June and beginning of July...

Hope you are all doing well folks! Sorry I haven't been able to write as much for June, it's one of the busiest months for me at work (my actual/real job at an international SR&ED tax firm). Hopefully I can start churning out articles more frequently starting mid-July.

To give you something to look forward to, I will be interviewing at least one CPA somewhere around the end of July to the beginning of August. Topic hasn't been decided yet but I'm thinking something on entrepreneurship...hmmm or maybe taxes. Guess you will have to wait and see!

All the best,
TT

Tax Free Saving Accounts (TFSA)

Contrary to its name, it doesn't have to be a savings account! In this article I'm going to explore the TFSA with you, going in-depth to give you a bit more information. It seems a lot of folks are still confused about their contribution limits and how it works. According to an article I have just read from Google Finance, "the Canada Revenue Agency recently sent 65,978 mailouts to taxpayers who apparently put too much money into their TFSAs in 2012." 

The penalty of over contribution is 1% per month of which your total contributions exceed your available contribution room. The CRA will calculate the tax penalty using the highest overage each month in applying the 1%.

The TFSA mechanism was introduced in 2009. For the first four years, $5,000 of new contribution room is added annually each year. For the year 2013, that annual contribution room was bumped up to $5,500 in order to reflect inflation. If you recall from one of my previous articles, the TFSA contribution room will only move up in $500 increments when adjusting for inflation, so you won't see an increase every year unless the inflation was large enough. Your contribution room accumulates starting from the later of the year you turn 18 years old or 2009. Here's an example:

Billy Jean turned 21 years old in the year 2009, it is now 2013 and assuming he has never contributed into a TFSA, how much does he have available for his contribution room? ... He has $25,500! ($5k x four years + $5,500 for 2013)

What if he turned 17 years old in the year 2009? Then he would have $20,500 because he wouldn't have accumulated the $5,000 in 2009.

What can you invest in?

Despite its name, it doesn't necessarily have to sit in a savings account. In fact the name TFSA is more like a tag you add on to a type of investment to indicate that it is being treated differently for tax purposes. You can have a TFSA for mutual funds, stocks, bonds, and GICs (although I dislike GICs!).

Key things to note:

• If you're not a Canadian resident or a "deemed Canadian resident", you cannot setup a TFSA
• Whatever you contribute is not deducted from taxable income in your tax returns
• Consequently, whatever you take out is also not taxed, neither is the growth within the account
• Whatever you take out in a given year is added back to the contribution room of the following year (both the principal and the gain portion gets added back)

Unlike an RRSP, there isn't a $2,000 grace amount so be careful of over contribution! 

-TT

Considering RRSP vs TFSA? Check out my earlier article here: http://ttfinancialadv.blogspot.ca/2013/05/rrsp-or-tfsa-better-option.html

If It's Too Good To Be True...

It probably is! Here's a tragic story from British Columbia about a senior woman who lost $100,000 because of a fraudulent investment advisor:

http://www.cbc.ca/news/canada/british-columbia/story/2013/06/07/bc-bcsc-david-michaels-investment-advisor.html

To sum it up, she trusted somebody who was no longer certified to sell securities and took out a remortgage against her home. This personable fraudster made claims that the victims' initial investments were guaranteed, and that he would only invest into low risk funds. The reality is that he invested it into a lot of securities that were not listed. When the investments didn’t achieve the results he had hoped, the guaranteed claims were not followed through.

When trusting in someone to manage your investments, here are a few things to be mindful of:

• A small single office investment firm, but they claim that your investment is guaranteed. Do they have the financial backing to actually be able to do this?
• Is the firm registered with the Canadian Investor Protection Fund (CIPF)? If the investment firm is unable to pay you their guarantees due to insolvency, at least you are covered by the CIPF. If they claim they are certified, verify it in the member directory here: http://www.cipf.ca/Public/MemberDirectory/CurrentMembers.aspx
• Do some online research of the investment firm, are there many complaints on forums and many negative media attention?
• Is the person conducting the transactions and investment research actually certified and academically capable? (eg. CFA, CFP, etc...)
• Are there any unusual restrictions on when you can withdraw your money?
• Are you able to see the value of your portfolio "on the fly" or can you only get monthly printed reports?

Have fun investing and good luck!

-TT

Hybrid SUVs: Now Is It Worth It?

In the last article we looked at whether hybrid cars are worth the extra sticker price, and whether you really get the best of both worlds: cost saving while saving the environment. Today we will look at whether the same conclusion applies in the hybrid SUV category. Just for fun I have added the Porsche Cayenne S and Hybrid into the mix, not like you would care about fuel cost if you drove a Porsche but just for entertainment purposes why not!

Short answer is, NO, it's still not worth it after looking at the extra MSRP price and its fuel consumption.

As you will see from the chart below in the Net Loss (Saving) column, you are actually losing thousands of dollars by going with a hybrid SUV! This is in addition to the sluggish performance of most hybrids. Yes you can argue that an electric motor has more torque and initial power, but we also have to keep in mind the extra weight that the battery and hybrid components add to the vehicle, and what about passing on a highway? Sadly, initial or low-end torque won't matter if you're flying down on the 400-series highway trying to go from 100km/h to 120km/h to pass another vehicle.

Note: 8 years have been chosen as the comparison time frame because that's how long the warranty is on the battery.

Just for fun I have put in some numbers for the Porsche Cayenne S hybrid. It's only been recently introduced so not much information is available online, even Porsche's website doesn't have warranty info on this vehicle. Looking at the other warranty areas though, it seems to me like it would be combined into other warranty areas for now, so likely around 4 years of coverage is my estimate. Looking at the partial figures in the chart above, you can already assume you won't save enough to cover the extra costs. However, like I mentioned earlier I don't think you would worry about fuel costs if you are driving a Porsche Cayenne S!

So there you have it, it's not worth it. Originally I thought maybe the electric motor can save a lot of the engine's work (and thereby fuel) given how electric motors have much more instant torque than a gasoline engine, and we know that torque matters the most in a heavy vehicle like an SUV. Turns out you lose even MORE money buying a hybrid SUV due to the upfront price difference between hybrid and non-hybrid. Although relative to the sedans, SUV hybrids do save more fuel over 6 to 8 years.

I must say however, the new Porsche Cayenne S looks stunning!

-TT

My bad!

Folks, please be aware of the edits I made to the hybrid car cost analysis article. A slight mistake on my part has been made in the cost analysis (although the conclusion is still the same).

My sincere apologies,

-TT

Hybrids, Contrarily Not The Best Of Both Worlds

Almost every major car manufacturers these days are pursuing green alternatives. They have tried everything from electric cars to clean diesel engines, but one of them seems to be the most popular these days - the hybrids.

As many car companies have pitched so far, hybrids consume less fuel per KM and as a result not only do you save money, but there's a self-actualizing aspect to it of being "green". Side note: For the few special individuals out there, if you really want to be environmentally friendly then let's stop accelerating from behind only to cut me off in front of a red light, thank you! 

Contrary to popular beliefs, I don't think hybrids really save you much money. There are two major problems, one of them you can actually do something about, and the other one you cannot mitigate.

The first problem is the lack of power. Have you observed the exhaust pipes of these hybrid vehicles while walking around in the city? It is usually more apparent during the winter but in most cases you will notice that it emits a consistent trail of fumes. If the engine is working that hard under acceleration, you are not really realizing the full benefits of driving a hybrid, neither will you be achieving those advertised fuel consumption ratings. At best it can be considered fuel saving, but not near those jaw-dropping advertised fuel consumption numbers. In essence you are not saving that much more money due to this compensation for lack of power through harder accelerations. For a small group of you out there though, who do try to limit your acceleration to take advantage of the hybrid system, this point wouldn't apply to you.

The second problem is cost of ownership, will you be able to save enough fuel to cover the battery replacement cost? Don't forget as well, any maintenance work on the drive train will be more expensive since it's a more complex system. As it stands right now, both Honda and Toyota applies a 3-year warranty for their hybrid Civic's batteries. Depending on how much you drive and how you drive, you can expect to replace it around 6 to 8 years if you do a lot of low speed city driving. The deeper you drain the battery simultaneously while it's trying to charge, the faster it degrades so it is really dependent on your driving. Based on online research, a new Honda Civic Hybrid battery pack can range between $2,000 to $4,000, while a new Toyota Prius battery pack will cost closer to $4,000. Let's look at some numbers, keep in mind these figures are assuming you drive 100 percent green which most of you won't be. (So expect the actual fuel cost to be higher)

As you can see above, it is unlikely you will save in fuel cost as much as you will pay for a new battery pack after six years on a Honda Civic Hybrid. Assuming you do drive as green as you can and you manage to attain the most efficient consumption figures humanly possible, you are still faced with a hybrid car's premium price tag. Such a premium in price is typically around $3,000 to $5,000 over the regular compressed dinosaur powered version, this means you have to save an additional $3,000 minimum to make up for the extra vehicle price and making it even harder to attain breakeven! 

EDIT: Please note that the previous version of this article is slightly incorrect, I mistakenly thought that Prius had a 3-year warranty when it's actually 8 years. The total savings in fuel over 8 years for a Prius is $4,177.92, just over the cost of replacing its battery assuming you drive 12,000 km (7,456 miles) per year. But in the end you are still faced with the premium price tag, something the fuel savings won't be enough to cover.

EDIT2: Let's say by some miracle your Prius' battery happens to breakdown just before the 8-year warranty ends and they replace it for free, you get another 6 to 8 years of usage. Your total fuel savings will now be approximately $8,355 over 16 years. It's still not worth it because the price tag for a Prius is $26,100, a better performing pure gasoline version Honda Civic cost $16,000 MSRP. The regular version of the Civic, being it's a more simplified power train will cost less to maintain, and it would handle better without the excess battery weight. Most importantly, a Prius would cost $10,000 more when you would only save $8,355! Of course, you're free to substitute the Honda Civic with another car in its class but unfortunately the end result will be the same.

It seems a hybrid car is worth it only if you drive in upwards of 20,000 km (12,427 miles) per year, while doing a healthy mixture of both highway and city driving to prolong the battery life. So if you are looking to buy a new vehicle, better whip out that calculator and do some number crunching! In the next article, we will investigate the fuel savings of a hybrid SUV because we can't use an analysis of hybrid cars since fuel consumption of the two are different.

-TT