A new year raises a number of questions for investors. How will stock markets perform? When will interest rates go up? And what rules have changed that will affect assets or tax and other planning? The last question is particularly important, as legislative changes both in Canada and in other jurisdictions can easily be overlooked by investors, sometimes to their detriment.
Here are five ways investors can take into account either recent or pending changes to certain laws that affect them, and help them protect and grow their portfolios in 2014.
Optimizing Registered Accounts
Ottawa launched Tax Free Savings Accounts (TFSA) in 2009 to help Canadians invest money tax free. Initially, the contribution ceiling was $5,000 a year. It was increased to $5,500 annually in 2013. So individuals now have a cumulative TFSA allowance of up to $31,000. With their relative ease of use and flexibility, these accounts should be one of the first stops every January for investors with taxable (non-registered) portfolios or cash to invest.
Another review point for investors with taxable income and little non-deductible debt should be the RRSP. Its maximum limit increases by $450 to $24,270 in the 2014 tax year. Business owners with high incomes who want to fund a larger pension in retirement than an RRSP allows should consider an Individual Pension Plan (IPP) or a Retirement Compensation Arrangement (RCA).
Snowbirds—Changes are Coming
It’s winter, and Canadians flock south. Pending legislative changes could have financial implications for snowbirds. Existing U.S. residency rules allow a Canadian citizen to spend a maximum of 182 days (six months) in the U.S. without a visa, or 120 days on average over a three-year period. Currently, the new JOLT (Jobs Originated through Launching Travel) Act before Congress could extend the limit to eight months, or 240 days, before a visa is required. However, the extended-stay rules could trigger serious U.S. tax-filing requirements for snowbirds (under FATCA legislation—see below) and could affect their provincial health coverage if they are out of the country for the extra time JOLT proposes. Currently, B.C. residents can only be away for seven months before losing their coverage. These pending changes have created uncertainty about the actual days allowed in the U.S. before becoming a U.S. resident.
Income Splitting, or Spousal Loans
The rules have changed here, too. Income splitting involves transferring investment income from a higher income earner to the lower income-earning spouse. Spouses can lend money to each other for investment but the CRA requires that the loan charge interest at a rate that’s at least the same as the prescribed rate the agency sets.
That prescribed rate for spousal loans decreased from two per cent to one per cent on January 1, 2014. Income splitting works if the income earned on invested assets exceeds the prescribed one-per-cent rate. While commonly available investment yields are low right now, the rate on a spousal loan can be set indefinitely, so a spousal loan made in 2014 at one per cent becomes even more valuable when interest rates and investment yields rise.
B.C.’s Family Law Act
This Act came into law in 2013 and has broad implications for B.C. couples. For instance, unmarried people who cohabit for two years effectively face the same rules for splitting assets as married couples if their relationship ends. This may affect gifts or inheritances from parents. It also treats assets that are brought into a marriage as exempt from division in a marriage breakup. These developments encourage the use of cohabitation agreements and require strong documentation to help determine whether assets are part of a marriage or not.
U.S. Tax Compliance Rules—FATCA
These are poised to get stricter when, on June 1, the U.S. Foreign Account Tax Compliance Act (FATCA) takes effect. Its purpose is to ensure that people considered “U.S. persons” who have accounts outside the U.S. file U.S. tax returns. These include dual Canadian/U.S. citizens, those with Green Cards and even Canadians who spend a lot of time in the U.S.
Also lurking are U.S. estate taxes and foreign bank account reporting requirements should your account appear to be held by a “U.S. person.” There are further requirements coming that will require Canadian financial institutions to assist with the IRS’s global pursuit of delinquent taxpayers. Make sure to keep up to date about FATCA and how it might affect you if you spend large chunks of time in the U.S., or if you were previously a U.S. resident. Failure to follow the rules can mean big penalties.
A January review of your personal financial picture and any strategic action that may be needed in the face of legislative change and other factors is important in preserving and growing wealth. The new and changing rules are very complex, so contact your trusted financial advisor for more information.
This article is not intended to provide advice, recommendations or offers to buy or sell any product or service. The info provided in this article is compiled from our own research and is based on assumptions that we believe to be reasonable, accurate at the time the report was written, but, is subject to change without notice.