However, estate law is extremely complex, says Michael Prsa, an estate lawyer in Brampton, Ont. “I’ve seen many situations where one wrong word in a so-called ‘simple will’ has led to a major mess.” Expect to pay a lawyer around $350 for a garden-variety will, more if detailed tax planning or bequests are involved.

Hunting and gathering
Before drawing up a will, make a list of all your assets, what they cost, what they’re worth, and where they are located. (Assets held jointly, such as a house or bank account, may not be covered by a will.) Then list your intended beneficiaries, their relationship to you, where they live and how old they are. If you want to leave bequests to charity, find out their exact names and addresses.

Get educated
A will is your chance to decide what happens to your stuff once you’re gone. But there are rules limiting your ability to ignore certain people. Children from an earlier marriage or an ex-spouse may have a claim on your estate, even if you’d rather they didn’t. Leaving them out of your will could lead to protracted legal claims and unnecessary confrontations between your heirs later on.

“You should carefully consider the practical and emotional impact of your will,” says Prsa.

The right person for the job
One of the most important decisions is picking the executor who will carry out your final wishes. Most people pick a spouse or adult child, but “this can get very complicated very quickly, particularly in blended families,” says Prsa. In some cases, it makes more sense to pick a neutral third party or a trust company.

It’s also smart to provide alternate choices for your executor, the proposed guardian of any minor children, and your beneficiaries.

Upgrade as necessary
A marriage immediately invalidates any pre-existing will, but a divorce only cancels out any mention of your ex: the rest of your wishes remain valid. These legal oddities make it crucial to keep your will as up-to-date as possible. Simple changes can be addressed with a codicil, but bigger changes will require a whole new will.

Programmed to save
If you’re going to be out for more than four hours, allow the temperature to rise to 28ºC and use a programmable thermostat to kick on the air conditioner an hour before you get home. You can also set the thermostat to turn off the air conditioner an hour before you leave. This can shave 10% off your bill.

Your biggest fan
When it comes to staying cool, “moving the air is just as important as cooling the air,” says Peter Love, a research fellow at Ryerson University’s Centre for Urban Energy. Fans are much better at moving air than central air conditioners. Ample use of fans will allow you to set the air conditioner at a higher temperature and still feel cool.

Get in the zone
Air conditioner efficiency has improved substantially, says Love. Replacing even a 10-year old system is likely to yield major savings. If you’re buying a new home, ask about having zoning technology installed. This allows your air conditioner to direct cool air to specific rooms at specific times. In older homes, manually opening and closing vents or dampers to stop airflow into particular rooms can achieve a similar effect.

Can’t see the savings for the trees
It’s possible to cut your cooling bill and beautify your home at the same time. Trees and vines planted on the south and west sides of your house will provide much-needed shade during the hottest parts of the day. When the leaves fall, the winter sun will warm your house and cut your heating bill as well. Reflective window coverings or awnings installed on south- and west-facing windows can provide comparable cost-savings—without having to wait for trees to grow.

Can you go without?
“Outside Ontario you can probably get away without central air conditioning,” says Fred Walter of Calgary’s Climate Change Central. Adding insulation and sealing leaks will help keep your home cool. If you’re still sweltering, Walter recommends portable or window air conditioners. While these units are not as energy-efficient as central systems, total energy consumption will be less if they’re used judiciously. Just remember to turn them off when you leave the room.

]]> http://www.moneysense.ca/2011/06/16/how-to-cut-your-air-conditioning-costs/feed/ 2 http://www.moneysense.ca/2011/04/15/how-to-plan-a-funeral/ http://www.moneysense.ca/2011/04/15/how-to-plan-a-funeral/#comments Fri, 15 Apr 2011 15:03:10 +0000 Peter Shawn Taylor http://www.moneysense.ca/?p=13304 A death in the family is a demanding and emotional time. The days leading up to a loved one’s funeral can be a blur of difficult tasks and major expenses, and many survivors complain about a lack of time for grieving. Here are a few ways to get a handle on the financial and mental stress.

Decisions, decisions
Cremation or burial? Open casket or closed? Religious service or private ceremony? In the absence of instructions from the deceased, a funeral director will ask at least a hundred questions, says Scott Macleod, owner of York Funeral Home in Fredericton and vice-president of the Funeral Service Association of Canada.

It can be a numbing experience. “A natural side-effect of grief is that making decisions becomes more difficult,” he observes. It may help to bring along a friend or relative who is at more of a distance from the grief to act as a sounding board.

Shop around
“A funeral is a major business transaction,” says Nicole Renwick, executive director of the Memorial Society of British Columbia, a consumer advocacy group for the bereaved. “It is okay to set a budget and shop around—that doesn’t mean you are being cheap.”

Renwick suggests visiting at least two funeral homes in the 48 hours after a death. Memorial societies are located in many provinces and keep track of your funeral wishes for a small fee. Members of these organizations are also able to negotiate better rates with select funeral homes.

Delegate where possible
Macleod recommends that only one family member, usually the executor, deal directly with the funeral home to avoid confusion. But there are plenty of other tasks that can be handed off to other family members or friends. Picking flowers, charities and music, writing an obituary or eulogy, contacting distant relatives and collecting photos or mementos for a legacy display are all jobs best shared among family members. “It can be important for everyone to participate in the grieving process,” says Macleod.

Understand the costs
Funerals range from basic to lavish, with price tags to match. In Ontario, the average cost of funeral home services comes to approximately $4,100, plus another $2,200 for a casket or container. But this does not cover extras such as flowers, clergy, a burial plot or death notices. An alternative is to ask for a direct disposition, which includes only the minimum services necessary to have a body transported and interred or cremated, with an average cost of $1,500. Renwick suggests one way to keep costs down is to arrange for cremation through direct disposition and then organize a memorial reception at a country club or rented hall later. That will require more effort on your part, but allows for greater personalization and can feel less rushed.

Preplan your own
Surviving the experience of organizing a funeral often encourages serious thinking about your own final ceremony. Simply writing down your preferences or joining a memorial society will make this task much simpler. “Leaving behind clear instructions is the biggest gift you can leave your family,” says Renwick. Pre-financing is another option, and can be done through an insurance policy or funds deposited into a regulated trust account. If you do pre-pay, make sure your survivors know about it.

2. Get your legal issues in order
Too many small landlords consider themselves passive investors rather than business owners, says Harry Fine, president of Landlord Solutions paralegal service in Toronto. “You need to understand the law, and it can be very complex,” Fine says. Prospective landlords must take the time to understand all their legal obligations, ensure the property is legal to rent and prepare a solid lease. A good place to start is by joining an association such as the Landlord’s Self-Help Centre in Ontario.

3. Find the right tenants
First the good news. Advertising for tenants is getting cheaper. Southen says he’s stopped paying for newspaper ads and now uses Kijiji.com exclusively. But three checks are still crucial for every potential tenant: a credit report, employment verification and a call to previous landlords. Ideally, you should avoid calling current landlords, as they might stretch the truth to rid themselves of a difficult renter. “Anyone who is not making all three checks is out of their mind,” says Southen.

4. Keep your tenants happy
Southen budgets $800 a year in routine maintenance for every unit he owns. And when something breaks, he sends someone to repair it ASAP. “You need to be responsive, because if a good tenant moves out, it costs you a lot of time and money to replace them.” Cutting down on tenant turnover is his secret weapon for a successful career as a landlord. Whenever a unit becomes vacant, he always re-paints and often re-carpets. “If you keep the place maintained, you will get a better quality of tenant.”

5. Take prompt action on bad tenants
For small landlords with one or two units, a single bad tenant can be devastating. Fine says a quick and aggressive response is necessary to limit the damage if a tenant stops paying rent or damages the property. “You can’t wait three months and hope the problem goes away,” he says. While tenancy law varies across Canada, some savvy tenants know how to game the system for extended rent-free stays. This can mean substantial extra expenses for landlords, as well as lost income.

Here’s how to do it:

Check for fairness
Property taxes, which pay for most municipal services, are the product of your home’s assessed value multiplied by the local tax rate. You can’t change the tax rate, but you can argue that you have been over-assessed. Begin by checking your home’s assessment report. This is typically a computerized estimate of your home’s selling price, based  on sales information from a particular assessment date. Is it fair? If a similar house on your block sold for much less than your valuation around the time of the assessment date, you may have evidence of over-assessment.

Fix factual errors
Assessments are carried out by provincial agencies or municipalities. If you’ve spotted a factual error on your assessment—it claims you have a two-car garage when you don’t—you can often get this fixed by simply calling the assessor. If there are no clear-cut mistakes, but you still think you’ve been over-assessed, you will need to officially appeal your assessment.

Prepare your case
The more unique your house, the harder it is to value—and the better your chances of winning an appeal. “If you live in a cookie-cutter neighbourhood, assessments are usually pretty accurate,” says William Howse, a Toronto tax lawyer. “But as soon as you get anything unusual in features or lots, or get into pricier neighbourhoods, then the computer can have big problems.” An older or smaller house in an expensive area or proximity to a busy road, railway or school can provide a strong case for appeal.

Compare, compare, compare
Find comparable local homes that sold around your assessment date for less than your home’s assessed value. This will be evidence that your assessment is too high. You’ll need to show a minimum 5% difference between your assessed price and the selling price on three comparable houses to have a good chance of winning.

Chose wisely
Selecting the right comparison houses is the true art behind a successful appeal, says Howse. Pick comparables that are within 100 interior sq ft of your own house (30 sq ft for condos), and ensure the houses  are the same quality as yours. For a formal appeal hearing, Howse strongly recommends hiring a certified appraiser.

What are your odds?
Few homeowners challenge assessments, but of those who do, many are successful. Roughly 45% of Ontario property owners  who submitted evidence of over-assessment last year got their valuations reduced.

Prioritize your  debt
“Not all debt is created equal,” says Mark Silverthorn, a lawyer and author of The Wolf at the Door: What to do When Collection Agencies Come Calling. For taxes or Canada student loans, the government doesn’t cut deals and rarely gives up. Secured debt, such as mortgages or home equity lines of credit, is tough to get out of too, but credit card and other unsecured debt is open to negotiation.

Find out who’s calling
Most creditors try to collect their debts in-house for the first six months or so. After that, they generally farm the work out to collection agencies. After a year or two the creditor may sell the debt to a debt repurchaser for as little as half a cent on the dollar. Keep in mind who you’re dealing with: creditors want full repayment, but collection agencies receive a commission and want the most they can get as quickly as possible. Debt repurchasers are often content with smaller payments.

Could you get sued?
Collection agencies routinely threaten to sue, but this is often a bluff. Only the original creditor is likely to go to the effort. Silverthorn says the slim commissions earned by collection agencies mean fewer than one in 10,000 consumer accounts end up in court. If you haven’t been served papers within six months of missing a payment, odds are you never will be.

Handle the calls
Creditors have the right to remind you that you owe them money. But only to a point. In B.C., Alberta, Ontario, Quebec and Nova Scotia, you can legally request that collection agencies stop calling you at home. Some provinces also have rules on calls to your workplace. Plus, you can screen your calls, hang up or get an unlisted number.  “You should speak to collection agencies when it suits your schedule,” says Silverthorn.

Cut a deal
If your debt is more than a year old and you’ve avoided a lawsuit, it’s time to bargain. Silverthorn cautions against making token “good faith” payments on bills, as this restarts the debt clock. And credit counseling usually requires that you eventually repay all your debts in full. Instead, try to get your creditors to accept 30¢ to 65¢ on the dollar, less if its been more than two years. But first get it in writing.

Repair your credit rating
Unpaid debts show up as R9 on your credit report: the worst possible rating. This will stay for six or seven years, depending on your province, and have a significant impact on your ability to borrow in the future. But any debt settlement—even for pennies on the dollar—will eliminate that debt and instantly boost your credit score. That’s why negotiating a settlement is generally a better option than declaring bankruptcy.

What did I think about that? How about: “Who left me off the invite list for the tax avoidance party?”

Most Canadians regard avoiding taxes as something between a duty and an obsession. Certainly I don’t want to be paying any more than I absolutely have to. Paying nothing at all sounds even better to me. But is getting out of your taxes really as easy as Dave made it seem? And if so, why isn’t everybody doing it?

One of the first people I talk to in search of an answer is Shy Kurtz, a tax-shelter promoter with Freedman, Kurtz & Kron Financial in Montreal. He stresses that he’s not trying to peddle anything that’s against the law. He draws a distinction between tax avoidance (where you take advantage of the rules to minimize your tax bill) and tax evasion (where you deliberately try to hide income or deceive the taxman). “Tax avoidance is perfectly legal,” he says. “Tax evasion, on the other hand, is not.”

There are two major strategies you can use to legally sidestep taxes. The first is to put your money into certain types of investments that government wants to encourage. Government deliberately equips these “tax-assisted investments” with generous tax breaks precisely because it wants to help them attract investors. The second way you can give the taxman the miss is to exploit loopholes in tax laws in order to earn outsized tax deductions. Manoeuvres like this are termed tax shelters. They’re the work of sharp-eyed lawyers and accountants who spot unexpected ways to legally beat the system set up by legislators and bureaucrats.

While the two types of tax avoidance are quite different, they both involve risk. Consider, for instance, the sad history of MURBs — a bureaucratic designation for Multiple Unit Residential Buildings, or what most of us would call apartment buildings. Back in the 1970s, Ottawa decided to encourage investment in this sector by allowing investors in new apartment buildings to claim their annual depreciation against other income for tax purposes. Promoters quickly took advantage of that offer and constructed leveraged deals that allowed MURB investors to put down as little as 10% of their total investment while giving them an immediate tax break almost as big as their initial cash outlay.

All of which was fine until the real estate market crashed in the late 1980s, vacancy rates soared and a lot of clever taxpayers found they couldn’t sell those lovely tax-assisted MURBs for love or money. The lesson? “The prospects of immediate tax savings blinded people to the economic reality of the underlying investment,” says Robert Brown, former CEO of PriceWaterhouse Canada, former head of the Canadian Tax Foundation and a long-time observer of the tax planning industry. “Investors weren’t thinking about the long-term implications.”

That lesson went unheeded in the 1990s when investors flocked to Labour-Sponsored Investment Funds (LSIFs). These are essentially mutual funds that invest in small start-up firms. Investing in such businesses has always been notoriously risky, so federal and provincial governments decided to offer tax credits worth 30% or more of your initial investment to encourage as many investors as possible to take the plunge.

Unfortunately, most labour funds have turned out to be dogs. Even the 10 best funds with a minimum five-year track record have lost an average of 1.2% a year, according to the fund tracker Morningstar. Many LSIFs have done far worse. Adding misery to discontent, those who invest in labour funds have to hold these poorly performing investments for a minimum of eight years or pay back all the tax credits they have already claimed.

The dismal track records of MURBs and LSIFs demonstrate that no tax advantage can compensate for a fundamentally lousy investment. “Any investment you make should stand up on its own investment merits,” says Adrian Mastracci, portfolio manager of KCM Wealth Management in Vancouver, a fee-only advisory service. “You should ask yourself: ‘Would I want to own this without the tax goodies?’ If not, you should move on.” That brings us to tax shelters. While government approves of tax-assisted investing, it’s no fan of tax shelters. These shelters are the work of tax planners who build their businesses on their ability to dream up clever shortcuts through the Income Tax Act. In doing so, they often incur the wrath of the Canada Revenue Agency, which wants to collect as much tax as it can and views fancy tax avoidance schemes with deep suspicion.

This battle of wits between the government’s revenue agency and tax planners is something akin to the spy vs. spy clashes of the KGB and MI5 during the Cold War: a fascinating struggle between unseen foes who are constantly challenging the rules. To keep track of all the tax shelters in operation, the Canada Revenue Agency requires that promoters register with the government. Anyone claiming a shelter tax reduction must include an assigned tax shelter number on their tax returns.

Hard-working minds are constantly dreaming up new kinds of tax shelters. Something known as the “Little Egypt Bump” took advantage of depreciation charges during mergers and raised eyebrows at the federal Auditor-General’s office as far back as 1986. Around the same time, other tax shelters packaged the tax credits that were doled out to encourage Canadian movie production and scientific research and resold them to investors looking for a break on their taxes. More recently “buy low, donate high” schemes bought art at low prices, then used questionable valuation techniques to donate it to charity in return for a tax receipt based upon values as much as three times the original purchase price.

The advantage of tax shelters like these is that they can’t wipe out your capital the way a tax-assisted investment can. On the other hand, you run the risk that the Canada Revenue Agency will decide your shelter runs afoul of the law and challenge it in tax court. In fact, all the above tax shelters — from the Little Egypt Bump to the film tax credit to the art flip — were shut down when the government took action to either clarify or change its laws. “The Canada Revenue Agency has become very aggressive about tax shelters, particularly those that have an underlying component of charitable donations,” says David W. Chodikoff, a tax litigation specialist at law firm Goodman and Carr in Toronto.

If your tax shelter is successfully challenged by the Canada Revenue Agency, you can lose your deduction for that year. You may also face a penalty, depending upon your involvement in choosing the shelter. And that’s not to mention the stress, says Chodikoff, who spent 15 years working for the federal government, trying to shut down questionable tax shelters, before entering private practice: “One of the biggest things I see, having been on both sides of the fence, is what I call the worry factor. It’s not just about the dollars and cents saved on your taxes, but about your mental health. A long and difficult reassessment can take years off your life and you really have to ask yourself: ‘Is it worth it?’” In shutting down the art flip shelters, for instance, the Canada Revenue Agency reassessed approximately 10,000 tax returns, creating massive headaches for the people who had taken advantage of those shelters.

So should you play the tax avoidance game? The answer depends upon how you define your terms. The most popular tax-avoidance tool is the humble Registered Retirement Savings Plan (RRSP). You should definitely take advantage of this tax dodge.

But tax avoidance doesn’t end there. If you’re a high-income earner who doesn’t mind rolling the dice in search of some tax-assisted investing, you may want to consider investing in flow-through shares, which are issued by some oil, gas and mining companies. A flow-through share gives the investor, rather than the originating company, the right to claim various tax deductions.

Consider an oil and gas company that issues $1 million in flow-through shares. It commits to using that money exclusively for exploration expenses, which gives it the right to deduct that amount from its corporate taxes. However, rather than use the deduction itself, the company passes it along to people who buy the flow-through shares. The shareholders can then write off the entire amount against their taxes, usually in the first two years.

Sounds good, doesn’t it? But there is a catch. Because the exploration company is giving up its right to the deductions, it tends to price its shares higher than a normal common share. This means the underlying investment can decline in value. For example, shares in the 2005 EnerVest Flow-Through Shares Limited Partnership, a mutual fund of flow-through shares popular with oil and gas investors, were sold to investors at $25 apiece. A year later they are worth only $14, a loss which offsets much of the tax saving. Bottom line: before you invest in any flow-through stock, do your homework to ensure that you’re buying a promising company as well as a promising tax write-off.

If you have the stomach for extreme tax avoidance, an innovation called gifted trust arrangements has replaced the nowbanned art flip deals as the tax shelter du jour. These shelters, such as the Donations for Canada program offered by ParkLane Financial of Burlington, Ont., use a mind-boggling series of trusts and sub-trusts and offshore firms located in exotic locales such as Bermuda to swell the original value of your donation. In 2005, its first full year of operation, the Donations for Canada program helped 6,000 taxpayers get $175 million in donation receipts.

It doesn’t take a tax lawyer to spot the attraction. The essence of the deal is that ParkLane’s parent company will quadruple the size of any charitable donation you make, thus boosting the size of your tax receipt. Depending on your province and tax bracket, a $1 donation can provide about $1.80 in tax credits. (This is how my friend Dave got his envy-inducing tax deduction.)

Yes, there are strings attached. To benefit from the donation, you select a charity — only a few are eligible — and that charity has to enter into a complex repayment agreement with ParkLane’s parent company. The result is that for every $2,500 in cash you donate, the charity gets a much smaller amount deposited in a hedge fund account. Over the next 20 years it receives 80% of the monthly profits from this leveraged sum. ParkLane’s parent company keeps the principal. While the program thus delivers less to charities, it could also give donors more than they bargained for.

“Certainly there are risks with our program,” admits Ron Olsthoorn, president of ParkLane. The biggest risk, of course, is that the Canada Revenue Agency may decide it is too good to be true, as it did with the art flip deals, and challenge it in tax court. However, Olsthoorn argues his scheme is fully protected against any possible objections from the taxman. “Since we are dealing only with cash donations, there are no valuation problems with our program and nothing for the Canada Revenue Agency to challenge. We think we’ve built a better mousetrap here,” he says. Just in case, Olsthoorn has set up a $500,000 legal defence fund that clients may access if the government does decide to test his plan in court.

While the revenue agency has not yet taken the Donations for Canada tax shelter to court, some tax experts expect it to be just a matter of time. Financial adviser Mastracci refuses to recommend the deal to his clients. “Anyone who puts their money into one of these charitable donation schemes is just asking CRA to put a red flag on their return,” he says. Jacqueline Couture, a spokesperson for Canada Revenue Agency, suggests as much: “It is our position that the 2003 legislation [which was used to shut down the art-flip deals] will apply to all types of donation arrangements to limit the allowable donation to the amount of the donor’s cash.” Donations for Canada participants recently got a terse letter from the Canada Revenue Agency saying the program was being investigated. If the government acts on this stated position, Olsthoorn may soon get a chance to put his legal defence fund to work. But for now, it is one of the more aggressive, and inventive, tax shelters available.

Despite the fact that a tax break would look pretty good on my next tax return, I’ll be steering clear of anything racier than an RRSP. I’m the conservative type, I guess. But after talking to countless taxpayers, tax lawyers and tax planners, I’ve learned one thing. Even if the Canada Revenue Agency bulldozes the Donations for Canada gambit, another dodge will quickly take its place. Like Hockey Night in Canada or a Tim Hortons coffee, a tax shelter seems like one of life’s necessities for many Canadians. Or as my friend Dave put it: “I pay plenty of taxes as it is. If I can find a way to legally save on them, I’ll take it.”

When less truly is more

Here are the key terms any tax-phobic Canadian needs to know.

Tax avoidance: this is the perfectly legal practice of trying to arrange
your affairs so that you pay the least tax possible. Do you contribute to an RRSP? Then you’re a tax avoider.

Tax evasion: this is the perfectly illegal practice of lying to the taxman or trying to hide some of your income. If caught, you face penalties ranging from a fine to a jail term.

Tax-assisted investment: these are investments that either Ottawa
or the provinces want to encourage, so government doles out tax breaks to people who put money into them. Labour-sponsored investment funds, which invest in small start-up companies, are one example of a tax-assisted investment.

Tax shelter: these are deals set up by private entrepreneurs who spot a loophole in
the tax system. They can offer a big tax break, but are often challenged by the taxman. One current example is what as known as gifted trust arrangements that swell the value of your donation to charity through a complicated series of manoeuvres.