If you are an active investor, your investment holdings probably include many different asset classes. For many investors, diversification is a very important part of the wealth accumulation process to help manage risk and reduce volatility. Your investment portfolio might include stocks, bonds, equity funds, real estate and commodities. All these investment assets share a common characteristic – their yield is exposed to tax. From a taxation standpoint, investment assets fall into the following categories:
The income from these investments are taxed at the top rates. They include bonds, certificates of deposits, savings accounts, rents etc. Depending on the province, these investments may be taxed at rates of approximately 50% or more. (For example, Alberta 48.0%, BC 49.8%, Manitoba 50.4%, Ontario 53.53%, Nova Scotia 54.0%).
These investments are taxed at rates lower than those that are tax adverse. These investments include those that generate a capital gain (stocks, equity funds, investment real estate, etc.), or pay dividends. The effective tax rate on capital gains varies depending on province from approximately 24% to 27%. For dividends, the range is between approximately 30% to 41.6%.
Tax deferred investments include those investments which are held in Registered Retirement Savings Plans or Registered Pension Plans (such as an Individual Pension Plan). One advantage of these investments is that the contribution is tax deductible in the year it was made. The disadvantage is that the income taken from these plans is tax adverse as it is taxed as ordinary income and could attract top rates of income tax.
The growth in cash value life insurance policies such as Participating Whole Life and Universal Life is also tax deferred in that until the funds are withdrawn in excess of their adjusted cost base while the insured is still alive, there is no reportable taxable income.
Very few investments are tax free in Canada. Those that are tax free include the gain in value of your principal residence, Tax Free Savings Accounts (TFSA’s) and the death benefit of a life insurance policy (including all growth in the cash value account).
While Canada is not the highest taxed county in the world (that distinction belongs to Belgium) it is certainly not the lowest. (According to the Organization for Economic Co-operation and Development, Canada sits as the 23rd highest taxed country in the world). It is also true that in addition to the taxes Canadians pay while they are living, the final insult comes at death.
Generally speaking, you have three beneficiaries when you die. You have your family, your favourite charities, and the Canada Revenue Agency. They all take a slice of your estate pie. Most people would rather leave more to their family and charities than pay the CRA more than they need to.
As our estates grow, they include funds that we intend to leave to our children and possibly to charity. They also include funds we are likely never going to spend while we are alive.
The secret to optimizing the value of your wealth for the benefit of your estate is to re-allocate those assets that you are never going to spend during your lifetime from investments that are tax exposed to those that are tax free.
One of the best ways to do this is through life insurance. As mentioned earlier, assets which are tax free include the death benefit of a life insurance policy. Systematically transferring funds from the tax exposed investments to, for example, a Participating Whole Life Policy, not only eliminates the reportable tax on the funds transferred, it greatly increases the overall size of the estate to be left tax-free to your beneficiaries – your family and your charities.
Let’s consider Ron and Sharon, aged 58 and 56 respectively. They have been told that they have a liquidity need of approximately $1,000,000 which would become payable at the second death. They are also unhappy about the taxes they are paying annually on their investments. They elect to re-allocate some of their assets to a Participating Whole Life policy for $1,000,000 with premiums of $31,890 for 20 years.
Over this period, they will transfer a total of approximately $640,000 of investments exposed to income tax to a tax-free environment. If we assume that their life expectancy is 35 years, the Whole Life policy will have grown to a death benefit of approximately $3,300,000*. This represents a pre-tax equivalent yield over this period of approximately 11%. Not only is there more than enough to pay the tax bill but there are funds left over for the family and any charitable donation they wish the estate to make.
In addition, with the transfer from a taxable to tax free investment, income taxes that would have been paid during their lifetime has also been reduced. Along the way, the Participating Whole Life policy has a growing cash value account which could be borrowed against should the need arise. At the 20th year for example, the cash value of the policy (at current dividend scale), would be slightly under $1,000,000.
This case illustrates only one example of how it is possible to optimize the value of an estate through asset re-allocation. By using funds you are never going to spend during your lifetime, you can create a much larger legacy to benefit others while reducing the total cost of your tax bill.
If you would like to investigate this concept to determine the value it can provide you and your family, please be sure to contact me. As always, please feel free to share this information with anyone you think would find it of interest.
* Values shown are using Equitable Life’s Equimax Estate Builder assuming current dividend scale for 2018.
The 2018 budget for Alberta focuses on the diversification of its post-recession economy, with the aim of creating more stability and less vulnerability to future fluctuations in oil prices. Here are some of the highlights:
Interactive Digital Media Tax Credit
Alberta intends to bring in a new Interactive Digital Media Tax Credit with a maximum funding of $20 million per year, which aims to offer eligible companies with a benefit of 25% of eligible labour costs. This benefit relates to costs incurred after April 1, 2018 and is aiming to better support the interactive digital media sector in the province.
Alberta Investor Tax Credit
The 2018 budget extends the existing Alberta Investor Tax Credit until 2012-22. The existing program offers a 30% tax credit to both individuals and corporations who commit to making equity investments in eligible Alberta businesses, such as those involved in research, development, digital animation and various others.
Diversity & Inclusion Credit
Relating to the Interactive Digital Media Tax Credit and Alberta Investor Tax Credit, the budget notes a 5% diversity and inclusion credit enhancement which could be claimed if the company offers employment to an individual from an under-represented group.
Capital Investment Tax Credit
The budget announces that the Capital Investment Tax Credit, a 10% non-refundable tax credit of up to $5 million for a corporation’s eligible capital expenditures on manufacturing, processing and tourism infrastructure, will also be extended until 2021-22.
Alberta Child Benefit
The 2018 budget details increases to these benefits for families with 1, 2, 3 and 4 plus children, as well as increasing the phase-out threshold for family net income from $41,786 to $42,287.
Alberta Family Employment Tax Credit
Increases have also been announced in the budget to offer more benefits for working families who have income from employment of more than $2,760 per year. The phase-out threshold has been extended from a family net income of $41,786 to $42,287, as well as increases to the benefit amounts for each family size.
The budget covers the agreement made by Alberta to adhere to a structured tax framework with the Canadian government for a period of two years after the legalization of cannabis for recreational purposes. Specifically, either $1 per gram or 10% of the producer price (whichever is greater) will be collected and the province will receive 75% of this tax room, both to be collected by the federal government. In addition, an additional tax of a maximum of 10% of the retail price may also be collected by the province.
Education Property Tax
A freeze has been set on education property tax collection, but the current rates have increased as follows:
· From $2.48 to $2.56 per $1,000 or equalized assessment for residential/farmland property.
From $3.64 to £3.76 for non-residential property
The 2018 Ontario budget features a number of new measures and billions of dollars of enhanced spending across the spectrum, as announced by the province’s Finance Minister, Charles Sousa. Read on for some of the key proposals.
A new sliding scale for personal income tax will be introduced, with seven personal income tax rates which will be applied directly to taxable income, in an attempt to eliminate Ontario’s surtax. The province estimates that approximately 680,000 will pay less tax as a result.
Access to further education will be income linked, with those families with an income of less than $90,000 per year receiving free tuition and families with an income of between $90,000 and $175,00 per year receiving financial aid for tuition costs.
Free Pre-School Child Care
Effective in the Fall of 2020, children aged two-and-a-half until they are eligible for kindergarten can receive free licensed child care.
New Ontario Drug and Dental Program
For those without workplace benefits or not covered by OHIP+, this program offers up to 4.1 million Ontarians a benefit that pays up to 80% of expense up to a cap of $400 for a single person, up to $600 for a couple and $50 per child in a family with two children, regardless of their income.
Free Prescription Drugs
The budget announces the introduction of free prescription drugs for those aged 65 or older, resulting in an average of $240 per year in savings per senior.
Charitable Donation Tax Credit
The non-refundable Ontario Charitable Donation Tax Credit will be tweaked to increase the top rate, remaining at 5.05% for the first $200 but increasing to 17.5% for anything above $200.
Seniors’ Healthy Home Program
$750 is offered to eligible households with seniors of 75 years of age or older to help them to care for and maintain their residence.
R&D Tax Credit
The budget introduces a non-refundable tax credit of 3.5% on eligible costs relating to R&D, or an enhanced rate of 5.5% for eligible expenditures of $1 million plus. Note that this enhanced rate would not be payable to corporations where eligible R&D expenditures in the current tax year are less than 90% of eligible R&D expenditures in the tax year before.
Innovation Tax Credit
The existing Ontario Innovation Tax Credit will see changes to its credit rate in the following way:
· If a company has a ratio of R&D expenditures to gross revenues of 10% or less, they will continue to receive the 8% credit.
· If their ratio is between 10% and 20%, they will receive an enhanced credit rate of between 8-12%, calculated on a straight line basis.
· If their ratio is 20% or more, they will receive an enhanced credit rate of 12%.
Ontario Interactive Digital Media Tax Credit
Eligibility to receive this tax credit will be broadened to include film and television websites.
Several key changes relating to personal financial arrangements are covered in the Canadian government’s 2018 federal budget, which could affect the finances of you and your family. Below are some of the most significant changes to be aware of:
The government is creating a new five-week “use-it-or-lose-it” incentive for new fathers to take parental leave. This would increase the EI parental leave to 40 weeks (maximum) when the second parent agrees to take at least 5 weeks off. Effective June 2019, couples who opt for extended parental leave of 18 months, the second parent can take up to 8 additional weeks, at 33% of their income.
The government aims to reduce the gender wage gap by 2.7% for public servants and 2.6% in the federal private sector. The aim is to ensure that men and women receive the same pay for equal work. They have also announced increased funding for female entrepreneurs.
Effective for 2021 tax filings, the government will require reporting for certain trusts to provide information to provide information on identities of all trustees, beneficiaries, settlors of the trust and each person that has the ability to exert control over the trust.
Registered Disability Savings Plan holders
The budget proposes to extend to 2023 the current temporary measure whereby a family member such as a spouse or parent can hold an RDSP plan on behalf of an adult with reduced capacity.
If you would like more information, please don’t hesitate to contact us.
The government’s 2018 federal budget focuses on a number of tax tightening measures for business owners. It introduces a new regime for holding passive investments inside a Canadian Controlled Private Corporation (CCPC). (Previously proposed in July 2017.)
Here are the highlights:
Small Business Tax Rate Reduction Confirmed
Lower small business tax rate from 10% (from 10.5%), effective January 1, 2018 and to 9% effective January 1, 2019.
Limiting Access to the Small Business Tax Rate
A key objective of the budget is to decrease the small business limit for CCPCs with a set threshold of income generated from passive investments. This will apply to CCPCs with between $50,000 and $150,000 of investment income. It reduces the small business deduction by $5 for each $1 of investment income which falls over the threshold of $50,000. This new regulation will go hand in hand with the current business limit reduction for taxable capital.
Limiting access to refundable taxes
Another important feature of the budget is to reduce the tax advantages that CCPCs can gain to access refundable taxes on the distribution of dividends. Currently, a corporation can receive a refundable dividend tax on hand (known as a RDTOH) when they pay a particular dividend, whereas the new proposals aim to permit such a refund only where a private corporation pays non-eligible dividends, though exceptions apply regarding RDTOH deriving from eligible portfolio dividends.
The new RDTOH account referred to “eligible RDTOH” will be tracked under Part IV of the Income Tax Act while the current RDTOH account will be redefined as “non-eligible RDTOH” and will be tracked under Part I of the Income Tax Act. This means when a corporation pays non-eligible dividends, it’s required to obtain a refund from its non-eligible RDTOH account before it obtains a refund from its eligible RDTOH account.
Health and welfare trusts
The budget states that it will end the Health and Welfare Trust tax regime and transition it to Employee Life and Health Trusts. The current tax position of Health and Welfare Trusts are linked to the administrative rules as stated by the CRA, but the income Tax Act includes specific rules relating to the Employee Life and Heath Trusts which are similar. The budget will simplify this arrangement to have one set of rules across both arrangements.
BC Finance Minister Carole James delivered the province’s 2018 budget update on February 20, 2018. The budget anticipates a surplus of $219 million for the current year, $281 million for 2019 and $284 million in 2020.
Corporate and personal tax rates remain unchanged.
The biggest changes are:
- Elimination of Medical Services Plan (MSP Premiums) effective January 1, 2020
- Addition of the Employer Health Tax (EHT)
- Provincial Property Taxes
The Employer Health Tax and Medical Services Plan premiums:
Effective January 1, 2020, the Medical Services Premium (MSP) will be eliminated. In last year’s budget update, MSP was reduced by 50% effective January 1, 2018. Starting in 2019, the budget introduces the Employer Health Tax (EHT). The EHT is to help fund the elimination of the MSP premiums.
The Employer Health Tax will be calculated as a percentage of payroll:
Provincial Property Transfer Taxes
Effective February 21, 2018, the following will occur:
- The provincial property transfer taxes (PTT) will increase to 5% (from 3%) on residential property values above $3 million.
- The PPT applies to foreign purchasers of residential properties in BC will increase to 20% (from 15%) and the tax will extend to include the Fraser Valley, Capital, Nanaimo and Central Okanagan Regional Districts.
- There is a new speculation tax on residential property in BC. This tax is targeted at foreign and domestic homeowners who don’t pay income tax in BC. Starting in 2018, it’s a rate of $5/$1,000 of assessed value, in 2019, this will increase to $20/$1,000.
There will be a new affordable child care benefit that will reduce child care costs by up to $1,250 per month per child by 2020. The new benefit will apply in September 2018. Families with pre-tax incomes of $45,000 or less will receive the full benefit, (up to the cost of care) while those who make up to $111,000 will receive a reduced amount, scaling based on income. The government will be releasing an online benefit calculator to help parents budget.
The budget will provide up to $350/month directly to licensed child care providers to reduce fees. They will be the following:
- Up to $350/month for group infant/toddler care
- Up to $200/month for family infant/toddler care
- Up to $100/month for group care for children aged 3-5
- Up to $60/month for family care for children aged 3-5
To learn how these changes will affect you, please don’t hesitate to contact us.
RRSP Deadline: March 1, 2018
The deadline for contributing to your Registered Retirement Savings Plan (RRSP) for the 2017 tax filing year is March 1, 2018. You generally have 60 days within the new calendar year to make RRSP contributions that can be applied to lowering your taxes for the previous year.
If you want to see how much tax you can save, enter your details below!
If you are seeking ways to save in the most tax-efficient manner available, TFSAs and RRSPs can both be effective options for you to achieve your savings goals more quickly. However, each plan does have distinct differences and advantages / disadvantages. Let’s take a look at their key features:
- While a TFSA can be used for any type of savings, an RRSP is used exclusively for retirement savings.
- You can enjoy tax free withdrawals from your TFSA due to the fact that you make your contributions after you have paid tax, whereas the opposite is true for withdrawals from your RRSP (except in the case of lifelong learning plan and home buyers’ plan)
- TFSA contributions aren’t tax deductible whereas RRSP contributions are i.e. with an RRSP, you can deduct the contributions that you make from your income when you file your tax return.
- It is required that you use earned income to contribute towards your RRSP but this is not the case for your TFSA.
- You can continue to contribute towards your TFSA for as long as you like, whereas you must close your RRSP and stop contributing towards it when you turn 71 and purchase an annuity or convert it to a RRIF with the savings that you have made within the plan.
- You are able to specify your spouse as your beneficiary with both your TFSA and your RRSP, however there is a key difference with how your savings are treated upon your spouse’s death. With an RRSP, there will be taxes payable upon the monies left in the plan by your children who inherit it, whereas with a TFSA, tax is only paid on the increase in the value of the plan since the date of death in the year that it is inherited by your children. What’s more, no tax is payable if the value that they receive is less than the value of the TFSA at the time of death.
In summary, your individual circumstances will dictate which plan is the most appropriate for you, depending on your tax position and withdrawal intentions. The primary difference between both plans is the timing of the taxes payable i.e. if you want to defer the payment of your taxes, particularly if your marginal tax rate will be lower in retirement, an RRSP may be more beneficial for you. Alternatively, if your marginal tax rate will be higher when you plan to make withdrawals, a TFSA may suit you better.
It has certainly been a busy week in terms of announcements regarding financial policies for small businesses. Following the series of proposed tax reforms that the government announced back in July, various tweaks and changes have subsequently been made, owing, perhaps in part, to confusion and frustration expressed among the small business community. This week Finance Minister, Bill Morneau, has made further clarifications and adjustments to his original set of proposals, aiming to bring more of a sense of balance to the plans. Like all policy changes, the detail can be a little overwhelming, so here is a summary of the key points for your reference:
- The government intends to honor a commitment made prior to the election, to reduce the small business tax rate from 10.5% to 9% by the year 2019.
- Morneau confirmed that the government has scrapped the proposal to limit access to the Lifetime Capital Gains Exemption.
- The plans announced earlier in the year to reduce the value of passive investments made by corporations will continue in principle, but with few key changes. There will be a threshold of $50,000 of income per year, which will be excluded from the newly set higher rate of tax.
- The government has agreed to “simplify” the rules related to the new plans, to prevent income splitting for family members, who are not active in a business, but the plan will still move ahead in principle.
- Morneau has confirmed that the government will still provide good entrepreneurial incentives for venture capitalists and angel investors. The criteria for which still needs to be established.
- The proposed rules to limit the conversion of income to capital gains have been abandoned due to the concerns that many related to intergenerational transfers and insurance policies were held inside corporations.
Of course, this is one area of government policy which is not only constantly changing, but particularly controversial in the current climate, so keep yourself updated regularly on new announcements and news, to ensure your understanding in this area and its potential impact on your family and business. If you have any questions, please talk to us.
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About Chris Geldert
Recognizing the difficulties navigating corporate structures and the insurance world I specialize in assisting business owners protect, realize and transfer the value of their business. I focus and guiding owners through the process, working with their various professionals, ensuring solutions are implemented to properly manage the risks and maximize the benefits. Above all I work to earn your business.