INTRODUCTION

By Colin J. Campbell

Recent budget changes, although not Earth shattering, have an effect on a wide segment of the population. I have attempted to cover all the information in one newsletter allowing you to choose what is important to you.

PERSONAL NOTE

These newsletters are not something that I purchase from a ghostwriter; everything is of my creation. Some of the factual material of course comes from reference documents provided by suppliers or in the case of budget information from government publications.

I have been a financial advisor for over 30 years, 17 in Cranbrook.  I think I’m good at what I do.  My stated goal is to help people create family money that will last generations.

I don’t intend to retire any time soon. I like what I do, I enjoy going to work, I enjoy helping my clients achieve financial security.

ON THE COST OF INVESTING

I believe that the fees paid on all investments should be the least amount possible.  It irks me that the suppliers of investment products i.e. Banks, Insurance Companies and Mutual Fund companies charge too much for investing, often in hidden fees.  My mission is to get fees to the lowest possible denominator, no more than two per cent per year.

I’m a firm believer in the power of value investing in equities that pay dividends. It is a lesson I learned from my mother.  She was a widow at 43, who invested in equities and stayed invested for her whole life.

Mutual funds are a good way for average investors to invest.  A good fund manager is always going to do better than I can on my own.  What I refuse to accept is that any mutual fund should charge more than two per cent to manage my money or my client’s money.  What I have discovered is that by using value dividend funds and fixed income funds, I can get excellent returns for my clients with fees less than two per cent.

In a challenging market with historically low interest rates and clients who wish to minimize risk, a fee of more than two per cent is not acceptable.

Here is an example of the effect a reduction of MERs can have on a portfolio. The assumptions: $100K invested at an average annual performance return of eight per cent over 20 years.

The total return at:  3.03% MER is $263,817.71 (net return: 8%-3.03% = 4.87%). However if the MER was 1.87% (net return is 6.13%) the total return would be $328,672.

This is a hypothetical example; however, the average rate of the TSX over 20 years is 8.7%. The average dividend paid by a quality value dividend fund is 4.5% therefore generating an eight per cent return over 20 years should not be that difficult, even if there are several down years.  If that logic holds water then using a value investment fund that has a lower MER makes a significant difference in the overall growth of the portfolio.

Can you afford to ignore what you are paying to invest?  Do you have any idea what you are paying?  Have you checked for the hidden fees or the annual investment charge that you are being billed?

If you would like us to analyze your portfolio including what fees you have been paying, we will be happy to do that for you at no cost. We will give you our recommendations without qualification, if you decide to do business with us we will be happy to assist you, however, if you wish to take our recommendations elsewhere that’s fine too.  I do not profess to have a lock on all the good ideas; I just get really annoyed when I see what people pay in fees for mutual fund investing.

Key points:  Know what your cost of investing is.

Action Plan:  Get your portfolio analyzed.  Choose dividend and fixed income funds that have lower MERs.

HOW TO PLAN FOR THE FUTURE

The reality is that less than 50% of the population under age 65 is saving for retirement.  The biggest concern to this same group is the amount of debt they have and how soon they can get out of it. There are some simple things you can do to reverse the course.

Christopher Arthur in his Ezine article states, “Perhaps the biggest mistake when working toward financial freedom is to see a lack of income as the problem. A whole lot of energy is wasted trying to earn more money, when the real issue is financial mismanagement. Of course, there is nothing wrong with making more money, but it won’t address the issue of overspending.”
Website https://www.freemoneyfinance.com stated, “Achieving financial security is greatly dependent on our ability to make wise choices when it comes to spending money. Spending, not earning, is the key to financial security (though both are important, of course). And yet we live in a society where over-spending is almost the norm. The result for many people is a pile of debt and all the nasty struggles associated with it. It’s certainly not the pathway to financial security.”

Here are some key ideas that can help get control of spending, especially impulse purchases and that will help reduce debt and lead to financial security:

On every purchase you are considering the question to ask; “Is this a need or a want?”  If it is a “need” then make the purchase at the best price for the product you need. If it is a “want” then don’t, it’s that simple.

Avoid sales, often they are not the bargains that you think they are or are led to believe by advertising and generally the item is not a need but a want.  The problem is our mind set is, “but I saved 50%!”.  However if the item you bought goes in a closet or sits in the store room because you really didn’t need it, there was no savings at all, just a loss of capital.

Your share of your income is about 60% of what you earn. You pay taxes, you make payments to CPP and EI and all of these come off your cheque before you get it, your silent partner in Ottawa gets paid first.  If you earn $100,000 a year you really have $60,000 to live on.  The key is to live within that limit not the gross earnings.

Pay yourself first, you need to save 15% of your annual income, the simplest way to do this is to put away about 1.5% of your gross annual income monthly.  That is a bit more than 15% but you need to make up for lost time. You can’t do it all at once, just like getting into the water come summer time you need to do it a bit at a time, if you start at 1% and work up to 1.5% over a year or two you will never miss it and it will become a habit, you won’t even notice until the statement suddenly comes with six figures in your savings accounts.  This is not a cost, you are not spending the 1% or 1.5% you are investing in yourself.  Not only do you deserve to do this but you will improve your self- worth and ironically you will get out of debt sooner than if you try to pay of the debt first.  It is a law of the universe and when you obey it you will be rewarded

Have an emergency fund equal to eight months income.  Make it priority One, once you have that in place then you can start to invest for longer term.  A good place to start is to set up a TFSA and make monthly contributions.  Once again be aware of the cost of investing, there is the cost of not getting the return that you should and there is the cost of paying too much for an investment.

Avoid falling into the trap of believing that you will save when the bills are paid.  The bills are never paid, you will always have some debt but you don’t have an infinite supply of time.  The only way to have financial independence is to save every month and do it year after year and avoid dipping into it when a want shows up.  As hard as it is to accept that is reality, you can go along doing what you have been doing and end up with of what you already got or you can resolve to change and join the 5% who save first and spend later.  It’s your choice, no one can do it for you.

This requires discipline and you probably need guidance, which is what we do and why we called our firm Guidance Planning Strategies, we help you make smart choices, we are here to encourage and even sometimes help you pick up the pieces when things go sideways.  All it takes is a phone call.

Key Point:  It’s not what you earn but what you keep that is important. Controlling spending will lead to saving.  Pay yourself first.

Action Plan:  Manage your money… learn discipline, get some help.

REGISTERED EDUCATION SAVINGS PLANS

B.C. Training and Education Savings Grant

The BC government announced in the spring budget that every child who turns six year old, will be eligible for a one time grant to their Registered Education Savings Plan of $1,200.00.  The RESP must be open prior to their turning six.

The criteria are:

The child must be born on or after January 1 2007

The child must have an RESP in place.  (Social Insurance Number required)

The child must be a resident of BC when the grant application is made.

The child must be enrolled in an education program. i.e. at school.

Parents/contributors will have a full year, between the child’s 6th and 7th birthdays, to apply for the grant (families of BC resident children born in 2007 will have until February 28th 2014 to establish an RESP. Parents are encouraged to set up an RESP as soon as possible.

The Canada Learning Grant is also available for Children born after December 31, 2003;
and

Children’s families who receive the National Child Benefit Supplement (NCBS) also known as “family allowance” or “baby bonus”.  It is an initial $500.00 and $100.00 per year to age 15.

You can set up an RESP with most financial institutions but beware of the fees.  Don’t hesitate to call for assistance we do know what we are talking about.

Key points: BC Government grants for education, children under six. Federal government grant for children born after Dec 31 2003.

Action Plan:  Apply for a social insurance number for your children, open an RESP account, prepare to apply for the grants.

PERSONAL TAX CHANGES IN THE FEDERAL BUDGET

FIRST TIME DONOR’S SUPER CREDIT

There are not a lot of changes in the federal budget that are of a personal nature other than the First-Time Donor’s Super Credit.  This is a onetime credit for those who have never made a donation before.

The current rules state that an individual can claim a non-refundable tax credit of 15% for the first $200 and 29% of all donations over $200, that are made to a qualified registered charity in Canada.

The budget proposes that if someone who has never claimed a donation credit after 2007 can receive an additional 25% non-refundable tax credit on donations up to $1,000.00.    A first time donor would be entitled to a 40% credit on the first $200 and 54% on donations over 200.00 up to $1,000.00.  Only cash donations qualify.  The First-Time Donor’s Super Credit (FDSC) can be claimed in 2013 or any year until 2017.

Key points: Increase in tax deduction for first time contributors

Action Plan: Charitable giving has great benefits if you have not taken advantage of this opportunity consider making a donation to your favorite charity.

LABOUR – SPONSORED TAX CREDIT PHASE OUT

Labour-sponsored Venture Capital Corporations Tax Credit – the budget is phasing out this Tax credit over the next four years reducing from 15% in 2013-14 to zero in 2017.  Again this is not something that has been that popular in recent years and has lost its luster due to the poor performance of the funds.

Key points:  Advantages of Labour-Sponsored funds are being phased out.

Action Plan: Consider moving RSP funds in a Labour-Sponsored fund to a traditional fund such as a value dividend fund.

Stop International Tax Evasion Program

This change only effect’s those who own property outside of Canada in excess of a purchase price of $100,000.  There is a form that must be filed with the tax return a T1135.  The form has been revised to ask more questions on the nature of the property, where it is located and any income derived from it.  If this applies to you you need to pay close attention to that form.  Failure to file that form can be costly.

Testamentary Trusts

Testamentary Trusts are trusts created upon death by the will. These trusts are allowed to calculate tax using the individual graduated tax rates as opposed to other trusts such as an inter-vivos trust that pay tax at the highest marginal tax rate of 29 percent.

Using a Testamentary trust as part of estate planning makes sense because of the favorable tax position. CRA is concerned that it may become a common practice and they propose to launch a consultation on possible changes to eliminate the tax benefits.   We will be watching.

Key points:  Changes to taxation of Testamentary Trusts may be coming

Action Plan: Using a testamentary trust is a useful tool in estate planning and should be considered even if the changes become a reality.

BUDGET CHANGES OF INTEREST TO SMALL BUSINESS

Lifetime Capital Gains Exemption

The Life time Capital Gains Exemption is being increased from $750,000 to $800,000 and will be indexed to inflation after 2014.

Dividend Tax Credit

The gross-up and dividend tax credit for dividends paid after 213 will be revised which will result in higher taxes on non-eligible dividend in 2014.  It is difficult to explain the net result is an increase from 19.58% to 21.22%

Key points: Changes in Life time Capital Gains Exemption and Dividend Tax Credits will impact small business

Action Plan:  Be sure to discuss this with your accountant.

OTHER ITEMS OF NOTE

MORTGAGE RATES

Mortgage rates are at the lowest they have been for years, you can actually get a locked in mortgage at 3.09% for five years.  Manulife Bank of Canada’s Manulife One and their new conventional mortgage have features that other banks don’t offer.

Key points: Low interest rates, and unique features can lead to debt freedom sooner.

Action Plan: If you have a mortgage coming due, consider calling us to discuss how a Manulife One mortgage can get you debt free sooner.

REVERSE MORTGAGES

Are you over 65 and are you considering a reverse mortgage as an alternative to selling your home.  Stop right now and call me.  There are alternatives that will save you money, give you more freedom to access your assets and keep you house in the long term.  Your life expectancy is far greater than the company that provides these vehicles predicts and being on the street at age 90 is not a great idea.

Key points: Reverse mortgages may be useful in some limited situations. But for most people the real issue is retaining the family home.

Action plan: Don’t think about any longer just phone me, we can discuss the alternatives and then you can make an informed decision. Due diligence is the key and remember this might be the 21st century but the old adage “Let the Buyer beware” still applies.

Key points: Reverse mortgages are expensive, usually limited to only a small portion of the asset value.

Action Plan: Do your due diligence and get a second opinion before signing up.

CONCLUSION

I have raised several points for your consideration. They may have an impact of tens (or even hundreds) of thousands of dollars to you and your family.

– Colin J. Campbell, CFP, CLU, Ch.F.C. Guidance Planning Strategies Ltd.

An insurance agent and financial advisor since 1975, Colin has been managing partner of Guidance Planning Strategies in Cranbrook since 1995.  He is active in the community through Rotary and other community projects. “I’m a big fan of the Kootenays, it’s in my blood and even though I was away for 25 years coming home was the best thing we ever did.”  Colin is married to Jane they have one son.

He adds, “my goal is to help people, make smart choices about money, and accumulate wealth that will last for generations.”

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