The Cost of Tax Phobia

A lot of people are so scared of the entire idea of tax season, that they rush right down to the tax preparer in the mall, and pay them to make it all go away. These guys charge anywhere from $40 and up.

Some people use tax preparation services that offer refunds right on the spot. This is where things can get costly.

If you file your return online, under normal circumstances you should have your refund in a week or two. If you get your tax return prepared by the instant refund people you get your money right away. The cost you pay for this convenience is ridiculous. You can pay up to 15% of your refund for this service.

You should also know that if you pay someone else to do your tax return, and they make a mistake, it’s not their problem. It’s yours. CRA will make you fix the mistake, and you will have to pay any penalties, interest, or late charges yourself. The guy in the mall has no responsibility.

Some of these tax preparation companies have also begun to encourage customers to accept their instant tax refund in the form of a preloaded debit card instead of a cheque. These debit cards are so loaded with fees and charges that they reduce the real cash available in your pocket.

My advice? If you decide to do things this way, ask for a cheque, avoid the debit card. Best advice? Get a simple tax preparation software program, and do it yourself.

 

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Filed under How It Works, Taxes

50% off Coupon on Easy Tax Tips

To celebrate the first day of Tax Season, from now until April 15, I’m happy to be able to offer a coupon for 50% off the price of Easy Tax Tips for Canadians at Smashwords.

Click on the link here, enter the coupon code SM43D and download the book in your favourite version.

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Easy Tax Tips for Canadians

Available at Amazon.com or Smashwords.com

My new book “Easy Tax Tips for Canadians” is now available.

Written in the same accessible style as my blog, this is the tax book for you if:

  • You hate tax season,
  • You don’t understand your taxes,
  • You’re afraid you always miss a deduction,
  • You wish someone could make this easier.

Easy Tax Tips keeps it simple, with hints and tips for regular wage earners, in plain English that allows you to save money by doing your taxes yourself.

You can buy the ebook version for $2.99 in all formats including Kindle and epub here. Or you can get the paperback version for $5.99 from Amazon.

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How to Get a Bigger Paycheque

Have you ever heard of a Source Deduction Waiver?

Every payday your employer deducts the amount of  tax set by the Canada Revenue Agency. This money is applied against your annual tax bill.

But not everyone has the same income tax circumstances. There are people who have significant deductions, like monthly RSP contributions, child care expenses, or even deductible investment loan interest, which often result in a sizable tax refund each year.

If this describes your situation, you might be eligible for a Source Deduction Waiver. A source deduction waiver means that your employer could deduct less tax from your paycheque each month. If that’s the case, it will mean that you won’t receive a huge refund at the end of the year, however you will get more money every payday.

While it does feel nice to get a big refund every spring, you have to remember that this refund is your own money, which you have given to the government as an interest free loan for the past twelve months. I am sure you could come up with better ideas than of what to do with a little more money every month than the government does.

For the proper forms, go to the Canada Revenue Agency website, www.cra-arc.gc.ca, and search for form T1213.

If you are up to date on your taxes, the government will calculate the proper amount, and authorize your employer to reduce the tax withheld. Please remember that this is not automatically renewed, you do have to reapply each year.

Put a little more money in your own pocket next year.

 

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Filed under Employment, Saving, Taxes

Flaherty’s Changes to Mortgage Rules

What will the changes to Canadian mortgage rules announced on January 17 mean to you?

If you already have a mortgage – not much. If you buy a house within the next 60 days (before the changes take effect) – not much. If you plan on buying a house during the next few years – not much.

If you are ass deep in debt, and looking to refinance to the hilt with a nice low interest rate, flexible payment, Home Equity Line of Credit in order to bail yourself out – lots.

New rules will restrict the number of years you can stretch out a normal mortgage to 30 years. No more 35 year mortgages with CMHC. You will also need to come up with a minimum down payment. No more “no-money-down” mortgages.

But that’s not the big news. The big news is that the Government through CMHC will no longer insure Home Equity Lines of Credit – called HELOCs.

For the last number of years home owners have been flocking to the banks (and others) to refinance their homes with Helocs. This allows them to use the equity they have built up in their homes to refinance debts like credit cards, or buy things like fancy cars, boats and cottages, or heck, just pay for a trip to Aruba.

These Helocs are sold to people by highlighting the flexibility of the payments, the low interest rates and your ability to pay off as much as you want. In reality most people only pay the minimum interest payment, never reduce their principal, and will get killed if the interest rates go up by more than a percentage or two.

Helocs are a form of never-never plan. Most of them allow you to make minimum or interest only payments, and never actually pay down the principal. I  can’t tell you how many of these things I helped people convert into real mortgages during the last few years I was advising clients.

You could live in your house forever and never succeed in paying it off. These lines of credit are as bad as credit cards, they’re a guaranteed source of monthly income for the banks that you never escape.

And with their floating interest rates on a principal that never declines, they are a time bomb waiting to happen in a world where interest rates have no-where to go but up.

As soon as CMHC insurance for these Home Equity Lines of Credit dries up, expect to the see the banks pull back their helping hands, and tighten up their credit granting procedures.

With any luck Mr. Flaherty will have prevented the banks from letting a few unlucky people from getting in over their heads in the future. If these rules work as intended, uninhibited, intemperate consumer spending will be marginally reduced, and those least able to cope will be protected from the bank’s grasping fingers.

What can you do?

If you have one of these never-never plans, talk to your mortgage lender. You have two options, set up a declining balance payment, which will pay off both principal and interest – or – convert to a regular mortgage with a defined amortization and a fixed interest rate on regular monthly payments.

As soon as you can, stop giving your life away to the banks, and get your house in order.

 

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Filed under CMHC, Economy, Finance, HELOC, Home Equity Line of Credit, interest rates, mortgages, Saving

Changes to Flash Crash Rules

On Thursday Canada’s investment industry regulator, IIROC, proposed new safety measures intended to prevent future flash crashes like the one that happened on May 6.

Existing “circuit breakers” halt trading when the entire market rises or falls extremely quickly within a short period of time, but trading in individual stocks must be reviewed manually. This new proposal would allow trading to automatically be halted for a five minute period on any stock that appears to be subject to a “flash trading” scenario.

The plan is to prevent the extreme investor losses we saw in May, when some stocks lost up to 99% of their value in minutes.

IIROC has invited public comments on the proposal during the next 60 days. Read the press release here.

 

 

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Financial Train Wreck

Stephen Roach, chief of Morgan Stanley’s Asia unit, says that Asian economies will not be able to withstand the “Tsunami” of American cash which Bernanke is flooding into the financial markets.  http://www.bbc.co.uk/news/business-11756677

American fiscal policy is a train wreck that is set to sideswipe the rest of the planet. The little guys are likely to get squashed.

I see inflation becoming a threat before the global economy has had time to fully recover from the recession. We could be facing a period of stagflation which would be as bad or worse than what we have seen so far. It would most certainly drag out the jobless recovery in the US for a very long time.

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Filed under Economy, Employment, Finance, How It Works, Inflation, interest rates, Recovery, Stock Market, Uncategorized, US Debt, US Dollar

Get Ready for Inflation

Ben Bernanke’s comments today underline my hunch that the US would try to inflate their way out of their fiscal mess.

Don’t take the Fed’s low interest rates policy at face value. In the long term this kind of policy causes inflation, and eventually we will see that higher interest rates will be necessary to bring the inflation it creates under control.

If you are a saver you will be penalized, as your savings and investments become devalued. People invested in Bonds and Bond funds, and GICs are especially in the firing line. It appears that the best strategy for the next little while will be to think short term. Don’t lock your investments in to contracts longer than 12 months.

Mortgages should be treated the opposite way. If you are not planning on selling, lock in for as long as you can. If inflation gets out of control, it isn’t unreasonable to expect mortgage rates to pass the 10% mark some time in the next 2 to 5 years.

Right now interest rates and mortgage rates are being held down by the lasting dregs of the recession and the appalling housing market in the US. But this will not last.

In Canada the housing market is relatively healthy, prices have not dropped, and anyone with a large mortgage at the high end of carrying capacity will be vulnerable to large jumps in interest rates.

http://www.reuters.com/article/idUSTRE69D5XW20101014

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Filed under Economy, Inflation, interest rates, mortgages, Saving, Uncategorized, US Debt

ETFs Took a Pummeling During May 6 Glitch

Reuters is reporting that no one knows exactly what caused last week’s crazy market gyrations, although there are plenty of weird theories to go around. Personally I kinda like the space alien theory, although the fat finger theory has a certain lyrical quality too.

Approximately 10,000 trades were cancelled, but many traders were left on the hook for trades that were considered within bounds. The complaints from those left out in the cold will probably continue for some time. It appears a large number of people were caught by automated stop-loss orders that sold their positions out at or  near the bottom. According to former SEC Commissioner Roberta Kemel, there may be little recourse for those investors. Lawyers say that claimants would have to show “gross negligence” in order to have any kind of case.

SEC Chairman Mary Schapiro told the House Committee on Financial Services that ETFs were particularly hard hit by the chaos for reasons that “are still unclear”. More than 25 percent of all such funds lost at least half their value. One ETF sponsor told the SEC that 14 of its funds briefly traded for less than 15 cents a share.

This is the type of circumstance which highlights the downside of  index tracking passive management. It also exacerbates the issues surrounding leveraged investments and the narrow focus of some industry specific ETFs.

I think ETFs have been mischaracterized as a buy and hold investment, when in fact they were originally designed for active traders who wished to track an individual index or basket of stocks. They were always intended to be sold if the markets trended downward.

And heaven help anyone who was involved in any leveraged products, and didn’t understand what they were getting themselves into. I don’t think the industry has done a very good job of explaining these products to the average retail investor, and yet everywhere you see advisors pushing them as a low cost substitute for mutual funds and recommending ETFs for inclusion in buy and hold RRSP accounts. Not good.

Today’s lesson – a little knowledge can be an expensive thing.

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Filed under Dow Jones, ETFs, Nasdaq, Securities & Exchange Commision, Stock Market, Uncategorized

Computerized Mayhem on the Dow Jones

A thousand point drop in the Dow Jones is stomach wrenching enough to make the toughest investor queasy. A thousand point drop in moments is just mind numbingly inconceivable. How many of us just stood in front of our tv screens like we had just been smacked upside the head with a board?

Although it now seems likely that the excruciating market gyrations we watched today were probably as the result of human error and/or a technical glitch, it really begs the question, How could we not have systems in place to guard against this type of thing?

Our stock markets have become so globalized that any news in any part of the world impacts decisions at trading desks everywhere. We have reached the point where turmoil in Greece impacts the price of oil in Alberta, and the rising price of gold affects the softening Euro.

Then some guy wearing his tie too tight hits the wrong button, and the Dow Jones tanks in moments.

I have to admit it made for great visual theatre, but the whole fiasco does call into question the degree to which we now rely on automated computer algorithms, and how unstuck things can become before real humans can step in to reassert manual control over the system.

Perhaps we need a rethink about the glories of technology and it’s ability to run our lives. Or should that be “ruin our lives.”

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