Author: Peter Richards

Clients and friends,

There’s still time for tax-efficient planning before we reach the year’s end. Here are some helpful tips from a recent AdvisorToGo podcast we tuned into:

1. Be sure to pay certain expenses before year’s end. Expenses related to investments (i.e. interest on money owed) are deductible for Non-Registered accounts if paid before Dec. 31st.
2. Consider tax versus income deferral. Evaluate your tax rates for both money in the corporation and your income. Determine whether you’d prefer to enjoy tax deferrals or leave the money in the business and whether you’d prefer to take salary or to defer income.
3. Rebalance your portfolio sooner than later. Those who have invested in equity markets have seen massive gains in their portfolio as of late. Rebalancing allows you to take those gains and reallocate them with your investment policy statement.
4. Think about year-end loss selling. Rebalancing will also help to realize potential losses and you might want to offset those against your capital gains.
5. Discuss year-end donation planning. In the season of giving, donating portfolio wins to a registered charity or worthy cause not only can support those in need, but it can also reduce your income tax expense. Alternatively, setting up a donor-advised fund allows for in-kind contribution, no capital gains tax on any accrued gains in your portfolio, and still provides a receipt for the fair market value on your donations.
6. Review your RESP options. Revisit planning for contributions to Registered Education Savings Plans (RESPs) for your children.
7. Consider your loan options. The prescribed spousal loans rate is fixed at 1% until the end of the year.
8. Review your RRSP contributions. For business owners, total compensation is key and salary must be considered against dividends. Paying yourself enough in salary (at least $162,000) is vital to being able to make the maximum contribution ($29,210) to your Registered Retirement Savings Plan (RRSP) next year. Those who turned 71 this year seeking to convert their RRSPs into Registered Retirement Income Finds (RRIFs) or Annuities have until Dec. 31st to make any final contributions.

Just some things to consider before we head into the New Year. Ready when you are.

Clients and friends,

Considering corporate insured asset planning in your holding company? Here are three key misconceptions we’d like to clear up:

1. It’s viewed as a nonessential if you already have wealth. Instead of a costly non-essential, life insurance can be viewed as another asset class within your diversified investment portfolio. You will benefit from tax-advantaged growth and create more wealth for family or charity; not the government.
2. It’s not a flexible strategy. Corporately owned life insurance is more flexible than you think—consider it another stock investment and another bank account. As things change in life, your policy can change too.
3. It’s a poor investment. Whole life insurance policies have been paying dividends for over 100 years. Because of the tax savings and estate benefit, its “Internal Rate of Return” (IRR) can be considerable.

Corporately owned life insurance can play a key role in your investment diversification and estate plan. We’re here if you’d like to chat more about how it can help you to achieve an efficient tax and investment strategy now, and for your family’s future.

Ready when you are.

Clients and friends,

In light of the recent re-election of the Liberal minority government, three major potential tax changes have emerged:

• The rumoured tax hikes for those with a higher net worth,
• Changes to the capital gains inclusion rate, and
• Plans to address wealth inequality.

Everyone is unsure as to exactly what’s going to happen, but here’s a related article if you’re interested in understanding the possibilities of what’s to come. In our next touchpoint, we’ll highlight some more specific personal tax and finance changes to expect post-election.

As always, if you have related questions or just want to bounce ideas around, please let us know. It’s what we’re here for.

Clients and friends,

This week, we’d like to highlight an interesting approach to legacy planning: the “Cascading Life Insurance Concept”. Also known as “The Waterfall Concept” or “Intergenerational Wealth Transfer”, it’s a strategy that is ideal for families that anticipate their money outliving them. It begins with the purchase of a whole life insurance policy by a grandparent on their adult child and the grandchild is named as the beneficiary. The adult child is the contingent owner of the policy, and, once the grandparent passes, the adult child then becomes the outright owner. Eventually, the ownership of that policy will be transferred to that child.

Here are just a few key benefits to this strategy:

1. Assets Can Grow Tax-Free Inside the Policy.
2.  It Provides a Layer of Financial Security for Multiple Generations.
3. It Can Preserve Insurability.
4. It Can Extend Beyond Legacy Giving.

This is also an interesting strategy to consider when dealing with the rollover of corporate shares to the next generation. Wealth transfer planning is a specialized process and it’s one of the things we do best. We’d love to chat with you today about extending your legacy for generations to come.

Ready when you are.

Clients and friends,

As summer comes to an end and an election is on the horizon, there’s a strong indication that business owners will be faced with higher taxes. Here’s an important reminder of a major change a few years back.

In 2017, the Canadian government introduced the “Passive Investment Income Rules”, limiting a business owner access to the full Small-Business Deduction (SBD) for tax years beginning after 2018. The SBD is a special deduction available only to Canadian-controlled corporations to reduce the overall tax paid on the first $500,000 active business income earned. Not only has this rate been an important incentive to business owners as they start or expand their small businesses, but it has also allowed business owners to use their corporations to accumulate retirement savings.

Navigating these tax rules makes saving for the future harder. Many small business owners who rely on their businesses to earn and save for retirement are facing reduced levels of saving from inside of their companies.

A thoughtful, strategic plan protects your business growth from tax. The key here is to reduce the amount of “Adjusted Aggregate Investment Income” (AAII) earned annually by your company, to maintain access to the full SBD. Here are 3 strategic ways to do that:

1. Control/Manage Your Asset Allocation. By adjusting your asset allocation from inside your corporation that holds your passive investments, there is potential to reduce the amount of annual AAII reported. If you hold onto your investments long term, tax can be deferred and you can avoid reporting taxable income on unrealized capital gains. By holding the fixed income portion of your portfolio outside of your corporation (in your RRSP or a tax-free savings account, for example), the highly taxed income won’t create more taxes.
2. Invest in Permanent Life Insurance. A permanent life insurance policy allows you to earn non-taxable cash value (or investments) within that policy. Upon the death of the insured, the proceeds are paid out tax-free and will increase the capital dividend amount of the corporation, meaning that your heirs will be able to draw tax-free funds from the corporation by paying tax-free dividends out of the company.
3. Consider Setting Up an Individual Pension Plan (IPP). Your corporation can deduct contributions to an IPP, where the investments would then be held. In this way, annual income avoids tax. Why? It evades the definition of “AAII”. Interestingly, too, an IPP can allow for greater investments than an RRSP.

If you’d like to sit down with us and discuss how these strategies might work for you to protect your wealth from taxes, let us know. You’ve worked hard for your success. Let’s keep what you’ve built yours.

Clients and friends,

These hot summer months make the decision to pack up and head to the family cottage or cabin an easy one. Plus, after several months in the Ontario provincial lockdown, a trip to the lake provides an ideal escape.

Many of our vacation homes have grown in value in a big way in the past year or so. Unfortunately, with this increased value can come a spike in taxes when you decide that it’s time to sell, transfer ownership, or when you pass away. This can result in added stress, with questions like: “How much tax will eventually be owing on the property?”, “When will those taxes be due?”, and, “What can be done to manage that tax?”

The ultimate challenge here is to minimize your tax liability. Here’s what we can do about it:

1. Maximize Your “Adjusted Cost Base” (ACB). You can only be taxed on the value of your property over and above your “Adjusted Cost Base” or cost amount above the sales price. Any improvements you’ve made to the property over time count towards your ACB. Typically, we pay less tax because these things usually increase the cost basis and decrease the capital gains. Work to pull these items together and hold onto them going forward. 
2. Claim the “Principal Residence Exemption” (PRE). The key to the definition of “Principal Residence”, here, is that you must “ordinarily inhabit” the space; no length of time is specified. This means, in general, that you could claim the “Principal Residence Exemption”, to shelter all or some of the gain upon the sale or transfer of the property, or upon your passing. While many people tend to list their primary home as their Principal Residence, this might be something to consider as property values of cottages continue to soar. 
3. Transfer Ownership. In this “estate freeze” of sorts, you would not face any tax on any future growth on the property. Instead, the future growth, and associated tax bill are attributed to the next generation. Yes, the potential challenge, then, might be paying tax upon that transfer, but this is not guaranteed. If you do end up having to pay tax, it’ll be paid at today’s capital gains inclusion rate, which is likely better than what’s projected for the future.
4. Consider Life Insurance to Cover Your Taxes. A final easy solution to manage vacation home taxes is through the purchase of a permanent life insurance policy, to cover those taxes upon your death. This idea allows for your heirs to fund the taxes owing should they wish to keep the cottage but don’t have enough in liquid assets to cover it. What’s more, a permanent life insurance policy allows for the tax-free accumulation of cash value.

A cottage or cabin is a place for fun, family time, rest, and relaxation and tax stress eats away at those plans. Let’s chat today about a plan for your cottage now, and into the future. Stay tuned for Part 2 of our Cottage Planning Conversation in the coming weeks.

Clients and friends,

As you know, we make a point of keeping you up-to-date on all things planning for your family business. Until recently, Section 84.1 of the Canadian Income Tax Act deemed it more expensive to sell a family business or farm to a family member than to a stranger. This is due to the difference in sale price and original purchase price being considered a dividend upon sale between family members, while the sale to a non-family member is considered a lower-taxed capital gain.

Recent changes to legislation will now amend this rule. On June 22nd, the Senate approved Bill C-208, which creates a limited exemption to the sale of qualified business corporation shares. What this means to small business owners, farming families, and family corporations is that the same tax rate when selling their corporation will apply regardless of selling between family members or to a third party. This will allow for sustainable family business and farm succession, secured retirement savings, and will result in fewer unfair taxes overall.

Click Here to read an article from Tim Cestnick of the Globe & Mail which highlights the exciting news. As always, if you have any questions, let us know. It would be great to hear from you.

Government rules for your retirement income plan will have you pay unnecessary tax and we want to make sure that doesn’t happen.

If all goes well, you will build up savings, expand your assets, be able to enjoy a comfortable retirement, and pass on assets such as business shares and property to the next generation. But, tax can rip those to shreds. The good news is that there are things you can do to address it.

As you know, we help business families make the most of their wealth, and in this touchpoint, we’d like to share an example of how you reduce tax in retirement.

Recently, we were introduced to Mary and Joe, aged 56 and 60, whose overall capital plan was at the centre of the retirement conversation. They had enough personal capital to deliver a comfortable lifestyle, as well as capital in a holding company that would likely be left for their estate. Their plan was to retire and sell the business sometime in their 60s, continue to invest in RRSPs, build up their hold co., and begin drawing retirement income from their RRIF minimums at age 71. It was looking good—except for the tax implications.

When we analyzed their income needs from all sources, it was clear that the government rules and tax obligations would force them into unnecessary high-income tax brackets, and would create higher tax on their corporate wealth, ultimately then creating unnecessary estate taxes.

So, what did we do? We worked with them to rebuild their plan, and, in the process, saved them significant money that would otherwise have been lost to taxes.

Here’s What We Did:

1. We provided an accurate measurement of their current and future wealth, integrating personal and corporate wealth together.
2. We analyzed their income need and the impact of their RRIF capital. We built an income strategy using this money as their base, starting at age 63 instead of 71.
3. We showed them how to defer more capital in their corporation instead of taking out salary, allowing for annual tax savings.
4. We showed them how to plan for tax-free dividends and tax efficient transfer of their shares to the next generation which included corporate life insurance strategy.
5. We reduced both their annual income and corporate tax obligations.
6. We created a new way of looking at their personal and corporate wealth together which they had never seen before and which created more overall flexibility for the family.

Here’s What’s Important:

As you think about how you’ll be paid during retirement, pay attention to RRSP/RRIF capital and have your corporate wealth carefully examined. The key in having a solid retirement income plan is properly integrating personal and corporate assets to ensure more capital is available while you are alive and for your estate.

If you have any questions about reducing income and long term tax issues, we should probably chat.

At Peter Richards Advisory Group, we work to provide you with up-to-date news on wealth and tax planning. This week, we’d like to share this article from our CALU organization. The piece points to the benefits of incorporating tax-efficient charitable giving strategies as a part of a diversified wealth planning strategy.

The article explains the “insured share donation strategy,” which intends to help a business owner to construct and satisfy their goals for their legacy while minimizing risk and maximizing tax efficiency. You can review CALU’s feature on this strategy here. If it raises any questions, please ask us. It’s what we’re here for.