From first-hand experience, I can tell you that dealing with the Canada Revenue Agency (CRA) can be bewildering. I would have to say that just about all the CRA people I have spoken to seem motivated to help me, but they all seem to disagree with each other. In his book Tackling the Taxman , Alex Doulis gives a host of examples where CRA employees don’t seem as willing to be helpful as I’ve found them to be. This book may actually be mistitled because most of the CRA people I’ve spoken to are women. However, given the tone of this book, my guess is that these women don’t mind being left out of the accusations. It’s clear that Doulis knows a great deal about income taxes and the dispute process between CRA and taxpayers. The parts of the book that explain these matters are very useful. However, the bulk of the book is a collection of stories of serious misdeeds by CRA employees. These stories are entertaining, but they don’t have quite enough detail for the reader to figure ou...

A reader, Andi, is concerned about the value CPP gives for the money contributed. Andi sent a detailed analysis comparing RRSPs to CPP that can be summarized as follows: If I could take all the CPP payments I’ve made and will make and instead invest them in my RRSP, the investment returns in the RRSP would make me far more money than I’ll ever get from CPP benefits. Assuming Andi is one of the few who has the discipline to stick with a reasonable portfolio through thick and thin, the conclusion that the RRSP approach would beat CPP is very likely true. The problem for government is that the majority of investors will make an anaemic return on their money due to paying huge fees on mutual funds, failed market timing attempts, and so on. Even worse, many people would simply dip into their RRSPs either out of true need or simply a desire for more consumption. Eliminating CPP would leave governments with a big problem. We can’t have huge numbers of older citizens no longer able to w...

Update: Annuity payment rates for one insurer are at the end of this post. The Canada Pension Plan (CPP) is essentially a CPI-indexed life annuity. Your CPP benefits are determined based on your contributions during your working life, and once payments start they rise with the consumer price index (CPI) each year. CPP payments may not be large, but their purchasing power remains constant for the rest of your life. This brings considerable peace of mind. For people who have built their own savings over the years without the benefit of an employer defined-benefit pension plan, it’s natural to consider turning a large lump sum of savings into a CPP-like CPI-indexed life annuity. This would eliminate having to worry about investing and would eliminate concerns about outliving your money or losing ground to inflation. I wouldn’t want to tie up all my savings in an annuity, but I can see the appeal of allocating a portion to an annuity so that the combination of CPP and annuity pay...

1. Jason Zweig at the Wall Street Journal reports on research into why it feels good to follow the crowd . Unfortunately, following the investing crowd is a formula for losing money. 2. Preet explains that the cost of the fake lake is barely a drop in the bucket of the total cost of the G8 and G20 summits . 3. Larry MacDonald isn’t taken by the “sell in May and go away” investment strategy .   4. With the earthquake in the nation’s capital, Big Cajun Man takes a look at earthquake insurance . 5. Frugal Trader got quite a response to the question of whether it makes sense to increase the Canada Pension Plan . 6. Canadian Mortgage Trends reports on the disagreement between Canada’s Privacy Commissioner and the Canadian Association of Accredited Mortgage Professionals over whether Social Insurance Numbers should go on mortgage applications . 7. Financial Highway explains some of the pitfalls of using debit cards .

I’m getting used to the periodic phone calls from the Royal Bank to discuss the products I have with them. However, their latest contact by snail mail adds a new twist. The RBC phone calls I get seem aimed at getting me to use more RBC products and always end with a pitch for a credit card. These calls are awkward because I don’t want to say too much until I’m sure that I’m really talking to a Royal Bank representative, and the person at the other end is trying to pretend to be interested in helping me save money, but is really interested in selling more products. The calls end when I’m sure that there was no important reason for the call. My latest contact from RBC is a letter with the following printed in large bold letters at the top: “Meet with your RBC Advisor before August 10, 2010 to review your ___ . Please book your appointment today.” The body of the letter repeats the deadline and adds even more of a sense of urgency. I wouldn’t blame people for reading this let...

It's possible to make a reasonable argument that the average investor would be better off investing in GICs than stocks and bonds. Unfortunately, David Trahair fails to make this argument well in his book Enough Bull: How to Retire Well Without the Stock Market, Mutual Funds, or Even an Investment Advisor . So, I'll try to make it for him. The main argument in favour of investing in stocks is their higher expected returns (called the risk premium) than guaranteed investments like GICs. However, the typical Canadian investor working with a financial advisor is invested in balanced mutual funds (half stocks and half bonds) and pays yearly fees in the 2%-3% range. To these fees we can sometimes add front-end loads and deferred sales charges. On top of that we can add the losses that come from panicking and selling at the wrong times. Taken together, these costs eat up the risk premium. This type of investor very likely is better off with bank GICs as long as they are he...

The Ontario Energy Board is seeking a $495,000 penalty against Summitt Energy for unfair practices in their business of trying to sign people up for 5-year fixed price contracts for gas and electricity. Ellen Roseman reported on this and a link to the full details can be found in the comment section below. Here is my favourite allegation: “AB attended at the residence of T.V. in Pickering, Ontario. He did not identify himself as being a sales agent from Summitt but rather stated he was a representative of Veridian, the local utility in Pickering. AB told T.V. that he had just changed the meter outside her home and she needed to sign a document to prove that he had attended at the residence. He did not explain that the document was for a five year fixed price contract with Summitt for the supply of natural gas and electricity.” I don’t think most of us are prepared for brazen lying of the type alleged here. I expect people to shade the truth a little, but just don’t expect som...

The best ideas for protecting the environment are the ones that save money as well. It’s hard to get people to spend more money for the good of the environment, but it can be easy to get them to save some money if it’s painless. Currently, the typical air conditioning system in most homes cools the entire house to a temperature set by a thermostat. In some cases, this chosen temperature varies throughout the day. However, this system is inefficient in two ways: 1. At night, most people set the thermostat lower for sleeping, but they really only need the bedrooms cooler, not the rest of the house. My air conditioner often works in the evening for several hours cooling the whole house down by two degrees. Some automated venting could concentrate the cool air in just the bedrooms to greatly reduce power consumption and save money. 2. Humidity is a big factor in the perception of temperature. But, thermostats only let users select a temperature. There are times when 26 degrees...

1. Over 70,000 Canadians were hit with taxes for over-contributing to their TFSAs. Here is a selection of articles on the subject: Canadian Tax Resource: Letter To Jim Flaherty on TFSA Over-contribution Penalties Ellen Roseman: Lisa’s story: Charged $1,240 for TFSA over-contribution Michael James on Money: TFSA over-Contribution Tax can Apply to an Empty Account 2. Royal Bank and BMO lent money to a grow-op . Oops. 3. Larry MacDonald reports on the problem at the US Securities and Exchange Commission (SEC) where employment is a revolving door of employees who jump to the industry the SEC is supposed to regulate . 4. Preet interviewed Mark T. Williams, author of Uncontrolled Risk . 5. Big Cajun Man makes the case for paying yourself first using an automatic bill payment system . 6. Frugal Trader updates the state of his Smith Manoeuvre Portfolio and includes a disclaimer that should scare most investors away from trying this manoeuvre . 7. Mr. Cheap argues the merits o...

A reader of this blog, Chris, posed the following thoughtful question: What do you think the implications would be if Canada were to implement more tax brackets? For example, if federal tax tiers were added at $200k and $300k with a federal rate of say 33% and 37% respectively? I'm not sure why the government hasn't gone in this direction because the majority of voters are not anywhere near these levels. This would help redistribute the tax burden and work down more of the country's debt. It's always tempting to tax the rich more. This idea isn’t new. In fact, back in 1963 Quebec's top marginal tax rate was over 93%! . This rate applied to income over $400,000 (the equivalent of about $2.9 million today). Chris's proposal is certainly a lot less punitive, but it still represents a significant tax increase for wealthier people. However, the world is a much different place than it was in 1963. The wealthy have much more freedom for where they choos...

Canadian Financial DIY had a thoughtful piece about pension reform and what retirees need that will resonate with many Canadians. An important consideration for any such plan is whether it is economically viable. The plan calls for replacing 40-45% of pre-retirement income adjusted for inflation for the rest of the retiree’s life. This is a significant increase over the existing Canada Pension Plan benefits. Let's assume that this change in benefits will be achieved by expanding CPP and that it will be fully funded by sufficiently large deductions from everyone's pay cheques to pay for these retirement benefits. I'm assuming that the 40-45% replacement figure is intended to apply to your income in the last few years of working, which is generally more than the average income over your working life (even adjusted for inflation). So, let's say that your yearly retirement benefits will be 50% of your average lifetime inflation-adjusted income. Let's also ass...

Former columnist for the Montreal Gazette, Bill Mann, has started a new Canada Watch blog at Dow Jones' MarketWatch.com site.  Take a look and see what Mann thinks Americans need to know about business in Canada.  ( Unfortunately, this blog had disappeared the last time I looked for it. ) In his first blog entry, Mann has a "did you know?" list of Canadian facts.  My favourite is " Canada has had only one bank failure in history (and none recently)."

The credit crisis that exploded in 2008 affected people across the planet, but few of us understand what happened to cause it all. Risk management expert Mark T. Williams wrote the book Uncontrolled Risk that tells the story of Lehman Brothers’ fall and more generally the events leading to the credit crisis. More than just a chronology, Williams explains why events unfolded as they did and why Canada’s banking system survived largely unscathed. Taking on too much risk in mortgage-backed securities led to the downfall of Lehman Brothers, a 158-year-old financial institution. With increased risk comes higher profit, but also greater chance of total failure. Lehman lost the gamble that in the case of imminent failure the U.S. government would judge it to be “too big to fail”. Here are a few parts of the book that I particularly liked: CEOs with too much control In the last couple of decades “shareholders became less hands-on and showed displeasure not by voting out directors ...

Canadians who contribute too much to their Tax-Free Savings Accounts (TFSAs) are subject to a 1% tax each month on the over-contribution. A quirk in the way that this tax is calculated means that it is possible to be in a state of “over-contribution” even after emptying out a TFSA. The rules for how to calculate the TFSA over-contribution tax are explained in the form RC243-SCH-A Schedule A - Excess TFSA Amounts. How these rules can lead to getting taxed on an empty account is best explained with an example. Sally opened a TFSA in January 2009 with the plan to invest in ABC stock. She opened an account and deposited her TFSA limit of $5000. Unfortunately, there was a misunderstanding with their bank and the account was not a trading account. Sally withdrew the money, opened a self-directed TFSA, and deposited the $5000 not realizing that this was considered an over-contribution. The withdrawal amount of $5000 was added to her 2010 contribution room, but was not available for ...

Update:  I've now checked the TFSA tax calculation for 4 people and only one was incorrect according to CRA's rules. One Canadian who goes by the handle Ref seems to have discovered a bug in CRA’s calculations of TFSA over-contribution taxes. From Ref’s calculations, it seems that CRA did not give him proper credit for removing excess TFSA contributions and continued applying the 1% tax each month even after the excess was removed. It's not clear how widespread this problem is. The confusion many people are having with Tax-Free Savings Accounts (TFSAs) is that if you make a withdrawal, you can put the money back, but not until the next year. CRA hits you with a 1% tax each month on any excess amount in your TFSA. But, CRA is supposed to stop charging the 1% tax after the excess contribution is withdrawn according to their RC243-SCH-A form for excess TFSA amounts. Let’s try a simple example. Sally heard great things about TFSAs and decided to open an account and ma...

1. A great many Canadians have been caught by the TFSA contribution limit rules. If you make a withdrawal, you can put the money back, but not until the next year. If you put the money back right away or generally treat a TFSA like a regular savings account, you could be hit with steep over-contribution taxes at 1% per month. Tax Guy drafted an open letter to Jim Flaherty asking for leniency for the many caught by this rule . CRA’s description of how to calculate the over-contribution tax is fairly clear. It seems that some financial institutions protected customers from these problems and some did not. 2. Guest writer Rachelle at Money Smarts wrote a funny piece about the tenant from hell: the stripper with dirty feet . 3. Canadian Financial DIY has launched a comparison of cap-weighted vs. fundamental index portfolios . He plans to report the progress of these portfolios taking into account realistic costs such as MERs, trading commission, etc. 4. Big Cajun Man had some f...

In response to new government regulations on credit cards, credit card companies are changing their minimum payment rules and their interest rates. In general both are going up. I don’t have many credit cards and only use one regularly, but my rarely-used Sears card is the first one to send me details on changes that will be effective in September. My nominal interest rate will rise from 28.8% per year to 29.9%. The actual yearly rate with monthly compounding is going from 32.9% to 34.4%. These rates are extremely high, but not too different from each other. For balances over about $1000, the minimum payment is going from 3% of the new balance to the sum of the month’s interest plus 1% of the new balance, which works out to about 3.5% of the new balance. This is about a 17% increase in minimum payment. The part of the new minimum payment calculation that is 1% of the new balance is actually the maximum of $10 or 1%. This may not seem like a big deal, but it significantly re...

Organizations are collections of individuals who don't necessarily agree on all things. This is very evident at the Canada Revenue Agency (CRA). You can call multiple times with a complex tax question and get a different answer each time. The only important answer is the one that is made in actually assessing a tax return, but it seems impossible to access this answer until you actually file the return. I am caught in a complex tax situation where the latest federal budget changed the rules so that I will owe much less money. Technically I'm supposed to pay the large sum, wait for the appropriate budget legislation to pass, and then re-file my 2009 income taxes and get the money back. If lending a large sum of money to CRA only to get it all back again later sounds insane to you, I agree. I decided to contact CRA to see if a more reasonable approach was possible. After penetrating the first few layers of CRA phone help the pleasant senior tax person I spoke to agreed...

Many people asking me about do-it-yourself (DIY) investing. Despite their initial interest, the usual result is for these investors to take no action and continue investing in expensive mutual funds. This has caused me to rethink how best to approach the subject. I now think that investors might be best to try easing into DIY investing rather than deciding whether to make one big jump. To illustrate how these interactions between me and a curious investor tend to go, I'll describe the case of a particular investor and acquaintance of mine who I'll call Sam. Sam said he heard that I write a Money blog and wondered if I might advise him on whether he needs to change anything about his investments. Sam had a financial advisor who he seemed to like on a personal level but didn’t make him feel comfortable about his investments. Sam couldn't understand much of what was on his multi-page account summary other than the dollar amounts that weren't going up as fast as he...

The market volatility on May 6th illustrated that wild gyrations in the stock market can affect exchange-traded funds (ETFs) as well as individual stocks. In particular, ETFs can trade at prices that differ from the value of their underlying holdings when markets get crazy enough. Canadian Capitalist's latest roundup of interesting investing articles pointed to a Wall Street Journal piece that explained clearly what happened on May 6th. It went on to give 5 rules for trading ETFs and suggested that investors stick to mutual funds if they don't understand the technical details. I think there is some middle ground. Long term investors in broad index ETFs can protect themselves without gluing their noses to computer screens monitoring ETF data. If you're an ETF day trader who jumps in and out of ETFs multiple times per day, or you like to place stop-loss orders on your ETFs, then I can't help you other than to suggest reconsidering your investing approach. The f...

1. Larry Swedroe explains why you might not want to own corporate junk bonds . They tend to drop in value at the same time that stocks drop. Usually you want your bonds to provide some stability for your portfolio. 2. Big Cajun Man had some fun announcing that Bank of Canada rates had gone up 100%! 3. As Preet collects more feedback on his Know Your Advisor (KYA) questionnaire, he plans to turn it into an e-book . 4. Canadian Investor looks at whether investing in Real Return Bonds is best done directly, with an ETF, or with a mutual fund . 5. Mike at Money Smarts discusses some research that suggests that if some financial advisors were made to disclose their fees, they may treat their clients worse than they do now . Even if this is true, I suspect that the benefits coming from clients knowing the fees would more than offset this potential problem. 6. Financial Highway lists the 8 warning signs that you have too much debt .

An often touted solution to the problem of too much garbage is charging a tax on each garbage bag picked up by local garbage services. However, according to Levitt and Dubner, authors of the book SuperFreakonomics , this hasn’t worked out very well in some amusing ways. In addition to creating an incentive to create less garbage, it gives people other incentives: 1. Stuff bags fuller. This has become known as the “Seattle Stomp”. 2. Dump garbage in the woods. This was done in Charlottesville, Virginia. 3. Flush uneaten food down the toilet. “In Germany, trash-tax avoiders flushed so much uneaten food down the toilet that the sewers became infested with rats.” 4. Burn garbage in the back yard. A hospital in Dublin “recorded a near tripling of patients who’d set themselves on fire while burning trash.” The authors’ main point is that people respond to incentives, but not always in the way we might expect. They study data to try to figure out people’s real behaviour. Th...

The premise behind the indexing approach to investing is to use a simple approach to get market average returns with a minimum of costs. This is usually done using index-based exchange traded funds (ETFs) or low-cost index mutual funds. Investors choose a mix of index funds and stick with it, possibly rebalancing periodically to maintain a preferred target percentage of assets in each fund. Once these decisions are made, the focus is on minimizing costs, including the cost of currency exchanges. If a Canadian investor chooses to own both Canadian- and U.S.-dollar funds, some amount of currency conversion will likely be necessary. All currency conversion involves spreads which are the difference between buy and sell prices. If you start with Canadian dollars, convert them to U.S. dollars, and then convert back to Canadian dollars, you'll have less money than when you started. The big question is how much less money will you have? For large dollar amounts traded in foreign ...

Trying to get a business to honour its warranty can be a frustrating experience. A friend of mine who I'll call Kevin encountered problems with the paint job on his car, and this has led to a type of run-around that I hadn't seen before. When Kevin bought his car, he paid for an extended warranty on the car's paint job. We can debate whether this type of warranty is worth buying, but in this case a serious problem did come up with the paint job on Kevin's car. It turns out that paying for the warranty worked out well in this case, or so Kevin thought. When he took the car to the dealership where he bought it, they told Kevin that he'd have to contact the insurance company that holds the policy first to get authorization to go ahead with a repair. You might think that the dealership should handle this detail given that Kevin never dealt directly with the insurance company in the first place. Kevin phoned the insurance company with his copy of the warranty c...