Author Topic: Reader Case Study - New Canadian permanent resident  (Read 5781 times)

moustacheverte

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Reader Case Study - New Canadian permanent resident
« on: August 23, 2014, 10:55:56 AM »
Income:
Me: 3,750$ per month as self-employed (no tax deducted). I should be put on the payroll in October for at least 45,000$ per year. I got this job a few months ago, I was making around 1,500$ per month before.
Partner: 1,350$ per month. She just started this job, she gets 40 hours a week but her contract explicitly states the employer doesn't guarantee any hours and they can fire her without notice.

Current expenses:
Average per month for the last 12 months for the 2 of us:
- Food: 405$
- Cosmetics/medicines: 75$
- Bills: 255$
- Going out: 90$
- Furniture: 30$
- Alcohol (bottle of wine when invited etc): 35$
- Rent (includes electricity): 910$
- Public transport: 160$

My own expenses:
Hobby: 45$
Drinks after work etc: 40$

Expected ER expenses:
Hmmm, not sure what goes there.

Assets: Amount & description
Me:
Standard savings account @ 1%: 15,000$
Income tax provision for taxes on self-employment on another savings account @ 1%: 1,700$
TFSA: 101$ (opened it because the bank was giving a 50$ bonus to get one)
Overseas savings @ 1% tax free: approx. 21,000$

Spouse:
Nothing saved: 0$

Liabilities:
0$
Partner plans on going back to studies for 1 or 3 years. Expected tuition costs ranges from 4,000 to 6,500$ per year though she might be eligible for government aid to pay it off.


I started reading MMM recently and it has been inspiring and now that our immigration situation is more stable, I'd like to look into making my money work harder so we can stop working before we're 50.
I realize a 1% savings account is not the best but I am confused about RRSP and TFSA. We are both 28. Our current plans hint that we will likely move out of Canada within the next 10 years.

What would fellow mustachians recommend? I am also not sure about the status of the overseas money, I have a feeling it will be taxed as income if I bring it over to Canada but I don't really know. Because I don't need the money right now, I just let it sit in the bank at 1% tax free.
Thank you for your help!
« Last Edit: August 23, 2014, 11:13:33 AM by moustacheverte »

nereo

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Re: Reader Case Study - New Canadian permanent resident
« Reply #1 on: August 23, 2014, 11:21:11 AM »
Hello and welcome

Sounds like we have aat least a few similarities -
Two question - what is your country of citizenship and where are you living in Canada??

Your current expenses are a bit hard to parcel out but depending on where you are living there aren't any obvious burning red flags of death.
Combining "cosmetics and medicine" is a bit strange - one is presumably necessary and the other isn't.  Public transit also seems high for two people depending on the city.

Definitely need to find a better place to house that $15k than a 1% savings account.  As MMM would say, those are all donut-eating, watercooler gosipping employees doing nothing to help you right now. 
What's important is that even if you leave Canada in the next 10 years you don't have to liquidate any savings held in RRSP or TFSA or brokerage accounts.  Those can stay there earning money until you need them, and then you play the "how do I convert them from $CAD to another currency" game. 


moustacheverte

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Re: Reader Case Study - New Canadian permanent resident
« Reply #2 on: August 23, 2014, 11:30:45 AM »
Hello and welcome
Thank you :)

Quote
Sounds like we have aat least a few similarities -
Two question - what is your country of citizenship and where are you living in Canada??
We are living in Montreal QC. I am a French citizen and she is a Polish citizen.

Quote
Your current expenses are a bit hard to parcel out but depending on where you are living there aren't any obvious burning red flags of death.
Combining "cosmetics and medicine" is a bit strange - one is presumably necessary and the other isn't.  Public transit also seems high for two people depending on the city.
You make a good point. They are combined because we buy them from the same place. I can guesstimate that various medicines are 20$ out of that 75$.
Public transit is 80$ per month so 160$ for 2.

Quote
Definitely need to find a better place to house that $15k than a 1% savings account.  As MMM would say, those are all donut-eating, watercooler gosipping employees doing nothing to help you right now. 
What's important is that even if you leave Canada in the next 10 years you don't have to liquidate any savings held in RRSP or TFSA or brokerage accounts.  Those can stay there earning money until you need them, and then you play the "how do I convert them from $CAD to another currency" game.

I read a post on MMM that was talking about TD Waterhouse but I don't know if it's a good value or not (9.99$ per trade?) and what "package" to choose... Are mutual funds the thing to go for? Should I do this before or after RRSP + TFSA?
« Last Edit: August 23, 2014, 11:36:42 AM by moustacheverte »

nereo

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Re: Reader Case Study - New Canadian permanent resident
« Reply #3 on: August 23, 2014, 11:41:07 AM »

We are living in Montreal QC. I am a French citizen and she is a Polish citizen.
A fellow Quebecer and with ties to Poland?  Bonjour mon ami! C'est un petit monde!

General wisdom is to contribute to your RRSP/TFSA first to maximize tax benefits, and then afterward invest in taxable accounts.  Since my SO and I are both students currently we do not have the option of investing in RRSPs just yet.
As for where to put the money, most here would recommend that you start with a broad-market index fund.  I like the SP500, but many favor a total market index.  Either will work.
The $9.99 per trade at TD isn't bad if you want to invest in individual stocks or ETFs, provided that you buy-and-hold and invest in larger sums (I'd recommend $1,000 at a time to offset the $10 fee).    Personally though I'd favor Vanguard due to their rediculously low annual fees for their index funds.

bonne chance!
« Last Edit: August 23, 2014, 11:46:45 AM by nereo »

moustacheverte

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Re: Reader Case Study - New Canadian permanent resident
« Reply #4 on: August 23, 2014, 12:59:40 PM »

We are living in Montreal QC. I am a French citizen and she is a Polish citizen.
A fellow Quebecer and with ties to Poland?  Bonjour mon ami! C'est un petit monde!

General wisdom is to contribute to your RRSP/TFSA first to maximize tax benefits, and then afterward invest in taxable accounts.  Since my SO and I are both students currently we do not have the option of investing in RRSPs just yet.
As for where to put the money, most here would recommend that you start with a broad-market index fund.  I like the SP500, but many favor a total market index.  Either will work.
The $9.99 per trade at TD isn't bad if you want to invest in individual stocks or ETFs, provided that you buy-and-hold and invest in larger sums (I'd recommend $1,000 at a time to offset the $10 fee).    Personally though I'd favor Vanguard due to their rediculously low annual fees for their index funds.

bonne chance!

RRSP only make sense if you earned a lot of money in the year prior, right? Or it doesn't matter?

Prairie Stash

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Re: Reader Case Study - New Canadian permanent resident
« Reply #5 on: August 23, 2014, 01:40:41 PM »
RRSP always makes sense. You can put 18% of your income into it and not pay tax on it. TFSA you can put money in after you pay income tax on it. When you pull it out there's no taxes, awesome later on when it grows.

Technically the $150 interest you'll get from the savings account you'll pay tax on. If you move it into a TFSA you can still earn interest but avoid taxes. Phone CRA and ask them your contribution limit, as a new Canadian I don't know if you get the rollover amounts from previous years, it's a quick call.

Carless

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Re: Reader Case Study - New Canadian permanent resident
« Reply #6 on: August 23, 2014, 03:08:05 PM »
There is an significant difference between TFSA and RRSP depending on your financial situation.  If you have low income, the TFSA is a MUCH better idea providing you have room - you pay taxes now, in a low bracket, and after the money has grown over time, you can withdraw that larger amount tax free.

If you put money in an RRSP now and are in a low tax bracket, you will pay taxes on that larger amount later = more money in taxes total.  Also, you may be in a higher tax bracket at that time or taxes may increase over the years (it's not like they'll ever go down).  RRSP is only a better value if you are in a notably higher tax bracket now than you anticipate being later.

As for brokerages, as a fellow Canadian I use Questrade.  Most purchases are completely commission free.  I recommend looking at the Canadian Couch Potato website model portfolios for a selection of index funds that give good market coverage with minimal complexity.

moustacheverte

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Re: Reader Case Study - New Canadian permanent resident
« Reply #7 on: August 23, 2014, 04:21:27 PM »
So I can consider we are in the lowest tax brackets and start loading the TFSA then. I'm just starting my career so I can only expect my salary to go up. Same thing for my partner.
From what I see here http://www.taxtips.ca/taxrates/qc.htm, the lowest tax bracket is 41,495$ which we are in. So we can expect to pay 29% taxes. Since I anticipate our salaries will keep rising as we get better jobs, I shouldn't touch a RRSP until I cross a threshold in a few years that I believe will be higher than my income during retirement.

Did I get it right?

moustacheverte

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Re: Reader Case Study - New Canadian permanent resident
« Reply #8 on: August 23, 2014, 04:23:21 PM »

We are living in Montreal QC. I am a French citizen and she is a Polish citizen.
A fellow Quebecer and with ties to Poland?  Bonjour mon ami! C'est un petit monde!

Indeed, are you from Poland?

nereo

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Re: Reader Case Study - New Canadian permanent resident
« Reply #9 on: August 23, 2014, 04:36:32 PM »

We are living in Montreal QC. I am a French citizen and she is a Polish citizen.
A fellow Quebecer and with ties to Poland?  Bonjour mon ami! C'est un petit monde!

Indeed, are you from Poland?
No, I'm from the United States, but my parents moved to the US from Poland in the late 1950s.  I've moved around a good deal but now reside in Québec.

Gerard

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Re: Reader Case Study - New Canadian permanent resident
« Reply #10 on: August 24, 2014, 06:02:30 PM »
So I can consider we are in the lowest tax brackets and start loading the TFSA then. I'm just starting my career so I can only expect my salary to go up. Same thing for my partner.
From what I see here http://www.taxtips.ca/taxrates/qc.htm, the lowest tax bracket is 41,495$ which we are in. So we can expect to pay 29% taxes. Since I anticipate our salaries will keep rising as we get better jobs, I shouldn't touch a RRSP until I cross a threshold in a few years that I believe will be higher than my income during retirement.
Did I get it right?

Mostly. You won't pay 29% taxes overall --- 'cause between the two of you you'll get a refund for your first $22,000 at least -- but 29% is the amount of tax refund you'd probably get for your RRSP. So yeah, avoid the RRSP until at least some of your earnings are in a higher tax "tranche"... which starts only a tiny bit higher, at $44K.

Another thing, you have very little money in your "preparing for taxes" fund... based on your info, you could owe up to $9800 a year in taxes on your $45,000 annual income. Maybe keep a little more in the savings account instead of moving it all into the TFSA. Or am I missing something, like once you're on payroll taxes will automatically be deducted?

RichMoose

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Re: Reader Case Study - New Canadian permanent resident
« Reply #11 on: August 25, 2014, 09:33:05 AM »
Based on your current income, it is most likely that investing via a self-directed TFSA is going to be your best option. Especially if you plan on moving out of Canada in the mid-term. The nice thing about a TFSA is that you can cash it out tax-free when you move. Then re-invest when you set up an account in your new country.

If you do choose to use a RRSP, you may be subject to tax issues in your future country and having to declare foreign assets. Or face a costly tax bill on a lump-sum payout.

Like Gerard pointed out, you may be quite a bit short in your future income tax savings.

I would take the following steps if I was in your shoes:

1. Open a self-directed TFSA account with a discount brokerage like Questrade that offers commission-free ETF purchasing.

2. If you've been working in Canada for more than 3 years, make a transfer of your $15000 in your savings account to your new TFSA account (make sure you do not overcontribute!!) You can find out your TFSA contribution limit by calling CRA or by opening an online access account with CRA on their website.

3. Check to see if you have better options for investing the amount in your overseas account. Just be sure not to incur tax penalties if you transfer amounts, if may be worth speaking to an accountant.

4. Maximize your TFSA contributions, current $458 per month / $5500 per year for each person.

5. Invest in low-cost index ETF's in your TFSA. Good options include ZCN.TO for Canadian Index, XUS.TO for US Index, XEF.TO for International Index.

Hope this helps and enjoy your time in Canada!

moustacheverte

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Re: Reader Case Study - New Canadian permanent resident
« Reply #12 on: August 25, 2014, 09:12:30 PM »
Another thing, you have very little money in your "preparing for taxes" fund... based on your info, you could owe up to $9800 a year in taxes on your $45,000 annual income. Maybe keep a little more in the savings account instead of moving it all into the TFSA. Or am I missing something, like once you're on payroll taxes will automatically be deducted?

Well, I wasn't on 45k the whole year. I calculated 30% of the portion of the 45k I would have gotten if I had been on this salary the whole year.

moustacheverte

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Re: Reader Case Study - New Canadian permanent resident
« Reply #13 on: August 25, 2014, 09:13:48 PM »
Based on your current income, it is most likely that investing via a self-directed TFSA is going to be your best option. Especially if you plan on moving out of Canada in the mid-term. The nice thing about a TFSA is that you can cash it out tax-free when you move. Then re-invest when you set up an account in your new country.

If you do choose to use a RRSP, you may be subject to tax issues in your future country and having to declare foreign assets. Or face a costly tax bill on a lump-sum payout.

Like Gerard pointed out, you may be quite a bit short in your future income tax savings.

I would take the following steps if I was in your shoes:

1. Open a self-directed TFSA account with a discount brokerage like Questrade that offers commission-free ETF purchasing.

2. If you've been working in Canada for more than 3 years, make a transfer of your $15000 in your savings account to your new TFSA account (make sure you do not overcontribute!!) You can find out your TFSA contribution limit by calling CRA or by opening an online access account with CRA on their website.

3. Check to see if you have better options for investing the amount in your overseas account. Just be sure not to incur tax penalties if you transfer amounts, if may be worth speaking to an accountant.

4. Maximize your TFSA contributions, current $458 per month / $5500 per year for each person.

5. Invest in low-cost index ETF's in your TFSA. Good options include ZCN.TO for Canadian Index, XUS.TO for US Index, XEF.TO for International Index.

Hope this helps and enjoy your time in Canada!

I found a bank called People's trust in BC that offers TFSA at 3%. I will also look in Questrade, thanks. I'll check my TFSA allowance with the CRA to make sure.

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Re: Reader Case Study - New Canadian permanent resident
« Reply #14 on: August 26, 2014, 06:13:32 AM »
Well, I wasn't on 45k the whole year. I calculated 30% of the portion of the 45k I would have gotten if I had been on this salary the whole year.

OK, cool! I just wanted to be sure you weren't blind-sided in the spring. I once learned at tax time that a scholarship I thought was tax-exempt wasn't, so I'm sensitive to the issue.

moustacheverte

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Re: Reader Case Study - New Canadian permanent resident
« Reply #15 on: August 26, 2014, 04:32:34 PM »
Well, I wasn't on 45k the whole year. I calculated 30% of the portion of the 45k I would have gotten if I had been on this salary the whole year.

OK, cool! I just wanted to be sure you weren't blind-sided in the spring. I once learned at tax time that a scholarship I thought was tax-exempt wasn't, so I'm sensitive to the issue.

Oh yeah, that stings!

Does Questrade charge to withdraw your money? It would seem that they charge 150$ but I would like to confirm.

RichMoose

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Re: Reader Case Study - New Canadian permanent resident
« Reply #16 on: August 26, 2014, 07:17:40 PM »
Yes, the fee is $150 to transfer out a registered account. Their full list of fees is on the website under the Pricing heading > Admin Fees.