January 2013 Questions & Answers



C Wrote: I am a single divorced woman who earns my income through my business which is run as a sole proprietorship. I run into a problem when I am dealing with Banks regarding lending and they only use Line 150 of my Tax Return for my income. I always provide them with my complete Tax Returns which include my Business Activities Page. A lot of these business activities are written off as I am allowed by Revenue Canada but the Bank uses ALL of these write offs as a loss so will not add them back into my Net Income Line 150 so that my true income is reflected. They even, as I pointed out to them were double dipping when asking how much I pay for Condo Fees, Insurance and Property Taxes. Those amounts were already reflected in my Business Activities Page as I have 1 Revenue Property and my other Property being my personal home where my business is run out of which I can write off those particular expenses at 1/3rd and a 3rd property which is a Revenue Property but free and clear of all encumbrances except for yearly property taxes and monthly condo fees. I also am able to write off the Mortgage Interest on my Revenue Property that carries a Mortgage which they double dip on me as well.

My question is: The income I generate per year is $110,000.00 gross but my Line 150 is around $45,000 to $50,000.00 (based on past 2 years of Tax Returns they were dealing with). I always felt that it was best to operate as a sole proprietorship rather than an Incorporated Company, but am I wrong? If I incorporated would this help me with my dealings with the Bank when and if I needed a loan? I think it is unfair how they deal with me. Is there another route to go? I left my previous Banking institute 12 years ago because of this issue and now my new Bank of 12 years is giving me the same grief.

It should be noted that I have run this business successfully for the past 24 years and have been divorced and independent for the last 12 years. Even while I was married my finances were always separate from my spouse's.

I hope that my question is one that you deem complicated enough to answer personally as I just don't know how to fight this fight anymore. I have an A1 credit rating and beside's my Mortgage asking for a small, short term loan has just put me through 21 days of hell with yet another day sitting and waiting for an answer. I have escalated my concern to higher levels within the Bank and just keep waiting.

Gail Says: You should not have to incorporate just to get financing. There are significant additional costs and incorporation only makes sense in the right circumstances. Anyone who is lending should be able to parse a tax return properly. You should not have to guide them through it. That's absolutely ridiculous. You're right to escalate the issue. Your only mistake was doing so after the fact as opposed to going in saying, "Okay, do you know how to read a tax return because if all you're going to look at is Line 150, then I need to deal with someone else." Banks are handing out money willy-nilly in the form of revolving credit, so only heave knows why they're putting you though the ringer. You may have to switch banks again (or at least threaten to) and this time you want a dedicated business account representative with which to deal.

Listen, I was declined by my bank for a CC. Yup, it happened. I emailed my branch manager with whom I have a good relationship and said, "Really?" I got the card. But you have to be prepared to demand the service to which you are entitled as a customer. And if one bank won't do it for you, try another.

It's too bad you have to live through this. This is the kind of crap that makes me crazy. Then I have to remember to breathe. 21 days is too long. My next call would be to say if they can't resolve this in the next 24 hours I'm walking.

BTW, the last time I changed banks, I called the executive vice president of retail banking to let her know I was doing it. She called me back to try and save the business. It was too late. 24 hours had gone by!


M Wrote: My girlfriend and I watch your show all the time and love it! I however wanted to email and make sure I am on the right track. I currently take home $3800 a month and am sitting with 24k in a student loan and 4k on a line of credit with my credit card being cleared every month (if I use it). We are moving in together in September. I live there now and am eating the cost of the apartment for 3 months until her lease is up and can move it) so as of right now after all my costs (food, rent, interest, phone, car, gas, essentially anything that I know will be constant cost) I end up with $1300 dollars to pay of debt/live (read, have fun) on. I have paid off almost $12,000 in debt in the last year. When she ends up moving in we will split the rent to the tune of an extra $550-$600 dollars a month to me. My goals right now are to pay off my highest interest in debt and keep in a downward motion every month, whether it be by $1200 dollars a month or $500 dollars a month, so that I may be debt free in 2 years. Does it sound like I am on the right path or would you suggest me to go in a different direction?

Gail Says: Sounds like you're doing fine sir. Make sure you get that line of credit paid off first since it's "callable" -- they can ask for it back at any time. Once it's gone, then throw the extra against the student loan until it's gone. Once that's done, take what you were spending and put half into long-term savings and incorporate the other half into your spending plan and goal achievement.


S Wrote: My wife and I have accumulated $55,000 in credit card debt. My wife has always kept her credit cards separate from mine. She is generous to a fault. She sees nothing wrong with taking money from her credit cards to give to a charity. I'm feeling overwhelmed by this debt and feel an urgent need to get out of it. We just recently purchased our home so we can't borrow against that so the only option in my book is a consolidation loan. My bank has agreed to lend me $50,000 at 3.75% over prime. I think this is a good deal considering most of my wife's credit cards are above 15%. I was roughly doing the math on her debt and she is paying about $500 a month in interest. We've had consolidation loans in the past and things didn't always go well simply because we started to accumulate more debt while paying on the loan. Bottom line my wife does not like the idea of the consolidation loan and seems to think she can pay off her credit cards on her own. Is there a downside to a consolidation loan? Do we have an alternative?

Gail Says: If your wife thinks she can pay off her debt faster at 15% than at 3.75% she is mathematically challenged! The downside to the consolidation is that it will free up your wife's credit cards so she can go right back out and do it all again. If she has truly seen the error of her ways, she'll be prepared to cut up all those cards and forgo using credit cards in the future. Clearly she is not skilled at managing revolving credit. If she is unwilling to live on cash from here forward, you're spinning your wheels. Under no circumstances should you co-sign for her consolidation loan. Under NO circumstances. If she can't get the consolidation loan without your help, you're in for a long haul and a lot of fighting and I send you my best wishes.


K Wrote: I just started a new job with great pay, doing construction so it is seasonal. I have $9,000 in debt (@ 4%) and after I pay all my monthly bills and expenses I still have an additional, $1800 (without overtime). Seeing as I might be laid off for January/February (depending on how bad the winter is), I was wondering if I should be leaning more towards paying off my debt or saving?? I also have a newborn expected in October!

Gail Says: Get the debt paid off first, then concentrate on building the savings as fast as you can. If you have the option of working overtime right now, do it before the baby comes and stash it away to help you through mat leave and baby's start-up costs. Your job now is to get to debt free as fast as possible while you pile up as much money as you can for the immediate future. Congrats on the baby!


K Wrote: Would you use an extra $3000 to make a mortgage prepayment ($100 000 mortgage / 10 years left) at 3.9% or a $25 000 car loan at 2.9% (3 years left) or add it to my TFSA which isn't quite maxed. I am debt free, with a solid retirement plan and pension. I was recently given a $3000 gift and want your opinion of where it would do the most good.

Gail Says: If it were my money and my decision, I'd top up the TFSA and stick the diff on the mortgage, which has the highest interest rate. But this is your choice, and you may want to get that car loan paid off and use the payments you would have made to boost your savings and reduce your mortgage down the road.


P Wrote: I have a 23 year old daughter that watches your programs, reads your books and is a huge fan. She has incorporated many of your ideas and plans into to her budgeting and financial planning. Here's the catch. She graduated from Social Work June 2011 and has lived at home ever since. To date she has not found work in Social Work but works about 30 hours a week until she can find something in her chosen field. I have paid for her education in full and she lives home rent free. It appears as though she may have a full time job, will find out this week. The other night when I suggested that she start paying rent, my daughter started crying and my wife had a fit that I would suggest such a thing. I was shocked at their responses and here's why.

Four years ago I took a weekend job to assist with paying for my daughter’s education due to the fact I had my investments in stocks and mutuals and we all know what happened to those in 2008. The investment portfolio went from $250K to $160K but is currently back to $195K. Rather than continuing to redeem stocks and mutuals at a loss, I borrowed the money for her education and took the part-time job to pay off the debt. I don't want to work 7 days a week any more but with a daughter that wouldn't contribute and a spouse that won't budget I have to continue to work 7 days a week to keep us afloat.

Other info:
daughter wants to go back to school to get Masters and that's why she doesn't want to pay rent/board
daughter has no debt and approx $20K in savings
daughter has a car that Dad pays for $335 lease payment plus insurance
spouse does not believe in budgeting or that daughter should contribute.
Leased my spouse a 2009 Toyota Venza for $535 month. 4 year lease, expires in July 2013. Advised her that we would do without for a year or lease smaller vehicle, she went ballistic.

Gail Says: Oh dear, you have not one but two Princesses on your hands. If you live in the greater Toronto area, why don't you apply to bring them on my newest show, which we start shooting shortly? I'm afraid I don't want to wade into this one without seeing both sides of the story. If it is exactly as you have described it, you have to ask yourself why both these women feel that you're the person responsible for supporting their needs and wants. You likely need to have a heart-to-heart with your family, with a calculator on hand to show the financial reality. As for working 7 days a week, if no one else is contributing and can, I wonder why you're doing it. Could your wife get the car she wants under her own steam? Can your daughter afford to pay for her Masters on her own? If they can't afford what they want, maybe it's time for them to see that reality by you NOT supporting their delusions.


J Wrote: Is one way better than another to pay your property taxes? Currently our lender pays and the monthly installment and it’s attached to our mortgage payment. Our village does offer the installment plan directly to the village - is this the same or is one a better way to go?

Gail Says: It doesn't make any difference. When you do it yourself, you usually make 4 or 6 payments a year. Through the bank, it's done monthly or as part of each payment, which some people find easier to manage. It's a totally personal decision.


K Wrote: I watch your show all the time because I think staying debt free is SO important! I am 18 years old soon to be 19. I was wondering if it is a good idea to get a credit card when I turn 19 to start building my credit but I am really scared to get it in case it results in debt!!! What would you recommend me do? I go to university full time but I work part time as well.

Gail Says: I’m a big fan of using a credit card to establish a credit history. Follow these rules:

Pay your bill in full every month. As long as you’re using credit to establish a credit history and for convenience, you’re fine. The minute you start carrying a balance it means you’re spending money you have not yet earned.

Track your spending in a spending journal. Each time you charge something, deduct it from your "bank account balance" so you don't end up facing a credit card bill that’s higher than you can afford to repay come the due date. Only by keeping track of where your money is going each time you spend – whether you use cash or a credit card – will you be shopping consciously.

Choose a card that gives back. You don’t have to pay a big annual fee to get a card that earns you rewards. My RBC Mastercard gives me 1% cash back every month. Hey, that’s money I don’t have to use from my budget. Know that rewards cards usually have higher interest rates, so if you’re stupid enough to carry a balance, you’ll more than negate the benefits.

Make sure you review your credit card statement every month. It’s not enough to just pay the bill off. You need to compare the charges that have come through on your statement with those you noted in your spending journal. This is the only way you’ll know if you’ve been overcharged, if your account has been fraudulently used, or if you’ve been charged interest in error.


S Wrote: Our daughter is almost 21 years old and is thinking of buying a condo. She is currently earning around 42k per year and is renting a basement suite for $900/month. She doesn't drive and has no student loans. She paid off her $1000 credit card bill with her income tax return. She has around 3k in savings. My husband and I want to help her with a 5% down payment but I'm worried that having a mortgage at such a young age is risky. She has always paid her own way and has never asked us to bail her out. She's quite responsible and hates that her monthly rent is not going toward her own house. Any advice is greatly appreciated!

Gail Says: This has less to do with chronological age and more to do with fiscal responsibility. A couple of points:

1. Rent is not a waste of money. For the first 10 years of her mortgage, she'll likely be putting as much as her current rent towards interest payments.

2. Why did she have a credit card balance (the one she paid off with her tax refund)? If she isn't managing her cash flow now (and carrying a balance says she isn't) then how will she handled the added costs/responsibility of home ownership?

Your daughter should decide how much she wants to spend on a home. Then she should calculate her carrying costs: mortgage payment, property taxes, condo fees, maintenance, utilities, home insurance. Let's say that comes up to $1150 a month. She should continue to pay her rent, but put the difference between her rent and her home carrying costs in a high-interest savings account. If she live on her income less the $900 in rent and the $250 going to the savings, that means she's managing her cash flow in a good way. In the meantime she's building up more of a downpayment / closing costs and the like.

Again, it isn't her age. It's how capable she is of managing the extra costs. Waiting a little longer to have more of a downpayment and all the other costs saved while practicing living on less is a good first step.


M Wrote: I have tried to be a careful spender all my life (i.e. live within my means). I love the way you teach Canadians how to be financially responsible. Here is my question. I have a variable rate mortgage at a low rate (prime -0.65). I have been paying down my mortgage on a biweekly acc. schedule with additional payments. Based on my current payment schedule, my mortgage should be paid off in 2 yrs. (which makes a total amortization of 12.5 years. My original plan was to pay it off in 10 but the plan took a detour when I diverted the "prepayment portion" to purchase a car a few years ago - which was purely a WANT.)

I sometimes make annual mortgage prepayments with my tax refund ($2000-3000/yr), but I wonder if it makes any difference now that the interest left on the mortgage is so low. Should I keep more money in my cash flow or put that money in a vacation (planned spending) fund instead?

I don't have any consumer debt. I have my TFSA (EF) & RRSP maxed out, & a few thousand float to pay for whatever needs arise; but I never have a "planned spending" category in my budget.

I have a stable job in the public sector with a defined benefit retirement plan, so my projected retirement income shouldn't be too crappy (but who knows what will happen 2 decades from now). Would it be too soon for me to start allocating money to a "FUN" category or should I focus on paying off my mortgage even though it won't save me much on interest?

Gail Says: I think you're in a great position to have some fun. I'm not the girl who believes you should save more, More, MORE...fun is very important. With all your i's dotted and your t's crossed, you're in a great position to play. I have a line on my budget (separate from entertainment) labeled "pleasures" and I HAVE to spend this money every month. Sometimes it's easy to get caught up in planning for the future, and this is my remedy. I budget $300 every month just for the things that make me smile and remind me of why I work so hard.