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Tax return - check
Today I filed my and m's tax return using Netfile. Nothing like waiting until the last minute (if you haven't filed yet as a Canadian you have until tomorrow at midnight). I used Quick Tax (as I have for the last 3-4 years or so) to prepare the return. Usually I file our taxes in early March or so but this year was a little more complicated than previous years. I had a bunch of capital gains to calculate which was a bit of a pain and we both had T3 slips rolling in as late as the first week of April.
This isn't quite as bad as it sounds; I had most of our return figured out just before March 1, so that I could make a small RSP contribution that would ensure I wouldn't have to pay any taxes, and in fact get a return. M had tuition and educations amounts that would ensure that she got a refund so no RSP contributions were required for her. Our total return will amount to right around $2000, with m getting a little more than two thirds of that and the rest going to me. Since I knew we would be getting some money back that means we don't really have a deadline. As far as I know there isn't a penalty if you are getting a refund (other than the opportunity cost of not having the cash) for filing late. However, if you owe money there is something like a 5% penalty for not filing on time and then a 1% penalty per month on the outstanding balance. So if you do owe taxes, make sure you file before tomorrow at midnight.
So how many of you out there are cutting it even closer than I did?
Sam Spendalot - Payday and Update
After the last update Sam's accounts looked like this:
Main account: $2181.98
Cash in pocket: $60
Credit Card balance: $136
High Interest Savings account: $200.07
It has been 13 days since the last update, 11 working days. Sam has still been buying his morning coffee and muffin for $3/day so he spent $33 on that. He also has been eating out for lunch most days at an average of $8 each time he eats out. Over the last 11 working days Sam managed to brown bag his lunch 3 of those days so he spent $64 on lunches. So that means that Sam spent a total of $97 since the last update on coffee and lunches. This means that Sam had to visit the bank machine again since he only had $60 in his pocket at the last update. Sam didn't like the $4.50 in service charges he had to pay last month just because he didn't use his own bank's bank machine to get cash, so he actually found a branch of his bank a few blocks away from his work. Sam withdrew $60 so he has $23 left in his pocket.
Sam found my article on personal cash flows
and downloaded the spreadsheet. Going back over his bank statements for March he entered his information as well as what he has spent money on so far in April (of course, this means that I went over the posts here and entered all the numbers). Going through this exercise uncovered some mistakes. First, we forgot to account for one of the deposits to Sam's high interest savings account, so his main account is $100 higher than it should be. Second, last month (and this month) I forgot to deduct Sam's other expenses like the cable bill, the heating, water and hydro bills and the phone bill. Those expenses came to $315/month for a total of $630 coming out of his account. And finally there seems to be $183 of expenses that I missed that I can't actually find in the posts. I entered all the spending that Sam did but somehow when doing that the spreadsheet shows an account balance that is $183 less than what I have posted here. I am going to assume that the spreadsheet is right and use those numbers from now on.
Sam went out this past weekend, spending $49 on his credit card for a dinner with a date. He also had to pay for parking downtown which cost him $6 (also on his credit card). After dinner they went out for drinks and spent another $35 on Sam's credit card. This leaves Sam's total credit card balance at $226 which he will have to pay next week.
Finally Sam got paid last week. This added $1600.04 to his bank account and he immediately moved $100 of that to his high interest savings account. Within a couple more pay cheques that high interest savings account is going to look pretty healthy. There are quite a few mutual funds available that take $500 as a minimum investment so Sam probably needs to start thinking about where he might want to put that money. I suspect that we will have a balance of closer to $1000 before Sam actually get around to doing any investing.
So Sam's accounts now look like this:
Main account: $2709.02
Cash in pocket: $23
Credit Card balance: $226
High Interest Savings account: $300.07
Just finding out about Sam Spendalot? Use these links to navigate through the series:
Start of series.
Retirement savings: Registered vs. Non-Registered
Ok, I want to add another layer to the debate about registered vs. non-registered retirement savings.
For any non-Canadians reading this we have something called a Registered Retirement Savings Plan or RRSP that allows for the tax sheltering of savings growth (interest, dividends and capital gains) while investments are kept in a registered account. Canadians get a tax credit for putting money into an RRSP which basically has the effect of making any contributions to a RRSP income tax free. The flip side of this is that when money is taken out of the RRSP (before or after retirement) it is taxed just like income. On the non-registered side of the equation any interest income or dividends from non-Canadian companies are taxed just like income, any dividends from Canadian companies are taxed at about 67% (so you get 33% 'tax free'), which might go a little lower in the next month or so and finally capital gains are taxed at 50% so you get half of any capital gains 'tax free'.
written by an Investment house makes the argument for putting investments into a RRSP. The conclusion in that article is that saving in an RRSP "is more beneficial than saving in a non-registered, taxable account." I think that based on their assumptions this conclusion can't be argued. They clearly show that an RRSP account will be worth more and last longer than a non-registered account. However, I think their example is too simplistic.
My gut feeling is that there is a way to structure investments in order to take advantage of the benefits of RRSP accounts as well as avoiding the downfalls like being taxed 100% on capital gains withdrawn from a RRSP account. Maybe I'm more willing than the average person to have some complexity in my investments and to track things a little more closely but I don't think that balancing RRSP vs. non-RRSP investments should be that difficult. What I want to do with a series of articles is prove whether my gut feeling is right or wrong.
To start we should take a look at the assumptions in the "Retirement Savings Debate" article which I will just call "the article" from now on. You can look at the link to the article above to see what the assumptions are. The main ones are that the income level is $100,000 and it is indexed to inflation as are the tax brackets (they used BC as the province of residence), contributions start at the age of 40 and continue to 65, RRSP contributions are maximized and refunds are invested in a non-registered account. They assume bond returns of 5% and equity returns of 8%. They also assume that 1.5% of the non-registered account becomes realized capital gains every year (and taxes are due on those).
The first thing I want to do is use their assumptions and see if I can generate the same results in a spreadsheet (or very close to it). Using this tax rate card
we can see the tax rates for both British Columbia and Ontario. Since I live in Ontario I want to move their B.C. calculations to Ontario calculations but I want to make sure I get the same results based on B.C. tax rates first.
In the next post in this series I will see if I can get the same numbers based on their assumptions as well as translate the BC numbers to Ontario numbers.
Our investment accounts.
In some previous posts I talked a little bit about our investment accounts. I want to expand on that a little bit to give some insight into how these accounts were started and why they are set up the way that they are.
First, some background information. People in Canada that have kids that are older than about 10 or 15 years old might remember a little Government of Canada treat called the baby bonus. I can't find specific information on it but from what I recall this was a monthly payment given to parents of children under the age of 18 (or was it 16?). The payments were more than $50 but less than $100 if memory serves. Some time in the last 10 or 15 years or so this program was ended (mostly, there appears to be 'Child Tax Benefit' now). Fortunately for me this program existed until I was 18 (or 16 or whatever it was) and the other really good part about this is that my parents didn't just spend this money. They saved it and put it in Canada Savings bonds and GICs. I don't remember all the details but I know that I spent some of that money on university-related costs as well as using some of it to buy my first house (which I bought in August 1996 at the ripe old age of 23 but that's another story for another day). I had about $3500 sitting in an Investor's Group fund around 1998 which was the majority of what remained of the baby bonus savings and was the majority of my savings at that time.
Around 1996 or 1997 my parents switched their investments from their Investor's Group account (why do you think I had an Investor's Group mutual fund?) to a new financial advisor that was suggesting people use what is effectively the Smith Maneuver to maximize their investment returns. Basically what the Smith Maneuver involves is taking any equity you have built up in your house, asking the bank for a loan on that and then taking that cash and investing it. This allows you to deduct the interest on your mortgage since it was used for investing (any Americans reading this might find this confusing. In Canada mortgage interest is not generally tax deductible but we also don't pay capital gains on our primary residence).
M and I have had an account with that financial advisor since about 1998. When we opened the account I took the $3500 I had in the Investor's Group fund and the financial advisor used that as collateral to borrow an additional $7000 to put into mutual funds. The interest on that $7000 loan is tax deductible and we made interest-only payments on that loan. Up to 2000 this account was doing fairly well. Then the bubble burst and 2000, 2001 and most of 2002 were brutal. It has taken until the last 6 months or so for the value of that account to be worth more than the money we have put into it (original investment plus the interest we paid on the loan plus any extra we had put in). In other words, keeping that cash under our mattress would have given us a better return.
While watching that account suffer in 2001 and 2002 I was getting fairly frustrated with the performance. In early 2003 I opened a TDWaterhouse discount brokerage account with the goal of beating the returns generated by the account managed by the financial advisor. The ultimate goal for this account is to handily beat the returns generated by our 'advised' account over the medium term (about 5 years) and show my financial advisor that she isn't really adding any value so I don't feel I should pay for the service I am getting. I also want to build that account (in conjunction with the next account) so that it is generating enough income to cover our 'lifestyle expenses'.
The third account is another TDWaterhouse account opened in m's name last summer. The main reason for this account is income splitting. I make about 50% more than m. Obviously I am in a higher tax bracket. Our overall goal is to be able to generate enough passive income from our investments to be financially independent. The most efficient way to do that is to have equal amounts of passive investment income in each of our names. This is assuming that investment income is the only form of income (which probably won't be the case for us, the point is to be financially independent, not to necessarily retire). So in order to achieve the goal of equal amounts of investment income we each have an account in our own name. I manage these accounts as one big account, although I try to keep the asset allocation in each account roughly equal so that income will stay equal over time. In other words, I don't want one account to out-perform the other over the medium to long term.
About a year ago I shifted the goals of our TDWaterhouse accounts slightly. Not only do I want these accounts to beat the returns of our managed account, I want these accounts to generate enough income to support our 'lifestyle expenses'. So far in 2006 our non-managed accounts have generated about 70% of the total income generated in all of 2005. So by the end of 2006 we should see about a 250% increase in income over our 2005 income. I don't expect that sort of increase to carry into 2007 but I do think we should see at least a 100% increase in 2007. My long-term goal is to get investment income to the point where is covers our lifestyle expenses by 2015 or 2016. I expect that we will be mortgage-free by 2012 or 2013 and all funds that were going to paying the mortgage will be moved to funding our investments.
Sam Spendalot - Payday and Update
When we last left Sam he had opened a high-interest savings account and put $100 from his last paycheque in that account. So Sam's accounts looked like this after the last update:
Main account: $2427.17
Cash in pocket: $45
Credit Card balance: $0
High Interest Savings account: $100
Sam got paid on Thursday which added $1600.04 to his account. Once again, following the pay yourself first principle the first thing that Sam did was put $100 of that into his high interest savings account.
Since the last update we have passed through the first of the month. This means that a bunch of Sam's regular bills had to be paid. These bills include his mortgage ($871.55), his condo fees ($240), his car loan payment ($280.33), his car insurance ($122.58) and Sam had a balance on his credit card from March 1 to March 4 of $1000 and from March 4 to March 9 of $800 which he then paid off totally. So the interest for 4 days on a balance of $1000 works out to $2.02 and 5 days of interest on $800 also works out to $2.02. The one other thing that Sam was a little surprised about was the $4.50 in bank fees charged at the end of the month. These were from Sam's 3 visits to a bank machine that wasn't his bank's bank machine. Sam's total first of the month expenses $871.55+$240+$280.33+$122.58+$4.04+$4.50 = $1523.00.
End Of Quarter Update
The first quarter of 2006 has come and gone. The TSX Composite Index ended 2005 at 11272.26. On Friday the TSX closed at 12110.61 for a 7.43% gain over the quarter. Nice return for 3 months. Our accounts also did quite well. The discount brokerage accounts that are completely managed by us are up 11.76%. The account that we have with a financial advisor is up 10.25%, both handily beating the TSX index. The Dow, NASDAQ and S&P 500 all were positive over the quarter but none of them beat the TSX. The Dow ended 2005 at 10717.5 and closed on Friday at 11109.32 a gain of 3.6% The NASDAQ ended 2005 at 2205.32 and closed on Friday at 2339.79 up 6.1%. And finally the S&P 500. It ended 2005 at 1248.29 and closed on Friday at 1294.83 up 3.7%.
From an income standpoint our discount brokerage accounts have generated $1175 in income (not including capital gains), compared to $1875 for all of 2005. The income generated this quarter represents about 7% of our household expenses (for the quarter). If we take out mortgage expenses our investment income was about 8.3% of our expenses. This is one of the reasons for tracking your expenses
. If you know how much cash it takes to support your current lifestyle you can know how close your investment income is to covering those expenses.
At the end of the quarter I like to update our net worth. I don't think that the actual size of your net worth really matters all that much. What matters is the direction of change in your net worth from period to period. I guess I should give a quick definition of what I mean by net worth. The way I calculate our net worth is basically the same way that companies put together their balance sheet. A balance sheet is a snapshot of a financial situation at a specific point in time. Likewise, a net worth statement is a snapshot of a financial position at a specific point in time. The important thing to note is that this is a snapshot, a picture of a bunch of 'accounts' at an instant in time. I choose to use the market close at the end of the quarter.
On a company balance sheet there are three main sections, Assets, Liabilities and Shareholder equity. Balance sheets must follow the equation of Assets = Liabilities + Shareholder's Equity. For a personal net worth statement we modify this equation slightly since we are the only shareholders we will replace shareholder's equity with net worth. After a little re-arranging we end up with Net Worth = Assets - Liabilities. Assets include things like your TV and stereo, your car, the fridge and stove, your house (although there seems to be some debate about this), that antique dining room table that was passed down to you from your great-grandmother, and your investments. Liabilities are things like your car loan, the outstanding balance on your line of credit, the outstanding balance on your mortgage, your credit card balance, any margin you have on investment accounts, etc.
Now that we have a little bit of background on what a net worth statement is I am pleased to report that in the last quarter our net worth has increased 9.16%. From a year ago our net worth has increased 38.5%. About a third of the 9.16% increase over last quarter came from a decrease in our liabilities which basically means we paid down our mortgage. The other two thirds of the increase came from returns on investments. Since I started tracking our net worth at the end of 2002 our net worth has increased just over 400%. I don't expect the same increase over the next 3 years since at the end of 2002 our net worth was less than our household income.