Tag: Life Insurance

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

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.

Do your heirs expect to inherit?

Do your heirs expect to inherit an old homestead property, a family cottage, a residence, your farm, an art collection, furniture, or business shares? They may have to be liquidated by the estate, perhaps at a loss, to pay any existing tax liability. Life insurance proceeds may help to side-step probate, or estate administration tax, and can cover any estate liabilities that could impinge on bequests that you want to make to your loved ones.

Make sure that your gifts stay in your family. Deemed dispositions of capital assets at death occur even if an asset is willed directly to an heir. A capital gains tax liability remains in the deceased’s final tax return and reduces the value of the estate.

5 Methods to reduce taxes that will be due upon your death.

  1. Use the spousal (and disabled child) rollover provisions of RRSPs or RRIFs.
  2. Leave assets that have accrued capital gains to your spouse to defer tax.
  3. Leave assets without capital gains to other (non-spouse) family members.
  4. While you are alive, gradually sell assets having capital gains, to avoid dealing with the capital gains all at once in your estate.
  5. Purchase life insurance to cover capital gains taxation in the estate.

Taxes may be payable on gains.

Income-producing real estate, a second residence, or cottage, and any other assets left to surviving family members, such as shares of a business, of stocks and investment funds may face capital gains taxation.

You may also want to consider charitable donations to lessen taxes in the estate. Hire an estate planning lawyer and make sure your Will is updated and includes your estate planning directives.

TFSAs can help transfer money to your heirs. 

Money accumulated in a TFSA does not attract taxes at the time of death. If you want to create increased transferable after-tax wealth, consider moving money into TFSAs from non-registered investment accounts. Note: It is important to get an Advisor’s guidance, and perhaps an accountant to implement this in a careful tax plan.

Be careful, though to also consider taxable implications when considering selling non-registered assets. Ask your tax advisor if you will be triggering a  taxable gain? Possibly utilize TFSAs to their maximum potential, and monitor the comparative tax impact of transferring wealth from RRSPs/RRIFs to heirs of the estate.

7 ways life insurance protects your financial foundation

Life insurance has been called the foundational strategy of building and protecting your net worth. The initial stages of your financial strategy should include adequate life insurance coverage.

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The following 7 tips will give you a template for your life insurance planning for a lifetime.

  1. Term life insurance is affordable protection when you are young When young, term insurance coverage offers the lowest cost per thousand dollars of coverage. It comes in various renewable periods of time, for example, 5-,10-, 20-year term and term to age 100.
    • Upon each renewal of term insurance, the cost can increase and may have a final term period ending at a certain age such as age 65, 75 or age 100.
    • Many term plans can be converted to lifetime insurance coverage without medical evidence, that will continue to cover you for the duration of your life.
  2. Life insurance can pay off large accumulations of debt  Many owe thousands of dollars on their credit cards or a large amount of business debt.
    • Replace the debt monkey with cash money Term life insurance often solves debt concerns. It can offer you the peace of mind that you will not be saddling your family with ongoing debt.
    • If you own a business You and your partners can enter agreements to redeem debt or buy business interests providing cash to your heirs.
    • Debt-free succession plans work better Infusions of cash into a business can help a succession plan to work well.
  3. Your life insurance plan can change to adapt to your needs Review your life insurance during each of life’s stages. Our circumstances change dramatically and so do our needs for life insurance. It may be time to review your life insurance and verify beneficiaries, policy amounts and any riders associated with the plans. As you evolve financially, so do your life insurance needs.
  4. You can protect your family when you have young children When you are newly married and starting a family, life insurance is purchased to provide tax-free capital in case one of the parents should die.
  5. When your children are going to college protect your liabilities Many of us tap into our savings to help meet their children’s tuition and housing expenses. We may purchase a child’s first car, or pay him/her an income for one or more years. If you die without providing continuing support, your young adult child may need to quit seeking a higher education due to a shortage of funds to pay for tuition and expenses.
  6. Special Estate Planning solutions When your estate will face a large tax bill, or you desire to leave a large sum of money to an heir or a charity, there are life insurance solutions. The proceeds of a death benefit can solve estate-related problems such as paying an estate’s tax liability on capital gains.
    • As you approach retirement, you may have accumulated assets that will be taxed as capital gains: such as a cottage, business, equity fund holdings, or a stock portfolio. Life insurance that continues for a lifetime, such as Term to age 100 or Whole Life (or Permanent Life)—can help pay the income tax due in your estate.
    • This can also replace an estate’s money used for paying taxes on remaining Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) holdings, as these funds are fully taxable to the estate where there is no surviving spouse or dependent child.
    • It can also pay off large business debts that may be left as an ongoing liability, weighing on a surviving spouse’s financial security.
    • You may have an heir who will need a large sum of capital invested to provide a lifetime income from a trust fund. This is often the case with disabled children who may have special needs which can be expensive over a lifetime.
    • You may want to leave a significant sum of money to a charity of your choice.
    • You may want to transfer large sums of wealth in a controlled manner using life insurance beneficiary directives which may in some cases circumvent probate and notification to others when you desire privacy in your estate outside of your will.
  7. Your exact life insurance needs can be calculated Life insurance specialists use a calculating system referred to as “capital needs analysis”. Consider insuring the adults in your family. The breadwinner’s income can be replaced to protect your family’s financial security. You may have debts that you’d like redeemed. Final expenses can be paid. A mortgage can be paid off. Retirement money can be generated. There are many good reasons to strengthen your financial security with life insurance.

It is necessary to calculate the capital needed over any short or long period to meet any financial situation. Call for an appointment to have us review your life insurance.

Note: Talk to your advisor about potential tax exemption changes to investment components of life insurance.

Copyright by Adviceon.com

Life Insurance can solve the final RRSP/RRIF tax bite

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Did you know that you cannot pass on your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) holdings tax-free to your heirs? Once the second spouse dies, all monies in an RRSP or RRIF are taxable as income in your final tax return unless there are dependent children.

An eligible individual is a child or grandchild of a deceased annuitant under an RRSP or RRIF, or of a deceased member of a Registered Pension Plan (RPP) or a Specified Pension Plan (SPP) or Pooled Registered Pension Plan (PRPP), who was financially dependent on the deceased for support, at the time of the deceased’s death, because of an impairment in physical or mental functions. The eligible individual must also be the beneficiary under the Register Disability Savings Plan (RDSP), into which the eligible proceeds will be paid. 1

In most cases, significant tax may be due, depending on your marginal tax rate and final calculations in your estate. Consider talking to your advisor about buying a joint last-to-die life insurance policy timed to pay after you and your spouse die. It can equate to a small percentage of your RRSP/RRIF holdings per year to make up for the taxes due on what has become, for some, a small fortune.

1 RDSP – Canada.ca

Can life insurance fund RRSP estate tax erosion?

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When planning your estate. It is important to consider how taxation will affect the future distribution of your estate.  For individuals that are married, when the first spouse passes away, the assets generally are able to achieve a rollover free from taxation to the surviving spouse. However, when the last surviving spouse passes away, all assets are deemed to have been sold at the time of passing, and this includes your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) holdings. 

Concerns leaving wealth to the next generation. Registered assets are taken into income in the year of the surviving spouse’s death, and taxes must be paid.  These taxes will be due after the death of the second spouse where there are no dependent children. An eligible individual is a child or grandchild of a deceased annuitant under an RRSP or RRIF, or of a deceased member of a Registered Pension Plan (RPP) or a Specified Pension Plan (SPP) or Pooled Registered Pension Plan (PRPP), who was financially dependent on the deceased for support, at the time of the deceased’s death, because of an impairment in physical or mental functions. The eligible individual must also be the beneficiary under the Register Disability Savings Plan (RDSP), into which the eligible proceeds will be paid. 1

Without an eligible dependent, a $500,000 RRSP or RRIF could be reduced to about half the sum after the death of the second spouse (assuming the highest tax rate).  How can this be avoided? How can you leave more of your wealth to the next generations?

A joint last-to-die life insurance policy may be a solution. A joint last-to-die policy insures two lives, usually two spouses for the purpose of paying for an estate’s tax liabilities such as capital gains on a cottage or business. In most cases where there also exists significant family wealth in RRSPs or RRIFs, taxes will eventually be due upon the second spouse’s death.  At that time, the entire remaining RRSP or RRIF funds are brought into income. Though this is not creating a liability as such, the taxation of large holdings of registered monies can deplete a family’s overall wealth.

By purchasing a joint last-to-die life insurance policy, the taxation of assets in a family’s estate plan can be offset by the significant life insurance proceeds.2 In the above example, a joint last-to-die life insurance policy for $250,000 would replace the estate value lost to taxation, therefore helping to preserve the estate’s net worth more fully for the family. This is especially true if the RRSP or RRIF owner is expecting to leave the entire amount to his or her heirs.

What about the life insurance premiums?  The premium for the life insurance policy to pay for the estate’s tax loss through RRSP or RRIF final estate taxation is usually a small percentage of a significant registered investment portfolio compared to the much larger tax bite. The death benefit may be partially tax-free. 2 A joint last-to-die policy can also be structured to pay back all of the premiums that have been paid into the policy, thereby minimizing the cost to the estate for a strategy designed to save money.

1 RDSP – Canada.ca

2 Note: It is recommended that you get qualified tax advice concerning the taxation of your registered retirement plans if you consider this strategy.

How do you deal with RRSP transfers upon death?

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When RRSP assets are present in an estate, there are a few steps to follow to assist transferal in the event of inheritance, death or separation.

A surviving spouse can transfer the full amount of a spouse’s RRSP as a refund of premium by rolling it into his or her RRSP or RRIF, life annuity or term annuity depending on age. Preferably, name your spouse as the beneficiary under all RRSP plans when you set them up, or make this provision in your will. Note: Your advisor will be able to look at your situation and advise you.

If you leave no surviving spouse but there is an adult child or grandchild who is ‘financially dependent’ upon the deceased at the time of death, the full RRSP can be transferred tax-free to the child’s RRSP or used to buy an annuity or RRIF. Minors, however, must use the funds to purchase an annuity with payments to age 18. Note: Your advisor should be consulted to determine if an individual is ‘financially dependent’.

In most cases outside of financial dependency, the funds are taxed in the hands of the deceased on his or her last tax return. Life insurance strategies can offset the large tax liabilities associated with RRSP/RRIF assets that seniors will face, thus increasing inheritances.

 

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Parents: Do not make this mistake in your will

How does the Guardian Clause in your will protect children?

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Caring for your priceless assets – your children.

Very few Canadians have a will, fewer have a currently updated will. Without a will, you cannot outline directives regarding your most priceless asset – your children. A will allow you to clarify your selection of a legal guardian for your children. Here are some steps to take in preparing for the transfer of parental responsibility while planning your will with your lawyer.

Choose an individual to be the guardian

  • Perhaps your parents, a brother, a sister, or a friend could assume the appropriate parental role in your absence. Consider living quarters, age, health, their ethics, financial means, and their current family stress load. Talk to them and get their approval first. Do not simply assume your parents or siblings will take the children.
  • Select a contingent guardian in case the first choice denies the guardianship, takes ill, or dies.
  • Ensure that the guardian will have sufficient capital to provide for the children, which may include the need for life insurance. Know your current financial net worth and how much income it can generate for your children.

The guardian clause is only an interim appointment.

In your will, you can insert a provision that you are appointing someone as your child’s guardian (which most lawyers do). It is important to remember that any such appointment is only good for 90 days as it is an interim appointment only. Therefore, it allows all interested people to get before the court (which makes the final decision about who will be the guardian). Why include the guardianship clause if it is only an interim appointment? Because it is strong evidence of who the parents wanted the guardian to be, though it is not determinative. That is up to the court.

Include these parameters in your will.

  • Choose a trustee to invest and manage any money that your children may inherit
    • Consider having adequate life insurance to cover the children’s financial needs so as not to burden the new guardian.
  • Express your financial directives regarding the maintenance and education of your children, and the age when they may personally receive the balance of the inheritance.
  • Update your directives when your circumstances change, reflecting for example, changes in your net worth; a new child in the family; a deceased beneficiary or desired guardian; or special wishes regarding the transfer of certain assets to specific children.
  • Choose a competent, informed, and trustworthy executor with the patience to follow time-consuming legal detail.