A bump in the social lending road?

A few weeks ago, Canada's first person-to-person lending platform community opened its doors with the launch of IOU Central. At the time, there was some discussion about which regulatory bodies would oversee this industry in Canada. The position taken by IOU Central was that there were essentially no watchdogs, and they based their operation on the Prosper model.

Well, it seems that Canadian P2P lending may have some watchdogs after all. According to IOU Central's website, they are currently operating with "limited functionality" while they "resolve a regulatory matter". During this downtime, users can not post new loans, nor can they place bids on loans. The only activity is the repayment and servicing of funded loans under the borrower and lender agreements.

This is an interesting turn of events, as IOU Central seemed to come out of nowhere, while the CommunityLend project has been working on regulatory and technical requirements for ages. The difference, of course, is that CommunityLend seems to be aiming to have its ducks in a row before launch, rather than going off half-cocked. It's possible that IOU Central's "regulatory matter" is actually very minor, and they'll be up and running again soon, but it looks to me as if they rushed to market, and are now paying the price for their lack of preparation.

The clouds part

I've written before that Ms. Loonie does not have taxes withheld from her paycheque. Instead, she uses an ING Direct account to save up her tax payment. This will be the first tax season to test this system (until this past year, she's always had taxes withheld), so I was crunching some numbers yesterday to determine where the ING balance stands relative to her estimated taxes owing.

Ms. Loonie is a post-doctoral researcher, and as such is paid under a fellowship grant. Other than the first $500, this grant income is not tax-free, because she doesn't qualify for the educational amount (she's no longer a student). Because the income is taxed, I've been treating it as regular employment income in my calculations, with the associated CPP and EI contribution requirements.

It occurred to me yesterday, however, while looking over her T4A forms (the official CRA form to document pension, annuity and other income), that CPP and EI do not apply to her income. This effectively reduces her taxes owing by more than $2,500!

After making the appropriate adjustments, it looks like she will have more than enough saved up to cover her tax bill. That's great news, but the even better news is that she started late last year with her ING savings (she made her first contribution in late August, giving her only eight months to save up for her April 30 payment), so with a full year to save up for her 2008 bill, she can actually adjust her contribution amount, diverting 25% to build up her own cushion of savings.

I've been dreading tax season this year, worried about whether we'd have enough to cover her bill, so with this sudden realization, a huge weight seems to have lifted.

This is a good day.

Happy Bissextile Day!

Now, before you all jump on me, saying that Bissextile Day is in June, I'm talking about the extra day that gets added in a Leap Year. Apparently, in the Julian Calendar, this extra day was initially an extension of the "sixth day before the calends of March", resulting in a "sixth day" that was twice as long as usual, thus the "bissextile", or "twice sixth" day. Phew. That's a lot of quotes and calendrical conventions.

Anyway, if you haven't done so already, today is your last chance to make a 2007 RRSP contribution (you can make a contribution tomorrow, but it can't be counted as a deduction on your 2007 tax return). If you're planning to make an in-branch contribution today, then expect some line-ups: today is the RRSP deadline and a Friday and the last day of the month, so banks will be just a bit busy.

Enjoy...

Managing your finances: pretend you're a corporation

I work in the marketing department of a large Canadian corporation. In my day-to-day job, I'm constantly dealing with different departments and business units and their individual business objectives and budgetary constraints. However, the scale of it all makes the actual dollars and cents seem very abstract; it's often hard to look at a multi-million dollar advertising budget and see it in terms of real money.

A couple of weeks ago, Ms. Loonie and I attended our condominium corporation's annual general meeting. We live in a building with about 100 units, and approximately 30 units were represented at the meeting. This was my first time attending such an event, and it was very interesting. Somehow, the smaller scale of this corporation's financial picture made it much more tangible, and I was really geeked out to go over the financial report. There are a lot of things from the way a small corporation like a condominium operates, that you can apply to your own finances:

• Reserve Fund - A big part of our common element assessment every month goes toward building the condominium reserve fund. This is the fund that is used to cover any "out-of-budget" expenses. Need to replace your boiler? Use the reserve fund. Need to fix leaks in the parking structure? Use the reserve fund. It's essentially the corporation's Emergency Fund, just on a much larger scale. I was interested to learn that the Condominium Act requires that a reserve fund be held in an interest-bearing savings account, just like your personal Emergency Fund should be.


• Operating Budget - Much of the rest of the common element fees help to cover things like keeping the lights on, paying the maintenance staff, and heating the building. These are all planned expenses, and the corporation takes pains to stick to this budget in order to maintain a positive cash flow. It sounds simple, but corporations need to do this just as much as individuals need to stick to their own budgets.


• Reserve Fund Study - This was the item I found most fascinating. The condominium commissions a study on a periodic basis to determine the general status of its assets and infrastructure. A team of engineers conducts a very thorough review of the building, and determines the amount that the corporation should set aside to pay to fix or replace elements when they eventually fail. This really makes the reserve fund a combination of the Emergency Fund and Freedom Account concepts; it's where we keep our "rainy day" emergency cushion, but it's also where we save up for periodic major expenses, like re-paving the driveway every 10 years, or replacing the heating system every 20 years.

It's not exactly a new idea to think of yourself as a corporation; lots of bloggers have written about how we're all essentially self-employed (even if you work "for the man", you're essentially a service provider, and your employer is your only client). It helps, however, to shake up your way of thinking about your finances. I know this meeting was an eye-opener for me, and I think I learned a lot.

Early RRSP withdrawals

I seem to have savings and taxes on the brain. I'm not sure whether this is because of yesterday's budget announcement, or Friday's RRSP contribution deadline. Either way, if you've been conscious at any point this month, you've probably been urged by someone to throw those piles of extra cash you have lying around into your RRSP.

While everyone's talking about getting money into RRSPs, I thought I'd look at the ways it's possible to take out your RRSP savings before retirement. Specifically, the HBP and LLP offer a way to do this when buying your first home, or pursuing post-secondary education, respectively.

Home Buyer's Plan

If you are a first-time home buyer, you can withdraw up to $20,000 from your RRSP, with no tax penalty, provided this money goes toward the purchase of a home within a specified time frame. You then have fifteen years to pay this money back in annual instalments into your RRSP. If you miss a year of catch-up contributions, then the amount of missed contributions is added to your taxable income, and taxed at your marginal rate.

Example

Suppose you withdraw $15,000 for a down payment under the HBP. You will then be required to pay back $1,000 per year to make up for the withdrawal over the next 15 years. If you miss a year, then $1,000 will be added to that year's taxable income.

You can look at this withdrawal as a loan you make to yourself from your retirement savings. There is no interest on this loan, except for the lost compounding on the funds you withdrew. If you withdraw $20,000 and pay it back over 15 years, then the value of those funds will be less than $20,000 in today's dollars. Hopefully you will make up the difference in home equity, but this is far from guaranteed.

Read more details on the HBP here.

Lifelong Learning Plan

If you are (or your spouse is) enrolled in (or planning to enrol in) post-secondary education, then you can withdraw up to $10,000 per year (up to a plan limit of $20,000) from your RRSP to cover educational expenses. You then have 10 years to pay this money back into your RRSP. As with the HBP, any missed catch-up contributions will be added to your taxable income.

Read more details on the LLP here.

Repayment

To pay back a withdrawal under either of these plans, you must complete Schedule 7, and include this with your tax return. The Schedule 7 designates a portion of your annual RRSP contributions as repayments to the HBP or LLP. These designated contributions will then not be included as deductions on your tax return.

Example

Suppose you have withdrawn $15,000 under the HBP, and make two RRSP contributions, one for $1,000 and one for $5,000. You would use Schedule 7 to designate $1,000 as an HBP repayment, and only the $5,000 would be included as a deduction on your tax return, even though you technically contributed $6,000 to your RRSP.

Note that the net tax consequence of making the $1,000 repayment and another $5,000 in RRSP contributions is to reduce your taxable income for the year by $5,000. This could also be accomplished by claiming the entire $6,000 as a deduction, and "missing" the $1,000 repayment: you would reduce taxable income by $6,000 for the contribution, and then increase it by $1,000 for the missed repayment.

Unless it bothers you to be "in arrears" on your repayments (to yourself), there doesn't seem to be much reason to claim a formal repayment on your tax return. The key is to ensure that your total RRSP contributions each year of your repayment period are greater than your required repayment amount.

Tax Free Savings Account: a Roth account for Canadians?

Wow, a lot can change when you spend a week on the couch. The federal government released the 2008 budget yesterday, and the news on everyone's lips (well, maybe not everyone, but at least on most Canadian PF bloggers' lips) is the creation of a new tax-advantaged savings plan, the TFSA. I hate to be a day late and a dollar short, but I can't go without commenting on this.

I've written before about the savings plans available in Canada and the US, and where the RRSP has a close cousin in the IRA, and the RESP is analogous to the 529 plan, the one savings vehicle unique to the United States is the Roth IRA. While the IRA (like the RRSP) is funded with pre-tax dollars, and withdrawals at retirement are fully taxed at the marginal rate, the Roth IRA is funded with after-tax dollars, and withdrawals at retirement are not taxed.

Well, the Roth account seems to have a new cousin (by marriage) in the proposed TFSA. Although not designated as a retirement account, the workings of the TFSA seem comparable to those of the Roth IRA: you can contribute up to $5,000 per year to a TFSA, and the income you earn in the account is not taxed. You can withdraw from the account at any time without penalty, and doing so actually frees up your contribution room again, so you can "re-fill" the account.

I'm finding it very difficult to find a downside here. The TFSA seems to be the ideal place for Canadians to keep their Emergency Funds. There's obviously a lot to be worked out here. I'm not sure what investments can be held in a TFSA, and what sort of interest rates will be paid on "cash" investments, but it sounds like a fantastic idea.

And it's nice to tie up a loose end by finding a dancing partner for the Roth account.

Weekly Wednesday weigh-in: Flu edition

Hi, all.

Sorry for the lack of posts lately. Since last Thursday afternoon, I've been down with the flu, lying pretty much comatose under a pile of blankets and nursing a fever of 38-39°C (100-102°F). I've barely been able to feed myself, let alone compose a coherent blog post. For those of you asking how that's different from any other week, I say "way to kick a guy when he's down."

At any rate, I'm back at work today, and have just finished wading through a sea of unread e-mail and composing my to-do list for the foreseeable future. Funny how some time away from the office can help to crystallize what you actually need to get done.

One of the "benefits" of spending several days in a sneezing, coughing, fevered haze is the loss of appetite. My reduced caloric intake nicely complemented my lack of activity, keeping my weight steady at 214lbs. Granted, this still means no forward progress, but at least I didn't backslide.

At this point, I think the message on the fitness front is clear: this isn't going to happen unconsciously. I need to make some serious commitments to stay active and eat well if I want to make a dent in this goal.

Let's make March a month of changes.