Monthly Archives: April 2015

The Federal Budget: 2015

On Tuesday April 21st, Finance Minister Joe Oliver tabled the federal budget for 2015. Election year budgets are typically more generous than usual, and despite a projected $1.4 billion budget surplus for the fiscal year, this one nevertheless contains a spread of handouts to Canadian families: a mixture of tax cuts, tax credits, and extra spending. In this article, we’ll take a look at a few of the highlights, changes that can really make a difference to your bottom line.

Changes to the TFSA

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We discussed Tax Free Savings Accounts in a previous article, but to reiterate, they’re a great savings vehicle for most Canadians. In the coming year, they’re going to get even better. The annual cap of $5500 of contributions will be almost doubled to $10000.

The primary beneficiaries of this change will be those on higher incomes, or those with low expenses. The average TFSA user doesn’t fill up the current $5500 annual allowance, so the extra $4500 is likely to go unfilled by most people, especially those trying to max out their RRSP first. On the other hand, if you are lucky enough to be able to fill out an RRSP and $5500 of TFSA, then putting more into your TFSA is perhaps not the most effective place to put further savings. Unless you really want the security of a TFSA, it might be time to look into something a bit more exciting like an exchange-traded fund.

For younger people, the new and improved TFSA can have a very different purpose: saving for a large purchase, such as a first home. TFSAs are more flexible than other tax-sheltered savings options like the RRSP, so they can be the ideal place to build your deposit.

“Income Splitting”

In our guide to (legally!) reducing your tax bill in Canada, we talked a bit about income splitting and its potential effects on the amount of tax you pay. Income splitting in Canada has until now required some fairly convoluted methods. We talked about the possibility of higher-income partners loaning money to their lower-income partners, and the bookkeeping necessary to do so legally. From 2015 onwards, it will be a bit easier.

The 2015 Family Tax Cut is not an example of income splitting, but for most purposes it might as well be. Married and common law partners with at least one resident child under 18 will be allowed to, effectively, split their income. The partner with the larger income can claim a tax credit worth up to $2000 based on the amount of tax he could have saved, had he had split his income with his lower-income partner.

So, who benefits? As with actual income-splitting, the families with the biggest potential savings are those with a big difference in income between the partners. The family with the most to gain would consist of one partner with a high enough income to take full advantage of the tax credit, one full-time homemaker with no income whatsoever, and one newborn for 18 years of claims. The further the higher earner is above a tax threshold, or the closer together the partners’ incomes are, the less they benefit.

More for Families, More for Seniors

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For families with children, the Universal Child Care Benefit rises to $160 per month for children under six, and $60 per month for those under 18. The Child Care Expense Deduction also rises by $1000. Also, remember the Children’s Fitness Tax Credit from our article on tax deductions? It not only rose to $1000 per year, but it also became refundable. If your kid plays hockey, keep the receipts.

Meanwhile, for those at the other end of the age range, Registered Retirement Income Funds got more flexible. The minimum annual withdrawal was lowered from 7.38% to 5.28%, reducing the risk of seniors outliving their savings. The new budget also laid out new tax credits for improving home accessibility.

Buying It For Life

Sometimes, buying the cheap option can cost you more in the long term. Consider the following example. You go out and buy a pair of winter boots for $50. They last their first winter, but during their second one the leather is cracking, the soles are worn down, and you end up replacing them. Meanwhile, your rich friend buys himself a new pair of boots for $200. They last ten years, by which time you have spent $250 on boots.

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The realisation that you can spend less by spending more has spawned a philosophy of “buying it for life”. Its adherents seek out durable, high-quality goods, with lifetime warranties whenever possible. Unfortunately, it has also become a marketing term, so you will still need to do your research.

Unfortunately, dropping a whole lot of money all at once isn’t an option for everyone. Someone on a low income might have almost nothing left in the budget at the end of the month. While the obvious answer is to save money until you can afford the lifetime guaranteed item, sometimes that just isn’t the right option. Sure, you could save up for your new winter boots for six months, but snow is falling right now and you don’t want your toes to turn black and fall off. You also need to weigh spending decisions against, say, your need for an emergency fund.

There are options. Windfall income can be put to good use upgrading to durable items, your credit card can help you to spread payment over the next few months, and short-term finance can be a great option. Still, as a frugal spender who makes smart decisions with money, you should figure out when buying it for life is a good idea and when it isn’t. This guide will help.

How often do you use it?

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Usually, the more often you use something, the more sense it makes to buy it for life. We often talk about things in terms of how many years they last, but engineers prefer to talk about Mean Time To Failure, using the amount of time that the system was actually in use. The more often you use it, the less time there will be before it stops working. If you only have one barbecue a year, you might as well buy the cheapest grill in the shop because it will probably last a lifetime, so long as the rust doesn’t get to it. On the other hand, if you can’t get out of bed in the morning without your cup of coffee, it makes a lot more sense to buy your bean grinder for life. This is where lifetime warranties really come into their own. Using almost anything daily will dramatically shorten its lifespan, but with a lifetime warranty you can just send it back for a brand new replacement.

How much will it cost over a lifetime?

It’s easy to get drawn in by promises of lifetime warranties and near-indestructibility, but make sure to compare how much the cheap alternative costs compared to the expensive buy-it-for-life model. Sometimes it is genuinely cheaper to buy the cheap, disposable option and replace it every now and then, and often the cheap version is just as usable as the expensive one right up until it stops working.

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Take maintenance costs into account here, too. Many buy-it-for-life products are aimed at real enthusiasts who want that product for its own sake as much as any savings. Sure, it will last for life, and the ticket price will be cheaper than a succession of cheap alternatives. However, it might require expensive maintenance, or it might need special treatment to stay useable. Cast-iron cookware is more or less indestructible, but it needs seasoning regularly and you can’t clean it easily.

In short, buy-it-for-life can save you money, but it won’t always. You’ll need to do your own research and examine your own lifestyle to tell the difference between a good investment and an expensive gimmick. Just like every other topic in personal finance, then.

How To: Credit Repair

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Not everyone is born knowing how to balance a budget or save for retirement. Many people, when it comes to financial planning, just close their eyes and cross their fingers. For those people, the first push towards educating themselves about finances often comes when disaster strikes: say, they are refused a mortgage. Bad credit can sneak up on you. You miss a credit card payment here, you let an unpaid bill go to collections there, and suddenly your credit score is way below the 650 mark and no-one will lend money to you any more. In this article, we’ll look at how to live with bad credit and how to rebuild your credit score to something a bit more impressive.

Living With Bad Credit

Living with bad credit is no picnic, but it doesn’t have to be a financial death sentence either. First, while you won’t have all the same options as someone with a high credit score, some sources of finance are still available. Although you should consider going cardless if it was poor credit card use that damaged your credit card rating in the first place, there are even some credit card options for you. Guaranteed approval credit cards work the way the name suggests: even with a history of bad credit, or no credit history at all, your application will be approved. People with poor credit may be required to make a security deposit.

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However, this no-questions-asked approval comes at a price. Because they are typically used by people with poor or no credit history, guaranteed cards tend to come with high interest rates, high fees, and low credit limits. Users of guaranteed credit cards should be especially careful: while they are great for building a good credit history if used responsibly, those high fees and rates can make a bad credit score worse very quickly. In fact, this is the general rule with bad credit loans, from auto loans to credit cards: you will pay a higher interest rate and larger fees.

If a guaranteed credit card doesn’t sound appealing, a secured credit card might be more your style. With a secured credit card, you deposit money with the card issuer in advance. You are almost guaranteed a credit card with a credit limit equal to your initial deposit: the card issuer is taking very little risk, as you have already given them the money that they will then loan back to you. Like the guaranteed credit cards, you may face high fees and interest rates.

Rebuilding Your Credit

Rebuilding your credit is a long process. For example, a first bankruptcy will linger on your credit card for typically six or seven years depending on the province you live in. Further bankruptcies will appear for 14 years. Most examples of poor credit, like defaulting or having a debt sent to collections, will stay for six years. However, the journey of a thousand miles begins with a single step, so here are a few steps you can take right now.

Identify the problem. Residents of Canada are entitled to unlimited free credit reports from Equifax or TransUnion, so long as they apply in writing. Look over yours for any bad debts. In particular, look for any bad debts that you don’t remember incurring: according to a 2005 study by the Public Interest Advocacy Centre, 18% of those surveyed reported errors in their credit reports. If you find them, dispute them. Look also for any debts that have gone to collections and pay those off as soon as possible, then ask the creditor to remove their collection notice from your credit report. Pay all bills on time, and try to reduce future bills to make this easier.

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Check your lines of credit. Responsible use of credit, for example the secured credit cards mentioned earlier, will put some good into your credit history. Don’t use them too much, though. One major component of your credit score is your utilisation ratio: the amount of money that you have borrowed compared to the amount that you could in theory borrow if you maxed out all of your lines of credit. The lower your ratio, the higher your credit score, with the sole exception of zero utilisation. This is why going cardless should be a last resort, but also why you should pay down your debts.

Declare bankruptcy? This is your nuclear option, and should only be done under the advice of a credit counsellor. A declaration of bankruptcy will wipe most debt from your credit report, although not everything (see our article on bankruptcy for details). It will also ruin your credit rating and stay on your credit report for years, making it the slowest way to rebuild your credit. Only do this if you cannot meet your existing debt repayment obligations without incurring further debt, even after attempts at debt renegotiation.