Finance Q&A with Mike Eppel

Since it’s 680News Financial Week, Business editor Mike Eppel answered your finance questions Thursday, January 21, live online between noon and 1 p.m.

680News.com: Welcome to 680News.com, Mike, and thank you for taking the time today to answer 680News.com readers’ questions about finance. Let’s get started.

Rob asks: I am 36 and my wife is 34, our total yearly income is $155,000. We have two children, aged 9 and 5. We have a $300,000 mortgage, the house is worth $500,000. In total I have $125,000 in RRSPs and my wife has $50,000 in RRSPs. We have two condos in the U.S. both valued at $150,000 each. I owe $170,000 in total for both. We put $300 in RRSPs each week. Should we be stable in retirement in the long run?

Mike answers: Rob, let me start first by stating for the record I am not a Certified Financial Planner, so PLEASE double check any of my comments with a registered professional when it comes to money management. The first thing though that I’d be concerned about is your total debt and specifically servicing that debt. The principle residence mortgage total, considering your age and income, doesn’t seem to be too out of line, especially with interest rates as low as they are. Having said that, you should make sure that you have an emergency fund established just in case of job loss or other unforeseen events to cover your home expenses. Of more concern is the U.S. property. Are these rented and do they cover the costs? Were they purchased for investment and at what price? Specifically, did you buy before or after the U.S. housing market downturn? Would it make any sense to sell one of the properties and use the cash to reduce debt elsewhere or put the money into your RRSP and use the tax savings to reduce debt? Also, with two kids, you did not mention any RESP savings. The Registered Education Savings plan is a must for parents to avoid big bills later for post-secondary education. Plus the government gives a nice 20 per cent kick-back every year in the RESP account. Hope that helps.

Cyrus asks: If someone opened a TFSA in 2009, then withdrew the money and closed the account, but then opened another TFSA again in 2009, what is the impact at tax time?

Mike answers: From what I’ve read about this, there would be no tax implications on the closure of one TSFA and the opening of another. The contribution room is not account-specific, rather person-specific.

Kim asks: I have a son that has been diagnosed a few years ago with ADHD and takes medication daily … it is on his school records and he has been “identified” there as requiring extra help and also documented with his doctor … I had heard through friends that there is a tax credit that I should have been using all these years to help with the extra costs of having a child with learning disabilities … is this true?? And what forms do I need to fill out?? How many years can I go back on this?? Any other advice??

Mike answers: Kim, in preparation for this chat, I sent your question over to Tax guru Tim Cestnick at Waterstreet Family Wealth Council. 

Here is his response: 

“I don’t believe you’ve missed out on any tax credit for your son. There is a disability tax credit, but your son with ADHD won’t qualify for that tax credit by virtue of his ADHD alone … well, I’ve never seen someone qualify for that reason. The disability has to be more severe. Your doctor can review the criteria using Form T2201 (I’m going by memory here…it’s the disability tax credit form) and decide whether or not your son meets the tests … I don’t think he will. Even if he doesn’t qualify for that tax credit, you should be able to claim a medical expense tax credit for any costs of medication you had to pay for yourself. There are really no other tax credits for kids with learning disabilities that would apply. I hope this helps!”

– Tim Cestnick, FCA, CPA, CFP, TEP
Managing Director, WaterStreet Family Wealth Counsel

Larry Kosowan asks: I recently began to buy and sell on the Toronto Stock Exchange.
1) Any tips for record keeping in preparation for tax season?
2) What are the main things I need to know about stating a profit or loss?

Mike answers: Depending on your trading activity, you’ll be inundated with transaction records from the brokerage that you deal with. Be sure to retain your purchase price which would be compared to your selling price for any profit or loss calculation … as you’d have to list both on your tax form to calculate the capital gain or loss.

Cathy Hewlett asks: I was wondering how I can get my credit card companies to lower interest rates? I have tried in the past and they give some lame excuse about not being able to do that. I don’t buy it.

Mike answers: Hi Cathy. To get your credit card interest rates lowered you have to be aggressive with the credit card issuer. If your account is in good standing, you should be eligible to pay less, especially if other companies are offering a lower rate. Call the company, say you can get a better rate elsewhere and threaten to leave. Also … ask for the Supervisor if you don’t get a positive response the first time.

Adnan Azam asks: Hi Mike,This past year I worked a lot of overtime which has put me in a different tax bracket than what I am normally in. Because of the excessive amount would I be owing more when I file this year or because of the high amount the overtime monies are taxed, would it be much of a difference compared to the past years? Thank you.

Mike answers: Very likely. You’re probably climbing the levels of the taxation bracket and will face a higher bill this year. Is the tax being automatically deducted from the source or do you pay all at once at tax-time? If so, I’d definitely have extra cash set aside to cover it this year. It’s great to make more money, but unfortunately the tax man wants his piece as well.

Colleen Budd (Wegat) asks: Hi Mike! For whom is the TFSA beneficial? I wonder if you should max out your RRSP 1st before utilizing the TFSA, or does it depend on your expected income once retired. I don’t know much about it.

Mike answers: The Tax Free Savings account was another welcome investment vehicle established by the Federal Government last year. The “who should use it” question comes up a lot. It really depends on your age, income level and savings objectives. Specifically it’s great for anyone with a lower income who wouldn’t not get the tax benefits from an RRSP. The RRSP tax break is based on a percentage of your income. The higher your income, the bigger the tax break. One good strategy is to save money in the TSFA … until you’re in a higher income bracket and then transfer the investments into your RRSP to benefit from the tax refund. Take the tax refund and reinvest it in the TSFA. It’s also a very good savings vehicle for shorter term goals, like the purchase of more expensive household items or a new car.

S. asks: Hi Mike, I have one question for RRSP investment. Is there any product in the market that could keep around 3 to 5 per cent of annual compounded interest and is safe?

Mike answers: GICs are about the only thing truly “guaranteed” but I’m not sure about the interest rate. To get anywhere near five per cent, you’d have to put it in for a number of years and early withdrawl would face a penalty. An investment professional may be able to guide you to the corporate bond market for a better return…but be sure to double check about the true “safety” of that type of investment.

Deepak Patel asks: Hi Mike, I listen to 680News daily but one thing I never miss is the 680 business news … very well reported. My question(s): If you had $1,000 (U.S.) today, which U.S. stock would you invest in? Also, if you had $5,000 (Cdn) today, which Canadian stock(s) would you invest in? If these above questions are too specific and you can not answer, which sector is expected to do well in 2010?

Mike answers: It depends when you need the money. If it’s cash you don’t need for years you can be aggressive in stocks. Otherwise, I’m sticking it in a GIC or Bond and putting it in a Tax Free Savings account. I’m a big believer in Index Funds and ETFs that track the market. I’m a horrible stock picker. I do like anything that pays a dividend … but again … a group of bank stocks rather than individual companies. Also, keep an eye on the Canadian dollar. As it gets stronger, it may be a good opportunity to buy undervalued U.S. companies and reap the rewards of the strong currency.

Question: Why are advisors reluctant to recommend investments for RESP accounts? Those who will advise,tend to park the amounts in a mutual fund (with load fees and trailer fees) like Templeton International where they gather dust for years. This money needs to grow with minimum risk. What would you suggest?

Mike answers: Personally, I’m a big believer in Exchange Traded funds for RESP’s and index funds. Low management fees, simple, track the market. Dividend funds have companies that actually make money. If your kids are young, you’ve got a longer time horizon before they actually will need the money so you can be more agressive. As you get closer to the time they need the cash, shift to more conservative holdings.

Question:  Hi Mike, What are the chances of the $ reaching at par with the USD and how soon?

Mike answers: I believe we’re going to see the dollar at par in the second quarter. As soon as the Bank of Canada starts giving signals that interest rates are going to start rising in the second half of the year, that will be the catalyst. Having said that, if the US recovery struggles and stocks decline, the US dollar will once again be in favour as a defense., at least until they start worrying again about the huge US deficit.

680News.com: It looks like we’re finished here, Mike. Thanks for your time and thoughtful answers.

Thanks to our listeners for their questions. Sorry we couldn’t answer all of them. If you want to follow up, please send Mike a note.

Have a good afternoon!