Comments on: Ideas for Your Tax Refund

By: Canadian Capitalist

Canadian Capitalist — Mon, 05 May 2008 20:22:16 +0000

pessimist: I keep Canadian stocks in taxable accounts to take advantage of the dividend tax credit. But the #1 priority for us after contributing to the RRSP is paying down the mortgage.

By: pessimist

pessimist — Mon, 05 May 2008 16:54:20 +0000

Hi CC. I am a newly minted Canuck and appalled at my tax bill. Most of my investments are foreign (obviously, since I moved here last year) and I only just realized that what would’ve been a fat refund got eaten up by taxes on my foreign dividends. So what kinds of mutual funds or ETFs do you keep in taxable accounts? Any recommendations? Thanks.

By: simms

simms — Thu, 01 May 2008 04:16:18 +0000

Jon202, which form would you use to claim the Transit Pass deduction? It’s not an option on the T1213 or the TD1.

By: Canadian Capitalist

Canadian Capitalist — Wed, 30 Apr 2008 14:28:41 +0000

Al: I agree with your list and your opinions. Rob Smith, commented elsewhere that a good thumb rule to follow would be to have home equity and other investments roughly equal. I think that’s a good thumb rule to follow provided mortgage debt can be comfortably carried.

By: Al

Al — Tue, 29 Apr 2008 13:06:09 +0000

I’m partially with sow and partially against.

He seems to be advocating using ‘extra’ money to invest to create cash flows. If you’re doing this while you have debt, then you are by default using leverage to invest.

Pros:
1) If the investment pays a greater after-tax rate than the debt costs, then you get ahead.
2) Most investments are more liquid than your house, so you have better access to the money if needed.
3) Putting all your money towards paying off the mortgage instead of investing elsewhere means you are not diversifying. I think this is where sow is seeing the risk.

Cons
1) Contra pro 1, the alternate investment either won’t have a higher after-tax rate of return or won’t be gauranteed. Paying off mortgage is very safe this way.
2) As mentioned, you are leveraged as long as you have debt and thus are taking on risk.
3) If your house does fall in value and you become ‘underwater’ then refinancing could be impossible.

Personnal Assesment
1) If you have a large mortgage/long amortization, throw as much money at it as you can (assumes you have a significant cash reserve).
2) If your mortgage is getting smaller, consider diversifying into other investments. I suggest avoiding rental properties as you’re still investing in real estate.
3) Like CC, who care what the rich do. They can afford to lose big bucks on risky ventures gone bad.

By: Robillard

Robillard — Tue, 29 Apr 2008 06:40:46 +0000

I disagree with sow. Of course if you have immediate need for the money, prepaying your debts is rather silly. Everyone who can afford to ought to maintain a certain amount of “safety funds” in liquid investments to avoid having to take on credit card debt, refinance a mortgage or sell longer term investments in order to pay for an emergency. Otherwise prepaying debts is a reasonably good option since it pays a tax -free return (unless you get a tax credit for the interest) equal to the interest rate on the loan. By prepaying now, you generate cash flows when the debt is finally repaid with a present value equal to the amount you prepay. A property does not get more risky as one pays down the debt. If it is a house or condo you inhabit, it continues to generate payments to you equal to the rent you would have had to pay if you didn’t live there. Furthermore, as the less of the value of the property is owned by the mortgage lender, in theory it becomes easier to refinance or change the terms of the mortgage if the need arises.

By: Canadian Capitalist

Canadian Capitalist — Tue, 29 Apr 2008 02:55:39 +0000

sow: How so? This is the first time I’ve heard someone say that pre-paying their mortgage is a riskier option. I couldn’t care less what the rich do; I try and do what’s best for my situation and for my circumstances and that’s how I believe everyone should.

By: sow

sow — Tue, 29 Apr 2008 02:25:10 +0000

CC,
Let me add my two cents before you use your tax rebate to prepay your mortgage. When you prepay your mortgage, this investment gets riskier and riskier. Consider this, the more equity you put into that house, the greater chance that you won’t see those dollars in the future. What if you need the money? Keeping the equity separate from your house will be the safest position you can be in. Your house was made to shelter people, not money. Check out http://www.stewardsofwealth.com/ for alternative ways to create wealth. What you’ll find is that the rich don’t do things a little different than the poor and middle class, they do the complete opposite. Keep it goin’ CC!

By: brad

brad — Tue, 29 Apr 2008 00:41:32 +0000

Aleks and Phil, what about using it (or some of it) to make charitable donations? I set myself an increasing target each year for charity, and given that the tax refund is income I hadn’t planned on having, I sometimes end up donating it. That can help reduce your tax burden while contributing to causes or organisations that you care about.

By: Phil S

Phil S — Mon, 28 Apr 2008 23:55:12 +0000

I’m in the same boat as Aleks. I kind of wished that they kicked in the TFSA for THIS year, so I could put my return somewhere that it won’t add to my tax burden. To compound my dilemna even more, my condo is already jam packed full of stuff that I don’t use much. So, I don’t even know what kind of “stuff” I would buy with my excess cash. I generally like to blow my cash on vacations, but I just started a new job and my vacation time won’t kick in for a while.