NEVER SAY NO TO A FREEBIE
Some things never change when it comes to saving, building and managing money. Business columnist Jonathan Chevreau presents the final instalment of the seven eternal truths of personal finance.
The final eternal truth of personal finance is to accept all offers of free money from the government.
True, where government is involved, opportunities for free money are few and far between. Most of us are in effect giving the government free money in the form of taxes. So any tax break can be viewed as a form of free money that should be maximized.
But before we get into that, let’s review the places where you really can get outright gifts of free money from the government. One that comes to mind is the RESP, or Registered Education Savings Plan. The 20 per cent Canada Education Savings Grant (CESG) is a $500 annual freebie as long as you contribute enough to your children’s education plans: 20 per cent of $2,500 is $500, so that’s the sweet spot.
Where the TFSA really shines is in retirement, because all withdrawals are totally free of tax
Then there are tax breaks targeted to certain citizens: users of public transit, fitness for youth, disability credits, child benefit, medical expenses and so on. Make sure you know what’s available to you and claim them. Refer to Evelyn Jacks’ Essential Tax Facts or other annual tax guides for a complete rundown.
Once in a blue moon, there may be freebies like the 2009 Home Renovation Tax Credit, which was meant to stimulate the economy in the aftermath of the 2008 financial crisis. The pond and waterfall in our backyard owes its existence to this $10,000 tax break.
The Ontario government’s $2,000 rebate on hybrid vehicles is another one, although it no longer applies. Some jurisdictions offer incentives to install solar energy panels or other forms of alternative energy. When these short-term freebies arise, you should jump on them.
Most Canadians will qualify as of age 65 (or 67 for younger folk) for Old Age Security (OAS) payments. Unlike CPP, you don’t have to pay into the OAS program: the money comes from general tax revenues, but you have to reside in the country for the stated minimum periods. This “freebie” may be clawed back if you have too much income coming from pensions, Registered Retirement Income Funds and non-registered savings.
On the other hand, those with no other financial resources may qualify for the Guaranteed Income Supplement to OAS, otherwise known as Senior’s Welfare. This one is a double gift: not only is it a freebie for the minority who qualify, but it’s also a tax-free gift. Of course, Ottawa has been criticized for not going out of its way to let seniors know about this program. As with OAS and CPP, once you’re old enough to qualify, you have to initiate the process, preferably six months in advance of the day you hope to start collecting benefits.
Next we come to ways of sheltering or deferring tax on investments. Now we’re definitely in the realm of tax minimization, not of getting an actual net benefit from government. The RRSP is the biggest example and has been around more than half a century.
As most readers know, the RRSP has two big tax benefits: first, it gives you an upfront tax deduction, which you can generate by making a contribution in the previous tax year and then filing your taxes on time. This especially benefits those in higher tax brackets, since the contribution immediately lowers your taxable income. The second benefit is ongoing sheltering of investment income that would otherwise generate annual tax on interest, dividend income and possibly capital gains.
Like many other government “freebies,” the RRSP is not an outright gift. The hitch is that one day when you want to withdraw the funds, you’ll be taxed at your top marginal rate, usually when the RRSP has been converted to a RRIF, and minimum annual withdrawals (fully taxable) commence after age 71. Fortunately, April’s federal budget slashed these minimum withdrawals by about 26 per cent, bringing them closer to today’s minuscule interest rates.
Certainly, all those years of tax-free compounding is better than being fully taxed each year on non-registered investments. And if you wind up in a lower tax bracket in retirement than you were when you were working, the difference in tax rates could be considered a type of government “gift.”
The mirror image of the RRSP is the newer TFSA, or Tax Free Savings Account, launched in 2009, annual contributions to which were bumped to $10,000 in the last budget. The TFSA offers no upfront tax deduction but does have the RRSP’s attribute of sheltering ongoing investment income from tax.
Where the TFSA really shines is in retirement, because all withdrawals are totally free of tax. This makes the TFSA the perfect “gift” to accompany lowerincome seniors who are receiving OAS and in some cases GIS. Unlike RRSP and RRIF withdrawals, TFSA withdrawals won’t trigger clawbacks of OAS or GIS benefits. So it’s a rare example of a double-freebie provided by government.
It’s worth singling out the capital gains tax exemption on principal residences too. Again, this is not so much a gift as it is a lower-than-usual form of punishment by taxation. But relative to most taxes, it’s a break that’s right up there with RRSPs, TFSAs and business ownership.
So those are our seven eternal truths of personal finance. No doubt the list could be expanded and I welcome reader suggestions. But I’d wager that anyone who takes this initial list of seven to heart and implements the ideas will be well on the way to financial independence.