Before he died in 2003, my father was a prolific poet and writer. The writing of Paul Haines spanned five decades, three continents, and two languages (English and French). He wrote short stories, essays, haiku-like poems, lyrics, liner notes for legendary jazz records, as well as articles for various musical publications.

When the writing stopped, I found myself obsessed with the idea of bringing his work together in the form of a book. I quickly realized it wasn’t going to be easy. Choosing the right pieces for the book would be difficult. His libretto for Carla Bley’s epic double-album Escalator Over the Hill along with his lyrics for Tropic Appetites could fill an entire book on their own. And I discovered that finding the right publisher for the task was almost impossible.

The problem was that books of poetry don’t move serious numbers in Canada, so there is little incentive for a conventional publisher to make the investment. To make it work, I needed a business plan that would make the project financially viable for a publisher, while also providing me with the services and infrastructure I needed.

Over the next three months, between touring Europe with my band Metric and working on my solo album in Los Angeles, I dedicated myself to the project. In hotel rooms, airports and backstage dressing rooms, I made lists of requirements that had to be met. For example, it was important to me that the book was associated with a respectable publishing house. I didn’t want my father’s name lined up on some random website next to a bunch of cookbooks or self-help manuals. This book was his legacy, and I wanted to frame his life in a context that would lend legitimacy to his esoteric approach to the written word.

A friend suggested Coach House Books, which turned out to be the solution. As the name suggests, this literary publisher is based in a little coach house tucked away in a back alley near the University of Toronto. Its staff were receptive to my approach, and we were quickly able to come to an agreement. If I paid to produce the book, they would handle the layout and proofreading. They would also offer guidance on aesthetic decisions, like the placement of photographs and the design of the cover.

They were sensitive to the emotional significance of the project from start to finish. We had a working title, but as we were nearing the deadline my brother suggested a new title that my family liked better: Secret Carnival Workers. By this point I was in the habit of bicycling across town several times a day to oversee the process, so everyone at the Coach House office was used to seeing me appear at the bottom of the stairs, breathless and perspiring. Still, they had never seen me arrive looking quite as anxious as I did the day we changed the title from Word Music to Secret Carnival Workers. To my great relief, the layout department seamlessly switched gears and incorporated the change.

In exchange for my lump-sum investment of approximately $20,000, I owned the books and I was free to sell them anywhere I pleased. A portion of the inventory would be consigned to Coach House at fair cost, and they would handle the conventional distribution and fulfillment of orders that came though their website.

Now I get an email from the Coach House offices every few months telling me they have sold the books they have in stock, and they need more. They deduct their commission from the revenue, and send me a cheque for the balance, which goes toward recouping my initial investment. I keep the boxes of books in our recording studio, where they serve as makeshift shelves, so every time I make a shipment it changes the furniture.

I didn’t set out to get rich by publishing my father’s writing. Good thing too, because I never will. But I’m close to recouping the cash I fronted, and with any luck, I’ll start to see a profit this year. Some would say that’s too long to wait for a return on investment, but I disagree. For 10 years, I invested every spare penny and every waking hour into making Metric what it is today. Those seeds are only beginning to bear visible fruit now. But that’s the best kind of investment: the kind that produces real value over the long term. In both endeavors, the real payoff had nothing to do with money, but for me, it was immeasurable.

Alfonso works as a systems analyst with an international financial services company, earning $104,000 a year. So far, he likes it here, and hopes to stay in Canada for at least five to 10 years before his next transfer. He’s well-educated, with an honors BA in computer science and a masters degree in finance from the Universidad Central de Venezuela. But even so, he is quick to acknowledge how little he knows about personal finance. “My ignorance regarding money has caused us a lot of grief,” says Alfonso. “It’s been a nightmare. I now realize how woefully unprepared I was to make some of the financial decisions I have had to make for my family.”

The sad truth is that the Delgados are drowning in debt (we’ve changed their names and some other details to protect privacy). They’re just starting out, but they’re already in the hole by almost $400,000. They have hardly any equity in their new home, they’re leasing an expensive Lexus car, and they have $34,000 owing on high-interest-rate credit cards and a line of credit. “All of our troubles started when we bought our townhouse three years ago,” says Carmen. “We rented a house for a year or two and we were fine. Then we got caught up in the dinner talk about real estate as a great investment and we bought a home before we were really ready. We’re still suffering from that decision today.”

That home, a $400,000 four-bedroom townhouse in Mississauga, Ont., was purchased in 2008. Alfonso’s first big mistake was to lock into a pricey five-year fixed-rate mortgage at 5.9% to buy it. He then watched in horror as variable mortgage rates plummeted to 2.5% over the following year and a half. “I couldn’t believe what a stupid mistake I had made,” says Alfonso. “When I tried to change the mortgage terms, they wouldn’t let me. I was stuck.”

Then real disaster struck. In March of this year, Carmen’s mother died from breast cancer and in May, Carmen’s sister Maria died suddenly from complications resulting from minor stomach surgery. After helping the family out with medical expenses and other costs, the Delgados were further in debt than they had ever thought possible. “Airfare alone for just myself cost $4,000 for each trip because it was last-minute,” Alfonso says. “We also helped the rest of the family out with medical bills. It broke us.”

As they had no savings, Alfonso had to put all of the unforeseen expenses on his five credit cards, at rates between 12% and 19%. That debt quickly ballooned to $29,000 and Alfonso began to panic. He felt there was no way he could keep making the $2,300 monthly payment on the mortgage for their townhouse without going bankrupt. Eventually, the family decided they couldn’t afford the house any more. They would have to downsize to a cheaper place.

Given all those demands, you might think that only the experts could design a portfolio structure that does everything you need, but there’s a surprisingly simple solution. It mainly comes down to the right mix of investments. “The trick is not to put all your eggs in one basket,” says Norbert Schlenker, a fee-only financial planner with Libra Investment Management of Salt Spring Island, B.C. “So if the basket falls, all your eggs don’t break.”

We believe that with just three components—stocks, fixed income and annuities—you can design a retirement portfolio that performs as soundly as many of those designed by the pros. Read on and we’ll show you how. When you’re done, you’ll have a retirement portfolio structure that will provide you with a good return and a good night’s sleep—then you can jump to our Retirement 100 feature where we even suggest which stocks you could select to load it up with.

Estimate your income
The first step is to figure out what kind of income you’ll need once you’re retired. You could spend hours with a calculator trying to come up with an exact number, but as a rough guide, if you have a spouse and kids, you own your home and your mortgage is paid off before you retire, it’s safe to assume that you’ll be able to comfortably live on between 50% and 60% of your working income. If you’re single, you have no kids, or you rent, you might want to boost that to 70%. To generate that kind of income, you would have to save up a lot of dough, but luckily, not all of your retirement income has to come from your portfolio. That’s because you’ll also get regular payouts from government programs such as the Canada Pension Plan (CPP) and Old Age Security (OAS), and you may also have a defined benefit pension at work. That means your portfolio will only have to provide the total income you need in retirement, less your annual government and pension benefits.

Let’s run some numbers to get you started. We’ve found that a typical middle class couple spends about $40,000 to $60,000 a year in retirement, assuming they own their home mortgage-free. (That’s only a rule-of-thumb: many retirees get by comfortably on less and many feel they need more.) Of that, a couple might get about $30,000 a year from CPP and OAS, if both members worked most of their adult lives. Thus many retired couples without pensions through work find that their portfolio needs to provide them with an income of between $10,000 and $30,000 a year. Consider that your “retirement income” gap.

Size up your savings
For simplicity’s sake, let’s assume that your retirement portfolio only has two kinds of investments in it: stocks, and fixed-income investments, like bonds. If that’s the case and you retire at age 65, research shows you’ll need a nest egg that’s roughly 25 times the amount you expect to withdraw from your portfolio each year to live on. Once you retire, you can then withdraw 4% of your total nest egg a year, plus inflation adjustments, and as long as you get roughly market returns, there’s only about a 10% chance that you’ll outlive your money.

In real numbers, that means that if your retirement portfolio has to supply you with $20,000 a year and you retire at age 65, then you’ll need a nest egg containing $500,000. If you retire earlier than 65, you need to bump up the size of your nest egg, as you’ll rely on the income from your portfolio for longer, and you need to bridge the gap between when you stop working and when you start collecting OAS. If you retired at 60 instead of 65, you’d be wise to start with a nest egg of about $650,000. Either way, you still have a small chance of outliving your money, but you’ll probably do considerably better—which means that you might well end up with a tidy sum in the bank for your heirs or charity when you die.

The right mix
Now that you know roughly how much you need to save up, the next step is to figure out how to invest it. A great starting point for almost any situation is to put between 40% and 60% of your savings in stocks, and the remaining portion in fixed income investments like bonds and GICs. The stocks will help ensure growth so your nest egg keeps up with inflation, while the fixed-income portion provides some stability in your returns and helps to protect you from market crashes.

Once you have your allocation roughly sketched out, you can further adjust it to fit your particular situation. For instance, a good rule of thumb is to go heavier on stocks the younger you are. That’s because you’ll have plenty of time to recover from a possible market crash before you need your money. On the other hand, if you’re only a few years away from retirement, many say you should play it safer by loading up on fixed income. You don’t want to lose 40% of your savings in a nasty crash just as you’re about to quit working.

There are several ways to accomplish this, but Norbert Schlenker suggests setting the proportion of your fixed income equal to your age. If you adopt that approach, you would invest 40% of your portfolio in fixed income when you’re 40 (and put the rest in stocks), and by the time you’re 60, you would have 60% of your portfolio in fixed income, and only 40% in stocks.

There are other factors that may cause you to go a bit heavier or lighter on stocks. These include how wealthy you are relative to your future financial needs, your ability to work longer if your investments perform poorly, whether you have a pension through work, and your willingness to cut retirement spending if things don’t work out.

Perhaps the most important factor in determining the right balance between stocks and bonds, though, is your risk tolerance. It’s important that you feel comfortable with the ups and downs in your portfolio no matter how wealthy you are. So even if you’re young and you have much more money than you need, if the idea of losing money in the market terrifies you, then don’t put much money in the market. If you do, it could lead to panic selling when the market falls, and that could have a big impact on your returns.

“People don’t generally have a good idea of their own risk tolerance,” says Schlenker. “I try to educate people in how their emotions get them to buy during euphoria and sell during panic, and how those are exactly the wrong things to do.” To get it right, Schlenker advises that “you sit down when things are reasonably calm, you think about what kind of losses you can take, and you set your asset allocation accordingly. Then stick with that.”

Buy yourself a pension
A simple portfolio of stocks, bonds and GICs works well for many people, but how do you like the sound of a guaranteed income for life? If that sounds good and you don’t want to risk outliving your money, you may want to throw some annuities in the mix.

A life annuity is essentially a guaranteed stream of income that lasts as long as you do. You hand over a large sack of money to an insurance company, and in return, they pledge to give you a set number of dollars back every month for as long as you live, no matter what the market does. Moshe Milevsky, professor of finance at York University’s Schulich School of Business, has just co-written a book about the advantages of adding annuities to your retirement plan. In Pensionize Your Nest Egg, Milevsky and co-author Alexandra Macqueen note that annuities provide many of the benefits of a defined benefit pension from work, which takes some of the load off your retirement portfolio. As they write in their book: “If you don’t have a pension—and you probably don’t—make sure you go out and buy one.”

But like many choices in investing, the decision to annuitize involves a trade-off. The main problem with buying regular fixed annuities is that there’s no turning back. If you convert $250,000 into an annuity and both you and your spouse die within five years after collecting only $90,000 in income, the insurance company will keep the rest of your money, and your heirs will get nothing. (Though on the other hand, if you both live to 98, you’ll make out like bandits.) Because of that, many people decide to put only part of their nest egg into an annuity for safety, and keep the rest in a standard mix of stocks and fixed income.

To figure out how much you should “pensionize” in an annuity, look at the size of your retirement income gap relative to the amount of pension income you already have. You should also consider the flexibility of your spending plans, your keenness to leave money to your heirs or charity, your state of health and your tolerance for risk.

If you already have a good defined benefit pension plan, you’re very wealthy, or you’re likely to die young, annuities probably don’t make much sense. However if you don’t have any other guaranteed income, and your health is good, many advisors suggest that you put enough in annuities to at least cover your most basic spending needs. That way if your regular stock and bond investments don’t work out, then you only have to cut back on non-essentials.

An income for life
The annual payout you get from an annuity depends on current interest rates and how old you are when you buy them. The older you are, the higher the payout for a given purchase price. Keep in mind though, that the cost goes up if you buy an annuity with extra features, such as inflation indexing. It also goes up if you buy an annuity that covers both you and your spouse.

A standard fixed annuity for a 70-year-old couple currently pays about 7% a year until the death of the second spouse (and it is guaranteed to be paid for at least five years). So if you put $250,000 down, you would get $17,500 a year for life. After inflation, that would provide a payout of about 5%, as long as inflation stays in the current 2% range. If you’re not concerned about a bequest to your heirs, you can see that a 5% payout after inflation with no risk of outliving your money looks better than the 4% after inflation you would get from a standard stock and bond retirement portfolio (with no guarantee of an income for life).

Some experts recommend inflation-indexed annuities, which raise the annual payout by the number of percentage points that inflation goes up each year, but the extra cost to these products may outweigh the benefits. There are also variable annuities, which are advertised as providing a guaranteed income for life plus the ability to profit from rising markets. These are hybrid investments consisting of a mutual fund wrapped in a minimum payout guarantee (usually 5%). They offer some hope for upping payouts if your embedded investments do particularly well, and you can cash in what’s left of your investment if need be. But the guaranteed payout is much lower than with regular fixed annuities and the fees are very high (about 3.5% a year or more), which reduces the chance of getting your payouts bumped up.

Hit the sweet spot
The longer you wait before buying an annuity, the higher the monthly payment will be, although obviously you will collect over a shorter period. Milevsky says to get the right balance, you should annuitize gradually in the sweet spot period between the ages of 65 and 75. Many Canadians will find it convenient to convert a chunk of money to annuities as they near the age of 71, which is when the government forces seniors to convert their RRSPs into either an annuity or a Registered Retirement Income Fund (RRIF). However, you should be cautious about annuitizing a large proportion of your wealth at once, because you’ll be at the mercy of whatever the annuity rate happens to be on that day for the rest of your life.

When you do add annuities to your retirement plan, you should make some adjustments to the savings you have in your portfolio of stocks and fixed income to compensate. Regular fixed annuities aren’t inflation adjusted and have many characteristics similar to long-term bonds (they insulate you from stock market swings, but their worth is vulnerable to rising inflation and interest rates). So if you’re adding those kind of annuities to your retirement plan, you’ll want to adjust the rest of your portfolio to make it less susceptible to inflation and rising interest rates. You can do that by reducing the average time to maturity on your bonds and GICs, or by adding real-return bonds. Or you can simply go a bit heavier on stocks.

Now all you need to know is which stocks to buy for the Canadian equity portion of your perfect retirement portfolio. As luck would have it, you can find some excellent suggestions among our top-rated Canadian dividend stocks in the Retirement 100.

Fortunately, there are steps travellers can take to ameliorate the pain and minimize the frustration associated with endless security checks, cramped seats and dismal meals. Here are a few of the best tips from people who fly for a living.

Select a decent carrier
It makes a difference. Really. “Most people go on-line and find the cheapest possible flight,” says Vancouver Island resident John Beaven, who, before his retirement, used to rack up between 250,000 and 300,000 air miles each year circling the globe as an account executive with Allied Signal. “But if you’ve flown as much as I have, you quickly realize that not all airlines are created equal. Not only do some have more comfortable seats and better air and ground service, but different airlines actually have their own, distinct, personalities. Some are super-friendly and relaxed, others are uptight and employ flight attendants who clearly hate their jobs.”

For the record, Skytrax, which bills itself as “the world’s largest airline and airport review website,” ranks Asiana Airlines as the best carrier in the world based on product and service offerings, followed by Singapore Airlines and Qatar Airways. Best economy-class seating goes to Qatar; best business class seating to Kingfisher Airlines; and Virgin Atlantic is ranked No. 1 in airport lounges. Perhaps unsurprisingly, North American carriers are conspicuously absent from virtually all of Skytrax’s Top 10 lists.

To check, or not to check
In a word, don’t. The array of mishaps, glitches and hidden costs associated with checked baggage is both long and scary. For starters, checked bags can get damaged—as evidenced by Halifax musician Dave Carroll’s smash YouTube hit United breaks guitars. Checked bags also get lost frequently. “Incidents of luggage getting lost or stolen have skyrocketed of late, because carriers are outsourcing luggage handling to companies that pay minimum wage,” says Lynn Jones, recently retired from a 30-year career as an Air Canada flight attendant. “If you feel you absolutely have to check bags, make sure your carry-on luggage contains at least a pair of pyjamas and full change of clothes, so you won’t be stuck if your checked bags don’t arrive.”

Jane Hutchings, another flight attendant with more than three decades service, says she avoids checking luggage at all costs. On a recent 16-day trip through Australia and New Zealand, Hutchings and her husband each made do with a single carry-on bag, then bought anything else they needed—extra clothing, shoes or outerwear—en route. Sure, they had to purchase extra bags to check in for the flight back to Canada, but checking luggage on return flights is less critical: “If it goes missing on the way back, who cares?” says Hutchings. “You’re home, so you’re not stuck without necessities.”

Travellers who need to check luggage should be aware of size and weight limits for bags, and the attendant costs for exceeding these limits. Air Canada, for example, permits economy class passengers to check two 50-lb bags. Bags exceeding 50 lbs are charged $100, and extra bags run as much as $250—each way! Moreover, the allowances and charges can change mid-journey, as travellers switch airlines on connecting flights, leading to some truly nasty surprises. “I know someone who was stuck paying $3,000 to get their luggage home after a lengthy cruise,” says Hutchings. “I know other people who’ve taken to shipping their luggage with FedEx or UPS rather than checking it. It can actually be cheaper in some cases, and they deliver it right to your door.”

Security
In the recent Hollywood film Up in the Air, uber-flyer Ryan Bingham (George Clooney) finesses security line-ups with a practiced—not to say jaded—eye. Old people are the worst, he opines, because they’re “full of metal bits and never seem to appreciate how little time they have left.” Asian travellers, on the other hand, are efficient and organized, and “have a thing for loafers, God bless them.”

It’s a throwaway line, but not without its kernel of truth: there are things travellers can do to get through security quickly, efficiently and with minimal stress. “Wear shoes without laces that you can kick off and put back on without bending down,” says Jones. “And wear socks. You don’t want to be standing on those filthy floors in bare feet.” Hutchings, meanwhile, advises travellers to leave loose change at home. “It’s heavy, and you can’t use it if you’re flying out of the country.” And pack liquids, gels, cosmetics and medication in see-through ziplock bags, “so security doesn’t have to rummage through your carry-on bag looking for this stuff.”

Seating
When booking flights, you might want to consider paying a bit extra—usually $30 to $60—to pre-select a seat. “The seats by the emergency exits are great because you get more leg room,” says Beaven. Conversely, the row immediately in front of the emergency exits is bad because the seats don’t recline fully; nor do the seats in last row at the back of the plane.

“Some people want to sit up at the front of the plane, because they think they can get on and off faster,” says Jones, “but what they don’t realize is that’s where the bassinets go, so they’ll often find themselves sitting next to screaming infants.”

Sleeping
If you’re lucky enough to be able to fly business class, check in advance to ensure your carrier’s seats recline completely flat. Flat-bed seats are “vastly superior” to so-called angled-flat seats when it comes to sleeping, says Jones. “That’s where you hear the snoring.”

Oh, and the pillows and blankets provided on overnight flights? “They’re used again and again,” says Jones. “They don’t change them unless they’re visibly dirty, so I advise women in particular to bring their own shawl or pashmina they can curl up under, together with a pair of comfy socks or slippers.”

“Eat lightly, and refrain from drinking alcohol,” adds Hutchings. “One drink in the sky equals two or more on the ground because of the difference in oxygen levels, and if you have a couple drinks before dinner and half-bottle of wine with your meal, you’ll feel like the cat’s breakfast by the time you arrive at your destination.”

Beaven says that on flights where he hopes to sleep he brings his own neck pillow and makes sure he gets window seating. “If you’re in the middle seat you wake up on another passenger’s shoulder, and with aisle seats you’re always getting bumped by the trolleys.” He also invested in a pair of noise-cancellation headphones. “They’re fantastic. Turn them on, and 90% of the engine and cabin noise disappears. They also make it a lot easier to hear the in-flight movies.”

How much you enjoy your flight often comes down to your level of preparedness, your attitude and your expectations, says Jones. “Flying isn’t what it was in the ‘70s, and there’s no point pretending it is. So, be positive. It’s so much easier to be nice than nasty.”

Even then, thanks to new lower-maintenance car parts and self-diagnosing technology, you can do some maintenance less frequently than recommended. Other maintenance you should do by the book, or risk expensive repairs.

How do you know which is which? We turned to Robinson and Philip Reed of Edmonds.com, to find out.

Check/replace the engine oil and filters every 4,800 km
Can you put it off? Yes
We’ve been trained to change our car’s oil every 3,000 miles (4,800 km), but we have to break this habit says, Reed. It wastes perfectly good oil, and the cost of frequent changes adds up. Each car model varies, but Reed says you should plan on changing the oil and filter in newer cars about once a year, or every 16,000 km. If you use synthetic oil, you can probably make it every 24,000 km.

Check or flush the transmission fluid every 80,000 km
Can you put it off? Yes
Dealerships promote frequent fluid top-ups and regular transmission flushes, but Reed suggests just keeping an eye on the fluid and pushing the limits of the manufacturer’s schedule. He says you could probably flush the system every 100,000 km if the manual suggests 80,000 km under severe conditions.

Rotate your tires every 10,000 km
Can you put it off? No
Many Canadian drivers switch to winter tires once a year anyway, so they can ignore the scheduled rotation recommendations. However, if you don’t use winter tires, then you should fork out $30 for an annual rotation.

Balance your tires and align your wheels every 10,000 km
Can you put it off? Yes
While many of us don’t rotate our tires enough, we tend to be overly concerned about alignment, says Reed. He suggests ignoring the manual’s schedule, and only going in to have your alignment adjusted if you feel a consistent pulling, or a noticeable vibration through the steering wheel.

Inspect or replace your spark plugs every 40,000 km
Can you put it off? No
When it comes to spark plugs, you should follow the manual. Otherwise you could end up paying $1,000 or more for a new catalytic converter. The maximum suggested mileage between inspections ranges from 40,000 km to 100,000 km, depending on the car.

Replace your battery every 40,000 km
Can you put it off? No
Here again, you should follow the manual. “You don’t win by leaving a battery in your car for longer than four to five years, because your alternator has to work harder,” says Robinson. A new battery typically costs $50 to $100. A new alternator, on the other hand, will cost you $300 to $1,000.

Inspect or replace the timing belt every 160,000 km
Can you put it off? No
Follow the manual here too. Canada’s fluctuating temperatures add a great deal of stress to belts, causing them to snap or break more easily. Always replace the belts (and adjacent components) according to the manufacturer’s schedule. But here’s some good news, says Reed: newer models have eliminated the belt completely.

Check and flush the engine coolant (antifreeze) every five years
Can you put it off? No
In this case, you should consider changing the fluids even more often than the manual says. Because of Canada’s frigid winters, Robinson suggests replacing long-life antifreeze once every three years, and regular antifreeze once every two years.

Flush your power steering fluid every two years
Can you put it off? Yes
You can neglect this one a little without putting your car at risk, says Reed. “Just fill it up every time you feel resistance in the steering column.”

Inspect/replace your brake pads (and fluids) every 20,000 km
Can you put it off? Yes
When it comes to brakes, Reed says the manual’s schedule will have you spending more than you have to. Your brakes have an automatic mechanism that causes them to screech when they need changing. He suggests waiting until you actually hear the screech before getting them changed.

While you should definitely take advantage of the one big exemption you do have—that you don’t have to pay capital gains taxes on your principal residence—most of the other dodges you hear about won’t work the way you hope. We’ve listed a few of them below, to save you the trouble:

Myth #1: I can avoid paying capital gains taxes by making my child a co-owner.
Nope. If you add a child’s name to the title for your cottage or home, the CRA views that event as a taxable disposition of 50% of your property at fair market value. The capital gains taxes on that portion are due right away, says Kathy Munro, a tax partner with PricewaterhouseCoopers in Toronto. When you and your spouse die, if you leave your portion of the cottage to your child, your estate will have to pay capital gains taxes on the remaining 50% then.

If you’re looking to buy a cottage, you could list your kids as joint owners right from the start, but that leads to complications too. For instance, if your child is under 18 at the time, the public trustee would have to act as the child’s agent, as minors can’t own property. “Believe me, it’s like opening up the jaws of hell,” says Barry Fish, a wills and estate lawyer with Fish & Associates in Richmond Hill, Ont. “You won’t be able to mortgage the property or sell it without the consent of the child’s government-appointed lawyer.”

If your child is an adult when you buy a cottage, it’s much simpler to include him as a co-owner from the start. But that too can be risky. If your son gets divorced, say, and he and his wife divide their property between them, she may claim half the value of your cottage. And remember, if your child’s name is on title as a joint owner, you can’t sell or mortgage the property without written consent from your child, so be nice to him.

Myth #2: I know there’s a $100,000 capital gains exemption. Where do I sign up?
You can’t. The $100,000 capital gains exemption was taken away in 1994. At that time, if you owned property other than your principal residence and you elected to increase the cost base of a second property, such as the family cottage, you could have triggered the $100,000 exemption. If you didn’t elect this option by 1994, it’s too late. However, if you are receiving property from your parents, always check to see if they applied for the exemption.

Myth #3: I’ll just give the cottage to my daughter. If there’s no sale, then there’s no taxes payable.
Unfortunately, the CRA found a way around that one too. It treats gifting as a deemed disposition of property on the day the cottage was gifted and capital gains taxes are due at that time. The CRA will assume the cottage was gifted at fair market value, to be determined by a tax or real estate valuator.

Myth #4: I can only declare my home as my principal residence.
Not true. As long as you lived in both your home in the city and your cottage in the country for at least a few weeks each year, you can elect either one as your principal residence. The key, though, is that you can only have one principal residence at a time. Thus, if your home had higher capital gains during the period from 1972 to 1985, and your cottage had higher capital gains during the period from 1986 to the present, you could claim your home as your principal residence during the earlier period and your cottage during the latter period to minimize your taxes. But the periods can’t overlap.

Myth #5: I can avoid probate charges by putting the cottage in trust for the kids.
Okay, this one isn’t a myth, it’s true—but, alas, unless you claim the cottage as your principal residence, you will still have to pay capital gains taxes. This is a real shame because probate fees, which range up to 1.5% of the value of the estate, are nothing compared to capital gains taxes, which can be as high as 47% of the taxable portion of the capital gain. So while you can avoid probate by setting up a trust, be careful that you don’t spend more on lawyers than you would actually save on the probate fees, which are often just a few thousand dollars.
]]> http://www.moneysense.ca/2010/11/24/top-5-tax-myths-about-leaving-property/feed/ 21 http://www.moneysense.ca/2010/11/23/avoiding-the-family-feud/ http://www.moneysense.ca/2010/11/23/avoiding-the-family-feud/#comments Tue, 23 Nov 2010 15:33:35 +0000 Julie Cazzin http://www.moneysense.ca/?p=8786 Ask each of the four Carson brothers where they spent the best times of their lives, and they’ll say at the 1938 family lake house on the glistening shores of Lake Huron in Ontario.

That’s where Jim, Rob, Matthew and Jason spent long, lazy summer days swimming and looking for fat, juicy worms so they could bait their heirloom fishing rods in preparation for hours of fun catching bass, whitefish and rainbow trout. On the drive up every Canada Day weekend in the wood-paneled station wagon, the whole family would stop in town to buy groceries at the small local market before finally arriving at the cottage, ready for endless weeks of summer fun.

But these days the Carson brothers (we’ve changed their names to protect privacy) don’t talk to each other anymore—and the cottage that was once their dream has turned into a living nightmare. When the boys’ parents, Hugh and Kathleen, passed away four years ago, they did what they thought was the right thing. That is, they left the cottage to all four boys to share as they saw fit, believing the boys would work out an arrangement that would please everyone. “I think they thought they were doing us a favour,” says Jason, 47, the youngest. “But I also think they didn’t want to be seen playing favourites, and they just avoided the whole topic of inheritance while they were still alive.”

At first, the Carson brothers tried their best to share cottage expenses and allocate the summer weeks at the cottage fairly. Jim, 56 and the eldest, would bill each of the brothers $3,000 a year for expenses, property taxes and maintenance. But that didn’t work for long. Jim, who lived a short 45-minute drive from the cottage, used it as much as he could every summer, but Rob and Matthew lived near Ottawa and drove to the cottage only a couple of weekends a year. Jason, who lives in Calgary with his second wife and two daughters, hasn’t come out to Ontario to use the cottage once since his parents died. So last year, after talking it over with his wife, he outright refused to pay his share of expenses for the cottage and asked his brothers to buy him out.

It all went downhill from there. The two brothers in Ottawa couldn’t afford to buy out Jason, and Jim told Jason point blank that he wouldn’t. Jim reasoned that he wasn’t stopping Jason from using the cottage, so why should the fact that Jason happened to live so far away cost him money? “That made me really mad and I just snapped,” says Jason. “I’m not going to allow him to treat me and my family that way.”

The result? A nasty court battle that promises to go on for years. By neglecting to draw up a proper succession plan, their parents have ruined the close relationship the boys shared growing up. “I know my parents tried to do the right thing but they probably should have just sold the cottage before they died and told us that was what they were going to do,” says Jason. “We wouldn’t have liked it in the beginning but we would have all eventually accepted it. Now there’s no turning back.”

The Carsons’ story is as sad as it is common. Most lawyers could write a book about the family feuds they’ve witnessed because of poorly thought out succession plans (and several have). Often, the parents are trying to be fair, but don’t consider how their plans will work on a practical level. Other times, the parents focus on tax issues, and what works best for their own finances, without really considering the kids’ needs at all. In some cases, parents ignore the issue altogether, because they just don’t want to
deal with it.

Whatever the reason, rather than leaving their kids a property that enriches their lives, parents can inadvertently leave an emotional minefield that causes years of strife. “When the parents are gone, all the unresolved emotional issues from childhood come into play,” says Brad Klontz, a financial psychologist based in Hawaii and co-author of Mind over Money. “Lawyers try to tackle the issues by using a logical approach. But it’s 90% emotional. The siblings will resort to primitive ways of dealing with the unpleasantness and either fight, freeze or run away, then nothing gets resolved for years.”

If you’re a parent who wants to avoid causing such a family rift—or you’re a son or daughter who fears that such a fight could be heading your way, read on. By following the tips below, you can ensure that your family never becomes embroiled in a nasty feud.

Talk it through
While it would have been difficult to predict the Carsons’ family feud, you would have thought that an all-out war in Gord Gallant’s family was a sure thing. Gallant, now a 47-year-old assistant construction supervisor in Erin, Ont., was the youngest of 15 children born into a French-Canadian family in Charlottetown, and his parents left him everything. His 14 siblings didn’t get a dime. Yet not one of them has uttered a word of complaint. The reason? The inheritance plan, fair or not, was in place from the day the first child was born, and everyone in the family knew exactly what it was. “It was part of the French Canadian tradition in our family to leave everything to the youngest child,” says Gallant. “Well, I was 15 when my parents died and I was the youngest. I was the lucky one who inherited everything.”

Gallant says that at the time of his parents’ death, all of the family property, which included the family home as well as a lobster business and its valuable accompanying quota, were put in a family trust for Gallant until he turned 21. In the meantime, he lived in the family home and his older sister and brother-in-law took care of him. “I sold the home to my sister, and the lobster business and quota to an older brother, who was the real fisherman in the family, as soon as I turned 21,” says Gallant. “They paid me fair market value and we’re still close today.”

It’s hard to believe that all this transpired so amicably, especially since Gallant didn’t exactly put the money he got from his brother and sister to good use. “I wasted a lot of it on the things that 21-year-olds do—wine, women and song,” Gallant admits. “But through the whole thing, my family and I were closer than ever. We still vacation together all the time today and I go out to P.E.I. every chance I get.”

Ruth Hayden, a financial educator and author in St. Paul, Minn., says that the Gallant family estate plan worked well because the kids knew about it years in advance, so they had time to get used to it. The open communication from the parents about what would happen gave the kids a lifetime to adjust their expectations and ask questions about why the property was being split up the way it was. “The key is that parents need to be open and honest about their intentions—even if they have to deal with unhappiness now,” Hayden says.

Don’t settle scores with a will
It’s almost always a mistake to favour one child over another when you’re leaving property, even if you’re trying to correct past financial injustices. If you really feel that one child deserves something extra, rather than doing it in your will, consider doing it while you’re alive.

That means that if you paid for medical school for your daughter and didn’t give your son anything for his schooling, then you should give him a cash gift during your lifetime—maybe for the down payment on his home when he buys one. Or, if one child took care of you for 20 years in the family home and the others didn’t help at all, then consider giving her a direct payment for the time she spent looking after you—and telling your other children at that time why you’re doing it. But don’t finger children out in the will for special consideration. “From my experience, most special gifts left in wills lead to hard feelings among the siblings,” says Ed Olkovich, a wills and estate lawyer in Toronto and author of Estate to the Heart.

If you’re dead set on favouring one or more of your children in your will, at least let your kids know about your decision well in advance. As Gallant found, when the whole family knows what to expect, that can go a long way toward heading off hurt feelings. But don’t fool yourself—when you first propose the idea, you could be in for a rough ride. “Even just discussing these decisions may cause a lot of hurt and anger, but it needs to be done because it gives the kids a chance to get some answers to their questions,” says Thornhill, Ont., lawyer Barry Fish, co-author of The Family Fight: Planning to Avoid It. “They may not like the answer, but they’ll at least understand why you did what you did.”

Include a note to the kids
To make absolutely sure there are no misunderstandings, it’s a good idea to write a brief letter to your children, to be read before the will. The purpose of the note is two-fold. First, you want to explain to your kids why you made the decisions you did. Second, you want to let your kids know that no matter what those decisions were, you loved them all equally.

Hayden has helped several clients write up what she calls a “statement of intention,” and she says it should read as follows: “We love you Kenny, Bobby, Johnny and Marie. We love you all equally and this is why we are doing what we do.” Hayden points out that the note shouldn’t favour anyone and that often fairness is really about quantifying the love. “If parents say from the beginning that they love the children equally, it goes a long way towards easing things through the process.” And don’t complicate matters by trying to include grandchildren in the will. “The only way to do this fairly is to have the grandkids’ share come out of the parents’ share,” says Hayden. “Deal with your children only and you will mitigate any feuds.”

Taxes come second
A common mistake when leaving property is to get so caught up in trying to minimize capital gains taxes, that your children’s emotional and financial needs get forgotten. Most middle-class Canadians will get only one tax-free capital gain on property in their lifetime, and that’s on their main residence. There are dozens of strategies for avoiding paying capital gains taxes when you leave your cottage or other family property to the kids, but most of them don’t hold water.

It’s important to understand this, because if you put too much emphasis on schemes to avoid taxes, you can end up making poor decisions. Not only can you let tax issues cloud simple and fair solutions to leaving property, most of them won’t work out the way you hoped anyway. “Tax considerations should not be the major reason why you leave property to certain family members, or for that matter, why you change title and gift certain properties while you’re still alive,” says Kathy Munro, a tax partner with PricewaterhouseCoopers in Toronto. “You absolutely want to minimize the taxes paid when passing on the family cottage—and there are some legitimate ways of doing that. But it’s not that easy.”

For instance, Munro says you can’t simply add a child’s name to the title while you’re still alive, or gift your cottage to one of your children and expect to pay no capital gains tax. Such strategies can trigger full taxation and put the family in a position where they may even have to sell the cottage to meet tax obligations. (For more on strategies to slash capital gains taxes, see Top 5 tax myths about leaving property)

Cathy Buchanan, 42, of Richmond Hill, Ont., says that for years her dad considered adding her name and those of her two brothers, Mike and Jon, to his cottage’s title. But after getting some professional tax advice, he decided against it. “My dad wanted to do the right thing, but he was getting conflicting advice from friends and neighbours,” says Buchanan. “He chose to leave things alone for now and look at things again when he’s a little older.”

Buchanan says the cottage has been in the family for three generations and her dad would like to keep it that way. But rather than trying to execute a complicated tax maneuver, they are considering a simple purchase when her dad gets too old to enjoy it. “My brother Mike and I have said that when my dad is ready to let go of the cottage, we will buy Jon out at fair market value,” she says.

Pay taxes with life insurance
While you should generally avoid complicated tax schemes, you shouldn’t forget about the impact of capital gains taxes altogether. The tax bill on capital gains can indeed be huge, and you need to make sure your kids can afford it. For instance, if you originally bought your cottage for $200,000 and it’s worth $500,000 when you die, your kids could end up being forced to pay out as much as $75,000 in taxes when they inherit the cottage.

A great way to cover that cost is to take out a last-to-die life insurance policy for you and your spouse. The money from the policy will then be used to pay the capital gains taxes due at the time of death. In some cases, children who stand to inherit the property may even be willing to pay the premium on the policy. A $500,000 last-to-die policy for two 65-year-olds would cost about $6,700 a year in premiums.

The right life insurance policy can be the solution in other situations too. For instance, if you’re in a second marriage and you have grown children from the first marriage that you’d like to bequeath something to, you could leave them a set amount of money in the form of a life insurance policy. It’s a great way to guarantee that your current family’s lifestyle won’t be disrupted, without forgetting the kids you had with your first wife or husband. “The more options you bring to the table in these kinds of situations, the better,” says Douglas Forer, senior tax partner with McLennan Ross in Edmonton, Alta. “Substantial cash from a life insurance policy goes a long way towards maintaining peace between the two families when the will is read.”

Sell the cottage when you stop using it
Once you reach your 80s you may find you’re not really up to the long drive up to the cottage any more. At that point, you may want to confer with the kids to see whether they actually want it. If not, the simplest thing to do is to sell it yourself, use the proceeds to pay the capital gains taxes and leave the rest of the money to the kids.

That’s what Barbara Wickens’ parents did. “My parents knew by age 80 that they didn’t want to keep the family cottage anymore,” says Wickens, a freelance editor, writer and co-author of Now What? A Practical Guide to Dealing With Aging, Illness and Death. “They made no secret of it, letting both my sister and me know that they had no intentions of passing it down to us. They paid their capital gains taxes and let us get on with our lives. I’m thankful for that today.”

Cash can be the best gift of all
That brings us to what may be the most controversial advice of all when leaving property: don’t do it. If there is more than one child, coming up with a plan that’s flexible enough to deal with life’s twists and turns while keeping everyone happy is almost impossible.

Even in the most straightforward situations, unforeseen problems can quickly emerge. “I have one client who left the cottage to her son and daughter as co-owners,” says Fish. “The daughter used the cottage every July and her brother every August.” The children got along well, and everything went smoothly as first. “But the daughter’s family was so messy that the son’s family spent the first few days in August cleaning up the cottage after them. After a few summers of doing this, they eventually sold the place and each bought their own cottage where their families could relax and behave as they liked.”

The truth is that asking several people to share a cottage or other property is almost always asking for trouble. If it wasn’t an inheritance, few people would choose to co-own a property with their siblings. “That’s why I tell my clients that the way to abort any family feuds is to envision everything being sold and transferring straight cash to your kids,” Olkovich says. He feels that leaving cash is almost always the fairest thing to do. “When those kids sit at the table around me as a I read their parents’ will, they’re all looking for one thing,” says Olkovich. “They want to be reassured that mom and dad loved them just as much as brother Sam and sister Susie. Nothing says that as clearly as an equal cash payout for everyone.”

Remember that by the time you’re gone, your kids will likely have their own families, their own homes and in many cases, their own cottages. By that point, the cottage or family home may not mean as much to them as you think.

That was the case with two brothers we’ll call Diego and Maurice. All the neighbours thought they would get into a huge fight over the family home on a tony street in suburban Toronto when their mother passed away two years ago. Instead the boys, who are now in their 50s with families of their own, were interested in keeping very little from their parents’ estate. Diego drove off with his dad’s antique Cadillac while Maurice came out of the house with a small cardboard box holding a few pieces of his mother’s heirloom jewelry. Then they instructed the real estate agent to sell the house and dispose of everything else in it.

“Keep perspective,” says Olkovich. “Your kids aren’t teens anymore. Many are probably on the cusp of retirement themselves. They don’t really need anything from the estate. More than anything, they just want to know they were loved equally. That’s the real legacy you should be leaving them.”

To show how that can happen, we’ve followed the fiscal fortunes from mid-life to retirement of a typical (but fictional) Canadian couple, who we’ll call Bill and Susan. At each stage, we’ve costed out what they pay in income and payroll taxes, versus what they get in government income and subsidies. We found that Bill and Susan go from paying $14,800 a year net in taxes while both are working at age 40, to paying about $7,400 in taxes at age 64, to receiving $10,200 a year at age 66 after they retire. And believe it or not, those numbers don’t even include payments from the Canada Pension Plan (CPP). If we did include that income, the fiscal shift would be even greater.

To do the complicated tax calculations involved, we relied on the expert help of Ali Jaffer, a certified general accountant from AR Jaffer Professional Corporation of Mississauga, Ont. He spent hours crunching the numbers, so you don’t have to. Now, if you’re ready, let’s follow Bill and Susan’s fiscal journey and see how you too can benefit from a big reversal in the tides of taxation.

A shift in fiscal fortune
What causes this change from being a net payer to a net receiver of government money? Three major factors. The first is a reduction in income. You need a lot less to live comfortably in retirement than you did at mid-life, so when they stop working, most Canadians are able to cut mid-life costs such as hefty mortgage payments, money spent on raising kids, and work-related costs. Because you need less income to maintain the same lifestyle, you’ll pay lower income taxes.

The second factor is the bevy of generous senior income programs that Canada offers, such as Old Age Security (OAS), which normally kick in at age 65. Finally, a host of tax breaks for seniors apply at age 65, allowing them to pay less income tax than 64-year-olds with the same income. Many Canadians have no idea how generous these tax breaks are until they prepare their first tax return after retiring, says Jaffer. Then they get a pleasant surprise: “It’s often a lot less tax than they expected,” he says. These tax breaks include pension income splitting, the age credit, and the pension income credit, as well as other provincial perks, and they can add up to thousands of dollars a year.

Bill and Susan at 40
Now let’s have a look at how these factors impact the fortunes of Bill and Susan as they progress through life. We’ll start with them as a typical financially-stretched 40-year-old middle-class couple with two kids, Kate, age 4, and Matt, age 2. Both Bill and Susan work full-time, with Bill earning $35,000 a year and Susan earning $65,000, for a total of $100,000. (That’s a little more than the median but less than the average for two-spouse households with children in Canada.) They just bought their first house a few years ago, so they carry a big mortgage, and they spend $14,000 a year on day care. Because of those high costs, they aren’t able to save for retirement at this stage, so they have no RRSP contributions at the moment. They do get federal child-related subsidies worth $3,400 and they get a tax deduction for their child-care expenses from Bill’s income. But they still pay a combined $15,100 in income tax and $3,100 in payroll taxes. That results in a tax bill, net of subsidies, that totals $14,800 a year.

Bill and Susan at 64
Now let’s consider what Bill and Susan’s fiscal situation might look like when they are 64 and nearing retirement. They’ve made a lot of financial progress since they were 40. Their house is now paid for, they’ve saved up a decent-sized nest egg, and they’re on the verge of retiring. They’re both working part-time and earn a combined $50,000 a year. (Susan earns $30,000, while Bill earns $20,000.) This allows them to cover their living costs, so they can keep their nest egg intact for their long-anticipated retirement. However, they are not adding new savings to their nest egg at this point, and therefore don’t currently contribute to RRSPs. Their kids are financially independent and long past the point of generating child-related tax breaks. With their income much reduced from their peak earning years, they now pay income taxes of just $5,700, plus $1,700 in payroll taxes, for a total tax bill of $7,400 a year.

Bill and Susan at 66
When Bill and Susan turn 65, they officially become seniors, and they fully retire. At age 66, they continue to enjoy the same income they did at age 64, with Susan earning $30,000 and Bill earning $20,000, for a total of $50,000. (That’s more than the median income for a seniors couple, but a little less than the average.) But neither is working for a living now: they draw their income from a combination of OAS, CPP, modest company pensions, and their RRSPs. All of this income is taxed at regular tax rates, but they pay much less tax than they did on the same income two years earlier. Now their income tax bite is only $3,400 a year, compared to $5,700 at 64.

As well, they have no payroll taxes, they get a small provincial property tax grant worth $334, their provincial government drug program covers about $700 of their $1,000 in annual prescription drug costs, and OAS pays them $12,500. As a result, they net a cool $10,200 a year from the government more than they pay in taxes.

A bigger break than families
You’ve seen how the tax and subsidy system is designed to give seniors a break. But the government also tries to give moderate-income families with kids a few breaks as well. So which group does the tax system treat most generously, seniors or moderate-income families? It turns out that seniorhood beats motherhood hands down.

To show this, we compare Bill and Susan’s tax and income situation at age 66 with that of another fictional couple. Jim and Nancy are both 40, and they have a young family with two kids at home. Both couples have the exact same annual income of $50,000. In Jim and Nancy’s case, Jim is essentially the sole breadwinner and his salary supports the family, while Nancy stays home to look after the kids, Leah, age 4, and Evan, age 2.

You’ve probably realized by now that a retired seniors couple like Bill and Susan who own their own home mortgage-free can live pretty comfortably on $50,000 a year, which is typical for retired seniors. But $50,000 in the hands of a 40-year-old couple with two kids, like Jim and Nancy, is more of a struggle. On that kind of income, Jim and Nancy can’t afford a house in a typical Canadian city. As a result, they rent a two-bedroom apartment and pay quite a bit more for accommodation than Bill and Susan pay for their much larger and nicer three-bedroom detached house.

Luckily, like Bill and Susan, Jim and Nancy have their tax breaks too, such as the spousal credit, the Child Tax Credit, the Universal Child Care Benefit, and the children’s fitness program credit. They could bring their tax bill down even further if they were able to pile money into RRSPs, but at this point they’re just keeping their financial heads above water and can’t afford to save.

Unfortunately for them, however, after everything is calculated, Jim and Nancy’s benefits fall far short of the government’s generous treatment of Bill and Susan. Just looking at income taxes by itself, our mid-life couple pays $6,100 while our seniors couple pays only $3,400—a surprising outcome considering the two couples have the exact same income. If you add in payroll taxes, government income and child-related subsidies, the net tax hit to our 40-year-old couple is reduced to $3,100, while our seniors couple becomes a net recipient of about $10,200 a year. That leaves our seniors couple $13,300 ahead of our mid-life couple.

That’s why when you turn 65, you should thank your lucky fiscal stars as your friends sing you a resonant Happy Birthday. Those government cheques will make for a very sweet birthday present—and it’s one that will keep on giving.