quadrantadmin, Author at Quadrant

If you die owning U.S. property or stock, beware of U.S. estate tax

Canadians, who are considering purchasing a vacation property in the U.S., often ask what is the best way to structure ownership of it. The main reason for their concern is to avoid being caught by U.S. estate tax if they die owning the property. In Canada, we don’t have an estate tax upon death, but instead, we have a tax on the unrealized appreciation of assets other than your primary residence. Due to the Tax Cuts and Jobs Act which came into effect in 2018, a U.S. or dual citizen would have to have a worldwide estate of at least $11.2 million to be subject to estate tax upon death. Non-U.S. citizens are still subject to tax for U.S. property, but there are some exemptions, and it can sometimes be prorated. Higher-value properties may require more complex planning.

Key Takeaways:

For U.S. citizens, including dual Canadian/U.S. citizens living in Canada, the U.S. estate tax applies to the fair market value of their worldwide assets upon death. Rates start at 18 percent and reach 40 percent once assets are more than US$1 million.
Canadians, who are not U.S. citizens, are entitled to a US$60,000 exemption under the U.S. domestic tax code, or to the prorated exemption under the Canada-U.S. tax treaty. The exemption is calculated by dividing your U.S. estate property by the value of your worldwide estate, and if your estate does not exceed US$11.2 million, then your estate will get a full exemption from U.S. estate tax.
The effects of the act are currently active until at least 2025, and unless permanent legislation is enacted, the exemption will return to the pre-2018 regime in 2026.

“Most Canadians can buy a condo or vacation home in the U.S. for personal use, just bear in mind the potential U.S. estate tax if you die owning the property.”

Start early and do your research when renewing your mortgage

If you’re renewing your mortgage this year, then it’s important to start working on it sooner than later. With the recent interest rate increases, if you’re renewing for the same amoritization period but at a higher rate, then your mortgage payment will increase. Many Canadians will stay with the same lender, but shopping around for a rate 30, 40, 50 basis points lower will save you thousands of dollars over your next five-year term. If you switch, then there may be fees that offset these savings. Starting 6 months prior to your renewal date will give you time to explore all your options and find the one that’s right for you.

What Canadians need to know about getting paid internationally

A recent study showed that millennial freelancers in Canada earn 27 percent of their income from international sources. Those getting paid internationally need to consider some obstacles to working with international companies. For instance, exchange rates aren’t always factored into payments and mark ups. Working for foreign companies can also be challenging because some companies ask for things that a freelancer doesn’t have like a U.S. bank account, and they often won’t see the delays or fees associated with international wire transfers. After everything freelancers may end up with less than they expected, so it’s important to know what your final payment amount will be and try to hammer out the details ahead of time.

How Much Money In An Emergency Fund Is Enough For Canadians?

An emergency fund is important for you and your family when unexpected expenses happen. Unfortunately, according to a 2016 study, about half of Canadians live without one. While not particularly glamorous, everyone should have one to help out when life events from grave situation to inconveniences occur. A general rule of thumb is that an emergency fund includes enough money for up to six months of expenses. It is to be used if you ever lost your job or to cover costs such as medical expenses, or unplanned necessities like a car breaking down or a home appliance needing to be replaced.

Key Takeaways:

Close to half of Canadians do not have enough money in savings to deal with a minor or major life crisis.
An emergency fund should consist of around 3 to 6 months of a person’s living expenses, and should be based on fixed costs like a mortgage and variable expenses like groceries and utilities.
Putting money aside for an emergency fund doesn’t need to happen all at once, and can instead be built up gradually.

“Regardless of the severity, what all these scenarios have in common is you suddenly shelling out money you didn’t plan to spend. And that can be problematic for nearly half of Canadians.”

Unpaid invoices are causing costly problems for businesses

When people don’t pay their credit card bills or mortgage payments, it can lead to long term negative consequences. This does not however, translate into the business world. Start up companies are forced to close when invoices go unpaid, finding it costly to pursue the debts. Businesses in Canada are given unique identification numbers which gives the government an opportunity to create a business credit bureau that delinquencies can be reported to. It’s something businesses need to push for.

What to do about your debt and mortgage after the interest rate hike

Banks and consumers in Canada are having to adjust to the increase in the benchmark lending rates. While the increase does also boost the rate paid out to savings accounts, many Canadians are still carrying high levels of debt. Before you do anything as a result of these changes, it’s important to look at what types of debt you have. Any investment that contributes to progress towards your future, like a student loan or mortgage, is considered good. Anything that doesn’t provide any future returns, like credit card debt, lines of credit or other higher interest debt, is bad.

Key Takeaways:

Pay off any bad debt with a higher interest rate first, but also consider what debt you have that is tax deductible.
As much as paying off debt is important, debt that has tax deductibility may be better to keep. For instance, if you are not able to pay off all your debt by borrowing from a TFSA, then you can at least use the deductibility from it to save on taxes and possibly create an income to pay off the high-interest or bad debt.
Consider switching from a variable mortgage rate to a fixed mortgage rate, especially if you believe that interest rates will continue to increase.

“It’s important to be more careful with spending and what kind of debt we are taking on and how and what the plan for repaying it is.”

Canadians Now Paying Lower Income Taxes Than Americans, OECD Data Shows

New data from OECD shows that in 2017 the net tax rate on a family with two kids in Canada is 12 times cheaper than a family in the United States. The net tax rate is the personal tax rate plus social security contributes minus family benefits as a percentage of gross income. In Canada, an average married worker with two children had their employee net average tax rate reduced to 1.2 per cent. The same family in the U.S. would pay 14.2 per cent in taxes. It varies greatly depending on income, but once the child benefit is factored in, an average one-income household with two children now keeps 98.8 percent of their gross income.

Renewing your mortgage? Doing your homework could save you thousands of dollars

Of the 47 percent of Canadians renewing their mortgages this year, those who take the easy option of renewing with their current lender, could cost them thousands of dollars over the next few years due to higher interest rates. It’s recommended that you do your homework. Recent interest rate increases mean that your mortgage payments will likely increase if you stay where you are. If you change lenders, you may be subject to the new stress test and fees, but you might save on your rate. You need to start looking at your available options, and if you find a good deal, lock it in now and don’t wait. If you are confused about what is the best option for you, speak to an advisor, but do it sooner than later.

Getting shipwrecked on T1135 island an unpleasant fate for taxpayers

If you own foreign property whose total costs exceeds over $100,000 at any point in the year, then the T1135 Foreign Income Verification Statement is a form you don’t want to file late. When it comes to getting late-filing penalties, the CRA is persistent, and you risk a $25/day fine, up to a maximum $2,500 per tax year. Even if no taxes are owed, the T1135 is a separate obligation that still must be filed. The form must be filed to report the ownership of most foreign property. It is also required for foreign stocks held in a Canadian, non-registered brokerage account.

Pay debt or invest? How to use your tax refund

Fewer people are spending their tax refund on luxury items, and instead are focusing on smarter ways to use it like investing and paying off debt. This raises the question, which is the better option saving or reducing debt? If you have credit cards that have high-interest balances, the answer is simple: pay these first. If, however, you are carrying low interest debt and have investment opportunities that in the long term can bring you a greater rate of return, then it may make sense to invest.

Key Takeaways:

Any high-interest debt, such as a balance on a credit card, should be the priority.
Compare the interest rate you’re paying on your debt with the expected after-tax rate of return of the investment, and also consider your financial picture if the investment falls short or you end up losing money.
If you can tolerate some risk and have a long enough time horizon before retirement you may benefit by skipping extra payments on low-interest debt and instead making contributions to an RRSP or TFSA account.

“The decision is trickier when it comes to debt with less onerous interest rates. Mortgages, home equity lines of credit or car loans may carry much lower interest charges.”