Canadian Capitalist » Canadian Interest

The Penny, Not the Cent will be Gone

Canadian Capitalist — Tue, 03 Apr 2012 03:08:23 +0000

There appears to be quite a bit of confusion surrounding the announcement made in Budget 2012 that the penny would be eliminated from our coinage system. Some Canadians believe that by eliminating the penny, businesses would always round up the cost of individual items and hence drive up prices. That is not quite true.

The Federal Government is simply going to stop producing and distributing pennies as of Fall 2012. Existing pennies will remain in circulation but over time, as the supply of pennies diminishes, businesses will resort to rounding off on cash transactions. Here’s an example: You walk into a dollar store and purchase an item selling for $1.25. Add 13% HST and the final tally is $1.4125. If you are paying cash, the store will round down the price to $1.40. Another customer buying 11 items and paying cash will be charged $15.55 ($15.5375 rounded up), not $15.95 ($1.4125 rounded up to $1.45 * 11). There is already many good examples of this principle at work such as gas prices, which often have a lowest unit of a tenth of a cent.

The eventual elimination of the penny will have no effect on credit, debit, cheque and electronic payments, where the cent will remain the smallest pricing unit. And even if every single retailer refuses to play ball and opts to round up the total final cost to the nearest nickel, it is a cost well worth paying for the hassle of dealing with those pesky pennies.

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Budget 2012: Changes to Old Age Security

Canadian Capitalist — Thu, 29 Mar 2012 21:31:59 +0000

The increase in the age of eligibility of the Old Age Security program in Budget 2012 was widely telegraphed in advance but there were still a few surprises. Here are the other major initiatives introduced by Finance Minister Jim Flaherty in Budget 2012:

Travellers’ Exemptions Increased

The travellers’ exemption is a dollar limit that Canadian residents can bring back after a trip abroad without having to pay customs duties or sales taxes. Budget 2012 proposes that the Travellers’ Exemption limits will increase to $200 for an absence of more than 24 hours (current limit: $50), $800 for an absence of more than 48 hours (current limit: $400) and $800 for an absence of more than 7 days (current limit: $750).

Increase in Old Age Security Age of Eligibility

Starting in April 2023, the age of eligibility for OAS and GIS will be gradually increased from 65 to 67. In other words, Canadians who were born on or after Feb. 1, 1962 can expect to receive OAS benefits at age 67. The age of eligibility will gradually rise for Canadians who were born between April 1, 1958 and January 31, 1962. The OAS age of eligibility remains unchanged for Canadians born before March 31, 1958.

New Option to defer Old Age Security

Budget 2012 proposes that starting on July 1, 2013, Canadians can opt for a voluntary deferral of OAS for up to 5 years and receive an actuarially adjusted higher pension. Here’s an example provided in the Budget document:

Rita will be turning 65 in December 2013. She plans to continue working as long as she can. She prefers to forgo her OAS pension for the maximum deferral period of five years so that she can have a substantially higher annual pension amount, starting at age 70. When she takes up her OAS pension at age 70, her annual pension will be $8,814 instead of $6,481 (in 2012 dollars).

Eliminating the penny

As of Fall 2012, the Government will no longer distribute pennies. Good riddance!

Workforce adjustments

The Federal Government is planning to reduce its headcount by 19,200 over a three-year period, a number that includes attrition. Most of the job reductions will occur in the National Capital Region.

Adjustments to Public Sector Pension Plans

The Government is proposing that public sector employees contribute 50 percent to their pension plans over time (IIRC, the current employee contribution target is 40 percent). Starting in 2013, employees joining the public service will see the age of retirement raised from 60 to 65.

Other changes that maybe of interest in the Budget include protection of long-term disability plans and improvements in the registered disability savings plan.

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Vanguard’s Wishy Washy Take on Active Management

Canadian Capitalist — Tue, 07 Jun 2011 03:30:26 +0000

US Mutual Fund giant Vanguard announced today that it is setting up shop in Canada and will announce its product line-up once it has submitted a preliminary prospectus with regulators. Vanguard’s reference to providing “sound solutions for Canadian advisors and their clients” suggests that its initial focus will be on the advisor channel. As most Canadians invest through the advisor channel where costs can be as high as 2.5 percent, it is a logical place to start. If Vanguard succeeds in driving down costs, it will make a meaningful difference for those Canadians investing through an advisor. DIY investors will have their own ideas of what Vanguard should do: my own wishlist includes a cheap REIT fund and currency unhedged US Total Market and MSCI EAFE index funds.

Oddly for a fund company that pioneered index investing, Vanguard’s website offers up a report that unsuccessfully attempts to make a case for both active management and indexing in a portfolio:

There is a strong argument in favour of combining the two approaches: Adding indexing to active-oriented portfolios can reduce costs significantly and can help temper risk as well. While a blended approach is likely to reduce the performance peaks, it is also likely to reduce the performance valleys, when investors are most at risk of exiting the market in unfavourable conditions. A combined strategy can help avoid the pangs of regret that your clients might otherwise experience when one approach trumps the other.

It’s not clear how one can avoid “the pangs of regret” since very few funds manage to beat the humble index fund in most time periods and it is nearly impossible to pick the winning fund in advance.

Other takes (mostly speculation at this point) on Vanguard coming to Canada:
Jon Chevreau says Vanguard will be introducing ETFs.
Money Smarts Blog on what he expects Vanguard to do.

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What to Expect From the Conservatives?

Canadian Capitalist — Wed, 04 May 2011 02:07:19 +0000

Now that the Conservatives have won a long-coveted majority, what pocket book measures can Canadians expect from the new Government? The Election Platform put out by the Conservatives contains the following key proposals (the * represents proposals that will be implemented when the federal budget is balanced):

Children’s Arts Tax Credit: A $500 credit per child for participation in eligible arts or cultural activities. The Arts Credit was included in Budget 2011 and it is a good bet that we’ll see it in the first budget, so be sure to file those receipts away.

Family Caregiver Tax Credit: A $2,000 tax credit to support caregivers of infirm dependants.

Guaranteed Income Supplement Top-up: Extra GIS transfers of up to $600 for single seniors and $840 for senior couples.

Family Tax Cut*: Allow families with children to share up to $50,000 of household income for federal income-tax purposes.

Children’s Fitness Tax Credit*: Double the value of the tax credit for physical activities from $500 to $1,000 and make it refundable.

Adult Fitness Tax Credit*: A $500 tax credit towards fitness activities for adults.

Doubling the Tax-Free Savings Account Limit*: Annual TFSA contribution limit will be boosted from the current $5,000 to $10,000.

No Changes to the Canada Pension Plan: The Conservatives will instead implement a Pooled Retirement Pension Plan.

Most of the pocket book proposals coming out of the new Government in its first few years of office are likely to be very modest. The Conservative record on election promises is somewhat mixed. While they cut the GST and sent out “beer and popcorn” cheques, they also taxed income trusts and did not fully implement a capital gains exemption.

PS: I’m delighted that this blog has yet again been included in The Globe & Mail’s list of the best of the money blogs. Many thanks to Kerry Taylor (aka Squawk Fox) and Rob Carrick for the nomination.

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Election 2011: Comparing Party Financial Platforms

Canadian Capitalist — Tue, 26 Apr 2011 03:59:02 +0000

KPMG has put together a handy table comparing the platforms of all the major political parties on the topic of corporate taxes, personal taxes, child and family care, education, environmental measures and sales taxes. The Conservatives are saying they will continue with the current plan of cutting corporate taxes to 15% by next year. The Liberals are proposing to cancel the planned corporate tax cuts for 2011 and 2012 and keep it at the 2010 rate of 18%. The NDP is proposing to increase corporate taxes to 19.5%, which according to their platform will provide the bulk of the funding for their spending initiatives.

In addition to the initiatives in Budget 2011, the Conservatives are proposing a slew of personal tax initiatives when the budget is balanced. That would include a doubling of the Tax-Free Savings Account annual contribution limit, income-splitting for families, a doubling in the Children’s Fitness Tax Credit and a new Adult Fitness Tax Credit. The Liberals are proposing a voluntary defined contribution plan within the CPP and the Dippers are promising an increase in CPP benefits with a stated goal of doubling the amount but the plan is light on details.

The KPMG article boils down the platforms into a few pages nicely but if you are so inclined here are the links to the entire platforms of the national parties: Conservatives, Liberals, NDP and the Greens.

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Why 30-year olds are screwed?

Canadian Capitalist — Wed, 13 Apr 2011 03:43:12 +0000

In his recent newsletter, financial planner Kurt Rosentreter explains why 30-year old Canadians are, financially speaking, screwed. One reason for the dismal outlook is simply the way things are today what with traditional pensions disappearing and home prices as high as they are. But the main reason, according to Mr. Rosentreter, is the way today’s 30-year olds are playing the hand they are dealt: being totally clueless when it comes to spending, taking on monster debt loads at today’s low, low interest rates and saving little or nothing despite not having a pension.

Today’s 50 year old will make it – they are the last generation to get in before the big mortgages hit and they may still get inheritances from their financially responsible, recession era parents who will die in the next 20 years, providing money for their retirement thankfully. It’s today’s 30 year olds who will be 50 in twenty years that are screwed. With little hope of being debt free in 20 years, with a bad attitude towards savings and debt elimination, with rising costs of children’s education, no pensions coming, frequent career change, wild stock markets, record low interest rates and longer and longer life with rising health care costs, today’s 30 year olds need to win the lotto to have a hope of achieving their financial retirement as culturally expected in Canada. Working to age 70, albeit part time, may become the norm for many in the next twenty years.

I would add one more point to Mr. Rosentreter’s list on why 30-year olds are screwed. The effect of retiring Baby Boomers on public finances is going to be akin to a swarm of locusts moving through a field of crops. Today’s retirees can count on receiving benefits from Old Age Security and Canada Pension Plan. 30-year olds have no such assurance and may find that they are left to fend for themselves.

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Liberal Proposals on the Canada Pension Plan

Canadian Capitalist — Thu, 07 Apr 2011 03:37:25 +0000

If elected, the Liberals promise to work on a new, voluntary supplement to the Canada Pension Plan that they call the Secure Retirement Option (SRO). Here’s how it would work: Canadians can voluntarily contribute an additional 5 to 10 percent of their paycheck into a retirement fund backed by the CPP. A contribution to the SRO will result in an equal reduction in the RRSP contribution room. It is not entirely clear but the wording in the document seems to suggest that the SRO will be a definited contribution plan and hence not a true pension. Since any changes to the CPP will require the assent of the provinces, the Liberals only promise to “pursue this innovative approach”.

The Secure Retirement Option is a new public option, within the CPP, that would change the outlook for those Canadians who currently do not have a pension plan. It would allow them to avoid the risk, complexity and hidden management fees of RRSPs. A two-person household, with earnings that start at $35,000 per year, and rise to $65,000 per year over time would need to have annual pension of $14,000 on top of the existing Canada Pension Plan and Old Age Security to secure a pension worth 60 percent of their household income at retirement. A voluntary six percent contribution rate from gross pay over the working years to an SRO account would put the household on track to achieve that goal. Participating workers who contribute more, or those whose employers provide additional contributions, would receive an even more generous pension.

The SRO is the same supplementary CPP option that received much media attention in the run up to the pension reform roundtable last year. But it doesn’t appear all that different in substance from the Pooled Registered Pension Plans that the Government announced it is working on last December.

The Platform also says that the party will support “a gradual increase of the defined benefits under the core CPP” but details are conspicuous by their absence. How much of an increase are the Liberals talking about? By how much will CPP contributions by both employers and employees increase? Of course, we can’t expect too much from an election platform. Mentioning benefits while omitting any discussion of costs is par for the course for a political document.

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Canadian Learning Passport: Check the fine print

Canadian Capitalist — Wed, 06 Apr 2011 02:19:08 +0000

In their election platform unveiled over the weekend, the Liberal Party of Canada is proposing that if elected they will implement a new program called the Canadian Learning Passport. Under the program, the Liberals will pay $1,000 annually over 4 years for every high school student who attends college, university or CEGEP. Kids from low-income families will receive $1,500 per year. The Learning Passport benefit will be directly deposited into a child’s RESP and the amount will be reduced for part-time students.

The Liberal Platform also mentions in passing that the Learning Passport “will simplify the existing scheme of tax credits by ending and rolling in the modest Textbook and Education tax credits” [Emphasis mine]. For the 2010 tax year, the education amount is worth $400 and the textbook amount worth $65 for every month that a full-time student attends University. For a full-time student attending University throughout the year, these tax credits could be worth as much as $837 per year, which is anything but “modest”. Talk about giving with one hand and taking away with the other!

As reader Phil pointed out the other day, it would be far simpler to directly reducing tuition for all students. But then I suppose the Liberals are banking on the fact that people like receiving $1,000 (or rather a net benefit of $1,000 less the value of existing tax credits) directly more than some abstract promise of tuition fee reductions. And they are also likely hoping that Canadians aren’t paying close attention to the fine print.

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Family Tax Cut: A Tax Cut for the Rich

Canadian Capitalist — Wed, 30 Mar 2011 04:22:21 +0000

The Family Tax Cut that the Conservatives say makes “the tax system fairer” disproportionately benefits one-income families with very high household incomes. I ran some numbers using the excellent Income Tax Estimator available here to find out how much benefit accrues to a one-income household with two children at various income levels. If you look at dollar amounts, families with incomes of $50K or less will save little to nothing under the Tory income-splitting proposal. But, as you can see in the following graphic, families with household income exceeding $100,000 will save substantial amounts on their income taxes.

One could argue that, of course, higher income families would save more because they pay more in taxes. So, let’s look at the percentage of income tax a household could save when the Family Tax Cut is implemented. Ideally, what we’d like to see is lower income households saving a higher percentage on their income taxes than a household with a higher income. But, as the following graphic shows, that’s not the case with the Family Tax Cut. A household earning $50K will save 13% on their federal income taxes, which is less than the 16% that a household earning $200K would save. Single-income households with a household income of $90K will save a stunning 29% on their federal taxes.

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Family Tax Cut: Big Tax Savings for Some Families

Canadian Capitalist — Tue, 29 Mar 2011 04:00:15 +0000

There are some pretty big ‘ifs’ attached to the announcement made by the Conservative Party today that they are planning on allowing families with children split up to $50,000 of income for federal income tax purposes. First, the Conservatives will have to get re-elected with a majority because they are proposing to implement the promise in their “next full term of office”. Second, the Family Tax Cut will be implemented when the budget is balanced, which according to the Government’s own projection in the latest budget won’t be any time before 2015-16.

The backgrounder accompanying the announcement provides two examples of families bringing in the same total household income facing significantly different tax burdens. A family with two parents earning $60,000 and $20,000 will pay $1,292 more in taxes than a family with two parents earning $40,000 each. A single-income household with an annual income of $70,000 will pay $1,992 more in taxes than a family with two parents earning $35,000 each. The Family Tax Cut proposes to eliminate the disparity in tax burdens by allowing couples with dependent children under 18 years of age to share up to $50,000 of their household income for federal income-tax purposes.

The Conservatives say that tax cut will save 1.8 million Canadian families an average of $1,300 per year. The biggest winners will be families with a stay-at-home spouse with a household incomes exceeding $100,000. For instance, a single-income family with a stay-at-home spouse and a household income of $200,000 can save roughly $7,000 in federal income taxes by splitting $50,000 of income. Of course, before they can bank these savings, the Conservatives have to win a majority and balance the budget. Both these conditions may never be fulfilled and in any case, 2016 is another five years away.

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