I’ve had to go through a number of steps in preparation for a trip to China. There are a number of costs and I was surprised at the total. Before I even get on a plane, I’ve spent $391 and counting. By far the biggest cost is the vaccinations. I needed several. Fortunately, the polio and tetanus boosters are covered by my provincial plan, but I had to pay a total of $313 for Hepatitis A, Hepatitis B, and Typhoid. My shoulders are like pin cushions. I needed a new set of power plug adapters that include a Chinese adapter. This cost me $28. The remaining $50 was for a Chinese visa. As far as I can tell, this is just a formality that exists to collect $50. But, who knows. Maybe some people do get rejected. As far as I am aware, my only remaining expense before taking off is the exchange on buying some Chinese currency. I’m expecting to enjoy the trip, but these costs could easily be overlooked by someone preparing a travel budget.

In Rob Carrick’s recent election wish list for investors, he led with a wish to eliminate GST on mutual funds. I share his desire to give mutual fund investors a break on mutual fund costs, but I don’t think this measure is likely to help investors much. Any time there is a reduction in the cost of providing a product or service, the savings get shared by producers and consumers. This split isn’t necessarily even, though. In very efficient markets for commodity items, most of the savings are enjoyed by the consumers. In inefficient markets, producers keep most of the savings. The mutual fund industry in Canada is competitive, but not on fees charged. Only a small slice of the industry competes on fees. The rest compete for access to customers who don’t understand fees. The bottom line is that if we eliminated the estimated annual GST of $567 million paid by mutual fund investors, there is little reason to believe that much of the savings would be passed on to investors. Mu...

I listened to a piece on CBC radio yesterday about a company claiming that there is a shortage of workers qualified to perform a particular task. The company wants to work with governments and universities to fix the situation. I don’t know much about this particular purported shortage, but such claims about worker shortages are almost always nonsense. During the tech boom we heard similar complaints from Nortel and other high-tech companies. They claimed that there just weren’t enough engineers and programmers. They called for universities to churn out more engineering and computer science graduates. We live in a free market society. If a business tries to hire workers and can’t find the number they need, the problem is not that there is a worker shortage. The problem is that they are not offering enough money. Worker salaries are driven by supply and demand. I am a competent programmer, if a little rusty. I haven’t worked as a programmer for many years because what I do...

Every year most large cities go through a painful budgeting process that usually results in property tax increases. A particular pet peeve of mine is hearing city bureaucrats or politicians describe some change as a cost savings when it is really a tax increase. Over the years I’ve been a homeowner I’ve seen an explosion of user fees for city services. These services were once provided free of any additional charge and paid for from general property tax revenue. Now they are at least partially paid for by user fees. Leaving aside the question of whether slapping user fees on everything is the right thing to do, it is annoying to hear some bureaucrat or politician describe the change as a cost savings rather than calling it what it really is: a tax increase. If the change were made in a revenue-neutral way that would be one thing, but that’s not how it works. If the city collects $100 million in property taxes one year and collects $100 million in property taxes the next year ...

Gail Vaz-Oxlade offers some straight-from-the-hip advice about not being suckered into taking on loans (in a post no longer online). I found the most interesting part of her advice to readers to be her assertion that you don’t need to keep a secured line of credit backed against your home to protect against identity thieves who try to take a mortgage out in your name. She says that courts side with the original owner. This is an area where it is easy to scare homeowners and I’d like to understand it better. Rob Carrick advises us to choose an investment strategy that is as rational as we can live with. I’d extend this line of thinking to say that as we learn more about investing and the inevitable ups and downs of the markets, it becomes easier to control emotions and tolerate more financial turbulence. Big Cajun Man has an important message about periodically changing your online banking passwords. Million Dollar Journey explains the many tax issues of buying property in F...

Senator Raymond Lavigne has been in the news lately after resigning to avoid getting kicked out of the senate and losing his $79,000 per year pension. The part of this that struck me was the article writer’s choice to describe the money at stake as a “$79,000 pension” rather than its full value which is clearly more than a million dollars. Similarly, generous pension plans make many government workers pension millionaires. People tend to value spread out payments as less than their total cost. So, a couple spending a day at an amusement park spending a series of small amounts such as $30 each to get in, $25 for snacks, and $15 for parking won’t feel like they spent a total of $100. The Lavigne article would probably have drawn more ire if the pension’s present value of more than $1 million were quoted. Moving to the subject of government workers, a Statistics Canada publication says the following: “In fiscal year 2006/2007, the average age at retirement of the public serva...

Noticeably absent from yesterday’s unveiling of the 2011 budget are many of the measures called for by wealthy old people. I think the government made the right choice on these issues. Many have called for big increases in RRSP and TFSA limits as well as making TFSA contribution room retroactive to age 18. None of this would do much for the average Canadian who can’t make use of all available room now, but a sudden large increase in RRSP room and particularly TFSA room would allow the wealthy to earn investment income tax-free. One could imagine an extreme situation where a couple derives an income of $100,000 per year tax-free from a very large sum invested in TFSAs, but collect the GST rebate because their declared income is negligible. If we keep creating tax measures to shelter more and more investment income from taxes, only income derived from actual work will be taxed. I don’t think we want a world where only working people are punished with taxes. RRSP and TFSA room s...

In a discussion about RRIF minimum withdrawals, the following question came up: what is the exact value used for portfolio size? RRIF owners must withdraw a percentage each year, but a percentage of what value? The value of a portfolio can vary minute-by-minute. I found the answer surprisingly hard to find. Curiously, the CRA guide for RRSPs, RRIFs, and RPPs was not helpful. This guide didn’t even contain the table of RRIF percentage withdrawals by age. I actually found the answer in a CRA guide intended for RRSP and RRIF plan administrators. Appendix D contains the table of percentages of minimum RRIF withdrawals at each age along with the following text: “As the carrier of a RRIF, you have to pay a minimum amount to the annuitant every year after the year in which the RRIF is set up. You calculate this amount by multiplying the FMV of the property held in the RRIF at the start of the year by a prescribed factor.” So, it’s the value of the RRIF contents at the start of the...

A colleague recently asked me if I knew of a good source for reliable interest rate predictions. He was trying to decide whether to break his mortgage and pay the interest rate differential. He only wanted to do this if interest rates were headed back up and it made sense to lock in today’s low rates. As is often the case, I knew the correct but unhelpful answer. Nobody knows for certain what will happen to interest rates. Even the U.S. Federal Reserve and the Bank of Canada can’t say what will happen to interest rates with any useful accuracy. These organizations react to world events more than they control them. The yield curve gives the collective interest rate predictions of the financial markets , but rates could be higher or lower than predicted levels. We need to stop looking for financial prophets and make financial choices assuming a range of possible outcomes. The curious thing about this line of reasoning is that I’ve had people agree with it and then proceed to ...

Canadian Couch Potato looks at a study of the dismal odds of outperforming an index with actively-managed funds over a lifetime. The Blunt Bean Counter found a few more reasons that I missed for young people to file tax returns even when they don’t owe anything. Big Cajun Man has some takers on his group challenge to give things up to improve your finances. Money Smarts has some tips on setting up a simple and cheap RESP GIC account. GICs won’t make big returns, but you’re less likely to make big mistakes with them. Million Dollar Journey gives us the benefit of personal experience buying foreclosures in Canada.

Based on an informal poll over the years of family and friends who invest in mutual funds, about half believe they don’t pay any fees to buy and own mutual funds. I have a message for them: you’re mistaken. There is no such thing as mutual funds without fees. The fees you pay have been hidden from you. There are rules about disclosing mutual fund fees, but financial advisors can follow the letter of the law without their clients actually understanding what fees they pay. The fees are explained in a document called a prospectus that is supposed to be given to clients, but even a simplified prospectus is long enough and complex enough that few clients read it. All mutual funds have expenses. Most of the ongoing expenses to run a fund are components of the Management Expense Ratio (MER). This is expressed as a percentage, such as 2%. This means that 2% of your money comes out of the fund every year to pay costs including salaries of the fund managers, payments to your financial...

If you’ve been having trouble with your dealings with the Canada Revenue Agency (CRA), there is a Taxpayers’ Ombudsman that may be able to help. In addition they have some good tips for how to deal with CRA. The types of complaints they can review are – Mistakes – Undue delays – Poor or misleading information – Unfair treatment – Staff behaviour If you think you have a suitable case for the Taxpayers’ Ombudsman, be sure to be clear about what you want and to submit complete information.  The Ombudsman recommends being calm and respectful when dealing with CRA. No matter how egregious your treatment by CRA, it is unlikely to be the fault of the CRA employee you are speaking to on the phone. Like many service workers, CRA employees who interact with the public get paid the same whether or not they help you (within limits). Whether you like it or not, they hold the power and you don’t. Fortunately, most people like to be helpful and CRA employees are no different. Yo...

AT&T has introduced a bandwidth cap on DSL usage that has sparked some outrage in the U.S. for how it will affect Netflix customers among others. However, the over-use charges are only one-tenth of what is generally charged in Canada. AT&T charges $10 for each additional 50 GB of bandwidth used above a base allocation of 150 GB. This works out to 20 cents per GB. Canadian over-use charges are typically $2 per GB and base allocations tend to be lower than 150 GB depending on the level of service purchased. It seems evident that Canada could use more competition in the internet access market.

Morningstar’s latest country-by-country fund report card gave Canadian funds a failing grade for the excessive fees they charge investors. However, it’s what the report doesn’t say that may confuse investors. The report doesn't include an assessment of the returns earned by each country’s funds. The grading categories are 1) regulation and taxation, 2) disclosure, 3) fees and expenses, and 4) sales and media. No grades are given for earning good returns for investors. This is likely to surprise many mutual fund investors. After all, the point of investing is to earn returns. What could possibly be more important to evaluate than whether funds did a good job of earning returns for investors? The reason that grades aren’t given for returns is that it isn’t possible for funds to collectively give above-average returns. In the same way that not every child can be above average, not every fund can be above average. The mutual fund industry controls such a high percentage of...

A Loonie Saved has an interesting approach to buying a car.    Squawkfox thinks that it rarely makes sense to agree to work for free. Money Smarts breaks down the different types of financial advisors. Big Cajun Man invites his readers to join him in some personal financial challenges. Million Dollar Journey looks at the economics of painting a room yourself or hiring a painter.

We often hear statistics about how men and women doing the same jobs aren’t paid the same. I’ve heard that women make anywhere from 60% to 90% of what men make. I don't trust these figures because the people who quote them often have axes to grind, but I do believe that a gap exists. I don’t think this gap is likely to close completely any time soon. The reason for this gap is usually attributed to sexism. I don’t know how much of a problem this is today but it definitely was a problem in the past. See a job posting from one of my father’s job searches back in the 1964 . However, I think there is another reason why women doing the same job as men get paid less, on average. I could have been paid much more in my career if I had devoted more energy to it. If I had worked more and spent less time with my wife and sons, my income would have been higher. I consistently made choices favouring a balanced life rather than devoting myself completely to my work. More than once I...

I used to think that consumers were hapless victims of advertising techniques designed to trick us into thinking that items are cheaper than they really are. However, I now realize that to some extent we contribute to the deception. To choose a simple example, suppose that the advertised price of some item is $17.99. We often say that the item costs 17 bucks. However, assuming that 13% HST applies, the real price is $20.33. I used to think that people were just bad at math and were being fooled. However, when we want an item, it’s easier to justify its purchase (to ourselves or a spouse) if we focus on the lower figure. This effect is even more pronounced with the cost of airline flights. A flight might be advertised at $99, but this is a one-way fare and doesn’t include airport charges, fuel surcharges, baggage surcharges, and a host of other fees. The final price of a return flight could easily be $400 to $500 (or $800 to $1000 for two people). But it is much easier to ju...

A friend I’ll call Tim had an interesting experience trying to open a secured line of credit with PC Financial. He was told that the processing fee for home appraisal and basic legal fees would be $150. However, he was later contacted by another organization looking for another $83. It turns out that PC Financial hires other organizations to handle some aspects of checking people’s credit worthiness. In this case, there happens to be a “Writ of Execution” against another person with the same name as Tim (including first name, last name, and middle initial). This other organization wants the extra $83 to cover their cost of having Tim sign an affidavit stating that he isn’t the same person as the deadbeat in addition to the cost of having the document properly witnessed. Tim was a little suspicious and contacted PC Financial about this extra charge. PC Financial confirmed that the charge is legitimate. (I suppose that “legitimate” is in the eye of the beholder here. At least ...

Much has been written about the merits of fixed- and variable-rate mortgages. These discussions usually boil down to the likelihood of saving money with a variable-rate mortgage. However, a more important consideration is whether prospective homeowners can handle higher interest rates at the end of the mortgage term. A quick check of current mortgage rates shows that borrowers with a good credit rating can get a variable-rate mortgage at 2.3% and a 5-year fixed mortgage at 3.8%. On a $250,000 mortgage with a 25-year amortization period, this difference in rates makes a significant difference in monthly payments: Variable (2.3%): $1095 5-year fixed (3.8%): $1288 That’s an extra $193 per month for the security of a 5-year fixed rate. But how much security do you really get from a 5-year fixed mortgage? Suppose that interest rates rise by 1% per year for each of the next 5 years. This is the scenario that we are trying to protect ourselves from when choosing a fixed mortgage....

Canadian Tax Resource describes a case where a court ordered someone to pay a friend’s tax bill. This is a cautionary tale about the dangers of helping someone evade taxes. A Loonie Saved makes the case that the stock market is overvalued based on stock market returns over the last century or so. Preet Banerjee explains that there are many ways that an index fund manager can fail to track the index well, but that we can detect these problems by simply checking the fund’s tracking error. Money Smarts explains the different ways that you can unlock a locked-in retirement account. Big Cajun Man got double-billed twice – one case was his fault and the other not. Million Dollar Journey explains the many fees that mutual funds charge investors.

Young people who have minimal income and don’t owe any income taxes often don’t bother to file a tax return. However, this can be a mistake. There are some benefits of filing a return. To begin with, filing a return for a simple tax situation can be extremely easy. In a recent case where I helped out, I was able to just use my own copy of tax software and the return took just a few minutes to file. Some advantages of filing when you’ve got low income and are going to school are 1. You can accumulate some RRSP room for the future. 2. You can file T2202A information related to school costs that will give a tax reduction in a future year. 3. If you happened to have any income tax, excess CPP deductions, or excess EI deductions taken from pay cheques from a part-time job, you may get this money back. 4. The simple tax return you file is a gentle introduction to more complex tax situations in the future. This article isn’t likely to be read by many young people in the situa...

A change in the way that stock options are taxed has meant that I will get money back on my 2009 income taxes. Even though the change was announced in the March federal budget , it didn’t become law until December and continued delays have forced me to continue overpaying my taxes throughout 2010 and now into 2011. When it became obvious that this change would reduce my income tax payable in 2009, CRA didn’t demand that I take out a mortgage to pay the tax bill. Instead they estimated how much I would have to pay based on the new rules and let me pay this amount. This estimate was higher than the real figure will ultimately be, but was manageable. This is the happy part of the story. So, the CRA automated system thinks I owe a huge sum, but there is a hold on collecting the money. A side effect of this “debt” is that I couldn’t file a T1213 form in 2010 to get permission for my employer to take off less tax on each pay. Total withholding taxes turned out to be more than doub...

I used to think that there was nothing wrong with realizing capital losses in a year where you couldn’t use them because they can be carried forward indefinitely. However, I discovered a scenario where I wish I had held on to some loser stocks. Suppose that in 2009 your spouse sold some stock and realized a $5000 taxable capital loss. Then in 2010 your spouse sold more stock and realized a $5000 taxable capital gain. Suppose further that your spouse’s other 2010 income is very low. You might think that you will get full value for the spousal deduction. However, this isn’t the case. The spousal deduction is based on net income rather than taxable income. The carried forward capital loss does not affect net income. Rather it gets subtracted from net income to calculate taxable income. So, the $5000 of capital gain income reduces your spousal deduction. If both blocks of stock had been sold in 2010, the capital gain and loss would offset each other and you’d have received th...