Michael, 67, is a self-employed craftsperson who, in many ways, is living the dream. He rents a cozy, comfortable cottage in Halifax and spends summers on his sailboat.
When he isn't working, he exercises regularly at a government-sponsored fitness centre and plays saxophone in a community band. Divorced with one independent daughter, he's also the first to admit that his situation isn't robust, he's keen on a portfolio makeover even though he doesn't have a portfolio.
"I have zero investments and zero equity in anything but a lovely old sailboat worth about $5,000 and an old car worth about $1,000," Michael says.
"I enjoy my life," he adds. "Eventually I'd like to move onto my boat entirely and set sail for warmer climes where I can live on it all year."
Michael's self-employment income fluctuates, ranging from about $18,000 to $24,000 a year. He also receives Old Age Security and Canada Pension Plan pensions totalling $8,000 a year.
However, he also owes about $30,000 in outstanding taxes. He doesn't plan on retiring any time soon.
"Since I work freelance, my age isn't a major factor in the work place," he notes. "I'm continuously learning about my craft … through online courses and e-books.
"As I get older and unable to work, I'll qualify for low-income supplements that will enable me to live modestly in my small rented cottage," Michael says. "I'll still play in my jazz band and still sail, though I may need to catch rides to the marina as I won't be able to afford a car."
If he could swing it, he'd love to buy a bigger and better boat.
So what do the experts say about Michael's finances? We asked Cecilia Tsang, financial adviser at Rogers Group Financial in Vancouver and Calgary's Kevin MacLeod, president of MoneyAdvisor.ca Financial Ltd.
$6,000 (his boat and car)
$800 a month for rent.
$400 monthly installment to pay back taxes.
$1,100 a month for living expenses (including food, car, utilities, phone and Internet).
$1,000 a month to cover taxes on current earnings.
$1,500 a year in mooring and storage fees for his sailboat.
For starters, both advisers say Michael should accelerate his plans to live on his boat year-round, which would save him $800 a month in rent, an expense he pays even during the summer. They also note there's a lot of risk associated with his current lifestyle. What would happen if he were to become ill and unable to work, for example?
Cecilia Tsang's tips
1) Revisit his monthly budget. Michael's maximum taxable income is approximately $32,000. At this level of income, his tax owing each year should be less than $3,000 ($250 a month), while he is supposedly saving $12,000 ($1,000 per month), Ms. Tsang notes.
"The amount of money Michael sets aside for [tax on] current earnings seems a little high," Ms. Tsang says. "He's saving $1,000 toward his current earnings, but he also makes separate tax repayments on his $30,000 tax debt of about $400 each month. If Michael continues to make payments of $400 a month, he likely would have his taxes paid off in approximately 7.5 years, based on the current interest rate charged by the CRA [Canada Revenue Agency] of 5 per cent on overdue taxes.
"However, if Michael puts the excessive amount of money he sets aside for taxes on current earnings – $750/month – toward his tax debt, the CRA tax bill could be paid off in about 2.3 years," she says.
2) Start a tax-free savings account (TFSA). Once that tax debt is paid off, Michael should take the same cash he was putting toward his taxes and save it in a TFSA in a systemic way where he doesn't have easy access to the funds, Ms. Tsang says. "These funds should be used toward his future expenses when he is no longer able to work," she says. "These savings could also be used toward his goal of buying a bigger boat."
3) Contribute to the Canada Pension Plan postretirement benefit. Since he's still working, Michael should start contributing to this immediately, Ms. Tsang says. "He's able to make payments into this plan until he turns 70," she says. "This is an excellent way to ensure that he can put some money away for his future without being tempted to spend it. Plus, these government benefits are indexed to inflation, which is very important."
Kevin MacLeod's tips
1) Consult a small-business tax professional. "Michael needs to make sure he's taking advantage of all the write-offs associated with being self-employed, including having the work space in the home," Mr. MacLeod says. "He may even want to revisit his past tax returns to make sure he hasn't missed any potential savings over the years."
2) Look into his eligibility for the working income tax benefit (WITB). This refundable tax credit provides relief to certain low-income individuals and families who are in the work force already.
"There are expenses he's already incurring, such as the rent on his cottage and his vehicle operating costs, that he could be partially written off against his income – if this isn't already the case – which will help him save tax without affecting cash flow at all," Mr. MacLeod says. "In fact, if these deductions are substantial enough, the WITB can create a refund on his tax return, even though he hasn't actually paid anything to the CRA."
3) Turn that boat into his home and home office ASAP. With technology, Michael should be able to work from anywhere, Mr. MacLeod notes. If he eliminated his rent expense, lived on his boat in Canada during the summer, then made his way to a warmer climate in the winter while continuing to keep his costs low, he could accelerate his debt payment and increase his savings for the future or a bigger boat.
"If living on the boat is a viable option, in addition to cutting the rent expense right out of his budget, a small portion of the expenses associated with the boat itself would become tax-deductible against his self-employed income in place of the rent he was paying before," Mr. MacLeod says.
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