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What should young Ellis do with a $500,000 inheritance?

A young engineer-in-training, who has no credit card debt or student-loan debt, questions what to do with a recent $500,000 dollar inheritance. A sound philosophy for the money is to use the rule of thirds. One-third to investing for the future, one third towards paying back the past by purchasing property and the final third to do something fun. He can still budget the income he currently makes while dividing up his inheritance in a practical as well as an enjoyable way.

Key Takeaways:

Invest a third in a non-registered investment account for future retirement savings, or as an emergency fund.
Use the second third as a down payment on a home with a mortgage for the remainder.
Follow your dreams with the remaining amount by doing a bucket list activity, making a charitable donation, upgrading your education or something else that’s amazing.

“Invest for the future, pay back the past, and live for the now.”

Rates are rising and I am rethinking all my money decisions

Rising interest rates have caused some to rethink how they plan to spend, invest and save going forward. After many years of low interest rates, the strategies that worked well in the past, like variable mortgage rates, should be re-examined. Previously, the only way to earn a decent interest rate was to invest in financial markets and take on increased risks. Investors may soon be able to look at savings accounts, but you’ll need to shop around for the best rates. Higher rates should also lead to different investment strategies due to increased corporate earnings and the effects of rates on certain industries. For fixed income, like bonds, a shorter maturity may make more sense especially if you need to sell before they mature. After living in a near-zero rate environment, we’ll need to make adjustments for a rising rate one.

Key Takeaways:

In a low rate environment, the only way to earn money was to invest in financial markets, which comes with added risks.
Better growth tends to increase the number of jobs, improve wages and consumer confidence, but also inflation, which can lead to even higher rates.
Rising rates can cause valuations (measured by price-to-earnings multiples) to fall, which is why sectors like utilities or real estate, which are thought of as bond substitutes, tend do poorly when rates rise.

“We’ve never been in this kind of ultra-low rate environment before, which means we’ve never been in this kind of rising rate environment, either. It’s important to remember that the reason rates are rising, not just here, but around the world, is that the global economy is improving.”

What the Bank of Canada rate hike means for your mortgage and savings account

Canada’s strong economy has prompted the central bank to up its interest rate by .25, making the overall rate 1.5 percent. The quarter of a percentage point increase proved to be a cue for Canada’s other primary banking institutions, which intend to follow suit. The bump is concerning to those Canadian households with high debt loads as variable rate-mortgage owners’s interest payments will rise as a result of the rate increase. However, there is a plus side for savings account owners as rates improve.

Key Takeaways:

The Bank of Canada’s decision to up the interest rate .25% to a total of 1.5% is reflection of Canada’s current economic stability.
The rate hike will mean higher borrowing costs for those with a variable-rate mortgage.
Canada’s highest profile banking institutions are upping their prime rates too, so savers should see some positive movement.

“Rates are slowly on the way up, but remain relatively low historically. On balance, it’s still probably a positive for the average household, for the average business.”

Making sense of how the tax exemption on your residence works

If you are trying to claim a Principle Residence Exemption (PRE) on your taxes, you need to be sure that you are qualified to claim it because if the CRA notices you don’t qualify, the penalties are high. Often owning multiple properties does not allow you to use this credit, but there are ways to do so, depending on how often you reside in these properties with a one year overlap. If you are unsure about using this credit correctly, be sure to read the CRA regulations.

Key Takeaways:

Our Canadian tax law has strict rules around what properties can qualify for the PRE exemption.
The CRA is looking at about 10,000 transactions a year that involve the PRE.
If you own more than one property at the same time, you could end up paying tax on one or both of the properties eventually, if they’ve gone up in value.

“Each family unit (which includes you, your spouse or common-law partner and any children under the age of 18) is allowed to designate one property as their principal residence for each calendar year.”

5 Tips For More Cost-Effective Giving This Year

Ultimately, giving is a way to support a cause that you’re passionate about and that you believe in. And so, it’s important to ensure that your donation makes the biggest impact towards the cause, as opposed to an organization’s overhead or other activities like fundraising. To safeguard your giving and make sure it goes to the right coffers, check to see if who you’re giving to matches the kind of passion you have, and don’t be afraid to audit charities. You should be able to look at what you give to a charity as a step toward building the kind of world you want to live in.

Key Takeaways:

Always do your homework before giving and make sure the charities you consider are legitimate and see how they spend their funds.
When you find a charity that is important to you, that you care about and believe in, consider setting up payments to give regularly.
Charities and non profits are not exactly the same, so be sure it is a registered charity by checking the CRA website if you’re wanting a tax deduction.

“Using your head as much as your heart when giving is important, so ensure you’re giving to a charity/cause that will most effectively manage your contribution.”

Avoiding tax and probate when passing down a rental property

If you own a rental property and you’re trying to reduce taxes and probate upon your death for your heirs, then you’ll need to look at the implications of some of the different options you have available. For instance, gifting a property now would trigger a capital gains tax for you now. The property also can’t be passed to your heirs at a low valuation when you pass and would instead be transferred at fair market value. One solution to avoid probate fees and future capital gains appreciation is to setup a trust. Capital gains taxes would still need to be paid, but there will be no probate fees later on. The downside is that a trust can be $5,000 or more for the initial setup, with $1000/year on-going costs.

Key Takeaways:

If you claimed depreciation on your rental property over the years, all this depreciation is “recaptured” in the year of sale – or in this case, the year of death. This is taxed at your regular tax rate, which could be as high as 54%.
Every province has different probate fees payable to validate a will and allow the executors to distribute the assets.
It’s important to prioritize your main goals. If it’s stopping future capital gains tax from accruing, you may need to incur some tax today. If it’s avoiding probate fees, a trust could work, but you need to figure out whether you want the rental income solely for yourselves or to be available for your heir.

“Consider your own retirement needs first and foremost and then get advice from a professional with strong estate and tax knowledge.”

Willful Neglect: Too many Canadians are dying without a will

If you die without a will you leave your heirs at the mercy of legal proceedings without any consideration for what your intentions might have been. Despite this, more and more Canadians are dying without having a will in place. If you want to make sure your assets go where you intend them to go, minimize tax burdens on your heirs or even make sure your children are taken care of, you need to take the time to create a will.

Key Takeaways:

Most people think they don’t have to write a will until they reach their senior years.
No one has the automatic right to deal with your estate after your death.
Without a will, a court estate administrator will decide how to divide the money and it may not be what you wanted.

“You might be equally surprised that over half of Canadian adults don’t have a signed will.”

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.”

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.”

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.”