Earth Hour in the Loonie household

Saturday evening, Toronto observed Earth Hour. There were lots of events in the city to commemorate the widespread turning off of lights between 8:00 and 9:00, but Ms. Loonie and I had a fairly laid-back plan for the evening. We joined a friend of ours whose condo has a nice city view, and from 7:30 until 9:30, we munched on a buffet of crackers, cheese and fresh vegetables, and watched the changes in the lighting of the downtown skyline.

Since darkness had not fallen completely by the beginning of the hour, the effect of lights turning off at 8:00 was far less dramatic than the effect of lights turning back on after 9:00. Still, it was a nice quiet evening in a cozy, candlelit environment, with good food and good company. In fact, when the lights started coming back on at the end of the hour, we decided to keep ours off for the rest of the evening (although we did cheat a bit by checking the March Madness results on TV).

I'm not sure how much Earth Hour actually accomplishes, aside from raising awareness and giving participants a warm fuzzy feeling, but I've certainly spent less pleasant Saturday nights, and I think we'll be making this a tradition.

TransUnion finally reports for duty

I requested my credit report from the three Canadian credit bureaus on February 7. This was my first time ever obtaining my report, and I opted for the free version, which must be requested offline, as opposed to the version available online for a fee. For Equifax and Experian (aka Northern Credit Bureaus), I was able to send my request by fax. TransUnion, however, does not list a fax number, so I had to mail my request to their Consumer Relations Centre in Hamilton. In all three cases, the request consisted of a form filled out with my personal information, as well as photocopies of two pieces of identification.

Equifax and Experian both responded promptly, and I had these two reports by the end of February. Equifax has an incorrect digit in my postal code, but other than that, the information in both reports is 100% correct. All trade lines listed are actual credit accounts that I recognize, and each line has the correct age, limit, balance and status. I was relieved to see no evidence of any identity theft. However, as March rolled along, I became increasingly uneasy at the lack of response from TransUnion.

Well, come Friday March 28, I finally received my credit report from TransUnion. The "file pull" date listed on the report was March 24, so it seems to have taken them 40 days, or just under six weeks, to fulfill my request, assuming four business days' delivery time at either end of the transaction.

As unimpressed as I am with TransUnion's turnaround time, it was interesting to note the differences in the content of the three reports. Equifax and Experian seemed pretty similar in the number and type of trades that they listed, while there were a number of accounts that were absent from the TransUnion report.

I think I'll still make a point of requesting all three reports once a year, but next time I'll make sure I send my TransUnion request by registered mail. It's just too unnerving having all my personal information floating out there for over a month with no idea of whether it's reached its destination.

That was a close one.

As many of you know, I've had some issues in the past few months with overengineering my finances. At times feel like a financial Icarus, flying too close to the sun on wings of automated transfers. I've been burned twice by my financial fiddling, once when I forgot how many free withdrawals I was allowed in a month, and once when my auto insurer charged me $0.01 more than they said they would.

Well, yesterday I had a close call with ING. Due to Friday being a holiday, last Thursday's Freedom Amount contribution didn't clear until this morning (there's a five-business-day hold on deposits). When I checked my ING balances yesterday afternoon, I saw that my monthly donation to Jazz.FM91 had just come out of my "Giving" account, leaving me with a balance of $81.75, $80 of which was still on hold.

I have to admit I don't know the NSF rules at ING, but I can only assume that the outcome would not have made me happy. I'm a little unnerved that I only avoided the sordid details by $1.75.

Paid Twice has a post today on the pros and cons of automated finances, which really hit home for me after yesterday's close encounter.

"Frugal" and "fun" activity: clean up your computer system

As part of a general aim to get more organized (technically one of my 2008 goals), I decided last week that I should clean up my home computer system. I've been running a dual-boot system (Windows 2000 and Ubuntu) for a number of years, and as always seems to happen, the computer has become rather cluttered. I always keep my computer relatively spyware- and virus-free, but there's inevitably some junk that builds up over time.

Well, enough is finally enough, so on Monday afternoon, I logged into Windows and started the process of formatting the hard drive and reinstalling the operating system. I have an old copy of Windows 2000 Professional, and there is no limit to the number of times I can reinstall this, so out of somewhat sentimental reasons, I still want to keep this OS alive. In addition, I wanted to reinstall my copy of Windows XP, which hasn't been used since the computer on which it was installed kicked the bucket a year ago. Finally, the plan is to add Ubuntu 7.10 to the mix, for a triple-boot system.

I hit a few snags in the installation process, but after a day or so of tinkering, I have Windows 2000 and XP peacefully coexisting. Tonight I'll add Ubuntu to the computer, and start the process of sharing my Firefox and Thunderbird profiles between the three operating system. I also want to take a stab at running Windows seamlessly in my Ubuntu session using virtualization software.

Personally, despite the frustration and hundred or so reboots, I find this sort of spring cleaning a lot of fun. Ms. Loonie shakes her head as I stare at my blue screen of life, but I love the idea of having a well-organized, freshly installed and up-to-date computer system. There's also the matter of actually using my copy of XP, which has been collecting dust for over a year.

When you combine breathing new life into my existing computer, with getting benefit out of an OS I've paid for, while continuing to use a free OS, and I think this counts as a pretty frugal activity.

I simply prefer not to think of the dollar value that I've spent during the installation process.

The market can make you crazy.

Interesting Money posted recently about his nasty habit of obsessively checking his investment balances. I have to admit that I share this tendency to over-track my retirement accounts, whether out of excitement, concern, or morbid curiosity.

In spite of my daily ritual of checking my account balance, I've generally been able to keep a cool head during the market turmoil that started last summer. I haven't done anything drastic like selling off my investments or switching to an all-bond portfolio. In fact, I seem to have been pretty lucky with my timing in diversifying my asset allocation using low-cost index funds. Given my still-negative net investable assets, the single biggest factor in my net worth trend over time is my ongoing debt reduction. As a result, although investment performance does have an impact on my overall financial picture, this effect is often overshadowed by my progress in paying down my debts.

I was looking at my history of monthly snapshots at NetworthIQ, and thought I'd have a look at my retirement account history. Since I started tracking my monthly progress, my retirement balance has gone from $36,087.43 to $46,914.08, an increase of $10,826.65. That's not a bad balance growth, but let's not forget that I've been steadily contributing to my RRSP during this time. In total, I've added $10,487.76 in book value (meaning actual out-of-pocket contribution value) to these accounts, so my actual investment "returns" really amount to $338.89. If I factor in my employer's matching contributions of $1,856.03 over the same timeframe, I'm actually behind by $1,517.14.

To get a (very rough) idea of the rate of return represented by these numbers, I'm adding half my contributions to my April 2007 balance, and using that as my starting amount. Therefore, I get the following 10-month rates of return:

• Without Match: $338.89 / ($36,087.43 + $5,243.88) = 0.82%


• With Match: ($1,517.14) / ($36,087.43 + $6,171.90) = -3.59%

This is equivalent to annual rates of return of 0.98% and -4.29%, respectively.

Even the positive 0.98% is not exactly kicking inflation's butt.

As I look at these numbers, I remind myself constantly of the words of encouragement offered to any long-term investor:

• The real asset at this point is the stock/fund shares themselves, not their dollar value. These investments are generating dividend and interest income, which is in turn being used (through a DRIP) to buy more shares.


• The 4.29% "loss" I see when I take into account my employer's matching contributions is currently only a loss on paper. Provided I don't get cold feet and sell now with prices at their current lows, there's a very good chance that I'll more than recoup this drop over the next couple of decades.


• Even though my investment returns over the past 10 months have been poor, I'm still nearly $11,000 ahead of where I was last April. That's nothing to sniff at.


• I wish, oh how I wish, that I had some extra cash lying around to snatch up some of the investments that are currently "on sale".

I'll say this much: it's certainly shaping up to be an interesting year.

Oh right, the blog!

Well hello there, loyal readers. I'm finally back after my Easter weekend hiatus. I hope you enjoyed your time off work. I wouldn't exactly call our own weekend relaxing, considering we had somewhere to be each of the past four days, but it was nice to have some time off, and to catch up with some relatives I haven't seen in a few months.

We managed to get through the weekend without breaking the bank, and now it's time to get my head back in the game. I've barely thought about either finances, my blog, or my day job during the past four days, so I have some catching up to do.

It was nice to see some upward movement in the markets yesterday, even if it has thrown my freshly rebalanced portfolio out of whack again. If I have to choose, I'll take positive growth over to-the-penny asset allocation, but I'm still shaking my head that I hemmed and hawed last week over the exact amount of each index fund to buy, only to have everything shift over the next few days.

Payday update: better late than never

Look at the "2007 Year-End Results" section of the sidebar, and you'll see that my debt reduction progress bar for 2007 sits frozen at 75.1%. I only made it three quarters of the way to last year's goal of $22,000 in revolving debt. This goal was a bit too much of a stretch for me, and although I made good headway, I fell short of the 100% mark by year's end.

Well, today my revolving debt finally dropped below my 2007 target of $22,000, coming in at $21,847.23. Two weeks ago, I passed the 20% mark in paying off my revolving debt, so this is just another milestone in getting rid of my debt. It took me nearly three months longer than expected to reach this goal, and I'll have to pick up the pace to make my 2008 goal of $14,000 by December 31, but I'm maintaining consistent forward progress, and that's the important thing. I've updated my NCN Network chart if you're interested in the details.

There's not a lot else to report on my March goals. I've met my $1,280 goal for my Emergency Fund, and I've been reasonably good on the physical activity front. I'm not seeing as much progress on the actual weight loss as I would like, but I've started running again, and that should speed things along. My post count for the month is coming along nicely, so all in all, it's looking like a pretty run-of-the-mill month.

Rebalancing for the first time

My employer allows us to direct up to 85% of our year-end incentive into a group RRSP to reduce our taxation on the bonus. Under this group plan, we can choose from a variety of low-MER mutual funds, or invest in the company's stock. I deferred a big chunk of this year's bonus into this plan, and then proceeded to transfer the balance into my brokerage self-directed RSP account.

As of last night, I had a large cash balance sitting next to my index funds in the brokerage account, and this morning I placed orders to use this cash to buy more units of my index funds. To determine how much of each fund to buy, I used a spreadsheet similar to Canadian Capitalist's rebalancing spreadsheet. Within a couple of days, these orders should be filled, and I will be the proud owner of a freshly rebalanced retirement portfolio.

Let's see whether my spotless record of timing the market continues.

Remember the tape deck: a lesson in delayed gratification

When I was a kid, one of my favourite pastimes was browsing the Consumers Distributing catalogue. The pages of this catalogue were always teeming with unimaginable treasures, from the latest G.I. Joe action figures and assault vehicles, to sporting equipment, to keyboard synthesizers and children's drum sets. Every November, my brother and I would gather around the catalogue to put together our wishlists for Christmas, which invariably took the form "CD page 72, item Q; CD page 89, items L-P..."

Just after I turned 12 years old, I spotted an item in the electronics section of the catalogue that I just had to have: a Panasonic dual cassette deck. Feast your eyes on this list of features, and tell me you can get through another day without owning this bad boy:

• One-touch, high-speed dubbing


• Cushion eject


• Auto reverse on recording deck


• Auto stop on playback deck


• AM/FM radio with telescoping antenna


• Built-in condenser microphone

The tape deck had everything I could possibly want. Unfortunately, it also came with a hefty price tag: $99.99.

I asked my parents to buy the tape deck for me, but they balked at the price. They agreed to give me extra chores around the house to earn some extra money, and said that I could buy it once I had saved up the purchase price. I was a bit downcast at the monumental task put before me, but I decided to soldier on and earn my way to my all cushion ejecting, all high-speed dubbing prize.

For the next several months, I cleaned bathrooms, dusted and vacuumed the house, helped paint the garage, and babysat neighbourhood children, and little by little, my pile of savings grew. I jumped at any opportunity to earn some extra cash, and I clamped down on my spending, because every quarter that I spent on candy or arcade games was a step away from my goal of kicking back and listening to my freshly dubbed cassettes.

After months of saving, the day finally came, when I had $114 ($100 plus taxes) in cash in my hot little hands. My mother drove me to Consumers, and I excitedly filled out the catalogue slip to request the tape deck. The cashier brought the box out to the counter, and I proudly handed over five twenties, a ten, and four ones (this was in the days before the Loonie had completely replaced the dollar bill). The transaction complete, we got back in the car and headed home with my spoils.

I loved that tape deck. Over the next few years, I spent many an evening basking in the dulcet chipmunk tones of high-speed dubbing, as I put together countless mix tapes. I felt a sense of pride every time I looked at it, knowing that I had earned it through hard work and careful planning. When it finally kicked the bucket in my third year of university, it was like saying goodbye to an old friend.

These days, when I'm suffering from a bout of technolust, I think back to the day I bought that tape deck, to the intense pride I felt being able to pay in cash, and to the years of use that I got out of my purchase. If I can't pay cash, I either move on, or save up until I can. The lesson of the tape deck is a powerful one: delaying gratification can make it much sweeter, with the feeling that you've unequivocally earned your new toy.

My thousands of dollars of consumer debt are a constant reminder that I've strayed from the path of delayed gratification in the past.

I'm glad I've found it again.

What the heck is a Finwikian?

By now, many of you have probably heard about The Finwikian, a new personal finance wiki created by Mrs. Micah of Finance For A Freelance Life. From the Finwikian home page:

The Finwikian is, put simply, a wiki dedicated to all things personal finance on the internet. It contains a catalog of personal finance blogs and will eventually include articles on numerous topics related to personal finance.

This is an exciting project, as it really represents a completely open collaboration by the personal finance blogging community. For those of you interested in contributing, head on over to register and add your blog.

Loonies And Sense is one of the blogs indexed at The Finwikian.

Happy Saint Patrick's Day!

Whether you're already nursing a hangover from St. Patrick's Eve, or simply working on tomorrow's hangover, be safe and try to use as much common sense as a day like today will allow.

Besides Christmas, I've often found St. Patrick's Day to be the single most difficult day of the year to maintain any sort of budget sense. Last year, for example, with the holiday falling on a Saturday (which will happen again in 2012), Ms. Loonie and I marched into our neighbourhood pub with a couple of friends at 11:30 in the morning, and finally relinquished our table and headed home just after midnight. As you can imagine, my MasterCard bill for the day was in the hundreds.

I don't know about you, but I'm glad that sort of thing only happens every 5-6 years.

Enhancing the Emergency Fund

Flexo at Consumerism Commentary wrote earlier this year about a five-point emergency plan, which takes the concept of the Emergency Fund beyond a simple cash balance in an online savings account. Flexo's emergency plan consists of the following:

• "Under the mattress" cash


• Liquid savings


• Investments


• Credit


• Loans/gifts from friends and family


• Frugality (bonus item)

The idea is to diversify your emergency portfolio, so that you have different sources of protection, as well as a defined "order of operations" for getting at your money. The list above is roughly in order of increasing desperation, similar to Mighty Bargain Hunter's rating of piggy bank strength. It's a good idea to have these levels of severity defined before you're actually facing an emergency.

This has got me thinking about my own Emergency Fund, currently a $1,270 balance in an online savings account (actually spread across four separate institutions). If I had to, I could get at this money within 24 hours by transferring it into my primary chequing account, and I have immediate ABM access to a portion of this amount via my HSBC access card. However, I like the idea of a more diversified approach to preparing for emergencies, and this has me thinking of ways I could spread out my funds a little more. I won't be pursuing the investment avenue (beyond my retirement savings) until my revolving debt is paid off, but there are a couple of ideas I'd like to explore in the short term.

The "under the mattress" cash is an idea that appeals to me. In the event of a power outage or natural disaster, it would be good to have a couple hundred dollars in cold, hard cash that I can grab at a moment's notice. Trent at The Simple Dollar has written about doing exactly this, and I think it's a smart move. With this in mind, I plan to pull $200 out of my Emergency Fund this week, and stash it at home. A year ago, I would have been hesitant to do this, not trusting myself actually to keep the money "for emergencies only". However, I feel that I've successfully cordoned off my Emergency Fund from my other finances, and I'll be able to use this cash responsibly.

I've also been thinking about other forms of currency, like stamps and public transit tokens. Now that we can buy "permanent" postage, both of these items are essentially protected against inflation. A stamp will always be good for mailing a letter, and a token will always be good for one ride on the TTC. Having a handful of stamps and tokens set aside (with the emergency cash?) could make things easier in the event we had to get out of town quickly.

Another emergency investment recommended by Flexo is to use your pantry as part of your Emergency Fund. Just keep a stockpile of staples on hand, and you know you won't have to worry about groceries during a temporary emergency. This could also apply to other non-edible staples, such as shampoo, deodorant, etc. Another twist on this is to redeem rewards points for grocery or pharmacy gift certificates, and keep these for use in an emergency. For example, I can redeem 1,400 Air Miles for $200 worth of gift cards at Dominion. That's a handy weapon to have in the emergency planning arsenal.

These ideas, along with building a chequing cushion, are things that I can act on in the short term, with minimal impact on my debt reduction progress.

What other elements do you have in your emergency plan?

Getting the most from a group RRSP

Canadian Capitalist has a nice post on the benefits of participating in an employer group RRSP. The gist is that, if your employer provides a match to your contributions, then you are leaving money on the table by not signing up for the plan. Many personal finance experts list this as a priority even while paying off debt: contribute enough to your employer's retirement plan (group RRSP for Canadians; 401(k) for Americans) to get the maximum employer match.

My employer has a group RRSP in which they match half of employee contributions, up to an annual maximum. In my case, the employer match is only available for purchases of the company stock. We also have a portfolio of low-MER mutual funds that we can contribute to through payroll deductions, but there is no match on these funds. Still, having an immediate return of 50% on my investment every two weeks is a great deal, even if it is all invested in my employer's stock. Unless the value of the stock suddenly drops by more than 30%, I end up ahead.

One of the benefits given by Canadian Capitalist is the up-front tax refund you get if you contribute to your employer's group RRSP through payroll deduction. Because you're making the RRSP contribution directly from your paycheque, your employer withholds less income tax, so the impact of the deduction is lessened. Plus, you aren't making the dreaded interest-free loan to the government.

Of course, this up-front tax refund also means you aren't in for a juicy refund cheque when you file your taxes in the spring, because you've already realized the tax savings. The RRSP advertising through January and February of every year is counting on the appeal of a big tax refund resulting from a lump-sum contribution to bring your money through the bank's door. However, if you've been contributing a portion of each paycheque all year long, you may not have this lump sum available.

There is a way you can "trick" yourself into giving yourself a refund for your group RRSP contributions. If you multiply your paycheque deduction by your marginal rate, and set up a recurring transfer of the resulting amount to an online savings account, then when tax season comes around, you will have a virtual tax refund sitting in this account.

For example, if you contribute $150 every two weeks to your employer's group RRSP, and your marginal tax rate is 40%, then you would set up a bi-weekly transfer of $60 to an online savings account. At the end of the year, not only will you have $3,900 (plus applicable employer match) in your RRSP, but you'll have $1,560 sitting in a savings account, as your reward for saving so well.

More good news

Looking back at last night's 1,542-word post on Canadian income tax, there's only one conclusion that I can reasonably draw:

I'm a nerd.

Just thought I should clear that up.

In other news, HSBC Direct has joined the club in lowering interest rates on savings accounts. Effective yesterday, their rate has dropped from 3.70% to 3.30%. They are now exactly on a par with ING Direct. The one upside here is that their promotional rate on new balances until May 2 now represents a 1.45% bonus over their regular interest rate. That's nothing to sniff at, if you have substantial balances to move over.

I'm always reluctant to "chase" rate offers on credit cards, mainly because of the impact that opening and closing credit accounts would have on my credit rating. Case in point: it took me months of fence-sitting to decide to take advantage of the 0% MBNA offer. When it comes to savings accounts, however, I'm far more inclined to "try out" a given account, because there's no concrete downside to having no-fee savings accounts with multiple institutions. Of course, managing these multiple accounts significantly complicates my finances. I have four distinct savings account logins to remember, and four distinct balances to check at the end of each month.

Given that the interest rates on online savings accounts seem to be converging just below the Bank of Canada rate, I'm not sure it's worth my time to chase minor rate advantages from bank to bank. The important thing is, my Emergency Fund and short-term savings are earning more interest than they would in a brick-and-mortar account, and they're with institutions that give me convenient access to the funds as I need them.

That'll have to be enough for now.

Making sense of income tax

With February out of the way, and the associated deluge of RRSP advertising put to rest for another year, it's time for the push to get your tax return filed. Canadians have until April 30 to file their tax return, and this is the time of year when we traditionally shove a pile of paperwork at our accountant, and hope for the best.

Although there can be a lot of number crunching involved, preparing a personal tax return can actually be pretty straightforward. I thought I'd post a general summary of the calculation of Canadian income tax.

The Basics - Marginal vs. Average Tax Rate

At its most basic, income tax represents a percentage of the income that you make in a year. If you divide your total income tax for the year by your total income for the year, you get your average tax rate. You will rarely see two people with the same average tax rate, unless they have exactly the same income. This is because income tax is actually calculated as a percentage of marginal income earned within tax brackets. For 2007, the federal tax brackets and marginal tax rates were as follows:

• $0.01 - $37,178.00 - 15% tax


• $37,178.01 - $74,357.00 - 22% tax


• $74,357.01 - $120,887.00 - 26% tax


• $120,887.01 and above - 29% tax

Therefore, if you had income of $40,000, you would pay 15% on the first $37,178 ($5,576.70), and 22% on the next $2,822 ($620.84), for a total of $6,197.54 in federal tax, giving an average federal tax rate of 15.5%.

Each province has its own marginal tax rates, which are calculated on top of federal taxes. In Ontario, for example, the 2007 provincial brackets were as follows:

• $0.01 - $35,488 - 6.05% tax


• $35,488.01 - $70,976.00 - 9.15% tax


• $70,976.01 and above - 11.16% tax

Therefore, if you had income of $40,000, you would pay 6.05% on the first $35,488 ($2,147.02), and 9.15% on the next $4,512 ($412.85), for a total of $2,559.87 in provincial tax, giving an average provincial tax rate of 6.4%.

That's the basic method of calculating income tax. Here is the CRA's list of 2007 tax rates.

Now we can get into some of the other factors that affect your income tax.

Income

Not all income is created equal. Employment income is fully taxable, while scholarship income for post-secondary students is entirely tax-free, and investment income has special tax rules. For a full breakdown of the treatment of various income sources, refer to the CRA's guide to total income for 2007.

Deductions

Deductions reduce the income on which you must pay taxes. You could say that tax deductions come off the "top" of your income, so you end up paying less tax in your top tax bracket. For example, if someone has $40,000 in income and claims a $1,000 deduction, then their taxable income drops from $40,000 to $39,000. This means that the amount of income taxed at a federal rate of 22% drops from $2,822 to $1,822, for a tax savings of $220. Compare this to someone earning $35,000, who also claims a $1,000 deduction: their federal tax savings will be only $150.

In general, tax deductions favour higher earners, since the tax savings happen in a higher tax bracket.

Examples of tax deductions are RRSP contributions, union dues, and job-related moving expenses. For a full list, refer to the CRA's list of 2007 federal deductions.

Non-refundable Tax Credits

Whereas tax deductions come off the "top" of your income, credits come off the "bottom", meaning they represent a tax savings in your lowest tax bracket. Take, for example, our $40,000 and $35,000 earners from above. If each of them claims a $1,000 federal tax credit, then they will each save $150 in federal taxes.

The "non-refundable" nature of the tax credits simply means that these credits can only be used to offset taxes owing; if you owe $100 in taxes without any credits, and claim a $1,000 credit, you will owe $0 in taxes, as opposed to being owed $50 by the government. In most cases this extra $50 can be carried over to the next tax year.

Tax credits are considered more equitable than deductions, since they do not favour high-income taxpayers over low-income individuals.

Examples of non-refundable tax credits are the Basic Personal Amount, the Canada Employment Amount, and CPP and EI contributions. For a full list, refer to the CRA's list of 2007 federal credits.

Charitable Donations

Charitable donations are treated as a tax credit, but there's a slight twist. The first $200 of donations in a given year generate a credit in your lowest bracket, and any amount above $200 generates a credit in the highest bracket (regardless of whether you have income in that bracket). This means that a donation of $300 would translate to a $200 federal credit at 15%, and a $100 credit at 29% regardless of your income.

If you are filing jointly with your spouse, you can (and should) pool your donations together on one return. If each spouse makes a $300 donation and claims it individually, then each spouse will have a federal tax savings of $59 (15% of $200 plus 29% of $100), for a household total of $118. Compare this to one spouse claiming $600 in donations, for a federal tax savings of $146 (15% of $200 plus 29% of $400). Similarly, if you plan to donate $300 this year and next year, it may be more beneficial to wait until next year to claim this year's donations. The idea is to minimize the number of "transactions" that are subject to the $200 threshold.

Other Taxes

Ontario residents pay a health premium, based on their income level, to subsidize health care. Several provinces, including Ontario, are also subject to a provincial surtax. For example, the 2007 Ontario surtax applies to provincial taxes as follows:

• $0.01 - $4,100.00 - 0% surtax


• $4,101.01 - $5,172 - 20% surtax


• $5,172.01 and over - 56% surtax

Note that the surtax is applied to the provincial taxes owing, not to taxable income. If an individual owes $6,000 in Ontario taxes, then their surtax will be 20% of $1,072 ($214.40) and 56% of $828 ($463.68) for a total surtax of $678.08.

A good rundown of all the provinces' applicable taxes is provided at Taxtips.ca.

Pulling It All Together

That's a lot of material to digest, so let's bring everything together with an example. I'm most familiar with Ontario taxation, living as I do in Toronto, so this will be an Ontario-centric example.

Particulars

• Employment income: $50,000.00


• RRSP contributions: $5,000.00


• Charitable donations: $500.00


• Income tax withheld by employer: $9,500.00


• CPP contributions paid: $1,989.90


• EI premiums paid: $720.00


• No "special" credits apply

First, let's calculate our friend's taxable income. The $5,000 RRSP deduction takes total taxable income down to $45,000. This is the amount that is subject to federal and provincial taxes. The taxes owing would be calculated as follows:

Federal Tax

• 15% of $37,178 = $5,576.70


• 22% of $7,822 = $1,720.84


• Total federal tax = $7,297.54

Ontario Tax

• 6.05% of $35,488 = $2,147.02


• 9.15% of $9,512 = $870.35


• Total Ontario tax = $3,017.37

This gives us the gross federal and provincial income tax amounts. Now, let's determine the non-refundable tax credits:

Federal Non-Refundable Tax Credits

• Basic Personal Amount = $9,600


• Canada Employment Amount = $1,000


• CPP Contributions = $1,989.90


• EI Premiums = $720.00


• Total federal credits = 15% of $13,309.90 = $1,996.49

Ontario Non-Refundable Tax Credits

• Basic Personal Amount = $8,553


• CPP Contributions = $1,989.90


• EI Premiums = $720.00


• Total Ontario credits = 6.05% of $11,262.90 = $681.41

Now factor in the charitable donations:

Federal Tax Credit

• 15% of $200 = $30


• 29% of $300 = $87


• Total federal credit = $117

Ontario Tax Credit

• 6.05% of $200 = $12.10


• 11.16% of $300 = $33.48


• Total Ontario credit = $45.58

Now determine the net taxes owing:

Federal Tax

• Gross income tax = $7,297.54


• Non-refundable tax credits = $1,996.49


• Charitable donation credit = $117.00


• Net federal tax = $5,184.06

Ontario Tax

• Gross income tax = $3,017.37


• Non-refundable tax credits = $681.41


• Charitable donation credit = $45.58


• Net Ontario tax = $2,290.39

Since the net Ontario tax is below $4,100, there is no applicable surtax. This individual's taxable income is $45,000, which translates to a $450 Ontario health premium. Therefore, the total taxes owing are as follows:

• Net federal tax = $5,184.06


• Net Ontario tax = $2,290.39


• Ontario health premium = $450.00


• Total tax payable = $7,924.44

This individual owes $7,924.44 in taxes for the year. However, because the employer has already withheld $9,500 in income taxes, there will be a tax refund of $1,575.56.

That's the basic nuts and bolts of how taxes are calculated in Canada. There are, of course, more complicated situations, for which a tax professional should be consulted. At the very least, however, this guide should help you to estimate your own return, so you know roughly what to expect.

Another Loonie's worth

In November, I celebrated my 100^th post, with a look back at the various topics I had covered to date on the blog. Well, you're currently reading my 200^th post here at Loonies And Sense. The blog is 277 days old, and my pace has increased from 0.58 posts per day for the first 100, to 0.95 per day for the last 100. I really love maintaining the blog, and it's nice to see this reflected in the numbers.

To celebrate this latest milestone, here are the highlights of posts 101-199:

Canadian Stuff

• Looking into RESPs - I decided to learn more about RESP rules, and determine whether this is a solution that makes sense for me. As far as I'm concerned, RESPs are a great idea, and well worth the associated risks. Proposed legislation would make some significant changes to the tax treatment of RESPs.


• Early RRSP withdrawals - I wrote about the HBP and LLP, two ways to pull money out of your RRSP tax-free before retirement.


• Tax Free Savings Account: a Roth account for Canadians? - With the 2008 federal budget, Canadians may get to see a very interesting savings vehicle starting next year.


• Person-to-person lending: not just for Americans any more... - Canada saw the launch of its first P2P lending community in February. However, before the month was up, the service had been suspended due to regulatory concerns.

Blogging

• The 37^th Carnival of Money Stories - In December, I hosted my first carnival, with 18 submissions.


• Will the six-month milestones never cease?! - The blog turned six months old in December.

Money Mistakes

• 'Tis the season for cash flow slip-ups - In December, while trying to finagle a cash-only Christmas, I made more than my monthly allotment of free withdrawals, incurring a $1.25 fee. Fortunately, I was able to get the fee waived.


• Paying the stupidity tax - By managing my finances "to the penny", I ended up overdrafting my primary chequing account when my renewed auto insurance payment went through for $0.01 more than I was expecting. This cost me an NSF fee, but taught me that I should plan for the unexpected.

Interest Rates

• Moving my Emergency Fund - I decided to move my Emergency Fund to HSBC Direct, because of their various access methods, and their (at the time) competitive rate. Unfortunately, the next day, HSBC reduced their rate. D'oh! HSBC has tried to make up for their dropping rates by offering a limited time rate promotion.


• Playing the 0% balance transfer game - I applied for an MBNA MasterCard with a 0% promotional rate on balance transfers. In January, I transferred $14,800 of my line of credit balance onto the card. This balance will sit at 0% until March 2009, at which point I'll transfer it back onto the line of credit.


• Feeling the Bank of Candada rate cut - The Bank of Canada dropped its rate by 0.25% in January, which lowered the interest on my line of credit, but unfortunately also affected my savings account rates.


• Another rate cut - Tuesday's rate cut of 0.50% marked the largest one-time change to the Bank of Canada rate since 2001. Bank prime followed suit with a 0.50% drop, and online savings account rates have also been dropping.

Important Dates

• The aftermath - My first Christmas since starting the blog ended up being a successful cash-only affair. I certainly used credit cards for my purchases, but I immediately paid off the purchases, generating no new debt from the holidays. Not too shabby...


• December update; 2007 in review - New Year's Day brought my first year-end review here at Loonies And Sense. I also set my first round of annual goals.


• Monday is "Family Day" - Ontario residents celebrated their first Family Day on February 18.


• This month has 29 days - Because of the Leap Year, the RRSP deadline this year was February 29, not the usual March 1.

Cash Flow

• And the lightbulb goes on... - I examined my budget, and discovered a couple of things about where my money actually goes, and a new way to think of my debt reduction.


• Coping with the January pay-cut - I griped a bit about the fact that, if you max out your CPP and EI contributions before the end of the year, they start up again in January. This is a nice problem to have, but it's an essential part of financial planning in the new year, nonetheless.


• Another look at the treadmill - I decided to take another look at the paycheque-to-paycheque cycle, and whether I'm actually starting to step off the treadmill. Turns out I've come a long way.


• Building a chequing cushion - I talked about building up a cushion in my chequing account, to be able to live "one cycle ahead" of my paycheque. Part of the benefit of this is to bring my own cash flow in sync with Ms. Loonie's cash cycle.

That's a lot of different topics. Let's see what the next 100 posts bring.

Wrestling the Costco beast

Whereas February began with a trip to Costco to replenish our non-edible household items, yesterday's expedition had us stocking up on food staples. From flatbread, cheese and breakfast cereal, to peanut butter, olive oil and milk, we seemed to buy something from just about every aisle. Add to that the cost of our membership renewal, and you've got one impressive Costco bill.

We stuck to our list, but the sheer bulk of our purchases translated to a very hefty bill. The membership fee comes out of an already accumulated balance in the Freedom Account, but even so, it was a painful bill to pay.

Yesterday was an hour shorter than most Sundays, and very nearly found us short of funds, as well. We need to get ahead of the curve on grocery spending; I think I may finally have identified a starting point for my chequing cushion. If I can set aside one pay period's grocery budget as a cushion, then I'll be better equipped to absorb these periodic overages.

Watch your step: savings account rates falling

Tuesday's rate cut by the Bank of Canada has already led to a 0.50% drop in bank prime rate, and now it's being reflected in online banks' savings account rates. As of today, ING Direct and Canadian Tire Financial Services have rates of 3.30% and 3.75%, respectively. HSBC Direct is holding at 3.70%, and ICICI Bank is still at 4.10%.

This makes HSBC's rate promotion a little more attractive, except for the fact that the promotion is so brief: the 4.75% promotional rate on new deposits only lasts until May 2.

It looks like we're in for some tough sledding ahead; my consolation is that, with more revolving debt than liquid savings, I still benefit from falling interest rates. I wonder how this will play out over the next couple of years.

Changes coming to RESPs?

This week, the House of Commons passed a bill that would provide a tax deduction for RESP contributions. The bill still needs to be approved by the senate, but it's an interesting idea.

Currently, RESP contributions are made with after-tax dollars, and compound tax-free until they are withdrawn by the beneficiary for post-secondary education purposes. At withdrawal, the investment income is taxed to the beneficiary, at their (usually low) marginal rate. Under the proposed bill, up to $5,000 in annual contributions would qualify for a tax deduction, similar to RRSP contributions. This would represent a fundamental change in the tax treatment of these plans, and potentially provide a much greater incentive for parents to contribute to their children's plans.

I've written before about the benefits of contributing to RESPs, essentially looking at this plan as a sort of "education insurance", but this new bill would significantly change some of the assumptions. Let's look at a simple example to determine what the impact of this change might be:

Assumptions

• One-time RESP contribution of $5,000


• CESG match of $500


• Contributor marginal tax rate = 43.41%


• Beneficiary marginal tax rate = 22.15%


• Investment growth = 8%


• Inflation = 3%


• 18 year investment period

The $5,000 contribution would generate an immediate tax savings of $2,170.50 for the contributor. In future dollars (i.e. after 18 years' inflation at 3%), this would be $3,695.13. The $5,500 (contribution plus CESG match) would grow to $21,978.11 after 18 years of 8% growth. Assuming that the beneficiary withdrew this entire amount for education purposes at the 18 year mark, they would pay $4,868.15 in taxes (since taxes would presumably be paid on both the contribution and the investment income). This represents $1,173.02 in net taxes paid (i.e. taxes paid by the beneficiary minus taxes saved by the contributor).

Compare this with the current rules, where the beneficiary would pay tax only on the $16,478.11 investment income, for a net taxation of $3,649.9 (since the contributor does not have any up-front tax savings). This is $2,476.88 more than the taxes paid under the proposed system.

Based on this example, it seems that the proposed tax deduction would result in a much more tax-efficient way to save for education, especially if the contributor were to put the $2,170.50 tax refund in a TFSA for some additional tax-free growth.

What do you think about this idea? Have I missed anything?

Another nice tax surprise

After last week's realization that Ms. Loonie would owe $2,500 less than expected on her 2007 tax return, I've been on the lookout for other hidden gems in the income tax rules.

Well, faithful reader, you will be delighted to learn that I've found another unexpected tax credit for which I (and many other Canadians) will qualify: the Canada employment amount. This is a federal non-refundable tax credit for taxpayers who received employment income for the year. You can claim the lesser of $1,000 or your total employment income (lines 101 and 104 of your tax return).

I earned just a smidge over $1,000 in 2007, so I'll be claiming the full $1,000 credit. At a tax rate of 15%, this translates to an additional $150 in my pocket.

Given that I stopped commuting to work just after the public transit amount came into effect, it's nice to have one of these new credits actually apply to me.

Who doesn't love finding $150?

Payday update: 20% paid off!

It's that time again! We got paid this morning, so I've updated my progress bars and NCN Network chart.

The big news this week is that, after making my bi-weekly payment to my line of credit, my revolving debt now sits below 80% of its starting balance. That's right: I've paid off more than 20% of my starting debt of $27,610.74. That still leaves 80% to be paid off, but this milestone is still a nice little feather in my cap.

My Emergency Fund sits at exactly $1,270, so I'm on track to meet my March goal of $1,280 even before I receive my March interest accrual in these accounts.

I missed my weekly weigh-in yesterday, but given what a setback I had with the flu, I'll pick this up again next week. So far, however, I've been walking to and from work every day in March (all four of them, that is), and Ms. Loonie and I have a date for a game of squash after work tonight.

If I don't roll up the rim, who will?!

This afternoon, I had a moment of weakness, and went down to the Tim Hortons in the food court to get a half-coffee/half-hot chocolate (a café mocha without the whipped cream). Much to my surprise, I was handed a Roll Up The Rim To Win cup. It turns out, this year's iteration of the annual promotion/sweepstakes has been running for over a week.

A year ago, I would have known about this within hours, not days. I guess I really have changed some habits in the past year. Without really noticing myself doing it, I've ditched my daily Tim Hortons habit, and turned their coffee into a once-in-a-while treat.

For those of you who just can't get enough of rolling those R's, you can track one blogger's adventures at this new website.

I haven't finished my coffee yet, but I'll let you know if I win the Bayliner bowrider or the Toyota Matrix.

Happy rrrolling...

More on P2P lending

I'm very interested in the recent developments in Canadian P2P lending. I haven't been involved in these new projects, beyond signing up for e-mail updates at CommunityLend, but I've kept an eye out for news.

Today in the RedFlagDeals.com forums, I found a quoted e-mail from Phil Marleau, the president and CEO of IOU Central:

Dear IOU Central user,

First and foremost I would like to thank you for being a pioneer in a brand new idea that one day may revolutionize the way Canadians do banking. Without you, IOU Central would not be possible. Secondly, I would like to apologize for any inconvenience the recent turn of events may have caused you.

Last Thursday, the Autorité des Marchés Financiers (AMF) requested that all new activity on our website be stopped. We of course complied immediately and stopped all lending and borrowing activities. IOU Central received legal advice from a major Canadian law firm prior to its launch with respect to the Canadian regulatory environment; however, IOU Central is acting in a very new area. We are the first in Canada to offer peer-to-peer lending, although similar models are operating in the US and the UK. We are committed to working with all the relevant regulatory bodies in order to continue to offer our service to borrowers and lenders in full compliance with applicable regulations. We have initiated discussions with the AMF in order to resolve the matter as soon as possible. In the meantime, our site continues to operate with limited functionality.

Thank you for your patience and understanding. We will update you on any new developments.

Best regards,
Phil Marleau
CEO & President

So it looks like they have received a "cease and desist" order, after launching their service without having fulfilled all the regulatory requirements. I'll be interested to see whether this kills their venture, or they're able to satisfy the regulators and get back up and running.

Update

The AMF has released a communication (PDF) regarding the action against IOU Central:

IOU Central Inc.
ORDERED TO CEASE TRADING AND ACTING AS SECURITIES ADVISER

Montréal, March 3, 2008 – At the request of the Autorité des marchés financiers (AMF), the Bureau de décision et de révision en valeurs mobilières (BDRVM) issued an order on February 27, 2008 against IOU Central Inc. ("IOU") to cease any activity, directly, indirectly or by Internet, in respect of a transaction in a form of investment governed by the Securities Act (the "Act"), including any activity as a securities dealer. The BDRVM also ordered Philippe Marleau and all directors, officers, employees, representatives and mandataries of IOU to cease any activity in respect of a transaction in securities in a form of investment governed by the Act for and on behalf of IOU, including any activity as a securities dealer.

IOU's website (www.ioucentral.ca) is an internet-based market that enables people to borrow money directly from and lend money directly to other people. According to the AMF, these activities violate the Act.

In its decision, the BDRVM expressed concern about the following AMF allegations in particular:

• IOU, Philippe Marleau and the other officers assisted borrowers in distributing debt securities to lenders without a prospectus from the AMF.


• IOU, Philippe Marleau and the other officers acted as securities dealers via a website without being registered with the AMF.


• The services offered through IOU's website were market activities governed by Regulation 21-101 respecting Marketplace Operation, but IOU was not authorized to carry on such market activities.

For the protection of investors, the AMF stressed that it was imperative that the BDRVM issue this decision without a prior hearing since IOU continued to operate its website.
The Autorité des marchés financiers (AMF) is the regulatory and oversight body for Québec’s financial sector.

– 30 –

Information:
Media only: Frédéric Alberro 514-940-2176
Information Centre
Québec City: 418-525-0337 Montréal: 514-395-0337
Toll-free: 1-877-525-0337
www.lautorite.qc.ca

So it looks like the issue is an alleged contravention of the Securities Act.

Another rate cut

This morning, the Bank of Canada announced yet another rate cut, taking the overnight rate target down from 4.0% to 3.5%. This marks a departure from the conservative 0.25% cuts we've been seeing over the past few months. Assuming that the banks follow this move, this will take the prime rate down from 5.75% to 5.25%.

As with any rate cut, this is good news for borrowers, and bad news for savers. If you have revolving debt, then you will be paying less interest on it ($5 less per year on a $1,000 debt). However, you will also earn less interest on cash savings, since the online banks also lower their savings account rates when the BoC cuts its rate.

Here's a quick review of the BoC and bank prime rates over the past year:

• January 16, 2007 - BoC rate = 4.25%; bank prime = 6.00%


• July 10, 2007 - BoC rate = 4.50%; bank prime = 6.25%


• December 4, 2007 - BoC rate = 4.25%; bank prime = 6.00%


• January 22, 2008 - BoC rate = 4.00%; bank prime = 5.75%


• March 4, 2008 - BoC rate = 3.50%; bank prime = 5.25%

Of course, there's always the possibility that the banks won't follow suit with a cut to the prime rate, or that they may lower prime by less than 0.50%. This announcement marks the biggest single change to the BoC rate since 2001, so it will be very interesting to see what effect this has, on savings account rates, the stock market, and the Canadian economy at large.

RIP, Jeff Healey

Sad news for Canadian music fans: Jeff Healey passed away yesterday at the age of 41 after a lifelong battle with cancer.

Jeff is a Canadian music legend, well known for his signature "overhand" guitar playing style and his extensive body of work. In recent years, he had become extremely active in the Toronto jazz music scene, as both a performer and an afficionado.

We'll miss you, Jeff.

Goals for March 2008

On the first business day of every month, I post my update for the previous month's progress, and set goals for the month to come.

Here are my goals for March:

• Reduce my revolving debt to $21,800 (currently at $22,357.23) - At my usual rate of payment, this should be pretty much where I come out. I'm in recovery mode after February, so I really just want to show that I can still stick to a debt reduction goal.


• Grow my Emergency Fund to $1,280 (currently at $1,254.11) - All I'm looking for here is to keep up my bi-weekly $10 contributions.


• Walk to and from work every day, and work out at least three times a week - I need to get serious about this one in March, to re-gain the ground I lost in February.


• Lose 4 pounds - The whole point of the above physical activity goal is to get some progress on my weight loss. This is the amount I want to lose in March, which will represent 8% total progress toward my 2008 goal.


• Blog 31 times in March - One post per day should be my standard.

I've taken my GTD review out of the formal list of goals. I'll still be posting the rest of the chapter reviews, but I'm done with setting it as part of my monthly goals.

That list should make for a productive month.

February update

We've reached the end of an extra-long February, and we're now into March, so it's time for my month-end recap.

Let's start off with how I did with my February goals:

• Reduce my revolving debt to $22,300 - I missed this one by $57.23. February was a busy month in terms of visiting friends and celebratory dinners, so we fell off the budgeting wagon for a good chunk of the month. Still, strong forward progress, and I can try harder in March.


• Grow my Emergency Fund to $1,250 - I met this goal even before the end of the month. Once interest had posted to all my accounts, my Emergency Fund stood at $1,254.11. All I'm trying to do at this point is maintain some token forward progress.


• Obtain copies of my credit report from each of the three Canadian reporting agencies - I have requested reports from all three agencies, and have received my Equifax and Experian (aka Northern Credit Bureaus) reports. The report from TransUnion is still outstanding. Other than a postal code error on my Equifax report, I haven't found any inaccuracies.


• Set up an automatic monthly charitable donation - Done. I set up a monthly donation of $20 to Jazz FM, a local non-profit radio station.


• Walk to and from work every day, and work out at least three times a week - I started out strong, but after a week with the flu, I've had a few days of taking the TTC, to avoid a relapse. I'll be back at it starting Monday.


• Blog 30 times in February - I hit this one dead-on. Exactly 30 posts.


• Finish my review of Getting Things Done - No progress. At this point, it feels a bit like beating a dead horse.

Now, on to my month-end update:

Assets:
Online Savings - $1,919.06
Self-Directed RSP - $37,421.38
Employer Group RSP - $9,492.70

Debts:
Credit Cards - $17,533.12
Line of Credit - $4,824.11
Student Loans - $29,013.17

Net Investable Assets: ($2,537.26)
Net Liquid Assets: ($49,451.34)

There wasn't a lot of movement this month. My liquid savings increased slightly, and with the late-February market rally, my retirement savings actually increased by more than my monthly contributions, so it was nice to see some growth there for a change. My investable assets increased by $896.25, and my debts decreased by $1,074.31.

Overall, my net investable and net liquid assets increased by $1,970.56 and $1,242.33, respectively. My NetworthIQ profile has also been updated (including loose cash, home, car and mortgage).