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‘The water’s starting to rise’: Insolvency business booms in Canada amid rate hikes

Financial expert and loan professionals in Canada are seeing a further spike in the rate of insolvencies. Official data says the rate of people going in into insolvency rose 9.4 percent in October. Additionally, interviews with individuals involved in the insolvency industry say they are seeing further spikes since October. They blame rising interest rates, a slowing economy and the proliferation of high-interest payday loans, which are difficult for the borrower to pay off.

“The tide has turned, and the water’s starting to rise”

Can I win by shifting funds from my RRSP to my TFSA?

If your RRSP account is where the majority of your money is held, what are the implications of transferring some RRSP money each year to a TFSA account to catch up to the maximum limit? Unfortunately, there is no right answer for everyone. Because this is a tax question, it really depends on your annual income, retirement income and financial goals as to whether it is wise to shift funds. For instance, if you’re not currently working or have a small income for this year, then withdrawing from your RRSP so that in retirement your income is reduced would be beneficial. However, at a certain income level, there isn’t any difference between leaving it in an RRSP or transferring to a TFSA.

Key Takeaways:

When considering shifting money from an RRSP to TFSA, taxes are an important factor.
You may not benefit from shifting funds depending on your current income as well as your after-tax retirement income, so consider your entire financial situation.
There’s a slight advantage to keeping your withdrawals under $5,000 because there’s less withholding tax, but this may be temporary as you may owe more tax when you file your annual tax return.

“An RRSP drawdown to fund your TFSA can mean more retirement income [but] this is a tax question so your annual income is important to consider when making a final decision.”

The TFSA limit is rising to $6,000: Here’s why you should contribute every penny of it

Tax-Free Savings Accounts (TFSAs) are turning 10 this year and experiencing a beneficial overhaul according to financial experts. In 2019, the maximum contribution limit will rise to $6,000 from its current mark of $5,500. TFSAs offer Canadians tax-free growth for life. While you contribute to a TFSA with after-tax dollars, they are a beneficial way to build wealth and protect it from taxation, which may hinder the compound growth. Other beneficial features are that there are no age requirements for contributions; unused contribution room can be carried forward; and one not prohibited from re-contributing after a withdrawal.

“TFSAs have been extremely popular among millions of Canadians, many of whom will welcome the upcoming ability to sock away extra funds in their TFSAs come 2019.”

New tax changes to affect small business, gasoline, CPP

Starting in 2019, Canadians can expect to see higher taxes and government payments at several levels. The Canada Pension Plan, or CPP, will see mandatory contribution rates rise with the new year. Additionally, some passive income being held by small businesses will be subject to higher taxation rates than in previous years. This is meant to encourage reinvestment of such income. Finally, taxes on fossil fuels will rise with some experts predicting Canadians will pay as much as 4 cents per liter of gas more at the pump.

“A whole host of federal tax changes come into effect in the new year. Some will hit your paycheque, others your bills — and if you’re a small business owner, there are a couple of changes coming for which you’ve likely been preparing for months.”

Divorce and taxes

You may think that your legal issues are done after your divorce is settled, but there is still one thing you have to be concerned about and that is your taxes. The Canada Revenue Agency (CRA) has to consider you legally separated and has to be informed of your change in marital status. If children are involved, then you will need to determine who claims the tax credit for eligible dependents and collects child benefits. Failure to be aware of CRA’s requirements and your changed tax situation can be very costly.

Key Takeaways:

If you’re recently divorced, the CRA expects you to notify them by the end of the month following the month your divorce was finalized.
A change in marital status can affect everything from total household income to your ability to qualify for certain tax credits.
Child support is not taxable income by the person who receives it, and the payer can’t claim the support as a deduction. Whereas, spousal support is fully taxable as income, and the paying spouse can claim it as a deduction on their return.

“Changes in your marital status can have a big implication on your taxes and on your financial situation,” says Boivin. “This might be a good time to sit down with your financial professional and review your overall situation.”

Insolvencies up in Canada in November, Alberta helping lead the way

The number of Canadian businesses and consumers going into insolvency or bankruptcy dramatically rose in November continuing a worrying trend. The province of Alberta saw the largest rise in insolvencies. Overall, the largest increase was in consumer insolvencies, rising 20.9 percent. Canadians now owe $1.78 of debt for every dollar of disposable income according to the Canadian Association of Insolvency and Restructuring Professionals (CAIRP). The increase is being blamed on consumers taking on too much debt which they were later unable to pay. Finance experts are encouraging people to look into possible payment plans rather than ignoring the problem.

“Total insolvencies in Alberta in November 2018 — including actual bankruptcies and proposals — for were up 20.2 per cent from November 2017.”

Higher interest rates pushing more Canadians to seek debt relief as business booms for insolvency trustees

The cases of insolvency in Canada are steadily increasing – even through traditionally slow months. More Canadians are applying for bankruptcy, mainly due to increased borrower interest rates. These insolvencies and higher interest rates are slowing growth in other sectors, including home buying and vehicle sales. Many have turned to payday loans but are digging themselves deeper into debt by borrowing more at these increased rates. Debt that would normally be manageable is compounded by extra interest and is becoming unmanageable for many that have borrowed money.

“Record debt burdens, rising borrowing costs and, in some cases, bigger payday loans are driving many Canadians to seek relief, according to several licensed insolvency trustees who spoke to Bloomberg.”

Here are Canadian consumers’ biggest concerns for 2019

Going into 2019, polled Canadians are concerned about interest rates rising, the value of the dollar, and most of all, the rising cost of goods. This is compounded by the fact that many have taken out loans or used credit cards which increased the amount of debt they owe. Experts are warning Canadians to focus on debt repayment and curb spending going into the new year while making wise investments that will give you peace of mind for retirement.

“People are focusing on the immediate priorities. If you take a long-term approach and you have a financial plan, these turns in the market don’t touch you.”

This man’s stocks rocketed. Can he move them to a TFSA at purchase price?

Trying to move shares that have increased in value from a private placement into a TFSA is an enviable problem. Unfortunately, there isn’t a way to transfer them at the lower purchase price, and avoid a capital gains tax because a transfer is considered a disposition of these assets at their fair market value. However, there are still ways to reduce the tax and maximize the financial benefits to investors who find themselves in this position. First, you can account for any expenses you incurred, and these costs can be subtracted from the transfer value to reduce the tax owing. In addition, only 50% of the increase will be taxable because of the way capital gains are taxed.

Key Takeaways:

While you can’t adjust the sale price or what you paid for the shares, you may be able to reduce your taxes.
If you have RRSP contribution room, then the benefit of moving it there instead of a TFSA is that the RRSP tax refund will be larger than the capital gains tax owing.
To further maximize the benefit of moving it into your RRSP, the RRSP tax refund could be used to contribute to your TFSA.

“Buy stocks low in a private placement and you could be lucky enough to face a problem if they have grown into something much bigger by the time you move them into an investment account”

Why incorporation isn’t always a magical tax fix

Planning for a business can be complex. There are many aspects of the business that you need to take into account when incorporating, including your business goals, annual tax implications and selling the business.

If the business plan is for it to be like a hobby, then it may not make sense to incorporate. Incorporation comes with expenses, including yearly licensing and accounting to ensure the books are balanced, but if you plan on growing the business, then it makes good financial sense. Incorporation can instill confidence in the business for your customers, and despite not having tax splitting options like prior to January 1, 2018, there are other tax benefits like the ability to retain unneeded income and when you sell the business. Before you begin, all things need to be taken into account as well as your personal and professional goals before you decide to incorporate or not.

Key Takeaways:

From a tax perspective, an unincorporated business that you run generates personal income that goes on your personal tax return. This is considered a sole proprietorship, or, if you had partners, a partnership.
Incorporation could give you access to the lifetime capital gains exemption of $848,252, and selling shares may result in tax-free income up to this threshold.
The drawback of incorporation is the cost, so make sure the costs and extra work are worth it. Many small businesses, especially in the early stages, are better off not incorporating.

“It’s a common misconception that incorporation somehow gives you access to magical tax deductions that a sole proprietorship does not. That’s not really accurate.”