Monthly Archives: May 2012

The song was released three decades ago, but its message is still relevant today. Radio stars couldn’t keep up in the flashy world of television.  Now, the medium threatened with possible extinction is the newspaper. We’ve been talking about the demise of print newspapers for a few years. A major article in the business section of the New York Times recently looks at the shrinking of the vaunted US publication The Washington Post.

The piece explains that the number of newsroom staff has dropped from more than a thousand to fewer than 640 people—with more layoffs pending. Major bureaus in various areas have closed. And at the end of the day (perhaps a tired cliché with the intensity of the 24-hour news cycle), the paper is faced with many competitors offering what they do…only doing it better.

At the Post, they’re trying to deal with the changing environment by innovating on the Web. Their challenge involves reinventing themselves, while staying true to the value and culture that made them a great newspaper. As an example, it’s harder to retain an online audience for a lengthy, in-depth look at a topic—while investigative journalism is one of their strong suits.  It’s probably still too early to tell whether or not they will be successful…or disappear.

Reading this reminded me of a blog I read recently written by David Bergstein called “11 Things you Take for Granted Today that Technology will Kill within Six Years”.  In his post he predicts that the following would all disappear:

• wristwatches
• paperback books
• instruction manuals
• greeting cards
• card keys
• tollbooth agents
• maps
• credit cards
• check books
• retail coupons
• cash

That’s quite the list. While you may or may not agree with some or all of the items, I think it’s easy to see how many could be on the chopping block. Although, I’m not sure six years is the right time frame.

But the bottom line holds true. The pace of change is so quick and the impact of technology on our lives and our work is so dramatic that’s hard to imagine any business or industry that is not at risk of being transformed—or killed—in the short to medium future.

This has huge implications for all businesses performing business strategy development. It’s no longer enough to look at your customers and competitors when developing your business strategy.  Now, it’s more important than ever to consider how your business fits in the larger business environment. That means keeping an eye on where the next category killer is going to come from. The radio stars probably never anticipated what television meant for them.

How often do you buy a lottery ticket? And how seriously do you bet on your chances of winning? A recent article in the Daily Beast news blog definitely caught our attention.

There’s a lottery in the US called Mega Millions that offers a jackpot of some $500 million. The article listed 15 things that are more likely to happen than winning the Mega Millions.

These include:

• death by vending machine – one in 112 million
• dying in an airline related terrorist attack – one in 25 million
• having identical quintuplets – one in 15 million
• becoming president of the United States – one in 10 million
• dying from bee hornet or wasp stings – one in 6.1 million
• dying from being left-handed – one in 4.4 million
• becoming a movie star – one in 1,505,000
• dying in a plane crash – one in 1 million
• death by flesh eating bacteria – one in 1 million
• getting struck by lightning – one in 1 million
• dying in the bathtub -one in 840,000
• dying in an on-the-job accident- one in 48,000
• murder – one in 18,000
• dying in an asteroid apocalypse – one in 12,500
• dying in a car accident- one in 6700

The odds of winning mega millions – one in 176 million

So you may be wondering why I think this was worth repeating. I’m amazed at the number of people I have spoken to whose idea of retirement planning is buying lots of lottery tickets. While there’s always the one in 176 million people who in fact does win the jackpot, it’s probably not the preferred way to do financial and estate tax planning.

Organizing your affairs to accomplish your financial goals requires planning and discipline. But if you’re willing to make those commitments, you will have much better odds than death by vending machine.

Together with the end of April, the tax deadline is creeping closer. We still have lots of tax planning tips for you. Today we’ll look at investment income.

The normal types of investment income you earn are interest, dividends and capital gains. Each of these is taxed differently.

Interest is taxed as normal income at whatever your marginal tax rate is. In Ontario, this means 46.41% in the highest bracket. Capital gains are only one-half taxable, so the effective rate on this type of income is only 23.21% at the highest bracket.

Dividends are taxed somewhat uniquely because of their nature. They are a distribution of after-tax profit to the shareholders of a corporation. So dividends are taxed to reflect the fact the corporation paying the dividend has already paid tax on profits. If you’ve been paid dividends, the amount included in your income is “grossed-up” to notionally reflect the total amount of pre-tax income the corporation has earned. You would then receive a credit to offset the tax the corporation has already paid.

There are two types of taxable dividends. The first are called “eligible.” These dividends are paid from public corporations, or from private Canadian-controlled corporations whose income was taxed at the highest corporate rate. “Non-eligible” dividends are from Canadian-controlled private corporations that have paid tax on their income at the small business rate.

The tax rate on eligible dividends in the highest bracket is 28.19% for 2011 while the tax rate for non-eligible dividends is 32.57%.

Now that you have a break down, let’s look at your tax planning opportunities. You can consider acquiring investments whose gain, when sold, would likely be taxed as a capital gain, such as publicly traded shares or real estate. There are a number of rules to determine whether a particular gain is a capital gain or regular income, but in most cases these types of investments are capital gains.

You can also acquire shares that pay dividends rather than investments that pay interest, your chartered accountant can help you with this.  There are many large corporations who have issued preferred shares that pay a dividend, offering a better after-tax rate of return than many interest-earning investments, while also offering what can be considered a guaranteed yield.

If you’re in a situation where one spouse earns dividend income, but whose total income is very low, they may not be able to take full advantage of the dividend tax credit they’re allowed. The higher- income spouse can claim the dividend income earned and then can claim the full dividend tax credit.

If you acquire investments that pay interest, you must declare the interest earned annually. You can defer tax by acquiring an investment that matures after the end of the current calendar year, delaying the income inclusion for one year.

If you’re able to acquire investments outside of your RRSP, it may be possible for you to have interest deductibility on borrowed money. Interest is generally not deductible when the loan was taken out for a purpose other than to earn income subject to tax. Examples would be your home mortgage, credit cards or loans to buy RRSPs. But if you borrow money to buy shares that pay dividends or investments that pay interest, the interest you pay for these investments would be deductible.

With appropriate tax planning you can structure your affairs so the interest you pay on things like your home mortgage, for example, would be tax deductible. You can do this by using the money from the mortgage to buy your income-earning investments.

Another tax effective strategy is to acquire shares of mutual funds. These are pools of assets invested by professional managers. Annual income earned by these funds is taxed to you as it’s earned as dividend income or interest. But the growth in value of the funds is only taxed to you upon sale.

By organizing the types of investments you acquire and managing how they are required in the most effective and appropriate way, you can substantially reduce the taxes you pay and increase your net after-tax return on your investment.

These days, it’s so common for families to have two working parents – either by choice or out of necessity. But it’s a struggle to balance two working parents’ schedules with childcare needs. The government helps by allowing a childcare expenses tax deduction so you can work, carry on a business, attend school or do grant-funded research. Of course, it comes with a lot of rules.

For two-parent families (married or common law) childcare expenses can only normally be claimed by the lower income-earning spouse. Single parents can deduct childcare expenses from their own income. In order to make a claim for your child, your spouse’s child, or a dependent, that person’s net income in 2011 must be less than $10,527.

There are circumstances where the higher income spouse can make the claim. If one spouse is disabled, in prison, in hospital, confined to a bed or wheelchair for at least two weeks, attending full-time high school or post secondary school or if the spouses have separated, then the higher income spouse can claim the deduction. This lasts only as long as the situation continues.

Let’s talk dollars. The amount you can claim depends on things like the child’s age and whether or not the child has a disability. There’s an umbrella limitation—no more than two thirds of the earned income of the spouse making the claim. “Earned income” includes salaries, business income, disability pension amounts from the Canada pension plan, research grants, social assistance, training allowances paid under the National Training Act, and apprenticeship grants.

For kids under age seven you can claim up to $7000 of expenses paid. If they’re between seven and 16 you can claim $4000. For children over age 16 who are infirm but not eligible for the disability tax credit, you can claim $4000 and if they are eligible, you can claim $10,000.

If you’re paying a boarding school or overnight camp, there are limits for each week the child attends. The weekly max is $175 per child under seven, $100 per child ages 7 to 16 (or over 16, infirm but not eligible for the disability tax credit), and $250 per child eligible for the disability tax credit.

Payments can be made to anyone living in Canada for services given in Canada…except the child’s parents, a relative under 18, or anyone else the parents claim a dependent deduction for.

There are still more chances to save. Family members over 18 with little or no income can provide child care services. This includes grandparents (but be careful not to impact any old-age security supplements), children over 18 who attend school and therefore have little income, nieces and nephews and others.

With appropriate year end tax planning and organization there can be significant tax help for families where both parents must or choose to work.