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Whether you are decades away from retirement or if it is just around the corner, being aware of the planning opportunities will take the fear and uncertainty out of this major life event.

Whether you are decades away from retirement or if it is just around the corner, being aware of the planning opportunities will take the fear and uncertainty out of this major life event.

Blue sky your retirement plans to get clarity

As you approach retirement, preparation and planning become extremely important to help ensure that this period of your life will be as comfortable as possible. If you are like most, you have spent considerable time contemplating the type of retirement you wish for yourself.

  • Is extensive travel your dream?
  • Do you have an expensive hobby or two you want to take up?
  • Will you stop working totally or continue to do some work on your own terms using your life experience and skills to supplement your income.
  • Will you remain in your house or will you downsize to smaller, easier to care for premises? Or perhaps housing that will be more compatible with the challenges of aging?

There are many lifestyle issues that need to be considered but to realize these dreams you must also be really secure in retirement, so the financial issues must be planned for as well.

The big question – How much will I need to retire?

Recent studies reported that middle and upper middle class couples spend approximately $50,000 to $60,000 per year in retirement. If this seems a lot lower than what you and your spouse are spending now, it probably is. That is because most retirees no longer have the same level of expenses around housing, education and raising a family.

The average age for retirement in Canada for males is age 62 (females, age 61). At that age, normal life expectancy is another 22 years. Many financial advisors use a rule of thumb that says you will need a nest egg of approximately 25 times your post-retirement spending.

The average CPP retirement pension is approximately $7,600 per year or approximately $15,000 per married couple (if spouse qualifies for income at same rate). Assuming a 4% withdrawal rate and adjusted for inflation this means that a middle class couple would require a retirement fund of $875,000 to $1,125,000. If you do not qualify for or wish to ignore your government benefits you would require between $1,250,000 and $1,500,000. For those lucky enough to have participated in a company pension plan, you may already have sufficient retirement income.

8 Retirement planning tips

Review your sources of retirement income

  • Registered plans –including RRSP’s, corporate pension plans, TFSA’s
  • Government programs – CPP, QPP, OAS etc.
  • Non-registered investments – stocks, bonds, mutual and segregated funds, cash value life insurance, prescribed life annuities
  • Income producing real estate – including proceeds from the sale of principal residence if downsizing.

Eliminate or consolidate debt

  • Try to avoid carrying debt into retirement. If interest rates rise and your retirement income is limited or fixed your lifestyle could be negatively affected.

Understand your government benefits

  • Review what government programs you are eligible for.

Know your company pension plan

  • If you are a member of a company pension plan review your pension handbook or meet with the pension administrator to understand what options are available for you. This should include reviewing the spousal survivor options.

Reduce or eliminate investment risk

  • Consider reallocating your investment portfolio in contemplation of retirement to eliminate or reduce risk. You may want to shift away from primarily equities in an effort to provide more stable returns.

Protect your savings and income

  • Also consider effective risk management to avoid depleting assets in the case of a health emergency affecting yourself or a family member. There are many insurance options available to help you do this including Critical Illness, Long Term Care and Life Insurance.

Know your health benefits

  • Determine how you will maintain your dental care, prescription, and other extended health costs through retirement.

Review your estate planning strategy

  • Are you still on track or do modifications have to be made to wills, trusts, tax planning, Shareholder and other agreements?

Tax planning in retirement

Tax planning most likely was part of your investment strategy during your working years and you shouldn’t abandon that now just because you are retired. Tax planning is just as important as it was pre-retirement.

Pay attention to the following:

Mark your calendar for your 71st birthday

  • By the end of the year you turn age 71, you must convert your RRSP’s into RRIF’s or annuities. There will be adverse consequences if you do not so be sure to take note.

Defer your taxable retirement income until age 71

  • Since your income from your RRIF or registered life annuity is fully taxable try to bridge your income from date of retirement to age 71 using non-registered funds. Your TFSA is a perfect vehicle to accomplish this so try to contribute the maximum (or exercise the catch up) for you and your spouse during your working years. Also, taking income from your segregated or mutual funds will also be an effective way of bridging your retirement income until age 71 at a very low tax rate.

RRSP contributions in year you turn 71

  • If you have unused RRSP contribution room you can make a lump sum contribution until December 31st of the year you turn 71. Your resulting RRSP deduction can be carried forward indefinitely and will allow you to spread out the deduction over any number of years reducing the tax on your future retirement income.

Try to avoid any claw backs

  • Your objective should be to effectively reduce line 234 on your income tax return – total income. Paying attention to how your investment income is taxed will assist with this. For example, the type of investment income that creates the most total income on line 234 is dividend income which is adjusted for income purposes to between 125% and 138% of the dividend received. This compares with 50% for capital gains and approximately 15% or less for prescribed annuities.

Continue to obtain professional advice

  • Continue to work with your advisors to find ways for you to reduce your post retirement tax bill to allow you to keep more dollars in your wallet.

Planning for a healthy retirement both financially and physically will ensure that you can enjoy a long and well deserved retirement on your terms.

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Critical Illness insurance was invented by Dr. Marius Barnard. Marius assisted his brother Dr. Christiaan Barnard in performing the first successful heart transplant in 1967 in South Africa. Through his years of dealing with cardiac patients, Marius observed that those patients that were better able to deal with the financial stress of their illness recovered more often and at much faster rate than those for whom money was an issue. He came to the conclusion that he, as a physician, could heal people, but only insurance companies could provide the necessary funds to create the environment that best promoted healing.

Why a Doctor Invented Critical Illness Insurance

Critical Illness insurance was invented by Dr. Marius Barnard.   Marius assisted his brother Dr. Christiaan Barnard in performing the first successful heart transplant in 1967 in South Africa. Through his years of dealing with cardiac patients, Marius observed that those patients that were better able to deal with the financial stress of their illness recovered more often and at much faster rate than those for whom money was an issue.  He came to the conclusion that he, as a physician, could heal people, but only insurance companies could provide the necessary funds to create the environment that best promoted healing.  As a result, he worked with South African insurance companies to issue the first critical illness policy in 1983.

Medical practitioners today will confirm what Dr. Barnard observed – the lower your stress levels the better the chances for your recovery.  When one is ill with a serious illness, having one less thing to deal with, such as financial worry, can only be beneficial.

Your Life Could Change in a Minute!

Case Study A – Lawyer, Male 55

Tom was a successful lawyer with a thriving litigation practice.  He had recently started his own firm and was recruiting associates to build the practice.  He was a single father assisting his two adult children in their post-secondary education.  Tom had always enjoyed good health, ate well, exercised regularly and was a competitive highly ranked (senior class) tennis player.

In 2006, at age 55, he was diagnosed with prostate cancer.  In addition to the emotional angst and anger at receiving this diagnosis he also was concerned about the financial impact this illness could have on both his practice and his support of his children. Fortunately, five years earlier at the urging of his financial advisor he had purchased a critical illness policy.

Within weeks of his diagnosis Tom received a tax free benefit cheque for $250,000.  He immediately called his advisor to tell him how elated he was that the advisor had overcome his initial objectives to purchasing the policy 5 years earlier.  He went on to say that with having the financial stress alleviated he was certain he would be able to tackle the treatment and concentrate on recovery in a positive manner.

Today, Tom is cancer free, his practice is thriving, and his children are successfully working in professional practices.

Case Study B – Retired Business Owner, Female 52

Christina at age 52 was enjoying a good life that came partially from the sale of her business a few years before.   Her investments were thriving and everything looked rosy.  Then 2008 came along.  As if the stock market crash was not enough, in December of 2008, Christina suffered a stroke.  Fortunately, it was not a severe stroke.  At first the doctors thought that it was actually a TIA as many of her symptons were minor. The next morning the MRI results confirmed that it was indeed a stroke and it had caused some minor brain damage.

Christina made a remarkable recovery and within a few short months was almost back to where she was before the stroke.  If you didn’t know Christina you wouldn’t have any idea that she had even had one.

As a successful business owner and mother, Christina had always been a big believer in the advantages of owning critical illness insurance.  At first, she had some concern that because her stroke was not that serious and she had recovered so quickly, that her claim might not qualify for payment.  These fears turned out to be unfounded as days after the stroke she received claim cheques for $400,000.

During her recovery period, Christina was fearful of having another stroke which caused her some stress however, she is certain that not having any financial worries during this time aided in her almost total recovery.

These two case studies, although quite different in circumstances illustrate some key points about Critical Illness insurance:

  • A life threatening illness or condition can strike anyone regardless of age or health;
  • Financial security reduces stress which can assist in the recovery process;
  • You do not have to be disabled to be eligible for a Critical Illness benefit;
  • Although you need to be diagnosed with a life threatening illness, you do not have to be at “death’s door” in order to have your claim paid;
  • The benefits are paid tax free to the insured

Call me to see if critical illness is right for you or use the social sharing buttons below to share this article with a friend or family member you think might benefit from this information.

©iStockphoto.com/ Dean Mitchell

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Often we see older investors shift gears near retirement and beyond. Many become risk averse and move their assets into fixed income type investments. Unfortunately this often results in the assets being exposed to higher rates of income tax and lower rates of return – never a good combination.

Growing your estate without undue market risk and taxes

Often we see older investors shift gears near retirement and beyond.  Many become risk averse and move their assets into fixed income type investments.  Unfortunately this often results in the assets being exposed to higher rates of income tax and lower rates of return – never a good combination.

Or maybe the older investor cannot fully enjoy their retirement years for fear of spending their children’s inheritance.

The Estate Bond financial planning strategy presents a solution to both of these problems.

How does it work?

  • Surplus funds are moved out of the income tax stream and into a tax exempt life insurance policy. 
  • Each year a specified amount is transferred from tax exposed savings to the life insurance policy

In essence, we are substituting one investment (the life insurance policy) for another (fixed income assets).

The result?

  • The cash value in the life insurance policy grows tax-deferred and may also increase the insurance benefits payable at death.
  • Since the death benefit of a life insurance policy is received tax-free by the beneficiary this strategy results in a permanent tax shelter.

In other words, there is an increase in the funds available to heirs and beneficiaries after death and a decrease in the taxes payable before death.

The Estate Bond in action

Robert, aged 60, and his wife Sarah, aged 58 are satisfied that they will have sufficient income during their retirement years.  They used the Estate Bond concept as a means to guarantee their legacy to their children and grandchildren.

Investment: $30,000 for 20 years into a Joint Second-to-Die Participating Whole Life policy which is guaranteed to be paid up in 20 years

Immediate Death Benefit: $892,078

Death Benefit in 30 years: $2,160,257 (at current dividend scale)

Cash Surrender Value in 30 years: $1,582,934 (at current dividend scale)*

* If surrendered, the cash surrender value would be subject to income tax but there are strategies that could be employed to avoid this tax.  Assumes using Participating Whole Life illustrated at current dividend scale.  Values shown in 30th year at approximate life expectancy.

Alternative investment in action

Investment: $30,000 for 20 years in a fixed income investment earning 2.5% AFTER tax

Immediate Death Benefit:  $30,000

Estate Benefit in 30 years: $1,005,504

It should be noted that obtaining this rate of return in today’s fixed income environment would be challenging. 

Additional benefits of the Estate Bond

  • The estate value of $2,160,257 in 30 years is not subject to income tax
  • The proceeds at death, if paid to a named beneficiary, are not subject to probate fees.
  • If the beneficiary is one of the preferred class (spouse, parent, child or grandchild) the cash value and the death proceeds are protected from claims of creditors or litigants during the insured’s life time.
  • The use of life insurance with a named beneficiary also results in a totally confidential wealth transfer.
  • Robert and his wife can both enjoy their retirement without affecting their family’s inheritance.

The Estate Bond strategy is designed for affluent individuals who are 45 years of age or older and who are in reasonably good health. For those who meet these criteria and have surplus funds to invest, this concept can provide significant benefits and results.

Please call me if you have any questions about the Estate Bond strategy or would like to determine if it is right for you.  As always, please feel free to use the social sharing buttons below to forward this article to someone that would find it of interest.

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Canada Pension Plan – Should You Take it Early?

Canada Pension Plan – Should You Take it Early?

The new rules governing CPP were introduced in 2012 and they take full effect in 2016. The earliest you can take your CPP Pension is age 60, the latest is 70. The standard question regarding CPP remains the same – should I take it early or wait?

While you can elect to start receiving CPP at age 60, the discount rate under the new rules has increased. Starting in 2016, your CPP income will be reduced by 0.6% each month you receive your benefit prior to age 65. In other words, electing to take your CPP at age 60 will provide an income of 36% less than if you waited until age 65.

CPP benefits may also be delayed until age 70 so conversely, as of 2016, delaying your CPP benefits after age 65 will result in an increased income of 0.7% for each month of deferral. At age 70, the retiree would have additional monthly income of 42% over that what he or she would have had at 65 and approximately 120% more than taking the benefit at age 60. The question now becomes, “how long do you think you will live?”

Assuming that an individual has $10,000 of CPP pension at age 65, and ignoring inflation (CPP income benefits are indexed according to the Consumer Price Index), the following table compares the total base income with that if benefits are taken early or late:

 

CPP Benefit Commencement

Total benefit received Age 60 Age 65 Age 70

One year $ 6,400 $10,000 $ 14,200

Five years $32,000 $ 50,000 $ 71,000

Ten Years $64,000 $100,000 $142,000

The question of life expectancy can be a factor in determining whether or not to take your CPP early. For example, according to the above table if you take your pension at age 60, by the time you reach age 65; you would already have received $32,000 in benefits. With $10,000 in pension income commencing at age 65 the crossover point would be age 73 (the point at which the total income commencing at age 60 equals the total income commencing at age 65). If you were to die prior to age 73, you would have been better off taking the earlier option.

If your choice is to delay taking the pension until age 70 instead of 65, the crossover would not be reached until age 85.

Some individuals may wish to elect to take the pension early and invest it hoping that the income from age 60 combined with the investment growth will exceed the total income that would be received by starting at 65.

Remember, if you elect to take your pension before 65 and you are still working, you must continue to contribute to CPP. After age 65, continuing contributions while working are voluntary. On the plus side, these extra contributions will increase your pension under the Post-Retirement Benefit (PRB).

Reasons to take your CPP before age 65

  • You need the money – number crunching aside, if your circumstances are such that you need the income then you probably should exercise your option to take it early;
  • You are in poor health – if your health is such that your life expectancy may be shortened, consider taking the pension at 60;
  • If you are confident of investing profitably – if you are reasonably certain that you can invest profitably enough to offset the higher income obtained from delaying your start date then taking it early may make sense. If you are still continuing to work, you could use the CPP pension as a contribution to your RSP or your TFSA.

Reasons to delay taking your CPP to age 70

  • You don’t need the money – If you have substantial taxable income in retirement you may want to defer the CPP until the last possible date especially if you don’t require the income to live or support your lifestyle;
  • If you are confident of living to a ripe old age – if you have been blessed with great genes and your health is good you may wish to consider delaying your CPP until age 70. Using the earlier example and ignoring indexing, if your base CPP was $10,000 at 65 then the pension, if delayed until age 70, would be $14,200. If you took the higher income at 70, you would reach the crossover point over the age 65 benefit at age 84 and after that would be farther ahead.

This information should help you make a more informed choice about when to commence your CPP benefits. Even if retirement is years away it is never too early to start planning for this final chapter in your life. Call me if would like to discuss your retirement planning.

As always please feel free to pass on this article to friends, family and colleagues using the share buttons below.

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Investing in today’s environment is not for the faint of heart. However, fortunately for Canadians, Segregated Fund products offered by many life insurance companies provide a safety net for nervous investor

Investing in today’s environment is not for the faint of heart.  However, fortunately for Canadians, Segregated Fund products offered by many life insurance companies provide a safety net for nervous investors.

Fund products present some interesting opportunities for people looking to get more security in their investment portfolios without sacrificing their potential for growth.

100% Maturity and Death Benefit Guarantee

At a time when most companies are reducing their guarantees to 75%, a few companies still offer 100% guarantees for both maturity value and death benefit.   

At the maturity date, the value of the investment will be the greater of the market value or 100% of the sum of deposits less any withdrawals taken.  In other words, at maturity (minimum 15 years), your worst-case scenario is receiving full value for all of your deposits.

At death, the 100% guarantee will ensure that your beneficiary receives the greater of the market value of your Segregated Fund or the sum of all your deposits less any withdrawals taken.

Reset Feature for Maturity and Death Benefit Guarantee

Resets can have significant value in a volatile market.  With this feature you have the ability to:

Reset the maturity guarantee value (usually more than once per year).  Accordingly, you can lock in your investment gains at maturity.  With each reset you also have the option of designating a new maturity date.

Automatically reset the death benefit guarantee, locking in your investment gains at death.  (The frequency of the reset varies by company). How Significant are Reset Options?  You Decide.

John invested $500,000 in a segregated fund and selected a technology fund as the investment choice.  The technology boom saw that investment grow to $850,000 and John wisely exercised his reset option.  Shortly afterward, the dot.com bubble burst and the investment value fell from $850,000 to $300,000 with no significant recovery.  This same bubble burst devastated many investors. Meanwhile, John was able to recover not only his original investment but also the full $850,000 at his maturity date.

Designation of Beneficiaries Enables Protection

One fact about Segregated Funds that is often overlooked is that as a product of a life insurance company, you can name a beneficiary for the proceeds at your death.  This creates the potential that your segregated fund investment may be free from the claims of creditors or potential litigants. 

Investing Using a Balanced Portfolio Close to Retirement

Volatile investment markets create a significant amount of stress and emotional turmoil, particularly amongst older investors.  The closer you get to retirement, the higher the stakes. Therefore, many investors have forsaken the potential of higher returns for a significant portion of their portfolio.  While this does reduce risk, it probably will result in lower returns.

By using Segregated Funds and taking advantage of the 100% Maturity Guarantee and reset options, one could achieve balance in their portfolio without necessarily locking in low yields. 

Estate Conservation for Mature Investors

The 100% death benefit guarantee means that you can remain invested in an equity portfolio while not risking the estate value of your investment portfolio. Regardless of what happens in the market, your investment fund is totally guaranteed at your death.  This guarantee is applicable to contracts purchased before age 80.  For contracts purchased after age 80 the guarantee is usually 75%.

By naming a beneficiary, upon your death, all of your segregated fund investments will flow to your beneficiary without any probate fees, administrative costs or risk of any Wills Variation Act litigation.

Capital Protection

Market downturn is not the only risk to which capital can be exposed.  For many professionals and business owners there are situations that may involve litigation either by creditors or other parties who feel they have a claim against your personal and business assets.  By naming a preferred beneficiary, this risk is potentially eliminated.

Complicated Estate Protection

For domestic situations involving previous marriages and the desire to protect capital for present or previous family members the beneficiary designation could be made irrevocable.  The irrevocable beneficiary designation confers rights and protection on the beneficiary, which would not be as enjoyable through the “primary beneficiary” title.

Another advantage of Segregated Funds is that the use of named beneficiaries allow for a confidential transfer of wealth at death. In uncertain times having the comfort of a maturity and death benefit guarantee provides investors with a significant safety net.

Please give me a call me to see if Segregated Funds will compliment your current investment strategy or use the social sharing buttons below to share this article with a friend or family member you think might benefit from this information.

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Can Probate Be Avoided?

Can Probate be Avoided?

Executors often find that the probate process can be both time consuming and expensive. Planning strategies exist that may eliminate or reduce the requirement of having assets probated.

What is probate?

Probate is a legal procedure that validates a deceased’s will and confirms the executor’s authority to carry out the testator’s wishes. This provides assurance to third parties such as financial institutions and land registry offices that the executor has the power to deal with assets according to the will.

Are all wills subject to probate?

There is no requirement that every will must be probated. Proper planning can eliminate the need for probate and also, the type of asset involved will generally dictate whether or not probate is required.

What is the cost of probate?

  • This will depend on the province. At the low end, Alberta has a flat maximum fee of $400, while at the upper end Ontario has a levy of $15 per thousand on estates valued in excess of $50,000. British Columbia has fees of $14 per thousand (estates over $50,000) plus a filing fee;
  • Property which is owned in another province may attract fees based on that province’s fee schedule.

What are advantages to probate?

  • When Letters of Probate are obtained, financial institutions, transfer agents, land registry offices and other third parties can safely transfer the assets to the intended recipients;
  • The time frame for any court challenges to the will or estate is usually measured from when the probate was granted. This limits the period of when legal action might be taken.

What are the disadvantages to probate?

  • The process can be time consuming and complex;
  • Depending on the jurisdiction the cost of probate along with the legal fees can be expensive;
  • The process is open to public scrutiny so information about the estate distribution is made public.

7 Tips to avoid probate

There are a number of strategies to, if not avoid probate entirely, reduce the value of the assets that would otherwise be exposed to probate.

  • Make sure you have a will – Probate fees will be applied automatically if you die intestate (without a will);
  • Gifting prior to death – this can reduce the value of the estate, so it has to be done with care. It is important that all control over the gift must be relinquished. Be careful as there may be income tax considerations, (capital gains etc.), as well as possible property transfer taxes;
  • Use named beneficiaries whenever possible – moving assets to vehicles such as life insurance, annuities, and segregated funds is a great way to avoid probate. The bonus here is that it also allows the proceeds to be paid quickly and directly to the beneficiary. This also applies to registered investments such as RRSP’s, RRIF’s, TFSA’s and pensions;

To avoid the unintended future inclusion of these assets in your estate if the named beneficiary dies, you should consider naming a successor (contingent) beneficiary;

Named beneficiaries also provide a confidential transfer. The exception to this is in Saskatchewan where probate rules dictate that beneficiaries to insurance products be listed even though the proceeds are not subject to probate;

  • Use of Joint Tenancy – Holding assets in joint tenancy with a spouse, child or other family member will avoid probate as the asset passes automatically upon death to the other individual. Using joint tenancy to avoid probate fees should involve careful consideration as there will be a loss of control once it is jointly held and the asset will be exposed to the joint tenant’s creditors;
  • Use of Trusts – Transferring assets to a trust will remove the asset from the estate. The use of an alter-ego or joint spousal trust can be very effective for this purpose. Be careful of appreciable assets that may attract a taxable disposition upon transfer;
  • Transferring assets to a corporation – Except for outstanding mortgages on real estate which are deductible, generally probate fees are charged against the gross value of an estate asset. If an estate asset was purchased with borrowed money, it may be beneficial to transfer that asset to a limited company. This will reduce the value of the estate and the company share value will be the asset less the debt used to acquire it;
  • Multiple Wills – Not all assets are subject to probate. It is becoming popular to have two wills – one for those assets that are probatable and one for those that are not. For example, someone who owns private company shares may wish to use a second will to transfer those assets as private company shares are not subject to probate. If assets are held in another province with lower probate fees there may be an advantage to have a separate will dealing with those assets;

The strategy of multiple wills is not available in all provinces and the use of multiple wills may create problems with the new Graduated Rate Estate tax with respect to testamentary trusts.

Please note that legislation governing probate and the fees that are levied vary by province so not all the ideas presented here will apply to every province. This article does not apply to the province of Quebec. Careful planning is advisable with all estate planning considerations and it is important to seek professional advice when considering these strategies.

We are here to answer any questions you may have on this complicated issue. As always, please feel free to share this article by using the share buttons below.

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Shared Ownership Critical Illness

Shared Ownership refers to a concept where more than one party owns an interest in an insurance policy. The most common of these arrangements is where the corporation is the owner and beneficiary of the death benefit and the shareholder or employee owns the cash value of the policy.

Recently there has been growing interest in applying this strategy to a Critical Illness policy. Although the CI policy does not have cash value, there is usually an option to have a Return of premium (ROP) in the following situations:

  • Upon death – If the insured dies without having submitted a claim for critical illness the premiums paid are refunded;
  • Upon Termination – If the policy reaches its termination age without a claim being made, the premiums paid are refunded;
  • Upon Surrender – If the policy is surrendered without a claim, premiums paid are refunded.

Who should consider this arrangement?

Anyone who owns shares in a corporation and wishes to protect that corporation against loss if one of the shareholders or other key employee is diagnosed with a critical illness.

How does it work?

A Shared Ownership Agreement is drafted documenting:

  • That the corporation will own, pay for and be the beneficiary of the CI coverage on the key shareholder or employee;
  • That the shareholder will own and pay for the Return of Premium option upon the surrender of the policy.

Who benefits?

Under this arrangement the company is protected against loss but should no critical illness occur the shareholder/employee will receive a financial benefit as the premiums paid will be refunded.

Is this really an important planning strategy?

Case Study

Barry applies for $500,000 of lifetime critical illness coverage with a return of premium benefit upon surrender. His company lawyer drafts a Shared Ownership Agreement, which stipulates that the corporation owns and is beneficiary of the $500,000 CI benefit while Barry owns and pays for the ROP benefit.

Premium Structure

  • The total annual premium for the policy is $ 9,131.
  • The Corporation pays the cost of insurance $7,003
  • Barry personally pays the ROP benefit of $2,128

How does Barry Benefit?

Twenty years later, when Barry turns 60, he determines that the CI coverage is no longer required. His company cancels the policy and Barry exercises his return of premium option. Barry receives a cheque from the insurance company for $182,628 Tax Free.

This represents an after tax rate of return on Barry’s annual ROP premium ($2,128) of 12.5% compound interest.

Consider this*,

  • One in three Canadians will develop life threatening cancer;
  • Half of all heart attack victims are under the age of 65;
  • Each year 50,000 Canadians suffer a stroke with 75% of all victims being left with a disability.

The CI Shared Ownership Strategy can result in significant financial benefits for the individual shareholder while the Corporation enjoys the protection of its key employees against loss from a critical illness.

Call me if you would like to explore whether this strategy will benefit you and your company. Or feel free to use the sharing icons below to forward this to someone who might find this of interest.

For Barry’s case study, Industrial Alliance’s Transition Critical Illness product to age 100 with Flexible Return of Premium was illustrated. Of course, results will depend on age and amount plus product features will be vary by company.

*Source: RBC Insurance

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The Honourable Bill Morneau, Minister of Finance, recently announced the federal budget for Canada for 2016. We've put together an infographic to outline the highlights of the federal budget and what it means for families, retirees and business owners.

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Lifetime capital gains exemption for 2016

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Does your Business Qualify for the Small Business Gains Exemption?

As a business owner, you may be aware that when you dispose of shares in your business you could receive an exemption on all or a portion of the capital gains that ordinarily would be taxable. This is due to the Lifetime Capital Gains Exemption which says that, for 2016, up to $824,1761 of capital gains is exempt from taxation.

The Lifetime Capital Gains Exemption (LCGE) is available to individuals who are disposing of or deemed to have disposed of:

  1. Qualified Small Business Corporation (QSBC) shares;
  2. Qualified farm property; or
  3. Qualified fishing property2.

For the shareholder of a small business corporation this valuable benefit could reduce or eliminate the tax bill that otherwise would be payable upon the sale or succession of the company. The important thing to understand, however, is that the exemption is not automatic. There are some conditions that must be met. In order for the business to be considered a QSBC and therefore qualify for the Small Business Gains Exemption (SBGE) there are two main rules:

Rule # 1 – Ownership of Shares

During the 24 months immediately preceding the disposition the shares must not have been owned by anyone other than the individual tax payer or a related person;

Rule # 2 – Use of Corporate Assets

Also, during this 24 month period;

    1. 50% or more of the fair market value of the corporate assets must have been used in an active business conducted primarily in Canada;
    2. At the time of the disposition (sale or upon death of shareholder), all or substantially all (defined as 90% by the CRA) of the fair market value of the assets must have been used to produce active business income. Some examples of corporate assets which could put a corporation offside with respect to its being a QSBC are cash, bonds, non-business related real estate and other investments.

In situations where corporations do not qualify for the SBGE due to failing to meet the 90% rule, remedies are sometimes available which may provide a solution. This will usually involve a “purification” of the corporation to distribute or transfer the non-business related assets. Some examples as to how this could be accomplished are:

  • Paying a taxable dividend to shareholders;
  • Paying down any bank debt or accounts payable;
  • Pre-paying corporate income tax installments;
  • Purchasing new assets which will be used in the business to produce active business income.

There is another area in which careful attention is warranted. In order for a business to be a Qualified Small Business corporation it must first be a Canadian controlled private corporation (CCPC). Should there be a sale of shares to either a non-resident or a public corporation, there may be a denial of the capital gains exemption as the corporation may no longer be a CCPC. This could also be the case where a non-resident executor is named in the shareholder’s will and the shareholder dies.

The rules governing whether or not an individual who owns shares in a small business corporation receives a capital gains exemption are complex and often confusing. It is important to obtain professional advice when undertaking the appropriate planning.

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Notes:

  1. The 2013 federal budget increased the LCGE to $800,000 for 2014 with indexing commencing in 2015.  The indexed amount for 2016 is $824,176.
  2. The 2015 federal budget increased the maximum LCGE for Qualified farm or fishing property to the greater of $1 million and the indexed LCGE realized on the disposition of qualified small business corporation shares.  When indexing increases the SBGE to $1 million then both SBC shares and farm and fishing property will enjoy the same LCGE.
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