Category: Personal Finance

Favourite reader “Telly” left a comment on her “Living and Working in Different Countries” post regarding a recent change to the taxation laws which affect cross border workers:

BTW, some very useful info for any Canadians working in the US (resident or not).

On Friday, the Canada-US Income Tax Treaty was revised and will apparently enter into force on Jan. 1, 2008. Basically, employee contributions to a US pension plan (401k) will be deductible on Canadian tax returns.

Yay!

Here’s the description and link if anyone is interested:

http://www.fin.gc.ca/news07/data/07-070_1e.html

Pensions & other registered plans – mutual recognition

Who it affects: Cross-border commuters – individuals residing in one country and working in the other – who contribute to a pension plan (or any of certain other employment-related retirement arrangements) in the country where they work. Also individuals who move from one country to the other on short-term (up to five years) work assignments, and continue to contribute to a plan or arrangement in the first country. In certain cases, such persons’ employers may also benefit.

Current rule: No rule in respect of contributions, meaning no assurance that they may be deducted for tax purposes in the country of employment.

New rule: Provided certain conditions are met, cross-border commuters may deduct, for residence country tax purposes, the contributions they make to a plan or arrangement in the country where they work. Similarly, those who move for work and meet certain conditions can deduct, for source country tax purposes, their contributions to a plan or arrangement in the other country, for up to five years. In both cases, accruing benefits are not taxable.

Examples: (1) A resident of Canada is employed in the U.S., and contributes to an employer-sponsored pension plan there. The employee’s contributions to the plan (up to the employee’s remaining RRSP deduction room) will be deductible for Canadian tax purposes. (2) An employee of a Canadian company is assigned for three years to a related U.S. company. The employee keeps contributing to the employee pension plan of the Canadian company. For U.S. tax purposes, both the employee and the U.S. company will be able to deduct the contributions.

Significance: Facilitates movement of personnel between the two countries by removing a possible disincentive for commuters and temporary work assignments.

Application: Applies for taxation years that begin after calendar year in which the Protocol enters into force. However, if ratification is completed in 2007 the rule applies for taxation years that begin in 2008 (i.e. the same calendar year that the Protocol enters into force).

I have a very definite philosophy for buying computers. I tell it to anyone I meet who is planning a purchase, they all agree that it makes complete sense, and then none of them ever actually do it.

Computers drop in value quickly as we call know. They’re right up there with cars (except worse) in that you buy it and it starts depreciating quickly and immediately. This isn’t going to change in the near (or arguably far) future (I can post arguments backing this up if you want, but just Google Moore’s Law and you’ll get the basic gist if you don’t believe it).

Based on this, my philosophy has always been to buy the cheapest computer that will meet my CURRENT needs, and give myself permission to upgrade once I run in to ANYTHING I want to run that the computer can’t handle. Even if its fairly frivolous (such as watching videos with cutting edge video encoding or playing a new game). You will have to upgrade more often following this approach, but if you’re buying $1000 machines instead of $3000 machines the math still works out.

Say a cutting edge machine costs $2500. Six months from now, it’ll be the “budget beast” they’re selling for $600. Buying the high end machine will give your computer an added lifespan of 6 months. I usually get 3 years out of the low end machines I buy, so I’m paying ($600 / 36 = $16.67 / month). With the higher end machine, lasting the extra 6 months, you’d be paying ($2500 / 42 = $59.52 / month).

So clearly (even if you want to quibble about the numbers) we’ve disproved that paying more for a computer “so it will last longer” is a good strategy. Related to this is the idea “if I pay more for a computer, it’ll be higher quality”. It won’t. Computers are made with commodity hardware (it all pretty well functions the same way), and more expensive is usually just newer, not higher quality (some exceptions to this, but you can actually buy lower performance higher quality parts cheaper than higher performance lower quality parts).

The second argument people make for buying an expensive new machine is “it will let me do XYZ which the cheaper one won’t”. Often XYZ is something the cheap one WILL do (you can’t purchase a computer that isn’t powerful enough to surf, playing music and write e-mails). Unless you’re going to be doing video editing or playing the latest first person shooter game (3D games where you run around blowing other people up), you probably don’t need the latest and greatest machine. If you think you *MAY* want to do one of these processor intensive activities, get the cheap machine, find an older version of the software, and if you do use it and like it, then buy the more expensive machine (most peoples’ intentions are never followed through on, so paying lots of money to have a machine powerful enough to run software that you’ll never use is a waste).

I’m a computer nerd, work in the field, do a fair bit of programming and whatnot, and I’m using a 3 year old notebook (notebooks are less powerful dollar-for-dollar than desktops). A low-end new computer is more hardware than I need (although if its cheap enough I’ll take it), how many people are out that that honestly need more horsepower than I do?

The third argument, which no one ever says out loud, is that a new computer has bragging rights. Your friends come over to a dinner party and are interested in seeing the new Vista. Computer nerds will help fix your computer so you can send an e-mail, and admire how fast it runs. Bragging rights are great and all that (hell, how many expensive cars would be sold if not for bragging rights), but is it really worth an extra $2K to try to make people envious?

Next time you’re going to buy a computer, look at the one you would have bought, buy a cheap one instead, put the difference in a PC Financial bank account ear-marked as your “new computer fund”. When you run into something your old computer can’t handle, buy a new one out of that fund. I can guarantee you that the same amount of money will last you FAR, FAR longer than buying top-of-the-line would have, and after the first computer, you’ll be running a more powerful machine too (the second cheap one will be way better then the first expensive one would have been).

Some time ago, in a comment, Telly expressed interest in how I go about comparing different living situations. This seems to be as good an inaugural topic as any :-).

My current living situation is a house that’s rented out by the room (with 3 of us in the main house) plus a basement apartment that’s rented out separately. I pay $500 / month all inclusive (with one shared bathroom and a shared kitchen). Before this, I lived with my ex-girlfriend paying half the rent ($440) + cable + some utils. Before that I rented a basement apartment for $650 / month all inclusive.

I’m considering staying here, renting a cheap downtown bachelor or buying a house / condo and renting out the extra rooms.

For a downtown bachelor, the advantages would be lower transit fees (I wouldn’t need a monthly pass if I was within walking distance of my job, this would probably cut my $99 tax-deductible transit costs to ~$40 / month), shorter commute (I spend 1.5 hours on the subway each day) and not getting annoyed by my roommates. The cons would be more expensive (it’d probably be a minimum of $750 for anything within walking distance of my work), I’d probably need to make a 1 year commitment, I may change jobs (but would then have an apartment that might not be close to my new work).

Buying a house or condo and renting out rooms is tempting. The pros would be I could be living for $500 or less a month, with my rent going to the housing expenses. On a place like the condo I currently own, I could live in the solarium, then rent out the two bedrooms. If I could get $500 for each, that’s pretty well cover my costs (and basically my downpayment / equity would be covering my monthly shelter costs). The negatives include room-mate aggravation, a longer commute (since the area I’d want to purchase in is even further from downtown then where I am currently) and having more cash tied up in real estate (this is a debatable con).

Another option (that I just came up with while writing this), would be to rent a house or a multi-bedroom apartment/condo then rent out individual rooms to subsidize what I’m paying. I came across a 3 bedroom house for $1200 / month. If I could get $500 each for the two other bedrooms, I’d be living pretty darn cheap.

Currently I’m leaning toward staying where I am (moving is a pain), but recently one of my housemates gave me the silent treatment for 3 days because I wouldn’t get off the phone with a friend and go help him with his computer, so after experiences like that a studio apartment starts looking mighty appealing…

This is part II of an interview I did with frequent commenter Telly regarding her experiences with living in Canada and working in the United States. If you want to check out part I then click here.

You mentioned the Can/USA tax treaty – what is it and how does it help you with your taxes? Are the taxes more complicated? Do you have an accountant?

There is a little used tax article in the US/Canadian tax treaty (Article XXV, paragraph 4) that basically states that a married individual that is a resident in Canada and a non-resident in the US, with income taxable in the US, shall not be taxed greater than a US citizen would be taxed. So basically what this means is that I would file in the US as if I were a resident, which results in a lower tax rate and means I write off my mortgage interest, property taxes, etc. like a US resident would. This should (and did) reduce my taxes payable in the US but didn’t make a huge difference in my taxes payable in Canada (it just meant I was able to use more of the foreign tax credit, which CANNOT be carried forward to following years). Using the tax treaty definitely makes the taxes more complicated but I managed (with some help from a great message board http://forums.serbinski.com/index.php) to do our taxes myself. I’m not sure there are many accountants in my area that have used this treaty much and though I managed to save about $2000US by doing our taxes this way, much, if not all of that would have been eaten up by the accountant. For people with a much larger mortgage, and higher interest rate, this could make a bigger difference in taxes paid (both in the US and Canada) so it is definitely something worth looking into.

Are there rebates you can use? Ie the American equivalent of a GST rebate for example?

No. Sorry – I don’t have anything to add here except I wish!

Does working in the US change your investment style? Ie with asset allocation?

It does to some extent in that we’re more likely to have both registered and non-registered investments. With respect to asset allocation, we do have a bit of a different perspective here as well, mostly because both my husband and I have $US investments from work pensions and 401ks. Because these investments are denominated in $US, we tend to keep them in US-based assets (index funds) in our 401ks.

I know nothing about 401Ks – feel free to describe them and their differences with RRSPs.

401k’s are (usually) a company sponsored tax deferred retirement accounts. Unlike RRSPs, you can not make an early withdrawal without incurring a penalty (10%). You can start withdrawing without a penalty at age 59 ½. I have to admit though, I don’t know the details of whether you have to convert to a RRIF or similar after a certain age as you have to with RRSPs.

The current limit for 401k contributions in the US is $15,500. Companies can limit based on percentages as well but most are pretty high. My company limits to 30% so someone making over $51k would hit the $ limit before the % limit here. You can not carry forward contribution room, it is basically use it or lose it (though there is a catch up clause once you reach 50 I believe).

401k dollars are taken (pre-tax) from each pay cheque based on the percentage you choose. The issue, as a Canadian, is that 401k contributions are taxed as income (not deferred) by the Canada Revenue Agency (CRA) so there is no real incentive to contribute. My company does give a 50% match on the first 5% contributed by me so I always take the free money and contribute no more than the 5%. The match is NOT taxed by the CRA (i.e. it is tax deferred). 401k accounts are held by various institutions (Fidelity, JPMorgan, etc.). In our case, we have about 12-15 fund to choose from (which MUCH lower MER than almost any Canadian funds). Also, ½ of my 401k can be transferred to a trading account for a one time $100 fee. I now use all the low-cost index funds available in the US (mostly Vanguard). With MERs of 0.07%, I can’t complain.

We also have a pension plan (recently switched from defined benefit to defined contribution) that pays a % of salary based on years of service and age. This currently works out to 4% for me.

Thanks a lot Telly for doing this interesting and informative interview with me and I look forward to doing more interviews with you in the future!

Click here to open an account with Questrade

I asked frequent commenter Telly if she would consent to doing an interview about her experiences with living in Canada and working in the United States. Not only did she do the interview but she spent a lot of time writing great answers chock full of interesting information. I’ll be conducting a couple more interviews with Telly in the future on other topics. If you have an interesting story and would like to be interviewed then please send me an email.

 

Why do you live in Canada and work in the US – ie how did this happen?

I graduated with a degree in Engineering back in 1999. At the time, there were many job opportunities in Michigan and the exchange rate was a whopping $1.50 or so! A 50% raise for crossing the border each day? Sounded about right to me (and my then boyfriend, now husband). Actually, I would say a majority of my classmates also accepted positions in the US.

The NAFTA agreement allows for a certain list of professions to obtain work in other NAFTA countries pretty easily. Each year I have to renew my TN visa by showing my university degree, a letter from my employer, and pay $60US to the Customs office States-side (my company reimburses me). It’s a relatively easy process that takes about 5-10 minutes.

What is your commute like with respect to crossing the border? Do you get to know the border guards? Do you work from home at all?

My commute isn’t all that bad most days, usually about 30 minutes or so (I live very close to the border). Most of my co-workers in the US actually have substantially longer commutes than I do as I’m usually opposing traffic. The days surrounding Sept. 11 were obviously very chaotic. For a few weeks after 9-11 I did work from home but other than that I do not. On some random mornings the border is messy for no apparent reason. My hours are flexible though so it doesn’t wreak much havoc on my day thankfully. I think as the exchange rate got worse (for commuters like me) more and more people looked to find work back in Canada and the border seems to be much less busy than back in the days of up to $1.60 exchange.

I use a Nexus pass which helps speed things along. The border guards are actually quite friendly and a few of them refer to me by name. 🙂

Are you planning to continue with cross border working? Is it a lot of hassle or no big deal?

I’ve actually been on the lookout for jobs back home but haven’t found anything too exciting as of yet. There are definitely still more opportunities in the US, especially for more technical positions and less manufacturing type positions. Crossing the border isn’t too bad. I think the two biggest issues for me are: 1) taxation, 2) maternity leave (as we’re thinking of starting a family in the near future.

As many of you probably know, the difference between Canada and the US with respect to maternity (or paternity leave) is rather drastic. A new mother, whether through birth or adoption, is only entitled by law (FMLA), to 12 weeks unpaid leave (most employers pay a percentage of pay for the 1^st 6 weeks). And actually, it’s remarkable how few people actually take the “entire” 12 weeks. More commonly, women tend to take just 6 weeks. (I’m sure all the new parents are thinking that’s nuts!)

As far as taxation goes, tax rates are generally lower in the US than in Canada. I am required to file in both countries: as a non-resident in the US and as a resident in Canada. A US non-resident is taxed at a higher rate than a resident (go figure) but this is generally still lower than Canadian rates. Basically what happens is that I get a foreign tax credit for taxes that were paid in the US and that is applied to my Canadian taxes. The difference between the rates produces an amount owing in Canada. For example, if my average tax rate is 25% in the US and 30% in Canada then I would get a foreign tax credit for the 25% paid and then owe the CRA the other 5% (further deductions can only come from that extra 5% essentially). This is where I find I can actually lose out by working in the US.

Back in the great exchange days, I never really thought much about registered investing (RRSPs). Bad – I know. I was spending like a recent graduate 🙂, enjoying lots of great vacations, paying off my car, eventually our wedding and (my bit of redemption) aggressively paying off student loans. Now that I’m a little more financially savvy and my husband and I are at point where we can live significantly below our means, I realize the importance of RRSPs. Unfortunately they don’t work well for me. Currently, since I don’t earn any income in Canada (except for a relatively small amount of rental income which there is no withholding for) I can’t receive a tax return…I always owe (based on the difference between the countries tax rates) as CRA has never taxed any of my earnings throughout the year. So basically, I can only contribute enough to my RRSP such that I get to zero owing for the year. That basically amounts to the amount of rental earnings plus the dollar amount difference between the (I’m kind of guessing here) 25% that was paid in the US and the 30% owing in Canada. This usually works out to about $3-4k – not much. So each year I wait till February and make my RRSP contribution for the year – just enough to bring me to zero owing on my Canadian taxes (anything more would be ineffective). Last year this only amounted to about $2000 (the tax rate differentials between Canada & the US seem to be getting closer). So needless to say, my RRSPs are inadequate.

My husband now works in Canada so we’ve taken the approach of maxing out his RRSPs and then using our extra savings to make pre-payments on our mortgage. Very recently though, we’ve decided to start splitting the pre-payments up: 50% will still go to pre-payments and 50% to a non-registered portfolio. We don’t plan to live in our current home for much more than another 2-5 years so we don’t want to be too aggressive in paying off the mortgage lest we think we can afford a lot more home next time around. 😉 This is still being sorted out though as we have a lot of built up contribution room we can use up for my husband’s RRSP.

Check back tomorrow for the exciting conclusion of Telly’s interview!

When my wife and I bought a new house a couple of years ago we undertook an extensive renovation. One of the after effects of this reno and subsequent move into the house was that it took us a long time to get the house organized and cleaned up. During some of the cleanups of the basement it came to light that we had quite a bit of reno material from Home Depot that wasn’t used and could be returned. Last fall I collected quite a bit of this stuff and took it back with no receipts and they gave me a store credit for $230 which I found quite amazing since these were items that I more or less considered junk and had very little use for. A couple of months ago I did some more exploring in the basement and found more returnable items and got another credit for $137 at Home Depot.

Now I realize that most people don’t have that much extra reno material sitting in their basement but sometimes it doesn’t hurt to take a look in the basement or garage and see what is there. You might have bought some materials or tools with the intentions of a project but never used them. If it’s been a while and you aren’t likely to use the stuff then return it, clear some space and get a store credit.

Another possibility are tools that were bought for a specific project. In our case we own a tile saw and once we finish off the kitchen backsplash – scheduled for anytime in the next 10 years 🙂 then we might as well try to sell the saw since we are unlikely to have any further use for it.Another area to look for returnable items is the garden. Most of the larger stores that sell plants offer a one year guarantee so if they don’t last the summer or perish over the winter, then take them back and get a new one. It may seem silly to be digging up a rotten plant to take back to the store but the fact is that you probably paid at least $5 for that plant so you should get your money’s worth. This will require a bit of organization since you’ll have to keep the receipts for these.

PaidTwice of www.paidtwice.com has kindly written a guest post with her thoughts on having an emergency fund. PT started her excellent blog to document her family’s journey to get out of debt. If you want to read an upbeat debt reduction blog written by someone with a PhD who works at home with her two young children (I didn’t think it was possible) then I strongly recommend checking out her blog.

There are many schools of thought on if someone who is in debt and working to pay that debt down should have an emergency fund. The money that sits in the emergency fund could instead be applied to debt reduction and help the person get out of debt just that much faster. Well, I am here to say that I am firmly in the “have an emergency fund” camp. Not a fully funded, extensive, cover any possible contingency emergency fund, but something that you can fall back on if small things come up so you don’t need to resort to using credit and increasing your debt.

Debt is more than a financial predicament. It can become a state of mind, and also a recurring behavior. If the only thing you have to fall back on if something unexpected comes up (and, just assume that something will, at some point come up) is credit, you can feel like you are just sinking back into the hole of debt you are already in, and it can erode any feelings of progress you have made. Personal finance is about taking control of your money, but it is also about personal behavior. Once credit is again used, it can become all too easy to keep using it, and end up worse off than when you started debt reduction. It can also begin to feel hopeless and not worth it if the debt continues to rise even when you feel like you are trying to reduce it.

But what if you’re sure you won’t fall back into the pattern of accumulating debt if you have a setback? That is where I feel I am, and yet I still would rather a cash emergency fund rather than a credit safety net. Why? Because debt is an oppressive weight. Debt makes me anxious, on edge, and simply the idea of using a credit card I won’t be able to immediately pay off and putting myself further into debt just makes me edgy. I feel the interest I am paying adding up deep in the pit of my stomach. The feeling of peace I felt when we finished saving our $1000 emergency fund is really unexplainable. No, $1000 can not cover any conceivable emergency, but it can cover a whole lot of things that might come up. Knowing that I won’t need to immediately turn to credit if my car breaks down or I get sick is a very good feeling. I wish I could bottle that feeling and sell it. That’d help the debt reduction!

As for the emergency fund, ours is $1000 and it will increase over time… once we are out of debt. My spouse and I have not quite decided exactly how much we want in it, but at least 3 months of expenses if not up to 6. It is an ongoing process. That is really a personal decision based on what kind of emergencies you might be able to foresee and also your own life circumstances, but I am not recommending $1000 as the end all of emergency funds. But for someone who uses every spare penny to pay down their debt, that $1000 cushion is a lot to reserve. But completely worth it, in my opinion, is for nothing else, the peace of mind it provides.