Blog

By: Shawn Todd, CFP

Most of us have golfed at one point or another during our lives. It may have been once, or it may have been many times throughout the summer. No matter how often you have golfed you will always remember the feeling of a firing a shot into a bunker [when you were going for the green], or just firing a ball into the water on a par 3. It’s tough, and it really starts to take the fun out of the game.

Most of the people reading this will have also invested at one point. Your home is one of your largest investments, and you may have several other investments in your portfolio. If you’ve been doing it as long as I have, then you also will have memories of the tech wreck, the financial crisis, and the market correction during Covid.

What does golf and investing during these market corrections have in common?

A well thought out gameplan.

If we approached golf without any consideration for the inherit risks of the game, well we would just feel the consequences. We’d lose a ball here, bogey there, it would be a miserable experience.  Some of us all can feel that pain. Playing the game more smartly, hitting more fairways, staying out of the bunkers, well of these efforts make for far better results.

Investing needs to be focused, and well thought out. Ensuring you understand the risks of the portfolio you are in, the timelines you have, the goals of each portfolio, and the risk of each investment in your portfolio; is incredibly important. There needs to be a well thought out plan for taxation, capital gains [this is the topic of the day – thanks to the recent budget], and a discussion of the solutions that make the most sense for each investor. Often what works for you, may not be what works for your neighbour or colleague. Like golf, we all have different risk tolerances, capability, and performance needs. You need to play your own game, and your own pace.

Unlike golf – there are some great opportunities that will enhance your experience. Portfolio management, risk management, diversification, and a deep understanding of your needs – will all allow for an exceptionally smooth ride.

Imagine golf is someone could just tap your shoulder right before you started your ill-fated swing and said – “I just wouldn’t take that shot”.

It might make the game a lot more fun.

Consider helping your investing experience by adding a professional wealth management team to help you understand your own gameplan.

My thoughts for the day.

Let’s dive right in on a powerful savings strategy that can make a significant impact on your financial well-being: automated contributions. By leveraging technology and setting up automatic contributions, you can effortlessly save money and build a stronger financial future. Let’s explore how this simple habit can pave the way to financial success.

“Set It and Forget It: Automate Your Savings for Stress-Free Financial Growth!”

The Power of Automation: Life can get busy, and amidst the hustle and bustle, saving money often takes a backseat. However, by automating your savings, you can remove the mental burden of manual transfers and make consistent progress towards your financial goals. Setting up automatic contributions ensures that a portion of your income is saved without requiring any active effort from you.

“Make Savings a Priority: Pay Yourself First!”

Pay Yourself First: One of the fundamental principles of successful saving is to prioritize yourself. Instead of saving what’s left at the end of the month, make it a habit to save first. When you receive your paycheck, allocate a predetermined percentage or fixed amount towards savings and have it automatically transferred to your investments. This way, you ensure that your future self is taken care of before other expenses arise.

“Small Steps, Big Impact: Watch Your Savings Grow!”

The Magic of Compound Interest: Automating your savings not only instills discipline but also allows you to take advantage of the power of compound interest. Over time, even small contributions can grow exponentially as interest compounds on your savings. By consistently funneling money into your investment, you can harness the magic of compound interest and watch your wealth grow steadily.

“Incremental Increases: Boost Your Savings Effortlessly!”

Incremental Increases: As your income grows or expenses decrease, consider increasing the amount you automatically contribute to your investments. Gradually bumping up your savings rate can be painless, as it adapts to your financial circumstances without disrupting your lifestyle significantly. Aim to periodically review and adjust your automated contributions to ensure they align with your financial goals and aspirations.

Conclusion:

Automating your savings is a game-changer when it comes to achieving financial success. By making consistent contributions to your investments without the need for constant monitoring, you can build a solid financial foundation. Remember, every small step you take today will lead to a brighter financial future tomorrow. So, set up those automated contributions, pay yourself first, and enjoy the peace of mind that comes with knowing your savings are on the right track. Happy saving!

Investments can deliver a major source of income and tax implications for individuals.  Each major type of investment income is subject to special tax treatment.

Understanding how your investments are taxed is an important consideration for investment planning since after-tax yield is more important than gross returns.  The most common types of income most investors will receive are interest, dividends, and capital gains.

Inside a registered account, like an RRSP or TFSA, these earnings are not taxed.  The total withdrawal from an RRSP is subject to income tax, while TFSA withdrawals are not.  For investment income that is subject to tax when it is earned, the effective income tax rate can vary widely for an individual.

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 Guaranteed Income Certificates (GIC).  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, the contract stipulates that they will earn $4 of interest each year for the next 10 years.  The investor must report the $4 of interest income on their income tax return each of those 10 years.

Since interest income is reported as regular income, like employment income, it is the least favourable way to earn investment income if it is subject to income tax.  Typically, GICs offer relatively less risk than other investments to compensate for lower gross and after-tax returns.

Dividend Income

Dividend income is considered 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).

Taxpayers 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.

Example:

 A shareholder of a Canadian Controlled Public Corporation is paid a dividend of $100.  This income is an eligible dividend and is subject to the gross up and the DTC.  The dividend would be grossed up 38%, so the income is now considered to be $138.   The DTC would be 15.02% of $138, the grossed-up amount, equaling $20.73.  Therefore, the shareholder would report a dividend income of $138, but would have their federal taxes 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 adjustments to the dividend, it would result in the dollars being double taxed.   This tax treatment makes dividends a more tax efficient way to receive income than interest income. Tax is payable when the dividends are paid out.

Different rules apply for dividends derived from non-Canadian and private corporations and can offer different tax treatment and advantages when professional tax expertise is employed.

Capital Gains

Capital gains are realized on equity investments (such as stocks) that appreciate.  For example, if an investor bought a stock at $6 per share and sold at $10 per share, they would have earned a capital gain of $4.  In Canada, only 50% of a capital gain is subject to income tax.  In this example only $2 of the gain would be taxed.  Another desirable trait of capital gains income is that tax is not due until the investment is sold or deemed to have been sold.  This provides the investor with a measure of control over the timing of taxes.  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 their tax situation and the implications that different types of investment income can have on future taxes.

Financial, retirement and income planning should include the anticipated tax obligations at both the federal and provincial level.  Ensuring an investor’s expert advisors understand overall objectives, risk tolerance and retirement timing can allow them to maximize after tax returns.

By: Michael Lutes CFP, CLU

Certified Financial Planner

Introduction

In Canada, the taxation of passive income earned by corporations has been a topic of interest and debate for many years.

The rules and regulations surrounding this income have evolved, impacting how businesses manage their investments and financial strategies.

In this blog post, we will delve into the essentials of Canadian corporate passive income, including what it is, how it is taxed, and strategies for optimizing your corporate investments.

What is passive income?

Passive income refers to the income earned by a corporation from investments in assets such as stocks, bonds, rental properties, and other passive sources. This income is distinct from active business income, which is generated from a corporation’s core business operations.

Common types of passive income include:

1. Dividend Income: Earnings received from investments in shares of other corporations.
2. Interest Income: Earnings from investments in bonds, GICs, or loans.
3. Rental Income: Income generated from leasing out real estate properties.
4. Capital Gains: Profits realized from the sale of investments, such as stocks or real estate.

How is passive income taxed?

Taxation of passive income is governed by the Canadian Income Tax Act. The key principle is that passive income is subject to a higher tax rate compared to active business income to discourage corporations from accumulating excessive passive investments.

Moreover, having too much passive income in any given year will reduce or eliminate a corporation’s access to the following year’s Small Business Deduction, the effect of which can be an additional approximately 15% income tax.

Strategies for managing passive income

To minimize passive income and avoid the potential loss of the Small Business Deduction, business owners should consider the following strategies:

1. Withdraw additional funds for investment in RRSP or TFSA accounts.
2. Use accumulated Capital Dividend Account (CRA) credit to withdraw funds tax-free and reduce potential for passive income.
3. Remove funds tax-free by having the corporation repay any outstanding shareholder loans.
4. Focus on capital gains-oriented investment. Unlike interest and dividend income which is earned regularly and taxed in the year it’s received; capital gains can be realized strategically and only 50% of capital gains are included in income.
5. Let your winners ride! In other words, if you have unrealized capital gains, you might consider hanging on to them until a future year when you may avoid a further reduction of your SBD. Or hang on and sell them in a year when you already have greater than $150,000 of passive income and have already eliminated the SBD anyway.
6. Spread out your gains. Instead of deferring capital gains to future years, sell your winners over two or more years to potentially avoid reducing your SBD.
7. Implement an Individual Pension Plan (IPP). An IPP is essentially a business owner’s very own defined benefit pension plan. The money contributed is eliminated from the calculation of passive income.
8. Buy permanent life insurance inside the corporation. The investment income is sheltered inside the policy as “cash value” and doesn’t count to the calculation of passive income. Furthermore, on death the entire death benefit can often be paid out to shareholders tax-free.
9. Donations from a corporation will reduce the funds that would otherwise be producing passive income. Further, if donating securities or funds with unrealized gains, there are additional benefits such as no tax payable and a credit to withdraw funds from corporation tax-free.

Conclusion

Understanding Canadian corporate passive investment income and its taxation is crucial for businessowners looking to optimize their financial planning strategies. By staying informed about the rules and employing effective tax planning strategies, businessowners can strike a balance between accumulating passive investments and managing their tax liabilities. Consulting with a qualified tax professional or financial advisor is often recommended to navigate the complexities of corporate taxation in Canada effectively.

Executive Summary

Receiving a raise or a bonus is a great accomplishment that lends a feeling of accomplishment and celebration. Many of us opt to use the bonus to buy something we’ve been wanting, like that flat screen television, for example. Rather than splurge, however, why not hold onto that bonus or raise and invest in wisely?

Saving a Raise

If you are not already on a pre-authorized contribution (PAC) to a savings or registered account, now is a great time to do so. Each pay, or each month, have a predetermined amount removed from your bank account and placed into savings. Once the funds are in a savings account (and removed from quick and easy debit card access), they can be used for several purposes:

Pay down debt:

• • Especially high-interest consumer debt like credit cards
  • Pay off your mortgage sooner: Save money for the future by increasing the mortgage payments above the minimum amount or increasing the payment frequency (bi-weekly instead of monthly)

Maximize the use of a “Registered” account:

• • Place the pay increase directly into a registered account like an RRSP to increase savings

In most cases a blended approach is best. Paying down debt alone doesn’t afford you the opportunity to amass a small, liquid, emergency nest-egg to cover unexpected expenses.

Saving a Bonus

Unlike a raise that should affect all future earning and raises that follow, the one-time bump on a bonus can disappear as mysteriously as it arrived. Rather than spend your bonus on a one-time, self-gratification, why not use it to strengthen your financial future?

Pay down debt:

As explained above, the pre-tax earnings required to pay post-tax debt can be significant. A large, one-time bonus can significantly affect the short and long-term savings of your family.

• • Paying off a large portion of your mortgage: a reduced balance causes each subsequent mortgage payment to have a larger portion dedicated to reducing the principal

Maximize the use of “Registered” accounts:

• • Place the bonus (or part thereof) directly into a registered account like an RRSP to increase savings

Often you may feel that as if your raise or bonus didn’t actually happen. You earn more, but don’t enjoy any of the benefits. A small celebration allows you to acknowledge and move forward. The celebration could take many forms, but it is best if it is unusual and distinctive.

Bottom Line

Getting a raise or bonus is an impressive accomplishment. Often, you may feel like you didn’t even get a raise which is why it is important to commemorate your accomplishment with a small celebration. Take some of that money and treat your family to dinner, go to the spa or celebrate however you see fit. Then, contact your Advisor for assistance to determine how to best utilize the extra funds.

Prioritizing debt is an important skill to learn because it determines how fast you will pay down your debts. Debts have varying payback plans that will require you to place them on a scale to decide which should go first. Obviously, the interest rate is an important factor to consider when prioritizing your debt. It is advisable to have a strategy for paying your debts so that your other financial goals can be met. Debts are known to affect the attainment of one’s financial goals. There are a few strategies you can try that can help you prioritize your debts for easy payment. Some of these strategies include starting with the debt with the highest interest rate; starting with the least balance; starting with the highest balance; and consolidating your debts.

Starting with The Debt with Highest Interest Rate

This is known as debt avalanche. It entails you starting off paying the debt with the highest interest rate to the least. Debts with high-interest rates are always difficult to pay because of the accumulation of the interests. Getting it off your books first will save you money and help you focus on paying off other debts and financial goals. Picture an avalanche and imagine your debt tumbling down quickly. That is how this strategy works.

Starting with The Debt with the Least Balance

This strategy is good for gaining momentum. It is known as the snowball debt repayment strategy, and it is more motivational than strategic. If you are finding it difficult to figure out how to pay your debt, start from the lowest and gradually work your way up. Another advantage is that it gives you that little bit of extra cash to tackle your big debts. This strategy also comes in handy where you feel you cannot adopt the previous strategy. Start with the least balance.

Starting with Your Largest Balance

This is the opposite of snowball strategy. This strategy prioritizes the debt with the largest balance, and it is an unpopular strategy because it may be difficult to achieve. The question is why will I start with my highest debt? It may not give room for other financial goals because all your resources will be channeled towards paying off that debt. However, there are cases where you may opt for this type of strategy. An example is when that particular debt has a promotion of a reduced interest rate, and you need to pay it off before the promotion ends.

Consolidating Your Debts

This is usually what you resort to when it is taking too long to pay your debts, or the interest rates are making it difficult to get it off your books. When you consolidate your debts, it gives you the opportunity of paying all your debts at once. You can take a loan to pay for your consolidated debts which then leaves you with the repayment of that loan only. For example, you can consolidate all your credit card debts and pay them off with a balance transfer credit card. This strategy is particularly effective when you have multiple debts that are hindering you from achieving your financial goals.

By: Louai Bibi, Advisor Associate

You’ll likely have heard about the concept of a family trust through a movie or TV show. If this is the case, you’ll likely assume that there is a direct correlation between having a family trust and being ultra wealthy.

This isn’t always the case and family trusts can be a huge help to the average Canadian family, but trusts are complex and requires advice from your tax/legal/financial planning team.

Here is an example where a family trust can be helpful:

John has two children from a previous marriage. John later marries Jane, who has two children from a previous marriage as well. John owns a cottage which he & Jane, as well as the four children love to visit. If John were to leave the cottage to Jane in his will, she may or may not let John’s kids have access to the cottage after his death or worse, when Jane dies, she very well may pass the cottage on to her own children through her will, which leaves John’s children out of the equation and likely conflicts with John’s wishes.

If John were to have set up a family trust that owned the cottage, he could have stipulated in the trust agreement that Jane & her children, as well as his own could have all enjoyed the cottage during their lifetime (following his death) but when Jane were to pass, the cottage would be willed to John’s children.

This doesn’t just apply to cottages or vacation properties either. John could have had a child with a disability who can’t handle their financial affairs and wanted the inheritance John leaves to this child to be paid over their lifetime, as opposed to a lump sum. There could even be a family member who would have blown through their inheritance during a weekend in Vegas, and a trust could allow this individual to receive their inheritance in chunks or once achieving a major milestone to mitigate this risk.

For the purpose of this blog – I won’t be addressing the tax benefits or consequences too deeply. After all, the most qualified person who can speak to this is your trusted accountant.

There are some great tax advantages to using a trust:

• Possibly reducing taxes at death.
• For business owners – multiplying the capital gains exemption.
• Income splitting opportunities with lower income earning beneficiaries.

There are also some disadvantages to using a trust that can sometimes outweigh the advantages:

• Cost of setting up a trust and annual tax returns are required.
• Attribution rules can be complicated and may make it difficult to shift income to lower-income beneficiaries.
• Likely not an ideal solution for US citizens and/or taxpayers.
• Trusts are taxed at the highest personal marginal tax rate.

All that to say, the decision to implement a trust is not one that should be rushed and should entail detailed discussions with your tax/legal/financial planning professionals as to how this strategy fulfills your goals and mitigates unnecessary cost, complexity, tax, and risk. Here is a link to a great article by BDO that uses an example of gifting a cottage from parents to children and the options available to them.

This process starts with some self-reflection. What does my legacy look like? Who receives my assets at death, what does my family dynamic look like and how can I structure this in a way that results in the least heartache, complexity and possibly reduces my taxes owing? Sometimes a trust fills that gap and sometimes it doesn’t. Once you’ve had some time to reflect on these items, you can directly book yourself into one of our calendars here to continue this conversation.

The very nature of debt implies that there is nothing good about it. No debt is good debt. However, taking debt is almost the only way most people can stay afloat. What differentiates a good debt from bad debt is the purpose of the loan. While some loans are a necessary evil, some unnecessary debts drag one into a financial abyss that may be difficult to climb out of.

What Is Good Debt?

Good debts are generally referred to as future investments that will appreciate in due time. The phrase ‘it takes money to make more money’ comes to mind. There are loans you may need to take to generate more income and build your net worth. Such loans are justified because they are needed investments for a future reward. Paying such loans back is not usually a problem because you would have used it to make double the loan. Examples of good debts include student loans, business loans, and mortgages.

However, there is an inherent risk in taking a ‘good debt’. As was mentioned earlier, debts are generally an inconvenience on one’s financial plan, so there is always that inherent risk when taking a loan even when it is supposedly going to build your wealth and increase your net worth in the future. When you take a loan for investment, there are a lot of assumptions involved. Nothing is certain; you may not get the return you hope for but what’s life without risk. This is why it is always advisable to be conservative about your projections. In other words, when taking a loan, always consider when the return will start coming in and what will be the amount of returns you will be expecting. Juxtapose it with the loan you are taking and ask yourself if it is worth it. When it comes to debts, there are no guarantees, even for good debts, the purpose of the loan is all that matters.

What Is Bad Debt?

Debt is said to be bad when you are borrowing to purchase a depreciating asset or an asset you do not need. Borrowing money to acquire a want and not a need is usually ill-advised. Financial advisers will say if the money will not increase in value or generate more money for you, then don’t borrow. Borrowing money to purchase a depreciating asset will only put you in more debt. The risks in a bad debt are visible as day. Examples of bad debt include car loans, credit card loans for shopping, football tickets, etc…

Other Debts

There are other types of debt that do not fall within the category of good or bad debt. These are debts that are relative to everyone’s financial capacity at the time of taking the debt. These types of debts may be good for one person and bad for the other. Someone with enough financial cushion may afford to take further loans to pay off his other debts or invest in more portfolios compared to someone already drowning in debt.

Debt Choices

As discussed, be it a good or bad debt, the reality is that it is still a debt, and you must pay it back. In deciding what type of debt to take, you must consider the type and purpose of the debt. This will help you determine whether a debt is truly worth it. Are you investing in your future or satisfying your wants? That question will help you in deciding whether to take the loan or not.

By: William Henriksen, CFP

Congratulations! Officially becoming the professional that you studied so long to become is an amazing achievement and that deserves to be recognized! The path to becoming a professional such as a doctor, dentist, or lawyer requires almost a decade of post secondary education or more. Take a moment here to acknowledge your achievement. Think of all the work you’ve put into those years and think of all the various paths you can take your career from here. It’s exciting, scary, stressful, and wonderful all at once. Let’s explore how you can best position yourself for the future.

Managing your cash flow as a professional

The moment you start making an income, you begin feeling the biggest cashflow flip that you’ve ever had. This is where you have an opportunity to set up a great habit for yourself by creating a budget that incorporates your values, priorities, and the wellness of your future self.

Things to consider when creating a budget:

1. Your fixed expenses: This establishes a baseline for all future lifestyle expenses so be careful.
2. Your insurance premiums: If you are running your own practice you may need to get individual insurance and should factor the premiums into your budget early on.
3. Your savings rate: How much should you be putting away for your future self and for your long-term goals? Do you have an emergency fund in place and how much should you aim to have in it? The amount will vary from person to person and should be discussed in the context of your unique goals and situation. As a professional, keep in mind that you will likely need to fund your own pension as you may not have an employer to fund a pension plan for you.
4. Debt repayment: Many professionals come out of school with significant student debts. Should you focus on paying it down first? If so, how aggressively? This will also depend on your unique situation.
5. Automation: Having all the above automated will create the possibility to implement point number 6.
6. Guilt-free spending: What’s left over in your budget is non-allocated money. In the real world the amount will vary from month to month depending on how often you get paid, but if you’ve automated everything to come out on the same date, once it’s past you can confidently spend money that’s left over with a clear conscience because you will have already allocated money to pay your fixed expenses, protect your income, health and family through insurance, and you will have paid yourself through saving and debt repayments. If the amount you’ve allocated to points 1-4 allow you to reach your goals, the amount left over can be spent guilt free.
7. Reviewing regularly: Keep in mind that being financially organized is a continuous process, so learning and adapting your strategies as your financial status evolves is key.

Following these steps and living below your means is a huge step toward reducing the stress or uneasiness you may feel about your financial situation. It will also have the effect of increasing your confidence that you’re doing the right things to align your capital with your values and priorities.

Protecting your future self and your loved ones

It’s easy to avoid thinking about what happens if life doesn’t go the way we plan because we don’t want to believe bad things can happen to us. We tend to avoid difficult conversations until we’re prompted to have them. As a planner I have a responsibility to have these kinds of conversations with clients when evaluating their insurance needs. More often than not, people don’t know what would happen if they got sick or injured to an extent where they can’t work to receive an income. They aren’t sure if they would be leaving enough financial support for their loved ones should they pass away. Ask yourself now, what kind of financial impact would something like that have on you and your family? Without insurance, your potential income you’ve studied for would go down to zero. If you passed away, those who depend on you may be left with financial hardships. You may want to consider if your current needs are going to change down the road and structure your insurance to account for those potential needs. Disability insurance, life insurance and critical illness insurance are ways to ensure that you and your loved ones will be financially taken care of if you’re faced with such events which are out of your control.

A common reason people avoid looking into insurance early on is that they believe it will be too expensive. This doesn’t have to be the case. Not only does it cost less to get insurance the younger you are, but you can also structure insurance plans as starter policies that are easily graduated into more robust long-term policies later. This keeps costs low until you have a handle on your cash flow and protects you right away with the coverage you need. If your insurance need today is relatively low compared to what it will become, you may want to have the option to buy more later when your situation changes without needing to prove you’re insurable. This is possible and should be discussed when evaluating your insurance needs.

Incorporating

As a young professional, you may be considering starting your own business or working as a freelancer. If you plan to grow your business, you may want to consider incorporating. Incorporating means creating a corporation, which is a separate legal entity from its owners.

Why should you consider incorporating? Here are some reasons:

• Limited liability protection: One of the main benefits of incorporating is limited liability protection. As a corporation is a separate legal entity, the corporation’s creditors cannot go after your personal assets. This means that your personal assets are protected from any lawsuits or debts incurred by the corporation. This can be particularly important for businesses that are exposed to higher risks or liabilities.
• Tax advantages: Another benefit of incorporating is tax advantages. A corporation pays corporate income tax on its profits, which is typically much lower than personal income tax rates. Additionally, as a corporation, you are subject to many different rules that create opportunities for various tax planning strategies.
• Insurance strategy benefits: Incorporating can also provide benefits for your personal insurance strategy. When I mentioned graduating your insurance policies earlier, this would be the place to graduate them to. Some of them anyway. This point could be an article on its own and is not the focus for today, but seeing the full game plan from a bird’s eye view can make the action plan for your current stage easier to understand.
• Credibility: Incorporating can also enhance your business’s credibility. It shows that you are serious about your business and committed to its success. It can also give your business a more professional image, which can help attract more clients or customers.
• Access to capital: If you plan to raise capital to grow your business, incorporating can make it easier to do so. Corporations can issue shares or bonds to raise funds, which can help you grow your business faster.

However, incorporating also comes with some drawbacks:

• Higher costs: Incorporating can be more expensive than other business structures. You will need to pay fees to incorporate and file annual reports with the government. There may also be legal fees associated with incorporating.
• More paperwork: As a corporation, you will need to keep detailed records and file annual reports with the government. This can be time-consuming and requires a higher level of record-keeping than other business structures.

In conclusion, incorporating can be a smart choice for young professionals who want limited liability protection, tax advantages, insurance strategy benefits, credibility, or plan to raise capital. However, it also comes with higher costs and more paperwork. If you are considering incorporating, it is important to speak with a financial professional or legal expert to determine whether it is the right decision for your specific circumstances.

Creating Options 

All things considered, there are a lot of big topics to approach at this stage of your life and of your career. You likely have some degree of uncertainty regarding the future and it’s very possible that your life changes significantly in your early career as you juggle your personal goals and your professional ones. To get off to the best start, and to account for these possible changes, it’s important to create options for your future self. Finding the right financial planner for you, creating a budget, getting the right type and amount of insurance in place, and working with your planner and their team to build your vision are the best things you can be doing now for your future self. Your future you will thank you!

If you would like to discuss this – book an appointment with us, we would love to hear from you!

Executive Summary

Creating a budget may sound boring but taking the time to do so will have a huge impact on your future.  It is easy to overspend and with the amount of household debt at an all-time high, managing your finances can seem hopeless.  However, the more attention you pay to your spending habits, the easier you will find it to achieve financial success.

What You Need to Know

Below are four reasons why you should create a family budget…today!

1. It Will Help Keep Your Goals in Sight – Setting financial goals for yourself is one thing, having a plan in place to achieve them is another.   Setting a budget for yourself will help you set goals, make a plan to achieve them, and will allow you to track your progress.
2. It Will Put an End to Spending Money You Don’t Have – When you have a realistic budget and commit to it, there are no excuses to spend on credit. You’ll know exactly how much money you have coming in, how much you can spend, and how much you need to save.
3. You’ll Be Prepared for Emergencies – Sometimes life happens, whether it be losing your job or becoming sick or disabled.  Having a budget means that you will have savings you can access if an emergency arises.  You will sleep better at night knowing that you are prepared for the worst.
4. It Will Force You to Acknowledge Any Bad Spending Habits – Sometimes we don’t know where we could improve until we start keeping track of our spending.  Even if you think you are doing well with your money, writing a budget may shed light on some areas that you could cut back.  This is a great opportunity to redirect some money into retirement savings or saving for another goal.

The Bottom Line

Everyone can benefit from writing a budget, whether you think you need it or not.  The key to achieving your financial goals is having a plan.  If you feel overwhelmed and don’t know where to start, reach out to us!  We will help you start a plan and will monitor your progress!

By: Louai Bibi, Advisor Associate

Should I get mortgage protection or life insurance?

If you have a mortgage, your mortgage lender has likely brought this up to you, and for good reason.

It’s important to have insurance when you have people who depend on your income, whether it is a spouse and/or child. It’s also important that you know what you are paying for and how it may or may not benefit you.

Term insurance is generally cheaper, allows for you to cover other insurance needs like leaving behind income replacement for your spouse or ensuring your children experience a fully funded post-secondary education if you aren’t around to contribute to their RESP, and allows you to structure coverage for a shorter, longer or permanent period as insurance needs change.

With mortgage protection through your bank/mortgage lender, your coverage reduces as you pay your mortgage down (which makes sense in theory, until you realize your insurance payment stays the same), the bank is the sole beneficiary of that money and every time you renew or switch lenders, you need to re-apply this coverage to your mortgage and are subject to whatever increase in cost is offered.

These are just a few differences between the two products. More listed in the snapshot below!

The traditional definition of a recession is two consecutive quarters of economic decline measured in Gross Domestic Product.  A more complex definition is a slowing of economic activity and an increasing unemployment rate.

Financial and lifestyle preparations should take place to lessen the effects of a recession.

What You Need to Do

1. Examine your monthly budget – You cannot save money that you have already spent.  Almost everyone has regular, recurring expenses that are not necessities.  Subscriptions to multiple streaming services are one example.  Find lower cost alternatives like a home, family movie night using a streaming service versus a $100 trip for four to the local cinema.  Delaying many small and large purchases can free your budget and your mind from stress.

2. Contribute to your Emergency Fund – Once you have identified unneeded expenditures in your regular spending, remove them from temptation by placing them into your Emergency Fund.  Having 3 to 6 months of income set aside is the recommendation and is almost impossible to achieve until a thorough examination of your budget occurs. Consider a TSFA.  A Tax-Free Savings Account (TFSA) containing liquid and low-risk investments provides tax exempt earnings and withdrawals.

3. Maintain your scheduled savings contributions – Whether a recession occurs or not, continue adding to your retirement savings in RRSPs and TFSAs, ad education savings in RESPs.  Skipping a few monthly contributions and the compounding of interest on them could free up a few thousand dollars but cost you tens of thousands of dollars at retirement.  The 20% grant (up to $500 annually) on RESP contributions and the $2,500 contribution to generate the maximum grant could grow into a year of tuition.  Treat savings like one of your bills that you pay first.  Your mortgage, insurance, and utilities must be paid.  Paying your savings first helps reinforce your budgeting efforts.

4. Reassess your investments – During a recession, like any other period, some types of investments can withstand the challenges better than others.  A frank conversation with your financial professional is an excellent step to preserve assets and investment income.

5. Eliminate, reduce, and avoid debt – Paying high interest rates is never a great idea, so it is best to pay them down as quickly as possible.  Interest rates are rising on the actions of central banks around the world, and those high interest rates will rise even higher.  Taking on new debt that will increase your monthly expenditures for both capital repayment and interest charges is not advisable.

6. Update your skills and resume – Should your employment be affected personally, it would be better to be prepared than react when feeling the pressure of replacing your existing income.  Revisit and update your resume with accurate dates and roles.  List your newly acquired skills and capabilities, and if applicable, don’t forget your online profile/s.  You can also consider investing in yourself by taking internal and external courses to bolster your skillset.

The Bottom Line

None of the six steps, above, require a recession or even the threat of recession to become valuable.  Each of them is prudent regardless of the overall economic and employment climate, so get ready for a rainy day, and you will be able to enjoy the sunshine, too.

By: Shawn Todd, CFP

Being a business owner is exciting.

You’ve thought of an idea for a business, made it work, helped it make its mark in whatever you do. It also brings with it challenges that can be overlooked as the business grows.

The topic that gets avoided

If you are a business owner and have avoided talking about what happens in the event of your business partner’s sickness or death – then you aren’t alone.  It’s a tough topic, one that gets avoided a lot. Talking about death and sickness is tough, and it’s hard to bring up.

It’s a common situation we run into often, where a business has been started with multiple partners, and it is now running smoothly, and may be experiencing some strong success.  The balance sheet may be positive, and the owners may be enjoying some smoother sailing than when the business first started.  If we broke down business growth into four time periods – early, growth, expansion, and mature times.  We often see this issue first, once the business hits a strong growth period, and achieves higher valuations of the company than owners expected.

What happens if a business owner dies, gets sick or injured and cannot look after the business in their capacity?

The shareholder’s agreement & buy sell agreement

Some of these initial pains to these questions can be somewhat worked out within the shareholders agreement and a buy sell agreement between the parties.  Some questions that a shareholder’s agreement may help solve will be; what responsibilities do the parties have to each other, when is a sale triggered if there is long term sickness, what happens at death of a shareholder, and some key discussions on evaluation and its formulation.  A buy sell agreement helps ensure this sale happens after death, or a triggering event.

The most common issue I see on this topic with business owners is an unfunded shareholders agreement. Often it has been talked about, but not put into place or solidified.  In the event of a shareholder’s death – normally the corporation would be expected to pay the estate of the deceased shareholder [in return – take back the shares], or there would be a well laid out insurance plan to offset this immediate cost, pay the estate, and have the shares returned in exchange.

In this example above, if Phil was to become sick long term or died, then Phil’s family or estate would be expecting a value for Phil’s shares. Ideally Olivia would rather not be in business or be left making business decisions with Phil’s family. What happens if the corporation doesn’t have enough to pay the value of Phil’s shares to the estate, or if there isn’t an insurance policy in place?

How to fix

There is a variety of ways to fund a shareholder’s agreement, the most common being with an insurance policy.  The policy can be paid personally or corporately, but the most common and most popular [for obvious reasons amongst owners] is to have the corporation pay the premiums.

Insurance policies can be set up to provide coverage for death of a business partner, loss of income due to disability, injury, or a critical illness such as Cancer.

It’s not too late to spend time with your business partner(s) to discuss these ‘what if’ situations.  Planning on what happens if a shareholder has to exit [especially under terrible & stressful circumstances] is a great way to strengthen your business in the back-end, and lower any fiscal risk.

Let us know if you have any questions, or please book a time with us to review your own shareholders agreement.  Click HERE!

Shawn Todd CFP – Partner – ECIVDA

By: Louai Bibi, Advisor Associate

Tax time is approaching quickly, which leaves many of us scrambling between now & the RRSP deadline of March 1st to figure out how to minimize our taxes owing for 2022. The objective of this blog is to equip you with the ammunition required to make an informed decision as to how much you may want to contribute.

A quick reminder as to how the RRSP works:

• The amount you are allowed to put in per year is based on your earned income for the year. You accrue 18% of your salary in the form of deduction room, up to a CRA prescribed dollar maximum which sits at roughly $30,000 for 2023.
• Unused contribution room carries forward. This means that if you haven’t made lots of contributions over the years, the deduction room that you earned in each of those calendar years would accrue with leave you with a healthy cumulative RRSP deduction limit for you to use as needed. Best place to check this limit is your MyCRA online account!

• As you read in the first sentence of this blog, the RRSP deadline for 2022 is on March 1st. This means that if you wanted to make a deposit in 2022 and were slammed with all the holiday festivities leading up to 2023, you are not out of luck!

• The amount you contribute (up to your respective limit) gets deducted from your taxable income. For example, if you made $70,000 in 2022 but made a $20,000 RRSP contribution, the CRA treats you as if you’ve made $50,000 at tax time.

So, in this example, someone earning $70,000 in salary should be paying close to $13,000 in federal/provincial taxes if you live in Ontario. Since our employers withhold taxes on our paycheque, let’s assume they have only withheld $10,000 for all of 2022. This results in a tax bill of almost $3,000 at tax time, which represents the difference between what should be paid versus what was paid over the course of the year. Assuming this person contributed $20,000 to their RRSP & deducted this from their taxable income in 2022, a tax refund of roughly $3,000 is created.

We have a graduated tax system in Canada. This means that the more you make, the higher your tax rate can be. So, since your employer has been withholding taxes as if you made $70,000 but the CRA taxes you as if you made $50,000, you are refunded your over-payment.

I’ve attached a great calculator that Wealthsimple has put together that helps you estimate your tax liability in advance. All you have to do is choose your province & fill in the respective prompts to get your estimate, which you can generally get the answers to from a year-end earnings statement if you have a straightforward tax situation. Click HERE to view this calculator.

Our standard disclaimer would be to discuss a potential RRSP contribution with your advisory team, in conjunction with your tax advisor. The tax calculator I’ve shared offers a great estimate, but sometimes there are implications or considerations that are not visible to the naked eye that need to be discussed before making your contribution. The intention with this calculator is for a curious individual to be able to plug in their details & model a few RRSP contributions (within their allowable limit), so that they can be prepared for a discussion with their advisory team! As always, Shawn, Corey, Mike & I are happy to be service & you can click HERE to book yourself into our calendar to discuss this further.

Happy RRSP season!

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!

Housing prices have been climbing quickly. This is especially true in major urban centres where most Canadians live. The rate of increase for the average sale price appears to be climbing faster than people are able to save.

Some Canadians see the dream of homeownership vanishing, others wonder if the choice to own is appropriate for them. No matter the situation, objective analysis should accompany the emotional aspects of buying a home.

What You Need to Know

Regardless of the ultimate choice, affordability is an important decision criterium. No one has ever enjoyed being “house poor”, where little money is left after making your rental or mortgage payment. Based on household income and available down payment a maximum purchase price can be determined.

Every Canadian financial institution has an online calculator to determine mortgage payments. Mortgage providers employ additional analysis tools to predict whether a borrower will repay the lender based on their income, total expenses and financial history. If lenders are reluctant or refusing to provide a mortgage, perhaps the timing is not appropriate, yet.

Mortgage rates have been at the extreme low end of their range for several years as central banks around the world have attempted to revive economies through inexpensive borrowing. When interest rates are low more people and businesses can afford to borrow more. When something is on-sale people buy more, but for borrowing, you cannot decide to delay a purchase when prices rise. Payments must still be made.

At some point rates will rise and some homeowners may not be able to afford their new, higher payments. Before buying their first home, borrowers should ask themselves, “if mortgage rates rose by 2%, would I be still able to afford my payments?”. For example, a $400,000 loan with an additional 2% interest adds $8,000 interest charges per year, or $667 more each month.

That increase would sit atop the existing mortgage payment. The same $400,000 mortgage with a 25-year amortization and 2.25% 5-year fixed rate requires a monthly payment of $1,750. Each additional $100,000 adds another $450 per month to the payment.

Lenders typically limit housing costs to 35% of gross income, acquiring a mortgage will ultimately decide if you purchase and the price. If you earn $100,000 then your maximum housing costs are $35,000 per year. Subtracting property taxes, condo fees and utilities will determine the amount available for mortgage payments. If these costs totaled $14,000, then a maximum of $21,000 would remain for mortgage payments. $21,000 divided by 12 equals $1,750 per month, yielding your maximum mortgage of $400,000.

A down payment is also required; the more the better. At least 10%, but 20% is preferred to keep payments lower. In the examples above with a $400,000 mortgage a first-time home buyer should plan on a down payment of at least $50,000 netting a purchase price of $450,000.

An experiment to determine if home ownership is appropriate is to act as a homeowner while renting. That is, make housing costs equal 35% of gross income. Set aside exactly 35% each month, pay your rent and utilities and the rest goes directly into a savings account, an RRSP or TFSA. Set up the deposit like a monthly bill that is paid automatically. If you are able to practice this disciplined spending/saving approach you are able to live at 35%, if not habits may need to be changed or a more modest home purchase should be contemplated.

Continuing the example of $100,000 income, then $35,000 per year or $2,920 should go toward rent, utilities and savings. If rent is $1,800 and utilities are $150 set up an auto-deposit for $970 each month. At the end of one year, you will have nearly $12,000 more set aside. At the very least this test should increase the amount of your down payment.

While you are accumulating your down payment the type of investments you purchase and sheltering it from taxes is also important. First time homebuyers can withdraw funds from their RRSPs, for example. Certain conditions apply, of course.

The Bottom Line

A dangerous emotion during a period of rapid rises in house prices is desperation. “If we don’t buy now, we’ll never be able to afford a home” has led many to overextend themselves financially. After that has occurred owning again can be almost impossible.

Couple the dreams of home ownership with objective analysis to determine the best course of action. Prudently investing your down payment in a tax advantaged way is another important aspect of the home buying and ownership experience. We are happy to help with calculations, scenarios, timing, negotiation advice with lenders and investment recommendations.

Book an appointment with us today! – CLICK HERE

Probate is the process of getting your will approved by the courts. This process validates your will and allows your executors to distribute your assets.  However, probate can often be an expensive and long process. Each province has probate fees which can end up being quite substantial on a big estate. Probate can also cause serious delays in the distribution of assets from the will because once a will is probated it becomes public record. This means that it can be contested and potentially delayed while the courts settle any disputes. The good news is that with proper planning, it is possible to minimize or even eliminate the number of assets that have to go through probate.

What You Need to Know

There are a number of planning strategies that can be used to bypass or minimize probate. Below are some common strategies to make your estate as efficient as possible.

1. Beneficiary Designation on Registered Assets – RRSP, RPP, TFSA, RRIF, LIF, and LIRA are all considered to be registered assets. This means that the CRA allows for a direct beneficiary designation. If there is a spouse, they are entitled to roll registered accounts into their own names. If there is no spouse, then the investor can name an alternative person to leave the money to that they designate directly on the investment account. Money left to a beneficiary bypasses probate and passes directly to the appointed person.
2. Designating a Beneficiary on Non-Registered Assets – Typically, non-registered assets do not allow a beneficiary designation and automatically go to your estate to be probated. Segregated funds can be used to designate a beneficiary on non-registered assets.  Segregated funds are a life insurance product that are solely sold by life insurance companies. While the MER’s can be a little higher on segregated funds, they offer many of the same investment options that some mutual fund companies offer. Therefore, if non-registered money is invested in a segregated fund, they too will pass probate.
3. Trusts – Any assets left to someone in trust automatically bypass probate.  There are a variety of trusts that are all used for different reasons. Trusts can be more complex than the options listed above, but they can be a very effective planning strategy that allows you to assign a trustee to manage the money.  However, it’s important to note that setting up a trust can be expensive. If avoiding probate is the sole reason for the trust, then it may be prudent to add up the costs of each to see which makes more sense.

The Bottom Line

Probate costs and hold up can be minimized with proper planning and guidance from a professional.  It is important to note that on registered and investments and segregated funds without a named beneficiary, the assets automatically go to the estate. This means they would be subject to probate.  It is a good idea to review your beneficiary designations regularly to make sure they are up to date.

Book an appointment with us – Click Here

Credit card debt is a recurring debt you are allowed to owe as long as you don’t exceed your credit limit. A credit card account is tempting as you can get whatever you want on credit as long as it is within your limit. It is always advised that you shouldn’t make purchases you cannot afford to cover at month-end. Another tricky feature of a credit card account is their interest rate charges on your debt until you fully pay. Payment is usually due at month-end and failure to pay as and when due would result in the accumulation of your debt as annual interest will be charged on the amount owed. There is also a minimum payment of 1% to 2% of your balance plus other charges that must be made to ensure you keep crediting your account. If you pay less than this minimum payment, interests will be charged, and it will keep on accumulating. Owning a credit card account can be a nightmare if not properly managed.

Tips On How To Overcome Credit Card Nightmare

The basic truth about overcoming a credit card nightmare is by taking charge of your spending. If you get this right, then you will enjoy the benefit of a credit card account. Here are some tips on how you can overcome your credit card nightmare:

•  Know Your Credit Card – Get as much information as you can on your current credit cards or potential ones. Research the issuer’s payment schedule and other terms and conditions. Be sure to confirm the interest rate and other fees that will be charged if you delay your monthly payment. You can set up automatic payments and calendar alerts to avoid falling behind on your payment.
• Be Disciplined – You should set spending rules on your credit card that you must follow. You can set a limit on your credit card expenses in a month. This will give you control of your spending and ensure that you live within your means. It is advisable to charge on your credit card what you can normally pay for with cash or debit card.
• Keep Track – You should routinely keep track of the status of your account at least every week. Charges accumulate without notifying you, so it is advisable to check your account at least once a week to know the state your account is in. Adopting this principle will help you track your credit card debts, the types of credit you have, and your repayment history. These are what lenders will use to rate your credit score.
• Avoid Cash Advances – Having a credit card account that can take care of things when you can’t afford it is quite tempting. You tend to want to take cash advances because you know you have a credit card account that can take care of things. Cash advances from your credit card account result in higher interest rates and transaction fees. There is no moratorium on your cash advance. Interest is charged immediately you take the cash advance. Avoiding a cash advance will put you in full control of your credit card account.

Tips On How To Prevent Accumulation Of Credit Card Debt

Credit card debt is easy to accumulate but difficult to do repay. The only way to avoid credit card debt is to prevent it from accumulating in the first place. Here are some tips on preventing credit card debt accumulation:

• Negotiate Your Interest Rate – Negotiating your interest rate on your credit card debt will go a long way in reducing credit card debt accumulation. The interest rates on your credit card debt are what make it difficult to settle your debt. Negotiate your interest rates with your credit card issuer so you can get the best deal possible.
• Forget You Own A Credit Card Account – Once you are in a credit card debt, a trick you can try to prevent accumulating debt is to put your credit card away for other purchases, at least until you meet up with your monthly repayment. That is why it is advisable to use your credit card for short-term financial needs such as utilities, groceries, and some other monthly bills. This will lighten the burden on your credit card account by keeping your balance within a reasonable limit. If you can avoid using your credit card for a while, it will go a long way in reducing your debt burden.
• Pay Your Debt As and When Due – Simply put, what makes your credit card debt pile up are the charges and interest rates on delayed payments. The best way to get over this is to pay your credit card debt as and due. Missing a due payment can leave you playing catch up. Your next payment will be for two months.
• Watch Your Spending – A credit card account can leave you spending lavishly but you need to caution yourself and stick to what you can afford. Going for everything you see for sale is part of what gives you credit card debt. It is advisable to always avoid unnecessary spending.

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.

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

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.

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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!

The concept of investment is no longer alien and almost everyone now has one form of investment or the other tucked away somewhere. Even new babies now have investments. Just as there is no age limit to investing so is there no limit to the extent of time you can hold your investment. You can hold your investments for decades and reap multiple profits on them. It is not all about having a long-term investment portfolio; there is a science to it also. It is important to be strategic in your choice of investment portfolios. Everyone has a risk appetite, and it is important to choose an investment portfolio that conforms with your risk principles. Another key factor to having a healthy long-term investment portfolio is adapting your investment approach to the changing dynamics of the financial market.

Secrets To Creating a Long-term Investment Portfolio 

When it comes to having an investment portfolio, it is important that you make the right decisions. This is what will ensure a healthy investment portfolio. If you are looking to grow your wealth over a 20-to-25-year span, you should try the following tips:

1. Select The Appropriate Asset Allocation: At this stage, you use your current financial situation to determine how you want to spread out your investment portfolio. To successfully do this, you must consider your age, the amount of capital you want to invest, and your risk appetite. Your risk appetite is important because when it comes to investment, you will make losses at one point or the other. So, depending on your risk appetite, you should choose an investment portfolio that is in line with your risk appetite. You should also consider your current expenses as you do not want to invest all your money and be left with nothing to settle your bills.
2. Structuring Your Portfolio: After determining how you want to allocate your investment portfolios, the next thing to do is to determine how much goes into each portfolio. This is where you determine how much goes into bonds, stocks, and cryptocurrencies. You can also go further by further dividing your portfolio allocations. For example, if you have an equity portfolio, you may decide to spread it across different industries to minimize your risks. You can also spread your bond portfolio into short-term bonds and long-term bonds.
3. Monitoring and Reviewing: After successfully structuring your investment portfolios, you need to keep an eye on them to make necessary adjustments where necessary. The fact that they are long-term investments does not mean you can abandon them and check them when you are ready to cash out. You analyze your positions from time to time and rebalance them where necessary. This is made necessary because of the constant price movements in the financial market which will make your initial trading positions change. Your current financial needs may also require you to change your position. If you have extra cash to invest, you may want to pump in more money and if you need cash, you may want to deduct from profits already accrued.
4. Strategic Rebalancing: After reviewing your portfolio and there is a need to rebalance your positions to make your portfolios healthy, you need to go about it in a strategic way.  In other words, while you identify a performing portfolio, you should also determine the portfolio you can use the proceeds of the performing security to buy. These are strategic decisions that must be taken carefully to ensure an all-round healthy investment portfolio over a long period.

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