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Managing Your Money
PAC today to reach your desired financial destination tomorrow
If you're like many Canadians, there are two things you always leave to the last minute: packing for a trip and making your annual RRSP contribution. And while a last-minute rush may not have a negative impact on your trip, it can definitely have a very negative impact on the size of your retirement nest egg.
But there is an easy fix - all you need to do is PAC early and often. In this case, PAC stands for a Pre-Authorized Contribution program, and it's a terrific strategy that makes investing so easy you'll often forget you're investing at all.
Unfortunately, most Canadians don't PAC - and it costs them in a number of important ways. According to a recent survey*, about 69 per cent of RRSP investors wait until January or February to make their contribution. This suggests that many Canadians make RRSP contributions for the tax savings they offer, rather than as part of a comprehensive personal financial plan aimed at achieving their retirement dreams. In fact, around 61 per cent of survey respondents indicated they had not even determined how much money they would need to save for their retirement!
Here's how PAC-ing would help these people … and you:
A PAC allows you to avoid the annual RRSP deadline cash crunch each year. It can be difficult to come up with a large lump sum of money at any time of year, and especially right after the holidays. But, when you are unable to make your maximum RRSP contribution, you shortchange yourself from obtaining immediate tax benefits and enhanced long-term growth in the best tax-sheltered, savings builder for most Canadians.
A PAC can significantly improve your financial future. By automatically investing, say $250 regularly each month at a compound annual return of 8%, you'll have $354,230 in your retirement nest egg 30 years from now.** But, if you wait until the end of each year to invest a $3,000 lump sum, you'll have only $339,850. By investing monthly, you've added $14,380 at retirement without an extra penny of cost. That's just one example of the considerable value of paying yourself first with PAC.
Tie your PAC strategy to a comprehensive financial plan. You wouldn't take a trip without knowing your destination. The same is true of your destinations in life - knowing what they are keeps you on track to getting there. Decide what you want to do in retirement and it'll be much easier to achieve your goal. And by correctly PAC-ing for the trip, you'll enjoy the double benefit of working towards your goal and saving on taxes.
Keep your PAC on pace with your life. As time passes, your income changes and your life changes - so your PAC should change too. You should aim to reset your PAC annually by a lump sum dollar amount or by a designated percentage. That way, you'll keep your RRSP contributions and other investing in line with inflation and personal wage increases.
By PAC-ing now and revising as you go, you'll ensure your investment strategy keeps pace with your objectives, your goals and your life. A professional financial advisor can help you PAC correctly and keep you on the road to personal financial independence.
*Survey results based on an annual Investors Group poll, conducted via a Decima TeleVox national telephone survey with a representative sample of 2,035 adult Canadians between September 11-21, 2004.
**The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future returns on investment.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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Is that gift from your employer tax-free - or not?
At this time of year it's not uncommon for employers to give gifts (other than cash) of some sort to employees. And while everybody likes to get a gift, the type of gift your employer chooses can either be tax-free to you and tax-deductible to your employer - or not. That distinction is covered in an administrative policy on Gifts and Awards Given by Employers to Their Employees, issued by the Canada Revenue Agency (CRA) back in 2001 and further clarified since.
Essentially, the policy allows employers to give each employee two non-cash gifts of nominal value each year on occasions such as Christmas, Hanukkah, a birthday, marriage or similar event. These non-cash gifts will be tax-free to the recipient, and tax-deductible for the employer, where the aggregate cost of the gifts is not more than $500 per year. Similarly, employers can give employees two non-cash awards per year, on a tax-free basis, in recognition of special achievements - such as reaching a set number of years of service, meeting or exceeding safety standards, or reaching a similar milestone, so long as the total cost of the awards to the employer is not greater than $500 per year.
Cash, or 'near cash' gifts or awards that can readily be converted to cash - such as securities, gold nuggets or gift certificates - are not covered in the policy and are considered by the CRA as a taxable employment benefit.
As well, the policy does not apply to gifts or awards that represent a 'disguised form' of remuneration. For example, if the gift is in lieu of salary, wages or other taxable benefits, the value of the gift is a taxable benefit.
Here are some common questions - and answers - about the gifts and awards policy:
I received two non-cash gifts from my employer this year - one cost $400 and the other $200. That's $100 more than the $500 maximum. Are both gifts taxable, or do I need to pay taxes only on the $100 above the maximum allowable amount?
The total cost of your gifts cannot exceed the $500 limit. Your employer must exclude one of these gifts from the total - it would be most beneficial to exclude the least expensive gift - and include it in your income as a taxable benefit at its 'fair market value.' In this situation, the employer should report the $200 gift as taxable income to you.
I received more than two non-cash gifts this year, but their total cost was less than $500. Are any of these gifts taxable?
Yes - your employer is allowed to give you at most only two tax-free gifts in a year. Your employer may choose the two gifts that have a combined cost that is closest to the $500 yearly limit, and include the 'fair market value' of the remaining gift(s) in your income.
Instead of a $2,000 year-end bonus, I selected a $500 stereo as a Christmas gift and a bonus of $1,500. Is the $500 stereo tax-free under this policy?
No - your bonus is a form of remuneration. As the gift in this instance is in lieu of your bonus, the value of the stereo is considered a taxable benefit.
My employer gave me vouchers worth $400 for massage therapy at a local clinic. Is this gift tax-exempt under the policy?
Yes - provided that the voucher is a gift and not in lieu of remuneration for work you've done, and if the vouchers are redeemable only for massage therapy and cannot be turned into cash.
Because the gifts/awards policy is 'administrative', the CRA has the final say on what's deductible and what's not - there is no appeal process for disagreements. For this reason, and for many others, it pays - in tax-savings and tax return accuracy - to seek the advice of a tax and financial professional this year and every year.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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You're never too young to dream up a picture-perfect retirement
If you're a Canadian under 50 years of age, you're probably pretty busy. These are your peak personal productivity years, when building a career and raising a family really keep you on the go - and with so many of life's daily tasks and pressures to occupy your waking hours, you probably haven't devoted much time to creating a 'vision' of your retirement years.
You're not alone: According to a recent national survey* only about half of working Canadians under 50 have given any thought to retirement. And that could cause problems down the road because people who do not have a clear picture of their desired retirement lifestyle are less likely to have accumulated savings or to have calculated how much income they'll need to retire. The survey also revealed that nearly 40% of non-retired Canadians without a retirement plan are very or extremely concerned about running out of money during their retirement years. And those who don't have a retirement lifestyle vision are also less likely to feel they have control over their retirement date.
Surveyed retirees who had to work part-time reported they were less happy with retirement. Many retired Canadians say they should have taken more steps to enhance their retirement, by saving earlier, saving more and seeking early professional advice among the most important.
On the other hand, retirees who reported that they enjoyed their new lifestyle are more likely to have substantial savings, a substantial employer-sponsored pension income, and spend time engaged in volunteer work and hobbies.
The conclusion is clear: A successful, happy retirement means having the finances to be able to do what you want when you want to do it. And, while your retirement will be as personal as your fingerprint, there's no doubt that when you clearly visualize your picture-perfect retirement, you are much more likely to achieve it.
Here are a few tips for bringing your personal retirement vision into focus:
1. Recognize that retirement will be a very different life stage. Consider all of the new opportunities it presents to build the kind of life you want, to set your sights on new accomplishment … to do whatever you want once you have all the time in the world.
2. Imagine what you'd like your retirement to be - then establish a realistic financial framework that will keep you on the path to making your dreams a reality. Your retirement vision may change as you move through various life stages. But when you have a comprehensive retirement vision in place and attach it to a financial plan that meshes with all your other life goals, you're much more likely to have a successful retirement on your own terms.
3. Plan to look after yourself. Canada's aging population and accompanying changes in services and financial support mean you should not count on the government to look after you in retirement. Your retirement plan should include income well beyond government assistance.
4. Start early. The sooner you start saving and investing, the more you will likely have accumulated by the time you choose to retire.
5. Boost your Registered Retirement Savings Plan (RRSP). Get the most in tax-deferred growth from your RRSP by making your maximum allowable contributions each year and quickly catching up on contribution shortfalls from previous years.
It's never too early to plan a picture-perfect retirement and take the right steps to get there. A professional financial advisor can help make sure your investments, including those in your RRSP, will provide the money you need for the retirement you want.
*Decima televox national telephone survey, September 2003, sponsored by Investors Group
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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