Personal Finance

Pay off debt, then start saving and investing

I took the plunge this weekend and expunged my debts to the depths of the hell from whence they came. It was a tough move for some reason, even for a cold, calculating accountant. Subconsciously, I held on to the debt in order to keep my asset balances high. Artificially high.

This is a bad move, and you don’t need to be a bean-counter to follow the logic. I had credit card debt at 18%, a personal line of credit at prime + 3%, savings earning me 3.5%, and a chequing account costing me the monthly plan fee less a paltry amount of interest. In summary, a net cost to me.

I had enough cash in the savings and chequing to pay off the debts, but for some reason I had held off on doing so for months, all the time allowing the interest costs to pile on. I felt more secure maintaining the artificially high cash/savings balances. Why is that?

It wasn’t until I started tracking my expenses using the so very Web 2.0 tool about two weeks ago that I realized the time had come to man up and pay the debt off. Only then could I save with a clean conscience, knowing I had no interest expense completely wiping out the interest I would earn on savings.

Note: I plan to write a post soon about It has really helped me get a hold of my expenditures and features a mobile version I can access on my cell phone to capture cash outlays as I make them.

So now you all know my dirty little secret. I’m an accountant and auditor, I find other people’s mistakes and control weaknesses, and until this weekend I wasn’t even managing my own finances like a pro!


Experts weigh in on interest deductibility issue

The Globe and Mail, a Canadian daily, has a feature on their website today where three tax experts from Couzin Taylor LLP and Ernst & Young LLP answer questions from readers about the interest deductibility “feature” of the Federal government’s budget.

Caribbean beachI’ve blogged about this complicated topic a couple of times now but never really felt I understood the issue as clearly as I could’ve. I think I made that apparent to my readers! The discussion on the Globe really helped me get the gist of this situation better than my rudimentary research before.

Some highlights:

The government has ignored the adverse macroeconomic impact of the proposals. The measure has specifically targeted double-dips that reduce foreign taxes. Reducing foreign taxes increases Canadian wealth and enhances Canadian companies’ ability to compete abroad. There is no benefit to Canada or hard working Canadians from the measure announced today, which increase foreign taxes.

Seems pretty counterproductive to hurt Canadian companies and think this is going to have any kind of positive impact on our country. This will reduce jobs here and abroad in Canadian multinationals and will not increase federal tax revenue here (but it will abroad).

In practice, companies headquartered in countries like the US and UK will have a competitive advantage as they are able to reduce their foreign taxes and thereby reduce their cost of capital, relative to Canadian companies. The budget materials suggest that other countries are considering adopting similar policies, but that remains to be seen. No other country of which we are aware has compromised the international competitiveness of its own multinationals to this extent.

Why are we enhancing the competitive advantage companies already have over our companies? Because those other countries have looked at the same measure in their own tax laws, but have yet to implement them? Sometimes it’s better not to be ahead of the curve.

The proposal as drafted encourages Canadian companies to deduct interest in the highest tax jurisdiction. In this regard, Canada has among the highest marginal tax rates in the industrialized world. In addition, there is often additional complexity and cost associated with obtaining a foreign interest deduction. Most companies will forgo trying to get a foreign interest deduction for these reasons, and will instead just take the Canadian deduction. This will increase foreign tax revenues and reduce Canadian tax revenues.

Wow. I guess a pretty important question is whether there was anyone in the Finance department warning the Minister of these very serious drawbacks to his plan, or whether they were just being ignored. This whole thing is approaching debacle status.


Canadian government backs down on controversial budget move

In late March I talked about the Canadian Federal budget, which had been recently released, and how it included a measure to prevent companies from deducting interest on debt incurred to fund foreign operations. I couldn’t understand the logic of the move.

Canadian ParliamentIt seemed strange for a conservative government normally known to be friendly to business. It also was inconsistent with how interest is generally treated for tax – that is, it is deductible if incurred to earn income both for businesses and individuals.

I wrote the blog post with more than a little trepidation, however, as I couldn’t shake the feeling that I might be missing something. The last thing I wanted was to appear the fool – perhaps the Finance Minister knew something I didn’t.

In the weeks that have passed since then, I have been joined by business leaders throughout the country decrying the move. It’s been sweet vindication reading every article featuring various business groups, executives and financial experts putting forward strong arguments against the now very controversial measure.

Now it appears the government is listening to us. They are “retreating” from the measure, and will continue to allow the deductibility of interest in these cases.

Companies will still be allowed to deduct the interest costs, but only once, Flaherty said Tuesday, claiming the measure was not aimed at eliminating the deduction but at corporations who were using offshore tax havens to claim the deduction twice — in Canada and in a foreign country.

The move was too much of a blunt instrument for the precise target Flaherty’s now claiming for the move.

On top of that, since when is it the Canadian government’s business what companies are deducting in other countries? Shouldn’t the government be focusing on establishing tax treaties with these countries, or at least working with other governments to put more pressure on countries with lax tax law?

Keep in mind I’m in way over my head here on this undoubtedly very complicated international tax issue. But it’s pretty nice finding out my initial thoughts about the move were spot on.

Terence Corcoran of the National Post has some smarter thoughts on the issue than I do:

Something is amiss in the ability of Canadian companies to deduct interest expense on their foreign investment. All serious reviews of the subject have concluded that the strange combination of Canada’s high corporate tax rates, interest-deductibility rules and the dense world of global tax law has produced a great distortionary mess that needs fixing. The question is how and when to fix it. Mr. Flaherty would be wise to announce that, in view of all the serious comment and inherent complexity surrounding deductibility, he will turn the subject over to a panel of experts to get to the bottom of the mess.

Something tells me I won’t be asked to be on the panel!


Budget move likely to discourage global expansion

Yesterday’s Globe and Mail:

The federal Finance Department is acknowledging it could reap a bonanza of additional tax revenue from a controversial budget move to scrap the deductibility of interest that companies incur to fund foreign operations.

I’m trying to understand the logic here but I can’t.

Caribbean beachI know this is money leaving the country, but shouldn’t the law focus on foreign ownership of the overseas operations at least, if that’s what this is about? After all, the money leaving has already been taxed anyway.

As well, this is inconsistent with how interest is generally treated for tax – it’s deductible if used to earn income. It was simpler that way, and when simplicity and consistency intersect within tax law, that’s a good thing.

And this from the CBC’s budget coverage:

The government will crack down on corporations that use tax havens to avoid paying taxes by eliminating the deductibility of interest incurred to invest in business operations abroad, improving information agreements with other countries and providing more resources to the Canada Revenue Agency to strengthen their audit and enforcement activities.

But I think the government could do more to stop this by focusing on the last two points: strengthening information agreements with the countries deemed tax havens, and increasing audits where there is suspected abuse.

Otherwise I expect foreign investment by Canadian firms to decrease sharply. It’s never a good thing when tax influences decisions, but this is going to hurt our global competitiveness too. It sucks when a few bad apples ruin it for everyone.

So it sounds like it’s similar to proposed legislation I blogged about a while ago in the US brought forward by a group which included Barack Obama.