Budget Update March 2019

On Tuesday, March 19, 2019, Finance Minister Bill Morneau presented the Government of Canada’s 2019 budget. Here are some highlights of these proposals for individuals. Please note, these are not yet law.

Highlights for Individuals

Employee Stock Options: The current tax rules provide preferential personal tax treatment to holders of employee stock options in the form of a stock option deduction which, if available, can effectively tax the stock option benefit at a personal tax rate similar to a capital gain.

Budget 2019 proposes to limit the tax-preferred treatment of employee stock options to annual grants of $200,000, based on the fair market value of the underlying shares at the time the options are granted. This limit will only apply to stock options issued to employees of large, long-established, mature firms, and is not intended to apply start-ups and rapidly growing Canadian businesses.

It should be noted draft legislation, including definitions of these terms, has yet to be released. Stock option benefits realized on options in excess of this limit would not be eligible for the stock option deduction and will be fully taxable at the employee’s personal tax rate.

Annuities for Registered Plans:  To provide greater flexibility for retirement planning, the 2019 budget is proposing to permit two new types of annuities for certain registered plans: Advanced Life Deferred Annuities (ALDA) and Variable Payment Life Annuities (VPLA).

  • Advanced Life Deferred Annuities will be permitted under a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), Deferred Profit-Sharing Plan (DPSP), Pooled Registered Pension Plan (PRPP) and defined contribution Registered Pension Plan (RPP); and
  • Variable Payment Life Annuities will be permitted under a PRPP and defined contribution RPP.

With the creation of an Advanced Life Deferred Annuity (ALDA) under an RRSP, RRIF, DPSP, PRPP or defined contribution registered pension plan, life annuity payments under the ALDA can be deferred until the end of the year in which the annuitant turns 85, which is an extension from the existing age 71 requirement.

The measures will apply to the 2020 and subsequent taxation years.

Home Buyers Plan: The 2019 proposed budget proposes measures that might help first time home buyers an ability to better manage buying a home and ongoing costs. The budget proposes to increase the withdrawal limit from $25,000 to $35,000 for 2019 and subsequent years. As a result, a couple will potentially be able to withdraw $70,000 from their RRSPs to purchase or build their first home. The changes also propose other measures to protect home ownership after the breakdown of a marriage or common-law partnership, couples who separate or divorce no longer have to be a “first-time home buyer” to qualify.

First Time Home Buyer Incentive: The proposed budget recommends an incentive for first-time home buyers an option with The Canada Mortgage and Housing Corporation (CMHC) to help finance a portion of their home purchase through a shared equity mortgage with CMHC, with maximum limits of 10% for a newly constructed home or 5% for an existing home for household annual income of less than $120,000. This may reduce the mortgage and borrowing costs for first time buyers. Additional details on any required repayments and the plan are still to be communicated.

Individual Pension Plans: Individual pension plans (“IPPs”) are registered plans which provide retirement benefits to owner-managers in respect of their employment. If an individual terminates membership in a defined benefit registered pension plan, there’s a tax-deferred rollover available. The pension’s commuted value is transferable to another employer-sponsored defined benefit plan or up to 50 per cent of the commuted value can be transferred to an RRSP or similar registered plan.

Planning is being undertaken that seeks to circumvent these prescribed transfer limits. This planning is affected by establishing an IPP sponsored by a newly incorporated private corporation controlled by an individual who has terminated employment with their former employer. The individual then transfers the commuted value of their pension entitlement from the former employer’s defined benefit plan to the new IPP. This planning seeks to obtain a 100-per-cent transfer of assets to the new IPP instead of the restricted transfer of assets to the individual’s registered retirement savings plan.

To prevent this type of planning, the budget proposes to prevent tax-deferred transfers of assets from a former employer’s defined benefit plan to an IPP. The proposal would prevent an IPP from providing retirement benefits in respect of past years of employment that were pensionable service under a defined benefit plan of another employer. Any assets transferred from a former employer’s defined benefit plan to an IPP that relate to benefits provided in respect of prohibited service will be considered to be a non-qualifying transfer that is required to be included in the income of the member for income tax purposes.

These measures apply to pensionable service credited under an IPP on or after March 2019.

Canada Training Credit (CTC):  One of the main reasons, according to the OECD Survey of Adult skills, why people don’t upgrade or learn new skills is that the expense of getting additional training or education is due to the cost. The budget proposes a new refundable tax credit intended to cover up to half of eligible tuition and fees associated with postsecondary or occupational-skills training. Eligible working adults between the ages of 25 and 65 will accumulate $250 each year in a notional account, which can be claimed in the year eligible training expenses are incurred. The CTC accumulates automatically each year up to a lifetime limit of $5000, and is designed to offset training costs at colleges, universities and other eligible institutions. In order to be eligible for the CTC in a year an individual must meet certain criteria.

Canada Student Loans – Lower Interest Rate: The budget proposes a significant reduction in the interest rate charged on Canada Student Loans and Canada Apprentice Loans. Starting in 2019-2020, the fixed rate will be reduced from prime plus 5% to prime plus 2% and the popular variable interest rate will drop from prime plus 2.5% to only prime.

Currently there is a six-month grace period after graduation, where the new graduate does not have to make any payments, but interest still accrues. The budget proposes to eliminate interest charges on student debt during this six-month grace period.

Tax Credit for Digital Subscriptions:  The Budget proposes a 15% non-refundable tax credit for eligible digital news subscriptions up to an annual maximum of $500 in costs for an annual maximum credit if $75. This includes combined digital and newsprint subscriptions for amounts paid after 2019 and before 2025.

Medical Expense Tax Credit: The budget proposes to expand the range of cannabis products eligible for the medical expense tax credit, applicable for expenses incurred on or after October 17, 2018.

Guaranteed Income Supplement: The budget provides enhancements to the Guaranteed Income Supplement (GIS), including making self-employment income eligible for the earnings exemption; and increasing the exemption of annual employment or self-employment income for GIS or allowance recipients and their spouse by:

  • Increasing the full exemption from $3,500 to $5,000 per year for both the recipient and their spouse; and
  • Introducing a new exemption of 50% of an additional $10,000, beyond the above-mentioned $5,000 exemption for both the recipient and spouse.

Registered Disability Savings Plans (RDSPs): A Registered Disability Savings Plan (RDSP) is intended to assist with the long-term savings and financial security of individuals eligible for the disability tax credit (DTC). Savings in these plans are supplemented with Canada Disability Savings Grants and Canada Disability Savings Bonds.

Currently, once an individual beneficiary of an RDSP is no longer eligible for the DTC, they cannot make additional contributions to the plan, and no government grants or bonds will be paid into the RDSP. In addition, the plan must be closed by the end of the year following the first full year that the individual is no longer eligible for the DTC, unless a medical practitioner certifies that it’s likely the beneficiary will once again qualify for the DTC.

Closure of the plan will result in repayment of government grants and bonds paid into the plan within the preceding 10-year period, the “assistance holdback”. The budget is proposing to remove the two-year time limit on the period that an RDSP can remain open after the beneficiary is no longer eligible for the DTC and eliminates the requirement for medical certification.

As a transitional measure, financial institutions will not be required to close an RDSP on or after Budget Day and before 2021 simply because the beneficiary ceased to be DTC-eligible.

There are detailed rules and criteria proposed in the 2019 Budget for the above items and all other proposed changes that can be accessed at www.budget.gc.ca.

Feel free to connect with us for clarity or to understand how some of the proposed changes may impact you.

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A Focus on Customers can Drive Value and Grow Your Business

Whether you are planning on selling or transitioning your business or are simply evaluating how you can grow or expand your business now, a focus on customers will help your business determine how to drive value.

There are many value drivers that can be considered and evaluated before you think about selling or transitioning. A potential buyer will analyze all aspects of your business: financial, sales, leadership, marketing, operations, technology and customers among other factors when determining transferable value.

How your business is engaged in marketing, branding and building customer relationships are important value drivers that can increase the attractiveness to a potential buyer.

Understanding that your business value is dependent on customers, their willingness to pay for your product or service and keep paying, is the first step. You may have already built great customer loyalty and brand awareness, but you may not have it documented or measured it in a valuable way.

Working with an exit planner or strategic value builder in advance of a sale (three to five years ideally) will provide a process to evaluate your existing marketing plan and put actions in place to build out the plan and increase your value proposition.

A well-developed, written marketing plan can help you build on what you have and implement strategies to maximize growth opportunities and increase sales. Boosting sales from existing customers, bringing in new customers and standing out with a strong marketing presence will build a stronger more attractive business.

Focus on your customer, find out what they value in your product or service and document it. Customer relationship management (CRM) tools and processes can help capture and analyze client data. Implementing techniques like customer surveys, client follow-up processes and customer reviews provide quantitative and qualitative data on what you do well and what can be improved.

Also, an in-depth view of your client segments, geographical segments, buying trends and client behaviour will help determine where there are opportunities for growth or possible risks. For example, there may be a risk if your customer base is highly reliant on a few customers or if they are all located in a single market. Another potential risk to consider is your sales process and who holds the key relationships with key clients.  Is there a process to train and transition the client relationships on an exit of an owner or loss of a key employee? A potential opportunity may be that most of your referrals come for a specific client segment that can be further developed.

Take time to research your competition. When it comes to products, services, marketing, pricing and distribution, ask yourself:  

  • What do you do better?
  • What do they do better?
  • What can you improve upon? 
  • What do you want to be known for?
  • What makes you stand out?

Understanding your market and developing your ideal client profile with a clearly defined value proposition will provide the foundation for your marketing strategies. Sales and marketing strategies can be developed to ensure you allocate your efforts in the right places.

When you create more value in your business than your competition, you have a more sustainable future.

If you have any questions or want professional advice on how to build value in your business, connect with us.

Building Value and Preparing for Business Transitions

In the next 10 years we will see a large percentage of businesses change hands. Research done by BDC Canada shows that 54% of entrepreneurs expect to leave their business in the next four to five years. Business owners need to evaluate their businesses now and put a plan in place to ensure the value of their business is at its highest when the opportunity arises.

Building a transition plan takes time and may include a variety of strategies, stakeholders and professionals to execute.  Working with an exit planner to build a formal process with written goals, actions and timelines will help owners build value and enhance the attractiveness of their business.

There are many options for owners on how to exit their business including: family succession, sale or transfer of control outside the family and winding down or selling assets. To prepare for a successful transition the business needs to assess the knowledge, skills, leadership and client relationships that are reliant on the current leader if transitioning the business to a new owner(s).

When the successor is known an assessment can be completed to determine the skills, strengths and areas for growth to build training and development plans for the next leader. If the successor is not known there are strategies to consider to enhance value for future management and leadership transitions.

Owners need to think about how long they are prepared to stay around after the business is sold. Expectations between the buyer and seller need to be discussed during the process. When the business can succeed without the seller on a day-to-day basis the business is more likely to succeed. An owner can plan for the transition and be in a better position for a possible sale.

Key areas owners need to think about:

  • Does your management team have the skills and experience to run the business after you leave?
  • Do you have any key staff contracts in place that would be essential from a purchaser’s standpoint?
  • How reliant is the business on you and your expertise or an any other single person?
  • How long are you prepared or willing to work during a transition period?
  • Does the business have human resource policies and employee or training manuals in place?
  • Is there an organizational chart in place with clear job titles, job descriptions performance reviews and training plans in place?

Working with an exit planner in advance of a sale (three to five years ideally) will help an owner and their team assess the areas of the business where transfer of leadership, knowledge and skills are necessary to prepare for a future sale or transition. It will also identify other areas in management and human resources that can be improved to increase the attractiveness of the business to a potential buyer.

If you have any questions about transition and exit planning or how to find a Certified Exit Planning Advisor to help you start yours, connect with us.

Giving an Unexpected Gift

The holidays are upon us.

Annual holiday gift guides have been circulated. Wish lists have been compiled and shared. The annual review of gift-giving and the intentions connected to why we give gifts and to whom is well-underway.

For many of us, we give gifts to people who are important to us and try to focus on things they want or need. In today’s world, gifts tend to be geared towards instant gratification.

Rather than get caught up in the season’s hottest trend or coolest gadget, this year consider giving your children or grand-children a gift that will help them achieve future success.

Permanent life insurance and child critical illness may not be at the top of their wish lists, but they will be a gift much appreciated the older they get. Insurance is a wonderful foundation for them to build their dreams upon.

A child’s insurability will change with age and other factors, as will their insurance needs. One of the highlights of permanent life insurance and critical illness insurance for children is locking in insurance while the child is young.

When you purchase the policy, you can add on the ability to increase or extend coverage in the future even if insurability has changed. This option can prove very valuable should your child’s insurability become a factor as they go through life. Occupation, hobbies, travel and health issues can impact the ability to buy more insurance in the future.

Your child’s permanent life insurance policy contains a cash value that grows with time and can be accessed, allowing for opportunities that may have otherwise been financially difficult. This cash value can help with education costs, a down payment on a home or income when they need it.

Child critical illness insurance can include a return of premium option, if no claim is made it allows for premium payments to be paid back in a lump sum and to be used to support your child’s dreams and future plans.

Permanent life and critical illness insurance give you the opportunity to set your child or grandchild up for success and help them be prepared for unexpected events.

Learn how insurance can be one of the greatest gifts you give by connecting with us.

Are you protecting one of your most valuable assets?

We protect the things we find valuable – the things that are difficult or impossible to replace. We insure our homes and vehicles because most of us can’t afford to lose them.

Consider the average price of a new Canadian vehicle is $33,00011, the average price of a Canadian home is $437,6992 and the average earnings over a 30-year career is $2,008,1543.

Over a 30- or 40-year career, your accumulated income is likely to be far more valuable than any other asset you’ll own. It may be time to think about what you’re doing to protect your ability to earn a living.

Disabilities are a fact of life, one in four people4 will be disabled for 90 days or longer at least once before they turn 65. The average length of a disability is 5.75 years5 if it lasts longer than 90 days.

Questions to consider:

  • Could you maintain your lifestyle?
  • Could you continue to run your business?
  • Could you meet debt obligations?
  • Could you pay ongoing expenses?
  • Could you continue saving for retirement or a child’s education?
  • Could you take the time to recover?
  • Could you afford any additional expenses related to a disability?

Most of us don’t want to think about it, but it’s something to consider. Some of the most common causes of claims are due to disabilities we can’t plan for, injuries like: fractures, dislocations or sprains, depression and anxiety, heart attack or stroke and cancer.

The good news is there are ways to plan for the unexpected. You can keep your earnings uninterrupted with proper insurance planning. Proper plans will help you avoid having to use your savings, sell your assets or surrender RRSPs to meet your day-to-day living expenses. Disability insurance is a plan that works when you can’t. If an accident or illness prevents you from working, disability insurance provides monthly income to help pay ongoing expenses. It can replace a per cent of your earnings – short term or long term.

Two common types of disability insurance are group and individual. Group insurance is arranged by an employer, association or union to help financially protect its employees/members. It focuses on general coverage for all employees/members. Premiums are usually paid for by the employee, so any benefits can be received tax-free. Benefit coverage is generally based on a percentage of earnings and will typically last for two years if you cannot work at your own occupation but may be extended depending on the plan if you cannot work in any occupation. Premiums are not guaranteed and may change depending on the claims experience of the group of employees covered in the plan.

Individually owned disability insurance generally provides control and choice to help you financially protect what matters most. And it’s all about you:  you own it and you choose the products and options you want that are customized for your needs. You should consider individual disability insurance if your employer does not offer group insurance with disability coverage, you are self-employed, and/or a business owner. There are also circumstances where your group coverage does not provide adequate coverage. If you are not covered for bonuses or sales commissions, if you are drawing income in the form of dividends instead of salary or if the maximum monthly income coverage does not provide sufficient income replacement.

Together or on their own, individual or group disability insurance can help protect you, your family and your lifestyle should the unexpected happen.

Working with a financial advisor to review your coverage and ensure your earnings are properly protected lays the groundwork for you to continue meeting your financial goals and to maintain your lifestyle, even if a disability prevents you from working or running your business.

If you have any questions about your current insurance plans or how to find a financial advisor to work with you to develop your financial plan, connect with us.

 

1 Jeremy Cato, Savvy shoppers knock about $4,000 off car prices in Canada, The Globe and Mail, May 2014.

2 The Canadian Real Estate Association, July 2015, http://crea.ca/content/national-average-price-map.

3 Assuming annual income of $45,741 with a 2.5 per cent increase annually for 30 years. Peter Harris, So, how much are we earning? The average Canadian salaries by industry and region, Workopolis.com, February 2014.

4 Calculations prepared by Great-West Life using a blend of occupation classes, genders and age ranges based on data obtained from the Society of Actuaries – Individual Disability Experience Committee (IDEC), 2012 IDEC Claim Incidence Rate Table.

5 Canadian Institute of Actuaries (CIA) 86-92 Agreement Table & 2012 Society of Actuaries – Individual Disability Experience Committee Table.

 

Farming Family Brings in Help to Talk About Succession

When it comes to estate and succession planning, open and intentional communication plays a big role in the success of a transition.

Talking with our families about money, especially when it comes to wills and estates, is not easy. In truth, it is something most of us would rather avoid, even if family discussions are an important step to ensuring our future emotional and financial well-being.

Professional mediation is an immensely valuable resource that can help facilitate productive, honest discussions that ultimately help to retain the long-term health of the family and the individuals involved.

Mediators understand historical issues and resentments sometimes resurface during discussions about wills and estates and can threaten relationships. Mediators are also aware of how inherent generational differences can make it hard to reconcile the older and younger generations’ visions for the future.

The mediation process is foremost geared toward improving family communication so the complex dynamics, found in all families, are dealt with in a productive way. The process gives everyone a chance to be heard and individuals are able to be open and honest about what they feel is important. Open communication, with a mediator, is one of the best ways to avoid future upset over wills and estates.

 

The Situation

The following is an example of a farming family who found value in the mediation process.

John and Ellen are in their 60s and have two married children, Jake and Rachel. The family has been trying to build and implement their succession plan for the past two years and, for various reasons, have found themselves unable to.

John plans to transfer the farm to Jake, his current employee, but is having difficulty relinquishing control and ownership. For John, much of his identity comes from his status as a farmer and the way it enables him to provide for and give generously to his family.

Both Ellen and Rachel fear John is overworking himself (and Jake) and putting his health at risk. Ellen would like to see more of her husband so they can start the third act of their lives and enjoy retirement together.

Jake wants his father to fully transition into retirement so he can gain more experience managing the farm, while his dad is healthy and be able to “start his life” with his wife.

Historical sibling issues between Jake and Rachel also factor into the succession planning process. Rachel has never been involved with the farm and does not want a share of the estate, rather, she wants Jake to succeed their father and take over the business. With her parents in retirement, she will be able to see them more frequently. She considers Jake lucky because he has the luxury of seeing their parents on a daily basis whereas she lives too far away to do so.

Jake, however, feels that he missed out on the parent-child relationship Rachel got to enjoy because he was so accustomed to working for John, as his manager rather than father. Both perceive each other as having an advantage in their relationships with John and Ellen. Even though Jake and Rachel are not at odds over their parents’ financial assets, the emotional complexity of their relationships with their parents and each other were inhibiting open, productive dialogue.

John and Ellen’s financial advisor recommended working with a mediator to facilitate a meeting with the entire family to discuss the family’s estate in a productive manner.

 

The Process

*         Before calling a family meeting, the mediator spoke to each member to hear their individual concerns and was able to assess them as a neutral, unbiased party.

*         The mediator emphasized:

  • Better communication practices such as explicitly stating what position individuals were speaking from (e.g. when is John speaking to Jake as a father and when as a manager?)
  • Ways to start dialogue and better articulate feelings and concerns
  • Taking accountability for the actions each individual committed to

*         John realized he needs to work on his life after business plan given that so much of his identity is tied to his role as a farmer. It took a neutral party to open his eyes to the concerns his family had already been voicing to him.

*         Jake and Rachel realized their historical perceptions of each other were not necessarily reflective of their current realities and were better able to understand one another.

 

Takeaways

Professional mediation is not a threatening or intimidating process. Mediators lay the foundation for healthy communication which ultimately serves to enhance the overall well-being of your family.

Seeking help from professional mediators who are outside of traditional planning roles (e.g. lawyers, accountants, advisors, etc.) can be immensely beneficial to the planning process.

At Intent, we work with a collaborative collective of professionals and are therefore adept at bringing in the best individuals to meet the unique needs of every client to ensure your long-term welfare.

 

Connect with us to learn how mediation can help advance your financial, estate and succession planning goals.

Exit Planning: What Baby Boomer and Millennial Business Owners Have in Common

In the world of business ownership, “exit planning” is still misunderstood.

For mature business owners, the term “exit” can make them feel as though they are being rushed into retirement. For Gen X (1965-1980) and Millennial (1981 -2000) business owners, the idea of “exiting” may seem like a vague and distant event with very little impact on the day-to-day demands of owning a business.

In fact, exit planning involves much more than simply “exiting”. It is a holistic approach to maximizing the value of your business in the present, to achieve optimal value in the future when it’s time to transition or sell. Just as a baby boomer planning on retiring in the next 10-20 years needs an exit plan, so does a millennial business owner who’s just starting out.

This is especially apparent given the potential for an entrepreneurial boom in the coming years, “beginning with two of the biggest demographic forces shaping the U.S. [and Canadian] economy: the aging of boomers and the emergence of millennials into the workforce” (Kaufmann Foundation, Sixth Annual State of Entrepreneurship Address).

Millennials are expected to be the most educated and entrepreneurial generation to date; surpassing even baby boomers whose needs, desires, and ambitions have consistently stimulated the creation of numerous global industries and cultural shifts. This said, millennials also have the most student debt in history and fewer financial means than many baby boomers did when they were starting a business.

An exit plan can help to mitigate financial stress by refining the direction of your business and ensuring it runs smoothly. Amongst other things, a comprehensive financial analysis (i.e. bank fees, pay-roll, assets, inventory, processes, etc.):

  • Increases stability
  • Standardizes business processes
  • Provides a valuation of your business and,
  • Fosters team enlightenment and empowerment

As millennials increasingly join the workforce, they will continue to challenge companies to redefine what it means to work effectively, be productive, and attain success. They are likely to change careers more than previous generations and will strive to attain a work-life balance, even if it means foregoing promotions or pay increases. Some millennials may start, sell, and/or buy numerous business in their lifetimes and having an exit plan means your business is attractive, saleable, and leverageable when the next great opportunity comes knocking.

Connect with us to learn more about building your exit plan.

Exit Planning is a Journey, Not a Destination

To many baby-boomers, the idea of retirement is more terrifying than it is exciting.

For the generation of entrepreneurs who invented the 50-60 hour work week, the thought of shifting away from a work-centric lifestyle can be unfathomable. Countless hours – years of your life– have been invested in growing your business and its continuation and success is significant.

In the next 10 to 20 years, the majority of baby-boomers will be ready to transfer their businesses. This will create a buyer’s market and making your business attractive will be key to a successful sale.

In other words, younger generations (Gen X and Gen Y) will have the opportunity to be very selective with where they invest their money. In his book Walking to Destiny, Christopher Snider writes, “only 2 out of 10 businesses that go to market will actually sell.”

For those business owners that expect to transfer their business to a family member, only 30% of all family-owned businesses survive into the second generation. Twelve percent will still be viable into the third generation, with 3% of all family businesses operating at the fourth-generation level and beyond” (Joseph Astrachan, Ph.D., editor, Family Business Review).

Creating a succession or exit plan is one of the best ways to ensure you either get the best value from your business or that it continues to thrive when it comes time to start the third-act of your life. Pulling all your key advisors – lawyer, accountant and financial advisor, to name a few – together to work with a Certified Exit Planning Advisor (CEPA) will enable you to build an exit plan considering all scenarios.

Questions like “who will I be when I am no longer a business owner?” and “how do I want to spend my time in retirement?” can be intimidating enough to dissuade business-owners from establishing an exit plan. Sometimes, baby-boomers are put-off by the thought of transferring their businesses to younger generations for fear that years of hard work will be squandered by those who don’t understand their vision.

The key thing to remember is: exit-planning is a journey, not a destination. A critical aspect of establishing and running a business is also having a succession strategy in place, even if retirement is decades away.

Having an exit plan, put simply, is good business strategy. It integrates business, personal, and financial goals and works to maximize business value while also prioritizing what life after business will look like.

If you have any questions about your exit plan or how to find a Certified Exit Planning Advisor to help you make yours, connect with us.