Golden Girl Finance
 
Christine Clarke
Posts (3)
 
 

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Q&A: Should I use home equity or investment money to pay off debts?

July 29th, 2011 by
 

Is it better to use your home equity to pay off debts or to use money you have already invested?

Asked by Anonymous, Alvinston, ON

 

There is no right or wrong answer to this question as it depends on your personal tolerance for carrying debt, as well as a number of other financial factors. Generally speaking however, to use your home equity to pay off more expensive debt like credit card debt, you would likely be reducing your interest expense for carrying the debt, but your debt position would not change. It would just be transferred to your home equity. If you are comfortable carrying debt and incorporate a repayment strategy, then reducing your interest expense would be a smart way to go.

Another strategy that can be used in the above scenario is to liquidate some of your investment portfolio to pay down the debt, and then use your line of credit to buy back your investment assets. You would still have the debt in this case and would need to incorporate a repayment strategy, but your interest expense would be tax deductible against your investment income. You should consult your investment advisor before implementing such a strategy as one needs to be careful of the tax consequences that may be triggered upon liquidation of assets in your portfolio. Careful attention must be paid to this as it could make paying off your debt quickly less effective, in that you may end up just exchanging interest expense for tax expense.

If you have less tolerance for carrying debt and you have assets in an investment portfolio that can be liquidated without triggering onerous tax, this may be the way to go as it gets rid of the debt immediately. Again, discussion with your investment advisor would be recommended to explore the tax consequences of liquidating investment assets.

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Q&A: RRSPs and TFSAs explained

June 14th, 2011 by
 

I have just come back to Canada after 6 years overseas and will be starting my first "real job" in Canada. I would like to start putting money aside into an RRSP, but since this will be the first year that I will be making any money, how do I find out my limit for maximum contribution? Do I have to wait until next year when I get my tax return back before I can open an RRSP account? Also, with regard to a TFSA, is it true that you can only have one TFSA account? Or can you have multiple accounts in one financial institution or in different financial institutions?

Asked by Anonymous, Toronto, ON

 

Welcome back to Canada! Here are some thoughts to help you better understand your RRSP and TFSA options as they relate to your return to Canada and your new job here...

RRSP

As you are just returning to Canada after being away for 6 years, and if you did not previously earn income in Canada , you will not likely be eligible to contribute to your RRSP in 2011. Let me explain.

The maximum that you can contribute to your RRSP is calculated as 18% of your Canadian earned income from the previous year, to an annual maximum set by CRA (Canada Revenue Agency). The maximum 2012 contribution room, also known as "deduction room", will be set at $22,970. Please note, if you are currently participating in a company pension plan, your RRSP deduction room may be adjusted accordingly. Your 2011 earned income will therefore not generate RRSP deduction room until 2012. As you may know, CRA will report your 2012 deduction room on your annual notice of assessment. Look for this to come after you file, and CRA has processed your 2011 tax return.

Please note that there is an exception to the above if you had earned income in Canada prior to leaving. For example, if you earned income the year you left Canada, that income would have generated RRSP deduction room in the year following. As the assumption is that you would have already left Canada by this time, you would still have the room available to you in the form of "carry forward deduction room". This RRSP contribution would be available to you immediately upon your return to Canada. A review of your last notice of assessment (if applicable) would indicate whether there is any available room, or you can call CRA's general inquiry line at 1-800-959-8281 to confirm.

TFSA

You are free to have as many TFSA accounts (within your institution or outside of your institution) as long as your total annual combined contributions do not exceed the annual maximum contribution limit, (currently set by CRA at $5000 for 2011). Having said that, TFSAs are designed for longer term savings and are not meant to be used like a bank account with multiple deposits and withdrawals. An important rule that is often overlooked is that if you were to contribute the maximum contribution in a given tax year and then withdraw a portion during that same tax year, you cannot top your TFSA back up until the following calendar year. For example, if you were to contribute $5000 in Jan 2011 and then withdraw $3000 in March 2011, you cannot replace the $3000 withdrawn until 2012 when you are eligible to top up any amounts missed or withdrawn in the past year, plus the 2012 maximum limit. The funds that you consider for your TFSA should therefore be designated for a longer term savings strategy.

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Q&A: Which term deposit is right for me?

June 14th, 2011 by
 

I am looking into putting some money into term deposits. There are a number of options with respect to how the interest can be paid: monthly, semi-annually, annually, or at maturity. Does it make a difference which one I choose?

Asked by Anonymous, Toronto, ON

 

The answer here is relatively straight forward. If you don't require income payments from the interest being earned (i.e. to live off of), it is best to select payment of interest at maturity as that will let the interest earnings compound. In this way, you earn interest on the interest.