Thursday, November 28, 2013

Travel Medical Insurance Analysis

To buy or not to buy medical travel insurance when traveling outside of Canada?  That is the question.  Comprehensive medical travel insurance can be pricey considering that the chance that you will actually need it while on vacation is not high.  However without it, the financial impacts could be catastrophic if you do end up getting sick enough to require medical attention, or worse yet, are injured in an accident.  According to market research reports, a hospital stay in the United States averages almost $4000 per day.

Travel insurance is offered by all the major banks, some insurance companies like Manulife Financial,  and other companies like Blue Cross and CAA.  Luckily all of these companies support an online quote for easy comparison, provided that you are under a given age limit which varies from 54 to 74 depending on the organization.  If you exceed that age limit, you may be asked to fill in an online medical questionnaire or to phone for a medical interview before you are provided with a quote.  If you answer positively to any of the medical conditions of an online questionnaire, then again you may need to phone for coverage.  It's interesting to note that if you answer negative to all the online medical questions, in some cases you may actually get a slightly lower premium.  This is because you will not be covered for any illness that is deemed related to the conditions that you denied having, so the risk of payment is much less.

We will both be 50 next spring and plan to travel to France for just under seven weeks.  Since we are well below the age limit set by any of the travel insurance providers, we were able to get a good comparison of rates and benefits.

For our criteria, the coverage benefits and exclusions were comparable and the main difference was price of the premium.  It seemed irrelevant whether our maximum overall medical coverage amount was $1 million or $5 Million for expenses that could include ambulance, paramedic care, hospitalization, private nurses, physio, chiropractors, drugs, dental and a one-way flight home if required.  Even the smaller limit seemed more than sufficient.  Different policies may put a maximum cap on certain types of expenses, such as $2000 for emergency dental work but they were all quite similar.  Each organization has a different criteria for the duration that you need to be stable from a pre-existing condition, ranging from 3 months to a year, depending on age of the applicant.

It is important to read the complete policy details to get a clear picture of what is covered, and more importantly, what is excluded.  There is a link to a sample policy on each of the websites, but often you have to really hunt for it.  Examples of areas where you need to clarify coverage for a given policy include the definitions of "stable period for a pre-existing condition" and immediate family.  In some policies, certain activities deemed as dangerous such as scuba diving may be excluded.  Each insurer may have different criteria for how soon you need to contact them prior to or after receiving your medical treatment. Not thoroughly understanding the specific terms could lead to minimizing or invalidating your coverage.

Based purely on price, the cheapest policies for our 48 day trip would be to go with TD Bank ($265) or Manulife ($279).  Manulife had the extra option of specifying a deductible in order to further reduce the price.  Adding a $500 deductible per person reduced our premium to $235.  This seemed worth the risk since the $500 would not bankrupt us, and the chance of our needing to use it was not high.

Our next consideration was regarding Trip Interruption Insurance.  We currently have four elderly parents, all closing in on age 90.  If one of them passed away during our 7 weeks abroad, it would be quite expensive to get an emergency flight home for the funeral and then back again to resume our trip.  However trip interruption insurance is extremely expensive and often doubles the premium.  And upon reading the fine print of what trip interruption insurance covers, it only flies you home but will not pay for you to resume your trip.

Manulife and Bank of Nova Scotia (which seems to use Manulife under the covers) offer something called "Bounce Back" protection.  On the surface, this option provided exactly what we were looking for–it would pay for you to fly home in case of death of an immediate family member, and then pay for you to return to resume your trip.  It was not even that expensive, at an extra $55 per person, compared against the thousands we would pay in airfare on our own.  However, the extensive exclusions in the policy rendered this option ineffectual for us.  It excluded any family member that was in poor health prior to trip departure or resided in a long term care facility, which included retirement homes.  This basically excluded most of our parents.

At the same time that we were doing all this research, we were also considering upgrading our CIBC Dividend Visa card to the CIBC Dividend Infinite Visa.  Our original card gave us up to 1% cash back, while the additional card gave up to 2% on a tiered spending level.  We had calculated that based on our regularly spending pattern, we would get more cash back with the Infinite card, even after deducting the $109 fees.  But this particular card also provided a slew of travel benefits including travel medical insurance for trips up to 15 days, flight delay and baggage loss, car rental collision, and trip interruption!

With this card, we will may not get a full bounce back, but at least we get trip interruption (one way fare home) for free.  Since it provides 15 days of medical insurance per card holder, we would only have to buy extra medical for the remaining 33 days (or 34 days to provide a safe overlap, just in case).  This would bring the travel insurance medical coverage for our 48 day trip down to $166.  So finally, we have settled on the best solution for our needs. 

Sunday, November 17, 2013

Cell Phone Plans - Revisited

It was too good of a deal to last forever.  In our book Retired at 48, we described our cell phone usage pattern as data heavy-voice "lite".  We rarely use the phone to make or receive phone calls or texts, but we do use the email and internet features daily.  The pay-as-you-go plan with data add-on option from 7-Eleven SpeakOut Wireless was perfect for our needs.  After buying a $10 SIM card, you can add air time (spent at $0.25/minute talk and $0.10/text) to your unlocked cell phone in denominations of $25-$100 and the additional minutes last for 365 days as opposed to the standard 30-60 days.

But even better was the data add-on of $10 per month for unlimited usage.  This is the part that was too good to last forever, and it hasn't.  SpeakOut has changed its pay-as-you-go data add-on to $10 per month for 100MB with additional usage charged at $0.10/MB.  There is no option to buy a larger add-on for more data with the pay-as-you-go plan.

An alternative is to abandon the pay-as-you-go plan and buy a SpeakOut Value Plan instead.   The cheapest value plan costs $20 for 100 talk minutes per month (way more than we ever use) and allows you to choose data add-ons of 500MB for $15 or 1GB for $25.  So our monthly cell phone fees would go up from about $12 to around $35-45 depending on our data usage.

Our first instinct was to repeat the price comparison analysis which we described in the book, to determine if we should change providers.  For our new analysis, we used 10 minutes talk time, 500MB data and the voicemail feature as our monthly requirements.

What we quickly realized is that for our usage pattern, Speakout is still the most inexpensive option for us.  Most of the other providers forced you to buy a pricier plan in order to get 500MB of data.  Wind Mobile came close with its $30 plan that offers unlimited data.  But Wind charges $8/month for voicemail and is not an official Apple Supplier, which is no good for us since we own an iPhone.  We are also concerned about the breadth of Wind's coverage area.

Our 500MB data requirement was just an estimate.  We really don't know how much data we use monthly on our cell phone, because up to now, our data was unlimited so we didn't keep track.  Since we mainly use our phone to check emails, it is possible that our usage will fall within the 100-350MB limit.  If this is the case, then we could stay on the pay as you go plan with the $10/100MB add-on and pay the $0.10/MB for up to an extra 250MB before we reach the $35 cost of the value plan.  We will try this pay-as-you-go with 100MB data add-on option for a couple of months in order to gauge what our real usage is.  We can then decide whether or not to switch to a value plan.

One consideration that influenced our decision was our desire to upgrade our iPhone 3GS to a newer iPhone model. An unlocked iPhone 4S is selling for $450 at the Apple Store while the 5S is $719.  Our plan had been to buy the 4S and stay with the SpeakOut, but since we were reevaluating cell phone plans anyways, we considered selecting a locked in plan for 2 years in order to get a 5S for $229.  There was a Bell Lite plan at $55 month that provided 500MB of data and 1000 talk minutes.  The $20 difference in monthly cell phone fees for two years would be offset by the $490 discount on the newer phone.  But when we called to confirm, we found out that the discount was only for the Bell Plus plan which was $80/mth!  The discount on the 5S for the Bell Lite plan was a mere $50.  Who would willingly lock into a plan for 2 years to save $50?!?   Then we considered buying the 5S anyways while staying with SpeakOut.  This was also not possible because currently SpeakOut does not support the new nano SIM card that the 5S requires.

So finally our decision was made.  We would buy an unlocked iphone 4GS, stay with our current pay-as-you-go plan and add the $10 for 100MB feature.  After a few months, if we find we are regularly using more than 350MB per month, we will switch to the appropriate SpeakOut value plan.

Thursday, September 12, 2013

Retired at 48 Featured at Toronto Word on the Street book festival

Annie and Rich English (A.R.English), the authors of the book Retired at 48 - One Couple's Journey to a Pensionless Retirement, will be speaking at the Toronto Word on the Street Festival held Sunday September 22, 2013 at Queen's Park Circle.

We will be at the Nothing But the Truth Tent from 3:00-3:45pm, talking briefly about our book and then joining a panel discussion about retirement.  We will also participate in the "Friend an Author" event.  Come join us!

Saturday, August 10, 2013

Preparing for Post-Retirement Medical Expenses

My husband and I have now been retired for over a year and have both turned 49 in the process.  The year went by in a flash.  We moved from one fun-filled adventure to the next, both in town and abroad.  We also took on the onerous and stressful task of helping one set of parents downsize their home and move into a retirement facility.

Unfortunately, we missed celebrating the one-year milestone because our dream retirement has been hit by an unexpected medical setback.  This March, I was diagnosed with Stage 2 breast cancer and required surgery, followed by chemotherapy, radiation and hormone therapy as the prescribed courses of treatment.  The surgery successfully removed all of the tumor and the follow-up treatments are almost complete. 

Luckily we live in a country where most medical expenses including surgery and hospital stays are covered.  What our health care system does not include are costs related to dental care, vision and drugs.  While we were working, these costs were paid for by our company health plans.  When preparing for our retirement, we realized that stopping work at such early ages meant that we would be on our own for these types of expenses until age of 65, when programs such as the Ontario Drug Benefit Program kick in to help out with some of these costs.

As described in our book Retired At 48, we researched various private health insurance offerings, comparing our known health costs against the premiums.
Invariably, the premiums were close to or even exceeded our expenses.  There were also set maximums to the amounts that you could claim against the policy for covered benefits such as drugs, vision, dental, physiotherapy and other services.

This was not the type of insurance we were looking for.  We could afford to pay for our current health costs.  What we were looking for was coverage against future, unexpected and potentially exorbitant expenses from some serious illness.  We settled on Manulife's Catastrophic insurance which has an annual $4500 deductible, after which further drugs claimed in that year are covered at 100% with no maximum.  The premiums were relatively low at about $240 per year as opposed to typical health insurance plans which often cost more than tenfold.

Our foresight and good planning in terms of acquiring health insurance paid off when I fell ill.  Although OHIP took care of the chemotheraphy drugs, it did not cover any of the medicines prescribed to ward off or minimize the many potential side effects of chemo.  This included four injections of Neulasta at around $2800 per shot, used to increase white blood cells and help fight infections.  After we covered the $4500 deductible for the "effective" year, the insurance policy paid for any additional drug costs incurred within this same time period.  So far this has amounted to almost $7000.

This catastrophic insurance has worked out as planned, but we had an unexpected windfall as well.   When it became known that we did not have full drug coverage and were facing such a high financial outlay for our insurance deductible, the hospital social worker helped me apply for the Victory Patient Assistance Program of Ontario.  This organization provides "financial assistance and other value-added services when you've been prescribed an oncology-related drug...".  Victory got in touch with the drug manufacturer of Neulasta and negotiated for them to pay for the entire deductible.  Victory also called Manulife for me and confirmed that Neulasta would indeed be covered by my insurance plan, once the deductible was covered.  So in the end, we ended up being reimbursed for the entire Neulasta fee of over $11,000 as well as the costs of other prescribed drugs.

There are a few considerations to take note regarding Manulife's Catastrophic Insurance offering.  First, you need to be relatively healthy and in good shape to qualify and they will not cover any "pre-existing conditions", or medicines that you were already taking prior to acquiring the insurance.

The deductible applies to every "effective year", which spans 12 months from the day your coverage begins.  My current effective year ran out on August 1 and hopefully, this will be the only year where I will require enough drugs to surpass my $4500 deductible.  So I tried to have as many of my prescriptions for drugs filled before this date as possible.  This included a hormone drug that I need to take for the next few years.  I was not due to start taking these pills until after August 1, but I asked the doctor to write me the prescription in advance so that I could have it filled before my year expired.  I also asked for a larger than usual amount to be filled at once, to maximize the expense covered.

Finally, when I had my claim processed, I found out that the processing fees charged by the drug stores were not covered, although it was not the total $10.99 fee which I saw charged on each prescription.  I received a bit less than I expected on my claim, but most of the expenses that I submitted were reimbursed.

While it is regretful that I had to go through this ailment, our forethought in planning for such a possibility really helped to ease any additional stress from facing significant financial burden on top of the medical concerns.  Being retired, it was also nice that neither my husband nor I had to worry about work-related pressures in addition to everything else.  Having my loving and supportive husband available to be by my side through every doctor's appointment and treatment procedure has been more comfort than I can express.

So all things considered, I have not had it so bad.  I am now coming to the end of my treatments and am recovering nicely.  I've tried to stay as positive and active as possible through it and I now look forward to a full recovery so that I can resume my dream retirement plans.  France, I had to put you on hold, but I hear you beckoning... see you next year!

Thursday, June 13, 2013

Unlocking Your Locked-In Life Income Fund

While I was still working, I was enrolled in a locked-in Defined Contribution pension plan.  On an annual basis, my employer contributed a preset percentage of my salary to a Locked-In Retirement Account (LIRA), which is basically a locked-in RRSP.  This amount reduced my RRSP contribution room for the year.  Once I retired, I transferred the accumulated money into a self-directed LIRA account at Scotia iTRADE, where we were managing the rest of our investments.  These funds were then used to buy more dividend-paying stocks, in line with the income generating strategy described in our book Retired at 48 - One Couple's Journey to a Pensionless Retirement.  However, at age 48, we would not be able to access this money for a while.

A LIRA has many more restrictions than a regular RRSP.  The earliest that a LIRA can be collapsed is age 55, and it must be converted into a locked-in income generating product such as a Life Income Fund (LIF).  The latest date to collapse the LIRA is the same as the RRSP–by the end of your 71st year.

The LIF not only mandates an annual minimum withdrawal, but also imposes an annual maximum withdrawal limitation.  This is to ensure that your pension lasts throughout your retirement years, rather than being squandered prematurely.  In my opinion, this is a "Big Brother" approach that feels unreasonably restrictive. I want to free up as much of the LIF money as soon as possible so that I can be in control of my own funds and make my own decisions.  Luckily there have been some recently added LIF rules that could help.

If your LIF is subject to Ontario laws, then rules have been introduced over the past few years which allow you to free up some of these locked-in funds.  However you need to be aware of them and take action promptly at the appropriate times in order to take advantage of them.   The two most relevant rules that apply to the most people are:

1. You can free up to 50% of the value of your LIF by submitting a request form to the financial institution managing the LIF.  The catch is that you must make this request within 60 days of creating the LIF.  You can request to either withdraw the money from the LIF or to transfer it into an unlocked RRSP or RRIF.  Choosing the withdrawal option could trigger a huge tax burden for the year, whereas transferring to the RRSP or RRIF would be tax-free since you are provided an contribution deduction slip which offsets the taxable income.  Unless you need all the money immediately, the latter seems to be the better strategy.   

If you hold stock within your LIF, you can provide instructions to transfer shares "in-kind" into the RRSP or RRIF.  This will save transaction fees of selling stock in the LIF and repurchasing it in the RRSP or RRIF.  It also will not disrupt any Dividend Reinvestment Plans (DRIP) that you may be registered in.

2. The small account rule indicates that once the combined value of all of your locked-in accounts is less than $20,440, you can submit another form requesting to unlock the rest of the money. 

The two steps can be executed sequentially.  If withdrawing/transferring 50% in step 1 brings the value of your LIF(s) down below the small account minimum, then step 2 can be executed to unlock the rest.  This means that LIFs in the range of around $41,000 or less can be totally unlocked within the first year.  If the value is more than that, then you need to set up the LIF to withdraw the maximum each year and wait for it to fall below the value of the small account rule.

Wednesday, May 29, 2013

Diversification the Key to Our Dividend Investment Strategy

Our main strategy for generating post-retirement income is to attempt to live off the dividends from our stock holdings. In our book "Retired at 48 - One Couple's Journey to a Pensionless Retirement", we describe in detail how we try to reduce risk through diversification.  For example, we buy many different stocks in various sectors and set limits for the amounts we would hold in each stock depending on market capitalization, setting lower limits for smaller, riskier companies and higher limits for larger, blue chip companies which are presumably safer and have a history of raising their dividends. 

The book also describes how we use the Globe and Mail Watchlist tool to check on the performance of our stocks.  In particular, we regularly monitor the dividend amount for each of our stocks, prepared to take action if necessary if one of them declares plans to significantly cut their payout.  Since we started with our dividend strategy many years ago, a majority of our stocks have raised their dividends, some of them multiple times on a regular basis.

Recently we did have one of our stocks take a relatively large dividend cut.  We purchased a small-cap stock in the health industry called CML Healthcare (CLC-T) in an attempt to diversify into different sector from the financial, telecommunications, energy, utilities and REITs that we are mainly concentrated in.  Based on our strategy of limiting exposure to smaller companies, the shares we acquired accounted for only about 1% of our portfolio.  At the time of purchase, it was paying a relatively generous yield of over 7%.  For various reasons, the company's earnings declined to the point that the dividend payout was no longer be sustainable.  This resulted in the share price plummeting by over 25% and the yield rising to an unreasonable level of over 11%.  The writing was on the wall that there would be a cut in the dividend, so we evaluated our options. 

We realized that even after the proposed 30% dividend cut from $0.75/share to $0.53/share, the yield would still be higher than most of our other stocks.  Because we owned so little of this stock, the net loss in dividends did not noticeably impact our annual dividend income.  Selling these shares would generate a capital loss that was significantly larger than the minor loss in dividends, and there was no clear replacement stock that could do better.

So in this case we decided to continue to hold the stock.  Our dividend strategy is designed so that no dividend cut in any single stock should create a major blow to our portfolio.  So far, this has worked out well.

We also encountered two scares that turned out to be false alarms.  The first was when it appeared that Telus (T-T) had cut their dividend by 50%!  Further investigation showed that Telus had actually executed a stock split.  So although their dividend payout was now 50% less, we also owned double the number of shares, each worth half the price.  The net result was the same... phew!

The second scare came from a data error from the Globe and Mail Watchlist.  For one solid week, both the Watchlist and the Saturday Globe and Mail business page showed that Cineplex Inc. (CGX.T) had dropped its annual dividend from $1.35 to $0.48, changing the yield from 4.2% to 1.39%.  This didn't make sense, since there was no news announcement or drop in share price (which usually accompanies a significant dividend decrease).  Checking both Cineplex's corporate website and other websites such as Reuters indicated that the Watchlist data was not correct.  In fact, rather than dropping their dividend, Cineplex has announced they would raise their dividend to $1.44.  We contacted Globe and Mail's globe investor support and advised them of their data error, which has since been corrected.  Another bullet dodged!

All in all, our buy-and-hold dividend strategy for generating retirement income continues to work well for us and we are insulated from the impacts of rollercoast stock prices as long as we continue to concentrate only on the stability of the dividends. 

Our recent experiences also accentuate the importance of paying close attention to your portfolio and being prepared to take action to re-balance when necessary.

Thursday, May 9, 2013

Tips for Reducing Costs of Live Entertainment

We really enjoy watching live theatre, but tickets can be expensive.  We probably watch more shows in a year than the average patron, and have employed the following ways to minimize this expense.

We tend to buy tickets in the lower price range rather than going for the best seats in the house.  We don't mind sitting further back, opting to see many shows from afar rather than a few shows up close.  However we are mindful of sight-lines.  We have learned that we usually prefer seats further back and closer to the centre, rather than way off to the side, or even up too close, where our view is obstructed from part of the stage.  It helps to be familiar with the seating configuration of the major theatres and understand the implications of various locations.  We once watched a play from the centre of the first row of the Bluma Appel theatre, and found ourselves so close to the stage that we were craning our necks to see the actors and had a clearer than desirable view of their nostrils.

Subscriptions to a series of plays often offer a healthy discount over purchasing tickets separately for individual shows.  I have held my Mirvish seasons tickets for over two decades and have received as much as 40-60% off the base prices.  We were watching up to 7 shows for the price of separately buying tickets to 2 or 3 of them. Following our strategy of seeing more for less, our subscription falls in the lowest price range, although I've had this subscription for so long that I now hold some of the best seats within this section.  For the 2012-13 season, we paid $179 for 6 musicals (love musicals!!).  So I'll be watching The Book of Mormon for under $30.  The Mirvish subscription is one of the most flexible as it allows free ticket exchanges up to 48 hours before the show.

Now that we are retired, we are much more flexible as to when we can attend shows.  Often, matinee performances are offered at a lower rate, especially those held during weekdays.  We recently watched a Tuesday afternoon performance of the Toronto Symphony Orchestra Plays James Bond for $29 per seat.  This option was not available for the same show later that evening.  You need to be careful trying this with longer running shows, because often the matinee performance will feature the understudy as opposed to the star.  Some shows offer preview performances at a lower price.  You get a discount for agreeing to see a show before hearing the reviews. The Stratford Festival usually has a preview session for their shows early in the season.

One great tip I've discovered is that you can sometimes save most or all the online or over the phone service charges and extra fees by purchasing your tickets in person directly from box office, as opposed to paying for the convenience of buying online or over the phone.  I have had savings of over $20 for two tickets by going this route. 

If you are willing to wait for a sale and possibly miss watching a show, there are many opportunities to score cheaper tickets.  Some theatres such as Mirvish offer same-day, limited "rush seats" or promote ticket deals towards the end of a show's run.  Group discount websites like Groupon or TeamBuy occasionally offer up theatre deals, especially for smaller or less popular shows that need the attendance boost.

The shows at smaller venues like the Factory Theatre, Tarragon, Lower Ossington, Hart House Theatre, etc. are usually offered at a much lower price and sometimes even have a "Pay What You Can" day.  I often prefer the lesser known, more intimate shows over the big blockbusters that are sometimes overhyped.  One of my favourite shows from a few years back was "Ride the Cyclone", performed at the Theatre Passe Mureille.  I enjoyed this smart, dark comedy of a musical as much as I did watching War Horse and much more than The Wizard of Oz.

Once a year in July, we go for really small, sometimes experimental works by attending the Toronto Fringe Festival.  For a 12 day span, you can watch 45-90 minute performances for $10-$12, in all sorts of venues ranging from small theatres to wacky locations like a bar, a bra shop or a traveling bus.  You take your chances and often get what you pay for.  But every once in a while, a gem such as The Drowsy Chaperone or Kim's Convenience shows up at Fringe, becomes the theatre darling of the year and gets picked up by mainstream theatres for a professional run.

Sunday, April 28, 2013

Net Filing Resulted in Tax Refund in 6 Business Days

As discussed in my previous post, I tried NETFILE (filing my income tax return over the internet) for the first time this year, using the free StudioTax software.  NETFILE fast-tracked the processing of my return relative to mailing in a paper form.  I received my tax refund into my bank account (for which I have pre-authorized deposit set up) in a mere 6 business days.

Next tax season will mark my first full year of early retirement, without any employment income from which my company already withheld taxes, or corresponding RRSP deductions to further reduce my taxable income.  For the first time, I will have to pay income tax as opposed to receiving a refund.  This means I will no longer be incented to file my return as quickly as possible, but still do not want to miss the April 30th deadline.  Using NETFILE immediately submits your return, so there is no need to worry about timing or delays from the postal service.

I can also pay my income tax online by setting up a bill payment with my bank.  I entered CANADA REVENUE in the search criteria and received the following options:
  • CRA 2013 Installments
  • CRA - Arrears
  • CRA - Payment on Filing
The last one, "Payment on Filing" can be used for full payment of the upcoming tax bill.  The "account number" is your social insurance number.  Through my bank, I can either post date the bill payment or pay immediately.  I just need to ensure there is enough money in my chequing account to cover the amount owed.

It is quite convenient that this entire process can be handled online from the comfort of my home.

Saturday, March 30, 2013

Studio Tax - Free Income Tax Program with Netfile Support

This year, Revenue Canada stopped mailing out paper tax forms and also ceased supporting telephone filing (Telefile).  While you can still pick up copies from the post office, print off PDF versions of the forms and hand-fill, or even fill them out online and then print them off, the real push is for people to use online tax software and submit their tax forms over the internet using Netfile.

Income tax software programs have been around for years.  TurboTax seems to be the most popular, with multiple versions ranging from $20-$100, supporting various types of income and deductions.  There have also been free online programs made available for people with really low income.

My returns were relatively simple in the past, so I usually did my taxes manually by hand, then either mailed in the paper forms or used Telefile.  This year, since it was more difficult to obtain the paper form and my tax return now included more sources of retirement income, I started looking into software options for filing over the internet.  In an article by the Globe and Mail, I learned about a Windows-based software called StudioTax that is free for everyone, regardless of income level.

The interface for StudioTax begins by gathering the information required to fill in page 1 of the T1 General form, including your name, address, date of birth, social insurance number, and info about your spouse if applicable.  Then it allows you to select which forms you received for your various sources of income, as well as choose from typical deductions including RRSP contributions, charitable donations, political contributions, tuition fees, expenses for dependents, and medical expenses.

Income Forms
Purpose, Sample Fields
Universal Child Care Benefits
Allocations from Income Trusts
Remuneration Paid (employment income), CPP contrib., EI contrib., Income Tax deducted
Pension, retirement, annuity, RESP, death benefits, research grants, fees for services,  and Other Income (not self employed)
Employment Insurance and Other Benefits
Fishing Income
RRSP income
RRIF Income
Employee Profit Sharing
Old Age Security (OAS) Income
Canada Pension Plan (CPP) Income
Investment Income (Canadian eligible and ineligible dividends, Foreign Income, Interest Income)
Worker’s Compensation, Social Assistance, Status Indian Tax Exemptions
Security Transactions – Capital Gains or Losses
Partnership Income – fishing, agriculture, business, etc.
Pension Adjustment Reversal

StudioTax provides good help and several tutorials to guide you through the various processes, but in general it was quite straightforward.  It is merely a matter of matching the box numbers on the paper tax slips with the fields on the StudioTax forms, and entering the corresponding values in these fields.  Amounts for your chosen deductions are similarly prompted for.  These processes shield you from needing to understand the actual CRA tax forms, in terms of knowing which fields should be entered or how to perform calculations on the raw data.  However, if you have more specific needs that require further tax forms, you can select to add any of the actual Federal or Provincial tax forms and then fill them out directly.

Once you are done all the data input, the program plugs the numbers into the correct locations in the actual tax forms, performs the necessary calculations, and the resultant CRA tax return is presented to you for review.  There is an option to validate your entries and you will be warned of inconsistencies, or missing data.  Another option allows you to try to "optimize" your return, including looking for ways of better dividing up income and deductions between spouses in order to minimize the tax burden.

Finally when you are satisfied with your generated tax return, you can create a .TAX file that is saved on your hard drive.  You can then go to the  Canada Revenue Agency at to Netfile.  You will be prompted to attached the .TAX form as part of this process.  In the past, you required a CRA Web Access code to perform the Netfile, and this code was sent as part of the paper forms mailed to you.  Since the mailing is no longer happening, the need for the web access code has been eliminated.

For this first usage of StudioTax, I wanted to verify my understanding of its calculations and compare them with my own.  So I still manually calculated the values of my tax return on the CRA forms, which are available at  Rather than entering everything by hand, I selected the "PDF fillable/saveable" forms so that I could enter the values using the computer.  When I compared the two results, they matched exactly.  This made me feel more comfortable with using the software.  Next year, I will probably forgo the manual calculations and just let the tax program carry the load.

Tuesday, March 26, 2013

Income Trusts - A Lesson Learned

In keeping with the retirement strategy described in our book Retired at 48, our portfolio concentrates on stocks that pay a steady dividend of 3.5% or higher, which we can withdraw regularly to pay our bills.  In building up this portfolio, we recently added several investments to our non-registered account that seemed to fit our criteria—relatively high dividend yield, good price to earning ratio, "Buy" recommendations from the analysts.  They also turned out to be income trusts, and we did not totally understand the tax implications of holding them outside of a RRSP or TFSA.  This tax season, we found out.

While the income trust pays on a regular basis (monthly or quarterly) similar to other Canadian stock, the money received may not be considered to be "eligible dividends", which qualify for preferential tax treatment.  The payouts from our various income trusts each contain more than one of the following components, many of which are taxed fully without the benefit of any type of reduction or tax credit.

Payout Type
Tax Implications
Eligible Dividends
Dividend tax credit which lessens the tax burden
Ineligible Dividends
Smaller dividend tax credit than eligible dividends
Foreign Dividends
Treated as regular income and taxed fully
Interest Income
Treated as regular income and taxed fully
Other Income
Treated as regular income and taxed fully
Capital Gains
50% of capital gains taxed after reduce by capital losses
Return on Capital
Reduces the purchase price of stock, so increases capital gain on sale

A new concept for us was the "Return of Capital" component of an income trust payout.  This amount is not initially taxed as income, but instead reduces the purchase cost of the income trust shares.  When you finally sell the stock, applying the reduction to the initial purchase price affects the calculation for capital gain or loss.  If you hold the stock for long enough, the price could reduce down to zero, making the entire sale price a capital gain.  If you still continue to hold the stock after the price is already zero, then you pay capital gains yearly on the additional payouts.

We had been careful to place our foreign stock and fixed income investments, such as bonds or GICs, in our registered accounts in order to shield ourselves from their tax implications.  We now realized that the income trusts needed to be treated in the same way, or we would be facing significant tax burdens which continue to increase the longer we hold the shares.

Having learned this expensive lesson, we will now take a one time hit to swap holdings, moving all income trusts to our registered and moving eligible dividend-baring stock to the non-registered.  Since we will trigger capital gains on the income trust sales, we will also sell any stock currently in a capital loss position to temper this.  We will incur the $9.99 administration fee per transaction on each sale and purchase.  Since I am buying and selling the same stock, possibly within the same day, I will try to stagger the buy and sell prices at least enough to cover to costs of the trades.  I have already successfully accomplished this for one of our stock and made a tiny profit in the process. 

Another advantage of moving the income trusts into the registered accounts is to save the hassle of calculating the tax owed on a yearly basis (let alone keeping track of the accumulating return on capital).  This is not an easy task compared to the eligible dividends.  It took several reviews of the CRA tax guide and reading multiple websites to get a good understanding of what needed to be done.  The T3 slips for income trusts also come a month later than the other tax slips, leaving less time to file your income tax.