A Lifetime Gift for Your Grandchildren

The Cascading Life Insurance Strategy

If you are a grandparent wishing to provide an asset for your grandchildren without compromising your own financial security you may want to consider an estate planning application known as cascading life insurance.

How does the Cascading Life Insurance Strategy work?

  • The grandparent would purchase an insurance policy on his or her grandchild and funds the policy to create significant cash value;
  • The grandparent would own the policy and name their adult child as contingent owner and primary beneficiary;
  • The cost of life insurance is lowest at younger ages, allowing the grandparent to establish a plan that allows the cash value in the policy to grow tax deferred;
  • When the grandparent dies his or her adult child becomes the owner of the policy.

What are the benefits of the Cascading Life Insurance Strategy?

  • Tax deferred or tax free accumulation of wealth;
  • Generational transfer of wealth with no income tax consequences;
  • Avoids probate fees;
  • Protection against claims of creditors;
  • Provides a significant legacy;
  • Access the cash value to pay child’s expenses such as education costs. (Withdrawal of cash value may have tax consequences);
  • It’s a cost effective way for grandparents to provide a significant legacy.

Case Study

Let’s consider an example of the Cascading Life Insurance Strategy.  Grandpa Brian is 65 and has funds put aside for the benefit of his grandson, Ian.  He purchases a participating Whole Life policy on Ian for an annual premium of $5,000 for the next 20 years. Brian’s daughter, Kelly is named as contingent owner in the event of Grandpa Brian’s death and beneficiary in the event of Ian’s death.

If Grandpa Brian were to die at age 85, the policy now passes to Kelly with no tax consequence.  The cash value of the policy (at current dividend scale) at that time is approximately $ 154,000 and the death benefit of the policy is approximately $800,000.

As a result of Grandpa Brian’s legacy planning, Grandchild Ian, now age 31, has a significant insurance estate that will continue to grow with no further premiums!

Please call me if you think your family would benefit from this strategy or use the social sharing buttons below to share this article with a friend or family member you think might find this information of value.

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Changes to the Taxation of Estates

Estate, trust and tax planners have long favoured testamentary trusts as vehicles to pass along assets to beneficiaries or heirs.   A testamentary trust is generally a trust or estate that is created the day a person dies.  Commonly, these trusts are established in a testator’s will.

A significant benefit to testamentary trusts had been that income earned and retained in the trust received the same graduated rate of income tax as an individual tax payer.  Unfortunately, under the terms of Bill C-43, after January 1, 2016, all income retained in the trust will now be taxed at the highest rate of tax applicable in the province in which the trust is resident.

There will be two exceptions to this new rule – The Graduated Rate Estate (GRE) and a Qualified Disability Trust (QDT).

Graduated Rate Estate

Anyone who has ever acted as an executor can tell you that it can take a considerable length of time to settle the estate.  How much time is reasonable?    Under the new act, the government is telling us that the appropriate amount of time for an estate to be settled is 36 months.  To support this, they point to statistics that suggest the majority of estates are wound up by then.  As a result for the first 36 months the estate will be classed as a Graduated Rate Estate (GRE) and during this period will be subject to graduated rates of tax as it would have been under the old system.  If at the end of this period, the trust still exists, it will now be taxed at the top rate.

The important points to consider are:

  • The representative for the estate can select any year end for the GRE;
  • If the trust continues beyond the 36 month period following the date of death, the trust year end will automatically convert to a December 31st year end going forward;
  • A Graduated Rate Estate is an estate and not a trust created under a person’s Will.
  • There can be only one GRE. If there are testamentary trusts in the Will, for example, for the benefit of children, they will be taxed at the top flat rate of tax.

Even though testamentary trusts have lost their preferred tax treatment, they will still present significant estate planning benefits for situations involving spendthrifts, special needs beneficiaries and blended families among others.

Qualified Disability Trust

A QDT is a testamentary trust that will continue to enjoy graduated rates of tax. The basic conditions of a QDT are as follows:

  • The beneficiary of the trust must qualify for the disability tax credit under Section 118.3 of the ITA;
  • There can be only one QDT for any disabled beneficiary;
  • Each year, in the income tax return, the trust will elect, jointly with the beneficiary, that the trust is a QDT;
  • In situations where both a testamentary trust AND an insurance trust are in the Will for the benefit of the disabled beneficiary only one trust can be a QDT – the excluded trust will have income received and retained taxed at the highest marginal rate.

The rules surrounding the Qualified Disability Trust are complicated so if you are preparing your Will with a disabled dependent in mind, please make sure to obtain professional help.

Life Interest Trusts

Appearing in the final legislation of Bill C-43 without prior warning was a change in the manner in which life interest trusts, specifically spousal trusts, alter ego trusts and joint partner trusts will be taxed when the income beneficiary dies.  When an income beneficiary (or second death in the case of a joint partner trust) dies, the trust is deemed to have disposed of all its capital assets at fair market value.  The income from this deemed disposition has, up to now, been taxed in the trust.  As of January 1, 2016, deaths occurring after that date will see the capital gains taxed in the deceased’s beneficiary terminal tax return and not in the trust.

This simple change can have significant implications.  If, for example, the deceased beneficiary’s estate does not have sufficient funds to pay the tax liability, the trust is jointly and severally liable.  This could create an inequity in situations where the deceased’s estate has different beneficiaries than the trust.

Another significant implication will be felt by post mortem estate plans, such as private company share redemptions that depend on netting capital losses against capital gains.  With the new legislation, capital gains which arise from the deemed disposition will be reported by the deceased, but the capital loss created by the redemption will be realized in the trust.

Any planning which has been implemented using these vehicles should be reviewed.  There may be required revisions or additional planning to deal with situations which are affected negatively by these new changes.

All the changes discussed here, take effect after 2015 and it is important to note that there is no grandfathering of existing plans.  If you have concerns that you may be affected by this new legislation regarding the taxation of trusts it is important that you discuss your situation with a qualified professional adviser.

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Is it Time for Your Insurance Audit?

Has it been awhile since you last looked at your insurance portfolio?

Are you a little vague in your recollection of all the coverage you have and why you have it?

Are you uncertain as to whether or not your portfolio reflects your current situation?

Just like going to the dentist for regular checkups is a necessary evil, reviewing your financial plan and products on a regular basis is also recommended.  Circumstances can change over time and making sure your protection is keeping pace is a worthwhile exercise.

A comprehensive audit should review the following:

  • Is the total death benefit of your life insurance appropriate to your needs? A current capital needs analysis can help to determine this.
  • If your current coverage is renewable term insurance should the policy be re-written before it renews at a substantial increase? Premiums for new coverage can be significantly lower than the renewal premium of an existing policy.
  • Is your need for life insurance permanent? If that is the case, you should ensure you have at least some of your needs covered by a permanent plan.
  • Are you nearing the end of the conversion period on your term policy? If yes, this may be the time to consider converting to permanent insurance.
  • Is your disability protection in place consistent with your current income? If you have changed jobs does new group coverage impact your personal plan?
  • Are the beneficiary designations still valid for your current situation? Has there been a re-marriage that may require changing the beneficiary or ownership of the current policy?

In addition, the following are important to note:

  • If your policy is a Universal Life policy with cash value are the investment options still appropriate to market conditions and/or your risk tolerance?
  • If the policy is a Whole Life policy are the dividends adequate to now fund the premium should you wish to take a premium holiday?
  • If your policy was assigned to a lender as collateral for a loan and that loan has been repaid make sure the assignment has been removed.
    • Does your existing policy qualify for a reduction in premium?
    • If you have you stopped smoking you may qualify to have the premiums reduced to those of a non-smoker.
    • If your policy was issued with a substandard extra premium and your health has improved you may qualify to have the rating removed.
    • If your policy was rated as a result of participation in hazardous activities, e.g. flying, mountain climbing, heli-skiing this rating can be removed if you no longer are active in these activities.

If the current policy is for business purposes the following should also be reviewed:

  • If the policy was to fund a Shareholders’ Agreement or Partnership Agreement, does the amount and type of coverage still satisfy the terms of the agreement?
  • Are the ownership and beneficiary provisions of the policy still valid for Capital Dividend Account planning?

Reviewing your coverage on a regular basis is recommended.  If you think it would be beneficial to you, call me to arrange a time to do an Insurance AuditAs always, please feel free to use the social sharing buttons below to forward this article to a friend or family member you think might find this information of value.

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If you have a mortgage on your home, chances are good you also have mortgage insurance. The idea is that if you should become seriously ill or die before paying off the mortgage, the coverage will kick in and pay it off for you. It's meant to offer peace of mind and to reassure you that your family will be able to stay in your home if anything should happen to you.

If you have a mortgage on your home, chances are good you also have mortgage insurance. The idea is that if you should become seriously ill or die before paying off the mortgage, the coverage will kick in and pay it off for you. It’s meant to offer peace of mind and to reassure you that your family will be able to stay in your home if anything should happen to you.

The reality falls a little short of that. In this week’s Marketplace investigation, we meet two families who bought the coverage and thought they were protected, only to have their claims denied when they became sick or died. In each case, the insurer said the applicant person had lied on their initial application form.

It turns out a routine test at the doctor could be reason to deny your claim, if you don’t mention it. Had a cuff inflated on your bicep? That counts as being tested for high blood pressure.

As Erica Johnson reports, the bank staffers selling mortgage insurance are unlicenced and rarely trained to explain the details and legalities of those insurance products. The result is people who pay premiums and think they are covered, only to realize later that they are not.

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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 immediately, you can deposit more into your TFSA as shown below:

  Prior to Budget 2015
Budget Changes
Maximum contribution $5,500 $10,000
Future limits indexed Yes No

Reduction in RRIF Minimum Withdrawals

Under the new guidelines proposed by the April Budget, individuals turning age 71 will see the required minimum withdrawals lowered according to the following table:

Age Existing New
  Factor (%) Factor (%)
71 7.38 5.28
72 7.48 5.40
73 7.59 5.53
74 7.71 5.67
75 7.85 5.82
76 7.99 5.98
77 8.15 6.17
78 8.33 6.36
79 8.53 6.58
80 8.75 6.82
81 8.99 7.08
82 9.27 7.38
83 9.58 7.71
84 9.93 8.08
85 10.33 8.51
86 10.79 8.99
87 11.33 9.55
88 11.96 10.21
89 12.71 10.99
90 13.62 11.92
91 14.73 13.06
92 16.12 14.49
93 17.92 16.34
94 20.00 18.79
95 & over 20.00 20.00

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 is 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 $100,000 $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 6,000 24,000 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

Proposed changes to the Small Business Tax Rate for Canadian Controlled Private Corporations will reduce the income tax rate for the first $500,000 of qualifying active business income as follows:

Effective Tax Rate
Pre-Budget 11.0%
As of January 1, 2016 10.5%
As of January1, 2017 10.0%
As of January 1, 2018 9.5%
As of January 1, 2019 9.0 %

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 as follows;

Effective Gross up Factor for Non-eligible dividends Effective rate of Dividend Tax Credit
Pre-Budget 18% 11.017%
January 1, 2016 17% 10.50%
January 1, 2017 17% 10.00%
January 1, 2018 16% 9.5%
January 1, 2019 15% 9.00%

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 (currently $100 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 from $500 to $1,000.

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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