The 2010 Federal Budget is optimistic by my financial planning standards, relying on slow growth in government spending and healthy growth in the economy hoping to balance the books by 2014-15.  This year’s budget has very little impact for most people. Here are the highlights pertaining to your personal finances :

What was not changed :

- no extension of the popular home renovation tax credit
- no tax cuts either
- no TFSA and RRSP limits increase either. 

What was changed (with excerpts from the National Post and CBC news)

Stock options relief: relief has finally emerged for many employees who exercised employee stock options and deferred their tax obligations until the date of sale of the underlying shares, only to find that the price of the shares has since plummeted in value. Read more here
For parents with a child with disability: If you have a disabled child and have contributed to a Registered Disability Savings Plan, you’ll be able to carry forward the Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) entitlements for 10 years as welll as transfer your RRSP to the RDSP upon your death.  These are truly great for parents with disabled children.
No more tax break for Cosmetic procedures: Procedures like liposuction, teeth whitening and Botox injections are no longer covered. However, medically necessary cosmetic procedures will still qualify for a tax break.
Child tax benefit can now be shared: The budget also changes the rules for parents who share custody of a child, when it comes to the child tax benefit and the universal child care benefit. Under current rules, only one parent can receive the benefits each month. Under new rules, both parents can share the benefit if the child lives more or less equally with two parents who live apart.
Tax treatment of the universal child care benefit - that $100 monthly payment for children under the age of six. The payment is currently taxed as income in the hands of the spouse with the lowest income in a two-parent family. That means a single parent may end up paying more tax than a single-income couple even if their respective incomes are the same. Under rules coming into effect this year, a single parent will have the option of including the aggregate universal child care benefit amount received in their income or in the income of the dependant for whom an eligible dependant credit is claimed. The measure will provide $168 in tax relief for single parents with one child under six in 2010, the budget document says.
Prohibiting negative-option billing in the financial sector. A financial institution won’t be able to bill you for products or services unless you’ve agreed to them.
Mortgage penalties: standardization of the calculation and disclosure of mortgage pre-payment penalties. That is so welcome!
Cheques holding period: Reducing from seven days to four, the maximum time a financial institution can hold funds from a cheque you deposit to your account. As well, the institution would have to allow you to access up to $100 from that cheque within 24 hours.
Read the full budget plan here or more info in tomorrow newspapers.

In order to forestall the possibility of a housing bubble and subsequent housing market crash the federal government has tightened up mortgage lending regulations. The following changes are to be effective April 19, 2010 but it is expected that most banks and lending institutions will implement the changes effective immediately. These rules apply to all government backed (CMHC) insured mortgages. The new rules are as follows.

-Borrowers are required to meet the standards for a five year fixed rate mortgage even if they actually choose a mortgage with a lower interest rate and a shorter term. For example you may wish to borrow $200,000 amortized over 20 years with a one year fixed rate mortgage at 2.65% which results in a monthly mortgage payment of $1,035. Well under the new rules you will have to prove that you have the finances to afford a $1,260 monthly mortgage payment which is what a fixed five year mortgage would cost at the current 5 year rate of 4.5%.

-The maximum amount that consumers can borrow to refinance their mortgages is being lowered to 90% of the value of their home, down from 95%.

-Investors wishing to buy investment or rental property in which they do not live will now have to have a 20% down payment instead of the current 5% required to get a government backed mortgage.

We feel that these rules make sense. If a person gets in over his head and can’t pay the mortgage he has a big problem.  If many people get in over their heads and can’t pay their mortgages then we all have a big problem. Look what happened in the U.S.

Find out how much of your charity dollars goes to administration click to read

Canadians largely unaware of market rally click to read

Reading “The BRIC countries are Rich, But Poor” click to read

Reading “Jeff Rubin: Riding Hard and Fast on Energy” click to read

Are you a moving target?: How to avoid falling for an unscrupulous mover. http://bit.ly/5P5jxh

Bank of Canada keeps rate at 0.25%: Mark Carney stays true to promise and keeps interest rates low. click to read
Enjoy your week!

We’ve reached the 1st anniversary of the Tax-Free Savings Account and this means another $5,000 in eligible contributions (bringing the total to $10,000).  We’ve talked about TFSA strategies before, but there are so many key money-saving tips associated with this account, that they are definately worth mentioning again.

Below are two articles you must read on how and when to best utilize the TFSA.  They discuss ideas such as:

-TFSA vs. RRSP - Which should we use? When to use both? At what age, income level, and tax rate is one better than the other?

-Placing the refund of an RRSP contribution into a TFSA

-Which highly taxable assets should be placed in a TFSA?

-Using the TFSA as a homebuyer’s or emergency fund

-Income earned or withdrawals from a TFSA do not affect eligibility for income-tested government benefits and credits (important for retirement planning).

-Using the TFSA to supplement RESP savings.

Both articles explain these strategies in simple terms.  If you have any questions or would like to open a TFSA (if you haven’t already done so), please let us know.

Article 1: RRSP strategies from Advisor.ca

Article 2: RRSP strategies from Morningstar.ca

A new Investors Group survey of 500 Canadian boomers—aged 43 to 63—finds a large proportion are either supporting their children, their parents or even both!  More than 40% of those respondents said that they expect the support will erode their ability to save for retirement.

Two-in-ten boomer parents have a child aged 19 or over living at home. More than half of these (58%) say their adult child makes no financial contribution to the household.

The boomers in the most difficult financial situation are those providing financial support to both parents and children simultaneously. One in 10 boomers are currently in this group.

The individual surveyed were asked the question what kind of impact supporting both their parents and children was having. Four out of 10 say they are reducing the amount they expect to save in retirement, and one quarter of respondents say they have adopted a less comfortable lifestyle or had to actually take on more debt.

Helping boomer clients efficiently support family members is an area we can add value. We can crunch the number, evaluate the impact and help you make appropriate planning decision.  The worst would be to delay the planning.  It is best to incorporate the situation into the plan.

From a December Fortune Magazine article titled “Redefining Emerging Markets”:

Summary:
-Countries such as Brazil, India, and Korea are being labeled “advanced emerging markets” because of high national income levels or developed market infrastructures.
-These advanced emerging markets are unlikely to experience the downfall of the Dubai World debt situation. 
-There are still some skeptics of emerging markets who point to catastrophic episodes from the 80s and 90s, such as Brazil’s inflation crisis.  However these countries have learned from these episodes, and implemented structural changes to reduce risk and maintain growth. 
-Around 15% of the MSCI All Countries World Index comes from emerging markets
-Brazil and India stock market fell harder than the US markets in 2008, but rebounded higher.  Their GDP is expected to grow 3% compared to 1.5% for the US
-Economic indicators still show a strong correlation between emerging and developed markets, especially China, the main trading partner of Latin American and East Asian countries.

Comments:
-The last 5 years have been very strong for emerging markets.  According to the MSCI emerging markets index, as of November 30th the 5yr return has been 13.3%.
-Long-Term (10 years) forecasts predict that they will continue to outperform against developed economies like the US and Europe.
-All well-diversified equity portfolios should have some emerging market content.  A typical You First long-term growth portfolio will have around a 10% weighting in emerging markets. 

I’ve added a video link below to an October 18th, 2009 interview with Patricia Perez-Couttes, who discusses the opportunities in emerging markets.  She manages AGF Emerging Markets, one of the top-performing emerging markets funds and one that’s been voted top emerging market fund in Canada for three consecutive years at the Canadian Investment Awards.

Click here to view the video. 

From a November 28th, 2009 Financial Post article titled “Now is No Time to Learn Pitfalls of Bond Market”. 

Article Summary:
-Lisa Myers, lead manager of Templeton’s flagship Templeton Growth Fund warns that now is not the time to increase your bond weighting. 
-Interest rates are at all-time lows and have nowhere to go but up
-There is an inverse relationship between interest rates and bonds
-The past 30 years have been favorable for bonds as interest rates have mostly fallen, therefore bond prices rose.
-Balanced fund managers are reducing their weighting in longer-term bonds to mitigate this interest rate risk.

Comments:
-As explained in the article, bonds have negative relationship with interest rates.  Given where we are with interest rates, it is understandable to have a weary outlook for bonds moving forward. 
-There have been a lot of articles written about inflationary concerns and what will happen once interest rates start rising again.  This is partly why gold has risen to record levels, due to its strong correlation with inflation. 
-Certain fund managers are starting to recommend real-return bonds (where the rate of return is adjusted for inflation) as a good fixed-income solution to a possible rising interest rate / inflationary growth environment.
-Fund managers are still pointing to the favorable yield spread between corporate bonds over government bonds.  Corporate bonds tend to be less sensitive to interest rate changes than government bonds.
-For those looking for higher yielding income solutions, in the past year, CI Investments, Mackenzie, and Dynamic Funds have all introduced some type of “Strategic or Diversified Income Fund”.  The objective of these funds is to seek income from the most attractive opportunities in corporate bonds, income trusts, infrastructure, and high-yield equities.  As market conditions change, managers have the flexibility to move in and out of these assets as they see fit. 

The link below provides 5-minute outlook on bonds given by John Braive, Vice-Chairman CIBC Global Asset Management in November 2009.  He goes over a lot of the issues discussed above.

Bond Outlook

Have you made your 2009 RESP contribution yet?  Do you need to top it up?  In order to get the maximum annual Grant of $500, you have to contribute $2,500 per child in your RESP account.  We can let you know how much you have contributed this year so far. 

Please note that Odette an Terry will be gone on Holiday from December 18th to January 5th, so please let us know in advance if you wish to make a contribution.  We will prepare the paperwork.  Thank you!