Monthly Archives: April 2015

Doing Taxes – It’s a Dirty Job

homer

There are few things on this planet more confusing and divisive than taxes. In Canada alone, there are federal, provincial, and municipal taxes (municipality taxes are mainly limited to property taxes). Depending on the province you live in, your tax rate will vary. In fact, there are so many factors that ultimately influence what you pay in taxes that there are probably as many variations in tax returns as there are people; everyone’s different.

Taxes have been around for thousands of years and come in many colors and flavors. Tax laws and tax deductions (aka. tax breaks) change all the time. Every year governments across Canada adjust how different things are taxed. Tax deductions are generally meant to reward people doing what the sitting government thinks is good for the nation, things like taking transit, saving for retirement, renovating your home, giving to charity or a political party, living in the far north, paying for tuition or text books, putting your child in little league soccer, doing artistic activities, etc. All these are current federal tax deductions everyone is eligible for, in fact there are hundreds of tax deductions that offer something for everyone.

The onus to do taxes is completely on you. If you do not file your taxes and owe the government money, they will hunt you down. You will also be subject for any interest fees due for any delays in payment, or a fine, or jail time. The Canada Revenue Agency (CRA) takes this stuff very seriously and expects you to also take it seriously.

There are generally 2 ways to do taxes in Canada: get an accountant / tax adviser to do them for you, or do them yourself with software like ufile.ca or turbotax.ca. There are pros and cons to both, but no matter what you chose, make sure you have all your tax documents together. All your receipts you want to claim tax deductions for, all documents the CRA has sent you. For me, my taxes aren’t that complicated, I don’t claim that many things. But I can see things getting out of hand quickly if you are an average family of 4, run your own business, own your house and spend lots of money improving it.

If you don’t really have it in you to go through the complete list of federal tax deductions, I don’t blame you. If you think your taxes might be complicated, get an accountant to do your taxes for you.

Tax adviser pros:

  • The biggest advantage to a human tax adviser is that they are better at tying your personal situation to any tax deductions you are eligible for, but not aware of.
  • They are usually accessible. If you have any questions, you can call them up.
  • If there are any complications, they can help take care of them.

Tax adviser cons:

  • The only real drawback is that they are going to be more expensive than DIY tax software.

I used to think tax software was gangling and cumbersome. But I used turbotax.ca to file my taxes for the 2014 tax year, and was impressed with how intuitive it was, and how everything was broken down into small steps. The website was also good at suggesting tax deductions I may be eligible for. It reminded me of my TTC transit passes that I forgot to claim.

Tax software adviser pros:

  • Inexpensive. It cost me $35 to do taxes for both my wife and I (H&R Block has a website that will do it for free)
  • Easy and instant. See how each change affects your tax return amount.
  • Getting better at advising on potential tax deductions.

Tax software adviser cons:

  • Though they’ve come a long way in a short amount of time, the software isn’t yet smart enough to cater to everyone’s squeaky wheel, though they do have a 1-800 number for anyone looking for a helping hand.

Having a human tax adviser is great, they can take a lot of the stress out of doing taxes. But with the tax deadline only days away, if you haven’t found someone to do your taxes, try out turbotax.ca.

Taking Action – Buying Stock

taking action - buying stock

Tired of savings accounts that lose you money? Want more growth and less fees than your bank’s mutual funds can offer? Thinking about giving the S&P 500 a whirl, but don’t know where to start? This post is for you!

Last week, we looked at stock markets and how their purpose is to let the public buy and sell shares in publicly traded companies. I mentioned that to invest in the S&P 500, you’ll need to buy an Exchange Traded Fund (ETF), like Vanguard’s S&P 500 index fund.

In order to buy and sell shares on a stock market, you need an stock broker, someone who has gone through various training programs and is regulated by the stock exchanged they work on. A stock broker is traditionally a person who takes buy/sell orders from individuals and fulfills those orders on the stock market floor by yelling and screaming at other stock brokers. Stock brokers usually charge a commission on every trade, that means if you want to buy some shares in company A and sell shares in companies B, that would be 2 separate trades, and your broker will charge you for each.

These days, the job of stock broker has been largely replaced by computers. So what we really need is a web broker. For you and I, a web broker is a website where we fill out a form specifying how many shares to buy or sell, at what price, etc. We then hit ‘Enter’ to buy and sell stocks. The web broker then trades your money with another web broker. The whole transaction could take seconds.

There are dozens of web brokers to chose from and every major bank in Canada has one, they are cheap and easy to use. How cheap are they? Well, that depends on what kind of investing you’re going to be doing and how often. As I mentioned, they will typically charge you per trade and web broker prices currently range from limited-time-free to $10 per trade.

The cost of a web broker is a fee, the third prong in the trident of costs (taxes and inflation being the other 2) and means that if you want to invest money every month, that could be $120 per year, which won’t be that big in the grand scheme of things, especially compared to some mutual fund fees. But I suggest planning on buying shares of TSE:VFV every 3 or 4 months to cut down on fees. Some web brokers can set up automated buying so all you need to worry about is having money in the bank.

Finding and opening a web broker account is easy. I would go to whoever your current bank is and tell them you’d like to open a web broker account. Here is a list of the 5 big banks and their web brokers:

If you aren’t with any of the above banks, you can still open a web broker account with them, or google around for another one. As long as the web broker allows you to trade on the Toronto Stock Exchange (TSE or TSX), you should be fine.

To open a web broker account, I would suggest physically walking into your bank and telling them that you want to open a web broker account, and someone will meet you to go over whatever steps are needed to setup an account. The banks do all the work for you, but there are quite a few forms they have to fill out, the process can easily take 30 minutes.

I would open up a web broker account for your TFSA, and a second web broker account for your RRSP. This will allow you to transfer money into your tax sheltered accounts, and buy and sell as much as you want without incurring any taxes. You would only pay taxes when you withdraw money from your RRSP web broker account. You will never pay any taxes on money withdrawn from any TFSA account, and you are able to withdraw money from your TFSA whenever you want.

Once your account is open, and you have a trading password, you are ready to buy a stock! The stock we want to buy is Vanguard’s S&P 500 ETF I mentioned earlier. It trades under the symbol: TSE:VFV.

This means <stock exchange>:<company stock symbol>, so TSE is the stock exchange, VFV is the symbol of the fund or company we want to invest in.

Things you’ll need to know to buy stock on any exchange:

  • The account the funds to make the purchase are coming from.
  • The action you wish to take (buy, sell, other stuff we don’t care about).
  • The company symbol.
  • How many shares you want to buy.

When deciding how many shares to buy, remember to factor in any web broker fees. If you have $1000, you can only buy 9 shares that cost $100 (9 x $100 = $900, + $6 (web broker fee) = $906)

You can buy VFV from your web broker’s website, or you can phone up the web broker directly and have a human to actually make the trade for you. Note that web brokers are neutral parties when buying/selling shares. They will not give you investment advice, so don’t bother asking them if buying particular shares is a good idea.

Don’t bother trying to time when you buy the S&P 500, in the long run, that won’t matter. Once you’ve bought your shares, hold them. Literally do nothing for decades and watch the value of your investment grow.

Stock Exchanges – The First Sharing Economy Market

exchange

A stock exchange is really a large auction, like ebay, but for company shares. Stock exchanges allow anyone with a bank account to buy shares in companies and Exchange Traded Funds (ETFs). Companies sell small amounts of themselves to the public in exchange for ownership shares in an Initial Public Offering (IPO).

For example, Acme Inc might try and sell 1,000,000 shares of itself for $50 per share in order to raise $50,000,000, or more if investors think Acme Inc is going places. If things go well for Acme Inc, they will have traded tiny slices of ownership for at least $50,000,000. This would be called Acme Inc’s IPO, they can then use the new money to invest in their business (maybe acquire a rival, update their factories, etc).

IPOs also allow founding shareholders the chance to sell some of their shares to the public for what can be a small fortune.

For Acme Inc, raising money on a stock exchange might be better than borrowing money from a bank, or raising $50,000,000 from one person or small group of people who would then be able to exert control over the inner workings of a company.

Companies that have shares on a public exchange, like the TSE or the New York Stock Exchange (NYSE), are called ‘public companies‘ because any member of the public can own a part of these companies by buying shares on a stock exchange. Companies on exchanges are subject to various rules and restrictions though. For example, they have to publicly announce the status of their operations and finances every 3 months (quarterly reports), they have to publicly declare who is on their board of directors, which typically represents the biggest share holders of a company. Also, their finances have to be in good shape, or they will kicked off the exchange.

Most of the time, when you buy shares on a stock exchange, you are not buying them from the company you wish to invest in, but from another investor. You are only buying shares from a company directly if it has an IPO, or secondary public offering, or third, etc. Otherwise, you are buying from another investor. It is important to know that people will sell shares for many reasons, but will generally only buy shares in a company if they feel that the worth of the company will go up.

And the worth of the company is often described as its market capitalization: the number of available shares it has, multiplied by the value of each share. So Apple, the largest company in the world currently, has a market capitalization of $740 billion, and a current share price of $127.09, making the number of Apple shares available at 5.8 billion. Market capitalization is generally considered how much it would cost to buy a publicly traded company, if you wanted to completely buy Apple, the company, that would cost you $740 billion today.

But we’re not looking to buy a company, only the S&P 500. Our next step is setting up a self directed investment account.

In order to invest your money with the S&P 500 you need to open a special kind of bank account, a self directed investment account. Because the specific S&P 500 investment we want to make takes the form of an ETF, we need access to the Toronto Stock Exchange (TSE).

The S&P 500 itself is an index, an index that can be easily duplicated with a basic formula. Other financial companies have created funds using this simple formula, and made these funds available on the TSE, Canada’s main stock exchange.