Two Types of Riba (Interest)

Riba can be simply defined as excess. Within the context of Islamic Finance Riba can be broken down into two major categories. Riba an Nasiyah and  Riba Al Fadl.

Riba An Nasiyah

Riba An Nasiyah is the primary and most common form of Riba (Interest) in the modern-day. This is a type of loan where money is lent out with a term of repayment and an excess amount (interest) is clearly defined in the contract. The prophet saw said, ” Every loan that draws profit is one from Riba”. It is also quite clearly defined in the Quran 2:275-279. Modern-day mortgages, car loans, student loans, and personal loans all fall under this category.

 

Wisdom Behind the Prohibition of Riba an Nasiyah

Firstly, we should realize that there is nothing in the entire creation of the world which has no goodness or utility at all. But it is commonly recognized in every religion and community that things that have more benefits and fewer harms are called beneficial and useful. Conversely, things that cause more harm and offer fewer benefits are taken to be harmful and useless. Even the Quran, while declaring liquor and gambling to be haram, proclaimed that they do hold some benefits for
people but the curse of sins they generate is far greater than the benefits they yield. Therefore, these cannot be called good or useful; on the contrary, taking these to be acutely harmful and destructive, it is necessary that they be avoided.

The case of Riba an Nasiyah is not different. Here the consumer of Riba does have some casual and transitory profits coming, but its curse in this world and in the hereafter is much too severe compared to this benefit and even in this world most revenue earned from Riba is quite low when compared to other halal opportunities. The Riba consumer suffers both spiritually and financially because they could have used this money in a more productive manner. Further, the issuer of this riba-based debt contributes to a society ridden with debt which slows down the rate at which people spend, consume and donate.

 

Riba Al Fadl

Riba Al Fadl is rarer in modern society but still exists. With Riba Al Fadl it is impermissible to exchange the same type of goods for goods of greater or lesser quantity/ quality. For example, you can not exchange 1lb of dates of lower quality for 0.5lb dates of higher quality. This falls under Riba Al Fadl.  In fact, there are six items that are expressly prohibited to do this with. Gold, Silver, Dates, wheat, salt, and barely. If extrapolated this would include most items that are the same in nature.

The Prophet (Saw) Said :“Sell gold in exchange of equivalent gold, sell silver in exchange of equivalent silver, sell dates in exchange of equivalent dates, sell wheat in
exchange of equivalent wheat, sell salt in exchange of equivalent salt, sell barley in exchange of equivalent barley, but if a person transacts in excess, it will be usury (Riba). However, sell gold for silver anyway you please on the condition it is hand-to-hand (spot) and sell barley for dates anyway you please on the condition it is hand-to-hand (spot).”

 

Wisdom Behind the Prohibition of Riba Al Fadl

Mainly this prohibition is to keep things fair and to close any backdoors to other types of Riba.

Understanding RRSPs & First Time Homebuyers Plan

There are many members of the Muslim community looking for the most efficient and cost-effective way to save up for their down payment for a house. And for many of the bigger cities in Canada, these down-payments can range from $30,000-$40,000 to $100,000-$150,000. The reality is this is a lot of money for your average Canadian and requires a bit of planning to accumulate it in an efficient manner. One of the strategies we often recommend for families is accumulating money in an RRSP and a Spousal RRSP. By using the RRSP you can accumulate $35,000 under your name and $35,000 under your spouses
name. By doing this it should save you between $20,000- $35,000 in taxes. Further, under the first-time home buyers plan. You will be able to withdraw $35,000 each to put towards the down-payment on your first house.

How does it work?

First things first, You have to contribute money to your RRSP and save on taxes. This could be any
amount up to $35,000 per person. $35,000 is the maximum amount that can be withdrawn from the RRSP. So you and your spouse can
withdraw a total of $70,000 from the RRSP for the first-time homebuyers plan.

Note: If you have previously owned a home in Canada you cannot withdraw money under the first-time homebuyers plan. This seems obvious but I have had a few clients ask me this question.

The money in the RRSP must remain in the RRSP for 90 days in order for it to be eligible to withdraw under the first-time homebuyers plan. After you have successfully used the money from the RRSP for the First-time homebuyers plan you will have two years before you must begin repaying the money. You must repay the money to your RRSP at a rate of 1/15th per year. If you do not repay the money that you did not repay will be subject to income tax. Therefore if you took out the $35,000 from your RRSP after 2 years you have to put back $2333 per year or $194.44 per month.

Things to keep in mind:
1) First-time home buyer withdrawal only works on your First House
2) Money must remain in the RRSP for 90 days prior to first-time homebuyer withdrawal
3) Repayment begins after 2 years of the FHBP being used
4) You must repay 1/15th per year of what you took out.

Tax- Loss Harvesting/ Selling

Tax-Loss Harvesting/ Tax-Loss Selling
There has been some inaccurate information floating around the internet lately about ways to save on taxes using losses in your investments. This strategy is known as Tax-Loss Selling or Tax-Loss Harvesting.

The Strategy:

Basically, if you have made an investment, in general, it is unwise to sell that investment at a loss. However, the exception to that is if you do not see a scenario in which the investment will recover, then you can sell the investment at a loss and use it to your advantage from a tax perspective.

How People Think It Works:

I invest $5000 in investment ABC. That $5000 I invested in ABC becomes worth $2500. I have lost -$2500. I sell the investment at a loss and use that -$2500 to lower my INCOME TAX (this is wrong).

How it Actually Works:

I invest $5000 in ABC investment. That $5000 becomes worth $2500. I have lost -$2500. I sell ABC Investment at a loss and use that -$2500 to offset my Capital Gains Tax (this is right).

You can only use a loss to offset a gain from a tax perspective. So if you had $5000 worth of DEF investment and it became $10,000. You Would have a $5000 GAIN. If you bought $5000 of ABC Investment and it became worth $2500. You would have a -$2500 LOSS. This loss can make it so you only pay Capital Gains tax on $2500 GAIN instead of $5000 GAIN.

Don’t create a tax problem for yourself by trying to offset your INCOME with a CAPITAL LOSS. The CRA will find you!

Is it Halal to Invest in Gold?

 

Let’s get right to it! Is it halal to invest in gold? The answer is yes! Of course, it is halal. Back during the time of the prophet (PBUH) most trade was done using gold and silver coins or simply trading one item for another. Therefore, investing in Gold, Silver and other precious metals is halal.

Just because something is halal does not necessarily make it a good investment or even the right investment for you and your family. That requries some research, thought, and in-depth analysis of your situation. If you are going to invest in gold here are some things to keep in mind:

1) Why are you investing in gold?

Is it for diversification? Many people add gold to their portfolios to diversify their investments and their downside risk. Many studies show that there is an inverse relationship between how the equity market performs and how gold performs. Therefore, many people invest in gold to limit some of their downside risk and
use it as a hedge against a volatile market.

 

2) Are you speculating?
Often I will get calls from clients asking me to move their ENTIRE portfolio into gold. Specifically because they read an article on how Gold prices will soar or equity prices will plummet. Even if the article ends up being right, this is an extremely risky maneuver based on speculative data. It could be catistrophic and ruin long-term financial plans. Avoid speculating especially with large amounts of money.

 

3) How will you invest in Gold, Silver and other precious metals?

Consider how you intend on investing in Precious metals. You have 3 options. Firstly, you could buy physical bullion. Gold coins, Silver coins, etc. If you choose this option you must considerwhere you will store them and how quickly you can liquidate (sell) the precious metals if you need cash. Another thing to consider is the point of entry. Gold is expensive and you may need to come up with a large amount of cash to purchase physical bullion. Secondly, you could buy individual shares or funds of precious metal mining companies. This would certainly give you exposure to precious metals and the point of entry is generally lower then buying a physical gold block or coin. The drawback is, the company could have excessive debt and other financial dealings that are impermissible in Islam. A third option is to invest in bullion funds, you get the benefit of investing in precious metals without having to worry about what the business is doing, they are easy to liquidate and the point of entry is relatively low. Some of the drawbacks are you do not have the physical gold in your possession and there are management fees associated with these funds.
The reality is, investing in Gold and other precious metals is halal. And it is something worth considering as an addition or compliment to your current portfolio. Like anything else it should be considered along with your goals, your risk tolerance and other factors.

Always do your research and Allah Knows best.

Jazakallah Khair

Most Common Financial Goals for Muslims

Over the last few years, we have been working with Muslims across Canada so that they can achieve their financial goals in a halal way. Whenever we work with clients we like to treat their circumstances as unique and make sure everyone who is a client of Canadian Islamic Wealth receives a financial plan. That being said, there are some common goals that many of our clients share. So we have compiled a list of the most common financial goals for muslims.

1) Buy a house

Almost every call, email or inquiry we get has Muslims asking if there is a halal way to buy a house. For many, this is simply out of reach. Either, they go to the bank and get an interest-based mortgage or they choose a halal option which requires a 20% down payment and is usually more expensive. Whatever the goal, we try to help muslims get their downpayment together more quickly and find the best choice for buying a home.

2) Paying for Kids Education

The average cost of a college degree can be anywhere from $6000-$10,000 per year for undergrad. For things like medical school, law school and dental school it will be even more expensive. Every Muslim with small children realizes that education is expensive and parents who can afford to, want to help their kids go to university or college and achieve thier educational goals. This is an amazing thing and helps kids stay away from huge amounts of student debt. We help our client maximize the grant money they can get from the government and invest the money in a halal way so that there is enough for university.

3) Retirement

We all realize that at some point we will all be to old to work. Many Muslims come to us with that realization and want to plan out their retirement. The main things we look at is regular investing, income needs in retirement and taxation. If we can solve those 3 issues retirement will be a breeze.

 

4) Saving for Hajj

Hajj is exepnsive. It can cost upwards of $12,000 per person to go to hajj. We recommend two things. First, make the intention you want to go to hajj. Second, start taking the necessary steps to go to hajj. If you can afford $100 per month you should be able to afford hajj in 5-6 years. If you can affor $500 per month, maybe 1-2 years.

 

Everybody we work with has a unique set of circumstances and goals that we are committed to catering to. That being said, these are some of the most common goals muslims have when it comes to their finances. If any of these sound like you, book a free call with us and we can share our strategies and expertise.

Investing: Advisor or DIY?

With the internet, technology, and an abundance of research now more than ever investors are asking themselves, should I still work with an advisor and pay their fees? So this article is going to look at the benefits and costs of working with an advisor as well as look at the benefits and costs of doing it yourself investing.

DIY Investing Benefits

Some of the benefits of DIY Investing are:

  1. Lower fees & Transaction Costs
  2. More flexibility in what you invest in
  3. Potential to make riskier and more profitable investments
  4. Forces you to become financially literate.

Overall you may save money, have more investment choices and become more financially literate when doing your own investments. This does come with some drawbacks.

Some drawbacks of DIY Investing are:

  1. More Time consuming
  2. Emotional mistakes may cause huge investment losses
  3. Research is less focused
  4.  Tax planning is generally overlooked by DIY Investors

 

DIY investing takes up a lot of time. With the amount of research and planning involved you need to ask yourself if you would make more money doing what you are best at (being a doctor, engineer, lawyer, accountant, etc) if you would make more money doing that instead of managing your own investments.  There are some benefits of going it alone but being emotional with your money, being more sporadic in your research, and overlooking tax consequences of various investments and strategies are all things to keep in mind on whether DIY investing is right for you.

 

Using an Advisor

I am biased but here are some benefits of working with an advisor:

  1. Keeps clients emotions in check when making investment choices
  2. Frees up time so clients can focus on other things
  3. Can help aim your investment decisions
  4. Has a larger overall financial plan for you

Overall an advisor will likely have a diverse offering of investment products and choices and may be able to help keep you calm in turbulent markets. Working with an advisor can also have drawbacks.

Some of the drawbacks to working with an advisor are:

  1. More expensive.
  2. Advisors can be dishonest and not what is in your best interest (do extra due diligence)
  3. Advisors will likely be more cautious with client investments this could cost you returns
  4. Advisors will have other clients and may not always be able to make you a top priority.

Certainly, there are many benefits to working with an advisor. I am an advisor and I like to think all clients who work with an advisor will be better off. However, that is not the case. There are many advisors who charge outrageous fees, behave dishonestly, and do things that are not in the best interest of their clients.

What to do?

Overall whether you want to do your own investing or hire an advisor it is imperative to do enough due diligence to make sure it is the right fit for you. If you decide on an advisor make sure your goals are being addressed and make sure they have a good track record. If you decide to do it yourself make sure you have enough discipline to ride out turbulent markets and make sure you have an overall strategy. Of course, I am biased. The best thing you can do is sign up as a client of Canadian Islamic Wealth.

 

 

Halal RDSPs

RDSPs (the registered disability savings plan) allows parents to save for their children who have a disability and qualify for the disability tax credit. Many Muslim parents have children that require this extra assistance and financial support but want to know is RDSPs Halal? The short answer is YES. However, we need to examine how RDSPs work, how you can benefit, and how they ought to be invested to stay Halal.

How does and RDSP work?

Children who qualify for a disability tax credit also qualify to open and Registered Disability Savings Plan (RDSP). The maximum lifetime contribution limit for an RDSP is $200,000. There are no yearly limits for how much you can contribute to an RDSP however limits do exist for the Canada disability savings grant and the Canada disability Savings bond.

Canada Disability Savings Grant

The Canadian government can add 100%, 200%, or 300% in disability grant money to your contribution. From the day your child is born until they turn 18. The beneficiary (your child) can get grant money up to $3500 per year and $70,000 over the lifetime of the RDSP. The grant amount is calculated based on contribution levels and household income. If your family income is under $97,000 you get a 300% grant on the first $500 contributed, 200% on the next $1000 contributed. $1500 in contributions gets you $3500 in grants or a total account value of $5000 for one year.
If you earn more than $97,000 per year you get 100% of every dollar contributed up to $1000 per year.

Canada Disability Savings Bond

If you are in a low-income family you may qualify for the Canada Disability savings bond. If you earn less than $31,711 per year the government will give you a disability savings bond of $1000 per year without you having to make any contributions. If you earn between $31,000-$48,000 you will get an amount proportional to the $1000 bond based on your total income. If you earn above $48,000 you will not qualify for the bond.

How can you benefit?

Obviously opening an RDSP for a disabled child can help you save and invest for their future. Further, this can be a way to create income for them down the road with investments and payments out of the disability savings plan. Many families use this as a way to help ensure their children with disabilities are cared for in the long-term.

How to make it halal?

Like any other account in Canada it is neither halal nor haram it all depends on how the money inside the RDSP is used that determines its permissibility.  Most carriers of the RDSP are banks and although you may be able to find some halal investment options I believe having an advisor that can actually guide you through it is paramount. That is why if you open an RDSP through us we can make sure it is set up at one of the providers and the investments are looked after in a halal way.

Lessons from Ramadan

Ramadan is fast approaching. With less than a month before this Ramadan, I thought I would talk about some of the financial lessons we can learn from Ramadan both from a practical perspective and from a financial perspective.

Living within or below your means

One of the things we partake in during Ramadan is fasting. From sunrise to sunset we go without both food and water. One of the lessons in this is that we as human beings can survive and even thrive on a lot less. If you reflect on this principle it is clear that we do not necessarily need that brand new car, we do not necessarily need all new furniture, we do not necessarily need to buy a house. It is permissible to do all those things but we should remind ourselves that we do not need all that stuff to be happy. Tell me of a time where you are happier than Ramadan during the year. I can not think of one. It is almost like the things that really make us happy (time with family, friends, God, and the community are what we really need).

Patience & Delayed Gratification

Instant gratification is all too common in this day and age. Instant likes on social media, delivery of the items we want right now. Unlimited options for TV and movies. Even when it comes to money we can buy that thing we can not afford with a credit card, we can buy a house on a mortgage and we can buy a car with a loan. Ramadan reignites the wonderful feeling of delayed gratification. Why? Because we go the whole day without food and water. Tell me a more exciting after a day of fasting than biting into a date and having that first sip of water rush down into your stomach.

Rewarding Yourself when the time is right

When Ramadan comes to a close we celebrate with Eid- Al- Fitr. During this time it is haram to fast. We are encouraged to eat, enjoy, celebrate and give each other gifts. Further, we are encouraged to buy a brand new outfit for eid. To wear our best clothes and to enjoy ourselves. After working hard during Ramadan to achieve our spiritual goals we are encouraged to enjoy and be happy.

All these lessons found in Ramadan can help us in our financial lives as well. Living within or below our means is a great financial habit. Buying things when you can afford them feels better than going into debt to get something you want now. Rewarding yourself when you have achieved a goal and when the time is right. All these lessons can be learned in Ramadan. May Allah bless your ramadan!

Ramadan Kareem!

Tech is Over Valued!

There has been a lot of pundits, experts, and even members of the Islamic Finance community saying that tech is overvalued. It’s too high, it’s going to crash, we’re in a bubble. Other than the fact that this statement is going to get headlines, clicks, and responses I do not believe there is much to worry about.

Why?! The market, the prices, gravity, the moon, trade wars with China, covid-19… there are always going to be a million excuses why the market is doing poorly. There is always going to be the need for attention-grabbing headlines. Nobody wants to hear everything is going to be fine. That is no fun. Instead, doom, gloom and the fact that your investments are going to go to zero is a far more attractive story.

 

Here is my take. Tech is not overvalued. Could it go down in the short-term as a sector? Yes. Will it go back up? absolutely! The reality is our world is becoming more and more digital. Every day we are surrounded by technology. The reason Covid-19 was not a complete economic disaster was because of technology. People could still work via zoom. People could still buy and sell via e-commerce, people could still maintain a level of productivity even in a Global lockdown.

If you are a long-term investor limiting your exposure to tech is a mistake. If you had invested in the Fidelity Global Technology Innovators fund in 2010 you would have seen average returns of 20% per year. Can you honestly say we are going to be less reliant on technology in the next decade? Any pundit who tries to make this case is a fool. The two sectors I see as winners over the next 10 years are technology and renewable energy. Everything else may still be profitable (not oil) but they will not grow the way tech and renewable energy will in the next decade.

What should you do?

As always, it depends. If you have a short period of time before you need your money, I would limit my exposure to tech and volatility altogether. However, if you do not need the money for 5-10 years (i.e. reitrement savings, kids education, etc) then I suggest maintaining some technology exposure in your portfolio.

Bitcoin: Is it Halal?