Hooray for TFSA! Canadian Federal Budget Delivers on My Wish List

Well, you read it here first on my Christmas Wish List 2007. Minister Flaherty has delivered on my request to institute a tax-free savings account just like the ISA that exists over here in the UK. Wonderful. These accounts are so simple and straightforward, they achieve much better than RRSPs the goal of getting people to save. There are no books written about ISAs, unlike the tome Preet Banerjee recently put out about RRSPs, because there's so little to write about. The worst thing about the new accounts is their awful acronym - TFSA. How the heck do you pronounce that - TaFSA? Didn't they learn with RRSP, where is the marketing savvy?

The $5,000 annual contribution limit is too low; better would have been double that and even better would have been four times higher, which would start killing off RRSPs. The "if you don't use it, you don't lose it" feature of the annual contribution limit is a great measure for added flexibility since many families with young children might not get the chance to save for a number of years.

I'd expect the new TFSA, as the info sheet suggests, to be heavily used by seniors, for instance for funding inheritances. The money can be put aside, grow tax-free and be non-taxable at death. While it is in the TFSA, it can serve as a safety cushion for unexpected health care costs and if not needed, passed along to the next generation. Increasing life expectancy could allow amassing a tidy sum.

In short, I believe the info sheet blurb is not too far off (except for the niggardly $5k) when it says "It’s the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP)."

It was nice to see our government paying attention to this humble blogger. I suppose they are waiting for the next budget to put in an annual tax-free capital gains exemption.

Blogger Identity - Anonymous or Real?

Came across this thought-provoking post at MoneyRelations on whether and why to reveal one's real identity as a blogger. Canadian Dream also talked about this topic here.

A few years ago, I attended a seminar at which health researchers reported on the credibility given by the public to health information found on the web. And do you know what most influenced whether people believed the information they came across? It wasn't the name of the person or the organization, the list of professional qualifications, the quality of the content itself that was most important. Drum roll, please ... it was the photo of the person supposedly giving the advice and the impression that left!! If you looked the part - wearing a white lab coat was good for health people, but a t-shirt killed your credibility - and you had a trustworthy face, then that really boosted your "cred". That's why I have a photo on my website - don't I look authoritative and trustworthy, huh? Please?

As for revealing my real name, it doesn't really matter to me. My friends and family know about my blog and anyone who emails me soon finds out who the person behind the door is. And I assume that no matter what I tried to do, my identity could likely be found out very quickly by anyone or any organization with reasonable smarts. So my policy is to attempt at all times to only write things that are a credit to me. As Mr Cheap of Four-Pillars commented on the Canadian Dream post with a hilarious link, you don't want to post anything your mom would be embarassed to read.

Probably my blog name CanadianFinancialDIY, which was meant to be descriptive (and has turned out not to be very descriptive at that since I write regularly about UK topics), makes me more indistinguishable in the crowd of Canadian bloggers. There are so many Canadian this's and Canadian that's, one has trouble remembering who is who. (Aside: is that the result of a generation of Canadians raised seeing the word Canada in every government department, agency, crown corporation, tribunal and outhouse?) Something weird or random would likely be better - has the name Google ever held that company back?

Financial Risks Can Be Health Risks Too

The BBC reports in Bank Crises 'deadly for health' that researchers have determined that financial crises and runs on banks, such as that occurring this past autumn at the Northern Rock, can cause a spike in heart attacks among the population. The article interestingly notes that older people are especially susceptible to heart attacks; perhaps a higher than expected risk aversion amongst older people is an instinctive adjustment for self-preservation? How often does one hear people say, "I don't want the stress of equity investment", or "I cannot take the stress anymore"? Maybe they are reacting to internal health messages from their body?

Another issue is that a proper appreciation of the relative real risk of various assets and holdings is essential. Do people need to be told that even banks are not perfectly safe and that low probability of failure is not equal to zero probability? Various politicians and business leaders who say that things are "perfectly safe" are actually doing everyone a dis-service. It is easier to face a known hazard than to deal with a nasty surprise when it was thought there was no chance of the bad thing happening.

To me this is another reminder that diversification - spreading investments and assets around so that if one fails others prevent calamity - is an essential protection.

Question on Spread Betting in the UK and Taxes in Canada

A reader sent in this intriguing question: "What are the tax implications for Canadians setting up a spread betting account in the United Kingdom. In the UK and Ireland there is no personal income tax from profits generated by spread betting on such instruments as futures, currency or stocks, as this is considered a form of gambling. My question is would Canadians be exempt from paying tax also."

Spread betting is indeed considered gambling in the UK, despite the similarity to options trading, and not just by the tax folks at HMRC. The financial betting is just another form of betting as is evident in  Investopedia's explanation of spread betting.

To guess at an answer since there may not actually be an official one (and I would bet it is a pretty well hopeless exercise to phone the CRA where you would likely spend a long time getting the service rep to actually understand what the heck you were talking about), I refer first to this explanation by accountant Tim Cestnick on the taxation in Canada of pure gambling like poker. The essence of it is that anything, including poker, can be taxable if it is a business. (I especially love the classic extreme example of this in the fact that bank robbers are liable to pay income tax on what they steal).

I suspect the CRA would apply the same principle to any winnings on UK-based spread betting. It notably does not matter that the UK government doesn't consider such winnings taxable. If you are a Canadian resident for tax purposes (and you pretty well have to have left the country and burned all your bridges in Canada to avoid that) then you are subject to pay Canadian tax on your worldwide income. The fact that the UK doesn't tax spread betting makes it simpler in principle for Canada to claim tax since there are no complications from having to avoid double taxation and having to refer to the rules of the Canada-UK Taxation Convention to decide who would get to claim your taxes.

But you have to report the income to the CRA. Making it much more difficult for the CRA to actually track you down should you decide to hide such income, were it actually a business, are some other provisions of the above Convention, which is further charmingly sub-titled "For the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital Gains". Way down in Article 24, it says in effect, that the tax authorities will exchange what information they normally collect and since the UK HMRC have nothing to do with taxing spread betting, it would be a surprise if they had any data about foreigners doing spread betting to send to the CRA, should they ever even ask HMRC. Nevertheless, it is better to be honest isn't it?btw, if you are able to successfully tell whether the market is going up or down and make any money spread betting, then I would sure like to know what your bets are. ... Naw ... I think I'll just stick with the boring plodding diversified portfolio, which is unfortunately taxable all the time somewhere.

Book Review: The New Retirement by Sherry Cooper

The New Retirement is part prediction and part advice. It describes the economic and social forces changing retirement and then provides advice to individuals on how to prepare for and cope with those conditions. It is a heads-up for all ages from those just starting their working life to those just at the point of retirement.

Right at the start, there is a useful definition of retirement: "A successful retirement for most people is to be physically and fiscally independent and active with love and purpose in their lives." (p.2) Bonus points for that, since so many discussions of retirement just assume everyone is on the same wavelength.

The kind of forces author Dr. Sherry Cooper examines includes: the baby boom, increasing longevity, physical and mental health, immigration, savings rates, interest rates and inflation, global economic performance in western vs emerging countries, company and government pension plans for both the US and Canada. A modest list, n'est-ce pas!? And all of it fits neatly into 235 pages of compact size pages. Somehow she manages this without leaving the impression that is glossy, surface fluff. How does she accomplish this? It is the art of the author - what you leave out is as important as what you put in, in other words, knowing where to put in the detail and where to write one sentence when a whole book could be written. Most likely this is a demonstration of a principle Cooper notes in the book, "Healthy older brains are better at dealing with complex situations, that you have dealt with for many years, having the benefit of so much experience." (p.208) Despite her eye-catching youthful appearance on the dust cover photo, Cooper has spent a lifetime analyzing and forecasting economic data. Her judgments and predictions merit consideration.

Here is a sample of her observations:

• "Early boomers will get to the financial markets first, before the real onslaught of demand for stocks, bonds and other investment vehicles." (p.25)
  
• "... low inflation and relatively low interest rates will be sustained for a prolonged period as potential growth slows with the decline in the growth of the labour force in Canada, the United States, Europe, and Japan. On the flip side, developing world growth will continue at a very rapid pace." (p.65)
• "The unsustainable promises made by successive governments, primarily to older Americans, could hobble U.S. foreign policy for decades." (p.96)
• " ... many public sector workers will be assured of gold-plated, fully-indexed pension plans..." (p.143)
  
• in the past 25 years, "... A portfolio of long-term government and corporate bonds returned to the investor a compounded annualized return of about 12.5 percent, compared to 9.5 percent for the TSX over that period. ... There is zero likelihood that the next 25 years will offer the same return for bond investors. " (p.161)
  
• in retirement, "... it is essential to hold 45 to 65% of your portfolio in stocks" (p.180)

Having set the stage and defined the environment we will face, the book asks and examines questions such as how much does one need to save, what is the required savings rate to achieve this, how much longer would one have to work to make up a shortfall, what type of investments (equities, bonds etc) should one favour given tax considerations and how much can one safely withdraw each year from a retirement account. Much of this material relies heavily on calculations and methods of others in the financial planning field such as William Bengen and his book, Conserving Client Portfolios During Retirement. These chapters give one a good feel for how various factors such as savings rate, withdrawal rate, working time, retirement duration and rate of investment return play off against one another. They do not give specific, unique answers to such questions, since that is impossible and depends on every person's individual circumstances. Instead, the advice is to work out your own answers with the help of a financial advisor.

The book covers other topics than the financial. There are several excellent chapters on being healthy and happy during the years of the "final third of one"s life". The good news is that achieving success is very much influenced by what we do. Eating well, exercising, reading, doing "brain work", being married, having a pet, pro-actively monitoring health to catch treatable disease early and a neutral view of the world, all can contribute to making those years the happiest of all.

The whole book is really an introduction (as noted above, it is short) to the retirement spectrum, but it is an excellent one. I especially like the copious chapter footnotes and 8-page bibliography that allow one to follow up topics of deeper interest.

Now, my quibbles.

• There is little / not enough treatment of planning for one's death and for a legacy, both financial and otherwise. Cooper herself notes that as one gets older one's mindset turns more to others and what one will leave behind.
  
• There's too much on how much better defined benefit pensions are than defined contribution or private plans like RRSPs and 401ks.
  
• The many examples in the chapter on "nest egg arithmetic" (the informal term "nest egg" itself starts to get annoying as it is used consistently throughout the book to refer to retirement savings - i.e. call it something else once in a while!) need to be cut down or better organized since the message gets confusing.
  
• The investment return assumptions, and especially their uncertainty, need to be more explicit and analyzed. For example, if North American economies are to slow in future, will stock market equity returns follow suit, such that future expected returns of the S&P 500 and/or the TSX will be less? There is a fascinating sentence in footnote 2 on page 219: "Greater diversification into such assets as Real Estate Investment Trusts (REITs), Treasury bills, and short-term bonds, commodity futures, and others could well further improve results, but the historical data are not available to prove that point."
  
• The postwar baby boom also happened in the UK (see here and here), contrary to the statement on page 19.
  
• The book targets two different audiences (as stated on page 2) - governments and other organizations who must respond to the emerging reality and to individuals planning their own future. Looking at it through individual eyes, I got impatient through especially the early chapters when most of the text would be of note to the former target group. The diffusion of focus and attention takes away from the book.

Despite the quibbles, the book is a valuable and unique, so far as I have seen, addition to the library of those contemplating and planning their own retirement. Its strength is the comprehensiveness of its forward-looking coverage of retirement topics from the standard financial to the physical and mental health aspects as well.

Bottom line, it is well worth a read (and remember, reading is good for your mental health). Four out of five stars. Buy it at Chapters or Amazon.

For those interested, BMO Investorline is hosting a free webcast on retirement by the author, Dr. Sherry Cooper on February 26, 2008. Register here.

Buying Scottish Cash - Caveat Emptor

Travellers to this lovely part of the world should take heed when buying some cash before departure that Scottish money (cash) costs more than English money despite the fact that both are the same currency - pound sterling!

RampantScotland describes this anomaly and provides other useful money travel advice for Scotland. Is this anomaly due to the fact that Bank of England paper currency notes are accepted everywhere in Scotland but notes issued in Scotland by the three Scottish banks are not commonly accepted in England (even though they are legal tender anywhere in the UK)? The other pages of RampantScotland contain a miscellany of useful and amusing facts about the place, well worth a wee browse.

For trivia buffs, BBC article "Scottish Money Needs Protection" explains how the anomaly came about:
"In 1826, the British parliament passed legislation preventing banks from issuing their own pound notes, a practice which was threatening to get out of hand.

But a vigorous campaign in Scotland, which enlisted figures such as the writer Sir Walter Scott, ensured that it was exempted from the new law."

Although RampantScotland says overseas banks issue only Bank of England notes, that is apparently not so in Canada as the the Royal Bank of Canada has two sets of buy/sell rates for cash and indeed you must pay more for Scottish pounds than English pounds. In addition, when you want to sell them back to the bank at the end of your trip, you get less for Scottish pounds. Today, for instance the buy/sell spread for Scots pounds is 7.165% but only 6.893% for the English kind.

Tax Primer for 14 Countries from HSBC

HSBC has a handy primer on matters taxation called the Global Tax Navigator for 14 different countries round the world, including Canada, the USA, the UK, Japan, Australia, Hong Kong, Singapore, India, France and Jersey. It outlines rules for those going to and leaving those countries.

Topics include:

• whether you need a work permit;
  
• how various types of income are taxed;
  
• rules for determining whether and how you will be taxed - residency, domicile or other;
  
• tax rates for different types of income;
  
• ways of filing returns;
  
• existence of tax treaties with other countries;
  
• doing returns with a spouse;
  
• whether inheritance, estate or other important taxes apply

All in all, it is good starting point that assembles a variety of essential tax information.