What is the Fiscal Cliff?

It is a term used to describe the tax increases and spending cuts that will automatically take effect in the United States at the end of the year.  “Fiscal” refers to the fact that we are dealing with government and not central bank policy, while “cliff” attempts to illustrate what will happen to the U.S. economy if these tax increases and spending cuts are allowed to occur at the same time.

The general idea is that if the American people see their incomes decline while the government removes investment or stimulus from the economy, consumption and economic growth will suffer.

At the end of the year:

1.      Income tax cuts implemented by President George W. Bush over ten years ago will expire, without extension.  If they are not extended, taxes will increase back to levels of the Clinton presidency.

2.      A payroll tax reduction that came into effect January 2011 will expire.

3.      The Affordable Care Act will see Medicare payroll taxes increase and the implementation of a new investment income surtax of 3.8% on dividends and capital gains for high-income earners.

4.      $1.2 trillion of budget “sequestration” will be implemented over the next 10 years.  This is just a fancy way of saying budget cuts. 

5.      The unemployment insurance benefit extension for 2012 will expire.

6.      Various other tax provisions will expire and spending cuts will occur.

This list is not totally complete, but it hits all the major issues.  Bottom line, a reduction in disposable income for consumers and a reduction of investment by the government will hurt what has been a painfully slow economic recovery in the United States.

Should we panic if we don’t see a deal by the end of the year?

No.  The fiscal cliff is an important issue because not only does it focus attention on America’s increasing deficit, it involves trillions of dollars, and the consequences would have a very negative impact on the U.S. economy.  But because the impact would be severe, it is hard to believe the politicians could be foolish enough to actually let it happen.

Admittedly, U.S. politicians have made questionable moves in the past.  However, even when they do the wrong thing, they usually fix it once they see the negative consequences of their actions.  So a deal could be reached before the end of the year, but it could also be reached early 2013.  Either way, they will make a deal because quite simply; failing to do so would be unacceptable and both Democrats and Republicans are fully aware of this.

Furthermore, if the U.S. “went over the cliff,” the impact of the tax increases and spending cuts would not necessarily hurt the economy immediately; the politicians know this, so they know they will have more time to work with, even as the end of the year rapidly approaches. 

So, investors shouldn’t panic.  In fact, any short-term downward pressure on the markets will provide us with a window of attractive buying opportunities.

Wishing you and your family all the best for the New Year!

Cheers,

 

Tracey

Source:  Original article by Gareth Watson, published on Advisor.ca Dec. 21/12

Financial Tips for Santa

Santa’s on a tight schedule, he only has a few days left to make sure all the presents are wrapped, packed and his reindeer are ready to fly.

The end of the year is also a crucial time for last minute financial planning, even for Santa.  Jolly old St. Nick is not only a Canadian; he is a prominent philanthropist, business owner, senior citizen, and extensive traveler.  Like all Canadians he needs to take into account several taxation and financial planning considerations before the end of the year.

Here are a few tips

Charitable donations.  Santa is one of the world’s most prominent philanthropists.  Fortunately for him, most of his donations will be made by the December 31^st deadline so that credit can be made on his 2012 tax return.

Income Splitting.  This is an important consideration as Mrs. Claus is not employed (as far as we know).  Santa might want to consider income splitting with her to minimize his annual tax liability by using a prescribed rate loan to Mrs. Claus.  Depending on the amount of the loan, the amount of tax paid by Santa could be substantially reduced.  (Current interest rate is one percent for such loans).

Avoid the OAS Clawback.  Once Santa’s 2012 income reaches $63,511 his OAS will start to be clawed back.

Santa does extensive travelling.  Because of this, he will need out-of-country travel insurance and may also consider out-of-country medical insurance for his Christmas Eve flight, just in case.

If Santa has made investments, the last trading day to ensure losses can be used to offset gains from this year is December 24^th for Canadian transactions and December 26^th for U.S. transactions.

Is Santa getting ready to RIFF?  If Santa turns 71 in 2013, he will need to start drawing down his RRSP.  The minimum withdrawal amount will be 7.31% of the value of his account on January 1^st.

Santa is an (incorporated) business owner with an eternity of active years ahead of him.  As such, he should consider opening an Individual Pension Plan (IPP).  An IPP is structured to provide tax relief for the corporation and enhanced retirement savings (beyond the RRSP).

Santa will want to take some time off and relax after December 25^th.  As a Snowbird heading south for the winter, he must remember if he stays in the U.S. for more than 183 days in two consecutive years, he may be liable to pay U.S. income tax.

So much to do; so little time.   Let’s hope Santa has hired a Certified Financial Planner to help guide him through the nuances of Canada Revenue Agency’s Income tax act.

Wishing you all a Wonderful Christmas; filled with family and friends.

Tracey

Source:  Original article written by Staff at advisor.ca

 

Financial Literacy for Kids – There’s an APP for That

 

Almost a third of Canadians (72%) agree that today’s young adults face more financial challenges than previous generations.   Rising educations costs, increasing debt levels and a difficult labor market are all good reasons why parents need to start talking about money to their kids.

It is crucial that parents teach their kids about the value of a dollar at a young age.  Although the majority of parents know their financial habits will influence how their children manage money; more than a third (36%) find it difficult to discuss finances with their kids.

The vast majority (97%) feel financial literacy is an essential life skill, and most believe (86%) kids should receive money management training in school.

Those who do receive financial training at a young age say their parents taught them the value of money and budgeting by having them share in the costs of things they wanted. 

“How often do your kids see you shopping verses depositing money into the bank?” asks Raymond Chin, a senior VP at TD Canada Trust.  He suggests, “Use examples in day-to-day life to demonstrate to your kids the importance of balancing priorities and budgets.  Explain why you bought milk on sale (for example) and be open about how much groceries, toys and vacations cost.”

The APP

Promoting financial literacy to kids can be difficult, give them a lecture and they will likely tune you out, but sneak it in as an iPad app and you will be sure to grab their attention.  RBC has developed a free iPad app for Canadian families to help them teach their kids about money.  Learning Money with Leo, teaches kids how to earn money, save for something they want, and spend wisely. 

“Our idea was to offer children a fun and engaging way to learn basic money skills they can build on in years to come,” said Jane Broderick, SVP marketing and channel strategy, RBC.  “This app is hands-on and tailored for children to use independently through games and advice, which will save parents time and teach kids the value of money.”

Children are becoming increasingly tech savvy at a young age.  Research shows that approximately half (52%) of kids under the age of eight have access to mobile devices, iPads or video iPods.  Furthermore, 46% of children between five and eight use a computer at least once a week.  The RBC app uses the latest technology to introduce young children (ages 3-6) to money concepts in an entertaining and interactive way.

It is important to seize every opportunity to teach our kids about money.   Research proves those who are taught at a young age about the value of a dollar carry good personal financial habits with them throughout their lives.

Off to download the APP, have a great weekend,

Tracey

Sources:  Advisor.ca original articles written by staff and Vikram Barhat, and financialplanningweek.ca

The Great One

That was the label bestowed upon Wayne Gretzky, the great Canadian hockey player, who left snowy Edmonton in 1988 for the greener pastures of Los Angeles. At the time, it seemed that Canada would never recover.

And here we are, 24 years later, and Canada has lost another "Great One", but this time in the realm of central banking, as Governor Mark Carney takes over the reins at the Bank of England on July 1st of 2013.

For the first time in its 318 year history, the Bank of England is hiring someone outside of Britain for the top posting.  One would have thought that London, the pre-eminent global financial centre for centuries, would have little problem in finding a suitable candidate from within; instead of raiding the Commonwealth!

But this choice speaks volumes about Mark Carney's talents, experience, work ethic, and ability to keep his cool as others lose theirs, not to mention having the capacity to see the forest past the trees.  Around Thanksgiving 2007 Mark Carney had a discussion with David Rosenburg, Chief Economist and Strategist at Gluskin Sheff + Associates Inc., regarding his concern over the insolvency of Freddie Mac and Fannie Mae’s balance sheets.  We all know what happened; next both Freddie and Fannie met their demise eight months later.

In the final analysis, history will judge Mark Carney based on the objectives set forth in the Bank of Canada Act, namely “to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of Canada.”

Well, on this basis, it would be difficult not to give Carney “straight A’s”.  Despite the current volatility in the global markets and economies, Carney leaves us with the Canadian dollar valued around par; this is at the same level today as it was when he took over from David Dodge five years ago (pre-financial crisis).  Furthermore for nearly 90% of his time tenure, core inflation has been at or below 2%, today it is approximately 1.3%.

To be sure, Mark Carney is transitioning out of Ottawa at a time when the economy is cooling off, but that is the same practically everywhere on the planet. Still, his sound monetary policy has set the pace and reignited capital spending, as business spending is now a full percentage point above the historical norm.   In comparison, the same ratio in the United States is a percentage point below the average; and it is two percentage points below in the UK.

One of Mr. Carney’s top concerns when he first took office was Canada’s lagging productivity performance, but we haven’t worried about that in a while.  Maybe it is because we are starting to see the benefits of this covert ‘strong dollar/stable monetary’ policy, in terms of it nurturing growth in the private sector, and in turn, sparking a  revival in Canadian productivity, and by extension, improving Canadian living standards.

A few final words; First, there may be concern about who could possibly replace Mr. Carney here at home. Be assured that Canada has no shortage of able successors to fill the role, as has been the case over the other seven periods of leadership change during the 78-year history of the central bank.

Second, the world should also know that Canadian exports go far beyond natural resources and do include brains as well. Canada has a long history of punching above its weight when it comes to assisting in the realm of global international finance. As one notable example, former Finance Minister (and Prime Minister) Paul Martin has been called on, time and again, to provide fiscal guidance for the U.K. government and he still acts as an advisor to the IMF.

Third, while we wish Mark Carney and the Bank of England well, we want to remind ourselves that the Los Angeles Kings never did win a Stanley Cup after the Wayne Gretzky trade.

But the Edmonton Oilers did!

Have a great weekend,

Tracey

 

Source:  Original article written by David Rosenberg, Chief Economist and Strategist,Gluskin Sheff + Associates Inc.  Fidelity Investments