What is market volatility? Volatility is when prices of stocks and equity funds increasingly shift in value up or down. When a low-volatility period is followed by increases in volatility, stock markets may begin to offer lower prices, which can effectually present lower-priced fund units, both offering a buying opportunity for the investor.
The stock market can both gain value in a “bull market” and can have periods of slowdown referred to as a “correction” or, if more prolonged, a “bear market”, which can occur during a recessionary period.
Many investors have seen their investments increase dramatically since the 2008-9 financial crisis that affected all the world’s markets. Further, since 2020 during the pandemic, the market has experienced remarkable gains as investors moved into another bullish period of growth after an extreme correction based on fear in mid-March 2021 occurred. Many of these investors have also witnessed a remarkable bull market taking many stocks and equity funds much higher than their previous years’ valuations. Conversely, investors who unwisely sold their holdings out of fear lost money.
The ideal strategy exercised by most successful contrarian investors like Warren Buffet is to buy investments when others are fearful and sell their holdings at lower prices.
When buying opportunities abound The market can experience increased volatility due to fears such as various wars, debt crises of countries, economic slow-downs, or mitigating inflation with rising interest rates.
Nevertheless, wise investors think positively during periods of higher volatility, relying on the professionals managing their investment portfolios.
Predesigned investment plans are necessary Though periods of volatility occur, exercise patience while maintaining a balanced and well-diversified portfolio according to a prescribed investment plan.
Plan with your advisor to establish a buying plan when others may be fearful. Market cycles of volatility are normal and expected.
**What are some of the differences between a Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP)?
The tax benefits of the Tax-Free Savings Account (TFSA)
The TFSA is a registered savings account that makes it easy for Canadian taxpayers to earn investment income, as the account title states, tax-free. A TFSA allows you to save money while deferring investment income on the after-tax monies invested.
Contributions to the account are not tax-deductible, and any withdrawals of the contributions and earnings from the account are not taxable. Canadian residents age 18 or older can now contribute annually to a TFSA.
TFSA Contribution Limits
2009 to 2012 $5,000
2013 and 2014: $5,500
2015: $10,000
2016 to 2018: $5,500
2019 to 2022: $6,000
2023: $6,500
2024: $7,000
Contributions are not deductible from your taxable income.
Add any unused contributions of your annual limit, cumulative back to 2009.
The tax benefits of the Registered Retirement Savings Plan (RRSP)
RRSP contributions are tax-deductible while RRSP withdrawals are added to income and taxed at regular rates. Your RRSP is primarily intended for retirement savings.
RRSP Contribution Limits
18% of the income you earned the previous year, up to an annual maximum of $26,500 in 2019, $27,230 in 2020, $27,830 in 2021, $29,210 in 2022, $30,780 in 2023, and $31,560 in 2024.
Contributions are deductible from your taxable income.
If you contribute to an employer-sponsored plan, it will reduce your contribution room.
Add any unused contributions of your annual limit cumulative back to 1991.
Reducing taxes on savings can encourage even greater levels of financial security as you invest. Because there is no tax paid on the investment income in or on withdrawals from a TFSA—Canadians now have a greater incentive to add the TFSA strategy to save for any need or for retirement.
Savings help to increase the funds available for investment when you combine your RRSP and your TFSA strategies during retirement.
RRSP and TFSA differences while you invest
TFSA contributions are not tax-deductible, but the contributions and the investment earnings are exempt from tax upon withdrawal. The TFSA offers the benefit of allowing after-tax investments to accrue without taxation. Tax assistance provided by a TFSA complements that provided through RRSPs.
Unlike an RRSP the money you put into your TFSA cannot be deducted from your income on your tax return. Canadian residents, age 18 and older, can contribute annually to a TFSA.
Similar to the RRSP, after you file your tax return each year, the government will determine your remaining available TFSA contribution limit for the coming year. Any unused contribution room gets carried over to the following year. Click here for the updated TFSA contribution details.
You can have more than one TFSA insofar as you don’t exceed your contribution limit.
Those who expect to be taxed at a lower marginal tax rate in retirement may be better to contribute to an RRSP before a TFSA.
There is no TFSA spousal plan. Individuals can provide funds to their spouse or common-law partner to invest in their TFSA, up to the spouse’s or common-law partner’s available room, and the income earned on the contributed amount is generally not attributed back to the spouse or partner who provided the funds.
The TFSA may also be a good investment if you are a member of a pension plan and have minimal if any, room to invest in your RRSP due to a high pension adjustment (PA) factor. More generous plans have a higher PA, leaving less room for personal RRSP contributions. You can supplement your retirement savings through the TFSA.
RRSP and TFSA differences while drawing Retirement Income
Unlike an RRSP, which must be converted to a retirement income vehicle at age 71, a TFSA does not have any minimum withdrawal requirement.
Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
For retirees with low income, every dollar withdrawn from an RRSP or RRIF will reduce the Guaranteed Income Supplement (GIS).
Money taken out of your tax-free Savings Account is taken out tax-free.
You get your contribution room back in the following year. The full amount of withdrawals can be put back into the TFSA in future years.
Careful when you re-contribute to a TFSA: Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
You don’t have to pay any tax on money that you take out of your tax-free Savings Account as you do with an RRSP, so you’re not penalized for short- or long-term saving. This makes the TFSA useful for investors who trade stocks or equity funds frequently.
Cautionary Note: Frequent buying and selling in a TFSA for the purpose of profit-taking may alert CRA to unusual tax strategies, which has been suggested lately as a caution.
Summary Considerations
Most Canadians will spend their employed lives in a higher average tax bracket than they’ll have in retirement. Thus, an RRSP may be the best way for the majority of Canadians to build a retirement nest egg.
If the tax rate at the time of withdrawal is expected to be higher than at the time of contribution, your best choice may be the TFSA.
The TFSA can improve savings incentives for low- to modest-income individuals because either the income earned in a TFSA nor the future withdrawals from it affect eligibility for federal income-tested benefits and credits, such as the Canada Child Tax Benefit, the GST credit, the Age Credit, Old Age Security and Guaranteed Income Supplement benefits.
Consider consulting your advisor before deciding whether to place money in an RRSP or a TFSA or to find out the combination of contributions that is best for your situation.
The following link to a CRA table outline the contribution limits for the annual money purchase (MP), defined benefit (DB), registered retirement savings plan (RRSP), deferred profit-sharing plan (DPSP) and the tax-free savings account (TFSA) limits, as well as the year’s maximum pensionable earnings (YMPE) CRA Registered Plan Limits
Here are some essential strategies that will help you achieve financial independence. It is important to get solid advice to design a plan that incorporates planning values such as those noted herein.
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 intended for retirement or other purposes.
Budget based on your income, not on your desire. Plan to spend less than you earn and don’t take on debt that your future income cannot service. 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. You can achieve such investing by purchasing units in a potentially promising investment fund systematically, 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 devalue over time. Acceptable debt can help you achieve an education or mortgage a home.
Differentiate your risks. Inflation risk will compete with long-term investment risk. Equity investment funds or the stocks of many companies are not guaranteed, meaning there is a risk. Yet equities have a much better chance to outpace the adverse risk of inflation—or as some have humorously termed shrinkflation—when compared to a savings account over time. Inflation is the single most significant 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 diversify among the various sectors. One sector may gain while another may lose some value, balancing 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 is to study funds as a speciality. To diversify in a balanced manner, one needs to weigh many factors concerning economic sectors, managers’ styles, company size, and foreign economic conditions.
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.
