Employee Benefits

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

Lifetime capital gains exemption for 2016

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.

If I can be of assistance to you, please do not hesitate to contact me. As always feel free to share this article by using the share buttons below.

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.

Whole Life Insurance: A Whole New Investment Class

 A Whole New Investment Class

The recent developments in investment markets and the volatile performance that has resulted have brought about a new appeal to an old workhorse.  For investors looking for a diversification in their investment portfolio and a more tax efficient fixed income investment alternative, a compelling argument can be made for the use of Whole Life Insurance.

Why is Whole Life Insurance a good investment?

• The tax advantaged steady growth, combined with significant estate benefits are the primary reasons why Participating Whole Life is now being thought of as a new investment class.

• Unlike other accumulation policies such as most Universal Life policies, mutual funds and other equity investments, the cash and dividend value of a Whole Life policy cannot decrease as long as premium payments are made.

 Who should consider Whole Life Insurance as an investment?

• Anyone looking for stable returns on their investment portfolio

• For those that have corporations and are accumulating surplus, the use of Whole Life in the corporation not only provides the same stable, tax deferred returns but also provides opportunities for Capital Dividend Account planning.

What is Whole Life Insurance?

• It is permanent life insurance protection – meaning it won’t expire before you do!

• It has level guaranteed premiums for the life of the policy. (Shorter premium paying periods are often available)

• It has tax advantaged cash value growth.

• It can pay annual dividends (participating whole life).

• Dividends can be taken in a number of different ways but the option most often selected to provide the maximum tax advantaged growth is “paid-up additions”.

• The assets of the participating pool are professionally managed and largely in fixed income investments. Management fees are extremely low (as low as 0.072% management fee) and the funds have very little volatility.

• This combination of guaranteed cash value and the non-guaranteed portion from the dividend account grows tax-deferred. At death it is paid to the beneficiary tax-free. 

Can I access the cash value of the policy?

• During the lifetime of the insured, the cash values can be accessed by way of partial or total surrender, or policy loan.

• Income tax may be payable on withdrawals. However, one alternative to avoid paying income tax is to use the policy as collateral and borrow from a third party lender. And if structured properly, the interest on the loan may be tax deductible.

Favourably compares to a long term, high yield bond

• Today most portfolio managers recommend that a prudent investor have a diversified portfolio with a significant portion in fixed income investments, such as bonds, term deposits, etc.

• Many investment managers suggest one third to 40% of an investment portfolio be in these types of investments for balanced growth.

Including participating whole life in your portfolio can produce some significant results, and reduce overall volatility.

Whether investing as an individual or via a corporation, the significant results that can be achieved by using Participating Whole Life are worth investigating.

Please call me if you think you 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.

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.

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.

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. 

Feel free to use the sharing buttons below to forward this to someone who might find it of interest.

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.

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.

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.