Personal Finance
Sheltering a windfall
Eduardo Saverin, one of the founders of Facebook, could walk away with up to $ 3.4-billion for his 4% share of the company once the initial public offering is completed. His estimated tax bill is no chump change.
That’s why tax experts were amused to learn that Mr. Saverin’s name recently appeared on a U.S. Internal Revenue Service list of people who, as of April 30, chose to renounce their U.S. citizenship.
The U.S. is the only country that requires its citizens to file a tax return and report their worldwide income, no matter where in the world they might live and regardless of whether they hold another country’s citizenship. Mr. Saverin is currently a resident of Singapore. By renouncing his U.S. citizenship, he could save millions of dollars of tax on his ultimate sale of his Facebook shares as Singapore doesn’t have a capital gains tax.
Of course he won’t get off scot-free as the U.S. has an “exit tax” which applies to Americans who renounce their U.S. citizenship. Essentially, the renouncing citizen is deemed to dispose of all of his or her property at fair market value resulting in a capital gains tax on any accrued appreciation of that property measured as of the date of renunciation.
According to Mr. Saverin’s spokesperson, he renounced “around September” of 2011, well in advance of the upcoming Facebook IPO when presumably the value of the shares was substantially less than the IPO pricing. The value of private company shares has an inherent degree of uncertainty associated with it since there is no public market that automatically puts a price on those shares, as there would be once the shares are listed on an exchange.
In addition, U.S. long term capital gains rates and ordinary income rates are set to rise after 2012 providing another incentive to realize gains now instead of in the future. Now that Mr. Saverin is no longer a U.S. citizen, any profit expected from the appreciation of his Facebook stock since his renunciation date will be free and clear of capital gains tax – both in the U.S. and Singapore.
The rules in Canada are very similar with the big exception that Canada doesn’t tax based on citizenship but, like most other countries in the world, taxes based on residency. If you’re a Canadian facing a looming tax bill on a sale of shares, you wouldn’t have to renounce your Canadian citizenship but you would have to become a non-resident.
Becoming a non-resident for tax purposes means severing your residential ties, which can include selling your home, having your spouse and kids move with you, giving up club memberships, driver’s license and provincial medical insurance coverage.
Of course Canada also imposes a “departure tax” on any accrued gains on property held as of the date of emigration. If you’re holding shares with substantial accrued gains, rather than becoming a non-resident of Canada, which would trigger the deemed disposition of those shares and impose an immediate capital gains tax, a better solution may be to wait until the year you plan to actually dispose of the shares and then move to a low-tax province before Dec. 31 of that year.
For example, for an Ontarian who is contemplating selling shares in 2013 such that they would face tax at a 25% capital gains tax rate (for income over $ 500,000), moving to Alberta by the end of the year would reduce the tax bill to a mere 19.5%.
Calgary vs. Singapore? The choice is yours.
Jamie Golombek is the managing director, tax & estate planning with CIBC Private Wealth Management in Toronto.
Scotia Insight: Married to your money
With wedding season approaching, happy couples are preparing to start their new lives together. Even though financial experts cite the importance of creating an open dialogue about money, it’s not uncommon for couples to put off talking about it until after the wedding.
Since personal finance will be an important part of every adult’s life, it makes sense to talk honestly about financial goals before you head down the aisle. This is true for all kinds of relationships – from young couples just starting out to people entering subsequent marriages with established financial habits.
Given that couples seldom agree on everything, it’s important to talk openly to understand each other’s viewpoint, and find common ground. Here are a few tips to help start a discussion about money:
Plan a time to talk: The first step towards success is simply starting the conversation.
Are you a financial match? Everyone has their own financial style. You may be cautious, while your partner may be more open to risks. Talk about it so you know where you each stand.
Identify goals: Talk about goals beyond the wedding day. Will you buy or rent and how will you save for your first home? Will you start a family or travel? How do you picture retirement?
Make a plan: With an idea of your shared goals, make a plan and set measurable objectives. For example, create an emergency fund or pay down student debt.
Commit to saving: Since many couples have big dreams, start a savings plan to work towards common goals that you can build on into the future.
Bring in an expert: While couples often consult a wedding planner for their big day, less than half of Canadians report having a financial advisor, despite the importance of managing money for life.
Find a financial advisor to help you balance your financial approaches and build a plan to achieve your long-term goals. They can help you find investment options that work for both of you and lead you from newly weds right through your golden years.
Lindsay Hay is a financial advisor at Scotiabank in Toronto.
Trading luxury for safety
Life in Central America is hard for a Canadian couple approaching retirement. They have had prosperous lives in Guatemala where Roberto, 65, a naturalized Canadian, was born. Years ago, working in Toronto, he met his Ontario-born wife, Flora, 61, and became a mid-level engineering manager for a major Canadian manufacturing company. Flora worked as an accountant.
‘Murders are not even headlines anymore. And there are kidnappings not just of the wealthy but anyone who has some money’
Moved by the company back to his country of birth, he opened his own profitable consulting business when the manufacturer ran into trouble. Flora found work as a translator for a major accounting firm. But life in Guatemala is not all tropical breezes. With one of the highest murder rates in the western hemisphere, though reportedly falling, it has recently averaged 15 per day in a country of 14 million people.
“The problem is safety for me and especially for my wife,” Roberto explains. “Murders are not even headlines anymore. And there are kidnappings not just of the wealthy but anyone who has some money. When you may not come home after work or shopping, crime is not just a statistic. It is as personal as it gets. But is it financially feasible for us to live in Toronto and to have enough money to support ourselves in retirement?”
Roberto and Flora bring home $ 4,880 a month after taxes, a grand sum where they live but not in Toronto. They have total assets of $ 1,224,704. That sum is made up of a $ 550,000 rental condo in Toronto and financial assets of $ 654,704. Their money will have to supplement modest Canada Pension Plan benefits generated during their time working in Canada and limited Old Age Security benefits.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with the couple.
“These people are realists,” he says. “They have examined alternative ways of financing their lives in Canada. What I have to do is to evaluate the plans, measure the pension income, and offer ideas on how to make the best of what they have.”
Asset Management
The couple’s largest single asset is their $ 550,000 rental condo, which yields $ 1,880 a month after expenses. That’s $ 22,560 a year or, divided by the $ 550,000 price, a 4.1% yield. That’s not a bad return, but it comes with the risk of vacancy, the potential expense of repairs, likely condo assessments and, of course, property taxes. They could boost the return and lose the management headaches by selling it.
If Roberto and Flora get $ 530,000 after costs and get a 6% return from any number of diversified real estate investment trusts, they would receive $ 31,800 a year before tax, less a small capital gains tax, likely less than $ 30,000, on a $ 130,000 gain. This income could pay the cost of renting an apartment at perhaps $ 2,000 a month. They would have sold at what many regard as the top of an overheated market. They will have converted the wild and woolly Toronto real estate market to simple rental cost with no condo assessments.
On top of this rental and investment income, the couple could obtain a 6% pre-tax return on their present investment assets of $ 609,704 (not counting cash). If these funds were to generate a 6% return less 3% for inflation, and if the money is spent by Flora’s age 90, it would generate an annual indexed return of $ 32,493 in 2012 dollars.
Retirement Income
The couple’s annual retirement income would therefore consist of $ 31,800 from the sale and investment of the $ 530,000 proceeds of the condo and $ 32,493 from present investments. Annual CPP benefits will be $ 4,200 for Roberto and $ 360 for Flora when she is 65. Roberto, who has spent less than 10 years in Canada, the minimum needed to qualify for Old Age Security, will get no benefits, but Flora, who will have 40 years of Canadian residence needed for full benefits, will get $ 6,481 a year. Add $ 12,000 potential business income from Roberto’s consulting, which he would resume in Toronto, and they will have $ 87,334 annual income before tax.
Assuming they split the income and pay tax at an average 15% rate, they will have $ 74,235 a year after tax, or $ 6,190 a month, for life in an expensive city. That will pay rent of $ 2,000 a month, leaving $ 4,190 for everything else. There will be no cushy expatriate life in the tropics, but they will have the comparative safety of Canada and be near their children.
The transition to life in Toronto would be costly. Roberto and Flora would have to buy furniture because the cost of shipping a truckload of goods from Central America to Toronto would be prohibitive. They would have to buy travel medical insurance to cover their own medical costs for three months until the provincial medical plan takes over their bills, and pay various expenses to bring in and license their car. Their present $ 45,000 of cash, which has not been counted in estimating investment returns, would cover those costs.
The challenge of living in Canada once again will be to stretch their limited income. Fortunately, they have the intellectual skills and experience to become active investors. Roberto can apply his engineering discipline to stock and bond evaluation.
Flora, with years of experience in accounting, can winnow income statements and balance sheets. As retirees, they will want to hold relatively low-risk investments that produce dependable and hopefully rising income. They need not depend only on mutual fund managers to find those investments, Mr. Moran suggests. They will have to put up with the volatility of capital markets and see beyond the storms that often ravage them.
“With little pension income, they will be almost completely dependent on investment returns,” Mr. Moran says. “They will have to hone their investment skills and have thick skins to cope with the volatility that goes with managing financial assets.”
Financial Post
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Half of Canadians plan to retire with mortgage: survey
The one thing Canadians won’t be retiring anytime soon is their mortgage debt, according to a new survey.
Bank of Montreal says 51% of Canadian homeowners plan to carry their mortgage into their retirement years.
“It’s a phenomenal number I think,” said Tino Di Vito, head of the BMO Retirement Institute.
But Phil Soper, chief executive of Royal LePage Real Estate Services, said times have changed and he believes Canadians can handle the burden.
“People are more sophisticated in their approach to personal finance today than the previous generation,” says Mr. Soper. “People are living longer, working longer and making real estate plans longer or further into their lives.”
Another trend, one which was not considered by the industry before, is people moving into more expensive, upscale homes after retirement. “Traditionally people paid off their mortgage and people lived in their home until it was time to downsize,” he says. “It’s not necessarily a dangerous trend.”
Another part of the trend could very well be strategic. With rates on a five-year closed mortgage at about 3.5%, paying down that debt might not seem as high a priority for many homeowners. That logic might not be so sound, says Doug Porter, deputy chief economist at Bank of Montreal.
“The extremely low level of interest rates is acting both as an inducement for people to take on more debt than they would have in the past and on the flipside not encouraging them to save as in the past.”
People could end up working longer and it might also mean there will be that much less equity in the home you’ll be leaving to heirs.
The attitude of homeowners could also reflect the longer amortizations the mortgage industry saw before the government cracked down on the rules, Mr. Porter said.
Traditionally, mortgages were amortized over 25 years, but that number ballooned to 40 before Ottawa twice lowered the limit, which now stands at 30. Many are calling for it to be reduced back to 25 years.
Ms. Di Vito says the issue is how it’s affecting retirement with half of Canadian homeowners saying their debt load was hindering their ability to plan and save.
“Carrying debt into retirement is a threat to financial security,” says Ms. Di Vito, who believes Canadians need about 70% of their pre-retirement income to maintain the same lifestyle. “That assumes other expenses such as mortgages are already taken care of.”
She says half of Canadian homeowners age 50 to 59 still have mortgage debt based on Statistics Canada information. By 60 to 69, 25% of those people still have a mortgage.
It doesn’t help that real estate prices continue at all-time highs. The Canadian Real Estate Association said this week the average home price reached $ 372,608 in April. In Vancouver, even though prices dropped almost 10% year over year, the average sale price in April was $ 735,315. Almost 60% of B.C. homeowners expect to take mortgage debt into retirement.
Author Talbot Stevens wonders how people will survive in their retirement.
“People get a hold of a line of credit and they spend $ 40,000 on upgrading their home. At least with that, you have something to show for it, maybe 40¢ on the dollar,” says Mr. Stevens, who worries about more frivolous spending. “We really have to be more responsible with debt and what we are using it for.”
Beware of debt settlement scams
If you are knee-deep in debt, you have likely noticed recent radio and TV ads featuring a well-known Canadian celebrity with a sonorous voice pitching a “debt-settlement” program that promises to pay off overdue loans at a fraction of the original amounts owed. Sounds too good to be true? Well apparently it is.
Unlike credit counsellors, who work with clients and creditors to renegotiate a debt-payment plan that both parties can live with, the debt-settlement program instructs the client to stop all payments to creditors and redirect their cash to a savings account.
The goal is to build up a lump sum representing as little as 30 per cent of the amounts owed that will then be offered to the creditors as a final payment.
Now it can happen that creditors accept a lesser sum in order to settle a bad debt.
The difference here is that the debt company takes substantial fees up front from the client’s savings account before even coming o an agreement with the creditors.
The creditors continue trying to collect their loans, with mounting interest, penalties and negative reports to the credit rating agencies while the client is lulled into believing that the debt-settlement agent is handling the situation on their behalf.
In many cases, the client is left holding the bag for a debt far greater than the original amount, and out of pocket thousands of dollars in fees, says Laurie Campbell, CEO of Credit Canada Debt Solutions, a national non-profit credit-counselling agency.
The Financial Consumer Agency of Canada (fcac-acfc.gc.ca) has already issued a public warning, but since debt services are a provincial jurisdiction, Laurie is calling for every province to pass legislation protecting debtors from upfront fees and other dubious practices (only Manitoba and Alberta have done so to date).
In fact, the United States has already outlawed the collection of debt-settlement fees up front which appears to have prompted some American debt companies to move their operations to the greener and less regulated pastures of Canada.
