Financial Planning, Investment Counselling, Tax and Accounting

Contents

Post-secondary education cost
Employee benefits
Are fixed rate energy contracts worth it?

Post-secondary education cost

by Marc Lamontagne, CFP, R.F.P., FMA

Data released by Statistics Canada on Sept. 4, 2004 show that between 1990/1991 and 2002/2003, university tuition fees increased at an average annual rate of 8.1% - that's four times the annual 1.9 % rate of inflation as measured by the consumer price index. There was some relief in 2004 as tuition fees increased an average of only 1.8%. So faced with this ever increasing cost, how much should you plan to set aside to fund your children’s education?

A lot of it has to do with where your child will eventually go to school. For instance tuition fees for Quebec residents are actually quite modest at about $2,500 a year. On the other hand, some Maritime universities can be quite expensive with Acadia topping the list at $8,116 a year for an undergrad degree. A good safe number to use would be $5,500. Professional programs are always more expensive. Law School costs nearly $10,000 per year and Medicine runs $15,000 per year. An MBA can cost over $50,000 for a 1-year program.

Sample budget for an 8-month academic year

Expenses	Living in residence	Living off campus	Living with parents
Tuition and fees	$4600	$4600	$4600
Books and supplies	$800	$800	$800
Residence and meal plan	$5600
Rent and utilities		$4560
Food		$1600
Personal expenses and transportation	$1700	$1700	$1500
TOTALS	$12,700	$13,260	$6900

Source: Council of Ontario

Your second and potentially greater cost at an undergrad level, will be living expenses for an out-of-town school. First year students generally have access to dorms on campus which can run from $5,000 to $7,000 for a room and a meal plan. Off campus cost will depend on the location and availability, but in certain circumstances you can almost double the on-campus cost.

Other costs to consider will be books, school fees, and other school supplies. Some textbooks at the campus bookstore can run as high as $100.00 for a new edition. It pays to compare prices at Chapters or ebay for the same or previous edition. Apart from incidentals and entertainment money you may also need to budget for travel or commuting and out-of-province medical insurance.

So what does it add up to? The Ontario Undergraduate Student Alliance (OUSA) estimates that, for an eight-month school term, a university student living away from home can expect to pay approximately $13,000 for tuition, fees, books, residence or rent, meals, and personal expenses.

In our next newsletter we will examine the best ways to fund the cost of post-secondary education.

Employee benefits

by David Burnie, CFP

Employers often look for creative ways to remunerate their employees. Non-cash benefits can fit the bill. But as generous as they may seem, it is important to understand the tax consequences of employee benefits being offered. You could be in for a surprise at tax time otherwise. This article will also be of interest to those who contract their services through an incorporated company.

Employer paid RRSP contributions

Employer paid RRSP contributions are a benefit that is fully taxable in the hands of the employee and must be included in the employee's income for the year on his or her T4. The employee will receive an RRSP receipt directly from the RRSP carrier at year-end. This will result in a reduction in the employee's taxable income for the year to the extent that he or she is eligible for the RRSP deduction.

Insurance

Group termlife insurance

Premiums paid by employers for employee group term life insurance are taxable benefits to employees. If you pay an employees' group term life premiums and they in turn reimburse the organization then no taxable benefit will result.

Long-term disability premiums

Payment of long-term disability premiums by an employer for an employee does not necessarily result in a taxable benefit to the employee. If an employer has paid the premiums on an employee's behalf and a claim is made on the policy then the employee would have to pay tax on benefits received. The cost of paying tax on the disability claim payments generally significantly exceeds the benefit to the employee of having the employer pay the monthly premiums.

For example, if your employer pays on your behalf, a monthly premium of $100 for $2,000 per month of disability coverage, it would seem you are benefiting $100 per month. If you became disabled, made a claim and began receiving the $2,000 per month, you would be taxed at a rate of approximately 20%. Your net benefit would be just $1600 per month. If you had paid the premium yourself, the $2,000 benefit would have been tax-free.

Consideration should be given to having the employee pay their own long-term disability premiums. In this case the employee would not be subject to tax on payments received in the event of a claim on the policy.

Private medical and dental plans

Insurance premiums paid by employers for private medical and dental plans do not result in a taxable benefit to the employee. This is one of the most common tax-free benefits offered to employees.

Directors’ and officers’ liability insurance

Employees and directors are not deemed to have received a taxable benefit if their employer/organization pays the premiums for directors’ and officers’ liability insurance.

Travel and transportation

Parking

Where general parking is provided in a parking facility without reserved spaces and an employee does not have exclusive access to a specific space then no taxable benefit will be assessed. However, where an employer pays for individual spaces and assigns a space specifically for the use of a particular employee then that employee may be deemed to have received a taxable benefit – don’t you just love CRA.

Traveling with a spouse

Employer reimbursement of the costs for an employee to take his or her spouse to a conference is taxable to the employee unless the spouse is actively engaged in the conference. To avoid having a taxable benefit assessed make sure that the nonemployee spouse takes an active and professional role in the conference and that the conference relates to the employee’s job.

Transportation assistance for daily commuting

Employers can reimburse an employee for transportation other than from home to the fixed place of employment without creating a taxable benefit.

Automobile allowances

Employees are not deemed to have received a taxable benefit if they receive a "reasonable" car allowance reimbursing them for transportation costs other than just from home to the fixed place of employment and back. CRA periodically publishes maximum amounts employers are allowed to deduct as an expense on reimbursement of employee travel.

Work environment and staff development

Improving your organization's work environment generally does not give rise to a taxable benefit. Often a fresh coat of paint, some donated art and "new" donated office furniture can do a lot to increase morale by making a workspace look clean and new with only a modest cost to the organization.

Professional development

Employers can pay for professional development for their employees without creating a taxable benefit provided the courses/conferences are related to the employee’s job.

Paying for employees to attend post-secondary courses is more problematic. Recently, the courts found that the value of an MBA course paid by an employer on behalf of an employee was a taxable benefit to the employee. CRA reasoned that the employee received significant personal benefit from attending the course.

Company fitness facilities

Providing employees with a fitness facility at the place of work does not result in a taxable benefit to the employees.

If your organization pays an employee’s recreational club dues then payment of the dues will be nontaxable provided you can demonstrate that having your employee as a member of a club directly benefits your organization. Please note, however, that golf club memberships paid by an employer are always taxable.

Payment of employees’ counseling costs

Providing an employee with counselling services for tobacco, drug or alcohol abuse, for stress management or for retirement or re-employment will not result in a taxable benefit to the employee.

Use of employer’s childcare facilities

Permitting employees to use a childcare facility fully paid for by the employer will not result in a taxable benefit to the employee.

Some employers do provide a space for childcare, set a per diem fee and charge all parents the same fee.

Any preferential fee discounts to employees are taxable.

Awards, prizes, gifts and employee discounts

Prizes for achievement

Employees receiving cash or other prizes of significant value for achievement (e.g. an all-expenses paid trip) must have the value of those prizes included in their taxable income. Receipt of a trophy or a plaque with limited resale value will not result in a taxable benefit.

Annual tax free gift

Employers can give their employees two non-cash gifts per year, on a tax-free basis, for special occasions such as Christmas, Hanukkah, birthdays, and marriages. The total cost of the gifts to the employer, including taxes, must not be more than $500 per year.

The employer can deduct the cost of the gifts!

Cash or near-cash gifts

This position does not apply to cash or near-cash gifts and awards. The value of such gifts and awards will be considered a taxable employment benefit. Near-cash gifts and awards may include:

• gift certificates
• gold nuggets
• any items that can easily be converted to cash

Gifts or awards whose value exceeds $500

Where the cost of the gift or gifts (maximum of two) exceeds $500, the full fair-market value of the gift(s) will be included in the employee's income. There is no exemption for the first $500. If the cost of the gift exceeds the $500 limit, the gifts are deemed to form part of the employee's remuneration package.

Are fixed rate energy contracts worth it?

by Marc Lamontagne, CFP, R.F.P., FMA

When was the last time you had an annoying sales person knock on your door, invariably at dinner time, wanting to sign you up for a fixed rate hydro or heating fuel contract? If you are like me, you can’t say nothankyouverymuchI’mnotinterested… quickly enough, as you close the door. But apart from poor marketing on the part of these fixed rate deregulated energy marketers, are their offers actually worth a second look?

It depends. A fixed rate contract locks you into a predetermined price for a period of 3 to 5 years. The price will be higher than the floating rate you are currently paying the local utility. Think of it as trying to decide between locking in your mortgage interest rate for 5 years, versus chancing a hopefully lower floating rate.

If you have not signed a contract with a deregulated marketer, you are paying the local regulated utility for gas or electricity supply. You are consuming what's known as ‘system gas’, or ‘default supply electricity’. By regulation, the utility is required to simply recoup the cost of the gas or electricity from you with only their administration costs added. The cost is totally variable since it is based on the short-term market rates, or the portfolio cost of energy supply that the utility has purchased to hedge their costs. The utility must get approval from the regulatory board for rate changes, but they can apply price increases retroactively if they can prove that it cost them more to supply the energy than they had previously charged their customers.

As an example, Enbridge Gas charges a floating rate of $0.353225 per m³ for natural gas. Alternately, Direct Energy has a five-year fixed rate contract for $0.4207 per m³ for the first year, then $0.4307 per m³ for the subsequent 4 years. There are of course a number of other charges on top of this, such as a meter charge and delivery charges that are exactly the same whether you have a floating or fixed rate contract.

Based on an average home use of 3,064 m³ per year, the fixed rate contract will cost you an additional $240 per year, compared to this year’s floating rate. So it is almost like buying insurance against the potential of an increase in the cost of energy. Or essentially, peace of mind. Historically, gas prices have risen steadily from about $0.05 per m³ in 1996 to $0.35 per m³ this year. It would be unusual for gas prices to fall in the long term. On the other hand, if energy prices do decline, you would not see a benefit. Visit www.energyshop.com for more information.