Multigenerational Legacy Planning

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.

How Small Business Owners Can Save For Retirement

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.

Cottage Planning Conversation, Part 1: Dealing with Tax on Your Cottage

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.

Bill C-208: A Tax Win for Business Succession Planning

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.

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8 Important Steps to Planning & Protecting Business Family Wealth

  1. A clear picture of your vision, goals, and what matters most to you.
  2. A thorough analysis and understanding of both your asset base and business holdings.
  3. A projection of all assets at reasonable growth rates per asset class.
  4. A detailed understanding of your human and capital risks.
  5. A definition of your personal goals with respect to spending in retirement.
  6. A tax efficient retirement income plan that is highly flexible to your needs and/or circumstances as they may change.
  7. A plan for the transfer or sale of your corporate assets and ongoing passive investments as defined by your vision.
  8. Open communication with your family members, proper Will planning, and a clear strategy for your estate.

RRSP/RRIF: The Quiet Tax Machine

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.

Tax Planning: The Donation of Private Corporation Shares

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.

Recovery Plan for Jobs, Growth, and Resilience: Your 2021 Federal Budget Analysis

At Peter Richards Advisory Group, we know the importance of keeping up-to-date on the latest news in finance, planning, and tax. This week, the Canadian government has presented its Federal Budget for the year, titled, Recovery Plan for Jobs, Growth, and Resilience.

Here, you can review a summary of the budget, aimed to “finish the fight against COVID-19,” to reduce the Canadian carbon footprint, and to provide better learning and childcare options for young families. Interestingly, the rumoured “wealth tax” and increase in the capital gains inclusion rate strategies were omitted from the plan, for now.

If the article raises any questions, please ask us. It’s what we’re here for.

A Compelling Tale: Ted Rogers & The True Value Of Life Insurance

To many, Rogers Communications is not only a popular technological brand, but the very foundation to everyday interactions, both personal and professional. Built and founded by the late Edward Samuel “Ted” Rogers, the Rogers brand remains today a master of the Canadian communications universe.

Rogers’ entrepreneurial triumphs lead to his becoming the second wealthiest Canadian, with a personal net worth estimated at more than $7 billion. The careful strategy that went into Rogers’ financial and estate planning only served to protect and grow his wealth for generations long after he was gone.

Few people plan their deaths as carefully as Rogers did, though few face such a number of physical ailments. Moreover, his father’s untimely death at 38 by a ruptured aneurysm formed much of Rogers’ mindset towards planning. As a part of his wealth strategy, Rogers established family trusts and 12 life insurance policies were taken out on his life, primarily owned by private, family-owned corporations. He updated them frequently, leaving little to fate.

The case exemplifies the benefits of incorporating life insurance into a diversified plan, making it central to the management of the Rogers family’s financial needs. Managing Partner at Integrated Estate Solutions and specialized tax advisor to the Conference for Advanced Life Underwriting (CALU), Kevin Wark provides an overview of Rogers’ estate planning strategy. You can read his article, featured in Forum Magazine here.

Willing Wisdom: What’s On Your Estate Planning ‘To-Do’ List?

At Peter Richards Advisory Group, we identify and close gaps in planning for our clients. With over 137 million adults in both Canada and the U.S. without a legal will, and many more that require a significant upgrade, we know that estate planning is an important issue.

We have had conversations recently involving next generation planning. To help with this process, we do have a complimentary tool that is useful and available: The Willing Wisdom Index.


To access it, please Click Here. It provides an Estate Planning Checklist to help begin planning for you and your family’s future. If you find you have any questions, please let us know. It’s what we’re here for.

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