“The greatest mistake we make is living in constant fear that we will make one.” – John C. Maxwell
Though there are many
misconceptions about financial planning, two common ones are:
it’s only for the
it’s only for ‘type
As’ with Herculean levels of self-discipline.
Even people in the throes of
planning – who are neither wealthy nor perfect – can find themselves deterred
by certain types of planning for fear of not having enough or making mistakes.
Estate planning, “the disposition
of assets during life and at death,”
is an example of planning that tends to inspire discomfort and aversion. At
first glance, estate planning focuses on things that require us to acknowledge
our eventual passing and really, relinquish our sense of control over our lives
and our assets. Think wills, powers of attorney and executors.
Good advisors, more than anyone,
know how hard it is to think about and plan for the time after we’re gone. Combine
these heavy emotions with the complexity of estate planning and it is
understandable why people might feel overwhelmed and prefer to ignore it
altogether. But estate planning is far more about gaining control than
relinquishing it and far less about ourselves and more about our loved ones.
For those who have been avoiding estate planning, here are three key questions
1. Do you have assets?
Although this is a straightforward
question, a lot of people overthink their answer. Young people especially, who
tend to have lower incomes and fewer assets, convince themselves they don’t
need a formal, legally binding will because they don’t have enough to bother. What
many of them don’t consider however, is their debt and how it too can be
inherited by loved ones after their passing.
Perhaps paying for a lawyer to draw
up a will isn’t practical or necessary for some but having a plan for their assets
(and debt) in the event of their passing is.
If this reasoning sounds familiar, consider writing a holographic will. It
is simply a letter of direction signed by two non-beneficiaries that outlines
how your assets are to be divided and distributed. Though more contestable than
a formal will, it is still a legally binding document unlike giving someone verbal
2. Do you have dependents?
The last thing anyone wants is for the
government to choose a guardian for our loved ones. Estate planning looks at
the impact our passing would have on loved ones and helps us determine the key
people we need to appoint (trustees, guardians, beneficiaries) to ensure our
minor children, dependents, and even pets will be taken care of in the manner
we approve. There’s no need to worry about making a mistake either, these key
players can be modified as life circumstances change.
Estate planning also addresses survivor income needs, often in the form
of life insurance. To be clear, different cultures have different opinions on
life insurance which means there is no one ‘right’ view. One way to think of it,
however, is as a method of compensating for the loss of your income and
ensuring your family has the time and resources to deal with your passing as
comfortably as possible.
3. What are your final wishes?
Rituals and practices surrounding
death vary all over the world. In Canada, having a funeral is commonplace and
so is having to make the very personal decision between burial, cremation, or
perhaps other options. Trying to plan for and make these kinds of decisions on
behalf of others can be extremely difficult and emotionally taxing.
Having a will that explicitly outlines final wishes (i.e. specific
funeral details, charitable intentions, burial or cremation preferences, etc.) can
help alleviate stress on loved ones and ensure they don’t grapple with the
choices they may otherwise be required to make.
Even if our natural inclination is
to shy away from estate planning – whether it is because we’re afraid of making
mistakes others will suffer the consequences of (i.e. triggering taxes) or
because of the unease thinking about death brings – it’s important to keep in
mind that having a plan keeps us feeling in control and at ease.
As difficult as it may be to
imagine the time after we’re gone, it is so much more comforting to know our
planning can help soften the impact of our eventual absence on our loved ones and
hopefully, enable their continued protection and prosperity.
For help establishing or revising your estate plan, contact us.
Whether you are in the early stages a new business or in the
start-up phase of building a business there are many financial planning
decisions to make. Planning for potential future problems is important to
ensure the continuation of the business is not impacted.
Business owners in the start-up phase tend to focus on
getting their business running, finding customers and launching into the market
place. Many business owners are often too busy with the day-to-day operations and
often put off planning. A financial planner will help identify problems that may
arise and protect owners and the business from the impact.
“Everybody has a plan
until you get punched in the face.” –
Three Important Planning
Considerations in the Start-Up Phase:
Structure – What
type of business structure do I need to set up? Setting up a business structure
(sole proprietor, partnership, corporation) will have an impact on initial
start up costs, control and flexibility in management, taxation of the business
and individual owners, plus the business risks for the individual owners. The
choice of the type of structure requires consultation from a business
professional to ensure the structure is right for your business.
Cash Flow – What
is the best and right type of financing for my business? What type of debt
protection do I need? Many start up businesses have most of their capital
invested and continue to reinvest in the business. This may result in business
loans or limited cash flow in the early years. Ensuring the business can
continue to repay loans in an unforeseen event is crucial for long-term success.
Key people – How
do I protect my business if a key person is not able to work? As a business owner you and any business
partners involved in the operations are key to the success of the business. An
unexpected loss, sickness or injury could threaten business operations and
success. Building a plan that protects current and future risks is vital to continuation
of the business. Protecting income needs for the individual owners and their
families should also be planned for.
Working with a team of business planning professionals such
as financial planners, lawyers and accountants is vital. This team can help
ensure problems are avoided or at least mitigated with proper planning. Building
a network of trusted advisors will help you
prioritize your goals and protect you from unforeseen risks.
The 2016 Small Business Owner
Study conducted by Environics Research Group revealed entrepreneurs would
handle some of their decisions and plans differently if they could start over. One
of the top 10 things these business owners would have done differently was to
seek out assistance from professionals such as financial advisors and lawyers.
If you have any questions about your business’s financial
plan or how to find a financial advisor to work with you to develop yours, connect with us.
The more organized you are, the less stress you will feel. Start
thinking about how you can make next year’s tax season easier with these tips to
keep your finances in order.
1. Review Tax Filings from Previous Years
For most people, the changes from one tax year to the next are relatively slight. Previous tax returns are great reminders of areas that can easily be overlooked, such as interest or dividends, capital loss carry-forward balances, and infrequently used deductions. If there were any problem areas last year that were extra complicated, try to brainstorm how you can simplify the process and better prepare yourself for this next tax season. This could mean being better organized this year, filing earlier in the year, or even deciding to get professional tax help instead of doing taxes yourself.
2. Keep All Your Tax Information Together
Have you ever gone through a drawer and found a receipt from several years ago but cannot remember if you deducted it or not? Keeping your returns and documents together year to year will help you remember what items you have deducted, what you need to track and what you don’t. Start a new folder or filing system now for 2019 and keep everything in one place. The most important thing is to create a system that works for you. Tracking documents can be the most stressful part of tax season. Some items most commonly tracked are: charitable donations, medical expenses and business expenses.
3. Save and Track Business Expenses
In general, if you are running a side business, small
business or start-up, and are trying to claim certain items as business
expenses during the year, you are going to have to justify these expenses. Save
or track, any items you think you might want to claim as a business expense. You
may not end up claiming them, but it is easier to discard receipts and
documentation than wish you had them.
Tax software can be your friend. If you have software like QuickBooks or Zero you can put a system in place to track expenses, all those small missed deductions can add up. If your business can justify hiring a bookkeeper or accountant, consider outsourcing the burden of taxes and the stress of month-to-month tracking so you can focus on running your business.
4. Go Electronic
Many of your monthly bills or receipts are now e-statements
or electronic PDFs. Start an electronic folder to track bills or monthly statements
for credit cards, bank accounts, charitable donations and expenses. Many companies provide an option to have the receipt sent to you
electronically after a purchase. If that option is not available, take a photo
of the receipt with your phone and save it your electronic folder. Be sure to back up your files in the
case of a crash or accidental deletion and to add extra protection password
protect your folder or individual files.
5. Prepare Yourself for Any Taxes You May Owe or Plan
for Your Refund
Not everyone will get a tax refund. Many will
actually owe money in taxes after filing. If you will likely owe on your
taxes, take steps and budget to ensure you can pay the amount owed. You don’t
want to be caught off guard when filing and be unprepared to pay the taxes owed.
Depending on your finances, what you do with
your refund could change each year. Is there a debt you need to pay off? Is
there a vacation you want to use your refund for? Do you want to save your
refund money for an emergency? Do you want to deposit to your RRSP or TFSA? Take
a look at your finances or consult with your financial advisor when determining
what your refund should go towards.
Feel free to connect with us to discuss your tax
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.
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
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.
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
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
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
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,
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
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.
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.
“Do the best you can until you know better. Then when you know better, do better.” ~ Maya Angelou
There can be some unexpected emotions at play for those in the early stages of financial planning. Besides the normal ‘geez what DO I want my life to look like when I’m in retirement?’ confusion, people may find themselves grappling with more complex, uncomfortable feelings like guilt and shame.
Why do people feel guilt or shame? It may be because they feel like they should have ‘saved more by now’ or have a belief that ‘everyone is saving and planning better than I am’. It is important to remember that financial literacy is not “common sense” and figuring how and where to start building a plan can be overwhelming, even with professional guidance.
But here’s the thing. Establishing a financial plan is one of the most effective ways to replace guilty feelings toward money with a sense of control and empowerment. A recent study done in the U.S. shows a correlation between amount of savings (not necessarily income) and overall happiness; the more you have, the greater your sense of well-being. In other words, there is no point feeling guilty about what you have or haven’t done to date because it’s already done. So, let the guilt and shame go and commit to building a plan and taking steps forward.
You have likely heard the ‘rules of thumb’ when it comes to investing. “Save 10% of your income”, is one of the better known ‘rules’ and is often the one that can cause people the most anxiety. These ‘rules’ are actually more like ‘in ideal situations, it is best to’. For example, if saving 10% of your income is not possible for your lifestyle, then lower it. Even one per cent is better than zero. The earlier you can begin saving for your future, the more impact compound interest will have on your investments.
Selecting an experienced financial advisor will bring outside, unbiased insight into your current situation and determine the best road forward. A good financial advisor will work with you to move your plan towards where you want to be in the future. As life, circumstances, and demands on our resources change, a good advisor will review and modify your plan to keep you working towards your goals and ultimately, a sense of well-being.
Regardless of all the ‘rules’ of investing, they don’t apply equally to every investor and may not apply at all, in some cases. Your best bet is to work with a financial advisor to build your long-term plan, work on achieving it, and modify as needed.
Be kind to yourself. Financial planning reality is different for everyone and taking any steps in the right direction is a move forward.
Connect with us to learn how you can learn how to start today and ease your mind.
In the simplest terms, capital gains are ‘gains’ usually monetary, obtained from the sale of capital property. Capital property can be real estate or securities like shares and stocks. The gains are the positive difference between what you paid for the item and what you sold it for, minus any legitimate expenses connected to it and the sale of it.
In Canada capital gains are taxed based on your marginal tax rate, which varies by province. However, only 50% of the gains are taxable. For example, on a capital gain of $100,000, only $50,000 would be taxable. So, for a Canadian in a 33% tax bracket, a $50,000 taxable capital gain would result in $16,500 taxes owing. The remaining $83,500 is the sellor/investors’ take. (The Canadian Revenue Agency offers step-by-step instructions on how to calculate capital gains.)
When it comes to vacation properties like cabins, capital gains are the difference between the purchase price and the selling price, minus the cost of any enhancements (not including ongoing upkeep) made to the property.
For the sake of this discussion, let us consider:
A family cabin purchased for $100,000 and worth $500,000 today
The cabin is owned by a mature couple (parents) with two adult children
For this example, assume the parents’ will is set up to transfer their share of the cabin between the couple after the first of the pair dies and then to their adult children after the last parent dies.
In this case, the capital gains wouldn’t be triggered until the last parent dies and the cabin transfers to the adult children. The capital gains tax would be due immediately as the asset, cabin, is deemed to have been sold to the second generation once the remaining parent dies. So, capital gains would be calculated based on today’s $500,000 fair market price minus the original $100,000 purchase price, with 50% of the $400,000 capital gain taxable.
During the time the cabin was owned by the parents if any capital expenditures were done, outside regular maintenance, like an addition for example, the costs associated with that addition can be subtracted from the overall capital gains.
For the purpose of this example, an addition was done and cost $50,000, leaving $350,000 as the capital gains and $175,000 as the taxable portion of the capital gain. The capital gains tax will be payable by the estate at the marginal tax rate of the estate. If the estate is rich in property and low in investments or cash, a sale of one of the properties may be needed to pay the taxes.
There are many variables involved in transferring a cabin between generations. Some of these variables include: primary residence status, multi generational transfer with multiple kids, joint owners, blended families, and more. It is easy to see how important planning for the cabin’s transition is and how complex it can become – it is worth the time invested to ensure the family cabin is passed onto the next generation in the most tax efficient manner.
There is no way to avoid paying capital gains tax. However, there are ways to plan when to incur tax and be prepared to cover the cost. Connect with us to learn more about what you can do to prepare for your cabin’s future.
Please subscribe to our blog for ongoing helpful information.