Category Archives: Money Tips

Deliberately Misleading Government Ads About Tax Breaks Anger No-Young-Children Canadians Needlessly

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Here we go again. The Federal Government has announced some new income tax changes in a way that grossly over-states what is really on offer. The ads and discussion will focus on some totally misleading numbers and will anger people who no longer have (or never had) children under 18: I get so tired of this.

Why Announce a $50 000 Tax Split If It Has No Meaning Whatsoever?

In this current round of misleading announcements, the Federal Government has said it is proposing a bill which will allow 2-parent families to move $50 000 of income from one spouse’s tax return to the other.

You can practically see the steam rising from the ears of the millions of Canadians who won’t be able to take advantage of this change.

But is the number $50 000 worthy of being announced?

NO. Because the impact of that shift is limited to a maximum benefit of $2 000!

The announcement should have been: Tax change allows families with children under 18 to save up to $2 000.

That’s it. It should not have ever quoted a misleading number like $50 000.

Here’s why.

Why the $50 000 Income Sharing Option is Totally Bogus

I only have access to 2013 tax software to run some tests with but here’s the case I reviewed:

  • One parent is earning $125 000 a year.
  • One parent is earning $25 000 a year.
  • Two children under 18.
  • Various normal types of deductions and small additional income amounts from Canada Savings Bonds etc.

How much should the higher-earning parent shift to the lower earning parent to save $2 000 in FEDERAL income tax?

(Note the proposed tax changes do not reduce provincial taxes at all.)

If they shift $18 000 in earnings from the higher earning spouse’s tax return to the lower, they save $1 667 in federal tax. (NOTE: The actual 2014 savings will vary depending on the 2014 tax return and some other factors.)

So they should keep going, right?

If they shift $30 000, they save $1 667.

What?!

If they shift $50 000 they still save $1 667.

Why??

Because after they shift $18 000 both of the family member’s are in the same tax bracket. Shifting who pays tax on it does nothing. (Many pensioners with near equal incomes are familiar with this.)

Here’s another case:

  • One parent is earning $125 000 a year.
  • The other parent is earning $0.

If they shift $50 000 to the lower earning spouse, they should get more than $2 000 back but they can’t.

So what do they have to shift to get $2 000 back?

For the example test case for 2013 taxes that I’m using, they only have to shift $18 500 to get the $2000 in federal tax savings.

So why announce you can shift $50 000 in income if it makes no difference!?

Because it sounds better! Because it might win votes! Because it’s a nice big sounding round number!

(And I suppose if I ran a few dozen cases, I’d probably find because it is the amount you need to shift between spouses under one or two circumstances to get the maximum $2 000 savings.)

I hate this kind of electioneering!

Why don’t they just announce, a new tax savings of up to $2 000 for parents of children under 18 who have very disparate incomes?

They don’t because $2 000 doesn’t sound that amazing, does it? It’s not even enough to top out one RESP contribution for a year.

Other Examples of an Inflated Unrealistic Tax Announcements

This is not the first outrageous announcement the government has made. How many people have seen ads telling them that families can use a $500 Children’s Fitness Tax Credit per child on their federal income tax return?

But what is the actual amount the parent saves? It sounds like $500. But the real savings is $75.

That is a $425 difference between what people THINK parents are getting and what they may be receiving.

It sounds like a family with three children could get $1500 back. In reality they get back at most $225 on their federal taxes.

Another example is the Adoption Tax Credit. It sounds amazing: $11 669! But that’s not what the parents get back. If they have $11 669 in applicable adoption expenses they can get back up to $1 750 on their federal income taxes. But again, announcing a savings of less than $2 000 isn’t the kind of big splashy number the political parties want to trumpet to the media.

What Is the Serious Negative Effect of these Intentionally Misleading Tax Announcements?

The real problem with this steady stream of misleading tax announcements is that it

  • doesn’t help parents that much
  • makes everyone who isn’t a parent at this time to children in that age group seethingly angry

The people who do not get any tax break see the big numbers:

  • $50 000 tax splitting!
  • $1000 per child sports tax savings!
  • $500 per child arts tax savings!
  • $10 000 (and more with inflation adjustments) per child for eligible adoption expenses!

And they think they are getting royally ripped off.

They don’t see

  • MAXIMUM $2 000 but most of you won’t get that much income splitting credit
  • $150 per child sports tax rebate
  • $75 per child arts tax rebate
  • $1 750 adoption expense tax rebate

Which would let them think, gee, is $150 back really going to pay for a kid’s skating, swimming, hockey and soccer fees for year?

Does $75 buy a lot of music lessons?

Does a child eat and require fewer clothes than $2000 a year provides?

If it costs over $11 000 to adopt a child is saving $1 750 really going to open more homes to children?

It just builds resentment against young Canadian families without really giving them much.

I wish there was a law against it! Some kind of “truth in advertising” law that would stop the government from playing this head-game with Canadians and setting us against each other.

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Advantages and Disadvantages of Holding a Self-Directed RESP Account at a Discount Brokerage

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When you first start a Registered Education Savings Plan you usually don’t have much money in it. But if you are able to contribute enough each year to receive the maximum Canada Education Savings Grant, and especially if you have more than one child and you can contribute $2500 each per year, within a few years you may have over $10 000 in the account. That’s when many people begin to think about ways to maximize their returns and to resent the fees they often have to pay for mutual funds. One option to consider is opening a self-directed RESP online brokerage account so that you can choose GICs from a variety of places or invest in stocks, ETFs and mutual funds; this article lists some of the advantages and disadvantages of RESP brokerage accounts.

Pros for Holding your Children’s RESP at an Online Discount Brokerage

If you wish to invest in Guaranteed Investment Certificates, you are not limited to the ones offered by a single bank which may only offer low interest rates. For example, if your RESP is at BMO InvestorLine, you can buy GICs from over 10 financial institutions including Home Trust and Equitable Bank both of which often pay rates significantly higher than the major Canadian banks.

You can invest in a mutual fund which mimics a daily interest savings account. The going rate is usually slightly less than paid by online banks such as PC Financial and Tangerine. (For example 1.2% vs 1.3%.)

You can buy units of low fee Electronically Traded Funds, ETFs, that mirror the performance of major stock exchanges such as the TSX or the NYSE

You can usually select mutual funds offered by a large variety of financial institutions with no fee required for the purchase and no penalty for selling the fund after holding it for 90 days (no load funds.) If there is a specific fund you wish to invest in, though, be sure to check that the brokerage offers that fund before opening your brokerage account. Each brokerage offers slightly different investment choices.

You have total control over how the money is invested.

Making new contributions to the RESP is usually as simple as a typing a few numbers on a screen and clicking enter. (No more sitting through sales pitches disguised as contribution meetings at your bank.)

You can check the details of your account and its earnings almost any time. You do not have to wait for quarterly or annual statements.

You can arrange to have contributions made automatically to your account on a monthly or annual basis. (This is also true of RESPs held at banks and of group RESPs managed by private companies.)

Cons for Holding your Children’s RESP at an Online Discount Brokerage

Many brokerages do not allow you to apply for all of the matching government grant programs. If you are planning to apply for grants in addition to the standard Canada Education Savings Grant, CESG, check with the brokerage to find out whether it supports the desired program before opening an account.

You may need to have a large minimum balance to avoid paying annual fees. (There is at least one exception to this.)

No one will provide you with guidance or advice about what to buy.

You will have to choose how to invest your money and if you lose money because of your choices there is no way to recover it.

If you wish to invest in GICs you may find the minimum purchase amount is very large. For example, the minimum at BMO InvestorLine is $5 000 per GIC.

If you wish to invest in a daily interest savings account fund, the minimum purchase amount may be large. For example, at BMO InvestorLine you have to keep a minimum balance of $5 000 in the fund, or sell all of your units.

A mutual fund you wish to invest in may not be offered for sale by your brokerage. For example, no brokerage currently offers the Tangerine mutual funds. Check before you open an account.

Occasionally there may be a minimum investment requirement for a mutual fund. This tends to be set by the mutual fund company, such as Steadyhand, however, not usually by the brokerage. If it’s a concern, check before opening the RESP account.

You will usually have to pay a commission fee each time you purchase or sell shares of a company or units of an ETF. The commissions vary from about $7 – $10 depending on the brokerage. Some brokerages may waive the purchase commission for some or all ETFs.

If you are planning to use a dividend re-investment program for shares or stocks in the RESP, be aware that

  • Brokerage accounts offer a synthetic DRIP. You will only get a new share or shares if your dividend payment is enough to purchase one or more entire new shares of the company. You cannot buy fractional shares in a brokerage account.
  • Each brokerage has a list of stocks and ETFs that for which it offers a DRIP. You may not be able to DRIP all ETFs or all stocks. If this bothers you, check whether the stocks and ETFs you want to purchase are eligible for a DRIP before you open a brokerage account at that institution.

If you transfer in your RESP from another institution, you may or may not be provided with good information easily about how much of the plan comes from your contributions, how much from the government grant/s, and how much from earnings made by the investments. I strongly recommend you keep clear records yourself!

The brokerage usually does not have any mechanism to stop you from over-contributing to the RESP. You should keep accurate records yourself about your contributions and make sure you do not exceed the $50 000 limit per child. Also, it will not warn you if you are contributing more than is needed to get the matching CES grant for that year.

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