By ROB CARRICK
From Tuesday’s Globe and Mail

Selling your home could strengthen your golden years if the proceeds are invested rather than used to buy new accommodations

Sell your house and rent: If you’re a baby boomer entering retirement, that could be the financial move of a lifetime.

The case for selling the family home starts with the fact that years of strong price increases have hugely increased the value of homes across the country over the amount paid for them. What to do with the proceeds after you sell? Invest them conservatively and rent your next home.

Rushing into the market today only makes sense if you’re willing to buck convention and rent. If you buy again, you could reap big profits from your current home and overpay for your next.

Understand, this is not a doomsday call on the Canadian housing market. It’s just an argument that we’ve seen a ton of upside in house prices and that the next few years may bring incremental further gains or some downside.

Selling now can be a way of removing risk from your financial future, says Ted Rechtshaffen, president of the financial advice firm TriDelta Financial. If you own a house, a big piece of your personal wealth is tied up in one sector and in one region.

“The only way to capitalize on what your house is worth today is by selling today,” Mr. Rechtshaffen said.

There are definitely benefits to downsizing and buying a smaller home or condo rather than renting. There’s a far better selection of condos and houses for sale than for rent. Psychologically speaking, many people have a bias against renting because it’s seen as giving up control and living without roots.

There’s also the argument that renting isn’t financially smart, but it doesn’t hold up well for aging baby boomers.

Mr. Rechtshaffen says his firm’s long-term financial planning models use a 4-per-cent average annual gain for house prices and a 6.5-per-cent average annual gain for a diversified non-registered investment portfolio. Those are pretax numbers, of course. Sell a principal residence and you pay no taxes on your profit.

You can rig an investment portfolio to be fairly tax-efficient by focusing on dividends and capital gains, but you’ll still get dinged to some extent by taxes. So estimate a 5-per-cent after-tax return from investments, Mr. Rechtshaffen suggests.

Now for living costs. You’ll have no mortgage payments if you buy, but you’ll pay property taxes and face upkeep costs that can be steep if you have an older home. Renters pay rent and the same utilities as owners. How does it net out? Mr. Rechtshaffen estimates renters paying $1,500 a month may find they’re spending only $700 or so more than owners on a net basis.

Financial planner Rona Birenbaum said she’s talked to clients about selling a house and renting, but mostly in situations where money is being spent faster than anticipated and there’s a need to unlock equity in the home.

Selling a house for many hundreds of thousands of dollars and then investing that money safely can make you feel financially secure, Ms. Birenbaum said.

“That’s the plus side of doing this,” she added. “The minus is there’s a great temptation to encroach on that capital. It requires a fair amount of discipline in how you manage your cash flow.”

Still stuck on downsizing into a smaller home or condo? So are a lot of your peers, which is why downtown condos are no bargain. The average price for a resale condo in Toronto was $326,750 in the first two weeks of this month, according to the Toronto Real Estate Board. Laurin Jeffrey, a Toronto agent, said $600,000 is a good ballpark amount for a nicely situated downtown condo.

If you buy a condominium, prepare yourself for stiff condo fees (include day-to-day maintenance, property management fees, amenities such as a swimming pool and workout room, cable TV and contributions toward a reserve fund to be used for major repairs). I’ve heard two stories in the past couple of weeks about people planning to move out of condos as a result of fee increases or special levies for maintenance. “There’s no rent control on maintenance fees,” Ms. Birenbaum said.

Your age may also play a role in determining whether it’s better to buy or rent after selling the family home. Mr. Rechtshaffen estimates you’d need to be in a home seven or eight years to offset the costs of moving in and then moving out again later on. Of course, this assumes your house is appreciating while you live there.

Renting is not on for most people, but it’s worth a thought if you’re a baby boomer with a house you’ve been thinking of selling. The peace of mind you get from locking in a good price could make it the financial move of a lifetime.

Boomernomics: Whether to buy or rent after you sell the family home

1. The state of the housing market
You Buy: A housing market decline could erode the value of your home, which may be your biggest financial asset.
You Rent: You’re bullet-proof.
2. Choice of places to live
You Buy: Lots of choice of homes and condos.
You Rent: Much less choice, and much less assistance available to find the right property.
3. Living costs
You Buy: Property taxes, condo maintenance fees and general upkeep.
You Rent: Rent, but minimal upkeep and maintenance and no property taxes.
4. Financial flexibility
You Buy: You can only access your home equity by borrowing against it with a line of credit or a reverse mortgage.
You Rent: The proceeds of the home you sold are completely accessible.
5. Cash flow
You Buy: Your home is a do-nothing financial asset from this point of view.
You Rent: Invest the money you get for selling the family home and you can generate income without touching the principal.
6. Taxation
You Buy: You can sell your home tax-free as long as it’s your principal residence.
You Rent: You will pay taxes on investment gains, but you can manage that by focusing on dividends and capital gains.

A new type of employee benefit trust—the employee life and health trust (ELHT)—was created recently after amendments to the Income Tax Act received royal assent. This new trust maintains the basic principles of health and welfare trusts (HWTs), codifying many of the Canada Revenue Agency’s (CRA) administrative positions with respect to them.

HWTs are an administrative concession established by the CRA and governed under the guidance of Interpretation Bulletin 85-R2. The administrative rules governing HWTs led to a continuing series of technical interpretations and court cases in which the CRA had to defend, and sometimes amend, its administrative policies.

Although ELHTs do not replace existing HWTs, they both provide group sickness and accident benefits, private health services plan benefits or group term life insurance benefits for employees or former employees. The following are some of the key tax issues that will affect employers contributing to ELHTs.

Eligible employees
The ELHT legislation introduces a new defined term: key employee. Generally, these are employees who are significant shareholders or high-income earners. Key employees are to be treated in the same manner as other employees under the trust. This may restrict the ability of small companies to set up ELHTs, because they may not have enough non-key employees to qualify.

Trust beneficiaries
Beneficiaries of HWTs were never clearly defined, but the new legislation attempts to do so for ELHTs. Qualifying beneficiaries of these new trusts include current and former employees, spouses and members of the employee’s household who are related to the employee. Another ELHT can also qualify as a beneficiary, meaning that if a group of employees wishes to leave an existing ELHT to join a different one or to create a new one, the funds held in the trust for their benefit may be moved to the other ELHT.

Deductions and contributions
The timing of employer deductions must match the use of contributions over time, and total deductions cannot exceed total contributions. ELHTs will, therefore, require greater compliance and record-keeping than HWTs. Administrators will have to determine the amount spent on designated employee benefits and report this information to employers for their deductibility calculations. The use of actuarial determinations should lessen this burden.

Although the timing of an employer’s deduction must match the benefit payments to employees, a concession has been made for specified multi-employer ELHTs: employer contributions may be deducted in the year contributed.

Promissory notes
ELHTs may be funded with promissory notes; however, they are not considered contributions and are not deductible by the employer. From the CRA’s perspective, a contribution is made to the trust only when the principal and/or interest are paid.

The new legislation applies to ELHTs created after 2009. While the federal government has indicated that it does not intend to make changes to the tax treatment of HWTs, it is likely that Interpretation Bulletin 85-R2 will be updated to reflect current assessing practices and perhaps clarify the interaction between these two vehicles. Meanwhile, employers that are considering establishing a new trust to provide employee health benefits should seek clarity from a tax professional in order to determine the advantages and drawbacks for the trust, its sponsors and its members.

Rebecca Hughes, CA is a tax associate with BDO Canada LLP.

Steven Lamb / January 24, 2011

A large number of Canadian investors appear oblivious to the costs associated with their mutual funds, according to a survey commissioned by ING DIRECT.  The poll found that 45% of Canadians were unsure about the annual management expense they are pay on mutual funds.

It should be noted, of course, that ING is a purveyor of mutual funds made up of ETFs and offers no financial planning services in conjunction with these offerings.

“It’s concerning that Canadians are unaware of the high fees they pay for mutual funds, especially since these are the most popular investments in most retirement portfolios,” said Peter Aceto, president and CEO, ING DIRECT Canada. “These high fees coupled with the typical performance of an actively managed mutual fund verses the benchmark index means many Canadians’ retirement portfolios are being shortchanged.”

The survey also found that 58% said choosing a mutual fund for their RRSP was not as simple and straightforward as it could be, and 36% were frustrated by the process of choosing their own.

Not surprisingly, the discount bank suggests its streamlined collection of ETF-based mutual funds is one way of avoiding the stresses of investing.

To be sure, limiting one’s investment universe to three options is a great stride toward simplification, but if 45% of investors are too disengaged from the process to look into the fees associated with their investments, they are probably too disengaged to be pursuing a do-it-yourself investment strategy.

Engaging a financial advisor to guide investment decisions and explain the costs associated with those decisions is probably a preferable route. The survey also found that 28% of respondents were unable to suggest what they considered to be a fair fee on their mutual funds.

Understanding what services are paid by mutual fund fees is the key to determining what is fair, so walking a client through their costs and your services should lay to rest any perception that mutual fund fees are too high, at least for the advised investor.

Published Wednesday, Apr. 27, 2011 6:26PM EDT Last updated Thursday, Apr. 28, 2011 6:20AM EDT

Last summer my kids suddenly took an interest in making money. My two oldest started their own small businesses, and the competition was on. Who could make more money – my son who scoured the local golf course for lost balls and sold them for a buck a piece, or my daughter, who made her own earrings and sold them to neighbours for three bucks a pair? (My daughter won, by the way.) So, here we are in April, and I’m now teaching my kids how to report their business activities on a tax return. Okay, so my idea of quality time with the kids is a little messed up. They’ll thank me later. Let me share what they’re learning. 1. File on time. If you’re going to owe money when filing your 2010 tax return, make sure you file by the May 2 deadline (the deadline is normally April 30, but it falls on a weekend this year). It’s important to file even if you can’t pay the taxes owing because you’ll be subject to penalties otherwise. The penalty is an automatic 5 per cent of the balance owing plus 1 per cent for each additional full month you’re late filing (to a maximum of 12 months). If you (or your spouse) are reporting self-employment activities on your return, then your filing deadline is extended to June 15. Regardless of your deadline, the taxman will apply interest to any outstanding balance owing if you don’t pay it by April 30 (interest on overdue taxes is currently 5 per cent). You may be better off borrowing to pay your taxes if you can borrow at less than 5 per cent. By the way, the taxman may be willing to waive or cancel any penalties and interest if your tax return is late due to circumstances beyond your control. To request this relief, file Form RC4288 with the Canada Revenue Agency.

2. Check the status of your return. If you’ve filed your 2010 tax return and are waiting for a refund, you can check the status of your return online by visiting CRA’s website and using the “My Account” service there (or the “Quick Access” service which provides a scaled-back level of information). Alternatively, you can call CRA at 1-800-267-6999 (be patient, the line will be busy this time of year, and be sure to have a copy of your tax return in front of you).

3. Making an adjustment to your return. So, you’ve filed your tax return and realize you’ve made a mistake, missed a deduction or credit, or failed to include all of your income. All you need to do is file an adjustment request. You’ve got two options here: You can go online to CRA’s website and login using the “My Account” service and make the adjustment online (look for the “Change My Return” option); or, you can mail in an adjustment request using Form T1-ADJ (available at cra.gc.ca) for this purpose. Don’t make an adjustment to your return until you’ve received your notice of assessment in the mail for the year in question – otherwise you might just confuse the taxman.

4. Filing an objection to your assessment. If you disagree with the notice of assessment, your first line of defence is to make a phone call to the CRA to try to resolve the issue. If that fails, consider filing a notice of objection. Although you can do this online using the “My Account” service, my experience has been – particularly for large amounts in dispute – that you’ll want to address a letter to the chief of appeals at your local CRA tax services office. The reason? Your objection needs to be well-crafted (I suggest using a tax professional if the amounts are significant), setting out the facts, your reasons for objecting and the reassessment you are seeking, and it will be difficult to be thorough doing this online. When setting out your reasons for objecting, it can be beneficial to cite the tax law and court decisions that support your position. An objection should generally be filed within 90 days of the date on your notice of assessment, or one year from the due date of the tax return in question, whichever is later.

Credit agency TransUnion says the amount Canadians owe continues to increase but that the rate at which consumers are piling on debt is beginning to slow down. TransUnion says overall debt, excluding mortgages, was up 4.3 per cent in the third quarter compared with a year ago. Quebec posted the largest increase at 6.6 per cent, while Manitoba had the lowest increase at 2.6 per cent. However, TransUnion says that is still an improvement over the double-digit increases that have been going on since before the recession. Meanwhile, TransUnion says that despite high debt loads, delinquency rates and past due balances have dropped across Canada.

Talk about your good-news-bad-news scenario: In a new poll about what Canadian boomers think about retirement, the results are both cheering and depressing. Simply put, Canadian boomers have a positive view about how they want to live, but they also have a lot of financial fears.

The good news first: Of the respondents between the ages of 45 and 64 – boomers all – 61 per cent say they are looking forward to retirement as an exciting stage in life. They envision a retirement without work pressures (58 per cent say that will bring them great enjoyment), full of travel (61 per cent) and hobbies, recreation and fitness (64 per cent), as well as community involvement (36 per cent).

Sixty-six per cent of those surveyed say they have a clear vision of their retirement lifestyle and 54 per cent say it will be comfortable.

Harris/Decima conducted the poll for Investors Group, a Canadian financial-services company.

So far, so good. The “lifestyle” component of this poll was so upbeat, I was feeling pretty good about being a boomer, something that doesn’t happen too often.

Then came the bad news: It turns out that 55 per cent of respondents said they don’t think they can afford their dream retirement lifestyle. I mulled over that statistic for a while and dismissed it. Who, at any age, can really afford their dream lifestyle? Right now, for me, that would include a penthouse apartment in New York – preferably with a nice, big ballroom. I would really, really love a chauffeur. And none of my shopping would take place at a Buffalo mall on Black Friday, my plan for later this week.

My daydreams were shattered when I saw the next statistic: 30 per cent think they won’t have enough money to pay their basic living expenses. Now that’s scary.

“That was discouraging,” admits Debbie Ammeter, the Winnipeg-based vice-president of advanced financial planning for Investors Group. While Ms. Ammeter says she was pleasantly surprised by the positivity of the lifestyle results, “one of the biggest surprises to me was the negative financial side.”

She says that anyone who falls in that scary category, no matter how close to retirement, should see a financial planner, get a review of his or her financial situation and figure out a way to get on track. “Because the earlier you start making adjustments, the easier it is to match finances with what you want to do at the time you want to retire.”

Investors Group, Ms. Ammeter says, thought it was important to survey boomers’ lifestyle plans and financial means because “we really believe that a big part of financial planning is actually articulating your life goals and that’s really the first thing before you can even decide what you need to meet those goals.”

In other words, know what you want and then figure out how to get it.

The survey also has an interesting statistic that can serve as an important lesson to younger people: Boomers who are already retired were asked what they would do if they could go back in time – and 36 per cent said they would start saving earlier.

Whatever you think of boomers, try to take that advice.

Former Bank of Canada governor says in report that many Canadians are unaware of the high savings levels they need for their retirement years

Canadians need to save between 10 per cent and 21 per cent of their pretax incomes each year – if they save consistently for 35 years – to have comfortable retirement incomes, according to a new report by former Bank of Canada governor David Dodge.

The report says many Canadians are unaware of the high savings levels they need for their retirement years, and may believe they are saving adequately when they are not.

The report, co-authored by Alexandre Laurin and Colin Busby and published by the C.D. Howe Institute, calculates various savings scenarios based on assumptions that Canadians aim to have annual retirement incomes between 50 per cent and 70 per cent of their preretirement incomes.

“Our findings provide Canadians with a ‘reality check’ about the saving rates required to meet their retirement goals,” Mr. Dodge said in a release Thursday.

” Our findings provide Canadians with a ‘reality check’ about the saving rates required to meet their retirement goals. “- David Dodge

The study said a broad debate about retirement incomes in recent years has mostly focused on potential reforms to rules for corporate pension plans or the possibility of expanding public pension coverage through a new national supplementary plan.

But there has been little public information about required savings rates for individuals, it says, even though many baby boomers are nearing retirement age and are concerned about whether they are saving adequately.

“The required level of personal saving is unknown to most individuals, leaving them to their own devices for a large part of retirement planning,” the report says.

It also says registered retirement savings plan (RRSP) maximum contribution levels do not allow higher income higher earners to save enough to replace 70 per cent of their incomes in retirement.

And it says many companies’ group RRSP plans, defined contribution pension plans and even traditional defined benefit pension plans do not set aside enough income annually to provide “adequate or reasonably assured retirement incomes.”

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Your Money:  Living Hand to Mouth

Sarah Boesveld

Monday, Sep. 14, 2009 05:41PM EDT

Retirement is under threat by a confluence of factors which have many people focused on the short-term, reveals a recent survey.

HSBC Insurance’s fifth annual Future of Retirement survey of 15,000 people in 15 countries predicts a perfect storm of demographic, individual and financial elements that is poised to derail retirement plans unless people take action now.

“A perfect storm is confronting pension planning, created by an aging population, falling pension funds values, a drop in state and employer contributions and an economic downturn that is forcing people to make tough financial choices,” says Stephen Green, group chair of HSBC.

According to HSBC, criteria for this situation includes
• short-term survival strategies in the midst of a recession that create a serious long-term pension “downturn deficit”;
• a lack of pension planning in the face of recognized longevity issues;
• poor levels of financial understanding, education and access to advice; and
• a concern for material possessions over long-term financial security.

Preparedness gap
The survey identifies a “preparedness gap” in people’s pension planning, with nearly nine out of 10 respondents not feeling fully prepared for their retirement, while 86% do not know what income they will receive in retirement. Just over one-quarter (27%) feel they fully understand their long-term finances, while 43% have undertaken some planning for later in life. Thirteen percent of respondents feel fully prepared for their retirement and 14% have done no retirement planning at all.

“If people prepare adequately for the long term, an extended later life can present a golden opportunity for many. But now is the time for people to seriously consider boosting their pension contributions to improve their prospects of a comfortable retirement,” says Green. “The cost of procrastination is likely to be high.”

Advice gap
The survey also reveals a parallel “advice gap” linking a lack of preparedness to insufficient financial education and guidance.

According to the data, 43% of respondents have no financial education, while 29% feel ‘fairly’ unprepared for their retirement, and 47% have never had professional financial advice

HSBC points out that as a result of the economic downturn
• 92% of people have changed some element of their finances;
• only 19% will now retire as planned;
• 17% are reducing retirement savings or have stopped saving for retirement altogether;
• 18% have used savings to pay off debt; and
• 9% expect to delay their retirement

According to Mark Twigg, director at Cicero Consulting, a financial services consultancy that undertook the survey for HSBC Insurance, the survey reveals the lack of understanding people have around their long-term retirement needs.

“They are less educated or aware when trying to understand [retirement] needs and to act on them than with their short-term requirements,” he says. “As the economic perfect storm threatens it is important that people are encouraged to understand long-term risks and to manage them effectively. While people are taking more responsibility for themselves, there is also a definite role for financial institutions to continue, and to build on, their work to educate and inform.”