How can indebtedness jeopardize a business?

Business Banking relationships are important. If a business owner who has a good relationship with his bank were to die, chances are the bank may call the loan if the business begins to experience financial duress and defaults on repayment. Many businesses have no option but to acquire a bank loan collateralized by the full value of their assets to survive financially.

  • Avoid collateralizing personal assets. The prospect may not be favourable when the loan equals or exceeds the value of the business assets and/or personal assets.
  • Following established rules, a bank may ask a business owner to collateralize a loan, not just with business assets and land, but with additional personally owned assets, which may encumber a spouse’s co-owned assets.
  • Add to that a possible collateralizing of any assets of a son or daughter (and spouses), who also share in family business ownership.
  •  Family members of small business owners can also lose their financial security if the business defaults on loan repayments.
  • If you own a business, avoid being held financial hostage by the lending institution or forced into liquidation.

Can life insurance reduce the risk associated with family businesses debt? You can solve this to a degree in a family business such as a farm by insuring the oldest and succeeding generations using joint-first-to-die life insurance policies or individual plans. Where there are non-family businesses, each owner/partner should be insured to cover the debt. When the life insured dies, the tax-free life insurance proceeds can be used to pay back loans and essentially win back ownership and discharge any liens of personally owned assets.

What if there is a Critical Illness?  Also, for the same reason, consider purchasing a Critical Illness Insurance policy on each principal business owners and key persons. This product could provide a substantial sum of money to pay off debt if one were to experience a major illness such as a heart attack or stroke. If an individual were to be incapacitated, he or she may need to be bought out by a partner or an heir (there should be a buy-sell agreement in place). The risk of a loan being called increases when an owner-manager is critically ill, and the bank manager loses confidence in the stabilizing influence of that owner.

Group Benefits and Employee Addictions

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Ten percent of the Canadian population report symptoms consistent with substance dependency. In the USA, the ratio is similar.

Source: Statistics Canada

Employers may watch for:

  • regular absence patterns
  • late for work
  • poor focus affecting production
  • confused about directives
  • appearing tired or stressed, or lazy
  • not collaborating well with other employees
  • a short temper
  • increased mistakes or wrong interpretations of duties

Have a policy for your employees who may suffer from substance abuse. Employers may have to find ways to approach, address, manage and/or get counsel for an addicted employee. The policy can also advise that your company suggest accessing an organization’s employee assistance program (EAP).

For an employee who suffers from an addiction to be eligible for group benefits, a group benefits plan may require that the employee disabled by addiction be introduced to a treatment program.


 

Group Critical Illness Insurance

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Group Critical Illness Insurance 

News of a critical illness can be very upsetting to a plan member. When you can offer them financial support during a difficult time with a Group Critical Illness Insurance plan, the employee can manage with the extra resources better.

Group Critical Illness Insurance Allows the critically ill to focus on recovery rather than worry about finances. It pays a lump sum amount when a plan member is diagnosed with a covered life-threatening illness.  The insurance benefit payment can be used as the plan member chooses. It is available to plan members and dependants.

Once a claim is approved for someone diagnosed with a covered illness, he or she is paid a lump sum. The money may be used however the person chooses, such as private nursing or medical care, modifications to a home or childcare costs, allowing the person to focus on recovery and managing the illness.

You can offer Group Critical Illness Insurance to plan members and their dependants while giving them an option to purchase additional coverage for themselves and their spouse. Benefits can be structured as either a flat amount (i.e. $25,000 to $100,000) or a multiple of the plan member’s salary.

Covered illnesses

Most standard plans cover these common major illnesses:

  • Heart attack
  • Stroke
  • Coronary artery bypass surgery
  • Cancer

Dependent on the plan, it may cover the illnesses above, plus:

  • Alzheimer’s disease
  • Aortic surgery
  • Benign brain tumour
  • Blindness
  • Coma
  • Deafness
  • Heart valve replacement
  • Kidney failure
  • Loss of independent existence
  • Loss of limbs
  • Loss of speech
  • Major organ transplants
  • Motor neuron disease
  • Multiple Sclerosis
  • Occupational HIV
  • Paralysis
  • Parkinson’s disease
  • Severe burns

How do mutual funds minimize exposure to single stocks?

Diversification advantage Mutual funds offer the investor the benefit of maximum diversification, with minimal exposure to any one stock. You pool your investment with the combined capital of other investors, which allows everyone to invest in many companies, not just focus on two or three larger stocks.

Fund managers usually diversify among at least 20 companies, investing no more than 10% of the fund’s total dollars into any one security.

Other advantages of mutual funds

• You can buy additional units of a mutual fund at any time.

• An automatic purchase plan called dollar-cost averaging (DCA) lets you invest equal amounts at regularly scheduled intervals. You buy more fund units when the prices are lower, fewer when prices are higher, thus averaging out the price of the units purchased.

• Mutual funds can be registered in RRSPs or RRIFs.

• Dividends, where applicable, are easily reinvested.

• Some fund companies allow transfers between their funds without charge.

• You can borrow against mutual fund assets (unless the contract is registered).

Business employee retirement planning

Employee Retirement Plans incorporate the following:

• Analysis of available investment vehicles and associated yields
• Investment tracking and reinvestment alternatives
• Individual financial and investment consulting
• Establishment and management of individual registered and non-registered retirement savings plans such as:

• Self-directed RRSPs, group RRSPs, & RESPs with the following investment alternatives: investment funds, segregated funds, and labour-sponsored funds.

Group Retirement Options

When your employees retire or are approaching retirement, they will need help through this period of change. Professionals are available to educate your employees about all available retirement income vehicles.  We offer the expertise and services to ease the transition to retirement for your retirees:

• Retirement consulting
• Retirement income projections
• Establishment of retirement income vehicles such as RRSPs, RRIFs, LIRAs, LIFs, annuities

Individual Group Investment Products

Whether you are making investment contributions to save for future expenses or retirement, the Group Investment Program allows you to take control of your personal portfolio and achieve your financial goals with peace of mind.

• Lower investment management fees
• No front- or back-end sales charges
• No deferred sales charges
• No minimum investment
• Self-directed RRSPs
• No annual administration fees
• Consolidated statements

The Fundamentals of Financial Independence

Here are some important strategies that will help you achieve financial independence. It is important to get solid advice which can design a plan which incorporates Planning Values such as those noted.

Separate your savings from your investments Before you begin to invest for a long-term financial goal, you’ll need to save for an emergency fund – up to six months worth of your salary. Then you are prepared for an unexpected expense such as an engine job on the car, a leaky roof or loss of employment. Otherwise, you may need to tap into your investments that are intended for retirement or some other purpose.

Budget based on your income, not on your desire Plan to spend less than you earn and don’t take on debt that cannot be serviced by your future income. Budgeting is based on your income, not on your past spending habits. Total your monthly expenses such as housing, utilities, food, clothing, child-care, transportation and debt repayment. This sum should not exceed 75% of your after-tax income.

Invest by paying yourself first You will only beat the habit of procrastination if you focus on paying yourself first. A rule of thumb: save 10% to 20% of every paycheck. This can be achieved by purchasing units in a good investment fund on a systematic basis, using an automatic payment program.

Use beneficial debt to build equity Minimize and pay off consumer debts – monies borrowed to purchase cars, clothing, vacations, stereos and other gadgets that decrease in value. Debt to help you achieve an education or mortgage a home, and is acceptable debt. Only if the interest rate is very low, and repayment is affordable, debt for investments such as investment funds, your own business, or blue-chip stocks may make sense. The interest on such investments, if not held in an RRSP, is tax-deductible.

Differentiate your risks Inflation risk will compete with long-term investment risk. Equity investment funds and/or the stocks of many companies are not guaranteed, meaning there is a risk. Yet equities have a much better chance to outpace the negative risk of inflation – – or as some have humorously termed shrinkflation — when compared to a savings account over long periods of time. Inflation is the single greatest long-term risk. At 4% over 20 years, inflation will cut the value of today’s purchasing power by half.

Determine to diversify A properly diversified portfolio will hold several types of funds including a mix of equity funds. Equity funds should differ in terms of what sector of the economy they invest in, such as agriculture, technology, mining, or finance. Though each fund would hold many stocks, make sure they are diversified among the various sectors. One sector may gain while another may lose some value, balancing out over time. Equity funds can also diversify by country (such as holding domestic, US and global funds); investment style (such as growth funds, or value funds); or company size (such as small, mid, or large-cap). Consider adding bond funds to the mix to diversify even more.

Optimize Your Portfolio If you can optimize your portfolio, you may minimize the risks, to help your return on investment. To truly optimize, one needs in-depth knowledge only obtainable from a professional whose job it is to study funds as a speciality. To diversify in a balanced manner, one needs to weigh many factors in relation to economic sectors, managers’ styles, company size, and foreign economic conditions.

Is your RRSP ready for you to retire?

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The Canadian government regulates the Registered Retirement Savings Plan (RRSP) program, allowing it to have unique tax benefits as you save for your retirement. Annual RRSP contributions can reduce the amount of income tax you pay in the year of your contribution. These monies invested annually grow on a tax-deferred basis, and tax is only paid at the time of withdrawal. RRSP Planning is a very integral part of your investment planning.

Have a look at the graph below to see how RRSP money accumulates over time based on a maximum annual investment.

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Your investments grow tax-free Your RRSP investments accumulate within the plan tax-free, as do any addition to your contributions, including capital gains, interest, dividends, and any other growth via dividends or distributions paid out on an investment fund. The longer your money stays sheltered from the taxman, the greater the tax-free accumulative earning power of your investment. However, taxation occurs once income is withdrawn from your RRSP.

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Planning Together – Spousal RRSPs and Tax

A spousal RRSP allows a couple to place assets in the lower-earning spouse’s registered account. The benefit of this manoeuvre enables the account owner to withdraw more in retirement at a lower tax bracket while retaining spousal RRSP ownership, controlling the choice of the RRSP investment vehicles. The owner also governs when withdrawals are made and pays the income taxes upon withdrawal (if the funds have been in the account for three years).

What happens when the RRSP account holder dies?

For estate planning purposes, upon the decease of the account holder, the RRSP is paid out to the beneficiary designated for that account.

How Much can you contribute to your RRSP?

Your Contribution Limit To find out your allowable  RRSP contributions you are allowed to deduct for your income taxes, check Last Year’s Deduction Limit Statement on your latest Notice of Assessment or Notice of Reassessment. Canada Revenue Agency (CRA) establishes guidelines for the minimum and maximum overall yearly amount a person is eligible to contribute to their RRSP. The basic formula used to determine a taxpayer’s eligible contribution is as follows: 18% of earned income minus any Pension Adjustment = the eligible contribution amount.

Who can contribute to an RRSP? All Canadian taxpayers with “earned income” in the previous tax year, or those having unused contributions carried forward from previous years can contribute to their RRSP. A person is eligible to make contributions to their RRSP until December 31 in the year they reach age 71, provided that they have contribution room.

Two methods of contributing to your RRSP You may invest by purchasing a lump sum investment prior to the deadline. The alternative is to invest on a monthly basis using dollar-cost averaging. You can always top up your RRSP contribution (up to the allowable limit), just prior to the deadline year by year.

The RRSP limit Table

Source: CRA

Revised: January 2021

Plan your RRSP Ahead to Reduce Taxable Income

It pays to plan your RRSP contributions before the end of the year to reduce your taxes that will be due on the current taxable year. To achieve this, assess your income and calculate how you can optimise the use of an RRSP to reduce your taxable income.

You may have Carry-forward Contribution Room

If you have not previously invested up to your maximum RRSP contribution limit, CRA allows you to carry over unused contribution room into future years for an indefinite period. Look on your Notice of Assessment.

What can you deduct on your tax return?

You can claim a deduction for:

  • contributions you made to your Registered Retirement Savings Plan (RRSP), Pooled Registered Pension Plan (PRPP) or Specified Pension Plan (SPP)
  • contributions you made to your spouse’s or common-law partner’s RRSP or SPP
  • your unused RRSP, PRPP or SPP contributions from a previous year

You cannot claim a deduction for:

  • fees charged to buy and sell within a trusteed RRSP
  • amounts you pay for administration services for an RRSP
  • the interest you paid on money you borrowed to contribute to an RRSP, PRPP, or SPP
  • any capital losses within your RRSP
  • employer contributions to your PRPP

What is the deadline to contribute to an RRSP, PRPP, or SPP for the purpose of claiming a deduction on your tax return?

The Income Tax Act sets the deadline as “on or before the day that is 60 days after the end of the year”, which is March 1st except in a leap year, when it will be February 29th; or where the deadline falls on a weekend, it may be extended.

Can contributions be made to a deceased individual’s RRSP, PRPP, or SPP?

No one can contribute to a deceased individual’s RRSP, PRPP or SPP after the date of death. But, the deceased individual’s legal representative can make contributions to the surviving spouse’s or common-law partner’s RRSP and SPP. The contribution must be made within the year of death or during the first 60 days after the end of that year. Contributions made to a spouse’s or common-law partner’s RRSP or SPP can be claimed on the deceased individual’s tax return, up to that individual’s RRSP/PRPP deduction limit, for the year of death.

What is not considered an RRSP, PRPP, or SPP contribution?

The following are not considered to be an RRSP, PRPP, or SPP contribution for the purpose of claiming a deduction on your tax return. We can point out the special rules that apply if you:

  • repay funds that you withdrew under the Home Buyer’s Plan
  • repay funds that you withdrew under the Lifelong Learning Plan

Note: It is recommended that you get more information on this subject by calling our office or your accountant.

How is your RRSP/PRPP deduction limit determined?

The Canada Revenue Agency generally calculates your RRSP/PRPP deduction limit as follows:

The lesser of:

  • 18% of your earned income in the previous year, and
  • the annual RRSP limit

Minus:

  • your pension adjustments (PA)
  • your past service pension adjustments (PSPA)

Plus:

  • your pension adjustment reversals (PAR), and
  • your unused RRSP, PRPP, or SPP contributions at the end of the previous year

Source: CRA

Revised: Jan 21

RRSP versus Non-Registered Investments

Let’s compare taxed and tax-free investment returns to see this advantage. First, let’s look at investing outside of your registered retirement savings plan (RRSP). If you have a marginal tax rate of 40% and invest $2,000 per year for the next 30 years at an average 7% annual return, you will accumulate $120,864.

Now consider if you invested the same money in the RRSP. If you contribute $2,000 every year to your RRSP for the next 30 years, and you earn an average 7% return, you will earn $202,146. The tax-advantaged growth empowers your RRSP as the growth is compounded over a long period of time.

Why is it important to save for retirement? RRSPs can give you the financial resources you need for a comfortable retirement that will meet your lifestyle requirements. Many Canadians are living for 30 years during retirement with a need to provide an income.