Blog

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!

By: Brian Adams, CLU, CH.F.C

You have worked for a company (or perhaps several companies) over the years, and you now want to hang up your skates and retire, however no one has shown you how to do that. In other words, where will my income come from?

Yes, you know you have a pension that you have been paying into, for what seems like forever, but how do you change that into income for you and your family?

First, you get a quote on how much is in that pension or pensions of yours and then you find out if that pension is portable (can it be transferred). Some, such as the ones with the federal government, are not.

Next you find out if your pension is indexed or not and, if so, at what percentage. If your pension is indexed, you may want to just leave it right where it is.

Let’s assume yours is portable and not indexed. So now you want to transfer that locked-in (taxed under pension rules) plan under your former employer, to a locked-in plan under your name.

You are allowed to move it to a Locked-In Retirement Account (LIRA) tax free. When you are ready to start taking an income from that account you can move it to a Life Income Fund (LIF). Which is essentially the same thing as a RRIF, that most people have heard of.

When you move it to a LIF in Ontario, you are allowed to unlock up to 50% of the value that was in your LIRA and put it into that RRIF or an RRSP.

That 50% that is still in the LIF has minimum and maximum amounts that can be taken each year as income, based on age. However, that other 50% in the RRIF or RRSP can be taken whenever you want and in any amount you want.  All income will be taxable whether in the form of LIF or RRIF income.

Combine this with your Canada Pension Plan (CPP) and Old Age Security (OAS), which are both indexed, along with any RRSP and TFSA savings you have, and you have your income.

For more information, click HERE.

By Louai Bibi, Advisor Associate

Should you take your Canada Pension Plan (CPP) as early as possible, at the default retirement age of 65 or defer to age 70?  I have included a handy calculator before to help us find out!

Click HERE

With this calculator, you’ll be able to map out at what age you’ll breakeven on taking CPP at age 65 vs 70. In this example, the breakeven age is 75 for a 50 year old. If this individual has a life expectancy of 75 years or less, it is more optimal to take CPP early on paper. If their life expectancy is > than age 75, they may be better off deferring to maximize the monthly pension amount.

The beauty of this calculator is that you can plug in your age, life expectancy (you can use the average of 84 for men, 87 for women), the rate of return your investments are achieving if you were to collect early & invest some/all of the monthly pension, the rate of inflation and benchmark a “start collecting early” versus a “start collecting late” scenario.

The reality is that we don’t have a crystal ball to know whether we’ll live to age 75 or 100, so we can’t base these decisions purely off the most optimal number a calculator spits out, which is where the qualitative considerations come in.

You may want to spend more money in retirement to visit your loved ones or check off some of the exciting items on your bucket list. I for one, would not want to wait 5 or 10 years to receive my optimally deferred pension to do these things, as long as my retirement/estate plan is sustainable and I know I won’t run out of money.

This is where we come in – whether it is Shawn, Corey, Mike, or myself. We help bridge the gap between what the calculator spits out and the values/motivations that prompted you to open that calculator in the first place. You are never too young or old to start planning for financial independence/retirement but like most things in life, it’s generally easier when you start early. You can book yourself into any of our calendars or reach out via email if you’d like advice on building out a financial plan.

Click HERE

You spend your entire working career accumulating retirement savings, but it seems that we forget that we have a right to spend it. The calculator is a great way to start this conversation, but not the way to end it!

Most optimal does not always = most appropriate!

By: Shawn Todd, CFP

Just before the New Year of 2023 – I was fortunate enough to go for a short adventure trip with my wife Michele, where we planned to do some extraordinary hiking in Arizona.  The first thing I did when I packed for my trip on the days we hiked – was making sure that I had packed a GPS, a compass, enough water, and had a plan.  It sounds simple, but you’d be surprised on how many people venture out with just their shoes.  I saw many with no gear, or the wrong gear.

Some short stats:

• 57.8 million hikers every year in the US.
• There are 4 deaths per 100,000 hikers
• 70% of hikers who die are male

Looking at these stats – right away it becomes a very good message to me that not only should I be careful, but I should always be packing a compass.  I’m male, I hike, I Iove my wife and family, and I’m planning a hiking trip.

When it comes to our personal lives, and our business lives, it’s very easy to overlook what you need to be packing in your ‘day to day’ backpack.  It’s very easy to be comfortable with life ‘as it is right now’. The home & your after-hours routine, and your work & your normal ‘day at the office’ routine all flow one day to the next without any issues.  Sometimes we neglect how each of these affects the other. How impactful our personal lives are with our work, and how significant a role our work plays in providing comfort in our personal lives.

The merging of our personal and business lives give way to four key themes on this Venn diagram above. These dual areas are:

Time – how much time can we spend with our loved ones, what kind of quality time is it?  How much flexibility does our business provide us, how hard have we worked to have it be this way?

Security – Our business without questions provides the security for us to make decisions that affect our spouse, our children and ourselves.  Where are the children going to post-secondary school?  Do we need to have two incomes or just one in the home? What will happen if one of our family is sick and needs care? Does our life feel safe and secure?

Income – We all start off with a life wanting to not be only concerned about money.  You may be more interested in your community, in charity, in just time with loved ones.  The income that comes in now, and the income that may or may not come in – if you weren’t working – will impact most of the decisions we make with the other three areas – time, security, and our goals.

Goals – This is where it’s always interesting.  Every single person has different goals, different needs, and different wants.  Spending a great deal of time here, really helps with a good foundation to mapping out where we want to go in life [and mapping out what trails we want to explore on that hike]

Many times, when we meet new clients – and we ask – “would you like us to spend time doing financial planning for you personally, and also for you corporately?” they may feel initially positive about it, but also feel slightly tentative about planning twice.  Why would I need to do this?

Some more short stats:

• 96 percent of small business [with 1-100 employees] survive for one full year
• 70 percent of small businesses [1-100 employees] survive for five full years
• There are over 1.3 million businesses in Canada with employees
• Small businesses provide over 70% of the total private labour market
• A healthy growth rate for a small business should be between 15%
• A business will double in 5 years at a 15% growth rate
• 350 people out of 100,000 [ages 45-49] will be diagnosed with Cancer [87 times the chance of dying hiking]
• 1,000 people out of 100,000 [ages 60 and older] will be diagnosed with Cancer [250 times the chance of dying hiking]

Spending time planning can’t take away all the risks of business failure, of financial stressors, or of getting a critical illness that impacts your business. It certainly can help make you aware of your blind spots.  Having an opportunity to see the risks, whether they are in your investment portfolio, in providing enough retirement income, or possibly in your business structure – really help make you more aware of your current situation, and your future situation combined.  You wouldn’t go on a hike without the proper gear, and I wouldn’t suggest you tackle life and business without the proper gear.

Take the time to review your own strategy and plan. If you’re unsure on areas, or need guidance, consider having a finanical plan completed, or updated.  Keeping both your personal and corporate worlds safe is key.  If you need to pack a compass to stay on track, I’d certainly recommend doing so.

Just my thoughts for the day,

Shawn Todd, CFP

Executive Summary

There are numerous ways to take money from corporate earnings while keeping your tax bill to a minimum. Often, business owners opt to receive a portion of corporate earnings through a salary. While others opt to extract profits using a mix between salary and dividends.

Finding the optimal combination to maximize your tax savings depends on many factors including (but not limited to) your cash flow needs, income level, payroll taxes on salary, or the corporation’s income level.

Understanding the tax treatment of payments is important as you want to ensure that the maximum amount of funds is left to be invested back into the corporation.

Earning Options

Paid-Up Capital: If you funded your corporation with a large sum of capital, you may be able to extract funds tax-free by reducing the corporation’s paid-up capital; essentially this is the amount of capital contributed in exchange for shares. Typically, you are allowed to pay shareholders any amount less than the corporation’s paid-up capital without tax consequences.

Repay Shareholder Loans: Another option to receive corporate funds is to repay shareholder loans. If you loaned funds to your own corporation, you are entitled to receive any amount of repayment of the loan tax-free. You may also arrange to have the corporation pay you interest on the loan. Taxation of the interest income is about equivalent to the taxes deducted if the corporation paid you a salary.

Passive income: Investment income earned inside your corporation is classified as ‘passive income’ as it is not generated by direct business operations. The combined tax rates are over 50%, depending on your province of residence, on the taxable portion of earnings. In the case of interest, that is the entire earned amount. For capital gains, half of the gain is subject to the combined tax rate and for dividends the rate is 33.33%. All three of these rates are higher than the highest marginal rate for individuals. Subjecting passive income to higher tax rates within a corporation can lend some benefits like:

• Building your nest-egg inside the business to fund future expansions
• Cover short-comings during difficult periods
• Facilitate borrowing

However, the largest risk with this option lies in losing the capital gains exemption on the sale of shares of a ‘qualified small business corporation.’ As the invested assets build over time, and operating assets decline in value thanks to depreciation, the asset mix could be lopsided. To have the capital gains be exempt, the ‘passive’ invested assets cannot exceed 10% of the fair market value of the corporations’ assets.

Lifetime Capital Gains Exemption (LCGE): For 2021, the LCGE limit per person is $892,218 and is indexed to inflation. This means a married couple who both own shares and can both utilize the exemption could shelter $1.784 million from taxes. Farms and fishing operations that qualify have the individual limit of $1 million per person, allowing a couple to shelter a maximum amount of $2 million. Depending on your goals, a short-term increase in tax and the professional fees associated to establishing the appropriate corporate structure could save you significant amounts of tax in the long run.

Maximizing Capital Dividend Payments: When you have a capital gain, the untaxed portion (one half of the gain) is added to its capital dividend account. The corporation can pay any amount from this account to your client without attracting personal tax. Although this is likely your best option, you must ensure that you make the appropriate tax deductions and remember to file the directors’ resolutions with the CRA.

Bottom Line

Every corporation is going to present varying degrees of needs. When it comes to determining how to pay yourself, be sure to be well informed before making any final decisions. Of course, consulting with a financial expert, like myself, can prove helpful. I encourage you to get in touch with any questions or concerns or to simply learn more.

Book an appointment to discuss how you can get money from your Corporation – Book Here

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

What You Need to Know

Interest Income

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

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

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

Dividend Income

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

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

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

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

Capital Gains

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

The Bottom Line

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