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Done your T-zero yet?


Each spring we engage in the same ritual frenzy.... helping the federal and provincial governments run the country and pay down the debt. The obligatory "completion of the T1" occupies a good portion of our time, whether we do it manually or by computer, and the only ones who profit by this are the feds and (maybe) our accountant.

At the end of this exercise, we will have determined two things.... the amount of tax we owe, and, by inference, the lifestyle which we have just enjoyed over the last 12 months.

The only useful thing about knowing the size of our tax bill is to be able to brag/complain about it at cocktail parties. Unfortunately, our net (after tax) income for the prior year is generally not considered, since there is not much you can do about it after the fact.

It wouldn't take much to modify the T1 in order to tell us however.......

" subtract line X from line Y and add(subtract) in any non-registered capital you received(invested)... This is last year's net income."

....there it is, the 'real' income you enjoyed last year, your lifestyle, the amount (after tax and investments) that you spent on bags of groceries, cases of beer, tanks of gas, holiday cruises, credit card interest, etc.

Naturally, Revenue Canada doesn't care much about your net income, and so you won't find this extra couple of lines on your tax return. What would be useful however, is to know what your lifestyle should be next year and all subsequent years!

In light of this, I would like to propose the 'T0', something designed for your benefit. Here is how it would work.....

Rather than entering information from your T4s and T5s, you would enter a future estimate of gross income (taxable and non-taxable) as you expect it to occur (paychecks, a future capital gain, pension...). Not just for next year, but over time.

The main difference between the "T0" and the T1 would be that you would enter your net income/lifestyle as data, rather than the other way round. In other words, you get to specify what your lifestyle will be. This is a bottom-up calculation.... 'from', rather than 'to', net income.

Now you can answer the following simple question .....

"I have $a in savings, earn $b, expect to retire in c years, downsize my home in d years (realizing an $e capital gain). How should I organize/schedule my investments in order to provide a constant $f lifestyle out to age g ?"

The data (a-g) required to source this calculation is something everyone has easy access to.... your salary as it will unfold over time, how much you have saved (RSP and nonRSP), an expectation of a future capital gain, pension or inheritance.... the only subjective decision to make is what you expect future interest and inflation rates will be, and a guess as to your maximum life span. None of this requires T4/T5- type information slips, this is data you can conjure up on the spot, at any time.

This is beyond simple tax or investment planning, this is true 'needs-based' or lifestyle planning. It shows how your entire financial life will unfold... the EXACT tax you will pay, RSP monies to invest/withdraw, nonRSP monies likewise... automatically computed.... all based on your need to secure a constant lifestyle to a maximum age. When can I afford to retire?, am I living beyond or within my means?, what will my estate net? what about life insurance?, should I continue to shelter my RSP after retirement? borrow to invest? make a sizable charitable donation ...you get the picture.

The problem with this calculation is that it is extremely computer intensive. This would not have been practical to do on a pre-486 computer.

The math is severe.... compound interest, income tax (the full T1 computation, not just an 'average tax rate'), the different tax treatment of registered/nonregistered funds, dividend income, RSP/RIF rules, CPP/OAS math, inflation..... this is not easy stuff. Thankfully, due in part to the advent of fast (math coprocessor equipped) personal computers, this calculation can be done accurately and in reasonable time (less than 10 seconds).

Attempts have been made over the years to approximate the math (the tax treatment of non-registered capital especially), entering an average tax rate or computing from gross income ('shortfall' and 'surplus'-type computing)... unfortunately, these solutions can be quite inaccurate. Until now.

Now it is possible for your financial advisor to quickly and accurately plan your future, pre and post retirement.

The "T0" is an idea whose time has come!

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