Canada vs UK Tax Comparison Updated for 2007 and 2008

Back in March I posted a comparison of various personal tax rates for Ontario Canada and the UK using 2006 rates. Here's an update based on the 2007 rates.


This chart shows the rates for 2008-09. Not much change , the UK is still lower for every level of employment income except for a narrow sliver at around $75,000 taxable income where the top UK rate of 40% is a tiny bit higher than the Canadian 39.41% rate. Woohoo!

This time I've coloured cells green where one country or the other has better / lower rates. I've made a correction on the dividend tax for the UK - there is actually no exemption, the 10% rate applies as soon as tax kicks in up to the start of the highest band where it becomes 32.5%. This correction changes the advantage such that Canada generally comes out ahead with respect to dividends for almost every income level. With virtually everything else, the UK is better and usually by quite a bit, a seen by the content of the green cells. With respect to capital gains, though the rate is lower in Canada in low to middle income brackets, the availability of an annual exemption of almost Cdn$20,000 probably means the effective tax rate for a large proportion of UK investors is zero. For example, if a £100,000 portfolio has net 10% of £10,000 gains in a year, the £9200 exemption would mean almost no tax to pay. Adding the availability of tax-exempt ISA accounts in which up to £7000 can be placed annually, it is likely that all but the rich won't pay any capital gains tax in the UK.

A lot of UK interest income would likely be effectively tax-exempt within ISAs too, though not dividends because the tax is deducted before payment is made to the investor and it is not recoverable / claimable. The comparative Canadian RRSP account temporarily shelters interest, dividends and capital gains from tax of course. However, when I came to the point in my career/life where I could start saving larger amounts for retirement, my RRSP was maxed out so I had to put most of the annual savings into a non-registered taxable account. I really have been paying tax on those investments. Were I a UK taxpayer, my savings could have been absorbed by an ISA.

The conclusion I reached in March still holds - the UK is the clearly superior country when it comes to personal taxes.

Source for UK tax information: UK DirectGov website.
Source for Canadian tax rate: TaxTips website.

Travel Costs for Visitors to the UK / Scotland

CTV's new story Canadian cities cheap in cost-of-living was a reminder and a confirmation of what I experience every day here in Scotland - it's expensive to live here. In the rankings, the most expensive Canadian city is Toronto, 82nd on the list with an index of 78.8 points while Glasgow, near where I live, or "stay" as they say here, is 36th with an index of 88.1. The company that compiled the data is Mercer and more details are here. It's hard to tell how to interpret the index but if it is meant to be linear - i.e. an index number twice as high means twice the cost of living - then I don't think the survey quite captures the reality. My experience is that things in Scotland and the UK cost about twice as much as in Canada, not the 10-15% the Mercer numbers suggest. My rule of thumb is £1 here buys more or less what $1CDN buys in Canada. Clothing, hotels, food at grocery stores or in restaurants, gas (petrol), golf - just about everything is costlier (The only thing about the same price is booze - it is an essential of life here - most Scots can outdrink Canadians by a mile!). The pain has been lessening somewhat in the past few months as the exchange rate has fallen from around $2.30/£1 to about $2.10 but travellers and vacationers be forewarned in your budgeting.

Updated Asset Class Correlations and the Commodity Controversy

Richard Ferri's company Portfolio Solutions website has a handy updated 14 page downloadable pdf titled Asset Class Correlations, which updates many of the major asset class correlation numbers up to the fall of 2006. He indicates an intention to do quarterly updates so it promises to be a useful on-going tool. Ferri is the author of the fine book All About Asset Allocation, which I previously reviewed here. The document contains an appendix with a very good explanation of correlation and its part in asset allocation (it looks like it was lifted from the book). Ferri's site also includes, for free, documents that track the long-term evolution of investment indicators, and one of his books called Serious Money, which I have on my list to review.

One of the interesting and controversial parts of the above paper is that Ferri finds that having a commodity holding in a portfolio reduces returns. He doesn't address whether it reduces volatility ... though the chart of returns appears to have less variation in the portfolio that includes the commodity. This is directly contrary to the findings of Roger Gibson in his book Asset Allocation which I reviewed here. What explains this difference I cannot tell - possibly a different time interval for back-testing the "with "and "without" portfolios, the different commodity index each used (GSCI for Gibson, CRB for Ferri) or something else, I cannot tell. Ferri himself says the topic is subject to on-going debate. For now, I've got a commodity holding in my portfolio - DJP, the iPath Dow-Jones-AIG Commodity Index - and it will stay there till next year's portfolio rebalancing at least.

Update June 26: Zephyr Associates has also compiled a series of asset class correlations, oriented to US investors and investments. There is a downloadable pdf here. It is interesting that the correlation of equity returns of every foreign country with the US has increased in the last ten years to the 0.7/0.8 level, which is quite high and lessens the benefits of diversification. Is this a sign of a world economy that is ever more inter-connected and inter-dependent and is thus permanent, or is it just a period that will pass? Correlations of other asset classes with equity like real estate and bonds are much lower and in some cases, widening, making the diversification benefit even greater. The correlations of the overall US market with various equity sectors is also seen to be much lower and again in some cases, widening. Is industry sector asset allocation a more promising strategy? After all, one can hold the entire market split up in different ways; it doesn't necessarily have to be on a geographic country basis. btw, thanks to Canadian Capitalist for the link to Zephyr Associates for his blog posting on the new Invest Skeptically blog where I found the posting with the link to Zephyr.

Book Review: Insurance Logic by Moshe Milevsky and Aron Gottesman

The third in the "Logic" series by Moshe Milevsky, this time with co-author Aron Gottesman, Insurance Logic explains all the types of insurance for individual consumers and families (i.e. excluding business insurance):

• life insurance,
  
• longevity insurance / life annuities,
  
• health and travel insurance,
  
• disability and critical illness insurance,
  
• automobile insurance and
  
• property / home insurance.
  

The book begins with basic principles and concepts of insurance, then proceeds to the individual types of insurance. Each insurance area has its own chapter, with a summary of key points, a list of references and further reading and a list of key questions to ask when going to shop for insurance. The authors explain and define terminology of such daunting terms as moral hazard and adverse selection along the way when necessary and appropriate. A glossary at the end lists the terms and their definitions. The approach is introductory in that there is no knowledge presumed of the reader but it is not dumbed-down. Authors Milevsky and Gottesman manage the remarkable achievement of making the highly complex subject of insurance clear and logical. One does not feel overwhelmed and confused. The language is careful and precise but not convoluted. There are few numbers and calculations and no price comparisons of individual companies or products. However, one does feel prepared to discuss intelligently with agents or brokers to shop and buy insurance.

The authors are university professors and the advice they give is impartial. That is quickly apparent anyway in the discussion of pros and cons and in their criticisms (governments, insurance companies and consumers all come for their share, though the tone is mercifully more a description of a sad reality than a diatribe of complaint).

Things that surprised me:

• the probability of disability hitting people sometime in their adulthood is quite high, so high in fact that doing something to mitigate the effects with insurance is a very good idea;
• making a number of small claims is worse than one big claim and could result in the insurance company cancelling your policy or refusing renewal;
• car insurance rates vary a lot from company to company for any one driver and the same company might be cheapest for one type of driver and most expensive for another;
• higher deductibles are a good thing for a consumer;
• property crime is rampant in BC compared to other parts of Canada;
• top-producing agents are more likely to engage in deceptive practises with consumers (there's a good question to ask your agent "are you a top-producing agent?"!)
  

Interesting Quotes

• "... purchasing insurance is implicitly a hedge, not an investment." (page xiv)
• "... the credit rating of the company selling you the policy (a life annuity) is extremely important." (p.38)
  
• "... the out-of-country protection provided by public health insurance is insufficient." (p.54) (especially in the US)
• "... disabilities lead to almost half of all mortgage foreclosures." (p.80)
  
• "... insurance policies are extremely complex and difficult for consumers to understand." (p.156) (you're not kidding - can I submit this for the under-statement of the year award?)
• "... most Canadians are solidly against insurance fraud, even though many practise it." (p.171) (by padding claims, apparently)
  

Suggestions for improving the book

• add more content on travel insurance requirements in the USA;
• add more references - though there already are some - for the reader who wants to go to the intermediate/expert level;
• add a table to compare the features and pros and cons of disability versus critical illness insurance;
• update table 12 Minimum Compulsory Automobile Insurance (which is dated April 2004); perhaps a connected website with up-to date figures on all the charts could be created?
• include an annotated sample policy with explanations alongside the actual clauses
  

My take-aways and items for action

• insurance is a valuable and essential part of an overall financial plan, dealing with financial protection
• it is possible to have too much as well as too little insurance
  
• shop around for car insurance rates, it's really worth it - more than 50% difference in quotes worth hundreds of dollars, (or even thousands for younger drivers) are possible
  
• forget insurance on small items, like extended warranties at electronics stores, it's a waste of money
• investigate doing a mortality swap (sounds like a good opening line at a cocktail party - "did you know I've just done a mortality swap?" ;-)
  

Every Canadian adult should buy this book, read it and keep it on the shelf for reference and selective re-reading whenever a new stage in life is reached or a major financial decision looms. The book is that useful and that important. Five out of five stars.

Buy this book at
chapters.indigo.ca

North American Automakers Best Japanese at Last!

No, it's not a joke. There really is something where Ford and GM are superior to Toyota and Honda. And it's not something trivial either. What is the mystery characteristic, you ask?

It is all about insurance. While perusing the website of the Insurance Bureau of Canada, I came across a publication called How Cars Measure Up, which contains 87 pages of a table that lists and rates vehicles according to four different cost indices and two theft indices. The table is easy to read because the results are colour coded - red = bad, green = good, though one has to refer to the insurance jargon glossary on the same website to figure out what the abbreviations in the column headings mean.

Taking a quick scan through the table for the best (green across the row) and the worst (red all over), Ford and GMC have more than half of the "greenies" while Honda is the runaway (or should I say, out-of-control?) winner of the flashing red award.

The Best

• GMC Astro/Safari Wagon AWD 1993-94 and Chev S10/Sonoma 4WD 1994
• Ford F150 2WD 1993-96 and F250 4WD 1994
• Ford Ranger 2WD 1993-95, 97-98
• Ford/Mercury Crown Victoria Grand Marquis 1993-97, 2001
• and a few others from outside ....
• Mazda B2300/3000/4000 2WD 1994-96 and Miata / MX5 Convertible 1993-94, 97
• Mazda Pickup 2WD 1996
• Subaru Loyale Wagon 1993
• Toyota Pickup 2WD 1993

The Worst

• Honda Civic Si 2DR Coupe 1997-98, 2002-04 and Hatchback 2002
• Honda Prelude 2DR 1993-2001
• Toyota Rav4 4DR 4WD 2001, 03-05
• Volkswagen Golf GTI 2DR Hatch 1998-2003

So, forget those testosterone ads for Ford pickups, they're safe and sedate! Stay away - on the lot and on the road - from the souped up versions of those Honda Civics (I do have the impression that most of them seem to be driven by twenty-something guys in ball caps who like to drag race down crowded streets ... maybe the red rating also stands for blood on the street?). Those wanting a sporty but safe car should go for the Miata. The Crown Vic ratings on the other hand fit right in with the "retired couple" image of the car. Do these ratings have more to do with the type of driver each car attracts, or does driving a 1993 make you a safer driver? Rest assured though, that the insurance companies will set your rates in line with these tables.

Scare-mongering on Retirement at CBC and Canadian Institute of Actuaries

Yesterday the CBC posted an article on its website titled "Most boomers aren't saving enough for retirement, actuaries say". When I saw the headline, I figured it looked worth a read but it isn't. Why? No specifics, that's why. It makes vague references to people not saving enough for a "comfortable retirement". What does that mean? One would expect that a reputable organization like the Canadian Institute of Actuaries would fund a meaningful, probably unbiased study. The article does say that the researchers who wrote the study came from the University of Waterloo. However, should you want, as I did, to see the report and the specific calculations that produced that scary headline, it isn't available. There's no link from the CBC and the website of the Canadian Institute of Actuaries doesn't seem to have it either. A news release which has a less scary, more neutral title "Planning for Retirement: Are Canadians Saving Enough?" doesn't provide much more detail, except that it seems that the whole study resides on profiles and scenarios of types of families and not, for instance, on surveys of the actual savings of families. The bottom line is muddled - it seems to be a study that questions more than accuses. It is certainly not worthy of CBC's sensationalized headline. So why doesn't the CIA make the study public?

Car Ownership vs Rental vs Sharing

As I am not full time in Canada these days, I decided to take a look at alternative ways of having wheels aka a personal vehicle available for my use. Everyone is familiar with the traditional ownership and commercial rental methods of having a car but a friend and neighbour had mentioned trying out a car sharing club membership so I decided to compare the three alternatives.

In a car sharing club, one pays an annual or monthly membership fee to get access to a fleet of cars scattered at locations across a city. Reservations are made for a time and day, one pays an hourly rate and away one goes. The car must be picked and dropped off by the member at the same place at the promised time.

My table of comparison of the advantages and disadvantages of owning vs renting vs sharing shows that the best option depends on individual circumstances, primarily the frequency, duration and distance of driving.

Car sharing is best for infrequent, very short trips of a few hours to a few days within a local area and when one lives in a city core, i.e. close to a car pick-up point. Several of the car sharing websites I came across ( see links in the table) stated that car sharing is cheaper than ownership for anyone driving less than 12,000 km per year. Ownership is best for lots of driving, anything over 18,000 km per year or more than about 120 days of driving. Renting seems to be superior for longer distances up to 18,000 km and up to 120 days driving per year, though I'm not sure if car rental companies would impose punitive disincentive rates for an extended rental of something like a two-month continuous rental. It's interesting that the cost advantage of renting is not dependent on kilometers driven (at least up to 18,000 km per year), it's entirely related to number of days of rental and the number where renting is better than owning - at 120 days per year - is quite high (see my chart).

Part of the decision as to which option to pursue certainly has to consider local factors. For instance, there is a local branch of Enterprise car rental close to my house and they offer free pick-up and delivery services, along with special month or longer rental rates. Also, my credit card offers some form of insurance protection for car rentals though I have to admit I don't really know the details of how good/ useful that is ... material for a future blog post!

The company that operates Car Sharing in Ottawa is vrtuCAR. One of my neighbours has used them and found it worked reasonably well, though collecting and dropping off the car from our suburb required taking public transit, which he said somewhat defeats the purpose.

Another benefit of car sharing and rental is that there are fewer cars on the road overall and people who use these methods of car transport tend to drive less, reducing road / parking congestion and emissions, both good for our environment. Local governments tend to like car sharing in particular and some offer preferential treatment like reserved parking, which can be a big plus in congested big city core areas. Check out the local car sharing websites of your city from links in my tables, or just Google car sharing like I did.