! UE IAL ISS EC SP VING SA XTA
GOLD & OIL SURGE SIGNALS END OF MINERAL BEAR MARKET Flow-Through Resource Funds Offer Upside Potential Plus Tax Savings
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Jean-Guy Masse Northern Precious Metals Management Inc
Who is Jean-Guy Masse? Jean-Guy Masse is the president and founder of Northern Precious Metals Management Inc. (NPMM) who is acting as portfolio manager for the Pangaea Flow-Through Fund 2016 Limited Partnership. Jean-Guy has been involved with the Canadian mining sector for over 40 years. He has been instrumental in assisting governments in the development of new financial structures to promote the exploration and development of mineral resources in Canada. He pioneered the creation of the first two mining limited partnerships in Canada which raised the required funds to allow Muscocho Exploration Limited bring the Quebec Montauban gold deposit to production in the early 1980s. Jean-Guy is a mining engineer (Ecole Polytechnique of Montreal), holds a master’s degree in Mining Administration from Stanford University of California, and is a Chartered Financial Analyst (CFA). He brings 40 years of professional experience as a financial analyst, investment banker, portfolio manager and mining executive covering projects in precious, base metals and industrial minerals to the management of the Pangaea Flow-Through Fund 2016 Limited Partnership. From 1993 to 2002 he served as president of three mining companies whose activities encompassed exploration, development and production of precious metal, base metal and industrial mineral properties. With this additional experience as a mining operator, Jean-Guy Masse spearheaded the creation of a new mining limited partnership in 2003, under the name “Northern Precious Metals Limited Partnership”, for investors to take advantage of the improvement in precious and base metal prices and to benefit from a major and long expected turn around in Canadian exploration activity. From 2003 to 2016, NPMM has launched twelve flow-through offerings through prospectuses and offering memorandums.
he resource industry experienced a severe depression beginning in early 2011 and most seriously affected the share prices of all listed resource companies. Although 2015 was another nightmare year for the industry, it will be recognized as marking the end of a most difficult five-year bear market. Prices for most minerals hit multi-year lows in December 2015 due to the prolonged economic weakness in China, the general uncertainty about the global economy and the enormous volatility created by continuous speculation as to when and by how much the Federal Reserve would finally raise U.S. interest rates. However, the year 2016 to date has seen impressive technical price reversals for most metals and minerals, which indicate that the recovery is underway.
Another point of interest is that, relative to earlier in the year, financial market volatility has calmed down and capital flows seem to be back in a fairly strong way, while some improvement has been noted in the emerging economies. The revival in demand should be most welcome by the base metal companies, which have seen their shares decline by anywhere from 70 percent to 90 percent in the last five years.
NICE REBOUND
Partnership.
To date, prices for base metals have also turned around, but in a much more modest way. However, prices should firm up in the coming year as a major revival in demand is looming on the horizon. The fuel for this revival of demand will come, this time, not so much from China but from Southeast Asian countries such as Indonesia, Thailand, Malaysia, Philippines and Vietnam. Some of these countries have already approved massive amounts of expenditure on infrastructure projects such as railroads, national roads and airports, while in others, such huge capital projects are in the planning stage.
INSIDE
PUBLISHER’S MESSAGE Page 2
FLOW-THROUGHS EXPLAINED Page 2
Crude oil has experienced a nice rebound in price from about US$30 to US$44 per barrel, due mainly to production disruption in Nigeria as a result of terrorist attacks, and in Canada because of wildfires. Would global economic growth pressure the price of oil higher? Short term, the evidence is lacking. There is a lot of oil around to depress the price below US$40. However, production disruptions moved the price up to about US$55 per barrel, in May. Therefore, US$40 to US$55 per barrel is the price range to be expected, at least over the next twelve months.
Gold prices jumped by more than 25 percent in the first six months of 2016 as gold holdings in exchange-traded funds (ETF) rose by an outstanding 715 tonnes. That large and sudden rise totally erased the drop in holdings that occurred during the 30-month period of June 2013 to Individual investors December 2015. This is the highest sixcan benefit from month total increase since ETF holdings were first recorded. One of the biggest a recovery of the drivers for gold is negative interest rates resource industry around the globe. With over $8 trillion of negative interest rate bonds, the bond by purchasing a market is widely described as a form of “confiscation by the state.” As a result, selection of publicly wealthy investors turned to gold with listed securities by the result that gold ETF holdings went sharply on the rise. With still-growing buying units of a sovereign debts and higher volumes Flow-Through of negative interest rate bonds, ETF holdings and the price of gold should Resource Limited continue to rise for the foreseeable future.
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Fall 2016
PROFESSIONALLY MANAGED Investing at the beginning of a recovery and, particularly after a severe bear market, has always been a profitable decision. Individual investors can benefit from a recovery of the resource industry by purchasing a selection of publicly listed securities coupled with a few units of a Flow-Through Resource Limited Partnership. Why a Limited Partnership? Because it is a tax shelter that offers both tax savings and the potential for capital gains. A flow-through partnership is a professionally managed portfolio of, generally, junior resource stocks that exists for a defined period of time. At the end of that period, the shares are sold and the proceeds would be distributed and treated as a capital gain by limited partners.
Caution Regarding Forward-looking Statements This article is for information purposes only and does not constitute an offer to sell or a solicitation to buy any securities. The information contained in this article is not intended to provide any tax, legal, or financial advice. Recommendation is that you consult an investment professional before investing in any investment product. Please consider a fund’s objectives, risks, and charges and expenses, and read the Offering Memorandum carefully before investing.
THE DISABILITY TAX CREDIT: APPLY NOW AND SAVE ON YOUR TAX RETURN! Page 5
WRITE OFF THOSE HEALTH BILLS Page 6
SAVE TAXES IN RETIREMENT! Page 7
ELIMINATE YOUR DEBT! CONSOLIDATE AND SAVE INTEREST CHARGES! Page 7
BIG TAX CHANGES TO IMPACT ANNUITY INCOME Page 7
WHAT ARE THE TAX ADVANTAGES? Below is a hypothetical example of a flow-through share fund, assuming the top tax bracket of 47.7 percent for a B.C. investor. For the sake of simplicity, the fund is also assumed to be invested entirely in B.C. resource companies, though in actual fact a fund manager is more likely to spread risk across the country. Investment amount Combined Fed & Prov. Tax rebate (47.7% rate) Federal Tax Credit B.C Tax Credit Total tax savings Less income tax on inclusion of federal & provincial income tax Tax Savings
$1,000 $477 $132 $150 + $759 $135 _ $624
Now let’s assume the fund is redeemed at a 100 percent of the investment value, bearing in mind the proceeds are fully taxable as a capital gain. Let’s do the math!
Proceeds of the sale Less capital gains at 47.7% tax bracket Net proceeds
$1,000 _ $239 $761
In the end, money can be made since the investment also garnered some handsome tax savings, making the total return to the investor of: Tax savings $624 Net proceeds $761 + $1,385 Under the above assumption, the final cash benefit to the investor is $1,385 on an investment of $1,000. In addition, for the investment to break even, proceeds of the sale would have to be as low as $494. Therefore, an investment in units of a Flow-Through Resource Limited Partnership offers a downside risk as well as an attractive potential capital gain.
2 KOOTENAY MONEY | FALL 2016
“Dedicated to the furtherance of finance literacy and well-being.”
TAXES? HECK, THAT’S YOUR MONEY!
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PUBLISHER’S MESSAGE
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axes are an unpleasant feature of life but as everyone knows, are unavoidable. Income streams generated in Canada, or monies entering the country from overseas, will inevitably attract the attention of Canada Revenue Agency. What to do? As advisors in the financial sphere, it is our job to ensure our clients do not pay more than their fair share of taxation. Hence this special taxation issue. With the end of the year in view, the opportunity to reduce taxable income through the financial strategies we examine such as the flow-through limited partnership and the health spending account, not to mention preparing for the tax changes to annuity income, the topic is timely one.
compelled to pay the necessary penalties. Rather, we advocate tax mitigation, which is perfectly legitimate and means operating within the tax regime to legally reduce the amount of taxation you are subject to. Our readers may be surprised to learn that as a well-known candidate in the upcoming U.S. presidential election has pointed out, they have a responsibility to pay as little tax as legally possible! The process we engage in to make this possible is based upon Canada’s tax laws and is called tax planning. This involves lowering your tax charges by structuring your transactions so you gain the greatest tax benefit possible. It’s not only legal; it’s also possible and it’s the smart thing to do, for yourself, your family, your business and your financial future in general.
Saving you taxes is a positive goal in itself, but we at Septen Financial have a broader purpose. Those savings can be funneled right back into income-producing investments or the type that steadily augment in value. In short, our tax-saving proposals are part of our wealth creation cycle and its true beauty lies in the fact these investments won’t cost you extra; they will be financed out of your income flow that would go to taxes. At Septen it has been our pleasure to reduce the tax burden of individuals and businesses across the country with the consequence they have thrived and remain our clients.
When all is said and done, it’s your hard-earned money and you have the right to maximize what is left after having paid your fair share to the tax authorities. And what better way to treat this money, wrested from the hands of the taxman, than to redirect it toward a vehicle that can produce more wealth? Monies saved in this fashion are best viewed as a windfall, a bonus, if you will, that is separate from your regular and expected cash flow and spending. Conventional wisdom tells us to protect such windfalls by saving and investing them for a rainy day, for education, and also for retirement.
Note that we are not speaking of tax evasion, which is a crime and includes hiding income from the CRA, not filing your tax returns, keeping two sets of books, making false entries on your tax form or claiming expenses or tax credits you aren’t entitled to. Such activities will label you as a tax evader and fast-track you to being audited and
The strategies referred to above and dealt with in this issue will appear unfamiliar to many since they are not the tools of bookkeepers of even accountants. They are, however, very much our working tools here at Septen Financial and we cordially invite you to contact us to see how they might work on your behalf.
FLOW-THROUGH LIMITED PARTNERSHIPS EXPLAINED
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Charles Duerden Septen Financial
he Flow-Through Limited Partnership is a uniquely Canadian tax innovation that has raised funds for mineral exploration that otherwise simply would not have happened. Every year, billions of dollars are raised for mining operations through these Partnerships that ensure this vital sector – and the larger Canadian economy – keeps ticking over. They have been responsible for some of the most stunning developments in Canadian mining history, among them the Ekati and Diavik diamond mines in the Northwest Territories.
these companies to issue flow-through shares to raise exploration capital, but rather than claim the CEE for themselves, they renounce it as they are permitted to do under the Income Tax Act, in favour of shareholders of flow-through limited partnerships. Contact your Septen Financial Representative for more details.
Their incredible success on the Canadian investment scene over the last 60 years is due to the fact that besides exposing investors to the upside potential that has driven Canadian resource exploration since its inception, they also “flow through” their qualifying exploration and development expenses to investors who can write them off directly against their taxable income. So what do Flow-Through Limited Partnerships do? Short answer: they invest in junior mining companies to provide the necessary operating capital for them to continue their exploration. The “Partnership” in the title refers to the legal relationship between the general manager of the Partnership on the one hand; and on the other, the Investor, who becomes a limited partner in the Flow-Through Partnership. More detailed answer: they provide active professional management of a resource portfolio, diversified to reduce risk; offer significant investment benefits; and reward the investor with important federal and/or provincial tax concessions. Here’s a quick summary of what flow-through limited partnerships offer the investor: • Professional management • Potential for capital appreciation • Reduction in current taxable income • Tax deferral and benefiting from capital losses • Diversification So how did this all start? Back in 1954, the Liberal government of Prime Minister Louis Saint-Laurent was looking for a way to jump-start the Canadian resource sector as the whole economy fell into a sharp slump that marked the end of the Korean War. The solution the mandarins of the time came up with was the flow-through share, a device that relied on the tax system and internal stimulus rather than factors external to Canada. In particular, the government allowed for the transfer of tax deductions between companies to boost the funding of Canadian mineral exploration projects. Mining, oil and gas companies could transfer certain exploration expenses to their investors, who were then able to deduct them against their own resource income. The system worked generally well but was not without its limitations. By the early 1980s, in the face of a worldwide recession that hit it hard, the resource industry started to demand further tax incentives to encourage exploration and development. In response, the federal budget of April 1983 allowed certain investors to deduct exploration expenses (and related depletion allowances) against any type of income as opposed to strictly resource income. The upshot was that the use of flow-through investments among resource companies became popular and exploration activity went into overdrive. For the second time in as many generations, the tax system had come to the aid of the resource sector. Every Canadian resource company, whether its business be in oil, gas, mining, base metals or even renewable energy, may fully deduct specific exploration expenses. This is known as the Canadian Exploration Expense (CEE). It has become commonplace for
WALID AT WORK! A new employee has recently joined the staff of the Kelowna office of Septen Financial. Walid Khalfallah, a 20-year old client of Pathways Abilities Society, has been working part-time for the last two months on a long-overdue filing project. In this time, he has won our admiration for his diligence and perseverance. Way to go, Walid!
“Dedicated to the furtherance of finance literacy and well-being.”
Issue 2 · Fall 2016
Septen Financial Ltd. 778.753.2020 PUBLICATION
STEPHEN HILL Publisher ROBERT EGER Executive Editor CHUCK DUERDEN Managing Editor CHASE JESTLEY Creative Director NEXT ISSUE INC. Distribution
The editorial offices of Kootenay Money are located at 203 Rutland Plaza, 125 Highway 33 East Kelowna, Canada, BC V1X 4G7 Phone (778) 753 2020 Email kelownainfo@septen.com Fax (778) 753 5090 Toll-free 1 (844) 385 2020
A TAX-ADVANTAGED INVESTMENT IN SHARES OF 100% PUBLICLY TRADED COMPANIES.
FLOW-THROUGH FUND 2016 LIMITED PARTNERSHIP
The Fund’s objective is to create a diversified portfolio of Flow-Through stocks, to maximize tax benefits, to mitigate investor risk, and to support returns.
Suite 203 RUTLAND PLAZA 125 Highway 33 East. Kelowna BC, V1X 2A1
778.753.2020 · TF: 844.385.2020 kelownainfo@septen.ca
A VALUE OPPORTUNITY IN TODAY'S LOW-PRICE ENVIRONMENT. Past performance is not indicative of future returns. This advertisement is for information purposes only and does not constitute an offer to sell or a solicitation to buy the securities referred to herein. The information contained in this website is for your information only and is not intended to provide any tax, legal or financial advice. The contents are not to be reproduced or distributed to the public or press. If there is any conflict between the provisions of this presentation and a relevant Offering Memorandum, the latter shall govern. Please consider a fund’s objectives, risks, and charges and expenses, and read the Offering Documents carefully before investing. Any reproduction, modification, distribution, transmission, or republication of the content, in part or in full, is prohibited.
W E HA V E T O M O RRO W C O V ERED
ARE YOUR INVESTMENTS LACKING GLOBAL FLAVOUR?
Savvy Canadian investors realize that globally diversified portfolios provide the best risk and return characteristics. Let us show you how adding a global flavour to your portfolio allows you to lead the Okanagan life more comfortably.
FALL 2016 | KOOTENAY MONEY 5
(778) 753 2020 ∙ kelownainfo@septen.com
DISABLED? CLAIM YOUR DISABILITY TAX CREDIT!
Charles Duerden Septen Financial
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Claiming the DTC will reduce the amount of tax that has to be paid on your benefits.
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s a new arrival in British Columbia, I was surprised to meet so many people, young and old, who were disabled. Accidents at work, on the roads, or adventuring in the wild had all taken their toll on their physical and sometimes mental capability. Consequently, their impaired state had also taken a toll on their ability to earn. What’s worse, all were facing costs for special treatment and care, placing further financial burdens upon them. What to do? Fortunately for these folks, the Canadian government recognizes the financial plight of persons with disabilities, and seeks to provide them with some relief via the Disability Tax Credit (DTC), which is available through the Canada Pension Plan (CPP). The government figures that it’s necessary in these cases to restore tax equity since a disabled person faces additional expenses that other taxpayers don’t face. This could range from prescriptions to hearing aids to wheelchairs to walkers. The official thinking is: you have layouts associated with your condition therefore you are entitled to a tax break.
STEP #2 This is the most important of the four steps. It involves taking the form to the professional who will serve as your health adjudicator; who that is depends upon the nature of your disability. It might be your family doctor. If you have hearing issues, it may be your audiologist; your optometrist, if your vision is at fault. Perhaps you have sustained an injury at work and are receiving treatment from an occupational therapist. Psychologists and physiotherapists are other professionals who can adjudicate on your behalf.
You must then ask them to fill out the form, which asks questions on your ability to complete normal, daily functions such as hearing, seeing, walking, feeding and dressing. There may be a fee involved in doing this so it’s best to ask when you are making the appointment. (If your health professional does charge you to complete the T2201 form, you can claim this as a medical expense on line 330 of your tax return!) It’s critical your health professional provides all the information the form requires, because many are not familiar with the DTC. It is also important they understand the daily challenges you face, and how important a successful application would be to your financial health. This is You have layouts not only because of the tax relief it can give you; it’s also because, as associated with your we have mentioned, it qualifies you to tap other extremely generous such as the Registered Disability Savings Plan (RDSP, condition therefore programs see our sidebar).
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So what is the Disability Tax Credit? It’s a non-refundable tax credit that helps persons with disabilities or their supporting persons reduce the amount of income tax they may have to pay. You have to qualify for the DTC in order to be eligible; there is some paperwork involved, which we’ll go into below but it’s well worth the effort. If you’ve been suffering from a mental or physical impairment you could have claimed a you are entitled to a federal disability amount of $7,899 for 2015. (This sum is entered STEP #3: tax break. on Line 316 of your tax form.) If a person with a disability is a Return to your health professional to get the signed and child under 18, there was an additional supplement of $4,607 for completed form back since you want to be the one responsible for 2015, for a total disability amount of $12,506. On top of that, sending it in. If some information is missing or you disagree with once you have established your eligibility for the DTC, this will open the door to other what has written about you, you are fully entitled to ask for a second opinion by taking federal, provincial, or territorial programs such as the registered disability savings plan, the form to another professional. the working income tax benefit, and the child disability benefit. What’s really good about the DTC is that it’s managed by the Canada Revenue Agency that eligible persons can claim on their income tax each year. If you’re receiving benefits from the Canadian government, as many persons with disabilities do, they will be considered taxable income. Claiming the DTC will reduce the amount of tax that has to be paid on your benefits. So in essence the DTC reduces the amount of taxable benefits you’ve collected in the previous tax year. So how do you qualify for the DTC? First, you have to have paid into the CPP over the course your working life since the age of 18. Specifically, you must have contributed enough during four of the last six years. Alternatively, you must have made enough contributions over the last 25 years, including three of the last six years before you became disabled. This may be a challenge if you have been out of work for some time. Secondly, your status as a disabled person has to be certified by a medical practitioner who will review your disability, medical records, and other documents. To qualify for the DTC, you have to have endured a “severe and prolonged” impairment that “markedly restricts” your daily living activities and has lasted, or expected to last for 12 months. If you have had a disability for some time, your tax returns can be reassessed as far back as 10 years, allowing for a maximum tax savings of $30,000. Let’s take a look as to how you actually go about applying for the DTC. In all, there are four steps.
STEP #1 Go online to download the Disability Tax Credit Certificate form, known as the T2201, from the website http://www.cra-arc.gc.ca
STEP #4:
Take the signed form to a Canada Revenue Agency Tax Centre. If there isn’t one in your town go again to http://www.cra-arc.gc.ca and type “Tax Service Offices” in the Search box or call 1 (800) 622-6232 to find the one nearest you. After you have completed the above steps, it becomes a waiting game. Don’t expect a reply from the government for six to eight weeks. If you are approved, you can go ahead and claim the DTC the next time you complete your tax return. If you get rejected, the reply will detail the reasons why. If this happens, you can send the form in once more after consulting with another health professional. Or, you can lodge an objection with the CRA. If you can’t take advantage of this credit, because, for example, you don’t have a taxable income it may be possible to transfer it to your spouse, common-law partner or other support person. The list of supporting relatives who can claim a person’s unused Disability Tax Credit includes a parent, child, brother, sister, aunt, uncle, nephew or niece. The DTC, in this case, can be included on Line 318 of your tax return, (“transferred to a supporting relative”). Key to making the claim is that the person on whose behalf it is made must be “dependent on the taxpayer for support.” The disability amount can be transferred in either its entirety or as the remainder of what the dependent was unable to claim himself or herself. If filing for the DTC on your own sounds a scary undertaking, we at Septen Financial will be happy to do it for you, free of charge. Yep, you read that right. Lots of other companies make a fine living by charging you for the service but when you call us it will be on the house!
All About The Registered Disability Savings Plan (RDSP) A Fast Way To Leverage Your Savings And Get Free Money From The Government! A registered disability savings plan (RDSP) is a Canada-wide registered matched savings plan that is intended to help parents and others save for the long-term financial security of a person who is eligible for the Disability Tax Credit (DTC). Its beauty is that it constitutes free money from the government, which can be leveraged instantaneously. Here’s how. For every $1 put into an RDSP account, the federal government can (if your family income is below $87,123) match with up to $3! This is the Canada Disability Savings Grant. If you don’t have anything saved and you are living on a low-income (less than $25,356), the federal government will put in $1,000 each year for 20 years! This is the Canada Disability Savings Bond. If your income is higher than $25,356 but doesn’t exceed $43,561, you can still receive a partial bond.
The money can be invested to grow and depending on your income, any money saved will immediately triple in value. The RDSP is exempt from most provincial disability and income assistance benefits; it won’t get clawed back and it won’t reduce disability benefits payments. Contributions to an RDSP can be made until the end of the year in which the beneficiary turns 59, but they aren’t tax deductible. Contributions that are withdrawn from an RDSP aren’t included in the beneficiary’s taxable income. However, what will be included in their taxable income when they are paid out of the RDSP is the government benefits that are paid into the Plan, like the Canada Disability Savings Grant, the Canada Disability Savings Bond, plus any investment income earned in the plan. Need a hand applying for the RDSP? Call us here at Septen Financial. We’re here to help!
6 KOOTENAY MONEY | FALL 2016
“Dedicated to the furtherance of finance literacy and well-being.”
WRITE OFF THOSE HEALTH BILLS! Business Owners can Deduct Health & Welfare Costs with a Health Spending Account
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here’s good news out there for business owners, whether incorporated or not incorporated, to cut back on taxes by writing off numerous medical, health and welfare expenses against taxable income.
Charles Duerden Septen Financial
Yes, for those folks out there with business of their own and paying taxes, they can deduct 100 percent of these types of expenses, for themselves, their family members, and employees directly against taxable income by setting up a Health Spending Account (HSA). The HSA is used by thousands of businesses across Canada to reduce taxes and serve as alternative to traditional health insurance, and for a one-time cost of a few hundred dollars, you should have one, too, if you don’t already have one.
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A Health Spending Account transforms medical expenses into business expenses.
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is entirely tax-deductible! The beauty of having a Health Spending Account is that for a nominal set-up fee, at the end of the fiscal year, all reimbursements from the HSA provider are excluded from the business owner’s taxable income, and all of the payments to the Provider are deducted by the business. As a recap, here are the three ways an HSA can save you money if you operate a business:
There are no deductibles when you use a Health Spending Account.
Why? Because medical/health expenses are a fact of life, and must be paid for, in one form or another, and the HSA approach is the most tax- and cost-efficient. Right now, there are three ways for a business owner to pay for these expenses. He or she can use a traditional health insurance plan but will quickly discover that they are costly, limited in coverage, and complicated to implement and administer. Secondly, these expenses can be paid for directly with after-tax dollars; this is expensive in itself, but will also incur tax consequences. The third and best choice is a Health Spending Account which transforms medical expenses into business expenses.
MAKING A CLAIM How does an HSA work, I hear you ask. The crux of an HSA’s value is that it enables you to pay health, dental and other welfare-related bills with pre-tax dollars rather than post-tax dollars. What’s the difference? A big difference as you can see from the illustration below, and the higher your tax bracket, the bigger the difference.
• Tax savings from deducting 100 percent of your medical costs • Reducing your costs by avoiding high premiums associated with traditional health insurance • The elimination of expensive deductibles Yes, you read that last point right: there are no deductibles when you use an HSA. Here’s another advantage over traditional health insurance: an HSA also covers pre-existing medical conditions. Such a condition will in no way affect your eligibility for inclusion.
At this point you’re probably wondering what types of expenses are eligible for reimbursement under an HSA. Suffice to say here that the range is extensive as detailed under section 118.2 of the Canadian Income Tax Act, and a complete list may be found under the CRA bulletin IT-519R2. Here’s a brief highlight: • • • • • • •
All prescription drugs – even Viagra! All dental – including dentures and orthodontic work All optical – including laser eye surgery Cosmetic surgery deemed medically necessary Psychotherapy Paramedical – including chiropractic, massage, physiotherapy and naturopathy Premiums – health and dental premiums paid into a spousal plan.
What if your daughter requires braces on her teeth? What if you have to travel to enable a family member to get needed medical treatment? Do you or a family member face hotel costs because of the need for outpatient care? Does your son require chiropractic treatment for that aching back of his? Maybe your spouse requires laser eye surgery to get the clarity of vision he or she needs for her job. Perhaps your spouse is paying premiums to their own, non-government plan and you’d love to be able to make them tax-deductible. What if there are unpaid portions of your spouse’s plan that are not covered; wouldn’t it be awesome to make those tax-deductible also?
ONE-PERSON BUSINESS The good news is that all the above expenses are eligible under an HSA making it a sensible choice for the small business owner. The HSA makes particular sense if that business happens to be a one-person business such as an incorporated consultant or contractor or professional corporation. Because this segment of Canadian business is difficult and expensive to ensure, it is overlooked by traditional health insurance providers. In the two options presented, an engineer with an income of $100,000 annually and in the top tax bracket of 43 percent plus is faced with a medical bill of $4,000. In the first (after-tax dollar) option, $7,018 is needed to pay the bill since $3,018 will be taken in tax. In the second (before-tax dollar) option, only $4,400 is needed, $4,000 to pay the bill and the 10-percent processing fee, which in this example is $400. The hard truth of the matter is that for someone in this tax bracket, it takes $1.78 of pre-tax tax dollars to pay $1 in medical expenses, since 78 cents is taken in provincial or federal taxes. By taking the second approach where the bill is paid through the company, that 78 cents is retained inside the company. Sounds good, eh? So how does one go about making a claim to an HSA? Below is a three-step example of a claim for a $1,000 dental bill involving three different entities: a business owner who has incurred the dental expense; the HSA administrator; and thirdly, the business itself. 1.
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The business owner pays the dentist with a personal credit card. The claim is then submitted to the HSA administrator. This involves entering details associated with the expense, i.e., the name of the patient, the type of service provided, the service date and the amount involved, which in this case is a debit of $1,000 to the business owner. After submitting the claim, the business remits a payment to the HSA provider for the amount of the expense plus a processing fee, which like our example, is usually in the range of 10 percent, amounting in this case to $100. This creates a trail of receipts for record keeping, thus far, a debit of $1,100 ($1,000 + $100) to the business
If a business has a number of employees, then an HSA becomes a powerful tool to attract, reward and retain key personnel. A type of Health Spending Account is available to incorporated businesses, which provides benefits to employees that are 100-percent tax-free, thus providing a superb addition to any employee compensation package. With a company Health Spending Account, employees will know the dollar amount available during any benefit year; will face no restrictions on the type of medical service they require; will not be linked with a specific practitioner; will not deal with copayments or face visit limitations. Perhaps the true beauty of having an HSA at their disposal is that employees can focus their available funds on a particular need whereas traditional plans try to give a little of everything. An HSA does have some limitations and restrictions but if the prospect of making your health and medical bills tax-deductible appeals to you, call us here at Septen. We’re here to help! The average Canadian family can easily face annual medical expenses of $3,000; all it takes is a few prescriptions, a new pair of spectacles and a visit to the dentist by each family member. Depending on your personal tax rate and province of residence, your savings through an HSA can range from about $500 to over $2,000 annually. One thing is for certain: if you are self-employed, there is every reason you should have a Health Spending Account. Contact your Septen Financial Representative for more details.
The HSA administrator then reimburses the business owner personally for the initial out-of-pocket expense, thus crediting him or her with $1,100.
Dartax
Bookkeeping & Tax Returns Need help applying for the Disability Tax Credit?
Call Dartax... TAX-FREE REIMBURSEMENT Here’s the kicker: that $1,100 the business owner receives from the HSA provider is entirely tax-free! Plus, the $1,100 payment the business makes to the HSA provider
778.753.1344
Darlene Lauze dartax01@gmail.com
FALL 2016 | KOOTENAY MONEY 7
(778) 753 2020 ∙ kelownainfo@septen.com
SAVE YOURSELF TAXES IN RETIREMENT! Drawing On Non-registered Accounts First May Be The Better Retirement Strategy
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ow big of a nest egg will I need? How much can I spend in retirement? These are two very common questions asked of people in their fifties. They’ve built a financial plan to help them save diligently and invest wisely but now they ask: “How do we get the money out without the taxes killing us?”
Mike Feeney Septen Financial Campbell River, BC Office
The usual advice is to draw income from your non-registered accounts, such as regular savings accounts first. When that money runs out, then you can start to draw funds from your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF). That’s because the money you withdraw from an RRSP or RRIF produces a T4 slip, which means you have to pay taxes on it. So, the logic that many people apply to their financial plan is to delay taking withdrawals from their RRSP or RRIF for as long as possible. This may not be the best advice. If you draw down all of your non-registered accounts first, you will eventually be left with a nest egg made up entirely of RRSP or RRIF money,
which is fully taxable. Then when you reach 71, you’re suddenly forced to convert your RRSP to an annuity or RRIF and start taking withdrawals. This will drive up your income, and because higher incomes are taxed at higher rates, you are likely to pay much more tax than you would have if you had spread out your RRSP withdrawals more evenly over more years. It may be wise to draw on your registered accounts first if you retire before age 65, since you’ll need to bridge your income needs before Old Age Security (OAS) and other benefits kick in. This can also help you avoid OAS clawbacks in later years. Determining the right drawdown strategy depends on your personal situation. Having no strategy can cost you thousands of dollars in taxes that may have been avoidable. Let me show you how you can get some of your RRSP or RRIF money out today, paying considerably less in taxes to the government. Haven’t you paid enough already?
ELIMINATE YOUR DEBT! Consolidate your debt, cut your interest charges with Manulife Bank
W
hen most people think about retirement planning, they think of building a retirement nest-egg through RRSPs and pension plans. While these are key pieces of the puzzle, it’s important not to forget about another important element of retirement planning – debt elimination. After all, the less you spend on interest payments, the more you can allocate to your retirement savings.
Lori Lee Manulife Bank
Most people look to their bank to show them how to be most efficient with their cash flow and debt management, but rarely does a bank offer these types of solutions, rather we tend to arrive at our appointment telling them what we are looking for, and they simply attempt to accommodate that – generally without taking into consideration your goals, your advisor’s recommendations, or your lifestyle needs. We need to be reminded that banks are not utilities, in fact their business is sales, and selling debt is a large driver of their bottom line. Let’s take a standard example that everyone can identify with at some point in their life.
MORTGAGE AS OVERDRAFT You have a bank account with an average balance of $5,000. You may also have a “rainy day savings” account, let’s say of $10,000. The bank allows you to have an overdraft on your chequing account that you may dip into occasionally, which costs 6 percent. Meanwhile, you carry a small credit card balance of $3,500, interest rate of 12 percent to 19 percent, plus you have a mortgage of $300,000. At this point, let me ask you this question: why did your bank structure your debt so that your income – salary, rental, pensions, commissions, whatever – goes into a chequing account? Wouldn’t it be more efficient if your mortgage was your overdraft? If you could
put your regular balance and savings against the money owed on the mortgage? You are making a small amount of interest on the balances (between 0.20 percent and 0.60 percent) and they are lending your money back to you at a higher rate. Furthermore, you are paying interest on money you do not owe. By simply changing the structure of your banking, you can reduce the amount that you are paying interest on by eliminating the chequing/savings/overdraft account structure. By changing the structure of your banking, you can see your income, expenses, interest paid and principal paid all in one place. By changing the structure of your banking, you can have the flexibility to reach your retirement goals in a more efficient way.
AUTOMATICALLY REDUCE DEBT A debt-elimination plan doesn’t have to be complicated. But you should have one or you’ll likely be in debt longer than you have to. There are a few simple strategies for getting out of debt sooner, such as: •
Building extra debt payments into your budget.
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Consolidating all of your debts at the lowest rate possible.
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Using your income and savings to automatically reduce your debt (without giving up access to that money).
When you’re planning for retirement, don’t forget about the impact that your debt has on those plans. With a strategy for becoming debt-free sooner, you may even be able to retire earlier than expected. Manulife Bank has specialists that work with your financial advisor to develop a debt-elimination strategy that complements your overall retirement savings strategy.
TOUGHER ANNUITY TAX LAWS SCHEDULED FOR NEW YEAR Retirees Should Act Now To Reduce Tax Burden
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Charles Duerden Septen Financial
olks who purchase an annuity after 2016 will have more of their payments subject to taxation. The change will come into effect January 1, 2017 under a new regulation to the Income Tax Act – Regulation no. 300(2) – that will use updated mortality tables in calculating the taxable portion of annuity payments. In short, the new tables show that because Canadians are living longer, the payment from an annuity will be comprise less a return-of-capital (which the government can’t tax) and more of investment income (which it can tax). Guess what this means. If you guessed tax on overall payments will go up, you’re right! Because annuity holders will be receiving more in the way of investment income in the New Year, this will increase the amount of their taxable income. Most folks are familiar with what an annuity is; it’s a contract between an insurance company and an investor, known as a Prescribed Annuity Contract (PAC) in the parlance of the trade. The way it works is that in return for making an investment in a PAC offered by an insurance company, the PAC will pay the investor a guaranteed return for a certain period or for Tax on the rest of his or her life.
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will be based on the 1971 Individual Annuity Mortality Tables, which extend only until the age of 70, leaving insurers to figure out mortality implications beyond that. The new tables go until age 90. While the amount of annuity payments will remain constant, the longer longevity projected by the new tables mean the non-taxable return-of-capital will be stretched out over a longer period of time, so reducing it proportionally within any given payment. At the same time, the taxable investment income proportion will rise.
annuity payments to be upped January 1ST.
The former is known as an annuity certain, meaning it will give a set number of payments and the latter is known as a life annuity, meaning it will pay the annuitant (that’s person who bought the annuity) for as long as they live. The payments the annuitant receives are made up of two components: a return of capital (that is, you are getting your own money paid back to you); and investment income. As you might imagine, the longer you live, the return of capital will be a smaller proportion and the investment income will be a bigger component. Until the end of this year, payments
The changes are detailed in the comparison chart provided by an industry leader in the field of annuities, and based on a $100,000 premium with a 10-year guarantee.
Are you approaching retirement and need a guaranteed source of income? Would you like to convert assets into a predictable income stream? If so, an annuity may be for you, but to take advantage of the existing favourable tax regime, you should contact Septen Financial now or a least before year’s end.
Pooled Western Canadian Mortgages * Residential Mortgages * Working for Western Canadians
7%
Annual Targeted Return 2011 11.65%
2012 9.50%
2013 8.07%
2014 8.15%
2015 15.28%
This investment is offered through Pangaea Asset Management Inc.
Septen Financial Ltd. Toll-Free 1 (844) 385 2020 , Email: kelownainfo@septen.com Suite 203 Rutland Plaza, 125 Highway 33 East, Kelowna, B.C. V1X 2A1
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