Tag Archives: government

Bonds – Lending to the Man

bonds

I’ve been a big proponent of investing savings in the S&P 500. It offers great long-term returns, and is safe. But it’s not that safe.

The S&P 500 isn’t the safest investment because when you buy equity/shares in a publicly traded company, you are buying a slice of ownership. Your fortunes rise and fall with the fortunes of the company you partly own. And you can sell your shares the same way people sell barrels of oil or any other commodity, through a market.

But if the company you partially own goes bankrupt, chances are, you’ll end up with nothing. That’s because a long line of people and organizations that the bankrupt organization owes money to are first when it comes time to cash in on whatever is left of the company. This includes banks, employee wages and bond holders. Share holders are usually last to get any pay outs in the event of a bankruptcy, and usually get nothing.

Bonds are basically IOUs that a large government or company will issue. They are cheap loans that a government can make because all western governments are so large and have been around for hundreds of years, that they can guarantee your return.

A bond is a financial certificate, it means the bank owes you money. But it also means you have no say in any of the banks matters, unlike a share holder. So bonds are creditor stakes in a company, whereas share holders have equity stake in a company. When a company goes bankrupt, creditor stake holders will have priority over equity stake holders when it comes time to dividing the remains.

Western countries are basically impervious to bankruptcy for the foreseeable future. Even though headlines can be grim, and all governments take on more and more debt, there has also been an increase in Gross Domestic Product (GDP). If you totaled the value of every financial transaction in Canada, every exchange in goods or services for money, you would have the gross domestic product. In 2014, Canada’s GDP was $1.8 trillion USD.

Of that $1.8 trillion, the Canadian Federal Government took $276.3 billion in taxes and other revenue. With that kind of growing revenue, it is easy to be convinced that a large government can guarantee the bonds that it issues.

Bonds are usually sold at specific times, in Canada, Canadian Savings Bonds (CSBs) are sold every October and November. They have a 10 year maturity. That means that you get the money back on your bonds after 10 years. You get your interest payments once a year.

Bonds backed by most western governments are so safe, they are considered to be risk-free. As such, they offer a low interest rate of return tied to the interest rates set by the Bank Of Canada. The annual returns for the CSB can be found online here. As you can see from its previous returns, bonds don’t make you a lot of money. In 2014, Canadian Savings Bonds would yield only 1% per year, it would be easier to just get a high interest savings account in 2014.

Bonds are something that you can buy through various Exchange Traded Funds (ETFs), but you can also buy them yourself directly through the government every October. For more information on buying Canadian bonds directly, information can be found on their website.

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.