New Rules governing the Canada Pension Plan took full effect in 2016. Under these rules, the earliest you can take your CPP Pension is age 60, the latest is 70. The standard question regarding CPP remains the same – should I take it early or wait?
If you take it at the earliest age possible, age 60, your CPP income will be reduced by 0.6% each month you receive your benefit prior to age 65. In other words, electing to take your CPP at age 60 will provide an income of 36% less than if you waited until age 65.
CPP benefits may also be delayed until age 70 so delaying your CPP benefits after age 65 will result in an increased income of 0.7% for each month of deferral. As a result, at age 70, the retiree would have additional monthly income of 42% over that what he or she would have had at 65 and approximately 120% more than taking the benefit at age 60. The question now becomes, “how long do you think you will live?”
Assuming that an individual has $10,000 of CPP pension at age 65, and ignoring inflation (CPP income benefits are indexed according to the Consumer Price Index), the following table compares the total base income with that if benefits are taken early or late:
Total benefit received CPP Benefit Commencement
Age 60 Age 65 Age 70
One year $ 6,400 $ 10,000 $ 14,200
Five years $ 32,000 $ 50,000 $ 71,000
Ten Years $ 64,000 $100,000 $142,000
The question of life expectancy can be a factor in determining whether to take your CPP early. For example, according to the above table if you take your pension at age 60, by the time you reach age 65; you would already have received $32,000 in benefits. With $10,000 in pension income commencing at age 65 the crossover point would be age 73 (the point at which the total income commencing at age 60 equals the total income commencing at age 65). If you were to die prior to age 73, you would have been better off taking the earlier option.
If your choice is to delay taking the pension until age 70 instead of 65, the crossover would not be reached until age 85.
Some individuals may wish to elect to take the pension early and invest it hoping that the income from age 60 combined with the investment growth will exceed the total income that would be received by starting at 65.
Remember, if you elect to take your pension before 65 and you are still working, you must continue to contribute to CPP. After age 65, continuing contributions while working are voluntary. On the plus side, these extra contributions will increase your pension under the Post-Retirement Benefit (PRB).
Reasons to take your CPP before age 65
Reasons to delay taking your CPP to age 70
This information should help you make a more informed choice about when to commence your CPP benefits. Even if retirement is years away it is never too early to start planning for this final chapter in your life. Call me if would like to discuss your retirement planning.
If you are an active investor, your investment holdings probably include many different asset classes. For many investors, diversification is a very important part of the wealth accumulation process to help manage risk and reduce volatility. Your investment portfolio might include stocks, bonds, equity funds, real estate and commodities. All these investment assets share a common characteristic – their yield is exposed to tax. From a taxation standpoint, investment assets fall into the following categories:
The income from these investments are taxed at the top rates. They include bonds, certificates of deposits, savings accounts, rents etc. Depending on the province, these investments may be taxed at rates of approximately 50% or more. (For example, Alberta 48.0%, BC 49.8%, Manitoba 50.4%, Ontario 53.53%, Nova Scotia 54.0%).
These investments are taxed at rates lower than those that are tax adverse. These investments include those that generate a capital gain (stocks, equity funds, investment real estate, etc.), or pay dividends. The effective tax rate on capital gains varies depending on province from approximately 24% to 27%. For dividends, the range is between approximately 30% to 41.6%.
Tax deferred investments include those investments which are held in Registered Retirement Savings Plans or Registered Pension Plans (such as an Individual Pension Plan). One advantage of these investments is that the contribution is tax deductible in the year it was made. The disadvantage is that the income taken from these plans is tax adverse as it is taxed as ordinary income and could attract top rates of income tax.
The growth in cash value life insurance policies such as Participating Whole Life and Universal Life is also tax deferred in that until the funds are withdrawn in excess of their adjusted cost base while the insured is still alive, there is no reportable taxable income.
Very few investments are tax free in Canada. Those that are tax free include the gain in value of your principal residence, Tax Free Savings Accounts (TFSA’s) and the death benefit of a life insurance policy (including all growth in the cash value account).
While Canada is not the highest taxed county in the world (that distinction belongs to Belgium) it is certainly not the lowest. (According to the Organization for Economic Co-operation and Development, Canada sits as the 23rd highest taxed country in the world). It is also true that in addition to the taxes Canadians pay while they are living, the final insult comes at death.
Generally speaking, you have three beneficiaries when you die. You have your family, your favourite charities, and the Canada Revenue Agency. They all take a slice of your estate pie. Most people would rather leave more to their family and charities than pay the CRA more than they need to.
As our estates grow, they include funds that we intend to leave to our children and possibly to charity. They also include funds we are likely never going to spend while we are alive.
The secret to optimizing the value of your wealth for the benefit of your estate is to re-allocate those assets that you are never going to spend during your lifetime from investments that are tax exposed to those that are tax free.
One of the best ways to do this is through life insurance. As mentioned earlier, assets which are tax free include the death benefit of a life insurance policy. Systematically transferring funds from the tax exposed investments to, for example, a Participating Whole Life Policy, not only eliminates the reportable tax on the funds transferred, it greatly increases the overall size of the estate to be left tax-free to your beneficiaries – your family and your charities.
Let’s consider Ron and Sharon, aged 58 and 56 respectively. They have been told that they have a liquidity need of approximately $1,000,000 which would become payable at the second death. They are also unhappy about the taxes they are paying annually on their investments. They elect to re-allocate some of their assets to a Participating Whole Life policy for $1,000,000 with premiums of $31,890 for 20 years.
Over this period, they will transfer a total of approximately $640,000 of investments exposed to income tax to a tax-free environment. If we assume that their life expectancy is 35 years, the Whole Life policy will have grown to a death benefit of approximately $3,300,000*. This represents a pre-tax equivalent yield over this period of approximately 11%. Not only is there more than enough to pay the tax bill but there are funds left over for the family and any charitable donation they wish the estate to make.
In addition, with the transfer from a taxable to tax free investment, income taxes that would have been paid during their lifetime has also been reduced. Along the way, the Participating Whole Life policy has a growing cash value account which could be borrowed against should the need arise. At the 20th year for example, the cash value of the policy (at current dividend scale), would be slightly under $1,000,000.
This case illustrates only one example of how it is possible to optimize the value of an estate through asset re-allocation. By using funds you are never going to spend during your lifetime, you can create a much larger legacy to benefit others while reducing the total cost of your tax bill.
If you would like to investigate this concept to determine the value it can provide you and your family, please be sure to contact me. As always, please feel free to share this information with anyone you think would find it of interest.
* Values shown are using Equitable Life’s Equimax Estate Builder assuming current dividend scale for 2018.
Owners of very successful private corporations are well aware of the importance of cash flow. Many are protective of how they allocate corporate capital so that business ventures are adequately funded and investment opportunities are not missed.
The Immediate Financing Arrangement offers an opportunity to provide life insurance coverage and accumulate wealth on a tax-advantaged basis without impairing corporate cash flow.
An IFA is a financial and estate planning strategy that:
· Combines permanent, cash value life insurance with a conservative leverage program allowing the dollars allocated to the life insurance premiums to do double duty by still being available for business and investment purposes;
· In the right circumstances and when structured properly so that all possible tax deductions are used, an improvement in cash flow could result.
IFA`s are not for everyone. For those situations that best match the necessary criteria, however, significant results can be achieved. The best candidates for an IFA usually are:
· Successful, affluent individuals who are active investors or owners of thriving privately held corporations who require permanent life insurance protection;
· Of good health, non-smokers, and preferably under age 60;
· Enjoying a steady cash flow exceeding lifestyle requirements;
· Paying income tax at the highest rate and will continue to do so throughout their life.
· An individual or company purchases a cash value permanent life insurance policy and contributes allowable maximum premiums;
· The policy is assigned to a bank as collateral for a line of credit;
· The business or individual uses the loan advances to replace cash used for insurance purchase and re-invests in business operations or to make investments to produce income. This is done annually;
· The borrower pays interest only and can borrow back the interest at year end;
· At the insured’s death the proceeds of the life insurance policy retire the outstanding line of credit with the balance going to the insured’s beneficiary;
· If corporately owned, up to the entire amount of the life insurance death benefit is available for Capital Dividend Account purposes.
Proper planning and execution is essential for the Immediate Financing Arrangement. However, if you fit the appropriate profile, you could benefit substantially from this strategy.
If you wish to investigate this strategy and whether it can be of benefit to you, please contact me and I would be happy to discuss this with you. As always, feel free to use the sharing icons below to forward this to someone who might find this of interest.
(Back to Back Long Term Care)
Will your family be affected by the costs of caring for an aging loved one?
Statistics Canada states that over 350,000 Canadians 65 or older and 30% of those older than 85 will reside in long term care facilities. With increasing poor health and decreased return on investments, the fear of facing financial instability in your declining years is real.
How will this impact your family?
Caring for an aging parent or spouse takes its toll emotionally and financially. Adult children with families and job pressures of their own are often torn between their obligations to their parents, children and careers. This often results in three generations feeling the impact of this care.
Is it important to you to have control over your level of care?
· The cost of providing for long term care is on the rise
· While many Canadians assume that full-time care in a long term care facility will be fully paid by government health programs; this simply is not the case. In fact, only a small part (if at all) of the costs of a residential care facility will be paid by government health care programs
· 28% of all Canadians over the age of 15 provide care to someone with long term health issues
· For the senior generation, the prospect of the failing health of a spouse puts both their retirement funds and their children’s or grandchildren’s inheritance at risk
· Capital needed to provide $10,000 month benefit (care for both parents) for 10 years is $ 1,000,000 (if capital is invested at 4% after-tax)
Norman (age 64) and Barbara (age 61) have three children, aged 32-39. While still in good health the family does have a concern for their future care.
To safeguard against failing health it was decided that they purchase Long Term Care Policies to protect their quality of care and a Joint Last to Die Term 100 Life Insurance Policy to recover the costs.
The Long Term Care policies would pay a benefit for facility care in the amount of $1,250 per week for each parent. The monthly premium for $10,000 per month Long Term Care for both Norman and Barbara is $544.17.
The Premium for a Joint Last to Die Term to Age 100 policy with a death benefit of $250,000 is $354.83 per month.
Upon the death of both parents $250,000 is paid to the beneficiaries (children) tax free from the life insurance policy, returning most if not all of the premiums paid.
Advantages of the Long Term Care Back to Back Strategy· Shifts the financial risk of care to the insurance company
· Allows for a comfortable risk free retirement
· Preserves estate value for future generations
When is the best time to put this structure in place?
· Remember, the older the insured, the higher the costs
· Do it early while you are still insurable!
Please call me if you think your family would benefit from this strategy. Feel free to use the sharing icons below to forward this to someone who might find this of interest.
Should you wish to learn a little more about long term care, the Canadian Life and Health Insurance Association (CLHIA) has published a brochure which can be downloaded here
There are a number of obstacles that could potentially de-rail a comfortable retirement. These include marriage breakdown, a stock market crash, and being sued. Another huge obstacle would be the diagnosis of a life threatening critical illness affecting you or your spouse. While it might be difficult to insulate yourself against some of the threats to retirement security, Critical Illness insurance goes a long way to mitigate the financial disaster that could result from a change in health as we approach retirement.
Considering that the wealth of many Canadians is comprised of the equity in their homes and the balance of their retirement plans, having to access funds to combat a dreaded illness could put their retirement objectives in jeopardy. Imagine that you are just a few years into or approaching retirement and you or your spouse suffers a stroke. The prognosis is for a long recovery and the cost associated with recovery and care is projected to be substantial. Statistics show that 62,000 Canadians suffer a stroke each year* with over 80% surviving* many of whom would require ongoing care. Since 80% of all strokes happen to Canadians over 60 those unlucky enough could definitely see their retirement funding jeopardized.
Sun Life recently reported that for a 45-year old couple, the risk of at least one spouse having a serious health condition by age 70 is 61.5%. With odds like these it is fortunate that a product exists that will provide tax-free cash to help defray the expenses associated with the care and recovery from a serious illness. Accessing retirement plans on the other hand, would trigger income tax on the funds withdrawn, adding to the financial burden.
While statistics indicate that the chances of having a critical illness are high, they also support the notion that those with the foresight in their planning to include Critical Illness insurance have a greater chance of keeping their retirement funds intact.
Critical Illness insurance is offered by most major Canadian life insurance companies. It can be purchased with different terms, from 10-year renewable to permanent plans providing protection up to age 100. Like most insurance products the cost is based on the age of the insured so the younger you get it the lower the cost will be. While 10 or 20-year plans are appealing based on price, consider how long you will need the coverage for.
If you wish to keep the policy into your retirement years, for the reasons stated here, a permanent plan or one that offers coverage to age 75 may be preferable, as premiums are locked in at lower rates. Some policies offer a Return of Premium rider that refunds premiums paid when the contract expires or is cancelled with no critical illness claim.
Saving for retirement is always a good idea and protecting your savings in the event of a critical illness is essential. It may be wise to consider doing it now, while you are still in good health and can take advantage of lower premiums.
It has been said that a Will is the last message you will leave your family. Having a Will can provide clear direction as to what your wishes are and who will get what. Die without a Will (known as dying intestate) and chaos will likely be the result. Having a Will allows you to provide for certainty instead of chaos.
Most of the reasons to have a Will have to do with what happens if you don’t have one and that often will depend on what province you reside in. Each provincial government has its own Wills and Estate legislation which also provides for the rules regarding intestacy. The following are some of the reasons to have a Will and what could result without one.
1. Informs your family how and when your property is to be distributed
Your Will affords you the opportunity to give clear instructions as to whom will receive your wealth. It also allows you to make bequests of certain items such as family heirlooms which you may wish to leave to a specific individual. For those who wish to leave funds to a charity, the Will allows you to do this. Without a Will, this opportunity may be lost. The bottom line is that you make the call. Dying without a Will means that the provincial government will make the determination on how your estate is to be distributed depending on the intestacy laws.
For example, if there is a spouse and children, the spouse will usually receive a specified amount. That amount can vary between $200,000 and $300,000 depending on the province. Any amounts over that are, for most provinces, split between the children and the spouse. The amounts due to the children, however, are not received by them until they reach the age of majority. Up until then, those funds are administered by the provincial government. If you reside in Alberta or Manitoba the children receive nothing, and all goes to the spouse.
If you die without a spouse and without children, then the assets will be left to parents, siblings, nieces and nephews, in that order. The government will receive all if there are no relatives. And remember those family heirlooms that you could dictate to whom they went in your Will? Without a will those and other similar assets will most likely have to be sold so the estate can properly be distributed.
2. Allows the testator to name an Executor
The task of the Executor is to administer the estate and ensure that the testator’s wishes are carried out. Without a Will, there is no Executor, and an administrator must be appointed by the government. Usually, this will be the spouse, but if the spouse is not willing or capable then someone else will have to be found to carry out this function. Regardless, the result usually will be unnecessary delays and increased expenses.
In administering estate assets, the role of an Executor also helps to ensure that there is no loss of estate assets due to lack of oversight prior to the assets being distributed.
3. Protects a common law spouse
British Columbia, Saskatchewan, Manitoba, North West Territories and Nunavut recognize common law marriages where the parties have lived together for more than two years. In these jurisdictions common law spouses have the same rights as a married spouse. In all other provinces, however, they are not recognized and as a result are entitled to nothing. There may be exceptions where a dependency claim can be made to the courts, but that could prove to be expensive and result in significant delays. It also could result in other family members making objections to the court. With a properly drafted Will, the rights of a common law spouse are protected.
4. Naming a guardian for your children
Having the choice as to who will look after your children should you die is an extremely important reason to have a Will. This is especially true in the case of a common disaster involving both parents. Consider the unimaginable scenario in which the decision as to who should be the guardian of your children was left to the courts.
5. Leaving instructions for your funeral, burial or cremation
A Will affords you the opportunity to leave concise instructions regarding your funeral arrangements. Dying without a Will or with no clear directive could cause stress and family discord.
6. Proper estate planning can result in income tax savings
Estate planning, including a properly drafted Last Will and Testament, may result in tax savings. On the other hand, dying intestate will see this opportunity lost and administrative costs increased.
It is unfortunate that many Canadians do not have a Will. While there may be some circumstances where a Will is not necessary, for those Canadians who are married and have children, a Will is vital and should not be overlooked. Ideally, a Will should be drafted by a lawyer who is acquainted with all the technical requirements and contingencies that come into play.
If you are without a Will, talk to a professional who can assist you as soon as you can.
One of the many advancements in medicine has been the use of genetic testing in determining the probability that an individual will develop a life- threatening illness or condition. Knowing that you or your children are not at risk of a major illness can be of great comfort while knowledge to the contrary can be of great value in preventative treatment and planning. The most famous example of this is the American actress Angelina Jolie undertaking a double mastectomy after learning that she carried a gene that made developing breast cancer a very high probability for her.
There has been a growing concern, however, that individuals would be very reluctant to undergo genetic testing if knowing the results could affect their ability to properly insure themselves or impact their opportunities for employment. As a result, a private member’s bill, Bill S-201, was introduced in the Canadian Senate resulting in the Genetic Non-Discrimination Act being recently enacted into law.
What does the Act do?
It is now illegal for employers, insurance companies, or any other entity or individual to require anyone to undergo genetic testing or to disclose the results of a genetic test before entering into a contract of employment or a contract which provides goods or services. Now, if you apply for life, disability or critical illness insurance, you cannot be denied coverage due to the results of a genetic test. Insurance companies and their agents are also prohibited from “collecting, using or disclosing” the results of a genetic test without an individual’s written consent. Penalties for not complying with the new law are severe.
It is interesting to note that the insurance industry in Canada has never required an applicant to undergo genetic testing in order to underwrite an insurance application. What the underwriters did require, however, was that if an applicant did have prior genetic tests that the results of those tests be disclosed. While the new legislation was being considered before the House, the Canadian Life and Health Insurance Association announced that the industry would voluntarily agree not to ask for genetic test results for life insurance coverages up to $250,000 which represented approximately 85% of all applications.
While many are hailing the new legislation as protective of an individual’s right to privacy, the Act is proving to be somewhat controversial, and many insurance industry observers and legislators are expressing concern for a number of reasons. Even prior to the bill becoming law, the Trudeau government expressed doubt as to the law’s constitutionality and there are some who feel the new Act will undoubtedly be challenged in court (the Trudeau cabinet was against the bill but the government allowed a free vote and over 100 Liberals voted in favour). Here are the areas of concern with the new Act from some of the different stakeholders – the life insurance industry, the Ministry of Justice, and the Canadian Institute of Actuaries:
Conflict with provincial law
The Insurance Act of each province provides that any material fact relevant to an insurance application must be disclosed. The current health and probable future health of an applicant as indicated in a genetic test is certainly relevant when purchasing life or disability insurance. As a result, the new Act is in direct conflict with provincial legislation. Up until now, the regulation of insurance contracts has been strictly a provincial matter.
Penalties for violations
The Minister of Justice has expressed concerns that Canada is deviating from its normal approach in enforcing laws against discrimination. Unlike other penalties for discrimination such as race, sex or disability, the consequences of violating the Genetic Non-Discrimination Act are up to $1 million in fines and 5 years imprisonment. This is unusual to say the least.
Probably the biggest issue for the insurance industry is the anti-selection risk. Some applicants for insurance knowing their higher risk factors due to genetic testing are certain to act upon this incentive to buy more insurance than they otherwise would at what would be lower than free market rates.
Effect on premiums
The Canadian Institute of Actuaries (CIA) is of the opinion the new Act will result in higher premiums. As a result of the insurance industry being restricted in obtaining full disclosure necessary for underwriting purposes, the CIA stated that their research indicates that premiums for males could eventually go up by 30% and 50% for females.
Faced with the potential for higher premiums, anyone who is contemplating purchasing or reviewing their insurance in the near future should definitely do so as soon as possible. For now, fully guaranteed products at a fair price are the norm in Canada. Whether or not this changes as a result of the Genetic Non-Discrimination Act remains to be seen.
Many business owners know the important role that life insurance plays in effective corporate planning. Whether it be the funding of a shareholder’s agreement, life insuring corporate debt, or protecting against loss from the death of a key employee, life insurance is of great value in underpinning the financial success of a corporation. Just as life insurance needs for families change over time the same is also true for requirements of the business. If it has been some time since you have reviewed your corporate insurance needs then it is probably time for a corporate insurance audit. This is especially true if the company has enjoyed consistent or significant growth since the time the insurance was first implemented. The scope of the audit and the insurance related issues include the following:
Current corporately owned life insurance
Have the factors which affect pricing changed?
If the current coverage is renewable term insurance should the policy be re-written now before it renews at a substantial increase?
Term Life Insurance policies usually have a conversion period until age 70 or 75 allowing the policy to be converted to a permanent policy without medical evidence. If the policy is nearing the end of the conversion period your options should definitely be explored, especially if you would no longer qualify for new life insurance. Are the beneficiary and ownership designations still compliant with current income tax regulations and Canada Revenue Agency policy? For example, if your corporately owned policy has a beneficiary designated other than the corporate owner, you may wish to review that arrangement to confirm that you are not attracting any shareholder benefit or other undue re-assessment risk. Also confirm that that the beneficiary designation is consistent with Capital Dividend Account planning.
Life insurance funding of the Shareholders Agreement
Has the share value of the company increased? If it has, then the amount of life insurance that the company owns to fund the shareholders agreement should be reviewed and increased. If new shareholders have been added to the agreement, then those new shareholders should be insured in similar fashion to the others. If the company continues to grow and thrive, it may be appropriate to change the type of life insurance held to something longer term or more permanent. For example, if it is obvious that ten-year renewable term insurance does not provide a long enough term, then the coverage should be changed to 20 year term or longer, or perhaps term to 100 or permanent coverage. Insurability can be lost at any time and the longer the term of the policy the longer the current premium will continue.
Insuring the human life value
Key person life insurance is used to reimburse a company for loss in the event of the death of an employee which would severely affect profitability or share value of the corporation. Periodically the company should review the policies it maintains for this purpose to ensure that the proper amount of coverage is in place. If there is no key person insurance determine whether there should be by identifying those employees whose death would adversely affect the bottom line of the corporation.
Life insurance collateral deduction
When considering the advantages of the Capital Dividend Account it is recommended that corporate debt be life insured. If a shareholder whose life is insured for this purpose dies and the insurance proceeds retire the outstanding bank debt, even though there may not be any residual proceeds remaining a Capital Dividend Account is created that is up to 100% of the death benefit. Capital dividends can be distributed tax free to the surviving shareholders making insuring corporate debt very advantageous. In addition, the corporation can deduct from income the net cost of pure insurance of the insurance policy.
If the corporation owns life insurance on a shareholder or key employee for this purpose check to make sure that the right amount of coverage is in place. If not, there should be an additional policy purchased or perhaps a re-write of existing coverage that results in the appropriate amount. If there is current collateral term insurance in place that has been issued with a rating due to less than ideal health or other factors it is recommended that an attempt be made to re-write that coverage. It is possible that the insured can now qualify for lower standard rates of insurance resulting in a lower premium.
If the current insurance was issued with an additional risk premium due to health or other issues this would be another reason to re-write the coverage. This is because substandard policies (those with a rating) issued after December 31, 2016 now have a higher net cost of pure insurance and therefore a higher collateral insurance deduction than those issued before this date.
Be careful to protect Generation 2 policies
The provisions of the Income Tax Act dealing with the taxation of life insurance policy were changed effective January 1, 2017. These changes modified certain factors that ultimately result in the amount of death benefit that can be credited to the Capital Dividend Account. Policies issued between December 1, 1982 and December 31, 2016 are referred to as Generation 2 policies and those contracts generally provide a larger CDA contribution, that Generation 3 policies issued in 2017 and later. As a result, unless there are extremely extenuating circumstances, those policies should be maintained in their current form.
Given the demands of running a business, it’s easy to put off what may seem to be a low priority item on your to do list. Life is unpredictable so it is advisable to always be prepared for events that are out of your control. Reviewing corporate insurance coverage periodically will help to ensure that the right amount and the proper plan is in place. With the help of an experienced advisor, an insurance audit can be very advantageous and have a positive effect on both the bottom line and the balance sheet of the corporation. If you think now is the right time, give me a call and I’ll be happy to assist. As always, please feel free to share this information with anyone that may find it of interest.