Tax deduction and Insurance

You can claim a tax deduction on insurance premium payments in three cases:*
1: When the policy (non term) is used as collateral for a loan.
2: When the policy is donated (via beneficiary) to a registered charity.
3: When the policy is part of a registered plan.

*subject to specific terms

Inflation and Real Return Bonds

Should you consider Real Return Bonds? For a quick description see:

http://www.bylo.org/rrbs.html

Inflation is currently approx 1.4%, which is low/normal. If it becomes something the Bank of Canada cannot maintain using its standard inflation control measures (to maintain an inflation rate between 1-2%), then Real Return Bonds, or RRB Funds should be something you consider for your portfolio.

At this point, I would say that paying additional premiums for inflation protection is a little unnecessary. Having said that, if you review my previous post where I wrote about the imminent need for BOC to engage monetary policy tactics to print extra money, you would agree that there are some concerns over its effects on rising inflation. How to we resolve this incongruity? Well, we can take two approaches based on making a decision on two assumptions: 1) How much faith do you have in BOC being able to reign-in inflation in the event of a greater quantity of money in the marketplace? If you remember, increasing the quantity of money devalues the currency and drives up inflation through price increases. 2) Can the premium paid for inflation protection be justified in light of better entry points for regular bonds/bond portfolios especially when the inflation threat has been removed? Why would you pay more to protect a threat that does not exist? It’s almost an arbitrage question. It is reasonable to assume that if you choose a RRB or RRB Fund and matched it to a regular Bond or Bond Fund of identical (assuming it exists) duration and interest payment (coupon) and the BOC is in fact succesful in maintaining low inflation, you would likely see a return greater than a return on a similar RRB’s/RRB Funds. The spread differential arising from the regular Bond/Bond Fund being purchased at a lower price, would produce a greater percent yield change (delta) in return over that of the RRB’s/RRB Funds as they converge in time to the same end value. Therefore, and subject to normal yield curve dynamics with a buy-and-hold strategy, in an area of mitigated inflation prevention, RRB’s/RRB Funds would not seem to be worth it.

To add balance I will say that I haven’t mentioned anything here about the strategies for buying and selling the bonds/portfolios for short-term gains on irregular yield curve shifts. I have also made assumptions regarding the reality of finding true arbitrage opportunities (the arena of hedge funds) between RRB’s and normal bonds. It may, in fact, not be possible to find identical features from across both bond types.  Also, I did not consider the responsibility of pension fund managers, segregated fund managers, or other guaranteed fund managers, who must consider the possibility of inflation as a protective and ethical measure for principal guarantees and who,therefore, may measurably affect the realized value of RRB’s/RRB Funds.

All of these points would likely bring different conclusions, which I would encourage. I am simply considering long-term buy and hold strategies– strategies more relevant to the average investor and, in my opinion, the only real strategy to consider when you’re using RRB’s or RRB funds in your portfolio. From that, I conclude by stating that I still do not recommend RRB’s at this time, but am cognizant that it can be a good solution for the conservative investor in a long-term buy and hold strategy. Lastly to consider, there is not a great deal of historical data to support the effectiveness of the Bank of Canada inflation control measures at this time. If such data eventually proves its effectiveness, I suspect that there will no longer be a need for inflation control measure (and their additional costs) in investment products.

Fundamental Networking

A good article on asking the right questions to a networking prospect:

http://thenationalnetworker.blogspot.com/2010/06/network-like-pro-five-standout.html

Education

I have decided that I have become critical of the concept of saving for your childs university education. Wait now…don’t get mad… There’s a point.  There are programs such as the RESP with a lifetime government top-up maximum of 7200 (depending on family income levels) and a maximum lifetime personal contribution limit of 42000. Sure it can grow tax deferred like an RRSP and it is taxed at the childs tax rate upon transfer (the contributions, however, are not tax-deductible), which is lower. There are some good strategies for maximizing those contributions. I especially liked the commentary on Tim Cestnick’s strategy by the FrugalInvestor (see http://www.milliondollarjourney.com/optimizing-resp-contributions.htm).

At this juncture I pose to you the following question: why are we, as investment and educational conscious parents, not demanding assistance with financial strategies for funding the pre-university education of our kids. I’m sure some of you have, but you appear to be in a minority in my experience.  I argue that the twelve years before university are more vital to a child’s development (educationally at least) than University. If the proper foundation is not set, what use is a 40k university education? How many of us had to work at call centres with large debt loads and various degrees because we are not competitive.  I’m sure the fault can be spread around, but I’d rather save for a more extensive preliminary education (even if only at the high school level). Flip it on its head- support them in their most influential years by presenting the highest quality education possible and then later, if they wish, figure out a way to assist them in getting themself through university. Perhaps they will even get a scholarship or financial aid. This seems to me to be a better strategy than the oft-used opposite.

Not that I’m against public schools or teachers. I certainly don’t have what it takes to be a teacher and there are certainly some premier public schools out there, but I don’t believe that the public school expose kids to the same kind of benefits as private schools. I am open to criticism on this point, but I spend a lot of time at Kings Edgehill and I can tell you that is shockingly different from my experience.  I was never exposed to a 10th of what those kids are.  It made me think that I would have rather paid 25-40k on that education than on the one I received in university.  Those kids are moulded instead of managed. The classroom size is allowed to stay reasonable. The  beaurocracy does not tie the teachers’ hands. The curriculum is allowed an unprecedented creativity without 10 years of committee.  The students are in music, theatre, sports, have jobs, all at a level that I have never seen in my experience; and for the same money that I (and mostly my parents) spent for University.

I am certain that this (in part) developed out of a false sense of practicality. It is natural to think that it is easier to save for 18 years than for 5, 10, or 12. If you’re not lucky enough to already be financially comfortable when you enter a relationship, it is easy to fall into the all-to-familiar trap (which I have spoken about critically in a previous post): saturate our family finances with credit card debt, car payments, a mortgage, a dog and then a baby. After that, and the removal of your sanity and time, all that is left is a life of paycheck to paycheck. If you are keen and have committed to saving for the baby’s education, why not simply adapt your investment strategy to a different concept.  Truly speaking, the timeline is not really that much of an issue. In the longest example,  you can take 14 years to save 30,000 dollars, which would pay for three years at a premier private school (high school level). That’s pretty good. Of course, using the shortest example of 5 years for elementary school predisposes perhaps a different economic entry point for the relationship, but even that is not impossible. You can fund the entire 12 years, 4000-5000 dollars at a time, with 12 years being about 50 thousand. I don’t know about you, but I know many people who spent 40k-50k on a four-year university education (+2 extra years in some cases) that didn’t give them  their dream job. And yes, you cannot claim a tax deduction on elementary and secondary school tuition payments, but there is financial assistance just as there is for the university level. And if you’ve had to borrow some of it, you are borrowing at a younger age with a better time horizon with which to recover. Without over extending the point, I guess the point is that if you decide to save for your children’s education..consider the increased advantages of earlier specialty schools. It doesn’t appear to come at the cost of time or money. In fact it can probably save you both.

Income Splitting and Investing

Simple Tip: The higher-income (and hence higer tax-paying) family earner should pay all the bills (rent, mortgage, utilities, groceries, credit card bills, etc) as well as any income tax bills for the lower income earner. This frees up the lower earner’s “retained earnings” to maintain a larger investment base with which to invest at a lower taxable rate.
Moving down one tax bracket can translate into a +10%* differential in possible investment returns from a similar investment strategy over that of the same investments by the main earner (subject to identical investment strategies and return scenarios).
*Estimate based on combined marginal and provincial (NS) rates for 2010. see http://www.taxtips.ca/marginaltaxrates.htm

Yachting and BP

What do you think of BP CEO Tony Hayward flying into England to see his yacht race around the Isle of Wight in the wake of the scrutiny over their handling of the spill? Well, from a business standpoint, suspending dividends and increasing liability caps to support Gulf Coast clean up efforts is quite a ‘revolutionary’ step when you consider a history of “shareholder” reaction to dividend suspension policies. As has been quoted by myself and others, those decisions were boldly positive for “stakeholders” of the business (that is to say everyone, shareholder or not, whose existence relies on the company)–those very millions of individuals whose existence drives the business from a holistic financial sensibility beneficial to the company well beyond that of direct shareholder equity. It is nearly unheard of in traditional corporate financial strategies and thought to be suicidal to company share values. In this context we can consider his decisions very bold and even socially responsible.

Having said that, it is certain that there is a demand to crucify the enemy of any environmental disasters. It is also human nature to search for a figure-head victim to fill that need.  What we often forget, though, is that after crucifixion the memory wanes.  If they truly want to change, channeling that frustration toward Hayward is short-sighted. Though I do support high levels of scrutiny for oil companies,  I recognize their essential need in the economic universe that we live.  There is a positve future that we are moving away from: responsible energy companies, like Xcel Energy (US),  Irving (open to scrutiny) in Canada, to a lesser extent Royal Dutch Shell, and even BP are in a transition. Old paradigms like conservative mentalities are always the last to run out of excuses to fill their theories.

I also ask: where were the hangmen during pre-spill economic thrift? Sure they were out there: they existed only amongst the most radical groups persecuted for  resorting to oft-militant  trudging.  Now the fiery and fervent ‘scruitinors’ appear precipitously in areas they couldn’t previously stomach.  They demand and yell for justice now when a year ago they would consider BP to mean “Boston Pizza.” Now Hayward’s every move personal life or other is the fault of all problems with the environment and global warming.  This ‘fad’ has become sociable, if fleeting, and surely ‘newsworthy’ on its own. The real issue is not discovered from the Perez Hilton of economic news coverage that easily lends itself to anger-fueled ratings, but rather from the larger issue that we would rather sweep under the rug.

The morality of the issue is not on Hayward. His own spokesman Robert Wine said the break is the “first for Hayward since the Deepwater Horizon rig that BP was leasing exploded April 20, killing 11 workers and setting off the undersea gusher. ‘He’s spending a few hours with his family at a weekend. I’m sure that everyone would understand that  (http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b3709919).”Somewhere we can all agree that he is entitled to a separation of life and work, but perhaps he could use a little tact (no pun intended).

Website Design

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Health Care

I posted this note on Facebook. I encourage your commentary:

“It’s interesting that if you have been paying premiums on Critical Illness Insurance and are qualified to receive payments due to a critical illness, you are permitted to use the money to pay for private health-care in the US or abroad. I wonder what health care critics think of that…hmm. In my opinion, people in a critical care situation should not be denied expert and efficient specialized care where it exists..fee or not. There is a demand to retain that option both from those who are ill and able and willing to pay for the service and from the practitioners alike, who profit from such structures. Not that I am against universal health care, I am not. It is necessary. However, I recognize that a hybrid solution will undoubtedly be demanded.”

Feedback from a former colleague of mine, who now works for Scotiabank and is very knowledgable of such things:

“I’ve always said that if the rich people want to have their own fee based health care in Canada that’s perfectly fine, and we can charge them a %100 tax on it so that for every procedure they have done it’ll pay for someone in the general health care system to have an equivalently priced procedure done. This idea would either improve our current … See Moresystem or kill two tier health care in Canada, either way it’s a win in my opinion. As for going to the states, hey if you got the money or your insurance covers it knock yourself out, one less waiting spot for a bed if I or someone I know needs it.”

I replied in agreement:

“That’s a good point. I agree with you on the tax issue. 100% of the money spent taxed at a rate higher than their normal tax rate. It would discourage aggressive utilization but it would support what I believe to be an obvious demand. There are arguments on compassionate grounds to maintain the two tier structure as well that people rarely consider… See More. Also, and you allude to it, it has often been argued that it would ease the strains on the general health care system. However, it is agreed that it should be kept in check.”

Real Estate

Read an interesting article from Canadian Business, regarding the ongoing issue of renting vs buying.

http://www.canadianbusiness.com/columnists/larry_macdonald/article.jsp?content=20100115_161309_6940

I have spoken about this at length many times and do not necessarily have a firm conclusion or recommendation about the issue. For sure there is no clear- cut `yes` or `no`on the issue. Believing otherwise is naieve. There are many factors at play, from location, to the current national and local economic climate, to national real estate paradigms and local real estate paradigms and environments, to government spending inititatives, to career and educational propensities of buyers, etc. To believe simply that buying a home will increase your equity is, I believe, a historically derived fallacy that comes from a tradition of homeownership that does not reflect all scenarios that families face nowadays.

I offer an analogy for you to consider. I have often said that a family should consider itself a corporate entity in the way that there is income, expenses, cash, accounts receivable,  liabilities, short and long-term debt, short and long-term investments,  retained earnings, etc.  There are a few things to consider with this. Mainly, that companies like people cannot exist without a level of ready cash flow net of all expenses, debt figures, etc. Having surplus cash is everything. Surplus cash can be invested back into a multitude of investment structures (or Capital if we were to keep the analogy) and will compound into growth opportunites.

Regarding the issue of home ownership, people often say that `I`m paying the same as I was when I was renting.`  This, sometimes knowingly, neglects to consider the gross expenses of the home owner is nearly always greater than the gross expenses of the renter. Unless you can completely and accurately account for: all the maintenance costs over the lifespan of the property, property taxes, insurance payments, utilities, unforseen liabilities (beyond those covered by insurance), and it is lower than the accumulated total of similar or different expenses for renting can it begin to make sense.  We, for some reason, either ignore this calculation or do not know that it must be figured when deciding to buy a house. A total for owning that is net negative of renting expenses would theoretically increase your total cash and hence retained earnings at the end of the month. If you then calculate the difference between mortgage payments and rent payments and sum it to the expense number and it turns out to be lower than renting should you logically  take the choice.  In this case, you would increase your retained earnings and hence increase your growth potential versus renting.

Theoretically the numbers can be the same. Even in that case can it be shown to be erroneous that home appreciation would be greater than keeping the higher monthly retained earnings from renting and investing in products that yeild greater than the historical and projected home appreciation rates of your area. Furthermore, your new net outgoing for the month, even if lower, must be summed with with all other historical debt issues of the family, any expenses incurred in the obtaining fo the property, and any new expenses related to your new location (if any: such as increased commuting costs, etc).

Of course, renting part of your new house adds an Accounts Receivable to the family corporation that as a great positive net effect that is hard to duplicate even if the spread between rent and mortgage in your area is very high (with rent being cheaper).  Also to consider is that the price of Gold is going up, there is a lot of agressive recovery momentum which has the effect of pushing up inflation, there is currently a high level of government debt which will undoubtedly be corrected to a large degree by the printing of more money by the goverment to pay it down, which devalues the money and drives up inflation. All of thise things suggests that inflationary rates in the next 5-10 years will be hard to maintain and will be  expected to move greater than +%2.5. This is a double edged sword to homeowners as the price will go up more quickly but the value of the money you receive at sale will not go as far.

There are also emotional reasons for buying a house that I have not considered. If you wish live and die in the same property; or if it has been a family property that you do not wish to relinquish; or if you have the capacity, research, resources, and knowlege to properly flip properties; or if you simply have other intangible reasons for buying the property and don`t care about the numbers, than none of what I said matters. But to claim you are buying a home because it will help build equity-this is a fallacy which only in the right circumstances is true. Credit Cards build equity too, but it is no good if the debt payments take away all our disposable and investable income. I have said nothing here either about the type of mortgage (variable or fixed-rate etc) and I know in Canada now you must be approved at a 5 year fixed in order to receive a currently reduced variable rate. However, as we have seen in the last few years most people get in below what the fixed rate is and then beyond the 5 years they double and triple their mortgage payments on new rate highs. You are then stuck with selling a house for less than the mortgage remaining and the rest you know from history.

I end by saying that it is not unreasonable to sell a property purchased for 300,000 dollars for 500,000 dollars and not take a loss when consider all real expenses incurred over the period, the inevitably high level of inflation we will see over the next 5-10 years, the increased costs associated with commuting, the national and local economic environment and the effect on mortgage rates, jobs, and your marketability in the workplace.  Although many people are succesful and very weatlhy on the basis of their real estate moves, you should make your decision with a great deal of intelligence and research. There are no broad stroke theories.