Spending – Doug Carroll

My 100,000% credit card interest gaffe

No, no … I wasn’t charged 100,000% interest by my credit card issuer, but I did literally gasp aloud when my own gaffe – which I’ve gratuitously estimated at that crazy figure – came to my attention on my credit card statement recently.

To be clear, a credit card is a powerful tool that offers convenience, efficiency and even some financial rewards. It would be fair to say that understanding and using a card wisely are fundamental financial skills in modern commerce.

In my case, which I will go into in more detail below, it is effectively the hub of our family financial routine. But before I get into the specifics of what sunk my spirits, a little background on the mechanics of credit cards.

Converting your credit into debt

For those new to the arrangement, a credit card is not a cash machine. Rather, it allows you a certain amount of room (your credit limit) to make purchases, the value of which then accumulates as your debt. The way most cards work, you have 21 days from your monthly statement date to pay the balance owing, and if you pay it all off then you don’t owe anything more. Sweet deal, huh?

How credit card interest is calculated

Now if you don’t pay it all off, that’s where interest comes in. You have had use of the card issuer’s money since the date of each of those purchases. Again, if you pay off the full balance, no interest applies. Once more, if you pay off the FULL balance, no interest applies. If you pay anything less, interest is charged for the month as if you had not paid off ANY of it – Check your statement for your particular interest rate.

Our household money management method

My wife and I don’t use credit cards for the credit, as strange as that sounds. Mainly, it’s the convenience of pulling purchases into one place, though we do enjoy receiving a few reward points in the process. We have two cards on the same account for the majority of our expenses, and every day or two we transfer the amount of the purchases into a side account to accumulate a cash reserve. At month-end, that cash is ready to retire the balance, even before the statement hits our inbox as a formal notice.

100,000% interest? Seriously?!

Earlier this year, I received and paid the statement the day it landed. Unfortunately, as I learned when the next month’s statement arrived, I’d transposed two digits in the balance, thereby paying a mere(!) 99.7% of what was owed. That 0.3% shortfall multiplied by the 19.5% interest on the balance, paid on day one of the 21 I had available, works out to 115,097% — But let’s not be ridiculous, so call it a round 100,000%.

The money moral of the story

Of course that’s crazy math, but the point is this: Make sure you understand how your credit card interest is calculated – and wear your glasses when paying the bill. Fortunately for me, my card issuer had mercy on me, crediting back the interest once I’d explained my error. Importantly, their action was based in part on my good past payment practices, which I will conscientiously continue with each future payment.

Minister of Revenue confirms the CRA is not going after retail employee discounts

At issue

In the house where I grew up, we bought almost all of our clothing, housewares and other durable goods from one retailer. That’s because it was the company where my dad worked, and part of the employment deal was a discount on purchases.

That’s a common practice for retail employees and restaurant workers, and one that garnered some front page media attention recently. It’s not because of any public uproar as if it was some kind of scandalous abuse. On the contrary, it was prompted by what appeared to be a reversal of the Canada Revenue Agency’s longstanding practice of acknowledging these as non-taxable items.

Is the CRA really intending to begin requiring employers to track the savings each employee receives, and report that as a taxable benefit each year?

Income Tax Act (ITA) Canada

Per paragraph. 6 (1)(a), income from employment includes “benefits of any kind whatever received or enjoyed by the taxpayer …in the course of, or by virtue of the taxpayer’s office or employment”. Some exceptions are allowed in the following subparagraphs, with no mention of discounts.

Income Tax Folio S2-F3-C2, Benefits and Allowances Received from Employment

The CRA has an ongoing multi-year project migrating and consolidating its tax practice guidance from a variety of older formats into the online Folio format. This particular Folio was published in October 2016, but the story hit the headlines in October, 2017.

The Folio states that a discount is generally to be included as an employee benefit under para. 6(1)(a). With the exception of discounts made available to the general public, “the value of the benefit is equal to the fair market value of the merchandise purchased, less the amount paid by the employee.” Responsibility is placed on the employer to “determine the value of the benefit to include in an employee’s income.”

CRA letters 2017-0726641M4 & 2017-0729161M4 – Taxability of employee discounts

An immediate firestorm erupted for the Minister of Revenue Diane Lebouthillier, and within a day she clarified that this was the action of CRA bureaucrats, not the government’s policy intention. One day later, Folio S2-F3-C2 had been taken down from the CRA website, replaced by as a statement that it was “currently under review.”

We now have written affirmation that employee discounts are not on the CRA’s radar. Two letters were published in the last couple of months, from the Minister of Revenue herself. The letters are almost verbatim one another, with one providing a bit of additional reassurance to restaurant employees. The Minister states that the “longstanding administrative policy that employee discounts on merchandise are generally not taxed … is still in place and is explained in Guide T4130.”

T4130 Employers’ Guide – Taxable Benefits and Allowances

This Guide advises an employer that if it sells “merchandise to your employee at a discount, the benefit he or she gets from this is not usually considered a taxable benefit.” If the discount is below the employer’s cost, there would be a taxable benefit for the difference between fair market value and the price paid.

Practice points

Generally, benefits received by an employee from an employer are taxable.
Discounts for an employer’s merchandise and meal discounts for restaurant employees continue to be non-taxable, per the CRA’s longstanding policy.
If a discount is below employer cost then a taxable benefit may still arise.

Si, si, si – Translating YES into your financial planning

For many people – especially young adults breaking into their careers – financial planning may feel like learning another language. There are new concepts, words and phrases, and time required to master how and when to apply them.

Now I’m not suggesting that Spanish is required, but you probably know that “si” means yes. By repeating that three times, si-si-si, you have a simple acronym that takes you through common stages in your actual life as a way to look at decisions in your financial life:

S chooling
I ncome
S aving
I nvesting
S pending
I nheritance.

Elements of all of these are at work at any time, so these titles are really meant to highlight the principal focus at a particular stage. As well, the time spent at any one stage will vary from person to person, sometimes with significant overlap and blurring of lines between them. In fact, you may go back through repeated cycles over your life, so think of this as isolating key issues to help you identify, build and apply your financial planning skills.

Schooling that fits your outlook

Education is the foundation for your life ahead. Choices you make at this stage can both open up and close off where you may be going, whether that’s formal schooling, hands-on experience or a blend of the two. Whatever path you take, this is when you are almost always spending more than you are earning, but it is truly an investment in yourself.

Income that supports the lifestyle you are living

As an income earner, you will be able to pay off education debt and move into positive cash flow for your current purposes. Managing this flow can be tricky, so be aware how much of your spending is going to needs and how much is consumed by wants. Those wants are what makes life more livable, but if they push beyond your current financial means, it’s time to either scale back or look for ways to improve your earning capacity.

Saving towards your future self

You have a past, you are in the present, and you will have a future. With a good handle on your present finances, you can devote a manageable amount of excess income to feed your future. With increasing clarity of that future vision as savings grow, you won’t experience saving as a pain of loss, but rather as a gain of future comfort and flexibility.

Investing your savings

Investing is not saving. It is what you do with savings. To this point the emphasis has been on building your skills and behaviours, in order to create savings distinct from your own earning power in the labour market. Investing layers on top of that, providing the opportunity and necessity of putting your money to work in the capital market, delivering the growth, protection and accessibility to meet your later life requirements.

Spending later rests on the decisions you make much earlier in life

Obviously you spend throughout your life, but in retirement it is the dominant feature of your finances. You may continue some work as a way to ease into it, but eventually your only income will be from your invested savings, with assistance from government sources. While retirement coincides with advancing years, a comfortable retirement is not simply based on reaching a particular age, but rather relies on having accumulated sufficient financial resources to sustain you in what will be your non-earning years.

Inheritance

Just as we are tied by love and emotion to the family and friends around us, we often have intertwined and interdependent financial lives. Providing an inheritance to others is a combination of moral force, financial need and legal obligation. Be conscious how this affects your planning, so that that you have a high degree of certainty that you will meet your needs and expectations through your life and beyond.