Cash flow management starts with knowing where exactly your money is going each month. Almost half of Canadians are not prepared for financial emergencies, with 53% relying on their next pay cheque. More than one-third (35%) would take out a small loan or use a credit card to deal with an emergency. Is this you? (Statistics from financial poll conducted by Leger and Refresh Financial)
We can help you get back on track by incorporating cash flow management strategies that will help you to re-prioritize your financial spending. By completing our Personal Financial Review (PFR) and listing all your current lifestyle expenditures, you will be able to identify where your major expenses are as well as any hidden spending.
Reviewing your cash flow not only determines where you are spending your pay cheque, but it can also determine:
where to cut back on your spending
help you set some financial goals
if major life changes have effected your cash flow
Here are some articles that provide more information on cash flow optics:
When buying a home, the actual purchase price will, of course, be your major expense but you do need to be aware of the additional expenses you will have. Some of these are one-time expenses and others are ongoing. You should summarize those expenses to ensure that you do not over-extend yourself. Here is a budget worksheet that can help you estimate your one-time and ongoing costs of home ownership.
If you were legally married you are subject to the federal Divorce Act. If you weren’t legally married, you are subject to provincial or territorial law. Both the Divorce Act and provincial laws are very concerned with the welfare of children and the courts will not approve a separation agreement or a divorce until there is adequate support for the children. Typically that support will be shared between the parents.
The Federal Child Support Guidelines describe which parent is responsible for how much support for children after a divorce. The guidelines are designed to divide support fairly between the parents and consider various factors such as:
the number of children
annual income of the paying parent
custody arrangements (sole, split, joint)
The guidelines do not have to be followed if the parents can show the court that their own arrangement is actually more beneficial for the children. To calculate hypothetical child support amounts based on your gross income, number of children and province of residence you can use this convenient Government of Canada Child Support Table Look-up.
Personal tax credits and deductions
Each spouse may be entitled to the eligible dependent amount. Only one spouse can claim the amount for a particular dependent, so if you have more than one child, it often makes sense to each to claim the credit in respect of different children, otherwise you’ll need to agree on who will claim the credit.
As for child-care expenses, you can claim expenses incurred by you for the period your child resided with you. Finally, in the case of tuition, textbook and education credits, a student can transfer these credits to either parent, but not a portion to both, which will require agreement between you and your spouse.
Deductibility of legal fees
Legal fees are generally deductible if they relate to collecting late support payments, establishing a right to support, increasing your support, or to make child support payments tax-free. If you’re the payer of support, legal fees are generally not deductible. Nor are fees related to child custody or visitation issues. If your deductible legal fees happen to exceed your income in a year, a non-capital loss is created which can then be carried forward, or back, to other tax years.
Since 1997 child support payments are included in the income of the paying spouse and received tax-free by the spouse who has custody. Therefore the parent who is using the child support payments to support their children will receive any child support tax free. A lawyer specializing in this area should always be consulted.
Termination & Severance
When you leave your job, you may receive a termination and/or severance pay. When your departure is involuntary every jurisdiction stipulates how much notice you must receive. Commonly, the company will pay you in lieu of actually working through the notice period. This termination pay is considered employment income for tax purposes.
You may also be entitled to severance pay which is payment in recognition of service, seniority, etc. Currently, only the federal jurisdiction and Ontario have statutory minimum severance requirements. In other jurisdictions, severance is dealt with under common law based on precedent. As a common law issue, the exact amount of severance you are entitled to will be determined by the particular nature of your employment arrangement and circumstances of your departure.
Your payments can have tax implications so it is important to understand the choices you may have about when and how to take your severance. Employment law is a provincial/territorial concern so the rules vary across the country but some general statements can be made.
The timing of your severance payment may be important. When lump-sum severance payments are made, your employer is required to withhold up to 30% in tax (for payments over $15,000). You will also be subject to any additional tax up to your Marginal Tax Rate which could be about 45%. Therefore, if you are leaving a job near the end of the year, you might ask your employer to defer the actual payment to the subsequent year, thereby deferring the additional tax until the next tax year.
A retiring allowance is a payment from your employer either in recognition of long service or as a payment due to involuntary job loss. Retiring allowances include severance pay and unused sick leave credits but do not include unused vacation pay or termination pay (in lieu of your notice period). Ordinarily, income received from an employer must be included in income in the year received. However, if money received meets the definition of a retiring allowance you may be able to postpone paying taxes on that income. The rules are quite specific but, in general, for each year or part year of service prior to 1996, you can transfer $2,000 into an RRSP with no immediate tax consequences. You can transfer a further $1,500 per year of service prior to 1989 when you were not part of a pension plan. You should speak to your our office or accountant to determine if you are eligible to use the roll over. This transfer can certainly help save some taxes. The money you can roll over is not subject to any withholding tax either.
Using Your Severance
Severance can be extremely helpful to get you through a time when you do not have other income. Finding a suitable new job may take more time than you think and it is comforting to know that bills will be paid and family finances and savings will not be strained. However, you may find yourself in the fortunate position that you will be receiving a severance payment but have already lined up another job. In this case, the payments can be thought of as somewhat of a 'windfall' and available for personal use.
Using the money to buy a new car, take a nice vacation, or doing that renovation you've been putting off can be very satisfying options. However, you certainly need to sit down and consider the implications. Although not as exciting, topping up your emergency fund or catching up on missed RRSP contributions may be more prudent. Call our office to determine what is the best use of your severance package. (Source: Dynamic Funds Snapshots article)
Sole Proprietor Financial Checklist
Operating a company as a Sole Proprietor is a challenging and, hopefully, rewarding experience. But, you want to be sure that your company is being managed and structured as efficiently as possible. Appreciating and taking advantage of all of the techniques and strategies available will help to ensure that running your company will continue to be a profitable and satisfying experience. Our office can provide assistance and guidance about running an efficient business. Take this opportunity to review your situation and consider asking yourself the following questions:
What is the best way to finance the company?
What regulatory requirements am I facing?
What should be included in a comprehensive budget?
What are the implications of hiring employees?
How can I receive income from my company?
What sort of insurance coverage do I need?
How will my company affect my retirement and estate plans?
How will my company be taxed?
(Source: Dynamic Funds)
Budgeting As A Couple
You may have been used to managing your financial affairs as an individual but now you will be approaching your finances as part of a couple. This will represent some challenges but also opportunities.
There are pros and cons of combining your financial affairs.
It's easier to manage one joint account. For example, it's easier to keep track of household bills. You can avoid deciding who pays what bills.
You may be able to save on banking fees if you have fewer accounts.
You may be able to earn a higher interest rate if you combine your bank-held savings.
You may be able to pay off debt faster if you combine your resources.
One spouse may feel they have an unfair burden if they contribute to paying off the other's debts or if one spouse spends more than another.
If one partner has to pay child or spousal support, the other spouse may not want to share in those costs.
Sometimes it's harder to balance a cheque book when two people use the same account.
If one person is in charge of the account, and something happens to him or her, or to the relationship, the other partner may find sorting out the banking difficult.
If the marriage ends, both partners will need a credit rating to get credit in the future.
Budgeting and Financial Compatibility
Regardless of whether you decide to combine your finances or maintain separate accounts, you should still take some time to create a Family Budget. Having a solid understanding of where your money is going is essential for meeting current and long-term financial goals. As well, financial issues are often the major source of stress in a relationship and working with your partner to create a realistic budget should be a source of harmony and peace of mind.
You and your spouse will probably have different attitudes towards money and financial management. This is to be expected but it is important that you understand each other's feelings. Coming to agreement on how you will approach your family finances should prevent misunderstandings. Here is a link to a quiz you and your spouse can do together that should provide some insights into and an appreciation of your respective philosophies towards finances.
Now that you are planning to get married you will need to consider how your current and future assets will be owned by you and your spouse. There are two basic structures of joint ownership and both have their advantages and disadvantages. Here is a general overview. A discussion with your lawyer our our staff is certainly recommended to ensure that your affairs are structured in a way that will best deal with your current and ongoing situation.
Joint Tenancy with Right of Survivorship (JTWROS)
This is a very common and popular way for couples to own family assets. As the name implies, the ownership is ‘joint' so that each party has an undivided but equal share in the property. One of the primary advantages of this ownership structure is the ‘right of survivorship' which in practical terms means that if one of the parties dies the other automatically assumes the ownership, and the asset does not flow through the deceased's estate which can cause complications. This legal approach is ordinarily used for the family home but it can similarly be used for other assets such as non-registered investment accounts and chequing/savings accounts.
Tenancy in Common
Ownership of assets as tenants in common is similar to a partnership arrangement where each party (or tenant) owns a specific share of the asset outright and may pass that share on to other parties through a Will. There can be cases where couples may decide that this is the preferable structure for them given their specific needs and goals.
Your Future Outlook
Whether or not you decide to combine your finances, it is important to think about how your personal and financial situation will change as you proceed through life as a couple.