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.

Friday, March 22, 2013

Currency Exchange Tip

We will be vacationing in Europe this summer and wanted to buy Euros for spending money.  We contacted several of the major banks, and a currency exchange on the same day to compare rates.  On the day in question, the various banks were offering around $1.40 per Euro.  By contrast, the rate given by Calforex Currency Exchange was only 1.3532.  Based on online reviews, Calforex usually offers better rates than the banks.  They do apply a service charge per transaction of between $2.50-$3.50 depending on the size of the purchase.  They are conveniently open on the weekends and accept cash, bank draft or debit, allowing you to withdraw funds directly from your bank account (assuming you have sufficient withdrawal limits).

They offer another feature that we may try out in the future.  They have a Buy Back Option for repurchasing up to 50% of the currency purchased, at the same rate of the original purchase.  The original purchase must be at least $1000 CAD and the money must be returned within 30 days of the original transaction.  This protects you from being stuck with purchasing more currency than you actually end up using.

Calforex Currency Exchange

Monday, March 11, 2013

Reduce Vacation Costs by Home Swapping

The largest expense on our annual budget is travel.  Being retired and having all this free time to travel is a double-edged sword.  During our working years, our jobs limited us as to when and for how long we could go on vacation.  Now that we are released from those restrictions, the world is our oyster, but we need to be careful not to overspend our pearls.

We use various strategies for keeping our travel budget down, which we describe in detail in our book "Retired at 48 - One Couple's Journey to a Pensionless Retirement".  A particularly effective technique has been the home swap, where we stay in another family's home while they simultaneously stay in ours.  No money is exchanged, so both parties receive free accommodations including a kitchen, living area and sometimes even a garden or outdoor terrace.  Additional savings are achieved by the ability to be able to eat some meals "at home", and we get the chance to live like locals in our travel destination.

We are signed up on two websites that support home swapping, a free one called Geenee and a fee-based one called Love Home Swap.  As expected, we are getting much more traction on the fee-based site and are receiving many more responses to our swap requests, even if those responses are to decline.  The assumption is that if you are going to pay money to a member, then you are serious about swapping.  Having said that, we were still able to previously complete two home swaps using the free site, with a trip to Chicago and one to Paris, as described in our travel blog.

It is not easy to find a swap match.  You need to find someone else who wants to visit your location at the exact same time that you are visiting theirs (unless you have a secondary property to offer for a non-simultaneous swapunfortunately we don't).  Persistence is the key.  Once we retired and joined the new fee-based swap site, we sent out almost 100 requests to homes in a multitude of locations that interested us.  We offered up a wide availability of dates and durations that we could travel.  We received a bunch of rejections from people who didn't want to visit our city, but were grateful that we were actually getting any type of answer at all, unlike with the free site.  We had several responses expressing potential interest for next year, which we've filed away to follow up later.  We also received several requests to swap with us for locations that were not high on our wish list, including Honolulu, Cayman Islands and Valencia, Spain.  We turned those down because we don't like sun vacations.  We also received a swap request for New York City, just one week after we returned from a visit there.. bad timing!

Our patience and perseverance finally paid off when we found a couple living in south of France who actually wanted to come to our city around the same time that we would want to visit theirs.  We chatted a few times on the website to ensure we felt comfortable with each other.  After agreeing tentatively to swap, we set up a Skype chat to get to know each other better.  We now have plans to spend a month in the Var region of Provence, in a small village surrounded by a medieval wall.  The cheapest rental accommodations we found for the same period in this area was over $4000.

Many people express concerns about "allowing strangers into their home".  There definitely needs to be a degree of mutual trust to make this work.  But remember that while they are in your place, you are also in theirs.  They will take care of your home as well as they hope you will take care of theirs.  So far, we have not had any problems with our swaps.  And since we are traveling for such a long period of time, it turns out it is more secure from an insurance perspective to have someone occupying our home rather than leaving it empty for extended periods.

We are looking forward to our next home swap adventure, and already making plans for the next year.