Category Personal Finance/ Estate Planning

An Alternative to RESPs

Statistics Canada estimates that the total cost of a four-year university education is more than $80,000,  including tuition, housing, food, books and additional fees.

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The Real Costs of College

When you think about how much it’s going to cost to send a child to college, you often concentrate only on the direct costs such as tuition and books. But there are indirect costs that also need to be considered.

Here’s a list of both types of expenses to evaluate when you are planning the costs of giving your child a higher education:

Direct Costs

  • Tuition: Some schools charge a flat fee, but others charge by the credit hours taken. Assume a minimum of 15 hours per term.
  • Room: This depends on whether the student lives in a dorm, an apartment or group house, or with a relative. Colleges usually provide an average figure for dorms, so use that because you won’t know the actual amount until your child has been assigned a room.
  • Board: If your student eats on campus, the school may require all meals to be taken in a dining hall or other campus facility. Some schools offer flexible meal plans, which are handy if your child doesn’t need three full meals a day seven days a week. The school’s estimates won’t include snacks or socializing. If the student lives off campus, calculate based on the usual amount consumed in a week at home.
  • Fees: Some fees are required and others depend on the course of study. For example, if your child takes science courses, you may be charged a lab breakage fee for each course. Some schools charge a student services fee based on participation in certain activities. And there may be fees for uniforms and equipment if the student plays a sport.
  • Books and Supplies: This depends on the student’s field of study. Science books can cost as much as $75 or more, and a literature course could require as many as 10 books. There may also be charges for workbooks, photocopied articles and study guides.

Indirect Costs

  • Transportation and Travel: Include commuting from the local residence to classes unless the student lives on campus, and travel expenses to and from home during school breaks. If the student has a car, include parking fees, insurance payments, and gas, oil, and maintenance.
  • Personal Expenses: Don’t forget the costs of laundry, entertainment, toothpaste, razor blades, haircuts and the like. They add up.

So it is no surprise that parents are looking for efficient ways to finance their children’s educations. Often the parent, or a grandparent, will gravitate to a Registered Education Savings Plan (RESP), the country’s top choice for financing higher education.

The popularity of RESPs stems from tax-deferred compounded growth, lower taxes on withdrawals because they are taxed to the child, and federal grants that help build the savings even faster.

But if the beneficiary decides not to get a higher education you may not be happy with the rules for accessing the money you’ve been putting aside.

For one thing, you must return to the government the grant portion of the RESP.

Then, in order to access the remaining money, three conditions must be met:

1. The account must have been open for at least 10 years,

2. The beneficiary must be at least 21 years old and be ineligible to receive education assistance payments from the plan, and

3.You must reside in Canada.

And then you have only two choices:

1. Transfer the money to a Registered Retirement Savings Plan (RRSP) held by you or your spouse or partner, provided there is contribution room, or

2. Withdraw it as cash and pay both your marginal tax rate as well as a 20 per cent penalty on money that you earned in the plan.

The alternative to these savings plans is an informal trust account.

The key difference between saving in-trust for your child and setting up an RESP is that the child has guaranteed access to the cash when he or she reaches the age of majority in your province. The money does not have to be used for schooling but could instead go toward travel, buying a car or home, or setting up a business.

But the money does belong to the child. You cannot access it unless it is for the benefit of the child. The money in an RESP belongs to you.

These informal trusts differ from formal trusts. The latter require a legal trust agreement, generally cost more to set up and administer, and are usually used for very large sums of money.

Informal trusts are simpler to set up and generally take the form of an in-trust account with a bank, trust company, credit union, investment company or mutual fund company.

Unlike an RESP, there is no limit on how much money may be held in the trust and no limits on when and how much you can contribute. That means you can put aside more than the lifetime maximum of $50,000 per beneficiary allowed by the registered plans. However, the trusts do not qualify for the federal education grants.

While setting up and contributing to an in-trust account is relatively simple, the tax structure is complex.

Income attribution rules apply to in-trust accounts. That means income such as dividends and interest are taxed in the hands of the higher tax bracket parent or adult who set up the trust.  If the trust is used exclusively to save Canada Child Benefits payments, however, interest and dividends are taxed to the lower tax bracket child.

Generally, then, in-trust accounts focus on growth stocks or mutual funds that invest in stocks, where growth is primarily from capital gains. There is no attribution of capital gains, and thus they are taxed to the child.

When money is withdrawn, the beneficiary will not owe taxes on the amounts you contributed. That’s because you put in after-tax dollars, so you have already paid income tax on the principal invested.

Using informal trusts is a complicated and at times controversial strategy that involves complex tax issues often reviewed closely by Canada Revenue Agency (CRA). Be certain to consult your professional advisor for help minimizing taxes and getting the most out of an in-trust education account.

Hold a Mortgage in Your Retirement Plan

Many people have two main investments: a home and retirement savings, the latter usually in either a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF).

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Q. Can I use my RRSPs for the Home Buyers Plan at the same time as the Lifelong Learning Plan?

A. Yes, you can participate in the Home Buyers’ Plan, even if you have withdrawn funds from your RRSPs under the Lifelong Learning Plan and you have not yet fully repaid the balance owed.

– Source: Canada Revenue Agency

The natural question then is whether you use those retirement plans to buy a home or other property? The answer is a qualified yes, under two circumstances.

1. Direct Purchase

If you have an RRSP, you can take advantage of the Home Buyers Plan and withdraw a maximum of $25,000 to buy a home (RRIFs are not eligible).

To participate in the Home Buyers Plan you must meet certain qualifications:

  • Unless you are disabled, you must be a first-time homebuyer. That means you or your spouse cannot have owned and occupied a home as a principal residence in the five years preceding the RRSP withdrawal.
  • You must have entered into a written agreement to build or buy a qualifying house before withdrawing the funds, and you must actually buy or build the house prior to October 1 of the year following the withdrawal.
  • Your Home Buyer Plan balance on January 1 of the year of withdrawal must be zero.
  • Neither you nor your spouse can own the home more than 30 days prior to the withdrawal being made. Also, you must make all of the withdrawals in the same calendar year.
  • You cannot buy a rental property or any other property that is not your principal residence.

2. Holding a Mortgage

Qualified investments in RRSPs and RRIFs include mortgages. So you can hold a mortgage inside your retirement plans and access more than the Home Buyers Plan maximum. However, you must meet the following strict requirements:

  • A lender approved under the National Housing Act must administer the mortgage. This includes most banks and credit unions, and many trust companies. The cost for this service varies, but typically is at least several hundred dollars a year.
  • You must insure the loan under the Canada Mortgage and Housing Corporation (CMHC) or through a private insurer licensed under the National Housing Act. The insurance may cost 2.9 per cent or more of the mortgage amount.
  • The amount of the mortgage payment, interest rate, and other terms of the loan must be in line with normal commercial practice. The interest rate must match rates in the market and other terms must match mortgages from financial institutions.

This approach does have a couple of disadvantages, including:

  • The extra cost and paperwork involved may make it unattractive.
  • Mortgages in your retirement plan may generate less income than other investments. If you would ordinarily hold investments yielding higher returns, the lost income could amount to a considerable sum over the term of the mortgage.

If you think that you want to hold your mortgage in your RRSP or RRIF, consult with your accountant to help determine the costs and how the restrictions might affect you.

Ten Home Improvements that Add Value

Before deciding where to spend home improvement dollars, consider talking to real estate professionals who are familiar with your area and have years of experience. They spend their days talking to potential buyers and know what features are likely to result in a “thumbs-up” on a house.

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First Impressions Matter

For the best chance of selling your home at the best price, presentation is key:

Basic maintenance – Home value doesn’t increase when you do small repair projects, such as replacing torn screens. But leaving them in place can signal neglect.

Furniture – Before showing the home, move furniture away from the doorways in each room. This gives a more open, larger appearance. Stand in doorways and evaluate the space of the rooms. You may be able to make them look bigger by rearranging furniture.

Clutter – The home should look lived-in but not crowded. Clear away knick-knacks and put surplus furniture in storage. Empty out crammed closets.

Windows – Open curtains so sunshine comes through clean windows, providing a light, airy feeling.

Flowers – Plant bright flowers near the front entrance and the back fence line, especially if they are visible through the home’s windows.

Smell – Air the home out and avoid strong pet odors, fried foods, etc. Ask your real estate pro the best way to create an inviting aroma.

Summer Barbecues on the Deck

Summer means barbecue season and with that comes the urge to kick back and relax outdoors.

Building a backyard deck will increase the resale value of your home by providing an extra “room” outdoors, a perfect place to relax after a cold Canadian winter. Estimated payback: 60 per cent to 90 per cent.

Pool Anyone?

Depending on where you live, a pool may be considered a requirement – or it may turn your home into a hard-to-sell white elephant.

People often disagree on the subject of pools. Some say the cost of a $25,000 pool won’t be recouped while others say it adds value.

There is one point of agreement. A pool can limit the size of your home’s market. Families with small children may view it as a danger, while other buyers may see it as a nice amenity, but not worth the work and extra expense. On the other hand, for many people, a pool conjures up fun images that could be enough to seal the deal.

With so many opinions, it’s no wonder that real estate professionals often advise homeowners that, if they’re going to add a big-ticket item like a pool, they should do it primarily to enhance their own lifestyles rather than to increase value for resale purposes.

Good guideline: Avoid trends that will appear outdated in a couple of years. By doing some fairly simple projects, you open your home to a broader market and hopefully, a quicker sell at the price you want.

Here are ten projects that generally add the biggest per-dollar punch to your home’s value and saleability:

1. Paint – New paint adds a fresh smell and a well-maintained appearance. On the other hand, a home that needs to be painted looks neglected. Estimated payback: As much as 300 per cent.

2. Landscaping – Well-trimmed bushes and a manicured lawn are signs a home has been maintained. These tasks may involve more sweat equity than financial investment. While landscaping, take a look at your mailbox. If it’s rusty and wobbly, replace it. A nice yard adds to the curb appeal that may get drive-by home shoppers out of their cars and through the front door for a better look. Avoid excessive landscaping unless it’s for your own pleasure. Buyers may admire it but few will pay extra thousands of dollars for it, regardless how much you spent on it.

3. Light fixtures – They don’t have to be expensive. But some old light fixtures make rooms look dated.

4. Window coverings – Do they let in the light? You don’t need costly drapes, but worn, outdated, or heavy window coverings are a definite negative. Natural light appeals to most home buyers.

5. Floors – Attractive flooring adds a lift and can be fairly inexpensive. If carpet is a neutral color and in good condition, it may only need professional cleaning. If not, replace it, stick to mid-grade, neutral tones that will go with all color schemes.

Nice-looking hardwood floors can be a major drawing card. If yours appear worn, it would be a smart use of your home improvement dollars to have them refurbished.

6. Central air conditioning – Depending on the area, this can be a feature that many buyers expect.

7. Updated kitchen – The kitchen is generally a major selling point, but it is expensive to totally redo it. Although prices can quickly change, the cost of a completely remodeled kitchen can range from $20,000 and $30,000, and even higher if you plan to install a showcase kitchen. That’s not bad if you’re doing the work for your own benefit and will enjoy it for a few years.

An alternative is do spot remodeling jobs that can be accomplished for less money. Consider a new sink and fixtures, counter tops, cabinet fronts, lighting, a paint job, and even drawer and cabinet pulls can add up to a nice kitchen face lift. If the appliances look old and used — or if they do not match — consider replacing them. Estimated payback on a complete remodel can range from 68 per cent to 120 per cent.

8. Bathroom – You can also do spot remodeling jobs on the bathroom with new, expensive looking, fixtures, a new vanity and an interesting mirror. Make sure vanity mirrors are at an accessible height for every member of the family. As with a kitchen, soft lighting and warm colours can go a long way in increasing home value. Add vases and plans as design elements. Estimated payback: 65 per cent to 120 per cent.

9. Energy features – If your home is older, energy loss may be a concern for would-be buyers. In that case, improved insulation for windows, doors, and storm doors can be smart upgrades. Given the nature of Canadian winters, consider installing thermal windows which help trap heat inside, keeping the home warm and reducing heating bills.

Prices change, but thermal windows range from about $20 to about $50 a square foot. Estimated payback: 50 per cent to 90 per cent. Some retrofits, like better insulation and high-efficiency furnaces, pay for themselves relatively quickly. Others, like solar panels, heat recovery ventilators, and tankless water heaters, may take years to pay for themselves. Payback: Highly variable.

10. Room addition – An added room may increase the value of your home, but may not pay for itself. Before building an extra bathroom or adding a family room, talk to a real estate professional to see what is selling in your neighborhood. If your home has two bathrooms, for example, but recent sales have been mostly three bathroom homes, it might be a worthwhile project. Otherwise, save you money. General estimated payback: 50 per cent to 83 per cent, depending on the addition.

These are just some considerations when improving your home for resale purposes. Getting top dollar for your home generally requires some work and cash. But with a little planning and some advice from real estate professionals, you can help make sure the dollars spent on improvements will come back in the sales price.

There Can Be Gold in Run-Down Houses

Foreclosures are bad news for banks and delinquent homeowners, but they can offer the best real estate deals in town for the rest of us.

Court Options

There are two main ways in Canada that a lender can recover a mortgage debt when a borrower defaults:

  • Judicial sale,which is conducted under the supervision and authority of the court. A lender must apply to the court to get the court’s permission to sell the property.
  • Power of sale, allows a lender to sell property without the involvement of the court. The lender has the right to sell the property from the mortgage document or legislation that authorizes power of sale in the particular province.


    Checklist of Information to Have at Hand

    To ensure your mortgage financing is in place before presenting your offer to the court, here is a checklist of information your mortgage broker and financial institution will need:

    1.Personal information such as; name, age,maritalstatus,dependents, social insurance number.

    2.Balance of chequing and savings accounts.

    3.Credit card account numbers with current balance.

    4.Stocks, bonds, mutual funds or RRSP values.

    5.List of any outstanding debts and the remaining balance.

    6.List of assets and their estimated value.

    7.Confirmation of employment on employer’s letterhead stating position, length of employment, and gross income.

    8.T-4 slips or Tax Returns for two years and a current pay stub as proof of income.

    9.Three-years’ worth of income statements and balance sheets, Canada Revenue Agency Notice of Assessments and tax filings (T1 general) if self-employed.

Houses, condominiums, and vacant lots can all be purchased after a foreclosure for 10 per cent to 15 per cent below the market value of comparable properties.This can mean a lower down payment, a smaller mortgage and lower monthly payments. The problem is, well-informed investors often snap up the premium deals before the general public knows about them. But you can compete if you know what you’re looking for.

Before you start your hunt for a bargain, be sure that you are prepared to invest the time and money to add value to the property.

A distressed, or foreclosure sale, results when the borrower defaults on his or her mortgage payments. The sale of the property is to satisfy the payment of the loan.

Getting to know real estate agents in the area that you are interested in can help you find out how to buy foreclosed homes. They can tell you when they are coming up for auction. Often people do not know they are on offer until it is too late.

Often the government will have mass sales where they have a group of houses that they want to sell off cheaply. Once again keep your eyes and ears open and call on your real estate agent for any upcoming auctions.

To start, there are two options that the court can take in foreclosure proceedings (see right-hand box).

The steps to buying a foreclosure vary depending on the province, so there may be small differences in how the sale of a distressed property proceeds. For example, in Ontario the lender can list and sell without court approval, while in Quebec the lender must first take title.

Generally, however, purchasing a foreclosure involves the following eight steps:

1.The lender/mortgagee applies to the court to sell the property where the borrower has defaulted on payments.

2.A court order is given to the mortgagee to sell the property.

3.The mortgagee can list the property with a local Realtor.

4.The court must approve the purchase price and the terms of the sale.

5.The purchaser makes an offer that is first accepted by the mortgagee.

6.An application is made to the court to present a no-subject offer (all financing, inspection, review and other conditions have been approved).

7.The court then either accepts or rejects the offer.

8.The court ratifies the offer that day and completion and possession dates are confirmed.

The difference between purchasing a foreclosure property and a regular property is that with foreclosure, a no-subject offer must be presented to the court for approval. In a regular sale, which usually has subjects, an offer is presented to the owner/vendor of the property. In most cases an offer presented to a regular vendor is countered and the negotiation between the buyer and the seller can often be a tedious and cumbersome process.

With a little foresight and work, you can beat the pack and wind up with a good deal on a long-term investment or second home. Once you find a property, you may want to check with your financial adviser to make sure it’s a worthwhile investment and fits in with your long-range financial strategy.

Why You Might Want Some Title Protection

You know that you can insure against what might happen to your home and its contents in the future, but are you aware that you can also protect your home from matters that happened in the past?

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The Risks That Are Covered

Title insurance policies cover a broad range of risks that include:

  • Unpaid property taxes;
  • Survey defects;
  • Construction liens;
  • Defects in title;
  • Costs arising from building code violations;
  • Title fraud;
  • Zoning issues;
  • Claims of mental incapacity;
  • Defects in title that may occur from conflicting ownership claims, liens, or unreleased mortgages, and
  • Compliance and access issues such as work orders, permit violations, fences, boundaries, tenancies, rights of way, and certain easements.

Consider this situation: A man knocks on your door and tells you that he actually owns the home you purchased several years ago and have lived in since. The problem, he explains, is that a deed was forged twenty years earlier that illegally transferred the property owned by his now-deceased father. Even though you later bought the property in a legitimate deal, the forgery voided that original sale and all subsequent sales, including yours.

This is when you want to be able to pull out your title insurance policy.

Depending on the age of the home, it may have gone through many changes of ownership in the past, and before the house was built, the bare land may have gone through many more. Every transfer of ownership provides an opportunity for error, deliberate omission, or crime.

When you purchase a property, the seller generally provides a deed that contains a guarantee that the title is good. The seller is stating that no other party will show up and claim to own your home because of an improper transfer in the past and you won’t be hit with years of unpaid property taxes or other potentially devastating problems. However, that seller may be completely unaware of a past problem that, if discovered, would void the sale.

Title insurance is aimed at protecting you from such problems.

Title insurance companies assume the risk that a homeowner may be required to remedy a title problem at a later date. When covered title problems arise, it is the role of the insurance company to correct the problem or pay for any loss the policyholder incurs up to the policy amount. Additionally, all title insurance companies pay for legal costs incurred in defending title against the claims of others. (See right-hand box for a list of risks title insurance generally covers.)

Most title insurance policies contain exceptions for such matters as failure on your part to disclose pertinent information that could affect the title.

The policy remains in effect as long as you or your heirs own the property, and you can purchase a policy long after you bought it.

Many lenders require title insurance to protect them against a loss on the mortgage up to the principal amount of the loan. Those policies remain in effect as long as the mortgage remains on the title.

Before a title insurance policy is issued, the title company or an attorney examines all public records that pertain to the ownership of the property, usually going back 50 years, to ensure that the chain of title is problem-free. Once the company is certain that the title is clean and unencumbered, a title insurance commitment will be drawn up, and a policy issued.

Title insurance can cut a homebuyer’s costs by eliminating many of the searches a lawyer would normally do as well as the costs of having a survey prepared and the expenses involved to remedy any problems a survey would have disclosed.

Depending on the problem, title insurance companies will sometimes provide coverage for issues that would otherwise prevent a deal from closing with problems. For example, if a bank refuses to release funds because the homebuyer has the same name as someone who is subject to a court judgment, title insurance can be used to ensure the transaction closes.

Or if it is discovered that the garage or pool of the house being purchased extends onto a neighbouring property, title insurance can cover the cost of removing the structure if that is necessary. Considering the costs that could be involved in such situations, title insurance can be a cost-effective proactive move.

The one-time cost for title insurance ranges from around $200 to about $325, depending on the province and the type of property.