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September/October 2003

Commentary - Hans H. Mathisen

How to Benefit from being Charitable- "The more you giveth, the more you get back", sayeth the Income Tax Department. The September edition of LIFE LETTER outlines three different scenarios under which tax benefits can be received through charitable donations. There are other methods of saving on taxes by giving to charity as well. Please call me for details.

How to Pay Less Tax with Life Insurance- LIFE LETTER for October revisits this topic. But, please let me re-state the gist of this bulletin: This is how we can pay our life insurance premiums with untaxed dollars and receive substantial estate benefits at the same time. We often complain about all the taxes we pay. But this is one way the Income Tax Act can work in our favor. I'll be glad to show you how this can work to your advantage.

THE STOCK MARKETS - As of the end of September, the major indexes are proving that we are now into another bull market. For the first 9 months of 2003, the NASDAQ index is up by 33.8%, the Dow Jones Index has risen 11.2%, and the S&P 500 Index has grown 13.2%. Year-to-date, the TSX Composite Index is up by 12.2%. The major European and Asian indexes have also risen considerably so far this year.

What are you doing about this? - Are you still sitting there with your money in GICs and paying taxes on the growth, earning less than 1% after you pay your income taxes? Here is another tax saving idea for you: Why not use "Other People's Money" to invest and make the cost of borrowing tax deductible? Please find below, more information on how you can use Other People's Money to invest, and you may even create your own tax deductible mortgage. Your comments are invited. And I have more information. Please call if you want more details.

In my commentary two months ago, I referred to two very conservative portfolios I'm in myself. Here's an update:

PORTFOLIO #1: March 7 to Oct. 3, 2003, the yield is 11.6% PORTFOLIO #2: April 28 to Oct. 3, 2003, the yield is 10.1%

Think about this and call me for details, please. I'll share my insight with you.

HAPPY INVESTING!
Sincerely,
Hans Mathisen



 

 

 

LIFE LETTER

How to benefit from being charitable

"Nothing lives in the Dead Sea. It cannot support any life because rivers and streams only run into it, not out. The Dead Sea only takes, it does not give."

Charities play a vital role in our society. The Canadian government recognizes this role and tax breaks exist to encourage taxpayers to give to their favorite charities.

Roger makes occasional donations to various charities. His donations are rather small and amout to only a few hundred dollars per year. He learned that he might get a bigger tax break if he was alittle more generous with his donations.

Donations used to be a direct deduction from taxable income, but are now treated as tax credits. Basically, a taxpayer's federal income tax payable is calculated first, and then certain credits are deducted from the total owing. Provincial and territorial taxes are then calculated based on the federal taxes.

For cash donations to a registered charity, the first $200 earns a tax credit of 17% and anything over this amount (within certain limits) gets a tax credit of 29%. Roger can actually get a larger tax credit on his donations over $200 than what his federal taxes are. He is in the 26% marginal federal tax bracket.

For example, if he contributes $1,000 to charity, Roger will get a tax credit of $34 on the first $200. The credit on the remaining $800 is $232. His federal taxes on the $800 was actually $208, so he comes out $24 ahead on his federal taxes. And he saves on his provincial taxes. too.

 

Mary has been a long time supporter of her favorite charity. She would like to make sure that her support continues after she passes away. Getting a tax break today would also appeal to her.

Life insurance can help make her wishes come true. The procedure is quite simple. Mary applies for insurance on her life, or uses an existing policy, naming the charity as the new owner and beneficiary. She pays the premiums and the charity gives her a tax-deductible receipt each year for the amount of the premiums she paid.

This approach is very effective because Mary can make a substantial bequest in the future by making payment over time, which may suit her situation better. Her donation is private and won't be publicized unless she wants it to be. The gift cannot be contested by anyone because life insurance is not open to such attacks, unlike donations in a will.

IMPORTANT NOTE - This concept is based on the understanding that premium donations are in addition to a donor's current support.

Steve and Brenda have substantial RSP assets that will be taxed when passed on to their children. They also want to make a difference to a charity. It may be possible for them to avoid taxes altogether.

All RSPs can be left to a charity when they have both died. The final tax return can get a tax credit for the full amount of the donation, wiping out the taxes owing. They can use a joint-last-to-die life insurance policy to take care of their children's inheritance.

Want to know more about making a difference to your favorite charity?

Call Hans Mathisen today at (306)242-7042.
or email -
hans@mathisen.ca

Copyright 2003 Bowen Financial Inc. All rights reserved

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LIFE LETTER

How to Pay less tax with life insurance

Ray had thought of his life insurance as a purely protection plan. The anti-avoidance rules and general restriction of tax benefits applicable to most shelters prompted him to take a new look at his life insurance for tax deferral as well.

A type of policy, called Universal Life, separates the cost of insurance and the "savings" element of your premium. You know how much of it is being invested and how much interest it's earning. Premiums are flexible, so you can choose how much goes into savings, within certain limits. The big bonus is that it receives more favorable tax treatment than a similar out side investment.

Universal life policies have three major tax advantage features. They can allow your savings to accumulate tax-deferred. The interest can be used to pay for the insurance costs, tax-free. And the untaxed accumulation can be paid out tax-free at death.

After the cost of insurance is taken from the premium, the balance is invested at current interest rates. The interest earned is not taxed as long as the policy is "exempt" under the Income Tax Act. Most universal life policies are exempt.The life insurance company monitors these policies and warns you if there is going to be a change in tax status.

The first advantage your investment in this policy has over outside invesments is the interest it earns compounds tax-deferred. Even if you fully withdraw all funds from the policy after twenty years, you will earn up to 22% more, after tax, than if you pay the taxes all along (assumes current tax rates).

You may not have to pay any tax at all on these earnings. The second tax advantage is that you can use them to pay for the insurance costs in the policy. Because the earnings within the policy are tax-deferred, you can actually pay the insurance costs with untaxed dollars.

The third tax advantage is that the total investment gain in the policy can be passed on without any tax whatsoever at death. For example, $3,000 per year savings invested at 6% annually for 30 years, and taxed at 50% (approximate top Canadian tax rate) each year would accumulate to about $142,726. Untaxed savings, on the other hand, would amount to $237,175, two-thirds more for your heirs! Plus, of course, the tax-free insurance benefit.

What If You Can't Get It When You Need It?

Buying life insurance today and know you'll need more coverage in the future? Unfortunately, you may not be healthy enough to get it then. You don't want to over-insure today, so what's the answer?

Adding a Guaranteed Insurability Rider to a policy may be the answer. This rider gives you the right to take out additional life insurance in the future, regardless of your health at that time.

This rider is a valuable add-on to a life insurance policy on a child's life. Many parents and grand-parents get a policy for a child for the low premiums and tax-deferring features, but don't want large amounts. A guaranteed insurability rider assures the child more coverage in the future without a medical.

Want to know more about tax-advantaged savings?

Call Hans Mathisen today at (306)242-7042.
or email -
hans@mathisen.ca

Copyright 2003 Bowen Financial Inc. All rights reserved

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Using Other People's Money

How an Investment Loan can help you invest

$50,000 Loan at 6%

Total cost to borrow:

Term: 9 Years
Cost: $3,000/Year
Tax Rate: 50%

$3,000 X 9 = $27,000

$27,000
X 50%
$13,500 - Net cost to borrow

$50,000 Investment at 8% Compounding:

leaves $50,000 Capital Gains at end of 9 years

$50,000 - Capital Gains

$25,000 - Tax Free
$12,500 - After Taxing remaining ______ $25,000 at 50%
$37,500 - After Tax Gain

$13,500 - Net cost to borrow
___________________________

$24,000 - Total gain after taxes, with no personal investment.

Manulife Bank

For more information, contact Hans Mathisen

 

 

How to Make Your Mortgage Interest
Tax Deductible

Conservative leveraging for the conservative investor
(If the phrase "conservative leveraging" sounds like a contradiction in terms, please read on. There is a way for conservative investors to participate in leveraging without running any undue risks.)
   

Many who would qulify for an investment loan are probably already using the concept of leveraging, but in a much less effective manner. Anyone who has taken out a mortgage has already borrowed to purchase an equity investment - an investment that has zero diversification, poor liquidity, and a non-deductible iinterest expense. Borrowing to purchase an investment expected to grow, with better dirersification and liquidity, and where interest expense is tax deductible, can be done with potentiallly less risk than one would have thouht initially.

Consider a family that has both a mortgage as well as non-registered investments. Below is an example to illustrate the point.

Balance Sheet Before Leveraging
Balance Sheet With Leveraging

Assets
House
RRSP
Non-registered investments
Total

Liabilities
Mortgage

Total

Total Net Worth


$200,000
$100,000
$100,000
$400,000


$100,000

$100,000

$300,000

Assets
House
RRSP
Non-registered investments
Total

Liabilities
Mortgage
Investment Loan
Total

Total Net Worth


$200,000
$100,000
$100,000
$400,000


$_50,000
$_50,000
$100,000

$300,000

 

(This is a simplified example for the purposes of illustrating leveraging using a 100% Investment Loan.)

An investor can sell his or her non-registered investments and use the funds to pay off some or all of the mortgage. Then through a leveraging investment program, the investor can reacquire non-registered investments using borrowed funds. The loan can be set up to pay "interest only". This helps to keep the monthly cost down.

In effect, you have made the interest on your mortgage payments tax deductible. With CONSERVATIVE LEVERAGING, you have created an annual saving of $1200.

Annual Savings: Borrowed Funds X Interest Rate X Marginal Tax Rate

$50,000 X 6% X 40% = $1200

Please Note: This illustration is intended to provide a simple explanation of Conservative Leveraging and is for general purposes only. Leveraging is not suited for everyone. Please contact Hans Mathisen for details about this opportunity.

Why not use Other People's Money?

 

 

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Mathisen Financial, Inc.
335 Redberry Road
Saskatoon, Saskatchewan S7K 4W5
Bus. (306) 242-7042 Fax. (306) 242-4314
Email:
hans@mathisen.ca