Here are some of the changes to corporate income tax:

Effective January 1, 2007, the threshold for small busines sis increased from $300,000 to $400,000.

The small business tax rate will decrease from 12% or 11.5% on January, 2008 and to 11% on January 2009.

The 4% corporate surtax will be eliminated as of January 1, 2008

The Federal Capital Tax is eliminated as of January 1, 2006.

Tax rates for larger corporation are also reduced to 20.5% on January 1, 2008, 20% on January 1, 2009 and 19% on January 1, 2010.

The carry forward period for non-capital tax losses and Investment Tax Credits will be increased to 20 years for losses and credits earned in taxation years that end after 2005.

The government has created a new Apprentice Job Creation Tax Credit that gives a business a non-refundable tax credit of 10% of salary paid to a maximum of $2,000 per apprentice.

Please keep in mind that this is the budget of a minority government. If the budget is defeated and the government falls, the budget is toast and we go back to the polls. Also, what we are presenting here is not intended to be a full analysis of the budget, but only a few highlight that many of our clients and readers might find helpful and informative.

Tick Tock Folks!

2006-03-03T05:39:00.000-08:00

Well, now that we have all of the RRSP stuff out of the way, it's time concentrate on income tax. As you can see by the countdown banners on the side of this page, you probably have less time than you think to get things done.

By now, you should have all of your slips. Americans, your W2's, 1099's, etc should have been sent to you by January 31st. If you believe that you don't have all of your slips, contact the people that should have sent them right away. By law, you have to have these now.

Canadians, the deadline for you to have your T4, T5 etc.slips mailed to you was February 28th. You may not have received everything yet as the mail is sometimes slow but if you haven't received everything by sometime next week, contact the slips issuer. Don't file a return unless you are sure you have all of your slips. It will only delay processing your return.

Americans, if your tax returns are simple, you may be comfortable doing them yourself. If so, did you know that 90% of all American tax payers can file their taxes on line for free? Many software companys offer free filing if your income is below a certain level ro if your qualify in other areas. Go to the IRS web site at www.irs.gov to see the different on line programs that are available. I have personally tried the site at www.turbotax.com and found it quite easy to use. They guide you through the return with an interview format that helps you get all of the credits that are available for you.

One word of caution. US income tax form can be quite complicated and if your return is more than a few slips, you should see a tax professional before you file. A good accountant can save you more money than they cost.

In the next few weeks, we will be posting more articles about income tax so check back soon. Better yet, if you put your email in the "subscribe" box to the left of this article, you will be notified when a new posting is made. We promise that your email will be confidential and not sent to outside parties.

Happy tax preparing!

Some Final RRSP Notes

2006-02-20T14:58:00.000-08:00

With the RRSP deadline fast approaching, I thought that I should add a few more hints.

Contribution Room

Most taxpayers have additional contribution room available over and above the amount you earned for the current year (in this case, your 2005 current contribution room is based upon your 2004 income.) You may have not used your full available contribution room for other years so it has been collecting for you. Check you 2004 Notice of Assessment for the amount you are eligible to contribute or call the TIPS line. This service requires you to have your S.I.N., birth date and amount of income that you reported on line 150 of your 2004 income tax return.

If you look at the first article on this page, you will see how to maximize your tax deduction by reducing your higher bracket taxes. But this is not the only reason for making an RRSP contribution. If you are older, you may want to get that investment in now so it will start earning that tax free interest, dividends or capital gain. Not every strategy is right for everyone. So look over what you want to accomplish, then make you contribution

Spousal RRSP’s

One of the most underused RRSP options is the spousal RRSP. A spousal RRSP happens when your buy the RRSP in the name of your spouse. You get the tax deduction but your spouse gets the RRSP. It is most often used when one spouse is working and the other isn’t or when there is a large difference in income between the spouses.

The purpose of this type of RRSP isn’t for the present, it’s for the future. Ideally, both spouses should have the same amount in RRSPs, This is because when you both retire, it is better for both of you to have the same amount of income. Personal tax credits are worth more than credits that you can transfer from a spouse. For example, if you both have taxable income, you both get a basic personal exemption of $8,012. The amount a taxpayer can deduct when a spouse has no income, they get a credit of $7,484, a difference of $528. Remember, that will be for every taxation year. There are also many other deductions that can be used by two individual tax payers but not for one filing for both people.

Before buying a spousal RRSP, examine just how much in RRSP’s each of you have then plan a strategy for equalizing the amounts you each have. You do not have to catch up all at once if it is not advantageous for the contributor. Remember, try and use the contribution room that reduces the highest portion of the taxable income. Contributing to reduce low income does not give you a good income tax deduction. See above regarding contribution room.

Remember, spousal RRSP’s are designed for families where one wage earner is making most, if not all, of the income. If you both are making about the same wages, you should each be making your own RRSP contributions.

Borrowing For RRSP’s

RRSP loans are cheap. This is because a financial institution wants to sell you their product. This is fine, as long as you like their product. The other reason is that the loan is secure. It is backed by the investment that you are purchasing. But it’s important that you pay that loan off as soon as possible or you may use up all of the gains that you make in your RRSP. Use your tax refund to pay this loan off, if possible. Remember, RRSP interest is NOT deductible for income tax purposes.

Don’t Know What To Buy?

Sometimes, as the deadline approaches, all of you procrastinators don’t know where to invest your RRSP money. You are afraid that you may choose the wrong investment and then you are stuck with it. There is an option. Most banks offer an RRSP savings account. You can park your money in this account, get your RRSP receipt in time for the deadline, then decide where you want to put it later. One caution. Make sure that when you have the change in investment done by a transfer from the bank. Don’t just take out the cash or you will be charged income tax on the money you take out. Just have your bank transfer the money to the new investment and you won’t have a problem.

Finally!

The last point that I want to make is that you shouldn’t be rushing at the RRSP deadline in the first place. The best way to invest is by using a monthly contribution then top up your annual amount at the year end. Doing this gives you the advantage of dollar cost averaging. What this means is that you are buying into the market at an average rate...not the top or bottom...so your cost is averaged over a period of time. Talk to an RRSP representative about this. You can arrange to invest a monthly amount that you can afford, then, if you wish, top it up before the current year deadline. Check it out. You will actually make more money this way.

RRSP's And Investing Your Money

2006-01-15T09:19:00.000-08:00

The question that I get asked most often about Registered Retirement Savings Plans (RRSP's) is, "Where should I invest this money?". This is also the hardest question because there is no one quick answer. You should first understand that an RRSP is like any other investment except that it is sheltered from income tax. For our American friends and clients, substitute IRA or 401K for RRSP (in most cases). The government approves the types of investments in the plan and then it is registered to be sheltered from tax. And beginning this year, there are no restrictions on the foreign content in your RRSP portfolio.

For more information on qualified investments for Canadians, click here.

Investing Basics
Most investment vehicles can be set up as an RRSP. If you are a sophisticated investor with plenty of time available to manage your portfolio, you might consider setting up a self directed RRSP. To do this, you must have a financial institution set it up. There is a cost to maintain it and a cost for every trade in and out of it. Add this to the brokerage costs, etc, and it can get very expensive. You had better to be able to make extra good returns on your investments to pay for these costs.

Most investors will get professionals to manage their investments for them. Basically, this is how a mutual fund works. Mutual funds are not just stocks. There are thousands of types of funds...high risk, low risk, blended, stocks, bonds, precious metals, index funds, etc. You buy shares in a fund that owns investments and manages them. For this, you are charged a management fee. All funds have them, hidden or otherwise, because nobody works for free. It's your job to find out what these charges are. All funds disclose them but sometimes it is stated in a way that is confusing.

In addition to management fees, many funds have a "load" factor. This is a charge made when you buy or sell your shares in the fund. Some funds are "no load" so they have no charge. Most of these funds are run by large financial institutions such as banks. Other funds have a "front end load", a cost when you buy the fund, or a "back end load", a cost when you sell the fund. So why, you might ask, doesn't everyone just buy no-load funds? Often, these fund are not very good performers. Often, the "loaded" funds are the best in making you money. Often, they are not. No matter what the case, it is your job to do the research and fund out if a fund is making you more than they cost. Which brings us to the topic of fund performance. When you pay fee to a fund you are actually paying for the funds management.

Naturally, you want the best managers for your money. So how do you determine this? Well, the only way is to judge the funds performance over a period of time, and the longer the period of time, the better. You can then compare the fund's management with things like stock market indexes (for equities), and the performance of similar funds. For Canadian funds, I would suggest Globefund.com as a great source of information. For USA Investors, you might try Morningstar.com

Here's the Canadian link.

Here's the American link.

So now we get to "what to buy?". Well, I'm sorry folks but there is no one right answer. What you invest in will depend a lot on who you are and how much risk you can tolerate. Here's a few tips on how to do that.

Determining Your Risk Level
With so many different types of investments to choose from, how does an investor determine how much risk he or she can handle? Every individual is different, and it's hard to create a steadfast model applicable to everyone, but here are two important things you should consider when deciding how much risk to take:

Time Horizon - Before you make any investment, you should always determine the amount of time you have to keep your money invested. If you have $20,000 to invest today but need it in one year for a down payment on a new house, investing the money in higher-risk stocks is not the best strategy. The riskier an investment is, the greater its volatility or price fluctuations, so if your time horizon is relatively short, you may be forced to sell your securities at a significant a loss.With a longer time horizon, investors have more time to recoup any possible losses and are therefore theoretically be more tolerant of higher risks. For example, if that $20,000 is meant for a lakeside cottage that you are planning to buy in ten years, you can invest the money into higher-risk stocks because there is be more time available to recover any losses and less likelihood of being forced to sell out of the position too early.

Bankroll - Determining the amount of money you can stand to lose is another important factor of figuring out your risk tolerance. This might not be the most optimistic method of investing; however, it is the most realistic. By investing only money that you can afford to lose or afford to have tied up for some period of time, you won't be pressured to sell off any investments because of panic or liquidity issues.The more money you have, the more risk you are able to take and vice versa. Compare, for instance, a person who has a net worth of $50,000 to another person who has a net worth of $5,000,000. If both invest $25,000 of their net worth into securities, the person with the lower net worth will be more affected by a decline than the person with the higher net worth. Furthermore, if the investors face a liquidity issue and require cash immediately, the first investor will have to sell off the investment while the second investor can use his or her other funds.

The Investment Risk Pyramid
After deciding on how much risk isThis pyramid can be thought of as an asset allocation tool that investors can use to diversify their portfolio investments according to the risk profile of each security. The pyramid, representing the investor's portfolio, has three distinct tiers:

Base of the Pyramid - The foundation of the pyramid represents the strongest portion, which supports everything above it. This area should be comprised of investments that are low in risk and have foreseeable returns. It is the largest area and composes the bulk of your assets.

Middle Portion - This area should be made up of medium-risk investments that offer a stable return while still allowing for capital appreciation. Although more risky than the assets creinvestment base, these investments should still be relatively safe.

Summit - Reserved specifically for high-risk investments, this is the smallest area of the pyramid (portfolio) and should be made up of money you can lose without any serious repercussions. Furthermore, money in the summit should be fairly disposable so that you don't have to sell prematurely in instances where there are capital losses.

Personalizing the Pyramid
Not all investors are created equally. While others prefer less risk, some investors prefer even more risk than others who have a larger net worth. This diversity leads to the beauty of the investment pyramid. Those who want more risk in their portfolios can increase the size of the summit by decreasing the other two sections, and those wanting less risk can increase the size of the base.

The pyramid representing your portfolio should be customized to your risk preference.It is important for investors to understand the idea of risk and how it applies to them. Making informed investment decisions entails not only researching individual securities but also understanding your own finances and risk profile. To get an estimate of the securities suitable for certain levels of risk tolerance and to maximize returns, investors should have an idea of how much time and money they have to invest and the returns they are looking for.

ARRGHH...YOU SAY?

I can hear it now...."This is too complicated!!". No, it isn't. If it seems like it's too much to think about, then you risk on relying on someone elseÂs priorities. This is YOUR money....YOUR retirement. Part of your investment should be time. Take the time to understand just what is going on here. You don't have to be an expert but you should understand the basics.

Finally, consider where you are getting your investment advice. Think about what the bias is. People like me advise clients for a fee. Our bias is to the client. You are the ones that are paying, so our duty is to you. Much of the "free advice" comes from people selling you investments. Many of these people are good, honest advisors who want to keep you as a client and will do their best to work in your best interests. But remember that they are being paid by the people who provide you with the investment. Their bias will be towards them. Listen to the advice, because it may be good, but remember where the bias is.

My next article will be on spousal RRSP's. Check back soon.

RRSP's - What? When? How Much?

2006-01-06T13:41:00.000-08:00

Well here it is, 2006, and it’s time to start thinking about your income tax again. As usual, the first item up is the RRSP contribution. For those that have made a monthly contribution, good for you. Your investment will be worth more in the end than the people who only contribute once a year. However, you may want to have a look at topping up your contribution before the deadline. For the people that wait until the last minute, you have until March 1st to get it done.

Here are a few of the basics:

money that you contribute to a Registered Retirement Savings Plan is deducted from your income before the amount of tax that you owe is calculated.

you may contribute a maximum of 18% of your 2004 earned income to a maximum of $16,500 plus any unused contribution eligibility from 1991. (check your 2004 Notice of Assessment for the correct amount or you can call Canada Revenue Agency's T.I.P.S. line for more information). The CRA web site is in our links at the side of this page.

prior to this year, you were restricted as to the amount of foreign content in your RRSP but this restriction has been lifted.

If you wish to calculate the amount you can contribute yourself, as well as find out just what qualifies as “earned income”, you can download the entire CRA (Revenue Canada) guide on pensions. You can either go to the Services page on our web site or:

click here to get it.

How Much To Contribute

Remember that you are buying an RRSP for two reasons. The primary reason is to save money for your retirement. Once purchased, your investment and it’s growth are sheltered from any income tax until it is withdrawn. Under this reason, you should probably contribute whatever you can afford. Building your “nest egg” is always a good idea. You should also try to make a monthly, rather than annual, contribution. This gives you the advantage of buying into the market at different levels plus it is easier to save it a bit at a time rather than in one big lump.

As to what to buy, I will try to cover the advantages and disadvantages of different types of investments in a separate article in the future.

The secondary reason (although for some people, the primary reason) for buying an RRSP is the tax savings. The idea is that when you take it out, you will be in a lower tax bracket than you are now. But just how much you save will depend on how much you have earned during the year.

The best tax savings are made when your income is high. Let’s examine the 2005 federal income tax rates. Provincial rate vary from province to province so I can only use the federal rates as a guide.

The first tax rate increase happens on taxable income over $35,595. The federal tax rate rises from 15% to 22% on amounts over the first $35,595. If you estimate that the provincial tax is about 50% or less of the federal amount so for the sake of this discussion, lets say that it’s 10%. Your contribution target should be to eliminate or lower any income above $35,595. At our estimated tax rate, every $1,000 that you contribute will save you $320. Naturally, if your income is higher, you will save even more. The next tax level is $71,190. Income tax on amounts over that is 26%. The provincial rates rise to about 12% so now you save $380 on every $1,000 contributed.

I won’t bother going beyond this right now, but as you can see, eliminating tax on the higher brackets is the best strategy.

In my next article, I will be discussing types on investments and the reason for spousal RRSP. Please check back and go to our web site for more information.

Welcome!

2005-12-20T11:50:00.000-08:00

Welcome to our 2005 tax info page. If you have linked here from our web site, then you know about us. If you found us through another way, then you might like to go to our web site to find out who we are and what we do. Click here to link to our web site.

During the coming weeks, we will be posting articles that we hope will help you in preparing for the coming tax season. Please understand this this is general information and your specific situation might require a detailed, personal analysis.

For now, Merry Christmas to everyone and a very Happy New Year. Please check back with us soon in 2006.