Recently, the Ontario Education Minister, Mitzie Hunter announced that the ministry of education will start to roll out a pilot financial literacy project for 28 high schools in Ontario. This project aimed to teach our grade 10 students about money and to provide them with more financial literacy. When I read the article, I was excited to hear that our provincial government had finally recognized that financial literacy and money skills are important to our society and it should be taught in our schools. However, what exactly will be the curriculum of this new financial literacy course is still unclear. So instead of waiting for the government to come up with the new curriculum, I’ve come up with a list of topics that I think will be relevant to the average Canadian. I would also want my kids to have the exact financial literacy when they grow up.
Credit History, Report And Score
Before applying for my first mortgage, I have no idea what is credit history. How do I build my credit history? Who stored information related to my credit history report and how accurate? What credit score is considered to be a good credit score? When should I start building my credit history? Why is my credit history important? These are all important questions that I wish I knew before I purchased my first home. It may have affected the mortgage rate I was offered and could have cost me thousands of dollars in interest payments. Hence, credit history management should be a part of the financial literacy curriculum.
Basics About Borrowing
Ever since I could remember, borrowing money from financial institutions to purchase material possessions that we don’t yet have money to pay for seems like a norm in the developed countries. Having the basic knowledge with regards to secured and unsecured personal line of credits, home equity line of credits, mortgages, student loans, car loans, credit cards loans, installment loans and payday loans is crucial. The average Canadian needs to know what is the effective annual interest rate for all the different loans. When does each type of loan start incurring interest? Which type of loans offers the best borrowing rate? How to qualify for the different types of loans? By knowing the lowest borrowing cost and being able to compare the different types of loans will provide the average Canadian with a great foundation to build his/her financial health on.
Filing Your Income Tax
There are only two certainties in life: death and taxes. Pop quiz. When do you have to file your tax return? Is filing your income tax mandatory even if you don’t have any income for the fiscal tax year and you are in the age of majority? Are there any benefits to filing your taxes? How do I pay less income taxes? Are there any special tax credits that I can apply for when I file my tax return? Do I need a tax accountant to file my income tax? These are the basic tax questions that every Canadian should know. Second pop quiz. Do you know that even on the year of your death, you still have to file your income tax? Well, you can’t because you’re dead. However, whoever manages your estate will need to file your last income tax return on your behalf. If every Canadian have to file his/her income taxes until death, shouldn’t it at least be a part of the financial literacy curriculum and be taught in school?
Sourced from TaxTips: Ontario Marginal Tax Rates
Income Tax Brackets
The income tax system in Canada is progress, which means the more you earn, the more tax you’ll pay. A while ago, I read a story about a fellow who refused a pay raise because the pay increase will push his income into a higher tax bracket. My jaw dropped when I finished reading that story. I started to wonder and I asked myself “how many Canadians had the same misconception as this poor fellow when it comes to the Canadian tax system?” Suffice to say, the financial literacy curriculum requires a dedicated section for the tax system to educate Canadians how their incomes are being taxed.
Tax Efficiency For Different Income Sources
When I first learned about the Canadian tax system, I became aware of the three major categories of taxable incomes: employment or self-employed income, dividend income and capital gain income. For the employment or self-employed income, every dollar you earned is being taxed. There is no way around it, so this form of income, you pay the highest amount of tax. For the dividend income, it’s grossed up, which means they’ll add an additional amount on top of the dividends that you received. Your taxable income will be increased by that amount. However, you will also get a dividend tax credit. Based on the tax bracket chart above (for Ontario residents), if you earn $90,563 or less for the tax year of 2016, dividend income will be your least taxed form of income. Last but not least, the capital gain income is only taxed at half the amount. For example, if you made $10,000 in capital gain income, then only $5,000 will be added to your taxable income. Even though I have covered the basics, how to differentiate which form of income falls into which category need to be fully covered by the financial literacy curriculum. Check out this post if you are interested in minimizing your income tax.
Registered Retirement Saving Plan (RRSP)
A couple of weeks ago, a friend of mine called me up to ask about the spousal RRSP rule. He’s a high-income earner with very little RRSP contribution room left for the 2016 tax year. On the other hand, his wife’s 2016 income was lowered than his and she had quite a bit of RRSP contribution room left as she rarely contributed to her RRSP. My friend thought that if he contributed to his spousal RRSP account, he’ll be able to take his wife’s contribution room for the same amount that he contributed and lower his income by that amount. However, that’s not how the spousal RRSP account works and the RRSP contribution limit is not transferable. This is just a simple case of misunderstanding of the use of the spousal RRSP rule. With that being said, there are many more RRSP related rules that the average Canadian needs to know. By adding a section related to the financial literacy curriculum, all Canadians will have the basic knowledge to reap the benefit of the RRSP when they retire.
Registered Education Saving Plan (RESP)
A lot of parents are working very hard to save for their children’s future post-secondary education by contributing $2,500 annually to the RESP account to get the government’s $500 education savings grant per child. Some parents even think that they need to have one RESP account for each child. Actually, there is a family RESP account that can have multiple beneficiaries. Any kid under the age of 18 in anyone’s extended family can be a beneficiary of the RESP family account. In addition, anyone can contribute to the family RESP account, but the contribution limits and government education savings grant still applies for each individual beneficiary in the account. Since the majority of the general population will get married and have kids one day, having an RESP category as part of the financial literacy curriculum seems like a logical choice. Here is a very thorough and well-written RESP article by Mike Holman
Tax Free Saving Account (TFSA)
Do you know that the Tax Free Saving Account may get taxed? Surprise? You’re not alone. For the individuals that over-contributed to their TFSA, they will be levied a 1% tax for each month on the amount over their contribution limit (either lifetime or annual). Since the TFSA was only introduced during the last major financial recession in 2009, it’s still relatively new and mysterious comparing to the RRSP and RESP programs. To ensure that the average Canadian can fully benefit from saving to this account, the financial literacy curriculum should consider adding a section for the TFSA.
Canadian Pension Plan (CPP)
In all honesty, I have very little knowledge of the CPP. I have always had this fear that the baby boomer generation will be depleting most of the CPP resources when they retired. The baby boomer generation does represent a significant portion of the population after all. With such a large portion of the population going from being contributors to recipients and not enough new blood to replace them, I don’t think that the CPP program is sustainable. I hope that I am wrong in this aspect so I can get in line to get my share of the CPP benefit when I retire. I have been contributing (not by choice) to the CPP every year since I joined the workforce. Some of the major questions that I have and still need answers to, are: what are the maximum CCP payment that I can get? At what age can I start receiving the CPP benefits? If I have an employer pension plan, how does it affect my CPP benefits? Can I get a lump sum instead of a monthly pay cheque? I would love to attend this section of the financial literacy curriculum when they offer it.
Old Age Security (OAS)
Another black box to me. I don’t have the confidence in any of these government programs when I retire. My fears may be overblown, but I don’t want to be at the mercy of any politicians’ hand out when I retire. This is why I work so hard to save money to ensure that I retire on my own terms. With that being said, I still need to know how my own income after retirement can affect the amount of money that I get in OAS payments. I don’t have any hope of getting any OAS payments, but if I get any, it’s going icing on my retirement cake. Once again, I would love to attend this section of the financial literacy curriculum when they offer it.
My Two Cents
Depending on how you look at it, this may be an exhaustive list or just a skim of the financial literacy curriculum surface. I’ve always believed that our school system lacked the financial literacy curriculum to prepare our kids with the required money skills to manage their finance effectively, efficiently and most important of all, responsibly. I hope that this post will motivate the average Canadian to push the governments harder to provide more financial literacy curriculum in our school system. In addition, if you don’t have basic knowledge of all the topics that were covered in this post, I’d encourage you to start your financial literacy journey. I really need someone to kick me from behind for lacking knowledge in the CPP and OAS area and start learning more about these two topics.