Calvin Leung's Blog

• Happy holidays
  I hope you have a safe and enjoyable vacation (for those of you lucky enough to have one). See you in January.
  
• Avoiding audits
  Question: I’m an electrical contractor in a sole proprietorship. I’ve been in business since 2001. For the first few years I had a small net income, but this year I’ll probably have an $8,000 net loss. Will the Canada Revenue Agency question my losses if I have too many of them and should I incorporate?
  
  Answer:
  
  The CRA has been paying closer attention to losses in recent years. But the agency’s main goal is to crack down on people running unprofitable side businesses just to write off parts of their homes, car or other personal expenses. Reporting three consecutive years of losses, however, will significantly increase your chance of an audit, says Ben Seto, a former CRA auditor and partner at Chim & Seto LLP Chartered
  Accountants in Mississauga, Ont. He also notes the CRA has hired thousands of additional auditors over the past few years and his firm has seen a spike in audits.
  
  As for whether you should incorporate, Seto points to two reasons he generally recommends the change. For starters, a corporate structure prevents creditors from seizing personal assets, such as a house. In other words, they can only take assets belonging to the corporation. This isn’t the case with sole proprietorships. Secondly, a business owner may pay less taxes as a corporation than as a sole proprietorship. As an example, take an operation that generates a $100,000 profit after paying the entrepreneur a $100,000 salary. In Ontario (tax rates vary slightly different among the provinces) the $100,000 in corporate income will be taxed at a rate of 18.6% and the $100,000 in personal income at roughly 30%. Compare that to a sole proprietorship, which causes CRA to treat the whole $200,000 as personal income and taxes the first $100,000 at about 30% and the second $100,000 at 42%. That said, expect to pay a one-time fee of between $1,000 to $1,500 to incorporate and then between $2,000 to $5,000 annually for bookkeeping and filing expenses. On the positive side, the change could attract more clients. “If you’re not incorporated,” says Seto, “you’re seen as a fly-by-night business.”
  
  
• A hopeless situation?
  Question: I am a 45-year-old single mother of two teenagers. I own a condo in B.C. valued at about $350,000 but still owe $173,000 (24 years left on mortgage at 5.5% fixed until 2011, monthly payments of $1,200).  My only other assets are $10,000 in a RRSP and $20,000 in a savings account.  I am a self-employed bookkeeper working from home with a monthly income of approximately $4,000. I have no other outstanding debt and no other significant assets.
   
  I am considering a line of credit against my home for $75,000 (at a rate of prime plus 1% = monthly payments of about $390) and adding all my cash to this to make an investment portfolio of roughly $100,000.  I am told that with this amount, I can qualify for better management at lower commission rates (approx 2% per yr). I believe this is called Discretionary Management. I am counting on around a 10% return over at least 10 years or more and thought perhaps I could take biannual profits and lump them on to my mortgage (maybe). There is an element of prayer that the “impending US recession” will not dramatically affect this plan. I am struggling to improve my overall investment knowledge, but I am painfully aware of my bleak financial future, if I don’t do something soon to better prepare for retirement.
   
  My question is, do you think that this is a reasonable option for me (or maybe just too darn risky?) or would it make more financial sense to just make bigger payments towards my mortgage and perhaps also lump the $20,000 savings amount on the mortgage as well?
  
  
  Answer:
  
  Risk in investing is like spicy food: everyone has a different stomach for it. That said for someone in your shoes, borrowing against your home to create an investment portfolio seems risky, says Diane McCurdy, a Vancouver-based certified financial planner and author of How Much is Enough? Balancing Today’s Needs with Tomorrow’s Retirement Goals. “As a single mom, you have to be a bit more careful, because you don’t have someone else to help you out,” she says. As for taking biannual profits to pay down your mortgage, McCurdy says the direction of the market is notoriously difficult to predict, making such a strategy unreliable.
  
  McCurdy supports the idea of paying down your mortgage faster. But she would take the $390 per month you have earmarked for the home equity loan and invest in mutual funds sheltered inside your RRSP. If you’re in the 30% tax bracket, McCurdy points out, it will only cost you $700 to have $1,000 working for you. Making regular contributions to your RRSP will also help protect you against the effects of a US recession. “If the market ends up going down, you’ll just end up buying more mutual fund units,” she says. On top of that, in months in which you can’t afford to contribute to your RRSP, you can skip it—the same, of course, can’t be said for payments on a home equity loan. Assuming an 8% compounded annual rate of return, those monthly $390 investments will grow to $229,719 over 20 years, and their tax returns will shave about 4 years off your mortgage during that period.
  
  What about the $20,000 in savings? McCurdy recommends keeping 3-months salary ($12,000) in an emergency fund and putting the rest into your RRSP. She also suggests tracking your expenses and budgeting to free more money for your investments. Although your financial situation may be stressful, McCurdy doesn’t see your case as hopeless. “At 45, you still have time to catch up on RRSP contributions, pay off a mortgage and then start putting money into non-registered investments. But the key is investing consistently.”
  
  
• Test
  

  This blog is currently being tested please disregard.

• Trend Spotting
  

  Question: What are some emerging consumer trends?

  Answer:

  Sure, it's not for everyone, but Klara Jirkova, a student at The Berlin University of the Arts, has invented a way to create Braille tattoos: implant tiny surgical-grade stainless steel balls under the skin. Over in Ireland, researchers at IBM are developing virtual worlds based on sounds rather than images. Fort Wayne, Ind.-based GM Micro recently launched the Voice Sense, a PDF for the visually impaired. Jeremy Gutsche, who heads a network of over 17,000 "Trend Hunters" around the globe, says innovations for the blind is one of the world's hottest trends.

  Another product category that could be huge: voice-activated communication and entertainment systems in cars. Ford recently launched Sync, a technology that lets you play specific songs from an iPod or make calls on your cell phone by using verbal commands. "The Sync is something that might make people consider Ford, even if it wasn't in their consideration set, and will have other companies racing to have the same technology," says Gutsche.

  Like cars, vending machines could also see some major changes. These devices may soon reward thirsty consumers with a free drink for watching a 30-second ad. That's one idea in the works at Apex Corp, a vending machine company in Japan. The Beautiful Vending Styler, which straightens hair and comes from The Beautiful Vending Company in the U.K., is spreading from nightclubs in London to cities such as New York. In Amsterdam, you can rent bicycles from automated machines. "Vending machines aren't just going to be about pop anymore," says Gutsche.

  Of all the emerging consumer trends on his radar, Gutsche thinks "eco innovation" will be one of the biggest in Canada. He points our Vancouver has a condo developments, which brand themselves as being zero carbon. In other words, these buildings have features that offset the damage to the environment caused by its residents.

  Now if someone could just invent a way to make Canada's weather warmer during the winters, we'd be set.

• death and taxes
  Question: My father recently died and had stocks valued at $84,000.  These stocks were in my brother’s and my father’s names.  The stocks were transferred to my brother within a month of my father’s death.  Now I am told a capital gains tax applies to the profit of these stocks, which is approximately $60,000.  I have not benefited from these stocks, and I am told I must share in the estate payment of the tax.
  
  Is this correct or can I evade paying half the capital gains and let my brother pay from his share of the estate as he has inherited all the stock?
  
  
  Answer:
  
  I’m af