What Does Carrying $1,000 Cash For 30 Days Do To You?

Dogs have no money. Isn't that amazing? They're broke their entire lives. But they get through. You know why dogs have no money? ... No pockets. --- Jerry Seinfeld

Money is energy.

The value of money comes from what it does.

What you give, you get back 10 fold.

So carry lots of cash. I've heard this advice several times.

Who Needs Cash Anymore?

I don't use cash much. Do you? I like having a minimum of $100 and a target of $140-$160. That's more than enough for expenditures that don't take credit cards. Or places like taxis where I don't feel comfortable using plastic. I don't use debit cards, following the advice of Frank Abagnale in Stealing Your Life. You may recall that Leonardo Dicaprio played Frank in the film adaptation of Catch Me If You Can. 

Why Not?

In January, pianist-turned-coach Paul Tobey suggested carrying $1,000 for 30 days. That's outside my comfort zone, which is perhaps the point. Your credit card probably gives you a $1,000 of purchasing power. That's not cash. Neither is a $1,000 cheque payable to you. 

You might not carry $1,000 cash if

1. you don't have the money
2. you're afraid of theft (can't trust others)
3. you're afraid you'll make impulse purchases (can't trust yourself)

During the Canadian winter, there's little for an insider to do. So I tried this experiment and ran into an immediate snag.

The Problem

My bank keeps cutting my daily cash withdrawal limit. I'm not a bad risk. These reductions are meant as protection from fraudulent activity. Originally $1,000 got cut to $500 and is now down to $300. Collecting $1,000 means visiting on four different days, which is arduous. Even worse, the bank machine spews $20 bills. Who wants to carry 50 (or more) pieces of germ-infested paper? I stopped making withdrawals after two days, which may negate the results.

The Results

Carrying extra cash has three positive advantages. 

1. You feel more successful (much like wearing better clothing)
   
2. You feel more prepared for opportunities
   
3. You feel more prepared for contingencies
   

I was in Sudbury recently with my friend Mike (whose preteen daughter apparently reads this blog !?!). He likes paying by credit card but couldn't: someone stole the credit card machine from the taxi. I used cash and had plenty left over. This saved us from walking or hitchhiking to the airport in -35C weather.

Other Emergencies

On September 11, 2001, I was in Halifax, Nova Scotia delivering a presentation while planes were crashing into the World Trade Center. We didn't know until an organizer interrupted just as I finished. At that point, we were all numb. How could both towers collapse? What was going to happen next? There was speculation that the phone systems (land/cellular) and the Internet were going to be shut down to prevent the terrorists from communicating. The power grid could be shut down. The financial system could be shut down to prevent terrorists from transferring money. Very confusing. Very hard to tell what would happen next.

In a daze, I got directions to a bank and withdrew the maximum permitted (probably $500). There were no line ups. As events unfolded, I didn't need this extra cash. What if I did? What if the bank was closed or had run out of money? Cash would have come in handy. 

Conclusions

Carrying more cash works. It seems redundant --- like having a 500 horsepower SUV in the city. If you go offroad, you'll be on a paved sidewalk. You don't need the extra speed either. Even so, the potential gives extra confidence and peace of mind. Unlike an SUV, cash is green (at least in America).

Unlike cheques, credit cards or debit cards, cash is universal. If you try this experiment, please share your findings.

Links

• Huh? Fraud Protection and your Bank Card
  
• Protecting Against Identity Theft
• Paul Tobey seminars (generally four hours and free)

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10-8 Leveraging: Are Tax Audits on the Way?

Did they get you to trade

your heroes for ghosts?

Hot ashes for trees?

Hot air for a cool breeze?

--- Pink Floyd, Wish You Were Here

Tax advice and income tax strategies. That's #1 on the list of what the wealthy demand from their trusted financial advisors. You're looking for more aggressive recommendations. That doesn't mean you'll blindly act on every idea. You'll weigh the risks and rewards.

But how can you decide what you want until you know what's available?

Fight or Flight?

Cold comfort for change?

Did you exchange a walk-on part in the war for a lead role in a cage?

--- Pink Floyd, Wish You Were Here

Flight: If you're very risk averse, that's fine. You can hide in the shadows by simply paying more tax than necessary. Even then, the taxman may still seek you out: to thank you for being such a profitable customer.

Fight: Successful tax planning leaves more of what you earn with you --- where it belongs. There's more risk, though. You could get audited. That scares some. Others simply factor that possibility into their risk/reward calculus.

CRA Audits of 10-8 Leveraging (or 10/8, 8/10 and 8-10)?

"The Canada Revenue Agency has recently become aware of these loan arrangements and we are reviewing them to ensure they comply with the Income Tax Act." --- Rebecca Merrett, Communications Manager

Since early December 2008, there's been concern about potential audits of 10-8 insured leveraging strategies by the Canada Revenue Agency (CRA). These strategies --- the last major innovation in insured tax planning --- turbocharge the perennial top 5 insured strategies by adding the advantages of financial leveraging while reducing the risks. And creating tax deductions.

Overview

In brief, you put cash into a special universal life policy. This creates collateral. You borrow at 10% and invest in suitable investments. This makes the loan interest tax-deductible, which drops your after-tax loan cost to 5%-6% (depending on your tax rate). What happens to your collateral? As a reward for borrowing, your collateral grows at 8% in a tax-sheltered environment. My American Express card rebates 0.5% for borrowing at 10.99% (current rate, conditions apply). Other lenders give points or other incentives.

You can invest with a line of credit secured against your house, but with 10-8 leveraging

• your loan rate is 10% (meaning larger deductions than borrowing at bank prime rates)
• your collateral grows at 8% tax sheltered (house prices can drop)
• you get life insurance

What Might Concern CRA?

CRA looks for abuse of the tax system. And they look for revenue. Since tax deductions decrease tax revenue, CRA may have concerns. Here are the three most likely areas:

• Is there a reasonable expectation of profit from the investments made?
• Is 10% a reasonable loan rate? (Dell's current flyer shows rates of 9.99% to 28.99%)
• Does the General Anti-Avoidance Rule (GAAR) apply? (A somewhat arbitrary "smell test")

You can find out more via the links at the bottom of this post.

Noise

There's plenty of noise about what CRA may do.

Running over the same old ground.

What have you found?

The same old fears.

--- Pink Floyd, Wish You Were Here

Those who oppose or don't have access to 10-8 strategies are spreading fear. Those who never understood 10-8, have moved to the sidelines --- where they belong. Those who did their due diligence at the outset remain in the game unfazed.

Time To Panic?

That's your call. Do consider the following facts:

• when uncertain, insurers get (expensive) independent outside tax opinions before developing new strategies
• 10-8 leveraging has been around for most of this decade
• most major insurers offer 10-8 strategies: BMO [bought AIG], Industrial Alliance, RBC, Sun, Transamerica
• there are no known challenges from CRA
• major accounting firms have reviewed and approved 10-8 strategies for their clients
• no insurer has discontinued their 10-8 strategies
• no major distributor has suspended the marketing of 10-8 strategies

The Worst Case

Suppose CRA finds fault with 10-8 leveraging. What happens? You can expect insurers to defend their positions and accounting firms to defend their clients. The courts would ultimately decide.

In the worst case, the loan interest would not be tax deductible. You would have borrowed at 10% to earn 8% in a tax-sheltered environment. That's not the worst thing in the world. You can unwind the leveraging by repaying the loans by selling the investments made with the borrowed money. You're then left with a "normal" universal life insurance policy. That's not so bad either.

Independent Opinion

Before embarking on any tax strategy, you know enough to get independent advice from professionals with relevant experience. Right? Note the work "relevant". Skills vary. Areas of expertise vary. So do levels of competence, but this is harder to spot unless you're an insider.

I'm biased. The wealthy want aggressive tax strategies to deal with their tax burdens. I was glad to help as the product actuary for one of the first insurers to offer 10-8 leveraging in Canada. Today as a marketing actuary, I spend most of my time helping advisors bring 10-8 leveraging to their clients.

There's fog today but won't the sun rise tomorrow? Won't the wind blow through the trees? Won't hot air give way to a cool breeze? As the old fears disappear. Wish you were here.

Links

• Your Trusted Financial Advisor: What You Like/Dislike
• Surviving An Audit: Two Lies and Three Tips
• The Pros and Cons of Financial Leveraging
• "10-8" Leveraging: Creating Tax Deductions
• "10-8" Leveraging: Turbocharging the Top 5 Insured Strategies
• CRA Comments on a "10/8" Insurance Structure (TaxGen.ca, Dec 3, 2008)
• 10/8 Strategies on CRA Radar (Advisor.ca, Jan 14, 2009)
• Taxes and "10/8" insurance loans (Investment Executive, Feb 2009)
• CRA Review of 10/8 Insurance Programs (Advisor.ca, Feb 23, 2009)
• Court clears '10-8' plan (Financial Post, Nov 12, 2011) new

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