Take the emotion out of investing

A common mistake is to make decisions based on emotions. In good times, investors are excited, they want to invest more and often “buy high.” When markets turn negative, investors become fearful and decide to cut their losses and “sell low.”

The investing emotional roller coaster shows what an investor may experience as their investment rises and falls. The key is to stay disciplined and committed to your long-term investment plan to avoid riding the emotional roller coaster. There are ways to manage emotions when you encounter uncertainty in the markets. Speak to your advisor – he or she can help provide the knowledge you need to help you stay focused on your long-term goals.

 

Source: https://www2.manulifeinvestments.ca/rs/819-OWT-537/images/take-the-emotion-out-of-investing-en.pdf

© 2019 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. 

 

 

Partnership, sole proprietorship or corporation?

Understanding the basic business ownership structures in Canada.

If you’re a small business owner or are thinking about starting your own business, you’re in good company. Small businesses account for 97.9 per cent of all businesses with employees in Canada and are also the largest private sector employer, providing jobs for almost 70 per cent of the private sector labour force.[1]

While the sky’s the limit for what kind of business you own, there are just three main ownership structures for your business: sole proprietorship, partnership or corporation. Even if you already own a business, the structure that worked for you at the start may not be the one you need now. Understanding what structure is right for your business can help determine a number of things – such as who is responsible for taxes, business decisions and legal matters. Here is a brief overview of each structure to help you get started.

Sole proprietorship

Most small businesses in Canada are sole proprietorships, owned and controlled by one person who has all the legal rights and responsibilities associated with their business. You make all the decisions and reap all the profits, but you also bear all the responsibility if something goes wrong. A sole proprietorship is not considered a separate legal entity from the owner, so if your business incurs debts, claims can be made against your personal income and assets to pay them.

This structure is best suited to a small or a start-up business. Registration is quick and easy and start-up costs are low. From a tax perspective, owners are able to deduct business expenses from their income, which reduces the amount of tax payable. If your business isn’t doing well, you can deduct losses directly from your income. However, if your business becomes profitable, it could put you in a higher tax bracket, significantly increasing your tax burden. In that case, it might be time to shift to a corporation.

Partnership

A partnership is established when two or more people pool their financial, managerial or technical resources to operate a business. Each partner has a share in the management of the business, its assets and profits (or losses) – according to the partnership agreement in place. There is no legal separation between the business and the partners, so business debt claims can be made against the personal assets of each partner. Because partners are held responsible for business decisions made by the other partner(s), it is highly recommended that you put a partnership agreement in place that outlines the authority and responsibility of each partner, as well as how the income will be allocated.

A partnership is best suited to a small or a start-up business and it’s fairly easy and inexpensive to form one. Income from a partnership is allocated to the partners and taxed as personal income on each partner’s own tax return. As with a sole proprietorship, if the business has losses, the losses flow through to the partners and offset other income on their personal tax returns, lowering their taxable income.

Corporation

Unlike the other two structures, a corporation is a separate legal entity, independent from the business owner(s), and required to file its own tax return. Any number of people can form a corporation, an entity that can buy, own and sell property – and also become involved in legal action. The big difference with a corporate structure is the liability, because the corporate entity bears the legal liability rather than the owner(s). Setting up a corporation is usually complex and more costly than a partnership or sole proprietorship.

When a corporation earns income, it pays tax at the corporate level, often at a significantly lower rate than that of individuals. However, when a shareholder draws income out of the corporation, it is taxed at the personal level. Business owners can use the corporation to defer taxes, take advantage of income splitting and capital gains exemptions, and plan for retirement by limiting the amount of salary they draw.

Finding the right business fit

Every business is different, so speak to your advisor today to better understand all the financial, tax and legal implications of each business structure. Your advisor can refer you to a team of specialists that can help structure your business in the way that makes the most sense.

BUSINESS STRUCTURES AT A GLANCE

Sole proprietor

Ownership: One person

Setup and registration:

  • Quick and easy registration
  • Low-cost setup
  • Minimal working capital required

Legal status and liability:

  • Business not a separate entity from owner
  • Owner personally liable for any debts

Tax treatment:

  • Taxed as personal income
  • Business expenses and losses can be written off from personal income

Capital considerations: Difficult to raise capital for expansion, etc.

Death of owner: End of company

Partnership

Ownership: Two or more people

Setup and registration:

  • Low-cost setup, shared between partners
  • Quick and easy registration
  • Legal partnership agreement recommended

Legal status and liability:

  • Business not a separate entity from owners/partners
  • Partners personally liable for any debts

Tax treatment:

  • Taxed at each partner’s personal income level
  • Business expenses and losses can be written off from personal income

Capital considerations: Difficult to raise capital for expansion, etc.

Death of owner: End of company, unless provision has been made in the partnership agreement.

Corporation

Ownership: Any number of people

Setup and registration:

  • Legal registration comes with costs and complexity
  • Annual fees for accounting/legal
  • More oversight, with compliance and annual filing requirements

Legal status and liability:

  • Business is a separate legal entity
  • Owners have very limited liability for corporate debts

Tax treatment:

  • Business files its own tax return
  • Taxed at the corporate rate
  • Can be used to defer taxes or for income splitting

Capital considerations: Much easier to raise capital

Death of owner: Continuous existence; ownership is transferrable.

© 2019 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value.

[1] 1 www.ic.gc.ca/eic/site/061.nsf/eng/h_03090.html

The family dollar juggling act

FOR PARENTS, DAILY LIFE CAN SEEM LIKE A JUGGLING ACT.  Adults in the family have a schedule, priorities and commitments.  Kids have a schedule, priorities and commitments.  Sometimes they match up.  Often they don’t.  As a result, many families become experts at keeping multiple balls in the air.

Fortunately, when it comes to financial planning, there are ways to reduce stress by introducing flexibility and improving balance within the family circus.  Families don’t have to give up the present for the future – or the other way around.  Instead, they can balance their short-term, mid-term and long-term needs, assigning some money each month to a variety of financial goals.  The truth is, many decisions don’t have to be “one or the other” – and that gives families flexibility to plan, save and spend in a way that works best for them.

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Registered savings plans and your estate

How to avoid a tax surprise from your RRSP or RRIF.   

Most Canadians are familiar with the tax advantages of using registered savings plans to save for retirement. Contributions to Registered Retirement Savings Plans (RRSPs) are tax-deductible, and any growth or income earned on the underlying investments inside an RRSP or Registered Retirement Income Fund (RRIF) is not taxed until withdrawn. But what happens when an RRSP or RRIF owner passes away? To help provide some clarity, we’ve compiled a list of answers to some frequently asked questions.

Why am I receiving a T4RSP or T4RIF?[1]

Under Canadian income tax laws, an individual is deemed to have sold or cashed in their assets for their fair market value at the time of death, including RRSPs and RRIFs. This means a T4RSP or T4RIF slip will be issued indicating the fair market value of the RRSP or RRIF at death.

It is the responsibility of the estate, and ultimately the estate beneficiaries, to pay income taxes on RRSP or RRIF assets even though those assets may have been paid directly to a beneficiary named on the plan. It is also important to note that for Canadian residents, no taxes are withheld on amounts paid out of an RRSP or RRIF due to death.

What are the income tax implications? 

The value of the RRSP or RRIF, as indicated on the T4RSP or T4RIF slip, must be included in the owner’s income for the year of death. This amount is fully taxable as regular income.

How can the income tax bill be reduced? 

If the RRSP or RRIF is left to a qualifying beneficiary (named directly on the plan or will), it is possible for the value of the RRSP or RRIF at death to be taxable to the qualifying beneficiary and not the estate.

Who is a qualifying beneficiary? 

1. Spouse or common-law partner[2]

The assets of an RRSP or RRIF can be transferred directly to a spouse or common-law partner’s RRSP or RRIF as a tax-free rollover. If the surviving spouse or partner is under age 71, the assets can be transferred to their RRSP. If the surviving spouse or partner is age 71 or older, the assets can be transferred to their RRIF or eligible annuity.

The surviving spouse or common-law partner will report the value of the deceased’s RRSP or RRIF on their tax return for the year and will receive an offsetting deduction for the transfer. They will be taxed on any withdrawals made in the future. The actual transfer of the RRSP or RRIF must take place in the year the survivor receives the deceased’s RRSP or RRIF, or within the first 60 days of the next year. If the transfer does not take place during the required time frame, the full value of the RRSP or RRIF can still be included on the surviving spouse or partner’s tax return, but no offsetting tax deduction will be allowed.

In the case of a RRIF, the surviving spouse or common law partner may be named a successor annuitant in the plan or the will. This means that they will simply receive the same periodic payments the deceased received from the RRIF. No special taxation issues arise on death when a successor annuitant is named; instead, the successor is taxed on the payments received each year.

2. Financially dependent infirm child or grandchild If an RRSP or RRIF is left to a child or grandchild who was financially dependent on the deceased by reason of mental or physical infirmity, the value of the RRSP or RRIF is usually not taxed in the hands of the deceased. In this situation, the child or grandchild can transfer the assets into their own RRSP or RRIF, or purchase a life annuity.[3] The transfer must take place in the year the RRSP or RRIF is received, or within the first 60 days of the next year, and the dependent child or grandchild will be taxed only on future income or withdrawals.

An infirm child or grandchild is considered financially dependent on the deceased if his or her income in the previous year was less than the basic personal amount plus the disability amount for that previous year. If the child’s or grandchild’s income is above this amount, he or she may still qualify as financially dependent, but only if the financial dependency can be demonstrated based on the particular situation.

3. Financially dependent minor child or grandchild If an RRSP or RRIF is left to a minor child or grandchild who was financially dependent on the deceased, the value of the RRSP or RRIF is usually not taxed in the hands of the deceased. Instead, the minor child or grandchild can use the RRSP or RRIF to purchase a term certain annuity. The maximum term for the annuity is a period equal to 18 years minus the age of the child at the time of purchase. Depending on the age of the child, this may defer tax only for a short time. However, since a minor most likely has few or no other sources of income, this may allow the income to be taxed at a lower tax rate than it would have been on the deceased’s final tax return.

What happens if an adult child is named as beneficiary?

If an RRSP or RRIF is left to an adult child who is not mentally or physically infirm, there is no tax deferral available. The amount will be fully taxable on the final tax return of the deceased and will be passed directly to the adult child named as beneficiary.

What happens if the estate of the deceased is named as beneficiary? 

If the estate is named as beneficiary of the RRSP or RRIF, generally the fair market value of the RRSP or RRIF is included as income on the deceased’s final tax return. However, if an amount is paid from an RRSP or RRIF to the estate and a qualifying beneficiary is named in the will, the legal representative of the estate and the beneficiary may file a joint election to treat the RRSP or RRIF proceeds as being paid directly to the beneficiary, in which case the same potential tax planning opportunities to the deceased’s estate will be available.

Speak with your advisor 

The tax rules when a person passes away can be complicated, and your advisor is the best person to talk to. He or she can refer you to a tax or legal specialist, depending on your specific situation. 

© 2019 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value.

[1] Quebec residents receive another form, RL2, used to file their tax returns with Revenu Québec.

[2] As these terms are defined in the Income Tax Act (Canada).

[3] The existing RRSP rollover rules are extended to allow the rollover of a deceased individual’s RRSP proceeds to the Registered Disability Savings Plan (RDSP) of a financially dependent infirm child or grandchild.

Investment loans 101

Borrowing to invest could increase both return potential and risk.

Many Canadians already borrow to invest without thinking about it that way. Taking out a mortgage to buy a home is, technically, leveraged investing. The homeowner borrows part of the money needed to make an investment in real estate that he or she couldn’t otherwise afford. As a result, the homeowner is more exposed to fluctuations in the real estate market – benefiting more if the market value of the home rises but also risking more if the market value of the home falls. 

Some people choose to use a similar strategy when investing, and borrow some or all of the money they want to invest. Again, this strategy amplifies the benefit if the value of their investments rises, but also amplifies the risk if the value of their investments falls. That said, for the right investor – one who plans to invest for the long term and has a higher tolerance for risk – borrowing to invest can be an effective way to accumulate wealth more quickly. And, when investing outside a registered plan, the loan interest may even be tax-deductible.

How does it work?

Two types of investment loans are 100 per cent loans and multiplier loans. With a 100 per cent loan, the investor borrows the entire amount he or she plans to invest. Some lenders offer 100 per cent loans ranging from $10,000 to $300,000. With a multiplier loan, the investor already has some money to invest, and the lender multiplies the value of the investor’s capital by up to three times, with loan amounts that can range from $10,000 to $1 million.

Regardless of the loan type, the overall strategy is usually the same. The investor borrows a lump sum, invests the money and keeps any investment growth, while paying interest on the loan. The key to a successful investment loan strategy is ensuring that the return on the investment is significantly higher than the interest on the loan – providing some leeway in case interest rates rise – and that the return is relatively stable, experiencing little volatility. That means the choice of investment is critical: it should provide solid performance with low risk.

Investors should be aware that they must be disciplined about paying back the loan because, unlike a mortgage, investment loans often don’t require that some principal be repaid with every payment.

What happens when investments rise – or fall?

An investment loan increases the amount of money an investor has available to invest, which amplifies any gains or losses. For example, if you invest $10,000 and get a three per cent return in one year, you could make $300. If you are able to invest four times that amount in the same investment with a 3:1 multiplier loan – $40,000 – you could make four times as much that year: $1,200. Compound stable returns annually over 10 years and the non-leveraged gain could be $3,439.16, while the leveraged gain could potentially be $13,756.66. 

However, let’s say that instead of earning a three per cent return in one year, the investment decreases in value by five per cent. In that case, a $10,000 investment would be worth $9,500, a loss of $500. A $40,000 investment would be worth $38,000, a loss of $2,000, and the full loan balance of $30,000 plus interest is still owing. Negative returns over time may prompt the lender to call the loan and require that it be repaid – in the worst case at a time when the investment value is worth less than the loan, requiring the investor to dip into other savings to pay off the debt.

Is it right for you?

Investors who are thinking about borrowing to invest should consider their time horizon, risk tolerance and the amount of debt they already have. They should be able to count on enough income to cover loan payments and taxes due on potential investment growth. They should also evaluate whether they can reliably earn returns that are significantly higher than the interest on the investment loan.

If you’re interested in finding out more about investment loans, speak with your advisor. He or she can help you weigh the benefits against the risks and decide if this approach is right for you.

INVESTMENT LOANS AT A GLANCE

Benefits

  • Potential for greater gains
  • Interest may be tax-deductible
  • Interest-only payments often available

Risks

  • Potential for greater losses
  • Interest rates may rise
  • Need a plan to pay back the principal as well as interest

© 2019 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value.

The value of advice

How having an advisor can bring you closer to reaching your financial goals.

Ever notice how many of life’s biggest goals have some financial component? Sure, you can master a foreign language or run a marathon without making a significant financial commitment. But try buying a home, starting a family or helping your kids go to university. Same goes for retiring early or leaving a legacy. Without disciplined planning and saving, these goals can just slip away.

Like many other Canadians who are juggling a job and a busy family life, you probably don’t have time to figure it all out for yourself. Then again, you may feel you don’t have the expertise to tackle the complexities of your financial affairs alone.

Not just about retirement

Some Canadians start thinking about talking to an advisor in their 40s or 50s, when retirement first peeks over the horizon. Life-changing events such as buying a house or having a child can also trigger a financial reckoning and the need for advice. But your goals don’t have to be that large and you don’t have to be wealthy. In fact, 64 per cent of advised households in Canada started working with an advisor when they had less than $50,000 in investable assets.[1]

Working with an expert has plenty of benefits

Turning to a professional for advice offers a huge advantage and can be the decisive factor in helping you meet your goals. Good advice might even help you surpass them. Surprised? According to a recent study, of those surveyed, Canadians with advisors financially outperformed those without.[2]

While different advisors bring different professional and personal skill sets to the table, a solid advisor will do three things:

1. Learn about you. This includes assessing not just your finances, but also your family situation, short- and long-term goals – even your hopes and dreams. Just as important, your advisor will establish your risk profile. Are you the buttoned-down type of investor who avoids risks? Or do you relish the thrill ride of stock markets, with their potential big payoffs? An advisor may also be able to provide access to a network of professional resources such as accounting and legal services.

2. Build your plan. This is the all-important “advice” part. Your advisor will work with you to create a comprehensive plan that balances today’s needs with your goals for the future, easily adaptable to changes in circumstance. It should also have milestones along the way, so you can gauge your progress. A complete plan will most likely include:

  • Disciplined savings: amounts to put aside on a regular basis
  • A customized investment strategy: based on your risk profile and time horizon
  • Debt management and cash flow planning: this should be part of every financial plan
  • Tax strategy: to help minimize taxes, of course
  • Risk management: life, disability and critical illness insurance, to help protect your family
  • Retirement plan: depending on your age and goals, the plan may include projections of when you can expect to retire, and with how much money
  • Will and estate plan: to protect your legacy

3. Adjust your plan. Life is all about change – often unexpected change. This means your plan should be flexible and subject to a regular review, generally once a year. That’s when you’ll sit down with your advisor to check your progress, revisit your goals and, if necessary, reset your course.

A prescription for long-term success

As you develop your plan, it’s important to be realistic about your expectations. An advisor won’t magically make your debt disappear or guarantee double-digit returns on your investments. He or she will, however, provide ongoing support and guidance so you can remain focused on your goals through the ups and downs life throws your way.

Be prepared, as well, to hold up your end of the relationship with some basic knowledge about the financial world. Start by reading the business section in your paper or following financial experts on social media. You don’t have to be an authority. But the more you know, the more you can be involved in some of the most important decisions in your life.

Regular checkups: your financial well-being depends on them

Getting started early on with an advisor and scheduling routine reviews can provide a considerable financial advantage in the long run. Be sure to ask questions and get the information you need to feel a high level of trust and comfort. After all, the healthiest and most rewarding relationship is one that will benefit you not just today, but well into your future.

© 2019 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value.

[2] www.ific.ca/wp-content/uploads/2018/01/Advisor-Insights-Modest-Investors-Easy-Access-and-the- Freedom-to-Choose-are-Keys-to-Successsful-Long-term-Investing-January-2018.pdf/18860

Living solo

 

How to manage finances on a single income.

In 2016, one-person households became the most common living arrangement in Canada for the first time, accounting for 28 per cent of all households and representing 4 million Canadians.[1] The number of people living alone between 35 and 64 has increased faster than other age groups, so the trend is not limited to the younger or older ends of the adult spectrum.[2]

The shift to one person households can largely be attributed to Canadians marrying later in life, divorcing more often and living longer.[3]

Singles are feeling the squeeze

People who live alone have a unique set of financial challenges. Most single Canadians are on the hook for 100 per cent of their living expenses and have no partner to fall back on financially should they lose their job or become ill or injured. They often have fewer tax planning opportunities, such as income splitting or family tax deductions, and may delay saving for retirement because they spend their money on more immediate financial needs.

Understandably, some solo dwellers feel their paycheques are stretched to the limit. Housing affordability is a major concern. According to the 2016 Census, 41 per cent of one-person households spent 30 per cent or more of their average monthly household income on rent or mortgage payments.[4] A recent survey found that 46 per cent of those living alone said they struggle to save for retirement while managing day-to-day bills, since they have to cover all their expenses on a single income.[5]

Financial basics for solo living

With careful planning, Canadians who live alone can support themselves financially – and still be able to save for their financial goals. Here are some tips.

Set up an emergency fund

One of the first things to consider is starting a fund to cover you in case of a financial setback. A small amount put aside with a weekly or monthly automated payment on payday will grow to a healthy balance quickly (aim for three to six months of expenses), and you’ll barely notice the reduction on your paycheque. A non-registered savings account that pays high interest without locking in your money is a good option. And while you don’t want to have to rely on credit cards in an emergency, you could consider opening a line of credit, which would typically charge a lower interest rate.

Create a budget

It’s tempting to travel and dine out, or indulge in other social activities, when there’s just one set of needs and wants to consider. A budget helps avoid the pitfalls of overspending and can show you how you might be able to reallocate funds towards savings. An array of budgeting apps, tools and worksheets is available to help you get closer to your financial goals – not to mention your advisor.

Consider insurance

Because singles depend so heavily on their ability to earn a paycheque, income protection such as critical illness, disability or supplemental health and dental insurance could be more beneficial than life insurance. Should an unexpected illness or disability arise, income replacement protection could help provide an income to someone who is unable to work, so they can manage their expenses with less worry and focus on getting better. An advisor can help you determine which type of insurance is most suitable for your situation.

Plan for retirement

Start as early as you can and keep investing – even if it seems difficult. Longer-term investing gives you a longer period of potential investment growth, and even small deposits can add up quickly. Contributions toward your Registered Retirement Savings Plan (RRSP) and/or Tax-Free Savings Account (TSFA) can help with tax efficiency and should be included in your budget.

Unique financial needs

If you are a single Canadian, speak to your advisor. You likely have different tax considerations than a dual-income household, and significantly different estate planning objectives. Your advisor can help you create a financial plan that fits your situation.

SPECIALIZING IN SINGLES

As solo living continues its upward trend, more businesses are catering to singles. Here’s how some industries are tapping into this market:

Grocery stores

More products are now available in smaller packages, such as meats, fish and fresh produce, along with an expanded offering of ready-made meal options for one.

Travel companies

Some waive the single supplement fee or allow singles to pair up in rooms, others offer all-inclusive trips or cruises priced for single travellers. Companies also organize opportunities for singles to meet, such as happy hour receptions or pre-voyage meet-ups.

Condo developers

The increase in condo construction has coincided with the rise of the single demographic. Suited for the single lifestyle, condos can be a more affordable option.

Source: www.cbc.ca/news/business/solo-living-business-opportunities-1.5046913

© 2019 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value.

[1] Statistics Canada, “Study: Living alone in Canada,” March 6, 2019, www150.statcan.gc.ca/n1/daily-quotidien/190306/dq190306b-eng.htm (accessed May 6, 2019).

[2] www.cbc.ca/news/business/canadians-livingalone-single-statistics-canada-1.5045116

[3] Ibid.

[4] Statistics Canada, “Study: Living alone in Canada,” March 6, 2019, www150.statcan.gc.ca/n1/daily-quotidien/190306/dq190306b-eng.htm (accessed May 6, 2019).

[5] www.advisor.ca/news/industry-news/help-single-clients-plan-for-retirement

 

Bank of Mom and Dad

How you can help adult children without jeopardizing your own financial future.

With the cost of housing and education continuing to rise in Canada, it’s more difficult for younger generations to get established. While average hourly earnings (adjusted for inflation) rose approximately $3 between 1977 and 2016, average housing prices have more than doubled, and significantly more than doubled in many of Canada’s urban centres.[1] The cost of a university education has almost doubled just since the early 1990s,[2] with tuition rising by 3.7 per cent annually over the past decade.[3]

It should be no surprise then that the number of adults aged 25 and older living with a parent has almost doubled since 1995.[4] In fact, two-thirds of Canadian parents are helping their kids financially, and one in five are assisting with larger purchases, such as a home or post-secondary education.[5]

It’s entirely understandable that parents want to help their children – but does helping leave parents at a disadvantage? Consider that, according to a report by the Financial Planning Standards Council, one-third of parents helping their millennial children pay for post-secondary education say they will have to postpone retirement, and 32 per cent of parents indicate that the financial strain is preventing them from paying off debt.[6]

Access your home equity instead of liquidating your savings

If you are a homeowner and a parent who intends to help your adult children financially, there may be a better solution available to you. Rather than dipping into your retirement savings, why not use the equity in your biggest asset – your home – to provide some financial flexibility and enable you to help fund large purchases for your children?

There are financial products that allow you to combine your mortgage, savings and income together in one multipurpose account. Any income you deposit can instantly reduce the amount you have borrowed (your mortgage or any other loans you might have). You reduce your loan interest costs until you need the income for your monthly expenses. When you combine your income and debt in one account, you save much more in interest costs than you’d usually make in interest earnings. And the best part is you can access that money whenever you need it (up to your borrowing limit).

If you have adult children who need financial help from you, make sure that your needs are met first – or you may be the one asking for help from your children later on. Unique financial solutions are available that can provide access to your home equity, and prevent you having to liquidate other investments.

Speak to your advisor today to figure out if an all-in-one account is a suitable solution for you.

© 2019 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value.

[1] https://globalnews.ca/news/3854264/boomers-gen-x-millennials-cost-of-living-canada

[2] Ibid.

[3] www.theglobeandmail.com/investing/personal-finance/article-parents-financially-supporting-thirtysomething-kids-its-happening

[4] Statistics Canada, “Family matters: Adults living with their parents,” The Daily, February 15, 2019, www150.statcan.gc.ca/n1/daily-quotidien/190215/dq190215aeng.htm (accessed May 8, 2019).

[5] www.huffingtonpost.ca/2018/12/13/canadian-parents-financial-help_a_23617433

[6] http://fpsc.ca/docs/default-source/FPSC/children-and-financial-dependency-fpsc-leger-study-2017.pdf

Recovering from a financial setback

IN LIFE, EVERYONE EXPERIENCES SETBACKS. These can run the gamut from losing a job to going through a divorce, to recovering from a serious illness. Then there are the unexpected expenses life throws your way. They happen all the time. A leaky roof, a flooded basement, a car breakdown – any one of these may cost thousands of dollars to fix, with the money required right away.

Sometimes, more than one of these difficult situations occur at once. It goes without saying that challenging circumstances can affect your finances – but just how do you recover and get back on track? Here are some tips.

1. Get professional advice

Whether a financial setback is big or small, a professional perspective can be invaluable. Your advisor can work with you to assess the impact on your short-term and long-term plans, to adjust or create goals, and to develop a plan of action that helps lead to recovery. Getting advice early can help you avoid making rash decisions – for instance, racking up a large credit card balance – that could be difficult to unwind after the fact. Your advisor should make you feel comfortable and offer constructive ideas on how to address your problem.

2. Tighten your budget

Any budget usually has some slack. Whether your income has dropped or your expenses have risen, it’s time to eliminate that slack to get your budget back in balance. Take a hard look at your discretionary (or non-essential) costs – everything from entertainment to travel. Are there free or lower-cost alternatives, such as books, magazines and videos from the library, activities in a local park or at a community centre, or a staycation instead of a vacation? You may even be able to negotiate a better deal on certain products and services (think bulk purchases and bundled discounts) without cutting back.

3. Explore big-ticket cost savings

If the financial setback looks as if it could last a long time, and cost a great deal, you may need to make significant lifestyle changes – changes that go beyond trimming. Examine the biggest line items in your budget. Can you move to a smaller home in your area, or a similar-sized home in a more affordable area? If you have two cars, can you make do with one and sell the other? Such changes are difficult to make, but they may be essential to help protect your future financial well-being.

4. Earn extra income

Can you bring any more money into your household? Perhaps you can sell something of value – art, antiques, collectibles. Or maybe you can work more hours (for example, moving from part-time to full-time) or even take a second job. Of course, if you’re caring for children or a family member and would have to make alternative arrangements so you can work more, run the numbers to ensure your after-tax income will more than pay for those costs.

5. Talk to your mortgage provider

If you have a mortgage, you may be able to reduce your monthly costs by negotiating more manageable terms with your mortgage provider. For example, you could switch from accelerated to standard payments, reducing the annual amount you have to pay towards your mortgage. If you were on an accelerated payment schedule, or if you’ve made lump-sum prepayments in the past, your provider may even be willing to give you a short-term holiday from payments. You may also want to ask about lengthening your mortgage’s amortization and adding any payments you’ve missed to your mortgage balance so you can pay those amounts gradually.

6. Talk to other creditors

Rather than letting bills slide, call your creditors, explain your situation and ask if it’s possible to lower your interest rate, reduce your payments or defer your payments for a period of time. This can give you breathing room to get through the worst of a setback and help to protect your credit rating – which will suffer if you simply stop making required payments. Another option to explore with your advisor is debt consolidation, which brings all your debts into one lower-interest-rate account with a single payment due every month.

7. Borrow sensibly

If you can’t find ways to spend less or earn more, and you’ve run through your emergency fund, take the time to research the lowest-cost sources of borrowed money in order to secure some extra funds. For homeowners, this is usually a secured line of credit. In some cases, a personal loan may be a good choice because it requires repayment according to a set schedule – so you know when you’ll be free of that particular debt. Your advisor can help you identify the best solution for your personal situation.

Look beyond the immediate problem

Recovering from a financial setback is a journey. It may take many months or even years to return to a place where you’re as comfortable financially as you used to be. But, in many cases, it can be done. What it takes is determination, patience and good planning.

As your financial situation starts to improve, try to stick to a streamlined budget so you can put extra money towards your debts. Gradually, start building a substantial emergency fund so you have resources available the next time you run into a financial setback.

Once you are in a stronger position, with more of a surplus, look at other ways to help protect yourself from future shocks to your finances, such as health and dental, critical illness and/or disability insurance.

Set some money aside for the future once you are able to take a longer-term view. That may include saving in a Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), Registered Education Savings Plan (RESP) and/or non-registered account.

When you have enough distance from the event, look back and consider if you might have done anything differently to soften the effects of the setback. Your goal should be to learn from the experience, without assigning blame to either yourself or your partner. What happened, happened. The key is to make sure you’re in a stronger financial position in case another difficult situation occurs.

How to hand down your cottage while keeping the peace and saving money

By Penny Caldwell

Nothing is sure but death and taxes. Ben Franklin said it centuries ago, but it’s never been more relevant than now for the aging cohort of cottagers preparing to transfer ownership to the next generation. “If you’ve got time and some creativity, and you are dealing with advisors who have done it before, then it’s straightforward,” says Jamie Golombek, the managing director, tax and estate planning with CIBC Financial Planning and Advice. “The problem is if you haven’t done any planning, and someone dies, then there’s a tax bill to pay right away. Where’s the money going to come from?”

Where indeed? But finding the money for taxes is only one part of a sound succession strategy. With planning, you can also ensure that the cottage stays in the family and that it goes to the children who really want it. You can lessen the capital gains tax hit or even postpone it for generations. You can reduce or avoid costs such as the estate administration tax (also known as probate fees). And you can protect the cottage from financial or marital claims, a concern that’s top of mind for many parents. Finally, and perhaps most important, you can put a cottage sharing agreement in place that provides a framework for solving multi-owner conflicts.

Where to start? The good news is that there’s at least one neat, novel trust technique for keeping the cottage in the family. But hold that thought. To understand the benefit of planning, you first need to understand all the ugly issues around cottage succession, because the best option may be a combination of strategies. Ready? Here we go.

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