Financial Planning Notes PDF

## Chapter 2: Money Matters **Money mat =** - Cash Flows - Budget - Credit - Saving **+ Building Wealth** - Grow Assets - Revenue - Liabilities **Paper to keep:** - Government related - Anything you put in TAX (7 years) **Financial Sustainability** - Capacity - Capital **Net Worth** - Me...

## Chapter 2: Money Matters **Money mat =** - Cash Flows - Budget - Credit - Saving **+ Building Wealth** - Grow Assets - Revenue - Liabilities **Paper to keep:** - Government related - Anything you put in TAX (7 years) **Financial Sustainability** - Capacity - Capital **Net Worth** - Measuring wealth - Own - Owe = Net Worth - Snapshot (of what is going on) - Issues - Ignores cashflow - Ignores trends **Cash Flow** - Budget - Money in and out - Can't be Negative - Surplus -> Asset - Gross - Net - Deductions **Primary** - Self employed - Spouse - Gov't - Include regular, consistent - Pay off debt, Invest - Don't include irregular **Budget** - Surplus/Deficit? - Net Worth? - Issues? - Trends? - Changes? **Try to invest 10% a month** **Debt Ratio** -> Low Number **Current Ratio** -> High Number **Liquidity Ratio** -> High Number **Debt Payments Ratio** -> Low Number **Capacity** **Saving Ratio** >= 10% ## Goals **Income** - SMART - Monthly, quarterly, annually - 7-3-6 Months of expenses - Maintain lifestyle - Savings, not investments - Needs vs wants - Adjusted **Expenses** - Record - Find a system that works for you - Review - Regularly **Everyday Savings** -> Low Interest Rate **High Interest Savings** -> Min Amount **TFSA Savings** ## Jan 23: Agenda **Taxes and Financial Planning** - Preparing a personal income tax return - Income Tax Fundamentals - Calculating Tax Rates - Four types of taxes are: - 5% Purchases - Property - Annual Property Taxes - 1-1.5% of property value - Capital gains tax when selling an asset - 50% of the gain when sold - Wealth - Interest, capital gains, dividends - Earnings - Income Tax **Income Tax - Canada - Residency, December 31** - Gross Income -> Net Income/Taxable Income - Tax Liabilities -> Return/Own - Investment - Tax-beneficial accounts - Taxable Income -> Tax Liabilities - Amount of tax you owe to the gov't for the year - MTR = Rate of last dollar earned - ATR = Total tax liability - Taxable income ## Exhibit 3-1: Computing Taxable Income and Your Tax Liability **Step 1: Determining Total Income** - Total Income: - Employment income - Net business income - Investment income - Taxable capital gains - Other income **Step 2: Calculating Net Income.** - Less: Deductions - Equals: Net Income **Step 3: Calculating Taxable Income** - Less: Other allowable deductions - Losses carried over - Equals: Taxable income **Step 4: Calculating Federal Taxes Owing** - Federal tax based on tax bracket **Step 5: Calculating Net Federal Tax** - Less: Tax credits - Plus: Net provincial taxes - Equals: Total tax due **Combined Income Tax Rate ( 20 19 )** **Alberta** - First $47,630 - 25.00% - Over $47,630 up to $95,259 - 30.50% - Over $95,259 up to $131,220 - 36.00% - Over $131,220 up to $147,667 - 38.00% - Over $147,667 up to $157,464 - 41.00% -Over $157,464 up to $209,952 - 42.00% - Over $209,952 up to $210,371 - 43.00% - Over $210,371 up to $314,928 - 47.00% - Over $314,928 - 48.00% **Example 1:** - TI = $100K - 0 - $47,630: $47,630 * 25% = $11,907.50 - $95,259-$47,630: $47,629 * 30.5% = $14,526.85 - $100,000-$95,259: $4,741 * 36% = $1,706.16 - Tax liability: $28,141.11 - ATR = $ 28,141.11 / $ 100,000 = 28% **Example 2: (MTR, Tax liability, ATR)** - TI = $150K - MTR = Rate of last dollar earned - 0-$47,630: $47,630 *25% = $11,907.50 = 41% - $95,259-$47,630: $47,629 * 30.5%: $14,526.85 - $131,220-$95,259: $35,961 * 36% = $12,945.96 - $147,667-$131,220: $16,447*38% = $6,249.86 - $150,000-$147,667: $2,333 * 41% = $956.53 - Tax liability: $46,586.70 - ATR = $46,586.70 / $150,000 = 31.06% **Try to invest in tax free account to reduce the tax amount owing** **NRTC** - **Liability**: $28,141.11 - 30,000 - 0 - 0 - **Tax Credits**: $20,000 - 30000 - 0 - $1958.89 - **Employer**: $12,000 - ~ $7,000 - $3858.89 - $1141.11 **Non Refundable Tax Credit** - **Basic Personal Amount**: $12,069 - **Spouse or common-law partner/equivalent-to-spouse/eligible dependent amount**: $12,069 - **Canada Caregiver Credit - infirm adult dependent relative, spouse or eligible dependant age 18+; line 30425 is reduced by line 30300 or 30400 claim**: 7,140 - Eliminated when spousal/dependent income exceeds: $12,069 - Reduced when relative's income exceeds: $16,766 - Eliminated when relative's income exceeds: $23,906 - Age amount (65+ years of age): $7,494 - Reduced when income exceeds $ 37,790 - Eliminated when income exceeds $ 87,750 - Pension income amount - lesser of eligible pension income or: $2,000 - Disability amount: $8,416 - Disability amount supplement for taxpayers under 18 years of age: $4,909 - Medical expense tax credit is for expenses in excess of the lesser of 3% of net income or: $2,352 - Eliminated when above expenses exceed: $2,875 - Tax credit for medical for other dependants is for expenses in excess of the lesser of 3% of dependant net income: $2,352 - Eligible adoption expenses - maximum per child: $16,255 - Canada Caregiver credit - infirm spouse/eligible dependant or child under 18 - line 30500 (infirm child under 18) or added to Line 30300 or 30400, and line 30300 or 30400 threshold increased by this amount: : $2,230 - Canada employment amount: $1,222 - Indexing factor for 2019: 1.022 ## Jan 28: Agenda - **Income tax review** - **Tax planning strategies** - Income splitting - TFSAs - Deductions & Tax Credits - Deferrals - **Tax assistance and auditing** **Combined Income Tax Rate (2019)** **Alberta** - First $47,630 - 25.00% - Over $47,630 up to $95,259 - 30.50% - Over $95,259 up to $131,220 - 36.00% - Over $131,220 up to $147,667 - 38.00% - Over $147,667 up to $157,464 - 41.00% -Over $157,464 up to $209,952 - 42.00% - Over $209,952 up to $210,371 - 43.00% - Over $210,371 up to $314,928 - 47.00% - Over $314,928 - 48.00% **Example: ** - TI = 175,000 ATR = 57,012.06 - MTR = 42% - Liability = $57,012.06 - = 0.3257832732.57% - ATR = 32.6% - TI = $175,000 - 0 - $47,630: $47,630 * 25% = $11,907.50 - $95,259-$47,630: $47,629 * 35% = $14,526.85 - $131,220-$95,259: $35,961 * 36% = $12,945.96 - $147,667-$131,220: $16,447 * 38% = $6,249.86 - $157,464-$147,667 = $9,793 * 41% = $4,016.77 - $175,000-$157,464 = $17,536 * 42% = $7,365.12 - Tax liability: $57,012.06 **Planning** - Decrease liability - Increase return - Lower taxable income - Use deductions - Apply tax credits **Evasion** - Illegal - Hiding assets - Lying about income - Fraudulent transfer **Registered** - Tax benefits **Non-Registered** - No tax benefits - "Cash accounts" ## TFSA - Never pay tax on earnings - Contribution Limits - Annual: $7,000 - Lifetime: $102,000 when you turned 18 - 2009->18: $102,000 - Limit: 2024 = $20,000 + $7,000 = $27,000 - 2025 = $20,000 - Invested - $5,000 - W/D: $7,000 - 2025: $12,000 - $5,000: $15,000 - Over contribute: 1%/18 per month - $ -> - TFSA - Securities - Savings - MFS - Stocks - CNC's - Bonds - Avoids taxes ## FHSA - TFSA and RSP - $7 unused: RSP - $ w/d to buy a house: no tax - New home owner or not own a property for 4 years ## Tax Deferral - Save tax dollars today and pay less tax in the future - Contribute: higher income - W/D: = more tax - Tax benefit - Lower income - Pay tax - Pay less tax - RSP TI = $100,000 - $8,000 = $92,000 - Contribute $8,000 Jan 1, 2025 - Mar 1, 2026 - W/D: pay taxes - Time of W/D - 0 - $5,000 = 10% - $5,000 - $15,000 = 20% - > $15,000: = 30% - 20,000 - 14,000 - File taxes - Add full W/D amount - 6000 -> CRA - To taxable in come - Pension contributions are tax deductible - Taxed @ W/D - D PSP: companies give employees a % of profits - Taxed @ W/D ## Tax-Free Savings Account (TFSA) - Can contribute up to $7,000 annually - Regardless of amount contributed to RRSP/RSP - Unused room can carry forward - Contributions grow tax free - Withdrawals are tax free as well - Withdrawals create contribution room for future years - Gains/withdrawals not considered when determining eligibility for federal income tax benefits (OAS) or credits - TFSA is subject to same investment restrictions as RRSP/RSP - For more information visit http://www.cra-arc.gc.ca ## Tax-Planning Strategies (10) **Tax Deferral Techniques** - Defer taxation of income until a later date when combined average tax rate will be lower - During deferral period investment income earned can be reinvested tax free - Registered Retirement Savings Plans - Registered Pension Plans - Individual Pension Plan - Deferred Profit Sharing Plan - Investing in capital assets - Registered Education Savings Plan ## Capital Assets - Pay tax @ sale - RESP - Parent contributes $ (no tax deduction) - $ increases over time and govt grants - Child pays taxed @ W/D only on grants and interest ## Wealth Taxes 1. Interest added to income @ MTR - Savings, bonds, GICS - (earn $1,000 * 42% = $420) 2. Capital gains - Sale assets or securities - (Gain - $1,000 - $7,500 x 42% = $210) 3. Dividends - Gross up to 38%, subtract - stock, mutual funds, tax credits, ETFs - Earn $1,000 * 1.38 = $1,380 - $1,380 - $1,380 - ^$579.60 - 42% - ^ X 25% - $ 345.00 - $579.60 - $ 345 - ^ $234.60 ## Jan 30: Agenda - Risk Management - Property Insurance - Auto Insurance - Life Insurance - Health Insurance - Disability - Critical Illness **Insurer** - Ins. Co - Policy - Premium - $ /mo - Pay $ in the event of loss - Policy Holder - Insured **Insurance protects against pure risk** - Don't insure against speculative risk **Risk Management** - Avoidance - Reduction - Assumption - Shifting - Do nothing risky - Mitigate, limit - Acceptance, plan to pay - Transfer, insurance **Homeowner/Property Insurance** 1. Home Insurance - Fire Insurance 2. Mortgage Insurance - Life: $500k - Protects against loss of structure and belongings - Pays off mortgage when a borrower dies - Home: $300k - ~ $600-800/mo 3. Tenant's Insurance - Replacement value - Policy: $20,000 - Loss: $24,000 - Loss: $18,000 - Personal belongings - Deductible - Amount insured pays first when there is a loss - Deductible: $ 500 - Deductible: $2,500 - Loss = $2,000 - You Pay: $500 - Insurance pays: $1,500 - Loss: $2,000 - You Pay: $2,000 - Insurance pays $0 - Higher deductible = lower premium **Auto Insurance** - A - $5,000 - Insurance - B - $5,000 - Insurance - Won't cover you based on liability/fault **Life Insurance** - Policy - Insurance Co - Insured - Death - $ -> Beneficiaries / Estate **Coverage:** - Provides income/savings to loved ones - Pay off debts - Savings for children **Income Replacement** - Excludes debts, inflation, changes to income, spousal income, assets **Nonworking Spouse** - They take out a policy to supplement loss. Paid to "working spouse" **What you have now (A)** - Bank accounts - Taxable investments and savings, other than your home and other real estate - Real estate you own other than your primary residence - Individual life insurance policies - Group life insurance policies - Total of what you have now: = A$ **What your dependents may need (B)** - Debt and expenses due at your death - Funeral and burial expenses - Final income taxes - Estate probate and administration costs - Mortgages and loans not covered by insurance - Credit Card debt - Subtotal: $ - Total of what your dependents may need: = B$ **Living Expenses** - 75% of your total family income (before tax) x the number of years your dependents will need it - Emergency fund (3 to 6 months of income) - Children's education - Average annual potential cost x average number of years in college * number of children - Total of what your dependents may need: = B$ **How much estimated life insurance you need (B - A= C$)** - Total of what your dependents may need (B$) - Total of what you have now (A$) - If C is positive, you may need more life insurance - If C is negative and your estimates are realistic, your dependents may be able to manage without additional life insurance ## Term - Start and end date - "Term 10" = 10 years - Premiums increase w/ renewal (age) - STOP = No longer in debt / retired ## Permanent - Lifetime - Investment/annuity "cash value" - Set payment