News Room

May 2025 Poll

Does the Liberal promise expected soon to cut the lowest personal income tax rate by 1% to 14%,  go far enough to help Canadians impacted by high costs?

Evelyn Jacks: Tax + inflation = investor loss

Tax time is a good time to evaluate the tax-efficiency of your investment strategy. This is especially true if the market volatility of recent years has spooked you into replacing the equities in your portfolio with "saferî investments that guarantee your principal and interest.  In the Knowledge Bureau Report of April 11, I promised you a look at the eroding effects of both taxes and inflation on your investment returns. The picture is not pretty. Recall that reporting interest on your income tax return follows two basic tax rules: ï You report interest in the tax year in which it is actually received or receivable. ï You report interest accrued from compounding investments on the debt's anniversary date, even though you haven't received the cash. What effect do those rules, and the annual inflation rate, have on your real returns? Consider the following chart, which analyzes the real return on a $1,000 Canada Savings Bond. In this scenario, we are assuming a 1.8% interest rate, 3% annual inflation and a 10-year hold period. The taxpayer is in the 31% tax bracket. Amounts shown are in current-year dollars (i.e. adjusted for inflation from year 0). Real after-tax return of $1,000 Canada Savings Bond, compounding interest Year Interest earned (1.8%) Taxes (31%) Inflation adjustment(3%) Principal and earnings left Real after-tax return Principal $1,000.00 0 Plus: Less: Less: 1 $18.00 ($5.58) ($30.00) $982.42 (1.76%) 2 $18.32 ($5.68) ($29.47) $965.59 (1.71%) 3 $18.65 ($5.78) ($28.97) $949.49 (1.67%) 4 $18.99 ($5.89) ($28.48) $934.11 (1.62%) 5 $19.33 ($5.99) ($28.02) $919.43 (1.57%) 6 $19.68 ($6.10) ($27.58) $905.42 (1.52%) 7 $20.03 ($6.21) ($27.16) $892.08 (1.47%) 8 $20.39 ($6.32) ($26.76) $879.39 (1.42%) 9 $20.76 ($6.44) ($26.38) $867.34 (1.37%) 10 $21.14 ($6.55) ($26.02) $855.90 (1.32%) Total $1,195.30 ($60.54) ($278.86) $855.90 (14.41%) Source: Essential Tax Facts, 2012 by Evelyn Jacks   After 10 years, your return after taxes and inflation is actually a loss of 14.41% in real dollar terms. Was this a safe investment? At the outset, you may have said "Yesî because the principal is guaranteed. Unfortunately, your principal has lost purchasing power because it could not compete with the eroding factors of annual taxes and inflation. Both time and money are precious. Always consider the real rate of return ó after taxes, after inflation and after taking into account the costs associated with the investment ó that you must earn to create purchasing power when you need it. And be sure to discuss the role of interest in your overall portfolio with your advisors. Evelyn Jacks is president of Knowledge Bureau and author of Essential Tax Facts 2012 and co-author of Financial Recovery in a Fragile World with Al Emid and Robert Ironside. Follow her on twitter @evelynjacks  

Taxpayers make the most of e-filing

As of early April, taxpayers have filed slightly more than eight million tax returns, with more than 80% of filerschoosing one of three electronic filing methods ó netfile, efile or telefile. This is a remarkable uptake of the electronic filing options that were pioneered in the early 1990s. The Canada Revenue Agency (CRA) also reports that the average refund on returns filed as of that date is $1,533. Of the 10% of filers who owed a balance, the average paid was slightly more than $3,187, which, unfortunately, may require some of those taxpayers to pay quarterly tax installments. Twenty per cent of those filing returns had no income, which means they filed in order to receive social benefits. The tax-filing deadline for most individuals is midnight April 30. For proprietors and their spouses, the deadline is June 15, although interest on any balances owing by those proprietors begins accruing on May 1.   Additional Educational Resources: Introduction to Personal Tax Preparations Services course and Essential Tax Facts 2012 Edition.  

Evelyn Jacks: Reporting interest income

It really is time to do that income tax return, with the April 30 deadline for individual filers fast approaching. And reporting interest income deserves particular attention this year, if you are among the worried investors who exchanged stocks for the "safeî havens of interest-bearing debt obligations such as guaranteed investment certificates (GICs) and Canada Savings Bonds. Indeed, the guaranteed return of principal and income resulting from the government using your money is attractive. But it is not all it appears to be: these interest-bearing investments are neither tax-efficient nor inflation-proof. If you take taxes and inflation into account, over time, you will actually lose both principal and purchasing power. Consider the tax filing rules. Interest reporting follows two basic tax rules: ï You must report the interest in the taxation year in which it is received or receivable. ï Compounding allows you to earn interest on interest during the term of the contract. On your income tax return, you must report all interest income that accrues in the year ending on the debt's anniversary date. So, you pay taxes on income you haven't received as you've effectively reinvested the pre-tax interest at the same rate as the principal pays. The issue date of the debt instrument is important because reporting stems from that date rather than the date of ownership. For example, because of the annual reporting rules, which apply to investments acquired after 1989, an issue date of Nov. 1, 2011, does not require interest reporting until the following year, that is 2012. In other words, the accrual of interest for the two-month period of Nov. 1 to Dec. 31 is not reported in the 2011 tax year. Things get even more tricky when investment contracts have unique features, such as: ï they do not bear interest and are sold at a discount to their maturity value; ï the interest rate of the instrument is adjusted for inflation over time; ï the rate of interest may increase as the term progresses; ï interest payments may vary with the debtor's cash flows or profits; ï if the instrument is transferred before the end of the term, a reconciliation of interest earnings must take place. Interest received or accrued each year must be reported as investment income on Schedule 4 ñ Statement of Investment Income and Line 121 of the tax return. Remember: you must report interest income earned even if you did not receive a T slip. Get help from your tax advisor in the trickier situations.  Next time ó Evaluating CSB returns: Taking inflation into account   Evelyn Jacks is president of Knowledge Bureau and author of Essential Tax Facts 2012  and co-author of Financial Recovery in a Fragile World. Follow her on twitter @evelynjacks  

Canada’s export dilemma: Wrong markets, wrong products

Over the past 125 years, whenever Canada has faced a recession or depression, exports have led the country into recovery. But this time around, says Mark Carney, governor of the Bank of Canada, exports have not measured up. "During the most intense phase of the Great Recession ó a nine-month period beginning in the fall of 2008 ó the level of Canadian exports plunged more than 16%, or more than twice the total drop during the previous two cycles,î Carney recently told an audience in Waterloo, Ont. "By the end of last year, exports still remained roughly 8% below their pre-recession peak.î To put that in perspective, considers the Canadian international trade merchandise numbers recently released by Statistics Canada.  In 2011, Canada's exports totalled $457.6 billion, an increase of 13% from 2010, as prices rose 8.6%. Imports increased 10.3% from 2010 to $456.4 billion, mainly on the strength of volumes, which were up 8.3%. That gives Canada a 2011 trade surplus of $1.2 billion, Canada's first annual trade surplus since 2008. So, Canada may be on the right track but it is not there yet. Indeed, Canada has steadily lost global market share. "Our performance has been the second worst in the G-20,î Carney said in his speech. "Our share of the world export market fell from about 4.5% to about 2.5% and our manufactured-goods export market share has been cut in half. Consistent with this drop, employment in Canada's manufacturing sector has fallen by more than 20%, representing nearly half a million jobs.î So, what is to blame for Canada's export challenge? Certainly the strong Canadian dollar has played a role but it seems Canada has also been selling the wrong products in the wrong markets. Our exports are concentrated in slow-growing advanced economies, particularly the United States, rather than fast-growing emerging markets. Since the recession, emerging economies have accounted for about two-thirds of global economic growth and half of the growth in global imports. In Emerging Asia, says Carney, "a massive new middle class is being formed, growing by 70 million people each year and representing a fast-rising share of global demand for all types of goods.î StasCan figures suggest some movement in the right direction. Although exports to the U.S. increased 10.4% year over year to $330.1 billion in 2011, the U.S. accounted for 73.7% of total exports in 2011, down from 87.1% in 2002. Exports to the United Kingdom increased 14.8% in 2011 to a record high of $18.8 billion and exports to China reached $16.8 billion, up 26.9% from 2010. Crude petroleum dominated exports to the U.S., up 32.3% to a record $68.4 billion. Precious metals and alloys represented more than 60% of Canadian exports to the United Kingdom and in trade with China, exports of iron ores and concentrates recorded the largest gains. Wood pulp and similar pulp remained the top export for a second consecutive year. Carney's prescription for reversing Canada's export record? Refocus, retool and retrain, he told his business audience. To read Carney's speech in full, click here .   Additional Educational Resources: Financial Recovery in a Fragile World  

Economic News: Outlook brighter

The latest economic numbers are displaying a spring-like optimism. Businesses surveyed for the Bank of Canada's Business Outlook Survey  are clearly positive about the next 12 months, March employment figures have far outdistanced expectations and corporate Canada is "fit as a fiddle,î as CIBC's March 27 Economic Insights reports. And that is good news for an economy that has been struggling with household debt and government cost-cutting. "Even with public-sector retrenchment underway, and indications that consumers may not have the same appetite to spend as earlier in the recovery,î write CIBC economists Benjamin Tal, Andrew Grantham and Avery Shenfeld in A Corporate Health Check: Fit as a Fiddle, "corporate Canada could be positioned to pick up the mantle and drive economic growth in the years ahead.î The only persistent risk to global growth is escalating oil prices. Writes Shenfeld: "Crude's fate is tied up in the tricky geopolitical dance taking place between Iran and the West, and given the lack of transparency in Iranian politics, a more disruptive misstep is a risk.î But even then, there is cause for subdued optimism. "As a net exporter of oil, and a more significant consumer of renewable energy, Canada is much better positioned than the U.S., Europe or Japan to weather such a storm,î he adds. "A given oil price jump results in a 50% greater hit to growth in the U.S. than in Canada.î Certainly businesses are optimistic about the year ahead. According to the Spring Business Outlook Survey, sales grew over the past 12 months and are expected to grow at an even faster rate over the next 12, based on order books and new contracts. That spills over into increased investment in machinery and equipment and rising employment. "Most firms expecting to expand their workforces cited the need to support current or expected sales growth,î reports the Survey. Statistics Canada's release of March employment numbers was another harbinger of an economic spring. It wasn't just that the 82,000-increase followed four months of little change and knocked the unemployment rate down 0.2 percentage points to 7.2%; it was more the composition of the jobs that created the excitement. "The underlying details of the employment report were extremely positive,î writes TD Bank economist Sonya Gulati in a report, "with gains being broad-based across sectors and industries. The majority of the gains were in full-time positions (more than 70,000), and part-time job creation was a more modest 12,400. Private sector job creation led the way with 42,600 net new positions, the public sector came next with 20,900 and last but not least, the self-employed sector created 18,800 net new jobs.î Dawn Desjardins, assistant chief economist at Royal Bank of Canada, reviews the past 12 months and notes a healthy trend: full-time employment was up 181,300 with part-time employment up a smaller 15,900. As well, average hourly wages for permanent workers were up 2.5% in March compared to a year earlier. Adds Gulati: "With private sector employment creation starting to put together a string of healthy positive numbers, we see that the economic growth baton is, indeed, being shifted from the public sector to the private sector.î Certainly, Canadian businesses have never been in a better position, according to CIBC's composite indicator of corporate strength. Based on nine indicators ó debt-to-equity ratio, cash-to-credit ratio, profit margin, return on equity, return on capital, export diversification by commodities and by countries, business bankruptcy rate and business confidence ó the composite is signaling robust growth: ï Debt-to-equity ratios are below long-term averages and have risen only slightly from 2007 lows. ï Cash as a proportion of corporate credit is at an all-time high of almost 60% (vs. 20% in the 1990s), providing "a considerable cushion.î ï Profit margins ó despite a backward slide during the recession ó are again "within shouting distanceî of their 2008 peak. ï Return on equity took a hit during the recession but has quickly bounced back. That rebound, reports CIBC, has been held back somewhat by two of Canada's strongest-growing sectors ó oil & gas extraction and construction. The accommodation & food sector, on the other hand, posted a return on equity three times its historic average. ï Business confidence finished 2011 slightly above long-term averages, despite global volatility. ï The bankruptcy rate is at its lowest in at least 30 years at only three per 1000. The long-run average is closer to 10. ï On the diversification front, exports to developing countries are increasing after a long history of focusing on the U.S. But diversification by commodity is not as impressive, although Canada is not as heavily reliant on oil as it once was.   Additional Educational Resources: Debt and Cash Flow Management and Elements of Real Wealth Management Courses.  

Evelyn Jacks: Family tax-efficient investment strategies

If the federal budget brought home one lesson about our post-crisis reality it is the importance of being financially self-reliant. If you were born on or after Feb. 1, 1962, you will not qualify for Old Age Security (OAS) benefits until you are 67. That means you need to create another $13,000 in retirement savings to replace those benefits. Yet, economists forecast negligible net returns after inflation and taxes over the next five years ó and that's going to make filling the gap more challenging. Fortunately, your tax return is one vehicle that can propel your efforts forward. That begs the question: are you taking tax rules into account when you are planning your family's investment strategy? Tax-efficient investment-income planning uses available tax rules to shift income among family members in order to equalize the amount reported by each family member, thereby reducing taxes for the unit as a whole. That helps your family create more "redundant income,î allowing you to save more money for the future. Done well, an effective tax strategy will also temper future tax erosion on the accumulated capital pools dispersed among family members. The first goal, then, is to create taxable income in the hands of each family member by using the progressive nature of the tax system ó that is, all the tax credits and deductions to which you are entitled as a family unit ó to average down the tax burden for the family as a whole. Be sure to discuss the following elements of a successful and tax-efficient family investment plan with your tax and investment advisors: ï Recover errors and omissions. First and foremost, always use the Taxpayer Relief Provisions to recover taxes owing to each family member as a result of errors or omissions on previously filed returns. This includes filing omitted returns, which is critical if you are to maximize RRSP contribution room as well as carry forward investment provisions such as capital losses which can reduce future taxes payable. Errors and omissions that end in recovered tax refunds also provide new capital for investment purposes. However, be audit-proof, as opening prior returns invites a check-up by the taxman. ï Maximize access to family tax-free zones. Begin with the Basic Personal Amount by taking advantage of family income-splitting opportunities. Also, by transferring important tax credits from one family member to another ó such as tuition, education and textbook amounts ó those tax-free zones are increased, reducing taxes for everyone.  Again, leverage those tax savings by investing refunds in the right tax-exempt or tax-deferred investment vehicle. ï Put capital in the right hands. Know how to transfer assets among family members. Inter-family investment loans, for example, can shift money to the lower-income family member from a higher income-earner during lifetime and at death. To do so legally, however, you'll need to transfer income and capital within the confines of the Attribution Rules, which can allocate investment income back to you on certain assets transferred to family members. You can avoid the Attribution Rules by putting money into tax-exempt assets for family members, such as Tax-Free Savings Accounts or a principal residence. ï Use tax-deductible debt. Understand what debt is tax deductible and how to shift capital losses from one spouse to another. In addition to interest expenses, other deductible carrying charges include safety deposit box fees, investment counsel fees as well as accounting fees for investment-income calculations. Itís Your Money. Your Life. Tax-efficient investing increases income, which leads to the more effective accumulation, growth, preservation and transition of family wealth. Tax-filing time is a great time to educate yourself and family members: ask your tax and investment advisors the questions for which you need answers. They can help you set up your 2012 tax year to benefit from tax-efficient investing. Evelyn Jacks, president of Knowledge Bureau, is author of Essential Tax Facts 2012 and co-author of Financial Recovery in a Fragile World. To purchase your books, visit www.knowledgebureau.com/books.asp Follow on Evelyn on Twitter @evelynjacks  
 
 
 
Knowledge Bureau Poll Question

Does the Liberal promise expected soon to cut the lowest personal income tax rate by 1% to 14%, go far enough to help Canadians impacted by high costs?

  • Yes
    3 votes
    9.68%
  • No
    28 votes
    90.32%