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NEW YEAR! NEW APPROACH!

By: Michael Lutes CFP, CLU

Certified Financial Planner

It’s a brand spankin’ new year, (2023 baby!). The calendar has turned, the slate is wiped clean, you’re at mile zero! You have twelve whole months to kick some butt when it comes to managing your money and financial planning! (Wow, I’m getting energized just writing this!!)

Perhaps you’ve already begun brainstorming ways to improve your finances in 2023. Maybe you’re hunting for new tax-efficient planning strategies. Or you think your investment portfolio could use a revamp. Or, after spending time with loved ones over the holidays, you’re inspired to audit your insurance and estate plans.

Or, like so many of us, you truly don’t know where to start.

Here’s a tip…

Start with your values. Let those values motivate your goals, life objectives, dreams. Whatever you want to call them, start there.

So, what are your values? Seriously, yours, what are they? Take a moment, take a minute, take whatever time you need…

No, no, no, not THOSE values…. those are the values you think you should have. The ones your brother incepted inside of you when you were chatting over the holidays. Or maybe those values are the ones your Instagram feed is telling you to have – fancy cars, fancy food, fancy vacations, fancy clothes, fancy blah blah blah.

Not those.

I’m talking about YOUR values. The ones that truly reflect the deepest sense of what cultivates happiness in you. The ones that make you feel authentically happy to just be. The ones that when you’re living in alignment with them you are at your most satisfied, most at peace, most content, and most fulfilled.

THOSE are your values.

(Ummm, I thought this was a financial planning blog…no?)

How does this apply to financial planning?

While considering all the calculator stuff – tax, investment returns, insurance, etc. – the best financial planning is done in a space where decisions of how to use your money – or capital (more on capital later) – are in alignment with your values. This is where financial confidence builds. This is where the real financial planning magic happens.

In this space, you stop obsessing over moves in the stock market, you don’t really care what shows up in the daily financial news, you can genuinely listen to your neighbor’s stock tip from their cousin who “worked on wall street” and effortlessly separate opinion from truth and move on.

This is the space where you can be totally and completely confident and fulfilled in your financial decision making, because you know it aligns to your values and your life objectives.

So, when it comes to financial planning this year, start with your values – dig deep, be real, be honest, be reflective – and let your values motivate your goals that ultimately drive your decision making.

Do this, and you’ll be kicking butt in 2023!

And if you’re one of us who, like most, need help uncovering their values and articulating their goals, we recommend talking to a trusted advisor who can help you through the process. If you don’t have a trusted advisor, schedule some time with us – we love to help!

Tax Matters for HNW

The view about high-net-worth people is they probably have too much and don’t bother about taxes. This couldn’t be farther from the truth. HNW people are just like everyday people. They bleed cash like every other regular Canadian. High net worth people are also entitled to tax benefits on their money just like every other Canadian. As a high-net-worth individual who moves financial assets from one place to the other, it is important to maximize whatever tax benefit is available to you to save funds. In this article, we will discuss key tax matters and best practices that you must be wary of when dealing with friends and family. These three matters include: property gifts, having a secondary residence, and personal loans to friends and families.

1. Tax Implications of Real Estate Property Gifts

Real estate is becoming increasingly expensive in Canada. If you have the privilege of owning some real estate properties and thinking of gifting them to your loved ones, there are things you must consider.

Capital Gains Attribution – This is one thing you should be wary of when gifting a real estate property in Canada. For a better understanding, let us look at this example: If you gift a property to your spouse and they decide to sell to a third party, any capital gain or loss on the value of the property will be charged back to you. In other words, any profit or loss made on a property you gifted to your loved one will be attributed as yours and taxed accordingly. This is known as Tax-free rollover. It is an automatic tax charge on income from a property gifted to a spouse. To avoid this, you must apply to opt-out of the automatic tax-free rollover. When you apply, it means that you will have to report any accrued gains on the property and your spouse will also report any future gains on the property. The exception to this is when the property is gifted to a minor. You are not allowed to opt-out when you gift the property to a minor.

Income Attribution – Income attribution in Canada has to do with income from real estate properties. This occurs especially when you gift a property to your underaged family member. It could be your child, or a nephew or niece. If the child is under 18, any income on the property will accrue to you and will be taxed. This means that you will carry the tax burden of the income on the property gifted until such minor clocks 18 years of age. The income referred to in this type of attribution means rental income. It is different from capital gains attribution.  Income attribution also applies to spousal gifting of property or a common-law spouse. Any income accrued on the property will accrue to you and will be taxed accordingly. In all of this, it does not matter if you spend out of the profit or not; if it is a gift coming from you to your spouse or an underaged loved one and it will be assumed that the income is going to you.

Double Taxation on Transfer of Real Estate Property – Double taxation on real estate property gifts may occur when you transfer your property to a family member for less than the fair market value of such property. For a better understanding, let us use an example where you sell a real estate property to your son at a value of $20,000 as against the fair market value which is $350,000. In this type of situation, it will be deemed that you made a proceed of $350,000 on the property. Your capital gains, in this case, will be $320,000 ($350,000 – $20,000). Half of the $320,000 will be subject to tax. If your son goes ahead to sell the property for the fair market value of $350,000, you will be taxed on this sale again. This then amounts to double taxation.  Another example of when double taxation can occur is when you sell your property to a loved one at a value more than the fair market value. For example, if the property is valued at $300,000 and you sell it to your sister at $350,000, it will be deemed that you made a proceed of $350,000 on the property and taxed accordingly, but it will be deemed that the property cost your sister $300,000. If your sister decides to sell the property in future, you will be taxed again. Fortunately, there is a way out. The reason for the double taxation in the scenarios painted above is that the property was sold for a value. However, if you transfer the property for no consideration at all, it will be deemed that it was sold at a fair market value. The beneficiary will have a fair market cost base which will allow you to avoid double taxation.

What Are Your Alternatives? With all the taxes mentioned above, it is advisable that real estate properties should not be transferred for a lower amount from the fair market value. But if you want to transfer your property to your loved ones without any consideration to find a way around Capital gains attribution and income attribution, you can consider any of the following:

  • You can gift your loved one the cash they need to acquire the money at a fair market value. That way, you will not be taxed on capital gains or income from the property.
  • The other option you have is to lend your loved one the money required to purchase the property at a fair market value. However, you must ensure that they pay a prescribed interest rate on the loan. – The full loan must be repaid on or before the 30th of January the following year and it must include the interest income in your tax return.

2. Best Practice Personal Loans to Friends & Family

Being a high-net-worth individual may mean that people come to you from time to time to get loans. It is a privilege to be able to help others, but you must ensure you do it with your eyes wide open so as not to regret it later. For one, the reason most people turn to private loans from friends and family is that banks have rejected them, and they believe they will get flexible terms. This makes lending money to friends and family a risky venture.

Here are some best practices to guide you on what you need to protect yourself:

Choose Wisely – People have different reasons for needing a loan without a thought as to how they will repay the loan. Some reasons are more worth it than others. Therefore, it is important to know the reason for the loan before giving it. The reason for the loan will probably tell you what you need to know about the person. They may be your friends and family but it is your money, and the final decision is yours. Here are some genuine reasons you can consider lending money:

  • A start-up business or an existing one. Investing in a business could yield returns afterwards.
  • Down payment for a new home. You can consider helping in this regard.
  • Medical needs. This is another genuine reason for which you can lend money.
  • Divorce and legal problems are also genuine reasons someone may want to borrow money.
  • If the person just relocated, you could consider lending him/her some money.

It is also important that every detail of the loan should be discussed. Being a friend or family is not enough. There should be a repayment plan and an agreed interest rate. All these terms should be clear and should be in writing if possible or there should be a witness to the discussion.

Have A Plan – It is important to have a plan with the person you are lending money to. Some of the things to be discussed include:

The Type of Credit Arrangement – It is very important to be clear whether it is a loan, or you are co-signing on a loan already borrowed. Both are risky but co-signing may be riskier because you are placing liability on yourself to repay if the person defaults. This may affect your credit score. Meanwhile, a loan coming from you bears a lighter risk because if the person does not pay it back, you must be prepared for that eventuality. Be clear on the difference and make sure you make the best decision.

Be Clear on Interest Rate – This is a tricky subject for friends and family who want to enter into a loan agreement. On the one hand, you as a lender will want to make sure you give a favourable interest rate, especially with the risk involved. The borrower, on the other hand will be expectant that you give an interest rate that will be favourable to him or no interest rate at all, considering the relationship between you two. Whatever the case may be, it is important that you are clear on this condition. You can give a lower interest rate than banks but high enough to ensure you make money from the transaction rather than your money just lying in the bank.

Get It Documented – This is an important step that could make or mar your relationship with the borrower. Money can be a tricky issue which can give room for recriminations. To avoid this, it is important to get everything discussed, especially the terms agreed upon by both parties’ documents. The amount, interest rate, repayment dates, and the penalty for late repayment. There are free online resources that provide templates you can use for the contract to be signed by both parties. This makes them facts and legally binding on both parties regardless of the relationship between you two.

Payment Arrangement – The payment agreement is an important part of the contract. It is important to agree on when and how the loan will be paid. All these should be written in clear terms in the contract drawn up. Loaning money to family and friends can be tricky. It is important to adhere to the tips mentioned to preserve your relationship with the person.

3. Tax Implications for Secondary Residences

It is not uncommon for high-net-worth individuals to have an additional shelter as part of their assets. it could be a vacation home or an investment. The fact remains that it is your asset and will be referred to as a secondary residence. Usually, a residence that is being habited is regarded as a primary residence. The CRA requires that you report a sale of your primary residence to qualify for the Principal Residence Exemption (PRE). The CRA will analyze your data before granting you a PRE. Details that are assessed include the duration you have been living in the said residence, your real estate investments, and your sources of income. All of these will help them determine if the building is truly your primary place of residence. This exemption does not apply to your secondary residence.

To save yourself some cash on taxes, if you have a secondary residence and you have a spouse or a common-law partner, you can designate the secondary residence to your spouse for all the years you own and use it as a primary residence which qualifies it for capital gains tax exemption when it is sold. Fortunately, the Canada Revenue Agency (CRA) does not prescribe how long you must live in a house for it to become your primary residence. It only says that you must habit the residence for a short period which makes it open to interpretation. Residences outside Canada can also be designated as a primary residence if the designate has inhabited the home in the year in which the PRE is being applied for. If you fail to take advantage of this, your secondary residence will be subject to capital gains tax for the years it was not designated to an inhabitant.

When designating, there are exceptions you need to take note of. The first is that only one property per year and per family can be designated as a primary residence. A family member in this context means your spouse or common-law partner and your children that are under 18. Another exception is that any residence that is above 1.2 acres in size will not qualify for PRE except if you are able to prove that the excess land is required for the use and enjoyment of the residence. This means that the excess land will be subject to capital gains tax.

For a maximum tax advantage, you should designate the residence with the highest average capital gains per year. You can also contact a tax expert for proper guidance.

Bottom Line

Although it seems like a lot to digest, that is why you have an advisor. Reach out with any questions in any of the above areas if you feel in over your head.

Book an appointment with us today! – CLICK HERE

How Investment Income Is Taxed

Investments can represent a major source of income for some individuals and with that income comes a wide variety of tax implications. The good news is that some types of investment incomes are subject to special tax treatment. Understanding how your investments are taxed is an important part of your financial plan. The most common types of investment income most investors will have to deal with are interest, dividends, and capital gains.

What You Need to Know

Interest Income

Interest income refers to the compensation an individual receives from making funds available to another party. Interest income is earned most commonly on fixed income securities, such as bonds and GIC’s. It is taxed at your marginal tax rate without any preferential tax treatment and is taxed annually whether or not it has been withdrawn from the investment.

Example: An investor buys a 10-year GIC that has agreed to pay him 4% annually. If the investor bought the GIC for $100, he can expect to earn $4.00 in interest every year for the next 10 years. The investor must report the $4.00 of interest income on his income taxes and will be taxed at the marginal tax rate. 

Due to the fact that interest income is reported as regular income, it is the least favorable way to earn investment income.

Dividend Income

Dividend income is considered to be property income. A dividend is generally a distribution of corporate profit that has been divided among the corporation’s shareholders. The Canadian government gives preferential tax treatment to Canadian Controlled Public Corporations (CCPC) in the form of a dividend income gross up and Dividend Tax Credit (DTC). The two types of Canadian dividends are usually referred to eligible or non-eligible. It is possible to receive dividends from a foreign corporation, but these dividends are not subject to any special tax treatments and are to be reported in Canadian dollars as regular income.

Tax payers who receive eligible dividends are subject to a 38% dividend income gross up, which is then offset by a federal DTC worth 15.02% of the total grossed up amount. Non-eligible dividends are subject to a gross up of 17% and 10.5% DTC.

Example: A shareholder of a Canadian Controlled Public Corporation is paid out a dividend of $100. This income is considered to be an eligible dividend and is subject to the gross up and the DTC. His dividend would be gross up 38%, so he would now have an income of $138.00.  The DTC would be 15.02% of the grossed-up amount, equaling $20.73. Therefore, the shareholder would report a dividend income of $138.00, but would have his federal taxes owing reduced by $20.73. 

The rationale for the gross up and DTC is related to the fact that dividends are paid in after-tax corporate earnings. If there were no adjustment to the dividend, it would result in the dollars being double taxed.  This tax treatment makes dividends the most tax efficient way to receive income. Tax is payable when the dividends are paid out. It is, however, important to note that the gross up and DTC rates are influenced heavily by legislation and could change at any time.

Capital Gains

Capital gains are realized on equity investments (such as stocks) that appreciate in value. For example, if an investor bought a stock at $5.00 per share and sold them at $10.00 per share, they would have a capital gain of $5.00. What makes capital gains different from other types of investment income is that you only are required to pay tax on 50% of the gain. Another desirable trait of capital gain income is that you do not have to pay tax until the investment is disposed of, giving the investor some control over when they trigger the gain and pay the tax. Whether or not they are the most tax efficient income depends on your province of residence and subsequent tax rates.

The Bottom Line

It is important to ensure that investors understand how their investments are being taxed and the implications that different types of investment income can have on your taxes owing. A great first step is meeting with an advisor who can help you put together the most tax efficient investing strategy, making sure your money is reaching its full potential…not going to the tax man!

Essential Tax Numbers 2020, 2021, & 2022

With a new year comes new tax numbers!  Below is a quick reference of important tax numbers for three years, including 2022.  CRA has utilized a 1% indexing (inflation) for those numbers subject to that condition.

What You Need to Know

Taxable income brackets: 

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RRSP Contribution Limit: 

  • 2020: $27,230
  • 2021: $27,830
  • 2022: $29,210

TFSA Limit

  • 2020: $6,000
  • 2021: $6,000
  • 2022: $6,000

Maximum Pensionable Earnings

  • 2020: $58,700
  • 2021: $61,600
  • 2022: $64,900

OAS Income Recovery Threshold (claw-back begins)

  • 2020: $79,054
  • 2021: $79,845
  • 2022: $81,761

OAS Maximum Recovery Threshold (claw-back recovers all OAS payments)

  • July 2021 to June 2022: $128,149
  • July 2022 to June 2023: $129,757
  • July 2023 to June 2024: $133,141

Lifetime Capital Gains Exemption

  • 2020: $883,384
  • 2021: $892,218
  • 2022: $913,630

Maximum EI Insurable Earnings

  • 2020: $54,200
  • 2021: $56,300
  • 2022: $60,300

Medical Expense Threshold

  • 2020: 3% of net income or $2,397, whichever is less
  • 2021: 3% of net income or $2,421, whichever is less
  • 2022: 3% of net income or $2,479, whichever is less

Basic Personal Amount for individuals whose net income is less than the beginning of the 29% tax bracket

  • 2020: $13,229
  • 2021: $13,808
  • 2022: $14,398

Age Amount and Net income threshold amount

  • 2020: $7,637  $38,508
  • 2021: $7,713  $38,893
  • 2022: $7,898  $39,826

Canada Caregiver amount for children under age 18

  • 2020: $2,273
  • 2021: $2,295
  • 2022: $2,350

Child Disability Benefit and Family Net income phase out

  • 2020: $2,886  $68,798
  • 2021: $2,915  $69,395
  • 2022: $2,985  $71,060

Canada Child Benefit

  • 2020: $6,765 per child under six, $5,708 per child age 6-17
  • 2021: $6,833 per child under six, $5,765 per child age 6-17
  • 2022: #6,997 per child under six, $5,903 per child age 6-17

The Bottom Line

These are the current numbers released as of January 2022, but could change without notice, and be superseded by other stimulus measures.

Source: https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/adjustment-personal-income-tax-benefit-amounts.html

 

Owe More Taxes than You Can Pay? Here Are Your Options.

Tax season is upon us and unfortunately that means paying any taxes that may be outstanding. Taxes should be carefully planned each year to ensure they do not become overwhelming, but what happens if you are faced with an unexpectedly large bill?

The most important thing to do if you have a large tax bill coming your way is to file your taxes on time.  Avoidance does not work with the CRA and it is best to face tax debt head one.  Delaying will only end up with additional penalties. There are a number of strategies available to help you deal with your tax debt.

What You Need to Know

1. Get a Personal Loan: This is the first step the CRA will expect you to take to pay off your debt.  Personal loans, borrowing against the value of your home, or borrowing from an individual are all options here. This will be the path of least resistance for most people. A personal loan will wipe out your debt to the CRA and allow you to create a reasonable payment plan for your situation that gives you flexibility to defer if necessary.

2. Access the Value in Your Home: Your home is often the biggest asset you own. Therefore, there are usually options to borrow against the value of the home. This can be done is a few ways:

  • Home Equity Line of Credit: The first options are looking into lending products such as a Home Equity Line of Credit (HELOC). HELOC’s work by allowing a homeowner to take out of large line of credit on their home.  Many people use these products as a mortgage alternative, but they also work to access the value of your home without selling the property.
  • Refinancing your Home: Refinancing is essentially taking a new mortgage out on your house. If you currently have a mortgage, this may mean replacing that mortgage with a new one that has a higher principal amount. If you are currently living mortgage free, this means picking a mortgage on the house as you normally would if you were buying a new house.
  • Use Your House as Collateral for a Loan: Many loans, especially those of large amounts, require collateral before they are issued. This means the lending institution wants something of value put up against the loan in case the loan is not repaid.
  • Sell Your Property: A last resort but selling a property may be the only way to gain access to its value if you are unable to secure financing.

3. Request for Taxpayer Relief: Individuals with outstanding debts to the CRA may be able to request “Taxpayer Relief”. Taxpayer Relief can reduce your amount owing by offering relief from penalties and interest charges.  Typically, taxpayer relief is only granted under extraordinary circumstances such as job loss, serious illness, and a clear inability to pay. Taxpayers must submit a formal request to the CRA using form RC4288 and submitting complete and accurate documentation of their circumstances.

4. Request a Payment Plan: Taxpayers may request a payment plan from the CRA but only after they have exhausted all other reasonable options to pay their balance i.e. Personal loan, refinancing house etc. Payment plans are typically not available for large amounts that can’t be repaid in a year. When negotiating a payment plan with the CRA it is always best to involve a tax professional who can make the negotiation for you.  CRA negotiators are experienced and their main concern is getting the balance owing as quickly as possible. It isn’t uncommon for taxpayers to enter a payment plan that is unrealistic for their financial situation.  CRA’s priority will always be the debt owed to them.

5. Declare Bankruptcy: Declaring bankruptcy has devastating short- and long-term financial effects and should only be utilized as an absolute last resort. Assets could be ceased and you will be unable to obtain credit for many years.  All options should be exhausted before resorting to bankruptcy. Hiring a debt counselor to help you decide if bankruptcy is indeed your only option would be prudent.

The Bottom Line

Tax debt can be overwhelming but realize there are options available to you.  It is always recommended that a professional tax consultant be hired if debt becomes unmanageable. They can help you consolidate debt, make payment plans, and negotiate with the CRA on your behalf.

5 Ways to Avoid Capital Gains Tax

Capital Gains tax occurs when you sell capital property for more than you paid for it. In Canada, you are only taxed on 50% of your capital gain. For example, if you bought an investment for $25,000 and sold it for $75,000 you would have a capital gain of $50,000.  You would then be taxed on 50% of the gain. In this instance, you would pay tax on $25,000.  In Canada, there are some legitimate ways to avoid paying this tax: Tax shelters, Lifetime Capital Gains Exemption, Capital Losses, Deferring, and Charitable Giving. *

What You Need to Know

1.   Tax Shelters

RRSPs and TFSAs are investment vehicles that are available to Canadians that allow investments to be bought and sold with no immediate tax implications:

  • RRSPs – Registered Retirement Savings Plans are popular tax sheltering accounts.  Investments in these accounts grow tax free and you are not subject to capital gains on profits.  When you withdraw your funds, you will be taxed at your marginal tax rate.
  • TFSAs – Tax Free Savings Accounts are like RRSPs in that they allow investments to grow tax free and you are not subject to capital gains tax on the profits you make. The key difference between TFSAs and RRSPs is that TFSAs hold after tax dollars. This means you can withdraw from the account without incurring tax penalties.

2.   Lifetime Capital Gains Exemption

The Lifetime Capital Gains Exemption is available to some small business owners in Canada. It is allowing them to avoid capital gains when they sell shares of their business, a farming property, or fishing property. The CRA determines the exemption amount annually.  The Lifetime Capital Gains Exemption amount is cumulative over your lifetime and can be used until the entire amount has been applied.

3.   Offset Capital Losses

Generally, if you have had an allowable capital loss for the year, you can use it offset any capital gain tax you have owing. This can reduce or eliminate the taxes you will owe. There are a few considerations for employing this strategy:

  • Losses have to a real loss in the eyes of the CRA. Superficial losses will not be allowed to offset gains.
  • You can carry your losses forward or backward to apply them to different tax years. Losses can be carried back 3 years and carried forward indefinitely. This means you can accumulate losses that can be used to offset gains in future years.

4.   Defer Your Earnings

A possible strategy is to defer your earnings on the sale of an asset because you only will owe tax on the earnings that you have received.  For example, if you sell a property for $200,000 you could ask the buyer to stagger their payments over 4 years. Then you would receive $50,000 a year. This would allow you to spread out your capital gain tax.

This strategy is known as the Capital Gain Reserve.  There are a few things you need to keep in mind before using this strategy:

  • The Capital Gains Reserve can be claimed up to 5 years.
  • There is a 20% inclusion rate for each year. This means you must include at least 20% of the proceeds in your income each year for up to 5 years.
  • There are some instances that the 5-year period can be extended to 10 years.

5.   Charity

Consider donating shares of property to charities instead of cash. This method allows you to make a charitable donation, receive a tax credit based on the donation, and avoid tax on any profit. Win-win!

* Avoiding or deferring Capital Gain Taxes should always be done with the guidance of a professional financial advisor and accountant to ensure all CRA guidelines are being carefully followed.

Book an appointment to meet with us! Click Here

Donating Life Insurance Policies

For many individuals there comes a time when life insurance is no longer needed. Whether it be a spouse has passed away, your children are grown, or you simply have the wealth to cover any unexpected expenses. A common route is to cancel life insurance and take the cash surrender value. This may be the solution for some individuals, but many policy owners may be interested in keeping the coverage in force and gifting the life insurance to a charity. Upon their death they could leave a lasting legacy in their community and receive a potentially substantial tax break.

What You Need to Know

How to Donate a Policy

Method 1: Charity as a Beneficiary

The most common way to donate a policy to charity is to simply name the charity as the beneficiary of the life insurance policy. The insured would simply assign the charity as the beneficiary, and upon their death the charity would receive a tax-free lump sum payout. The insureds estate would then receive a tax credit based on the amount of the gift.

Method 2: Charity as Policy Owner & Beneficiary

Another option is to have the charity of your choice agree to take over ownership of the policy and become the beneficiary. Similar to the previous method, the charity would still receive the tax- free payout upon the insured death, avoiding probate. The difference between this method and the previous method is that the insured would receive a tax credit immediately. If the insured continues to pay the premium, they will receive additional tax credits as well.

This method comes with more considerations then simply naming the charity as the beneficiary. The first and most important consideration is whether or not the charity is willing to take on ownership. If the insured does not plan to pay the policy premiums anymore it is possible charity may not be able to take over the premium payments. It may be an extended process to find a donor who would be able and willing to take on such a commitment. One solution to this problem may be to donate a policy that is functioning has gone paid up. Paid up policies allow their cash value to pay the premiums, eliminating the need for payor.  Another consideration is the possibility that the charity will no longer be operating at the time of the insured’s death. Both of these matters would require extensive planning to avoid.

Lastly, since the tax credit would be granted while the donor is alive, it is important to ensure that the entire tax credit can be used. Living taxpayers are only eligible for a tax credit that is worth 75% of their income for the year and can only be carried forward up to 5 years. It is not unlikely that the FMV of the life insurance policy would be more than the insureds yearly income, causing a portion of the tax benefits to be lost.

Case Study

Mary is a 71-year-old widow. All of her children are grown and independent. Mary lives very comfortably on her retirement savings and her husband’s life insurance proceeds. Many years ago, Mary purchased a whole life participating life insurance policy for herself in the event she was to die before her husband. She has recently realized that she no longer needs the coverage, as she has sufficient savings to settle her estate and leave an inheritance to her children. Mary does not want to cancel the policy as it has grown substantially over the years.

Mary’s insurance advisor recommends that she donate the life insurance to a charity. Her advisor explains that if she makes a charity her beneficiary then the charity will receive the life insurance benefit upon her death and her estate will receive a tax credit for an amount equal to the FMV of the donated policy.

This option sounds very appealing to Mary, as she is an active volunteer in her community and she understands the good her donation could do.  Her advisor refers her to an actuary and underwriter, who evaluate her policy to have a FMV of $250,000.

By choosing this option, Mary was able to give a substantial gift to the charity of her choice and was able to reduce her taxes upon her death in her estate, leaving more money for her family.

The Bottom Line

Make sure you talk to your advisor about all of your options before cancelling your life insurance policies. Donating a policy is a little known or talked about option, but it may the perfect solution for some people. Your advisor can help you find the resources necessary to make transactions such as this as successful and beneficial as possible.

Click HERE to book an appointment with us today!

The Insanity of RRSP Season

As each February concludes and RRSP contribution season ends, investors across Canada exhale and exclaim, “Never again.”  Investors go through a swirl of emotions awaiting annual bonuses and jumping through hoops to make their annual RRSP contribution. And the next year, they will do it all over again. To change this hamster-wheel of hastily called meetings, sound recommendations hobbled by hurried decisions the planning should begin long before RRSP season. There is no time like the present to change the upcoming flurry of activity associated with RRSPs.

Most importantly of all, a last-minute approach to retirement saving and investing means that you do not benefit as much as you could. Instead of enjoying the rewarding experience of saving for the future, it becomes a panicked, last-minute appointment. This is far from the measured, planned and calm approach that trusted Advisors espouse. A new routine can be created with a Pre-Authorized Credit (PAC) that makes regular contributions to your RRSP.

 What you need to know

What would be the difference to an investor between depositing $24,000 per year at the end of February versus $2,000 at the beginning of every month?  The difference becomes clear when calculated over a 20-year period. In both scenarios an investor has contributed the same amount, $600,000 (25 x $24,000 or 300 x $2,000).

But the amount at the end of the period is not the same! 

  • At 6% after 25 years the annual $24,000 approach will yield $1,316,748
  • At 6% after 25 years the monthly $2,000 approach will yield $1,385,988

A difference of nearly $70,000!

In almost every case, this is a conservative estimate. The difference is usually much larger because an investor who commits to monthly contributions and agrees to a PAC (Pre-Authorized Contributions) is much more disciplined. An annual, large payment is more susceptible to the negative effects of variations in year-end bonuses and a year of day-to-day spending. The temptation is to believe that, if skipped, payments can be caught-up later, which the effects of compound interest make it difficult to achieve.

 The Bottom Line

Setting up a monthly PAC can help you retire sooner. The only difference is how frequently you make your RRSP contributions. Nothing more, nothing less.

Contact us to discuss starting or increasing your RRSP PAC!! Click Here!

Defined Contribution Pension Plans vs Group RRSP: A Guide for Business Owners

Employers have several options available to them when it comes to setting up a retirement savings plan for their employees. Defined Contribution Pension Plans and Group RRSPs are the most accessible plans to most businesses. Here is what you need to know about each plan and how they can work for your employees.

What Is A Defined Contribution Pension Plan?

Defined Contribution Pension Plans are an employer sponsored retirement savings option available to Canadian business owners and their employees. Defined Contribution Pensions Plans are made up of a combination of employee contributions, employers’ contributions, and an optional voluntary contribution component. Defined Contribution Pension Plans are regulated by provincial pension laws, which varies from province to province.

What Is a Group RRSP? 

A Group Registered Retirement Savings Plan (Group RRSP) is an employer sponsored retirement savings plan. Group RRSP’s have many similarities to individual RRSPs with the only difference being that they are administered on a group basis. The plans are made up of employee and employer contributions, but unlike traditional pensions, the employer is not required to contribute any amount to the plan.

Similarities and Difference 

  1. Tax Deferred Savings: Both Defined Contribution Pension Plans and Group RRSPs offer tax deferred savings for employees that contribute to them.  Contributions are taken at the source before tax and contributed to the plans on the employee’s behalf. Both investment options allow employees investments to grow tax free until they retire, at which point the funds with be taxed as they are withdrawn.
  2. Contribution Limits: Both plans are subject to annual contribution limits. This amount is equal to a percentage of each employee’s income from the previous year. Both employee and employer contributions count towards this annual limit.  Both plans will also cause a pension adjustment to employees. This means their individual RRSP will be reduced based on the amount contributed to their employer sponsored plan. This keeps an equal playing field for those who do not have work pensions.
  3. Age Limits: Defined Contribution Pension Plans and Group RRSPs both require that employees stop contributing to the plan and start drawing on the funds at age 71. At this point, employees must convert the plans to an income fund that will pay them out a retirement income.  For Defined Contribution Pension Plans, this fund is called a Life Income Fund (LIF).  LIFs have minimum and maximum withdrawal requirements that plan holders must adhere to.   Group RRSPs holders have two options at age 71. Plan members can a) cash out the plan and pay all tax owing or b) convert the plan to a RRIF and start taking an income.  RRIFs have minimum withdrawal requirements that plan holders must adhere to.

Pros and Cons

Defined Contribution Pension Plans 

Pros

  • Attractive to Employees due to the employer matching component. This can greatly accelerate employee’s retirement savings
  • Funds are locked-in and therefore not accessible until the employee retires. They do not have the option to spend their retirement savings frivolously.
  • Funds grow tax free if they stay in the account
  • Employer Contributions are tax deductible
  • Typically, the investments offered in a pension plan have a much lower fee than traditional investments.
  • Simple, reduced selection of investment options available within the plan.

Cons 

  • Defined Benefit Pension Plans can come with higher administration costs and require continuous maintenance.
  • Due to the fact funds are locked in, employees have little to no flexibility in how they use the money they accumulate.
  • Employer contributions are expected. This can be a significant expense, depending on how many employees a business has.
  • Benefits at plan end are at the mercy of market fluctuations.

Group RRSP 

Pros

  • Employer contributions are not mandatory. This allows for businesses to offer their employees a retirement savings option regardless of the financial abilities of the company, with the flexibility for the company to contribute at any point if it becomes feasible.
  • Funds grow tax free if they stay in the account.
  • Group RRSPS have low start up and maintenance costs.
  • Generally, Group RRSP have a must larger investment shelf than pension plans.
  • No legislative regulation means flexibility for employees to dip into their savings if necessary ie. Home buyers’ program or Lifelong Learners Program.

Cons 

  • Employees have the option to withdraw from the plan at any time, which can severely impact their retirement savings.
  • Larger investment shelves mean more opportunity for employees to take unnecessary or unsuitable risk with their investments.
  • Employer Contributions are a taxable benefit to employees
  • Benefits to employee are not guaranteed and are subject to market fluctuations

Bottom Line

Both plans offer their advantages and disadvantages, with each having something unique to offer. Whichever you choose for your business, you can rest assured you are helping your employees work towards a financially secure retirement!