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CategoryMoney saving tips

Death, taxes and interest payments! Part 1 of 2.

Death and taxes… .. the only two things that are certain in life….you’ve heard this one before.   I think there is a third thing that can be just as stressful… ‘interest payments’…. (before this article becomes too depressing, I’m going to share some things that will help to reduce our interest costs and minimize our taxes).

Paying interest on your credit cards, loans, lines of credit or mortgage is something all of us will experience at some point in our lives or, for many of us, for most of our lives…   ‘Paying interest and taxes can be the death of us’.   That’s because taxes and interest payments account for as much as 67% of our gross incomes.  That’s right, 67%!!

Tax Freedom Day (the day in which Canada, as a whole, has earned enough income to pay all their taxes for the year) this yeas was June 6th.   Any income earned up to this point was paid over to the govt.  Any income after this date is paid to yourself.    It’s hard to know exactly how much tax you really pay given there are several hidden taxes such as alcohol, amusement, gasoline tax, property taxes, HST, etc.    That’s about 42% of your gross annual income going towards taxes.

Now let’s add in how much we pay towards carrying out debts.   There are different stats out there but from my experience, I would say that 25% of gross income goes towards paying all debts...

Add the two together and you get 67%.   67% of your gross income goes towards taxes and interest…  Okay, that’s the bad news.. and now for some positive news…. Here come the tax and interest tips….and maybe this will extend your life by making things a little less stressful.

TAX TIPS

Foreward   – I’m going to skip the usually RRSP recommendations…. anyone invested in the stock market over the past 10 years will know that there has been virtually 0% return during this time..  There may be a place for RRSPs but I’m just not a big fan of them…  Remember, RRSPs are not tax exempt like a Tax Free Savings Account.   Tax is still payable when you withdraw the investment.   ..The theory is that your investment can grow within the RRSP, tax-free, and then you can withdraw your investment at a later date and pay taxes only on the amounts you withdraw….

-In general, to reduce the amount of tax you pay, you must take advantage of tax-incentive programs or participate in tax-deductible investments..  One of the proven winners over the long and short term has been real estate.   We all know someone that made money by buying investing in property…

REAL ESTATE RENTALS

buying a rental property will allow you several different deductions and opportunities to build capital and a future income stream….

-rental property purchases will allow you to write off expenses associated with purchasing the property… such as legal fees, any arrangement fees, account set up fees, bank fees, maintenance and repair of the property, etc.

-interest payments and on-going maintenance costs can be deducted from rental income, resulting in reduced rental income or a possible rental income loss that can be written off again your personal income.

-the property can appreciate in value, tax-free…. You ONLY pay tax if and when you sell for a profit.   (Historically, property values increase every 7 years… we are in an unusual period of history at the moment.  There are no guarantees the property will be worth more tomorrow..but I like a proven winner.).  If you plan to buy an investment property, then plan to hold for 7 years.

-when you sell the property, you will have to pay capital gains tax on the net profit (purchase price less expenses such as real estate fees, lawyer fees, moving costs, etc).    At the highest marginal tax rate, you would have to pay around 21.50% of your net sale profit towards tax….  Here’s a link to the formula…  That tax rate is in line with the RRSP withdrawal tax rates…

-let’s not forget that your mortgage on the rental property is being paid down for you by the rental income.… each and every year.   If you buy, rent and hold, then you will have a mortgage-free property in 20 or 25 years.. maybe sooner if you factor in the normal rent increases every year…  Rental income is usually indexed with the cost of living….    This part of the investment is rarely considered or talked about.

Watch for Part 2 for our advice on how to minimize taxes and reduce your interest costs.

A look back at Oct 2008 and the Bank’s kool-aid..

October 2008 will be remembered for a few reasons….. First, it was Obama’s rise to the presidency… the first black American president…. next, it was also the end of Lehman Brothers investment bank and the beginning of one of the biggest global recessions in modern history…

That’s how most of us will remember October 2008….. but  there was also another very memorable event that took place.  You see, it was around this time that I heard some borrowers were getting calls from their Bank to lock-in their Variable rate mortgages…. or to take a long term fixed rate mortgage to ‘protect themselves from the uncertainly’ that surrounded the markets at the time…. I warned mortgage borrowers to expect a call  from their Bank offering a ‘safer mortgage option’ or some ‘special offer’ to lock into a fixed rate or a long-term rate…and NOT to take such offers or deals….

Can you imagine a Bank advising or recommending that you lock in your Variable rate or to take a long-term Fixed rate at that time?    At the time, Variable rates were are at around 3.35% and 5 year fixed rates were at around 5.75%.   Uh, no thank you… I’ll pass on the bank kool-aid.

The funny thing about uncertainty is that it usually brings us lower interest rates…..not always, but during this time we knew the World Banks would work together to lessen the economic impact of the Lehman Brothers collapse.   Unfortunately, there were far too many borrowers that listened to their banker and locked into the much higher Fixed rates…

The moral of the story is that Bankers and their ‘Mortgage Specialists’ work for one company, one Bank… they can only offer you one set of products and MUST do what’s in the BEST interests of their BANK…. They have to drink the Bank koolaid….   Mortgage Brokers can offer the products from dozens of lenders and can also compare the benefits and differences between Banks… Remember to ask questions and opinions from neutral, unbiased professionals.

Don’t drink the kool-aid…

Solar power subsidy… part 3 and the conclusion of my application.

Solar power…. those words make me think of green energy.. no more smoke stacks… electric cars, no nuclear power plants..etc…    These were some of the reasons I applied to get my own home approved for the Ontario Government’s Microfit subsidy program.   Oh, that and the $0.805/ KwH that I would be earning… a $0.70/KwH profit… Sounds like a no-branier, but would that be enough of an incentive for me to go through with the purchase?

Three months ago, I began the process of applying to the Ontario Power Authority for approval to the Microfit program and was approved.   I applied for approval to the Local Distributor Company (LDC local hydro company)..in my case it was Burlington Hydro.   They sent out an Engineer to ensure my house would qualify….. good news is that I was approved…  Everything was set.  I just needed to get a site assessment for my our peace of mind to see if my house was positioned correctly to take advantage of the sun’s rays.

I contacted an installer and supplier… They did a free site assessment…(most installers and suppliers wanted to charge me a fee)…  My house was not positioned to achieve optimum efficiency…. I would achieve only achieve 72% efficiency out of a recommended 90%…. Cost to install 30 high-end panels would be $45k.    My expected annual return would be around $5,500.

End result…it would take me almost 10 years to recover my investment… but then again, I would have that 20 year govt contract selling my power at $0.805/Kwh compared with paying $0.11/KwH…

So after several dozen hours spent researching, applying, meeting with inspectors, installers, etc and 3 months later, my decision is to not move forward with the install.   There are many reasons but it seems to me that we still don’t know what effect this would have on the value of our homes…. Will prospective buyers like the panels in 3, 5, or 10 years?   Will the panels be out of date when I go to sell?   There just seems to be too many unanswered questions at this time…

The installer told me that my approval from OPA is good for 12 months… and maybe the price of the panels will drop enough that it could make sense for me to get the installation done…. but right now, a 10 year payback it way too long….   I’ll update you further should I have any new information…

My advice to anyone that is looking to participate is to do your research… there is a lot of data to be digested…  Buy Canadian… don’t just go with the lowest cost panels… buy quality.. we have some harsh weather in Ontario… Contact the Canadian Solar Industries Association for some referrals…. seek out a reputable installer and supplier… Get recommendations directly from the manufacturer….

If you want more info, just drop me a line and I’d be happy to share more details of my research.

Good debt and Bad debt…. maybe we Canadians have more good debt?

I saw this recent article about Good debt and Bad debt…  Canadian Personal debt levels have now surpassed $1.5 trillion.  That’s a big number… should we be concerned?  I started to wonder how much of this is Bad debt?  Let’s take a closer look at these stats.

First, let’s define Good debt.. I agree with the article….to me, it’s debt that is used to accumulate an investment or asset….  and if it’s an investment then you may be able to deduct the interest costs from your income, making it tax-deductible…..  investments like a rental property, stocks, bonds, etc would qualify…Borrowing to invest in a rental property is good debt and you can deduct the mortgage interest and other property related costs from the rental income.

Bad debt is any expense where the interest is not tax-deductible and is used to purchase consumer goods… things like borrowing for a vacation, a 60″ TV, that new computer, or leather sofa..etc…  Hey, we all spend some money on these items, the key is to have some discipline.  Borrowing to buy a TV, computer, take a vacation, etc is generally a bad idea… save up for these purchases and then pay in cash.

Now the stats say that $1.5trillion makes up all personal debt including mortgages….  Hey, wait a minute… outstanding mortgage balances recently topped $1trillion in Canada…. If mortgages are classified as Good debt, then let’s subtract this from the total personal debt total of $1.5trillion…

We now have $500billion in potentially bad debt…  So let’s amend the household average debt to $58,000 per family of 4.   Is that really a high number?  And let’s look at our asset base… Guess what?  Our personal asset base is appreciating in value…Here’s a previous article that shows Canadians are borrowing wisely and we just taking advantage of theses record low interest rates to enhance our net worth…  And here’s a more recent article from CBC.ca stating our household credit is growing at it’s slowest pace since 2002.  Good to see some positive news put out by the media.

Remember, Good debt can help you grow your net worth… Bad debt is for personal lifestyle and usually decreases your net worth… We all have some bad debt, we just need to minimize it as best we can.

Solar Power subsidy… update on my application

On May 25th, I submitted my own application for the Ontario Power Authority’s (OPA)Microfit program.   The program was created by the Provincial Liberal govt as a way to encourage homeowners to use alternative, clean source of energy such as sun, wind, water and bioenergy. Green energy.

Solar power is the one that interests most people, including myself.   The deal is simple.  The govt will pay me $0.802 kWh for 20 years.   Compare this with the $0.07 to $0.10 kWh that most homeowners pay for normal household electricity and you can see this can be a very lucrative incentive to ‘get off the grid’, as they say.     That could generate around $7,000 per year for me.    But then again, it’s gonna cost me around $30,000 to $40,000 to install the solar panels and hook up to local hydro company….  Still, the payback is around 8 to 10 years… after that, it’s all profit and eventually, I can make and use my own electricity.

Back to my application….. It’s being processed by the OPA and it could take upwards of 45 days to get it processed.   I have also submitted my application to my local hydro provider, Burlington Hydro.   They also must approve my home for connection and hook up.  I’m now in a race against the election clock.   Yes, another election this fall…..  This time it’s a Provincial election.  The Conservative govt has made it clear that if they win, they will probably scrap the program as it’s too expensive in their mind.   But all existing applications and contracts will have to be honored no matter which political party is in charge.

And so, I wait…   stay tuned for more details as they unfold…

Oh, and by they way, I do see why the Conservative govt would want to scrap the program…  Up until last December, there were a number of companies that popped up and offered FREE installation of the solar panels, in return for 85% of the revenue for 20 years…and then there are the bigger farm properties…  I took a drive up to Tobermory a few weeks ago.   Along the road were dozens of these strange looking barns with no walls and  just a solid frame and roof… They were huge!  The roofs were covered with solar panels…  These buildings were clearly designed for one purpose…..to attach the solar panels and  produce electricity… and to generate revenue…..

This is not what the program was intended for… The program was created for property owner to produce their energy…not over produce and sell it for an exorbitant profit…. We can probably guess that once the 20 year guaranteed govt contract is up, these huge barns will probably collapse and disappear….

It’s these sort of loopholes that infuriate most of us…  The govt seems to have closed the gaps now but not before many have taken advantage of the offer and are now generating untold $$$thousands and probably $$$millions in some cases per year….  Some forward thinking could have prevented and minimized the losses.

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