Pay Attention to Your Beneficiary Designation

It’s more important than you think

Naming a beneficiary is a valuable feature of life insurance and segregated funds policies so it is important to carefully choose your beneficiaries.

Estate – the default choice

Many people choose to name their “estate” as their beneficiary.  Although this is an easy short-term solution, it is important to review the risks of doing this.  If you are stuck for a significant “other” beneficiary, don’t forget to change it to a more appropriate option later.  Why?

  • The proceeds will be subjected to probate fees and the benefits received will be co-mingled with all the other estate assets which may be exposed to various third parties.

What’s in a name?

Simply naming an individual or trust as beneficiary will keep the proceeds out of the insured’s estate and also protect the death benefit from the claims of creditors or litigants.

VIP Beneficiary

A “preferred beneficiary” is a spouse, parent, child or grandchild and receives VIP treatment in the form of protection.  All the proceeds of the life insurance product (including Segregated Funds) are protected against claims of the creditors or litigants of the life insured not only upon his or her death, but any cash values in that policy are also protected during the lifetime of the insured.

  • A minor “preferred beneficiary” will require a trustee for their portion until they reach the age of majority.
  • Note that the preferred beneficiary status does not apply to siblings.

Trust your trustee

Think carefully about to whom you assign the task of trustee.  It can be a difficult role to fill, often challenged by trying relationships. Be sure to discuss the role with your intended trustee and make sure they are comfortable with it and understand the responsibilities of the role.

Contingency Plan

Often parents of minor children are concerned about would happen should they both tragically pass away at the same time.  For this reason, the children are often named as “contingent beneficiaries”.  If the children are minors, the trustee named to act on their behalf, will receive the proceeds directly upon the death of their parents avoiding any estate considerations.

As life changes, so do beneficiaries

If you have an older life insurance policy it is probably a good idea to review the named beneficiary as your circumstances may have changed.

It may be time for a change if……

  • You have divorced – If you have a divorce agreement that required you to maintain your spouse as the beneficiary, have the conditions of that requirement now expired (e.g. children are now of age) and is no longer required?
  • If you have remarried – is your ex-spouse still named as the beneficiary?
  • If a policy was assigned to the bank or other lending institution – have the assignment removed if the loan is paid off.
  • If you have new dependents – children, grandchildren or even dependent parents.
  • If your children are now grown up – and have families of their own, does this change how you want your life insurance proceeds to be paid?
  • If your children are married, their spouses may have access to these proceeds too. Is their relationship solid, or is their a risk of half of your life insurance proceeds being paid out as part of a divorce settlement? Perhaps you should consider naming your grandchildren as beneficiaries instead?

The need for life insurance no longer exists

Often, older individuals find they have no one to whom they wish to leave their insurance proceeds.  In this situation, naming a registered charity will provide a charitable tax deduction in the full amount of the proceeds at death.

Let’s review your beneficiary designations and make sure your life insurance proceeds end up where you want them to be.  As always, feel free to use the sharing icons below to forward this article to someone who might find it of interest.

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A New Year’s Resolution You Shouldn’t Break – Saving For Retirement!

Many of us set New Year’s resolutions for ourselves and often those resolutions have to do with finances. January is the month we say, “Ok, this year I am going to save more and spend less”. This article won’t tell you how to spend less, but it will outline two government sponsored programs available to help you save for retirement or even just a rainy day! Of course these are not the only vehicles you can accumulate money with – those include anything from putting dollars under the mattress to the most sophisticated tax shelter schemes – but these two are the most popular.

Tax Free Savings Accounts (TFSA)

This is the new kid on the block established by the government as of January 1, 2009. Canadian residents age 18 or older could contribute up to $5,000 into a TFSA. The funds would grow tax free and although there is no tax deduction for the contribution, withdrawals can be made at any time without paying tax. Also, there is no earned income requirement for an individual to contribute. For those years where no contribution is made, it can be made in later years. Any withdrawals can be paid back in addition to current contributions. Be careful not to do this in the same year as the money was withdrawn so as to avoid a tax penalty for over payment.

There are a wide range of investment options, from mutual funds, GIC’s bonds, segregated funds etc. Since withdrawals are not taxed as income, they do not affect any income tested government benefits such as Old Age Security, Guaranteed Income Supplement or the Child Tax Benefit. In addition, funds can be given to a spouse or common-law partner to invest in a TFSA. For families where the children are 18 and over, significant total contributions can be made.

When the program was first introduced it was intended that the contribution limits be indexed for inflation. As a result the contribution limit since 2013 and 2014 was increased to $5,500. In 2015 the limit was again increased to $10,000.  The 2016 limit will be rolled back to $5,500.  For those that have not yet started a TFSA, a total contribution of $46,500 could be made during 2016.

Even though there is no tax deduction for the contribution, the fact that funds accumulate with no tax payable on the growth and no tax owing on the withdrawal, make this vehicle ideal for rainy day savings or for retirement savings over and above other registered plans such as a Registered Retirement Savings Plan.

Registered Retirement Savings Plans (RRSP)

With this vehicle contributions can be made equal to 18% of the previous years earned income subject to a maximum contribution. The maximum contribution has been increasing and for 2015 is $24,930. The maximum is also increased by any existing RRSP room. Unlike a TFSA, contributions made to an RRSP are tax deductible against earned income. Withdrawals from an RSP are taxable as earned income and taxed at an individual’s top marginal rate. Contributions can be continued to be made until the year in which the contributor turns age 71, at which time, the RRSP must be converted to a Registered Retirement Income Fund or Life Annuity.

Spousal contributions may be made to lower income spouse but contributions of both spouses may not exceed the maximum RSP room of the primary contributor. If your spouse is younger, contributions may be made to his or her plan until he or she reaches the age of 71. Contributions can be borrowed from a lending institution but the interest paid will not be tax deductible. This is also true of TFSA’s and, in fact, with any registered plan.

Phew! That was pretty dry, but these are government programs and, as everyone knows, the government has no sense of humour! If you want to beat the rush you can call me to discuss the strategy that works best for you.

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Is the Life Insurance Industry in Canada Stable?

Given the problems encountered by some large financial institutions in the United States, how concerned should we be about the state of the life insurance industry in Canada?

Insurance is one of the most closely regulated industries in Canada.  Unlike the United States, in Canada there is a government organization that supervises all of the federally incorporated and foreign insurers to ensure that these companies operate in a prudent manner.  This organization is the Office of the Superintendent of Financial Institutions (OSFI).  The major life insurance companies are federally regulated by OSFI (For those companies that are provincially chartered their oversight is provided by the province in which they do business).

Life Insurance companies are decreasing in number

It is a fact that over the past decade the number of life insurance companies operating in Canada has decreased dramatically.  This decrease is mainly due to the mergers and acquisitions of the existing companies.  For example, those individuals who maintained policies issued by Maritime Life, Commercial Union, North American Life, or Aetna Life, now find themselves insured by Manulife Financial.

The good news? No insured individual has ever lost any contractual benefits due to their insurance company being acquired by another.

Adequate reserves are the key to stability

  • OSFI oversees the stability of life insurance companies by enforcing the requirement that adequate reserves be maintained in order for the companies to meet their future contractual obligations.
  • Reserves are known as “actuarial liabilities” and each company is required to put money aside and to invest that money prudently so that they may pay future benefits on policies that they have sold in the past.
  • These reserves are generated from premiums paid to the insurer and the investment income earned on those premiums.  Under the Insurance Companies Act, insurers are required to invest in a “reasonable and prudent manner in order to avoid undue risk of loss.”
  • Also, OSFI requires an amount over and above these reserves, known as the Minimum Continuing Capital and Surplus Requirement (MCCSR) to be maintained by the insurer.  OSFI necessitates that the life insurers maintain an amount equal to 150% of the MCCSR requirement.  The MCCSR ratio maintained by member companies of the Canadian Health and Life insurance Association has consistently been significantly higher than the minimum requirement.

More protection for Canadian policyholders

As additional protection afforded a life or health insurance policyholder there are benefits provided to all policyholders through a not-for-profit organization known as Assuris.  This organization in a manner similar to the Canadian Deposit Insurance Corporation protects policyholders should their insurance company fail.  Assuris guarantees the following:

  • Death benefits – Up to $200,000 or 85% of the promised face value, whichever is higher;
  • Critical Illness – Up to $200,000 or 85% of the promised benefit, whichever is higher;
  • Health expenses (including travel insurance) – $ 60,000 or 85% of the promised benefit, whichever is higher;
  • Monthly income (disability, annuity etc). – $2,000 or up to 85% of the promised benefit whichever is higher;
  • Insurance companies TFSA’s  – Up to $100,000;
  • Segregated Funds – $60,000 or up to 85% of the promised guaranteed amount whichever is higher.

So how strong is the Canadian Life Insurance industry?

  • The combination of strong effective oversight and regulation of prudently invested actuarial liabilities have resulted in a robust financial industry enjoying assets of more than $514 billion in Canada, making the industry one of the largest investors in Canada.
  • 10% of all Canadian and Provincial Government bonds and 15% of all Canadian corporate bonds are held by the insurance industry.
  • Canadian insurers also hold $650 billion in assets abroad.  The industry in Canada employs over 150,000 people.

Even though the life insurance industry in Canada has gone through significant changes in the past decade or two, the industry remains stable and capable of meeting its contractual obligations in the future. 

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Group Life Insurance – Only Part of The Solution

Ownership of individual life insurance at its lowest level in 30 years

The Life Insurance and Market Research Association (LIMRA) 2013 study shines a light on a developing problem for Canadian households:

  • Individual ownership of Life Insurance was at its lowest level in 30 years;
  • 3 in 10 households did not have individual life insurance at all;

Why Group Life Insurance may not be all that you need

If your goal is to replace income for your family for more than 2 years, you may want to add an individual policy to your group insurance coverage.

According to the same LIMRA study, on average, households with only group coverage can replace the household’s income for less than 2 years.  While households with both group and personal life coverage can replace income for more than 5 years.

While group life insurance provided by an employer is a valuable benefit, it does have limitations when used as the only source for life insurance protection.  Some of the reasons group insurance should not be relied on solely for family life insurance include:

  • Group Insurance is not totally portable: If you leave your job, your group life insurance typically does not go with you.   While it is true that some of your group benefits may be converted to an individual plan when you leave, the plans available for conversion for life insurance are often extremely expensive and are quite limited.   Given that a recent Financial Post survey reports that only 30% of respondents stayed in their jobs for more than four years, this could be problematic.   Having additional personal coverage offers a safety net if you find yourself between jobs.
  • Group Life Insurance coverage is often inadequate: Most employee benefit plans provide group life insurance as a multiple of earnings up to a maximum.  A common schedule is two times salary and the maximum may leave you underinsured.
  • Renewal of Group Insurance is not guaranteed: It is important to be aware that the contract to provide employee benefits is one between the employer and the insurance company.  The employee has little or no control.  The coverage may be cancelled by either the company or the insurer.  Another concern is that future premiums may not be guaranteed.
  • Group insurance is not flexible for planning: While group coverage is usually a low cost source of life insurance, it should be looked upon as a top-up to personally held life insurance which provides the necessary protection.  Proper financial planning will determine how much coverage is required to protect your beneficiaries in the event of your death.

5 reasons why consumers don’t act

The LIMRA study also lists five difficulties that consumers have when making decisions about their family protection options.

  • Difficulty in understanding policy details;
  • Are unfamiliar with life insurance;
  • Difficulty in deciding how much to buy;
  • Uncertain about what type of life insurance to buy;
  • Worried about making the wrong decision.

Contact me if you are one of the many Canadians who would benefit from a review of your options to determine if you have an adequate mix in your insurance portfolio.  As always, please feel free to use the sharing buttons below to forward this information to anyone you may think would find this of interest.

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Get Your Corporate Dollars Doing Double Duty

Owners of very successful private corporations are well aware of the importance of cash flow.  Many are protective of how they allocate corporate capital so that business ventures are adequately funded and investment opportunities are not missed.

The Immediate Financing Arrangement offers an opportunity to provide life insurance coverage and accumulate wealth on a tax-advantaged basis without impairing corporate cash flow.

What is an Immediate Financing Arrangement (IFA)?

An IFA is a financial and estate planning strategy that:

  • Combines permanent, cash value life insurance with a conservative leverage program allowing the dollars allocated to the life insurance premiums to do double duty by still being available for business and investment purposes;
  • In the right circumstances and when structured properly so that all possible tax deductions are used, an improvement in cash flow could result.

Who should consider this strategy?

IFA`s are not for everyone. For those situations that best match the necessary criteria, however, significant results can be achieved. The best candidates for an IFA usually are:

  • Successful, affluent individuals who are active investors or owners of thriving privately held corporations who require permanent life insurance protection;
  • Of good health, non-smokers, and preferably under age 60;
  • Enjoying a steady cash flow exceeding lifestyle requirements;
  • Paying income tax at the highest rate and will continue to do so throughout their life.

How does it work?

  • An individual or company purchases a cash value permanent life insurance policy and contributes allowable maximum premiums;
  • The policy is assigned to a bank as collateral for a line of credit;
  • The business or individual uses the loan advances to replace cash used for insurance purchase and re-invests in business operations or to make investments to produce income.  This is done annually;
  • The borrower pays interest only and can borrow back the interest at year end;
  • At the insured’s death the proceeds of the life insurance policy retire the outstanding line of credit with the balance going to the insured’s beneficiary;
  • If corporately owned, up to the entire amount of the life insurance death benefit is available for Capital Dividend Account purposes.

Proper planning and execution is essential for the Immediate Financing Arrangement.  However, if you fit the appropriate profile, you could benefit substantially from this strategy.

If you wish to investigate this strategy and whether it can be of benefit to you, please contact me and I would be happy to discuss this with you and/or your accountant.  As always, feel free to use the sharing icons below to forward this to someone who might find this of interest.

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Estate Planning Tips for Real Estate Investors

For many Canadians the majority of their wealth is held in personally owned real estate. For most this will be limited to their principal residence, however, investment in recreational and real estate investment property also forms a substantial part of some estates. Due to the nature of real estate, it is important to utilize estate planning to realize optimum gain and minimize tax implications.

Key Considerations for Real Estate Investment

  • Real estate is not a qualifying investment for the purposes of the Lifetime Capital Gains Exemption.
  • Leaving taxable property to a spouse through a spousal rollover in the will defers the tax until the spouse sells the property or dies.
  • Apart from the principal residence, real estate often creates a need for liquidity due to capital gains, estate equalization, mortgage repayment or other considerations.
  • Professional advice is often required to select the most advantageous ownership structure (i.e. personal, trust, holding company).

The Impact of Capital Gains Taxes

  • Upon the disposition (sale or transfer) of an asset there is income tax payable based on 50% of the capital gain of that asset.
  • Capital gains taxes can be triggered at death unless the asset is left to a spouse in which case the tax is deferred until the spouse sells the asset or dies.
  • In addition, there may be probate fees levied against the estate at death.

Why is Estate Planning Important?

It is recommended that family issues (including estate equalization) be addressed with certain types of real estate assets. Estate planning can organize your assets with the objective to ensure that at your death they are distributed according to your wishes:

  • to the proper beneficiary(s),
  • with a minimum of taxes and costs
  • with the least amount of family discord.

Tax and Estate Planning Strategies for Real Estate Holdings

Principal Residence

  • If your home qualifies as a principal residence, there is no tax on any capital gains upon sale or transfer of the property. An individual can only have one principal residence and the same holds true for a family unit (for example, both spouses have only one principal residence between them).
  • If the property is held as joint tenants, upon the death of a spouse the ownership automatically remains with the surviving spouse. Upon the death of the surviving spouse his or her will dictates who will receive ownership of the home (usually one or more of the children).
  • In preparing your estate planning for your principal residence, you may wish to ensure that you have sufficient liquidity to cover the cost of any property tax deferral program that you have exercised. This is especially important if the home is intended to be retained by the beneficiary(s) and you don’t want to burden them with the significant cost of repayment.
  • Planning for the beneficiaries to retain the property often creates discord if the children are not all in agreement about the final disposition of the house. Should you just wish to leave the home to one child and not to the others consider estate equalization and use cash, other assets or life insurance as a replacement to the interest in the home.

To maintain family harmony, considerable thought should be given when making decisions to bequeath or liquidate the family cottage or recreational property.

Recreational Property

  • If the sale, transfer or deemed disposition at death of the cottage or other recreational property results in a capital gain, that gain will be taxable. As in the principal residence, ownership could be in joint tenancy which will defer the tax. The tax will also be deferred if the property is left to your spouse in your will.
  • There may be some concern that if the property is left outright to the spouse and the spouse remarries the property may ultimately end up with someone who was not intended as a beneficiary. To avoid this, a trust could be used to hold ownership of the property. A spousal trust created in the will also accomplishes this while at the same time maintaining the spousal rollover to avoid tax on the gain of the property. In addition, the spousal trust has an added advantage in that it allows the testator to specify who will inherit the property on the spouse’s death.

Real Estate Investment Property

  • Sale, transfer or deemed disposition (at death), usually will result in a capital gain or capital loss. If the property in question is rental property, depreciation (known as capital cost allowance) may be claimed as a deduction against rental income. At death, if the fair market value of the rental property exceeds its undepreciated capital cost, there will be a tax payable on the recaptured depreciation. A value of less than undepreciated capital cost will create a capital loss which, in year of death, can be deducted against other income.
  • If the property in question is performing favourably as an investment, it may be desirable to leave it to the surviving family members. In this case, it is recommended that any liquidity requirement for taxes, costs etc. be funded to alleviate the financial burden.
  • From a planning point of view, it may be advisable to own commercial real estate through a holding company. Depending on the circumstances the same could be true with rental property. If required, the shares in the holding company could be owned by a Family Trust which may have a beneficial income splitting result.

Solving the Liquidity Need

One of the most cost effective methods in providing the necessary liquidity in these situations is the use of second-to-die joint life insurance.

The Insurance Solution

  • Tax free cash at the second death.Naming a beneficiary bypasses the will and is not subject to probate.
  • The proceeds are protected against creditor claims.
  • Insurance provides for a guaranteed low cost alternative to the issue of satisfying the liquidity need at death.

Please call me if you would like to discuss your personal estate planning needs.  As always, feel free to use the social sharing buttons below to forward this article to a friend or family member you think might benefit from this information.

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Estate Planning for Blended Families

Avoid Disinheriting Your Children

In today’s family it is not unusual for spouses to enter the marriage with children from previous relationships. Parents work hard at getting these children to functionally blend together to create a happy family environment.  Often overlooked is what happens on the death of one of the parents. In most cases special consideration for estate planning is needed to avoid relationship loss and possibly legal action.

Typically spouses leave everything to each other and when the surviving spouse dies, the remainder is divided amongst the children.  The problem? Even with the best of intentions, there is no guarantee that the surviving spouse will not remarry and inadvertently disinherit the deceased’s children.

6 Estate Planning Considerations for Blended Families

The Family Home

  • In the situation of the family home being owned by one parent prior to the marriage, the other spouse may consider purchasing an interest in the family home. In this situation, consider owning the home as tenants-in-common to allow for each spouse to manage their interest in the home separately.
  • Provisions can be made in the will for the surviving spouse to remain in the home until the time of their choosing (or death) before passing on the interest to their respective children.

Registered Retirement Savings Plans

  • To take advantage of the tax free rollover from their RRSPs each spouse should consider naming each other as beneficiary. If there are no additional investments or assets to pass on to the children, consider using life insurance as the least costly way to provide a legacy for the children.

Other Assets and Investments

  • If each parent has other assets or investments that could provide income in the event of death, a qualifying spousal testamentary trust could direct that the surviving spouse receives all the income from the trust with the possibility of making encroachments on the capital for specific needs. Upon the surviving spouse’s death, the remaining trust assets will be distributed to the appropriate children.

Choose a Trustee Carefully

With trusts being vital to effective estate planning, careful consideration has to be given as to whom will be a trustee.  For blended families, children of one parent may not be comfortable with the choice of the trustee for their inheritance.  Some situations may call for multiple trustees or perhaps the services of a trust company.

Although effective, using testamentary trusts might result in some children not receiving their inheritance until the death of their step parent.  Life insurance may be the ideal solution.  Proceeds from life insurance will guarantee that the children will be taken care of upon the death of their parent.

Advantages of Life Insurance for Blended Family Planning:

  • Can be an effective way to create a fair division of assets when one spouse enters the marriage with significantly more wealth;
  • Death benefit is tax free and could be creditor and litigation proof;
  • Ability to name contingent owners and beneficiaries (including testamentary trusts);
  • Death benefit could be used to create a life estate under a testamentary trust, providing income to a surviving spouse with the capital going to the appropriate children at the surviving spouse’s death;
  • With a named beneficiary proceeds pass outside of the will so cannot be challenged under any wills variation action;
  • Provides for a significant measure of control and certainty as to when and where the proceeds will end up.

The Elephant in the Room

It is important to remember that whatever planning options are used, total and open communication within the family is essential to maintain family harmony and ensure everyone is aware of the state of affairs.  Full discussion will avoid misunderstandings and reduce uncertainty as to what the future may hold for everyone in the family.

Planning for blended families should involve professional advice in creating solutions that satisfy the objectives of both spouses and their respective children.  Call me if you require help in this area 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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Ease Your Retirement Worries with Immediate Annuities

The majority of Canadians work hard to accumulate a retirement fund and many are averse to exposing savings to unnecessary market risk after they retire.

In today’s prolonged low interest rate environment, immediate annuities are often dismissed or overlooked as a viable vehicle for providing retirement income. Perhaps they shouldn’t be.

An annuity is an investment that provides a guaranteed income stream for a set period of time or for the lifetime of the annuitant. While annuities may not be for everyone, for those trying to find a way to guarantee income in retirement Immediate Annuities may be the answer.

3 Retirement Risks to Avoid

Outliving Your Savings

No one wants to outlive their retirement fund or leave their surviving spouse without resources. An immediate life annuity either on a single life or a joint life basis could be the answer for those looking to ensure that their monthly living expenses are taken care of for the rest of their lives.

If you are a member of a company or government pension plan, you will have the option of structuring a regular pension income for this purpose and to select survivor options for your spouse.

If your retirement savings are in the form of a Registered Retirement Savings Plan, you have the option of converting your RRSP into a RRIF (Registered Retirement Income Fund) or purchasing an immediate life annuity.  This must be done no later than age 71.

Market Risk and Volatility

While you are drawing income from your RRIF you remain invested for the undrawn balance. Seeking higher yields involves a measure of risk. A downturn in the market, such as what happened in 2008, could prove disastrous to a retirement plan. An immediate annuity is not subject to this market risk.

High Rates of Income Tax

The income you receive from a registered source (i.e. RRIF’s, pension, or registered immediate annuities) is all taxable.

You can use your non-registered savings (such as TFSA’s) to purchase a prescribed immediate annuity which will be taxed at a much lower rate than traditional income producing investments (such as GIC’s, bonds etc.).

There are a number of conditions to be met for an annuity to be prescribed, the main ones being:

  • The owner of the annuity must be the annuitant;
  • The owner is an individual, testamentary trust or spouse, alter ego or joint partner trust;
  • The purchase of the annuity is made with non-registered funds.

Annuity income from a prescribed annuity is a blending of interest and return of capital.  This results in less tax payable.

Changes are coming

Unfortunately, the advantage of prescribed annuities will be greatly reduced after January 1, 2017 as the government is changing the factors in determining the taxable portion of prescribed annuity income.  Existing arrangements will be grandfathered meaning only new annuity purchases will be affected after this date.

Also, as of January 1, 2016, the only Testamentary Trusts that will be allowed to purchase a prescribed annuity are testamentary spouse or common-law partner trusts, or a Qualified Disability Trust.

Retirement Scenario A
Protecting Against Market Risk – Certainty of IncomeConsider the circumstances of John and Mary who are aged 73 and 72 respectively.  They have done well for themselves in accumulating wealth for retirement but, after living through a number of bear markets, they realize that they must stay conservative in their investment approach in order to protect their future income.

They have determined that they require a guaranteed monthly income of $1,800 pretax in order to meet their day to day living expenses.  To give them peace of mind, they purchase an immediate joint life annuity that will pay them $1,800 per month for as long as they live.

John and Mary transfer $344,947 * from their RRIF to pay for a registered immediate annuity providing $1,800 monthly income. This will provide them with a predictable and sustainable income for the rest of their lives. The guarantee income period is 10 years which means if they should both die within this time the balance of the 120 guaranteed payments would go to their beneficiaries.

Retirement Scenario B
Reducing Taxable Income with Prescribed AnnuitiesRoger is a 74 year old widower who has non-registered funds invested to produce income.  He has GIC’s and bonds totaling $250,000 which provide him with an average return of 3%.  This results in $7,500 per year annual income which after tax gives him $ 4,875 spendable income (assuming a tax rate of 35%).

If he were to use the $250,000 to purchase a prescribed immediate life annuity he would receive an annual income of $19,915.* Of this, only $1,255 per year would be taxable.  His after tax spendable income would be $ 18,660 per year.  The income from the annuity would be paid for the rest of his life but should he die within 10 years his beneficiary would receive the balance of 120 guaranteed payments.

By providing lower reportable income, prescribed annuities can also be effective in reducing the chances of a clawback of OAS and Guaranteed Supplement Income payments from the federal government.

8 Key Facts to Know About Immediate Annuities

  1. An annuity can be an important component of a balanced financial plan;
  2. It can provide predictable and sustainable income for the life of the annuitant(s), regardless of market conditions or interest rate fluctuations;
  3. The rate of income provided by an annuity is generally higher than other guaranteed income vehicles;
  4. Annuitants can chose the frequency of their payments and also include indexing to help keep pace with inflation;
  5. Annuities are backed with assets to match the duration of the payments. This means that when interest rates are low, it is possible to lock in higher long-term interest rates with an annuity;
  6. Choosing a guarantee payment for the annuity income means that if the annuitant dies prior to the balance of the guarantee period, the beneficiaries will receive the balance. Otherwise the annuitant receives the income for life;
  7. For those over the age of 65, taxable income from an annuity will generally qualify for the pension income credit;
  8. For prescribed annuities, after January 1, 2017 the government changes in how the non-taxable portion is calculated come into effect and after that date will not provide the significant advantage that they do now.

If you or someone you know shares the concerns of protecting income throughout the retirement years, an immediate annuity might provide a solution to some of those concerns.  Please feel free to share this information with your friends and family.

*Annuity rates shown are those of BMO Life current as of August 14, 2015;
** For prescribed annuities purchased prior to January 1, 2017.
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Budget 2015 Highlights

On April 21, 2015, Finance Minister Joe Oliver tabled his first federal budget.  The provisions of the budget will be of particular interest to owners of small and medium sized businesses, seniors and families with children.  As well, those looking to make certain charitable donations will be encouraged by Oliver’s budget.

Below is a brief commentary on each of the key budget proposals.

For Seniors and Savers

Increase in Tax Free Savings Account (TFSA) Limit

  • Effective January 1, 2015 the annual contribution limit has been increased from $5,500 to $10,000;
  • As a consequence, the automatic indexing of the annual contribution limit has been eliminated;
  • On April 24, the CRA announced that even though this provision is not law as yet, they will allow increased deposits to a TFSA effective immediately.

Reduction in RRIF Minimum Withdrawals

Original guidelines set in 1992, called for a minimum withdrawal percentage from a RRIF at age 71 of 7.38% increasing to 20% from age 94 onwards. Also, in 1992, the nominal rate of return of RRIF assets was set at 7% and indexed at 1% annually;

  • Under the 2015 Budget, the new withdrawal factor at age 71 will be 5.28 % increasing to 20% at age 95 and over;
  • Also, the nominal rate of return on RRIF assets will be set at 5% and 2% indexing;

As a result of these changes, individuals taking the minimum required withdrawal at 71 and beyond will see greater capital preservation in their RRIF.  This can be illustrated in the following table:

Capital Preserved Under New RRIF Factors Age 71 Capital Preserved ($)
Age Existing RRIF Factors New RRIF Factors Difference(% more remaining)
71 $100,00 $100,000
80 $64,000 $77,000 20
85 $47,000 $62,000 32
90 $30,000 $44,000 47
95 $15,000 $24,000 60
100 $6,00 $10,000 67


  1. For an individual 71 years of age at the start of 2015 with $100,000 in RRIF capital making the required minimum RRIF withdrawal each year.
  2. Age 71 capital preserved at older ages is expressed in terms of the real (or constant) dollar value of the capital (i.e. the value of the capital adjusted for inflation after age 71). The calculations assume a 5% nominal rate of return on RRIF assets and 2% inflation.

Source – Conference of Advanced Life Underwriters (CALU) Special Report, April 2015.

Home Accessibility Tax Credit

  • Once implemented, will provide up to $1,500 in tax relief for qualifying individuals (mainly seniors and disabled persons) making accessibility and safety related home improvements to their principal residence.

For Business Owners

Small Business Tax Rate

  • For the first $500,000 per year of qualifying active business income, the current small business deduction reduces the federal corporate income tax rate to 11%
  • Under Budget 2015, there will be a 2% decrease in the small business tax rate which is to be phased in over the next 4 years at a rate of .5% per year.

Dividend Tax Credit For Non-eligible Dividends

  • Under Budget 2015, proposals call for a change in the gross up and dividend tax credit rate in conjunction with the proposed reduction in the small business rate;
  • This measure will have the effect of reducing taxes for small businesses and their owners over the next four taxation years.

Increase in Lifetime Capital Gains Exemption for Qualified Farming or Fishing Property

  • The Budget proposes that on or after April 21, 2015, the LCGE for capital gains realized on qualified farm or fish property is increased to $1,000,000 (currently $813,000).

For Families

Included in the Budget but previously announced:

  • The Family Tax Cut will allow couples with children under the age of 18 to split their incomes for a tax credit of up to $2,000;
  • The Universal Child Care Benefit proposal increases the benefit to $160 per month for children under the age of six and provides a new benefit of $60 per month for children ages 6 to 17.
  • The children’s fitness tax credit has been doubled.

Other Proposed Measures

Donations involving Private Shares or Real Estate

In the past, CRA has had concerns with donations involving private company shares and property being valued appropriately.

  • Budget 2015 proposes to exempt individual and corporate donors from tax on the sale of private shares or real estate to an arm’s length party, provided the cash proceeds are donated to a registered charity within 30 days.
  • If implemented, this will take effect in 2016.

Simplification of Form T1135 Reporting

This form which deals with the reporting of foreign property has proven to be extremely onerous for the individuals, corporations and trusts who are obligated to file it.

  • For taxation years that begin after 2014 the form will be significantly simplified.

Registered Disability Savings Plan

In 2012, the government had announced that for those individuals who did not have the capacity to enter into such arrangements, a qualifying family member could temporarily become a planholder.

  • Budget 2015 extends the temporary period from December 31, 2016 until December 31, 2018.

New Anti-Avoidance Rules – Tax Avoidance of Corporate Capital Gains

  • Budget 2015 contains proposed amendments to Section 55 of the Act, which exists to prevent conversion of corporate capital gains to tax-free intercorporate dividends.
  • These new amendments will be applicable to dividends paid after April 20, 2015.

Budget 2015 is a document consisting of over 500 pages, so there are many more elements than what is discussed here.  The budget proposals included here are the main ones that may have the most impact on your planning.

If you require assistance in determining if your personal or corporate planning will be affected, please call me and I will be happy to assist.

Also, please feel free to use the sharing buttons to forward this article to anyone you feel would benefit.


Sources cited in this article:

  • CPA Canada Federal Budget Commentary – 2015
  • CALU Special Report – April 2015
  • Canada Revenue Agency – Website News
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5 Recent Tax Changes for the 2015 Tax Season

Tax time is almost upon us and there are some recent changes which will affect many Canadian residents.  The important changes to keep in mind are as follows:

The Family Tax Cut

This is the watered down version of income splitting plan that was introduced by the Harper government in 2011.  The provisions allow couples with children under the age of 18 living with them to shift income from a higher income spouse to a lower income spouse so that the combined taxes payable will be reduced.  The most that can be taxed in the lower-income spouse’s hands is $50,000 resulting in a federal non-refundable tax credit which will provide maximum savings of $2,000.

Increases in Child Related Expenses

Parents have also benefited from increases in the following:

  • Children’s Fitness Tax Credit – Increased from $500 to $1,000;
  • Universal Child Care Benefit – Increased from $1,200 to $ 1,920 for children under 6 and (new) $720 for each child age 6 through ugh 17;
  • Child Care Expense Deduction – an increase of $1,000 (can’t claim until 2015);
  • Adoption Expense Tax Credit – increased from $11,774 to $15,000.

The Expansion of the “Kiddie” Tax

Originally introduced in 2000, the kiddie tax was designed to eliminate the tax savings created by the splitting of certain types of income (most commonly dividend income from a private corporation) with children under the age of 18.  The Federal Budget in 2014 has expanded the definition of split income exposed to the kiddie tax to include business and rental income that is paid by a third party to a minor.  If the minor’s relatives perform an income generating function or has ownership in a partnership interest for this purpose the kiddie tax will now apply.

Foreign Account Tax Compliance (FATCA)

This U. S Legislation came into effect July 1, 2014 and requires the CRA to inform the Internal Revenue Service about the financial accounts of any U.S. person living in Canada.  For these individuals, there is a possibility that they may be required to pay tax in the US especially with the new Medicare surtax on net investment income.  As a result of FATCA there has been an appreciable increase in the amount of disclosure documentation for US persons living in Canada.

Canada Revenue Agency Revised Form T1135

Effective with 2014, taxpayers must now provide significantly more information about their foreign property.  Form T1135 must be filed by Canadian residents, corporations and trusts who during the year owned specific foreign property having an adjusted cost base of more than $100,000.  Filing is also required by partnerships that hold specified foreign property with an ACB of more than $100,000 where the non-resident member’s share of income or loss is less than 90% during the reporting period.  If you are required to file Form T1135 be sure to review what Specified Foreign Property includes and what must be reported.

Changes to Testamentary Trusts

Since 1971 a Testamentary Trust has been an effective vehicle for estate planning due to the fact that these trusts currently enjoy graduated rates of tax in the same way that an individual taxpayer does.  Testamentary Trusts are created by Will and become effective when the testator dies. Inter-vivos trusts which are created during an individual’s lifetime are taxed at the top marginal rate in the province in which the trust resides. This will change on January 1, 2016 when Testamentary Trusts will no longer enjoy preferential income tax treatment but will be subject to tax at the highest marginal rate similar to inter-vivos trusts.  This is a significant change and will necessitate careful planning before the effective date. There are limited exceptions such as trusts created for the benefit of an individual who is eligible for the disability tax credit.  Also, graduated rates of taxation will continue to apply for 36 months after the date of death.

As a result of this change, it is expected that there will be an increase in the use of inter-vivos trusts, alter ego and joint partner trusts.

It is not easy to keep up with all the changes affecting income taxes and the documents that must be filed.  These are just a few of the recent changes that could affect many Canadian taxpayers this year.  It is recommended that you check with your accountant about other changes that could also affect you.

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