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
Banks follow established rules, which include asking a business owner to collateralize a loan, not just with business assets but also with personally owned assets, such as a principal residence and cottage. Collateralization can require collateralising a spouse’s co-owned assets, even if the business is incorporated.
Add to that a possible collateralization of any assets of a partner or adult child (and their spouses) who also share in ownership. Small business owners can lose their shirts if they default on a loan.
What if an owner dies? It is unwise to assume that a good relationship with the bank will continue if the heir of a small business or a partner is not in favour with the bank manager. Bank managers can change or apply strict policies while reassessing the leniency shown to previous owners or administrators.
Eliminate doubt in a family business, such as a farm, by insuring the oldest owners and succeeding generations using joint-first-to-die policies or individual life insurance policies. In the case of a non-family business, each owner/partner should be insured to cover the company’s debt. When the life insured dies, the tax-free life insurance proceeds can be used to pay back loans, win back ownership, and discharge any personal assets liens.
What if there is a critical illness? For the same reason, small business owners should consider purchasing a critical illness (CI) insurance policy for each principal business owner and key persons. CI insurance could pay off a considerable bank debt if one were to experience a significant illness such as a heart attack or stroke. One could become incapacitated and 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 sick, and the bank manager loses confidence in the debt-paying influence of that owner.
After the death of an individual, every estate must file a final (or ‘terminal’) tax return. All assets are deemed to disposed of at the time of passing, and this can trigger probate fees and other expenses.
A certificate of appointment (“Probate”) or Estate Administration Tax (EAT) is not always necessary to actualize the transfer of certain assets. Much depends on how the asset is held during one’s lifetime, and the value of the asset transferred. Some institutions will not require probate for assets under a certain amount. Concerning jointly-owned real property, and bank or investment accounts, these assets will pass to the surviving joint tenant by right of survivorship. In cases where joint ownership of assets is considered for estate planning purposes, it would be prudent to obtain legal advice.
Life Insurers offer life insurance policies, segregated funds, and term funds, which may designate one or more primary beneficiaries, and further contingent (secondary) beneficiaries, allowing probate/EAT to be circumvented entirely, enabling direct access to those funds without joint ownership or survivorship of a joint tenant. Segregated funds and term funds are classified as deferred annuity policies, and as such, these assets can help lessen the overall fees charged on your estate. Monies pass privately and directly to your beneficiaries, outside of your estate and the probate process.
Concerns for Estate Planning
In Ontario, Probate fees were the forerunner of the new Estate Administration Tax (EAT), which is to shift to the Minister of Revenue. An Executor/Trustee will now have to file a detailed summary of assets that are distributable under the will. The Ministry reserves the right to take up to 4 years to assess, or the right to reassess, making the Executor/Trustees responsible for that reassessment. Executors and beneficiaries may face liabilities if estate assets distribute before assessment or reassessment. How does an Executor reclaim assets already distributed?
Assessment powers are not minor With the introduction of the estate administration tax (EAT), the government has given the Minister of Revenue audit and verification powers patterned after the federal Income Tax Act, thus giving the Minister of Revenue the right to assess an estate in respect of its EAT liability.
Estate trustees may be personally liable for the claims of creditors that cannot be paid as a result of an improper estate distribution. It will be an offence for an estate trustee to fail to make the required filing with the Minister of Revenue or where anyone makes, or assists in making, a false or misleading or omitted fact in connection with the estate trustee’s filing. Because offences are punishable by fine, imprisonment or by both, errors and omission insurance may be needed by executors handling larger estates.
Potential Legal Issues for Estate Trustees and Executors
Imagine if you are a personally chosen friend of a deceased person with $1.5 million in assets, who previously selected you as Executor/Trustee of his or her estate. Though duty-bound, you may feel that the risk is now very high if an error occurs. Consequently, you may want to off-load the potential liability to a professional accountant and lawyer to present all the documentation for EAT.
Consider that the costs of such a transfer of liability could rise to the maximum of 6% per professional (two professionals would mean 2 x 6%) of the value of the Estate. This could bring the total cost of dealing with EAT to a maximum of 13.5% of the estate value. In the above case, fees could cost upwards of $202,500.
Segregated and Term funds may offer investors an edge over other investment products in the province of Ontario when it comes to planning someone’s Estate. Segregated and Term funds also offer estate privacy of the distribution of money under the insurance act.
Note: Not applicable in Québec as notarial wills do not need to be probated by the court and, for holograph wills and wills made in the presence of witnesses, probate fees are minimal.
Here are ways to protect your successor financially.
Allow the potential successor to get involved in managing important team projects. Try to increase the successor’s financial insights and general responsibilities over time. Allow independence while ensuring that the right professionals assist the successor, such as a good accountant and insurance agent.
Consider visiting other family businesses that have transferred their business through continuity planning.
Establish mentors and advisors for the successor. Consider setting up a board of directors if one is not in place. Implement leadership training programs.
We do not suddenly become what we do not cooperate in becoming.— William J. Bennett
Protect your assets during Succession in the following ways:
Cover your key persons. Use life and disability insurance to cover the cost of replacing an owner, successor, contingent successor, or a key executive in the event of death or disability.
Ensure debt redemption. Life insurance proceeds can pay off bank loans and other liabilities—paid at the owner’s death. Also, consider critical illness insurance, which would pay up to $2,000,000 if the proprietor were to become critically ill.
Provide income replacement insurance. Disability insurance benefits can provide income to an owner, successor, or key executive if disabled over specific periods. The payment paid as a benefit to a disabled insured, places less payroll burden on the company.
Fund a buy-sell agreement. Life and disability insurance proceeds can fund a buy-out upon death or disability, where two or more owners are in business (effective for current or succeeding generations).
Fund a stock redemption. When other members of the family own stock, you can buy life insurance for the owner and make the successor the beneficiary. This will provide cash upon the owner’s death to allow the successor to buy the stock of, say, sisters or brothers, based on a pre-determined formula related to equalizing the estate.
Fund capital gains tax liabilities. If significant capital gains will impair the company, reduce personal assets, or disallow a legacy of a cottage or other asset, use a permanent life insurance product designed to pay off all capital gains liabilities.
Create capital to equalize your estate. In the future event where one child will inherit the company, life insurance can be purchased by the owner or spouse to pay the non-involved children a tax-free cash benefit in predetermined amounts, clear of probate. To avoid resentment, you can inform these children that they will be treated fairly in the overall estate.
Let him, who would move the whole world, first move. — Socrates
Maintain relationships during succession
Keep your banker informed. What would your banker do if something happened to your firm’s current owner? Who else knows of the company’s loans or actual financial status? Introduce your successor (and the succession plan) to your banker and review all the company liabilities. Reveal your life insurance planning to the banker that can offset liabilities in the balance sheet.
Sustain client relationships. Introduce your successor early on to your key clients. Perhaps host client appreciation events.
Harmonize the successor with the constituency. The key players will help the company survive, including critical suppliers, influential families within and without; shareholders you hope will seek minimal dividends instead of future growth; employees, especially those holding company stock; and the key executives.
Diversify sources of retirement income. Keep your retirement investments separate from your business. Consider purchasing segregated funds, separating your assets from the company while reducing exposure to creditors. Avoid investing your profits into the business without developing your independent retirement resources. Thus, you will not need to rely on the company to create an ongoing retirement income, though you may receive dividends and income from the business.
Move towards financial independence of your business. Though you leave a legacy to your successor(s), you can ensure that the inheritance will have sufficient funds to survive during and after the succession. Drawing from your retirement savings can reduce dependency on business income (or dividends).
The Buy-Sell agreement is one of the most important legal documents a business can have to protect shareholders if a business owner/partner dies.
They must be planned ahead Whether you own a partnership or corporation, we can help you set up a buy-sell agreement while you are alive and capable of doing so. We will help you value your company and set up the proper Buy-Sell Agreement to meet Canada Revenue Agency’s (CRA’s) standards.
Funding the Agreement We can determine if the company has the cash flow or a large amount of money available to support the buy-out of the deceased or disabled owner. If not, life insurance can be used to fund a buy-sell agreement as it can pay a large amount of tax-free capital at the right time of the death of a business owner/partner.
Making it legally binding We can meet with your lawyer and the buyers’ lawyers. After it is drafted, all parties will review it to their satisfaction and sign it to make it legal. It is suggested that life insurance be purchased first to ensure one is insurable. Even where there is a medical problem, in most cases, an insurer is willing to design a policy to suit the risk based on the respective health of the individual.
Capital gains from a business, cottage, second residence, rental property, or non-registered investment are subject to taxation when the property is disposed of. How and when the property is disposed of requires serious consideration, as the tax implications can be enormous.
Here are some areas where capital gains tax may develop:
If you own a Family Business Many family businesses have accrued large capital gains over time, due of course to the success of the businesses. When sold, the business will incur a taxable disposition that could be subject to high taxable capital gains.
If you own non-registered Investments Any capital asset that is held outside of an RRSP, whether a stock, GIC, or investment fund to name only a few, will be taxed on the difference between its fair market value at time of sale, and the cost of the asset. The difference between the purchase price and the sale price will be either a taxable gain or loss.
If you own a Cottage When you sell your cottage, or you and your spouse die, capital gains tax will be triggered on the difference between the cost and the fair market value at the time of sale. One major consideration is how to keep the cottage in the family.
Assuming the kids want the cottage, how can the tax problem be handled? What if there are not enough assets in the estate to pay the taxman? If there are not enough assets or cash to pay for the tax bill, it may be that the cottage has to be sold.
Can A Solution Cost Pennies on the Dollar?
One solution that can help overcome tax issues, and provide enormous estate savings, is a permanent life insurance policy. A permanent life insurance solution will create a non-taxable death benefit that can pay the capital gains tax on the accrued increase in value of a family business, cottage, second residence, or unregistered investment. The most common form of estate policy purchased is a Joint Last-to-Die Life Insurance contract. These types of policies can insure both spouses’ lives, but only pay out on the last death. The cost of the product is often more affordable than an individual policy since the insurance risk is lessened by insuring two lives.
Psychological fear can hold one back from investing. People behave according to their mindset. Some of the following thinking can keep one from not putting their money to work by buying equity investments such as equity investment funds. If you have said any of the following statements, you may be experiencing investor anxiety:
“I think the markets will pull back and lose some value.” I will wait and invest when this happens.” This viewpoint is based on the need to confirm a belief before acting, where the investor must minimize any evidence that contradicts their belief mantra. The media frequently offers terrible news if the market has a low day, and it is easy to hear only this information while filtering out other positive news. This process can paralyze an action plan to invest for years.
“I want to sell the investment if I see a profit.” People might sell an investment early once it rises in value for fear of future loss. Aside from considering taxation, once sold, an investment with either a gain or a loss ends any future potential of that investment rising in future value. To avoid this mindset, one should have a disciplined written plan for buying and selling assets that can be frequently referred to.
“The market is bound to correct and head down because it is at a peak.” Anchoring our point of view occurs when someone assigns a reference number, like a 52-week high or low, to compare the price of an investment stock, the unit value of a fund, or a stock exchange’s last peak value. Past price movements are poor predictors of future price performance. When you invest for the long-term for retirement, using past price patterns is comparable to driving your car while gazing in the rearview mirror as a reference.
Conclusion
The above emotional mindsets can ruin or avoid forming an otherwise excellent investment plan. They can help you develop a risk tolerance profile and investment plan. Please work with your investment advisor to help you understand how the mind can trick us into failure simply by not investing over the long term.
“Individuals who cannot master their emotions are ill-suited to profit from the investment process.” Benjamin Graham
Estate Planning is a financial planning process that every responsible working person with dependents should accomplish, even if it is preparing a last will and testament and living will for health purposes.
Estateplanning can empower your heirs in the following ways:
Plan to reduce taxes in your estate When transferring your assets, including mutual funds, using a will, try to pass as much value as possible to your heirs. If you hold equity mutual funds that buy and hold stocks, they may have accrued capital gains. There will be a deemed disposition of all your property at fair market value at the time of your death. For some this could mean a capital gains tax liability.
By knowing your estate tax liability List each separate asset you own, the purchase price and date, as well as its current value. Include your non-registered investments in stocks, bonds, and mutual funds. Have your accountant assess what the tax liability will be.
Your spouse and deferred taxes Property willed to your spouse can be rolled over tax-free on your death. Your spouse will actually inherit the assets at the unchanged adjusted cost base (cost amount) of the property. The taxation of the asset will then occur when your spouse disposes of the property or at the death of the spouse. This tax deferral is beneficial especially if you have large holdings in equity mutual funds invested for value as in large cap or blue chip stocks. Alternatively, you can choose to transfer any asset to your spouse at fair market value on death and recognize the accrued gain or loss.
RRSPs and your children Under the rules proposed in the 1999 Federal Budget, RRSPs can be transferred tax-deferred to your dependent children or grandchildren, even if a spouse survives you. Before the 1999 Federal Budget, a transfer of RRSP funds to dependent children or grandchildren would be taxable if there was a surviving spouse.
Income splitting using a testamentary trust By establishing a testamentary trust in your will, you will be able to maintain control during your lifetime over the use of your assets such as a mutual fund investment portfolio. The trust can provide guidelines for the treatment of these assets after your death. The trust document can specify the split of income among heirs. Carefully planned income splitting may allow for significant tax savings.
Assess your tax liabilities with an estate lawyer and/or accountant and make estate plans to determine how to pay them. Consider the use of life insurance where the capital gains tax liabilities are substantial.
If you are a business owner, you may have an individual critical to your success. Insurance can protect you against financial loss if incapacitated in three areas.
1) Key-Person Life Insurance
2) Key-Person Critical Illness Insurance
3) Key-Person Disability Income Protection
Key-Person Life Insurance Life insurance is usually the foundation of a key-person protection strategy. It provides an immediate injection of capital into the business precisely when needed—when a key person dies. At this time, the death benefit is paid to the company tax-free.
Renewable Term Life Insurance is usually the most economical option over the short term. In certain circumstances, permanent insurance may provide better protection when coverage is needed over a long time.
Key-Person Disability Income Protection Disability insurance can be used for two purposes in a key-person context:
• The provision of a continued salary to a key person that becomes disabled, usually until the earlier of age 65 or recovery from the disability.
• Owner-managers can purchase insurance that provides continued payment of office expenses and salaries during disability, usually for a limited period.
Key-Person Critical Illness Insurance Critical illness insurance provides protection when a key person is afflicted by a specified disease or health problem that does not necessarily render them disabled but affects their desire or ability to work. Depending on the policy, this insurance coverage can pay a lump sum, or an income payable to the business, to help cover losses created by the absence of or lower productivity of the individual.
