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Financial Success Guide For Young Adults

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   I would like to start by thanking you for purchasing my e-book Financial
Success Guide for Young Adults. The reason I wrote this book was, after many
years working for a Financial Institution, I noticed a real lack of understanding
of basic financial concepts, knowledge and terms by young adults. Having a
Son that was just about to become an adult, I thought of all the ways I could
help him with his financial goals. I decided that there were a lot of other
young adults that could use the same knowledge and advice, put into a helpful
guide that they could understand. I certainly hope this book benefits you and
helps you to make informed choices when it comes to your finances. The
information and ideas in this book are my own and do not reflect or bias
where I have worked and is not intended to replace professional advice should
you require it. It is a general guide with basic principles to benefit the majority
of young adults age 18-34. The website links and information contained in the
guide are correct as of the date of publication.
Please feel free to email comments to my email- darla@finsuccessguide.com
I leave you with wishes that you will always have more than enough of
whatever you desire in life.

Sincerely,

Darla
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Chapter 1 Building a Strong Foundation
1)   Budgeting
2)   Saving
3)   Insurance



Chapter 2 Basics of Banking
a)   Banking
b)   Chequing Accounts
c)   Overdraft Protection
d)   Savings Accounts
e)   Term Deposits and Guaranteed Investment Certificates
f)   Retirement Savings Plans
g)   Tax-Free Saving Accounts
h)   Mutual Funds
i)   Investment Income Types

Chapter 3 The Truth About RSPs
a) About RSPs
b) Home Buyer Withdrawal Plan
c) Life Long Learning Plan
d) Supplementing Income Through RSPs

Chapter 4 Credit- The Good, The Bad and The Ugly
a) Credit Bureau Explained
b) Establishing Credit
c) Protecting Your Credit Rating
d) Credit Worthiness
e) Credit Products

Chapter 5 Tax Tips
a) Filing Your Return
b) Taxation Rates
c) Credits
d) Direct Deposit
e) Notice of Assessment
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               Building a Strong Foundation


   Building a strong foundation for your financial success may sound like a lot
of work. It doesn't have to be. Taking control of your finances and being
aware of how important they are, is the most important decision you can do
for your future, aside from education or training for employment. Having
control over your finances will ultimately give your control over your life
choices. You may think that at a younger age, you don't have much
expendable money, so how powerful can it be? Being financially responsible
now, right now, will give you more choices than you think. It may not seem
like much to you now whether you are responsible or not financially, but you
will see as you read this guide, that you can choose to give yourself choices
later, or leave yourself with very few. The fact that you are reading this guide
is an indicator that you are ready to take control of your finances.
Congratulations.

  I am going to introduce the subject of budgeting. Yes, I know, get the
groaning over with now. It's not as difficult or as onerous as it sounds. You
don't have to record every penny you spend or take all of your fun money and
buy bonds. I have a few simple ways to help you budget or plan your monthly
expenditures. A good idea is to not have all your monthly bills due at the same
time during the month or out of the same paycheque. Some payments cannot
be changed, but you can plan for them out of each cheque just the same. Pay
your bills first and foremost. Always. I will explain later in the credit chapter
why this is so important. Pay those first, and then you will know how much
you have left over. Plan ahead, even just in your head, how much of that left
over money you have to last you until your next pay. Think ahead what is
coming up in the next 2 weeks or month. Don't blow all your leftover money
on payday and leave yourself nothing for the next 2 weeks. That doesn't leave
you many choices for that period of time, does it? Have a good time, enjoy
your pay, but leave yourself some fun for another day. It is a long 2 weeks or
month otherwise.

  One of the basic and most important foundations for financial success is
savings. Whether it be to a Retirement Savings Plan, a savings account, or
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Mutual Funds. Savings help you to manage the bigger expenses, provide
security for unexpected expenses and build credit worthiness. The easiest way
to save is to have 'purposeful savings'. It is hardest to save when you just plug
money into a savings with no real purpose. It just sits there staring at you,
tempting you to spend it and not having justification to keep it saved.
Purposeful savings will help you budget for those savings and when you know
what you are saving for, it will make saving more rewarding. You will look at
your savings balance knowing what it is for , and therefore, less temptation to
spend it frivolously. There are several ways to save, depending on the purpose
of your savings. The easiest way to accomplish this is to determine what you
are saving for, how much you will need to set aside, and treat it like a bill.
Don't consider saving an option, but a forced saving that has to be done each
month or each pay, for a particular reason. Most savings plans can have
automatic transfers from your chequing account to your savings. Set it up on
a convenient date out of your account on payday, or the day after and treat it
like an automatic bill payment.

   The first type of savings is for bigger expenses such as car insurance, house
insurance, property taxes, etc. You can pay these bills monthly to the provider
of these products, but sometimes they come with a financing interest rate if
you receive the product, or you pay ahead of time with no benefit to you.
Paying yourself through savings ahead of time earns you interest in your
account and control of the funds. Most Financial Institutions offer free savings
accounts and Mutual Funds as a savings product. They pay nominal interest
for short term investing ( 1 year or less) but it is your money, you may as well
benefit from it until the bill is due. You can open as many savings products as
needed to achieve your savings goals. For example, your car insurance due at
annual renewal is $1800.00. Divide $1800.00 by how many months left until it
is due, and put that amount of money into a savings account. Let's say it is
$1800.00 and due in 12 months. 1800 /12= 150. Put $150 per month into a
savings plan specifically for your car insurance, and by the time it is due for
renewal, you will have earned a little interest and have the enough money to
pay it in full. If you had paid your insurance monthly, in installments or
payment plan, you could have been charged a fee for financing and possibly
interest on the amount owing as well. By saving for it, you have now not only
earned some interest, you have avoided paying extra fees and interest. It will
be very satisfying to be able to have that money available when the car
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insurance or any other large expense is due. Set up one for each of your large
annual expenses and it will make paying for them so much easier and less
worrisome.

   The next type of purposeful savings is less specific but also very important.
You need to have money set aside for unexpected expenses and occasion
expenses. Put away 5-10% of your net income each month to this account. If
you bring home $1500 in net income each month, put away $75 to $150 each
month into this account. This account is for unexpected events like car repairs,
or if an appliance in your home breaks down. It is also for things like that
concert you want to go to that you have to have the money for now, or your
friends want to go on a weekend trip, or it's the change of the season and you
need some new clothes or shoes etc. Here again you have choices. Now you
have a little extra set aside so you have a choice, to go to that concert, or buy
that toaster to replace the one that blew up this morning. You won't have to
panic or avoid paying a bill to do what you want. Though keep in mind, this
account is not for just anything you want to buy, it has to be special or
important enough to deplete your emergency fund for. Another reason for
this emergency fund is for occasions. Christmas, Mom's birthday, your little
Brother's graduation. You have to have something in the fund for these
occasions that you know are coming expenditures. Holidays and events can
be very stressful financially if you don't have money set aside for them.

  The last savings plan I want to talk about is a Retirement Savings Plan. I
wrote a chapter later in this guide explaining all the benefits of an RSP and
how to benefit throughout your life from these savings. You can contribute
approximately 18% of your gross income to RSPs, less any pension that you
contribute to through your employer. Start by setting aside 5-10% of your pay
to an RSP. Increase as needed to fund your particular savings goal.

  I know that savings plans may seem to take up a lot of your available
spending, however, treating savings as a bill helps to keep it in perspective.
You are going to have these expenditures whether you save for them or not, so
you are going to have to pay for them at some point. It is better to be prepared
and have the money available, than to scramble at the time they are due.
Start smaller for the emergency fund and the RSPs, increasing annually as you
get used to not having the money available for free spending. As an example,
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at my workplace, we had a Christmas Club where each employee that
participated, contributed a certain amount to a pooled Mutual Fund account.
On December 1st of each year, the accumulated contributions were paid out to
each employee along with any interest or growth income that was generated
from the pooled funds. It was a great feeling to have money to spend during
the holidays. The first year I started out contributing $20 per pay. I got used to
that amount over the year, so the next year I increased it by $5 to $25 per pay,
and kept increasing it annually as I got used to the new amount. You really
will get used to these automatic payments. At first you will have to make a
conscious effort to save. Like any habit, good or bad, it takes a determined
effort to get the habit started, however, after it becomes a habit, you do it
without thinking about it. It becomes effortless.

  An important foundation for financial success is planning for the
unthinkable. Insurance is a back up plan that is a very important component
to your financial well being. Life Insurance is a policy, designed to cover debts
you leave behind, a source of funds to replace lost income or support you
provided to your dependants. The amount of insurance depends on the stage
of life cycle you are at. Younger adults with no dependants would need
minimal, if you have dependants, you will need more. I won't belabour the
point as each circumstance is different and a Life Insurance Agent should be
consulted regarding types of policies and coverage that meets your needs.

   Creditor Insurance is Life Insurance and/or Disability Insurance and/or
Critical Illness Insurance that covers your for a specific debt instrument. It
could be for a loan, mortgage or line of credit. If you were to die, the debt
would be paid in full, leaving your estate free of that debt. If you become
critically ill, your payments would be made by the Insurance Company until
you are well enough to resume earning income. Some offer disability or job
loss insurance, which in the event you are unable to work, your payments
would be made. We all think when we are young we are invincible, however,
life happens to young and old alike. These are great coverages to have for a
small increase to your monthly payment on the debt. You have the advantage
of youth, which will make your premiums low and affordable. If you already
have pre-existing coverage at work, it is still a good idea to have creditor
insurance as the coverage at work may not be 100% and you'll need to rely on
that for all your other living expenses.
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   Home Insurance is a must have whether you own your home or rent. If you
own your home, the the Financial Institution where your mortgage is held, will
require fire insurance before funding the mortgage. If you rent, you should
always have contents or renter's insurance. The owner of the home you are
living in, insures the structure, but not your personal contents against loss.
Contents or renter's insurance is nominal compared to replacing items stolen
or replacing every single item you own in the event of a fire or flood. This is
very important. You don't want to be one of those sorry people in the paper
that not only lost their home, but everything they own except the clothes on
their back, and have to appeal to the charity of others, simply because they
didn't want to pay for, or think insurance was important.

  Building a strong foundation for financial success is the first place to start.
Like building a house, the foundation and structure of the house keep it
standing for as long as they are strong. You can decorate the house however
you like, but if it is a house lacking in strong foundation and structure, it will
deteriorate rapidly and be worth nothing. Start your financial life with a
strong foundation and the rest of your finances can build on top of that to
decorate your financial successes. As difficult as it may seem initially, to
implement these foundational principles, it will be well worth it. Start small,
and increase the amount of savings, and insurance as you adjust to paying for
them. It will become a good habit, that will benefit you for the rest of your life.
Get started today on a regular routine of budgeting, planning and saving, and
you will be well on your way to always having enough.
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                            Banking Basics

  Finding a Bank (Financial Institution) that fits you is something you should
take seriously. Are you still banking where you had that account since you
were a kid, or at the Bank your parents bank at? There isn't necessarily
anything wrong with that, but are you banking there for the right reasons? Or
have you just not thought about it? Not all Banks are the same and not all
Bankers are the same. It is important now that you are an adult, to form a
relationship with your Bank and a Banker. You have an opportunity now to
benefit from the products, services and expertise that they have to offer. You
will be coming to events in your life where you will have to do more than just
put money in and take money out. It is important to feel comfortable dealing
with your Bank, and doing business at the Bank that works for you. Banks
have changed. They want your loyalty, they want to have a relationship with
you. Young Adults are the up and coming consumers. You are the ones that
are going to need mortgages, loans and investment strategies. You are the
ones that are going to keep the Banks going for the next generation. Having
worked for a Financial Institution for 18 years, I have really enjoyed helping
young people with their finances. But, I also saw the gap in the understanding
of finances by most of the young people I was trying to help. This was the
impetus for this guide. Somehow in all the courses at school and the guidance
by parents, the understanding of financial basics for young people are
missing. There are a lot of other Bankers like me that would love to help you
plan a strategy, answer questions, give you information, and help you with
your financial needs. Find one that fits for you.

Find out about your Bank. What hours are they open? Are they available
across country, or across the province should you be travelling? Do they have
widespread ATMs? What are their service packages? Do they offer online
banking? All these things can make your banking easier. I will go over briefly
the main types of investments and products available at most Financial
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Institutions. For more in depth product descriptions, you should see your
Bank, or compare Banks online.

   Bank cards( ATM cards) are a necessary tool for our convenience based
world today. They are used to identify you at your Bank, to access the bank
machine, and to pay for purchases at retailers. If you use a bank machine that
is from your Bank, there is no fee other than a transaction on your account.
However, if you use a machine that is not from your Bank, there can be a fee
up front at the machine your are using, and again one with your month end
fees from your account. These are interac fees that are passed down to you
from the Banks. If you do not have access to a machine from your Bank, you
can get cash back with a purchase at some retailers and save you the extra
fees. These fees can add up very quickly, and become very costly, especially if
you are paying two fees for each withdrawal. Planning ahead if you are
unsure what is available if you are away from home, will help to prepare for
these situations. Make sure you are aware of your limits on your bank card.
There are different limits for cash withdrawals, direct payment purchases at
retailers and for deposits made at the bank machine. Some or all of your
deposits made at the bank machine could be subject to a hold. Make sure you
understand the limits of your card. Discuss with your Banker to find out what
they are, and make adjustments if needed. Other uses for a bank card are,
online banking and telephone banking. These are a great way to check your
balances, pay your bills, transfer between accounts, and maintain your
personal information. You can also apply for credit, open accounts and get
information about additional products and services offered by your Financial
Institution.

  Chequing accounts are your main operating account. Most people don't
write cheques anymore, but this is the account for your monthly expenditures,
for your pay, and the majority of your credits and debits. This is the one
account that all Banks want you to have with them. It is the core that all your
other banking is built around. There are several different types of chequing
account packages. The main focus when choosing an account package is to be
honest with yourself about the amount of transactions you will be doing in a
month. Transactions considered for fees are withdrawals of any kind, in
Branch, ATM, direct purchase at retailers,and any automatic payments from
your account. Taking the package that includes 10 transactions when you use
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your bank card for every purchase, will only cause you to incur additional fees
at the end of the month that add up very quickly and can be much more than
the more expensive package would have cost you. Watch your month end
fees, and if need be, change your package accordingly. There is no point in
paying additional fees. Automatic payments or direct debit from your
account, is an easy way to pay your bills, transfer to savings and other
investments, and pay your credit. This account is your 'working supply' of cash
that you use for all your day to day banking needs.

  Chequing accounts can have overdraft protection available to you if you
qualify for the credit. This is a slippery slope indeed. If you feel you need
overdraft protection as an emergency in the event your payment comes out
before you can scramble to the bank on payday, fine. However, too many
people end up being constantly in their overdraft and it becomes a very bad
habit. Overdraft protection can be one of the most expensive forms of credit
as the interest rate is usually very high, even higher than most credit cards.
Interest is charged from the day you use it until it is fully paid. Consider the
alternatives of changing payment dates on your automatic debits, or having
your pay direct deposited. Overdraft protection is a good safeguard if you are
out of town a lot, or have trouble getting to the bank, it can be there for the
occasional oops if needed. That is all it should be used for.

   Savings accounts are a very useful tool that I have already talked about in
depth in the Building a Strong Foundation chapter. There are usually a few
types of savings accounts to choose from depending on the amount of money
you are going to be keeping in the account. The interest rate will vary
depending on the balance you keep and the type of account it is. Most savings
accounts do not have a monthly fee, however, they usually only allow for a
minimum amount of withdrawals per month, and can get very costly if you use
it more than the allowed amount. Savings accounts pay interest to the
account monthly and are compounded daily in most cases.

  Term Deposits and Guaranteed Investment Certificates ( GICs) are a deposit
instrument that will pay you a specified rate of interest for a specified period
of time. In most cases, you need a minimum of $1000 to invest for 1 year or
longer, and $5000 to invest for under 1 year. The principal investment
(amount you initially invest) in these products are guaranteed by CDIC (
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Canada Deposit Insurance Corporation) and are a very safe investment. They
are generally not cashable before the anniversary date (date they are due)
unless otherwise specified. Term Deposits and GICs earn interest income that
can be payable monthly, semi-annually, annually or on the day they are due.
Some have compound interest or simple interest. To learn more about CDIC
insurance coverage, see your Financial Institution for brochures and
information.

  Retirement Savings Plans are a registered savings plan for retirement. I
have dedicated a chapter to these investments - The Truth About Retirement
Savings Plans. RSPs are available in the form of an RSP savings account, Term
Deposit/GIC, Mutual Funds and Brokerage accounts. Minimum deposit
amounts for Term Deposits and GICs are generally lower than for
non-registered investments. RSPs are a registered plan which means that they
are registered with Canada Revenue Agency, and all deposits and withdrawals
are reported to them for taxation purposes. Any income generated in an RSP
account, are not taxable as long as they stay in the registered account.
Withdrawals from an RSP are subject to a Withholding Tax of a minimum 10%
that is remitted to Canada Revenue Agency on your behalf. This will help to
offset the taxation on this amount, that then becomes income taxable to you
in the year of the withdrawal.

  Tax-Free Savings Accounts(TFSA) are a registered account. The benefit of
the TFSA, is that any income earned in the account, is not taxable as income.
The contributed amount themselves are not deductible. Your allowable
contribution limit is $5000 per year. Over-contributions are assessed a
penalty by CRA. Contributions are cumulative, which means that if you don't
contribute the maximum allowable for one year, the unused contribution
room is added to the following year's maximum allowable contribution limit.
For example, if you invested $2000 in one year, the next year, you can then
contribute $8000 instead of just the $5000. As well, any withdrawals made
during the year from the TFSA, affect the contribution room for the following
year, not the year in which the withdrawal was made. For example, if you
contributed the maximum $5000 in this year, and withdrew $3000, you
cannot re-contribute the $3000 this year, as you have already contributed the
maximum, however, you can add the $3000 to next year's contribution limit
and contribute $8000 for the next year. This product is a great way to
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maximize your investment income, by not having to claim the income on your
tax return, and therefore, keeping all investment income from this account.
Tax-Free Savings Accounts are available in savings account, Term
Deposits/GICs, Mutual Funds, and Brokerage Accounts. To learn more about
the Tax-Free Savings Accounts click on the link below to go to CRA website
page for Tax Free Savings Accounts.
CRA- TFSA[1]

   Mutual Funds are pooled funds, that hold various stocks, bonds and other
deposit or credit instruments. When you purchase Mutual Funds, you buy a
number of units in that particular fund. The value of each unit itself will
fluctuate and this determines the market value of the account on an ongoing
basis. Mutual Funds can offer interest income, growth income and dividend
income. When you purchase mutual funds, you pay the current price per unit
for that day. ex- if the unit value was $10.57/unit and you purchase $50 worth
of that Mutual Fund, you would have been able to purchase 4.73 units. No
matter the value of the fund, you will still own that amount of units. If the
value of your Mutual Fund account drops, you still have the same amount of
units, the price per unit is just lower than what you paid for it. The purchase
value, is how much you paid for it when you bought it, and the market value is
how much it is worth now. If you buy mutual funds regularly through a
savings frequent purchase program (contributing bi-weekly or monthly), you
can benefit from 'Dollar Cost Averaging'. This means that basically, if you
contribute more frequently, the average cost of the units may end up costing
you less than if you bought a larger amount all at once for a higher price. For
example, if you bought $50 worth, one month at $12/unit, you would have
bought 4.16 units. If the next month you bought another $50, and the unit
value is $9.50/unit you would buy 5.26 units. Your average cost/unit would be
$11.26/unit. You now have 9.42 units costing you $100. Had you bought $100
worth while the unit value was $12/unit, you would only have 8.33 units.
Obviously the trick is to buy when the unit value is low, but most people don't
have time to keep an eye on Mutual Fund prices. Mutual Fund unit values are
determined at the close of the Stock Market each day which is 4:00 E.S.T.
Because of this, you cannot withdraw your funds until the unit value has been
determined. Therefore it is good to keep in mind, that you cannot have ready
access to your mutual fund account balance as you do a savings account. This
can be a good thing, as you cannot access it as easily. There is too large a
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variety of Mutual Funds to explain them in depth, and each Financial
Institution carries it's own diverse portfolio of funds to offer. Mutual Funds
can be either registered for RSPs and TFSA, or non registered for regular
savings. The potential risk for each fund varies as does the potential return.
Mutual Funds can either be short term or long term. Principal amounts
invested in a Mutual Fund are not guaranteed. Mutual Funds can only be sold
by a licensed Mutual Fund Representative.A Representative will help you to
decide what fund is right for you depending on your investment objectives,
length of time you plan to keep the money in the account, your level of risk
tolerance and other financial variables. Talking to a Representative is the best
way to investigate and find out which Mutual Funds are right for you.

   I would like to talk about different types of income from investments. I have
mentioned what types of income each investment generates. Different
income types benefit you in different ways, and have different tax treatment.
Interest income generates a steady source of income and can be used for
compounding to increase your rate of return. Interest income is taxed at
100%, meaning that if you earned $100 from an investment, you would add
the entire $100 as income on your tax return. Dividend income is payouts
from your stocks in mutual funds and can be re-invested or paid into the cash
portion of the investment. Dividend income has a dividend tax credit that is
applied on your tax return to offset the income. Growth income which is the
growth or increase in value of your investment. Growth income is reported as
Capital Gains on your tax return, and has an allowable limit, which reduces
the amount you have to claim as income. You should always try to diversify
your portfolio to help reduce rate risk and generate different types of income.
It is a good idea to have some savings, some term/gic and some Mutual Funds.
To have all your money in one investment vehicle, limits the income you can
generate. If you have all your money in terms and the interest rates are low,
that will limit your ability to invest at a high rate. If you have all your
investments in Mutual Funds, and the stock market has dipped into a low
period, you won't be able to buy as many units, thereby limiting your
purchasing and income earning power. Even if you only feel comfortable
investing in Term/GICs for the safety factor, you should have your due dates
come due at different times for each investment. That way, at one of the due
dates, the interest rates could be higher, but if they are all due at the same
time while interest rates are low, you have to renew at the lower rate. This is
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reducing your risk by spreading out your investments, as well as reducing your
risk on poorly performing investments.

  I have only covered the basics of what a Financial Institution has to offer.
Each one has a variety of products and services to meet your needs. It's up to
you to find one that suits you. Don't be afraid to go in and talk to your
bankers. They are there for you. If you don't like something about your
banking experience, or are upset at something to do with your bank, don't be
afraid to say something. Give them the opportunity to set it right or to help
you make your experience better and more comfortable. If they can't or won't,
perhaps it is time to find one that can. You are the paying customer, and have
a right to a high level of service. There is someone there that is waiting to help
you with your financial success. All you need do is ask.
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        The Truth About Retirement Savings Plans
  You are probably wondering why I am including a whole chapter on RSPs
when this is a book for Young Adults. Well, RSPs aren't just for retirement
anymore. Retirement Savings Plans are a very flexible, useful product for
young and old alike. Thanks to the government (yes, that's right), changes
have been made to the traditional RSP as well as a change in perspective in
how they are thought of. This investment product has become a wonderful
means to assist your lifestyle and financial goals throughout your life

  Before I begin however, I want to clarify that I am talking about Retirement
Savings Plans or Registered Retirement Savings Plans and not Pension Plans.
The difference being, RSPs are investments contributed by you, at a Financial
Institution, whereas, Pensions, are benefits offered to you by your employer.
Pensions are locked-in until a specified age and generally have a vesting
period (specified period of time you must be employed by the employer
offering the pension). Pension Plans are a great benefit and another way to
pad your financial future success. However, for the purposes of this chapter, I
am only referring to RSPs.

  RSPs traditionally have been a tax-deferred savings plan with the intent
being that you save money for when you retire to supplement your pension
income from employment and/or CPP/OAP. Tax-deferred does not mean that
you will not have to pay tax on this income, you will just have to pay it later,
when you withdraw the funds from your RSP. Any contributions to your RSP,
are deducted from your total income on your tax return, to calculate your net
income. Only net income is used to calculate tax payable. You can contribute
approximately 18% of your net income to RSPs. Once you have filed your
return, and receive your Notice of Assessment, it will give you the amount you
are allowed to contribute for the following year. Over-contributions are
assessed a penalty by Canada Revenue Agency at a rate of 1% per day.
Withdrawals to the RSP are taxable in the year of the withdrawal. The idea
being that you would be earning less income at that time, so withdrawals to
the RSP would then be taxed at a lower rate due to being in a lower income tax
bracket. Withdrawals from an RSP are considered income and are subject to
taxation at the specific tax rate, depending on your total income for that year.
As well as being tax deferred, all income generated in an RSP, is non taxable
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for as long as it stays within the RSP. RSPs are considered long term
investments. Considering the power of compound interest, even small
contributions made when you are young, will continue to compound and earn
income and become a large amount over the long term. For example, if you
contributed $50 per month for 30 years you would contribute $18000. If you
earned a rate of 5% and compounded the interest monthly, after the 30 years,
you would have $41612.93. You would more than double your investment
simply through compounding interest. It would be more, if you had a higher
rate of interest at any time during the 30 years. So, even a small monthly
payment could net you a nice amount. Consider how much you would have, if
you contributed more? It is because of this, that it is so important to start
contributing as early as you can, even if it is a small amount.

  The traditional function of the RSP has changed greatly over the last decade
or more. The main change has been the Home Buyer Plan. This is an initiative
by the Government to help people to buy homes. You can now use money in
your RSP as a down payment on a home. You can withdraw funds in your RSP
(up to $25000 ) without paying income tax on the amount withdrawn, as long
as you re-contribute the minimum amount owing in the year it is due. You
have 15 years to pay back the HBP, in payments of 1/15 of the amount
withdrawn. ex- if you withdrew $25000, you would have to re-contribute
$1667 every year to your RSP and report it on your tax return as a Home Buyer
repayment. This has allowed many homeowners to supply their
downpayment on a home with before tax dollars. Meaning that they are using
money that has not had income tax paid on it yet. If you saved for a down
payment in a savings account, you would be using after tax dollars ( money
you would have already paid tax on ), so potentially, less money saved. As
well, interest income earned from a savings account or Term Deposit/GIC is
taxable as income whereas income generated in an RSP account is not. To
learn more about The Home Buyer Plan click on the link below to go to the
Canada Revenue Agency Home Buyer Plan information page.
Home Buyer Plan CRA Info Page[2]

  An additional change to the RSP is the Life Long Learning Plan. You can
withdraw up to $10000 from your RSP to put towards your education. You
have a maximum of 10 years to pay back or re-contribute to your RSP. There
are too many variables as far as repayment amount and when you will have to
                                       18



start paying money back to your RSP to explain here. If you would like more
information on the Life Long Learning Plan, click on the link below to go to the
Canada Revenue Agency Life Long Learning Plan information page.
Life Long Learning Plan CRA Info Page[3]

  So, you're not planning on buying a home anytime soon, or going back to
school and you have invested all this money into your RSP. Now you have to
wait until you are old and gray to see the benefit. A good idea, I'm certainly
not against saving for retirement at a young age, in fact you should be doing
that as part of your financial plan. However, there are still more uses for an
RSP if needed. Retirement is not necessarily the only time you may fall into a
low income time of your life. In fact, there may be other times in your life that
you fall into this bracket while your expenses are very high. If you have small
children or decided not to go back to work full time after maternity leave, your
income will be less. You can supplement your income with RSPs. You may
work your butt off for 3 years to go on that six month sabbatical and tour
Europe. You will only have six months worth of income to declare in that year.
Again, you could supplement your income with RSPs. Change your perception,
think of RSPs as a 'tax deferral savings program'. They can be used in many
ways. Just bear in mind, any withdrawals are added to any employment and
other income on your tax return, so you don't want to withdraw unless you are
in a lower than usual income year. Which is generally after you retire and are
no longer generating employment income. So please, save earnestly for your
retirement as well. The younger you start the better. Remember the power of
compounding interest. You'll be very happy you started young, when you are
old and gray and living a fantastic, comfortable retirement.
                                         19




           Credit: The Good, The Bad and The Ugly


       Credit is a necessary evil for today's society. Unfortunately, all too often,
it is used to excess, and has had a negative impact on a lot of people's lives.
Credit comes in a variety of forms, and when managed properly, will help you
to attain your financial and life goals. Let's face it, we can't all pay for
everything in cash as much as we would like to. Credit is sometimes necessary
even just to purchase online, or reserve a hotel. Credit definitely has it's uses
and can be used to your benefit. I would like to cover the different types of
credit, how to manage your credit, how to build a strong credit rating, how to
protect your credit rating and what exactly is a credit rating in relation to your
financial success.

  I would like to first explain about Credit Bureaus. There are two main credit
reporting agencies ( often referred to as Credit Bureaus) that gather credit
information. They are Equifax Canada Inc., and TransUnion of Canada. They
are strictly governed by Federal and Provincial laws. These reporting agencies
store and maintain credit information about individual consumers in Canada.
Members of the credit reporting agencies include Banks, Finance Companies,
Auto leasing, credit card companies and retailers. The information held at the
Agencies is for use by these members. Companies that grant credit to
consumers, report to these agencies regularly, providing information about
their customers' credit and payment activity. Information provided on the
individual credit reports include, personal information such as aliases,
address, employer, SIN, and birthdate. Details of all your credit facilities,
including amount borrowed, when it was granted, how much the minimum
payment is monthly, the amount you still owe, and whether you have made
your payments on time or not. Any public records such as bankruptcies or
court judgements made against you. Collections made by a collection agency
also show on your bureau and whether or not they have been paid, what date
they started to collect, if any payments have been made. Each time you apply
for credit, it is also recorded on your report, whether you were granted the
                                         20



credit request or not. Closed credit facilities are also recorded on your report
to show past credit history.
Any time you apply for credit and fill out an application, you are asked
permission to allowing the credit granting company to access your credit
report. They use this report to decide if from past credit history, how much
credit you currently have outstanding, and any derogatory credit history, if
you are eligible to obtain the credit you are applying for. This is why it is
extremely important to keep your credit clean.

    It is sometimes difficult as a young adult to build your credit. It seems like no
one will give you credit until have had credit. Some Financial Institutions are
willing to help out someone with their first credit card. Take advantage of this
if it is available to you. Charge one thing on your card each month such as a
tank of gas, or some other necessary item. Pay off the amount as soon as the
bill comes in. It only has to be for a minimal amount as long as it is paid every
month. This will help to establish your credit. Another way is to get a cell
phone in your name. This contract does report to the Credit Bureau and will
establish credit for you. One or two types of ongoing credit is enough to get
you started. One credit card is enough. Your credit will not improve
necessarily by having all kinds of credit at once. Just a few to show that your
are credit worthy and that you pay your bills on time. Unfortunately, paying
your rent and utilities does not report on your credit bureau, so that won't
help you establish credit. These are monthly bills that are due ahead of time,
or on a monthly basis, so are not an actual credit product. However,
collections of these items if unpaid, will report. When applying for credit,
there are a few things that your credit granter will look for when deciding if
you qualify for the credit you are asking for. They look for any past credit
history, if you have any pattern of savings, how long you have been working
for your current employer, and your capacity to repay. Savings show a pattern
of self discipline and something to fall back on if you need to. Working for the
same employer or at least in the same employment industry, shows stability.
Constantly moving home addresses shows instability. A relationship with the
Financial Institution helps as well. Basically, if you were going to lend
someone money, you want to know whether they have paid someone else
back the money they owed them, that they aren't going to quit the 10th job
they have had in the last year, you want to know where to find them, you want
to know they are able to afford to repay you the money, and you want to be
                                        21



sure you will see them again in the event they miss a payment. These are all
the things that will be looked at when you apply for credit.

   It is very important to protect your credit rating. Too many times, people
ignore it and think they can fix it later, or make some excuse why they ran into
hard times. I have heard so many times, " well that was when I was young and
stupid". Well, that doesn't cut it once you have become an adult. It is an
excuse to be irresponsible and being irresponsible comes with a penalty. That
penalty is not being able to get approved for credit for quite some time after
the period of stupidity. A poor credit rating, slow repayment (being 30, 60, 90
days late on bills), any collections you owe take a very long time to come off
your credit report. Just because you have paid these amounts back, doesn't
mean the history of them isn't still there. One item that comes up time and
again is cell phones. Either young people themselves or the parents that sign
up for the contract, get hit with the collection when the cell phone plan is
dropped. When you sign a contract for a cell phone, you are signing a binding
contract to either pay your monthly fee as agreed, or pay the amount that is
owing to pay out the contract. You cannot just stop paying and switch to
another cell phone provider. This unpaid contract then goes to collections and
is put onto your credit report. This is a widespread problem, and something to
be taken seriously, since it could affect your credit granting for many years. I
have also seen collections for unpaid video rentals that the customer just
never went back to pay. For as little as $5- $10 in unpaid charges, you can ruin
your credit report. Pay your bills always. Just remember, if you do have credit,
pay at least your minimum payment amount each and every month and never
skip out on bills. Having a pristine credit history will make your life so much
easier. Even the cash back hold amount at your bank machine, is granted by
your Financial Institution based on your credit rating. Trying to get a
mortgage or a loan can be very difficult if your credit is not in good standing.
It takes years for bad credit, even paid up bad credit, to fall off your credit
report. This is one area of your life you don't want to be irresponsible. It would
be disappointing to save enough of a down payment to buy that car, or that
home, only to be denied credit for the amount you need to borrow, because
you didn't think it was a big deal to pay your cell bill or your visa bill on time.
No do-overs. Once done, no amount of explaining or whining can change that
report.
                                       22



   Other than making sure your bills are paid as agreed, there are a few other
ways to protect your credit and credit worthiness. Make sure that your credit
is being reported properly. You can check your credit report through Equifax
Canada Inc. or TransUnion Canada online.
Equifax Canada Inc.
TransUnion Canada
It is a good idea to check it once a year. This also ensures that no one else has
been using your name or Social Insurance Number to obtain credit. Your
Social Insurance Number is a very important document, and should be
protected properly. Do not give out your SIN except where required by law.
For purposes of tax reporting, or for communications with government
agencies or credit reporting agencies, your Financial Institution and employer
will require your SIN. Never give your SIN over the phone or on the internet.

 There are a few ways to ensure your credit worthiness. Don't apply for
unnecessary credit or keep applying for all kinds of credit. All these credit
requests show on your credit report, and bring your overall credit score down.
Having unnecessary credit will increase the potential credit you have
available to you. Credit granters use a formula to qualify you for new credit
that uses how much credit you already have available to you, added to your
housing costs, any other fixed payments, plus the new credit. This is divided
by your annual gross income, to get your Total Debt Ratio. This ratio cannot
exceed a certain limit. The amount of available credit you have in credit cards
or lines of credit, whether you use them or not, is seen as potential debt. This
means that if you have a retail card, a gas card, a Mastercard and a VISA,
these are all potentially usable credit. If you have a card that has a limit of
$5000 but you only owe $40, it is still going to be calculated at the $5000
because you could potentially charge up to $5000 the next day after receiving
the new credit. Limit it to what you need, and that is all.

  There are several different types of credit. These are the basic descriptions,
and again, since most Financial Institutions offer varied products, please see
them regarding specific product details.

  Loans are pretty straight forward. The lender lends a certain amount of
money, for certain period of time, at a set rate of interest. You make monthly
payments that will enable the loan to be paid out within the specified
                                       23



amortization of the loan. Loans can be from 1-5 years and can usually be paid
in full anytime without penalty. Loans can be for automobiles, investments,
furniture and many other things. They can be unsecured, or secured by the
item you are purchasing or by investments. If the loan is secured, it usually
will have a lower rate of interest. The payment amount remains fixed for the
duration of the loan.

   Lines of Credit are a revolving credit product. This means that you have a
credit amount available to you and as you borrow, then repay, that credit is
then available to you again. Much the same way a credit card works. This
makes Lines of Credit a more flexible and longer term credit product in that
you can keep it for however long you choose and use it as much as you need, it
isn't gone when the amount owing is paid in full. Repayment on a Line of
Credit can be more initially, since it is paid back at a percentage of the amount
owing, but then as you pay it off, the minimum amount owing per month
decreases. You can repay a Line of Credit at anytime without penalty. Lines of
Credit can be accessed like an account through your bank card, internet
banking or telephone banking as well as cheques, making them convenient
and very easy to use. Lines of Credit can be unsecured, or secured with
investments, or equity in your home ( called Home Equity Lines of Credit).
Student Lines of Credit are a special product that have a repayment of interest
only for the period the student is enrolled in an acceptable post-secondary
education and for 1 year after graduation. When the 1 year grace period is
over, the repayment returns to a percentage of the amount owing plus interest
monthly. Secured Lines of Credit offer a much lower rate of interest than
unsecured. Revolving credit can be harder to be approved for, since the credit
is available to you again, once the amount owing is paid off. You will need a
much better credit rating, and personal stability to be approved for a Line of
Credit as apposed to a fixed term loan.

  Credit cards are the most common credit product. It is very difficult these
days to be without a major credit card. They are needed to rent a car, make
purchases online, reserve a hotel room, and various other times where cash or
direct debit are not available to use. There are many different types of credit
cards with different rates and benefits available today. Check around and see
what benefits are useful to you. The most important thing to remember about
credit cards is, that you should have the money available to you , to pay for
                                       24



your purchases at the end of the month. This keeps you from living off your
credit cards. Most credit cards have a minimum 3% repayment amount per
month. Credit cards can be a very expensive form of credit. Make sure you are
aware of the interest rate of your card. You won't have to pay any interest on
your card, if you pay the balance in full by the due date. If you don't pay the
entire balance by the due date, the amounts charged during the month are
then charged interest from the day they were posted. Cash advances are
charged interest from the day the funds are advanced to you. Some credit
cards offer lower interest rates on balance transfers, than on purchases or
cash advances. Be aware however, that when you do make a payment on this
card that your payment is applied in the order of the lowest interest rate
balance first, and the highest last. In the case where you have purchases and
low rate balance transfers, it is applied to the purchases first and the balance
transfers after. Some retail stores offer a 'do not pay for 2 years' type of
promotion for their products if you have their credit card. This is not a bad
deal if you need to purchase a major appliance or furnishings. However, a
word to the wise, you will have to pay a deferral fee, your taxes are due up
front, and it you do not pay for that purchase on the due date in 2 years, or
whenever it is due, they will charge you back interest for the whole 2 years
that you have not paid. So, make sure you pay that off when it is due. You can
of course pay it off before then, interest free, or make monthly payments to it
so that it is already paid in the 2 years, and other than the deferral fee, it
would be an interest free loan.

  Mortgages are the one biggest credit product you will have in your lifetime.
Mortgage rates, terms, and conditions are so varied, that you really need to
have an open discussion with your lender to find out which one is right for you.
Mortgages are either conventional or high ratio. To understand, Loan to
Value, means- how much you owe on the home, compared to the appraised or
market value of your home, in a ratio. If your home is appraised at $200000
and your mortgage is for $160000, your Loan to Value (LTV) is 80%. $160000
divided by $200000 is .80. A conventional mortgage is up to 80% LTV and a
high ratio mortgage is any LTV over 80%. The difference being, in a high ratio
mortgage you will need to apply for insurance to cover the amount being
loaned to you by your lender, that is more than the 80%. This adds extra fees
to the mortgage amount. The maximum LTV for a mortgage, insured or not, is
95%, making the minimum downpayment for any home 5%. One of the
                                       25



Insurance companies that offer this product is Canada Mortgage Housing
Corporation (CMHC). They have a wonderful website full of information about
buying a home, maintaining your home and other information for existing
and potential homeowners. Click the link to go to their website. Canada
Mortgage and Housing Corporation [4]
  A mortgage can be amortized for up to 30 years. This is the life or length of
borrowing for your mortgage. Inside the mortgage, you choose term and
interest rate that set the payment amounts. Repayment amounts are fixed for
that term. After the term is up, you can renew the mortgage to another term
and interest rate, as often as it takes until the mortgage is paid out. You can
pay monthly, semi-monthly(2 times per month), weekly, or bi-weekly(every 2
weeks). Paying bi-weekly or weekly, pays your mortgage off faster, since you
will be making extra payments throughout the year compared to monthly and
semi-monthly. Paying more often decreases the overall amount payable more
quickly, thereby reducing interest costs. This decreases the amortization of
the mortgage by a few years without increasing your payment, or making
extra payments.
  Mortgage terms can be 6 months to 10 years in length. They can be open
mortgages , which means that you can pay any amount during that time in
addition to your regular payment amount, or pay off your entire mortgage.
An open mortgage is useful if you are wanting to sell your home, and don't
want to lock into a longer term, thereby having to pay interest penalties for
paying your mortgage off when you sell. You can also lock in your mortgage
to a closed, or fixed term during the open term with no penalties. A locked in
or closed term, has repayment penalties if you pay more than the allowable
amount per year. Most institutions allow you to make some principal
reduction payments over and above your regular payments and allow you to
increase your regular payment by a certain percentage. The conditions can be
explained to you by your lender. A fixed term mortgage has a fixed rate of
interest for the entire term. You lock in at a set interest rate, and it doesn't
change until the renewal at the end of the term. There are also variable rate
mortgages that have a rate that is a certain percentage above or below prime.
Prime is the banks prime lending rate, that can change along with the Bank of
Canada rate. For example, if you have a prime + .5 variable rate mortgage
with a term of 5 years and prime is currently 3%, your rate of interest would be
3.5%. However, if prime were to rise to 5%, your rate would move to 5.5%,
and conversely, if it were to fall to 2%, your rate would lower, to 2.5%. The
                                       26



advantage to a variable rate mortgage , is that you can take advantage of the
lower rate, if the prime rate decreases after you sign your mortgage term.
Your payment amount stays the same, so you are paying less interest and
more principle each payment if this happens. This allows you to pay your
mortgage faster since you are paying more principle per payment. Of course,
on the other hand, if the prime rate increases, you would be paying more
interest and less principle. With variable rate mortgage, even closed
mortgages, you can lock into a fixed term mortgage at any time. You may
want to do this, if the prime rate is increasing too much, and you would then
prefer to lock in your rate so that it doesn't fluctuate anymore. Repayment
privileges are the same for a closed variable rate mortgage as they are for a
fixed term mortgage.

  Home Equity Line of Credit is another mortgage type that is much different
than other mortgages. HELOCs can not be high ratio mortgages, which means
the maximum loan to value must be 80% or below. The difference with a
HELOC is that it is a revolving credit product. As with other lines of credit, as
you pay down the principle of the mortgage, the credit available increases,
and is available for you to use again for any purpose. For example, if you
originally took out a HELOC for $300000, payments made have decreased the
amount owing to $250000, you then have $50000 available credit to use for
any purpose, including home renovations, car purchases, holidays, or
investments. Home Equity Lines of Credit are interest only payments. You pay
only the interest every month, and the principal payments are made by you
when you choose. This makes it very affordable, and flexible, since you can
pay extra anytime you choose without penalty, or just pay the interest owing
each month. The interest rate is set at the time of application, as a prime + %
interest rate. However, you can lock in all, or a portion of the amount owing
on a HELOC to a fixed rate term if you choose. Home Equity Lines of Credit are
also available as a second mortgage for equity take out, to do renovations, or
to have as a secured line of credit. For example, if you had a home that was
appraised at $400000 and you had a conventional mortgage for $150000 on
the home already, you could have a HELOC using the equity in the home.
LTV 80%= $320000 (80% of $400000)
$320000 - $150000 (amount already mortgaged)= $170000 equity available.
Home Equity Lines of Credit are a very flexible product and are widely used for
homeowners that have equity in their home already due to low mortgages, or
                                       27



increase in market value of home from house price increases.

   As you can see, credit comes in many forms, and some are simple, some are
complicated but all are very useful. However, in order to benefit from credit
products, you have to treat your credit rating with respect. Use credit wisely,
don't abuse it, and you'll have many options available to you when you need
it. Taking care of your credit is up to you.
                                        28



                                   Tax Tips
I'd like to start by mentioning that I am not a tax expert, tax preparer, nor have
I ever worked for Canada Revenue Agency. These are tips and suggestions
that I thought were important enough to mention as part of this guide. Taxes
can become very complex and it is best to consult a tax preparer, Canada
Revenue Agency, or online resources for tax questions or information not
covered here.

  Any time you are employed or earn income, you have to file a tax return.
Always file your return every year. The main reason for this, other than your
responsibility as a citizen, is you could be missing out on tax credits, grants, or
money you would otherwise be getting from the government if you had filed
your return on time. Filing multiple years together won't necessarily backdate
any credit you would have received. Some of these tax credits or grants come
up unexpectedly, such as credits paid to offset cost of heating and
environmental credits. If you hadn't filed your return in those years, you
missed out on them along with any other credit you may have qualified for.
  When preparing your return, apply for all tax credits to see which ones you
qualify for. Make sure you have all your receipts before filing your return. You
may miss out on some deductions if you don't wait for all slips to come in.
some deductions such as charitable donations, are allowed to accumulate and
can be used in the subsequent year, if not needed in the current year to lower
your income or tax payable. It is important to keep in mind the tax brackets.
Your income is taxed at the one tax rate and any income over the next tax
bracket threshold is subject to additional rate of tax. For an example of how
tax brackets work:

15% on the first $40726 of taxable income +

22% on the next $40726 of taxable income ( the portion of taxable income
between $40726 and $81452 ) +

26% on the next $44812 of taxable income ( on the portion of taxable income
between &81452 and $126264 ) +

29% of taxable income over $126264
                                        29




Provincial tax rates vary by province. Both sets of rates can be viewed on the
Canada Revenue Agency website where I got the above information at the
following link:
Canada Revenue Agency Federal and Provincial Tax Rates [5]
This is where deductions such as RSP contributions , help to lower your net
income. Another reason to lower your net income, is to qualify for certain
credits that are payable only to persons with an income below a certain
income level. An important point to keep in mind, if you are working for more
than one employer, is that each employer will deduct tax at the rate of the
income earned from them only. You may not be having enough tax deducted
by each employer to compensate for the combined incomes of both jobs. You
may want ask one of your employers to deduct additional tax. You can
request this by filling out the extra tax to be deducted portion of your TD1
form that your employer keeps on file for you or click on this link to download
the form from the CRA Website CRA TD1 Forms Download Page [6]. You could
also set aside an extra amount monthly into a savings account, increase your
contributions to your RSP, or donate money to charity. Remember to always
keep a copy of your previous years tax returns and any related slips for seven
years in the event that you are audited. You may need to prove your
deductions, particularly if you e-file or tele-file your return instead of sending
in the paper copy.

   Having your tax return, GST or Child Tax Benefit direct deposited to your
account is a good idea. Not only do you receive your credit faster than by mail
in some instances, but if you move, and forget to inform the government of
your address, you will still receive your payments until you notify them.
Always make sure you notify them of a change of address. Some of the credits
issued only come by way of cheque, as well as your personalized return is
mailed to you in preparation for the coming tax year, containing personal
information on it, as well as your notifications for credits you may or may not
be receiving during the year. Having the government direct deposit your
payments, does not make it any easier for them to access your accounts or to
know your personal information. If you have not already set up direct deposit,
your financial institution will be able to provide the forms for you to fill out
and send in.
                                                      30



 After you file your return, you will receive your Notice of Assessment (NOA).
Keep this notice and attach it to your copy of your completed return with all
applicable forms and receipts. The Notice of Assessment shows your total
income, net income, how much you received back in income tax, or how much
you owed and if you paid it, as well as your allowable RSP contributions for the
next tax year. Notice of assessments are sometimes used as income
verification of your total income, when applying for credit. The net income
from your return can be used for calculations on other government
applications made at a later date. It is best if you have your Notice of
Assessment available for future reference.

  These are some basic tax tips that will help you to make the most of what is
available to you, and understand what is important to you in relation to
income tax.




[1] http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html

[2] http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html
[3] http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/llp-reep/menu-eng.html
[4] http://www.cmhc-schl.gc.ca/en/co
[5] http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html
                                                    31



[6] http://www.cra-arc.gc.ca/formspubs/frms/td1-eng.html
                                      32


1   i can comment

    kevin roy Sept 8, 2009 11:38 AM

				
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