Government Money


23% of the people think that the government has their own money. What have these people missed? There is no such thing as the government’s money. There is only the people’s money.

Governments spend your money after they have taken it from you. You do not pay taxes, they take taxes from you. There is a difference.

Why must they take the money? Because you would not voluntarily spend your own money on the things the government spends it on. You would try to achieve the results you do value in more efficient ways. While they claim to be, most government departments are not very interested in solving the problems they have been given. See this earlier post. Survival

I think most people know that government costs something. Police, the courts, good roads, airports, hospitals, schools, and the fire department are all valuable and we would pay to have them if they did not exist. It is the extras that we would not choose to buy that cause the problems. An interesting game is to decide what government departments would survive if they had to charge for their services and use that money to pay their own way. Weights and Measures, food safety, drug safety, CBC, licensing, the zoo, the water service, CRTC, ………

To be a successful citizen you need to know:

  • On what the government spends the money,
  • Would you spend it differently? Better?
  • What happens when the government spends money they don’t have?
  • What happens when the government prints money?
  • What happens if the government can’t meet its obligations?

You cannot manage your affairs well without knowing the government’s impact upon them. Consider government debt. Notice that governments are in debt and by big amounts. Do you know what that means?

It means you are in debt. There is no such thing as government money and there is no such thing as government debt. They spent more of your money than they have taken so far. On things you might not value. A government deficit and the debt that results are just taxes that they haven’t taken from you yet. You owe the money. You will pay.

The only way the government can balance their budget is to unbalance yours.

Notice that interest rates are very low just now. People who owe a lot of money benefit when rates are low. What happens when they inevitably go back up? Nothing good for the government and thus nothing good for us because the people are the money tree.

If you would like to have a different result, encourage your politicians to spend less and help them to do so. Every time you hear, “The government should do something about that,” decide if you would pay directly to have it done. If the answer is no then don’t encourage them to do it.

It’s all your money. Try to influence how it is spent.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

‘Tis the Season


Most people know the story of the Good Samaritan.  He helped an injured person of another faith and gained no personal advantage from doing it.  That is important, but what is also important is that the Good Samaritan had money.  He paid the innkeeper for the injured person’s care.  If the Good Samaritan had had no money, we would probably not know about him. 

Charitable intentions are good, but charitable works require resources.

Hanukkah, Eid ul-Fitr, Yule, Kwanzaa and many other belief systems  have a celebratory season that more or less coincides with Christmas.  No matter your faith, for many, this is a time to consider charity and charitable works.

It has been my experience that people overlook the essence of charities.  The work they do is important and we support the charities that solve the problems we think are important.  But, charities serve another useful purpose.  They are our personal proxy in the doing good realm.

For most of us, money is easier to come by than the time it would take to do what a charity does.  We use money instead of direct participation so that other skilled people can do the work and we can conserve our time.  In economics this is called “Comparative Advantage.”

Charities build structures to complete their work.  Your charities count on you because the structure is expensive to maintain.  They need you.  Pay attention to your role as a donor, you would not be easy to replace.

There are many organizations seeking money to complete their work.  The last survey seems to be 2003.  There were then more than 160,000 charities and non-profit organizations in Canada.  About half registered charities with CRA.  Today they are more than 100,000 registered charities, so I suppose there are probably 200,000 or more altogether.  That is a lot of competition for only a few dollars.

Competition means that the charity and the donor must be maximally effective.  Charities must use resources better and donor must find efficient ways to give.  For a donor efficiency means getting more money to the charity for the same out of pocket cost.  In Canada giving appreciated shares in publicly traded corporations is a good way.

Consider also the idea of “Planned Giving.” Notice that when you pass on, it may be very difficult for the charity to replace your donations. Properly structured, you can become a “perpetual donor” for your church or other charity.  Remember them in your will or in other ways.  The capital you leave can earn income that replaces your regular donations.  $50,000 invested at 5% will provide about $50 per week.  Properly planned, there is little, sometimes no cost, to your heirs.

Even Homer Simpson could participate.  “I don’t mind being generous, as long as it doesn’t cost too much.”

Merry Christmas to all.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Everything Before The But


My late friend Targon often said, “Everything before the “but” is bulls…  “

He was talking about a judge delivering his judgement and reasoning.  It applies to far more of the world than that.  “However” sometimes substitutes for “But” and the meaning is identical.

Politicians frequently do it.  Perhaps they believe we will get bored and stop listening before the end of the thought appears.  Probably works.

We do it with our children and significant others.

We should stop.  It is distracting and it reduces the value of the thought you are trying to present.  It misleads or perhaps confuses the listener.  Unless you mean to do that, you need another method.

Simple and direct communication works better because it treats the other person as important.  Statements in the form “Here is my opinion, if you want, let’s discuss how I came to this point” is useful communication.

If you have seen the movie, “Moneyball,” you saw exactly this approach.  “You’ve been traded to Detroit.  Call _______, he is a good guy and will make the travel  arrangements.”

You get an adult response, because the other adult knows what is happening.

When communicating, efficiency is value added.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

To-Do Lists


The To-Do list is an unexceptional management tool.  Everyone does one and it allows several good things to happen:

  • Hard to forget things
  • Easy to prioritize things
  • Feels good as you catch up
  • Motivates you as you fall behind

Nonetheless, it is a trap.

To-Do lists are action oriented.  As such, they tend to be logistical or sometimes tactical.  They are never strategic.  The trap is described by:

“The urgent is seldom important and the important is seldom urgent”

No one has a to-do list with these on it:

  • Be a contributing and useful person
  • Be happy
  • Live a fulfilled life
  • Teach my children to be functioning adults.
  • Love my spouse
  • Grow as a person

That second list probably matters more than:

  • Pick up dry cleaning
  • Pay phone bill and
  • Call Bill about lunch Tuesday

Yet I know of no one with such a list.

There is another list that I think is important.  It is the “Never Do” list.  Worth thinking through what should be on it.

It is easy to become tactically and logistically involved.  There is nothing wrong with that, it helps keep the day-to-day of life flowing.  Just make sure that you know your strategy and have made it the driving force in your life.  If you don’t, you will soon reach, “We are hopelessly lost but making good time.”

Strategy matters most, at least until you have a good one.  Once you do the to-do list will help you bring it to life.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

On The Value Of Free Things


Lakefield Ontario sculptor, Don Frost, sent me an email on Friday the 21st.  It reminded me that what we get for free is often worth more than what we pay for.

Be sure to see some of his work here.  DonFrost Sculptor  You won’t be disappointed.

When you get there be sure to scroll down and click on the “Resurrection Cross”  The page it leads to will also show an interesting piece installed in Riyadh.  Both are proof that artists see the world from a different plane than we mortals.

Don’s Email:

don frost tree and sun

“Of all the events surrounding this season, today is the one which I can truly believe in with no hocus-pocus or question  the validity  thereof.

This ball that we are all sitting on has passed the half-way point in it’s yearly jaunt around the cosmos, the days are now getting longer and summer is coming .!!!!!!!!!!!

Now that makes me happy and it didn’t cost a thing.

Cheers, enjoy  an artful day !”

Good thought.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Gimme Shelter


All of us wish to be immune from tax, but few of us are. If you want to protect your income from tax you will need a strategy that considers time, risk and a few other variables. Then you can go to the buffet of methods.

All of the material here is meant to be for discussion. Ideas shown here are pure forms. Others exist that hybridize the types. Not everyone should participate in any particular type. They should fit together with other plans and should achieve known purposes. You will be best served if you discuss the material with professional advisers familiar with both the concepts and your personal situation.

The idea of a tax shelter is that you can invest or reinvest money that would otherwise have gone to the government. It could be current tax due or it could be tax on future income from the investment. The amount of tax deferred is a good measure of the value of a given kind of shelter.

Income tax shelters are based upon two premises:

  1. I can deduct my investment
  2. I can defer tax on the income my investment earns

This leads to four possible formats.

Type 0 I cannot deduct the capital and I cannot defer the income.

Type 1 I can deduct the capital and I cannot defer the income it earns

Type 2 I cannot deduct the capital and I can defer the income it earns

Type 3 I Can deduct the capital and I can defer the income

Type 0 are probably best avoided. They are included here for completeness. They include things like bonds, GICs, mortgages, and the like. You should hold these investments inside some other format or hold them for reasons that are more valuable than the adverse tax treatment. They have no tax shelter value.

Type 1 shelters are common in November and December and are used by people who are tax averse and who can bring other factors to the investment party. Things like risk tolerance, ability to accept ambiguity, investment skill, liquidity, and patience.

These shelters have an interesting defining characteristic. Their value is greatest at the beginning. They tend to wear out quickly after that. Once the initial investment has been deducted, the ongoing income will add to income. Eventually you will need more shelters to protect the income the early ones are generating.

As one pro hockey player pointed out, “You don’t have tax trouble until your shelters are making money.”

They tend to be best when the client wants to move income a year or two into the future. Maybe just before retirement. More commonly they are sold to people who value reduced tax payments more than increased net worth.

Type 2 shelters provide no immediate relief because you can’t deduct the investment. They provide shelter for future income not for current income. As opposed to Type 1 shelters their tax value is lowest in the beginning and increases over time.

There may be tax due some other day, but not always. If you buy a Picasso, you may have a large gain someday, but until you sell it, it appreciates without tax. More likely than a Picasso, most of us will have a TFSA. It will grow forever with no current tax and no tax at surrender either. There are limits on how much you can invest but not on how much capital you can accumulate. A TFSA is close to being a given for everyone. An ideal home for bonds and GICs. Sadly, only for smallish amounts of investment.

Life insurance is interesting too. If properly designed, the investment income grows tax deferred. If you withdraw capital, some or all may be taxable. If you leave it there until death, the accumulated income becomes tax free. There are limits on how much you can put in per thousand of insurance

In all Type 2 shelters, their greatest value is far in the future.

Type 3 shelters are theoretically most desirable. They include RRSPs, pension plans and the like. The theoretical part comes into play when you realize that all are created by specific legislation and all have limits on the capital deposited. More serious all have rules to force the amounts back onto your future tax returns. If you don’t get around to spending all the money, your estate will pay the tax on what remains.

All type 3 shelters are useful but they need to strategically managed. For example maximizing your RRSP up to age 72 and then taking minimum RRIF payments will be unlikely to create the most wealth for you. The beauty of deferred income and deductible capital may be a trap once you are near retirement. You can work it out for you own case.

In type 3 shelters the peak value of tax deferred occurs a few years after retirement and eventually falls to zero.

Tax shelters are more complicated than most people think and they don’t work for everyone. They should be considered in any case where people are taxed currently at high rates and have capital to invest or who have growing investment income.

It is okay to say no to tax shelters as long as you can say no for a reason. Usually the reason is it
does not make any real money

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Sell Alaska


No one ever went broke taking a profit.  Maybe it is time for the Americans to sell Alaska.  Steve Mufson of the Washington Post published this piece on December 14th.  To solve our debt problems, let’s sell Alaska  His thesis is that Alaska is worth between $2.5 and $5 trillion.  A nice deal considering its purchase price of $7.2 million.  It is worth now, about 700,000 times more.

Other than noticing that selling Alaska would not make more than a dent in the US federal debt, what practical thing can we learn from that deal?  How about this?  There is no possibility that anyone can earn a large rate of return for a long time.

The Alaska sale results in a compound rate of return of just under 10% if the $5 trillion number is good and about 7.5%, if the $2.5 trillion number turns out to be real.

Those rates don’t seem hard to get, do they?  I’ll bet you have had financial advisers that wanted to assume a long term interest rate of more than 7.5% when projecting your portfolio values.

Could be they can get it, but FOR HOW LONG?

The interest assumption in your plan is a key element.  Do not just accept some number pulled from the air.  If your time frame is more than 10 years you might want to consider being conservative and see what happens.  It is probably best to behave like an actuary and use current rates in the short run and low rates for the later periods.  Surprises on the upside are always easier to deal with.

On the opportunity side of this story, the real estate agent who puts this deal together will do just fine.  I suppose they may need to accept less than their usual commission rate.  Even 2% commission would be an interesting number.  I wonder if the listing will show up on MLS.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Sound As A Dollar


Inflation happens when more money chases the same or fewer goods. For the past three years governments have injected a great deal of money into the economy. The goods and service side has not changed as much, yet there has been no significant inflation. How come?

There are several possibilities for the no inflation result. Perhaps the best guess is that it is a combination of many things. The candidates:

  1. People are not using money to chase goods. They are using it to pay down debt.
  2. Many people have lost their jobs and thus have less spending power.
  3. Banks and many businesses are holding much larger than normal cash reserves. Banks are not relending the money that the people used to pay off their debts.
  4. Holding cash reduces the “velocity.” When dollars are used for purchases they turn over quickly. A dollar that changes hands four times a year is different than a dollar that changes hands twice a year. A reduction of velocity reduces inflation.
  5. Foreign governments have increased their dollar reserves.
  6. This time is different. Printing money really won’t matter.

If you want to bet on 6) I would like to hear from you.

Inflation will eventually appear. The result will be higher interest rates and reduced value of dollar denominated assets. That result is baked into the economy.

If your doctor tells you that you are as sound as a dollar, call 911.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Money Can’t Tell Where It Comes From


Retired people and a few others make a fundamental strategic error.  They fail to notice that income (especially income for tax purposes) and cash flow are not the same thing.  Your financial plan should be careful to make the distinction.

You can spend cash but you cannot spend income.  People who try to manage income to meet their spending needs frequently pay to much tax or pay tax too soon.

All to no advantage.  When you go to the grocery store, the money you pay with cannot tell if it is an income dollar or a cash dollar.  You should develop the same way of thinking.

Disconnect your thinking so that income replenishes capital and capital supplies cash to meet your lifestyle needs.  As soon as you do this you will begin to enhance your estate and thus your security.

 Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Gresham’s Law


Gresham’s law is commonly stated as “bad money drives out good money.”

It seems to be a universal truth.  If you have $20 gold coins circulating along side $20 paper bills, you will find the gold coins disappear into a safety deposit box and the paper money is spent.  People believe good money is worth more.  Pretty simple really.

In retirement though, many people lose track of the idea and they sometimes preserve their bad money and spend their good money.  Even in the absence of gold there is still a distinction.  Good money is money that is worth full value.  100 cents per dollar.  Bad money is worth less, maybe much less.  In many cases, you will find that spending a RRIF quicker than mandated by the tax rules is a good idea.

By definition a RRIF is “bad money’ because before you can use the money, you must give up a share to the government.  Same in your estate.  It is reasonable to believe that a RRIF dollar in your estate is worth no more than 52 cents.  While living, it could be as little as 48 cents if OAS clawback is a problem and it may well be for a surviving spouse.

For the majority,  tax on RRIF income is 35% or less.  The dollars taxed at 35% are better than dollars taxed at 48% to the estate or 52% to a surviving spouse.  It would take a long time for the tax deferral advantage to make up the difference.

Consider the case where a couple has income of about $120,000 between them.  If one dies, then RRIF income to the survivor can easily cost 52%  when the OAS Clawback is included.  Income for the survivor will probably be about 25% less (assumes some pensions) than the total before and the tax bill will go up.

Your reasonable strategy then is to spend bad dollars before good dollars.  RRIF first, usually spread out to about age 80 to 85, then other investments, while being sensitive to tax, then the TFSA, and finally assets held inside life insurance plans.

Under this method the assets left in your estate will be worth closer to 100 cents per dollar and your spending while alive will be after a tax rate you can manage.  You will need to a long term income projection to get the time and the mix right.

An easy estate optimization plan.  Plus it will give you greater flexibility should you live a very long time.  The dollars left for you to use later are close to 100 cent dollars.  If you need to spend money at an advanced age taking $1,000 from a TFSA is about the same deal as taking $1,900 form a RRIF, so you don’t need so many dollars working for you.

Work it out, it can easily matter.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

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