The Perspective Newsletter from Worldsource Financial Management Inc.
Soap operas can trace their ancestry back to the 1930’s, when the manufacturers of soap products such as Proctor & Gamble first produced affairs of love and drama for the radio. By the early 1950’s, soap operas transitioned to television, and daytime TV changed forever. Propelled by captivating story lines, compelling characters, conflict, volatility and the occasional reemergence of long lost personalities their longevity and popularity in the entertainment industry continues to persist.
Much like a good “Soap”, financial markets continue to provide us with both intrigue and drama. With a host of familiar characters to both root for and against, market makers have provided us with the ultimate love/hate relationship to follow over the past five years.
Over this period it is debatable whether the most entertainment has been endowed upon us by policymakers from the U.S. or from Europe. Regardless of the outcome of this debate, policymakers on either side of the Atlantic continue to bicker, feud and resolve important issues at the last possible opportunity. In the U.S. it was the Sequester, a massive series of federal budget cuts enacted by the Budget Control Act of 2011 and initially set to begin on January 1 of this year. However, this date was pushed back two months as a result of the year-end deal making inspired by that daytime drama known as the “Fiscal Cliff”. The Sequester did go into effect on March 1 and will result in spending reductions of approximately $85 billion during 2013, with similar cuts to be seen through 2021. Thus far the impact of the Sequester has yet to be felt by most Americans and has not resulted in the warnings of delayed Social Security cheques and the closing of a vast array of government offices and services.
As the World Turned … their attention to Italy in February to watch the results of the Italian general election, the classic Soap script unfolded and found a onetime communist, a former comedian and a licentious billionaire vying for power. The results of the election created even more drama as essentially a deadlock between the billionaire Silvio Berlusconi’s center-right party, the former communists, Pier Luigi Bersani’s center-left party and the Five Star Movement led by one time comedian Beppe Grillo was created. More than a month later, the script remains the same with neither a coalition nor an elected government.
The worry across Europe, and financial markets as a whole, is that Italy’s enthusiasm for reform and austerity may wane resulting in a deterioration of Italy’s debt situation. Meanwhile another Euro member had their own debt crisis in March as Cyprus became the fifth euro-zone country to receive a bail-out after Greece, Ireland, Spain and Portugal. However, the Cyprus bailout package came with a twist in that it also required aid from bank depositors, many of whom are Russian investors. Although it is one of the smallest Euro zone members, the Cyprus saga still caused its share of market volatility as investors fretted over the details, scope and impact of the bailout.
Any daytime drama worth its salt provides for the unexpected return of a long lost central character and in the world of financial markets the first quarter marked the return of Japan. After essentially being lost for 20 years due to a combination of deflation and yen appreciation Japan’s Nikkei Index returned in the first quarter of 2013 with a local currency increase of nearly 19%. Largely due to new Prime Minister Shinzo Abe’s focus on business and economic growth, Japan has introduced aggressive monetary easing (leading to a weaker Yen), increased public spending and introduced an inflation target of 2%. Like the return of many long lost “Soap“ characters questions about how long Japan will remain part of the storyline will continue to linger.
Despite this drama, the first quarter of 2013 was a positive experience for viewers of financial markets. The MSCI World Index returned 10%, while the S&P 500 regained and surpassed its previous highs of 2007 in gaining 12.9%. In comparison, Canada’s S&P/TSX Composite Index struggled to a +3.3% return. Although our Consumer Discretionary, Health Care, Industrials and Technology sectors produced doubled-digits results, the negative returns of the Materials sector weighed on the index overall. Also noteworthy in Canada, was the March 21 Federal Budget which focused most of its attention on balancing federal spending with revenues by 2015.
And these, of course, are “The Days of our Lives”!
Achieve Tax Balance & Increase Cash Flow
For many Canadians, filing a tax return is a day of reckoning. In 2013, April 30 is circled in red on the calendar of those Canadians who are not self-employed and June 15 for those who are. However, with careful tax planning throughout the year these dates could be celebratory affairs that validate the actions and decisions that are made during the year.
While many Canadians like to get a tax refund, few recognize that a refund essentially represents an interest free loan made out by you the taxpayer to the federal government. On the other hand very few Canadians want to pay more tax than they already do. One reason for this is that if additional tax is owed upon filing a tax return, it may necessitate the requirement to prepay tax going forward in the form of quarterly installment payments. (Note that quarterly tax installments are required when tax owed is estimated to be more than $3,000 in the current year, and tax payable in either of the two preceding years has been $3,000 or more.)
The challenge then is in achieving “Tax Balance,” a term that essentially means finding the right mix between tax payable and tax refundable. Some strategies to consider are:
Reduce Income Tax Payable at Source
When RRSP contributions are made through payroll deduction, income tax remittances can usually be reduced. An ideal way to do this is through a Group RSP as contributions to these plans are made on a pre-tax basis. Those whose employer does not provide a Group RSP may still apply to have their RSP contributions accounted for at source by completing “T1213 Form” to reduce tax deductions at source. This form may also be used to account for child care expenses.
Another way to increase your take home pay is to complete and provide your HR department with form “TD1 Personal Tax Credit Return”. This form takes into account tax credits such as the basic personal amount, child amount, spouse or common law partner amount, caregiver amount, and tuition and education amounts, along with other factors. Completing it will enable you to receive the benefit of these tax credits throughout the year as opposed to waiting to file your tax return.
Canadians also often overlook the following tax deductions and tax credits.
Eligible medical expenses are perhaps the most overlooked tax credit, as many don’t believe that claiming them is worth it. However, eligible medical expenses can be found everywhere and include prescription glasses, dental and drug expenses for you, your partner, and your minor children. In order to claim medical expenses your total expenses must be more than the lower of either 3% of your net income or $2,109. Your medical expenses are claimed on line 330 of Schedule 1, while the medical expenses for other dependants are claimed on line 331. These expenses can be claimed for any 12 month period ending in the current tax year and as long as they were not claimed in the previous tax year.
Disability Tax Credit
The disability amount is a valuable non refundable tax credit that taxpayers with disabilities can use to reduce the amount of income tax that they have to pay. In order to be eligible, a medical professional has to fill out and sign the “T2201 Tax Form”, the Disability Tax Credit Certificate, and the Canada Revenue Agency has to approve the application.
The credit may also be shared with a spouse, common-law partner or dependent in circumstances where the full amount of the credit does not fully eliminate tax payable. Additionally if you have had a disability for some time, your tax returns can be reassessed as far back as 10 years.
Family Caregiver Amount
Available for the first time in 2012, the family caregiver tax credit is a 15 per cent non-refundable tax credit on an amount of $2,000 that provides tax relief to caregivers of infirm dependent relatives. This includes, for the first time, infirm spouses, common-law partners, and minor children. It is also not a standalone tax credit, as it also includes enhancements to the calculation of other dependency-related credits.
If you’ve moved to a new location that is at least 40 kilometres closer to your new job or post secondary educational institution you can claim a tax credit for your moving expenses. Note that eligible expenses could include the commissions you paid to your realtor when selling your old home.
One of the most overlooked tax deductions are carrying charges. Deductible carrying charges or investment expenses include the following as well as interest, if the cost has been incurred in order to earn income from your investments:
- Safety deposit box fees – note that the 2013 federal budget proposes to eliminate the deduction associated with this carrying charge.
- Fees paid for the management of your investments.
- The cost of having your tax return prepared, only if you had property or business income and you did not use the cost to reduce your business or property income.
Small donations to eligible charities can add up over the year as charitable donations, receive a 15% federal tax credit on the first $200 (worth $30) and a 29% credit on donations in excess of $200, up to a maximum of 75% of income in the current tax year. Consider optimizing charitable donations by combining the donations made by each spouse on one return.
Achieving “Tax Balance” is a constant strategy that must be continuously reviewed and evaluated, while it requires a significant amount of time throughout the year, doing so can have positive effects on cash flow and prosperity.
The information contained herein is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, or professional advice. Readers should consult their own subject matter experts for advice on the specific circumstances before taking any action. This information has been obtained from sources, which we believe to be reliable, but we cannot guarantee its accuracy or completeness. Worldsource Financial Management Inc. does not assume any liability for any inaccuracies in the information provided. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Mutual funds are not guaranteed or covered by the Canada Deposit Insurance Corporation or by another government deposit insurer. For funds other than money market funds, unit values change frequently. For money market funds, there can be no assurances that a fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in a fund will be returned to you. Past performance may not be repeated. Please read the prospectus before investing.