Articles

The newly rich: How your world changes when downsizing creates a windfall

0 Comments

ted_banner

You may never have imagined yourself sitting on a financial windfall and wondering what to do with it but many older Canadians who have lived through the housing market’s finest hours are facing just that.

If the investment in your family home has paid off handsomely over your lifetime, there might come a time to lock in those gains. You could downsize and buy a cheaper home or condo — if you knew how long you might want to live in the property and if you don’t mind all the land transfer taxes and transaction costs.

9589919_sOr you could give yourself the flexibility of renting an equally nice home or condo.

The question is – what do you do with it, and what do you need to think about, when that big cheque comes from the real estate lawyer?

Here are five things to think about:

  • What is your new annual budget going to look like? You will have major savings on annual house upkeep and repairs and no more realty taxes. You will have major new expenses with your monthly rent. Will this end up costing you $40,000 more a year or only $10,000 more or is it closer to a break even scenario?
  • In order to cover off annual spending, how much, if any, do you need to draw each year from your non-registered investments? The key is not to think about how much income does this need to spin off, but rather cash flow. This income focus is a mistake that many people make, and it sometimes leads to higher risk investments and almost always in much higher taxes.
  • Based on your current situation, what is the chance of you outliving your money? What is your likely estate value and lifetime tax bill? These important questions may require help from a financial planner, but if you don’t already have a strong handle on this, now is the time to get it. Aside from peace of mind, having this knowledge will drive a number of decisions around your spending habits, investment strategy, gifting habits (to family or charity), tax planning and estate planning.
  • Your tax bill is getting very big, and you need to figure out how to make it smaller. In addition to being forced to draw 7.59% of your RRIF value (based on age 73), you are now suddenly taxed on income and realized capital gains on investments. If you earn 5% income (half Canadian dividends and half interest or U.S. dividends) on this portfolio, that works out to $35,000 of Canadian dividends and $35,000 of fully taxed interest and U.S. dividends. You could be facing over $20,000 in taxes that you weren’t facing before plus you could lose $6,700 in annual Old Age Security (OAS) payments. This is a little less painful if you are able to fully split income with your spouse, but can be very expensive if you are single.

 

The good news on the investment front is that you can structure the portfolio to generate much less income, cut  your tax bill, and possibly even keep your full Old Age Security payment in the process. Among the tools to help accomplish this would be:

  • Start with an investment portfolio that has limited exposure to interest income and U.S. dividend income in the taxable investment account. This will lower the amount of income that faces the highest tax rate.
  • If you are paying for investment advice, try and ensure that the investment fees are tax deductible. This will lower your overall cost and also lower your taxable income and can help with OAS recovery.
  • Consider Corporate Class funds that have low yields and can defer capital gains – or other income limiting investments.
  • Look at other tax sheltering ideas such as shifting some funds to tax sheltered insurance or using flow through shares with investment certainty (a locked-in loss) that is more than offset by government tax credits.
  • Look at gifting strategies as part of the overall plan – both giving to family and to charity.
  • How do you use your wealth to make the most of your remaining years? This is touched upon above, but it is really about sitting down and saying ‘what do I want to do now? What goals do I have for myself?’ Not just the bucket list idea, but what kind of values and relationships do I want to leave with my kids and grandkids and friends? Do I want to try to make a bigger difference in other people’s lives – either financially or through other things that I can do? When you suddenly have more liquid wealth at your disposal, it is a good time to take a step back and think about what it can allow you to do?

 

While the selling of your family home can trigger this type of review, it can happen in other situations as well. Often it is at a time of inheritance or in some cases when a retiree chooses to take the value of their pension as a lump sum. It can even be the much rarer scenario of a lottery win.

At all of these times of positive financial change, it is important to think about how it could change your lifestyle, how your tax situation changes, what type of advice you might require, and how it might allow you to positively impact others. These situations may never come up in your life, but if it does, it is often a once in a lifetime opportunity. Plan wisely.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 1st October 2014.

Welcome Home!

0 Comments

Are you a Canuck residing in the US, but planning to return to Canada?

We have had many inquiries recently from Canadian citizens living in the US, who are considering moving back to Canada, wanting to know their options.  There are many things to consider before returning home.

While Canada offers many wonderful things to those returning home, such as safety, great public services, freedom, being close to family, seeing old friends and a system you can trust. It is also a move back to the land of taxes, rules and regulations, rain and snow. Whatever your reasons for returning, there are many things to understand before making this move.

The biggest question is Why do you want to move back to Canada?  The answer to this involves learning about what is important to you – what you want life to offer you and what changes you are willing to make and what costs you’re likely to incur if moving to Canada is the right choice for you.

Once you have answers to the following questions, you will be able to make a more informed decision:

Where do you plan to settle in Canada. Different provinces offer different amenities, services, and taxes. Will you buy or rent. Did you know that only Canadian sources of income are considered for a Canadian mortgage.

Understand the changes to your tax situation. How will your income be taxed, do you need to file  tax returns in both Canada and the US and for how long? Understand when you are deemed a resident and the tax consequences of this. Have you done a before and after tax comparison. How will a move affect your estate plan.

Prepare your finances. Prepare a summary of Lifestyle expenses. What costs more, what costs less and determine if you can afford the move and changes. Did you know you may be able to combine US Social Security and the OAS payments. Is this the right option for you. How does this fit with your capital preservation goals.   Are assets joint for estate purposes. If you have a foreign Pension, can it be paid into a Canadian account. How will you access these funds.15882723_s

Do you have a US green card? Should you keep it and what are the implications of this.

Do you have insurance i.e. life, disability and/or long term care? If so, is it good for services in Canada, or only within the USA.

Will you keep funds outside of Canada? What are the implications of this.

Do you have pets?  Understand what is required to bring these into Canada.

Do you have a drivers Licence and vehicle? Can you  “convert” your current licence to a driver’s license in the province you will be living in. Can you bring your car with you. You can only import cars from the U.S. and only under certain conditions.

Understand Health Care in Canada. Know the rules in different provinces. There is no coverage for the first 3 months if you move to British Columbia, Ontario, Quebec, or New Brunswick. Other provinces do not require a waiting period. You may need to buy 3 months of health insurance in Canada or go three months without health insurance. You assume the risk and potential costs of any health issues that come up within that time period.

Research the availability of medical services. What are the services and availability of a family doctor in the area where you want to live. Some doctors in are not taking on new patients. Some services have a 3 to 6 m delay.

Friends?  If you have made deep friendships in the U.S., you will have to make new friendships or renew old ones in Canada. The older you get the harder it is to make significant friendships. Is it worth coming back to Canada?

Quality of Life. Will your quality of life and bottom line improve by moving to Canada vs. the US. What are you are giving up. Some feel Canada is expensive, cold, and dark in the winter. Some things do cost more , such as taxes, gas and groceries, however other things may cancel that out, such as not having to pay for costly health insurance premiums and deductibles and at 65, receiving minimally costing drugs.  Only you can determine your cash flow and what makes sense for you.

As long as you have weighed your options and know what the bottom line looks like, the next step is to make the decision about returning home.

Regardless of your choice, TriDelta Financial can assist you in managing your assets on both sides of the border and connect you with a team of mortgage, tax, investment and legal specialists to assist you in making your transition smoother.

Heather can be contacted by email at heather@tridelta.ca and by phone at (416) 527-2553.

↓