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New Liberal tax implications for each of us

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taxes

As we sit here in the last quarter of 2016, the new tax brackets ushered in by the Federal Liberals are about to become reality as people begin preparing their tax returns early next year.

The Liberal web site states:

  • When middle class Canadians have more money in their pockets to save, invest, and grow the economy, we all benefit.
  • We will cut the middle income tax bracket to 20.5 percent from 22 percent – a seven percent reduction. Canadians with taxable annual income between $44,700 and $89,401 will see their income tax rate fall.
  • This tax relief is worth up to $670 per person, per year – or $1,340 for a two-income household.
  • To pay for this tax cut, we will ask the wealthiest one percent of Canadians to give a little more. We will introduce a new tax bracket of 33 percent for individuals earning more than $200,000 each year.

For Ontarians the new tax brackets generally mean that those earning an income between $45 – 90k will be paying less tax than last year, and those earning $200k and up will be paying more.

While income tax reduction strategies like RSP contributions can be done early next year for the 2016 tax year, other’s need to be done before year end in order to be applied to 2016.  Some examples include:  tax loss selling, sharing capital losses with a spouse, or strategic withdrawals from RIF / RRSP accounts.

Our Income Tax calculator is a great starting point to assist in some year-end tax planning.  It can quickly provide an estimate of taxes owing, your marginal tax rate on various forms of income, and your annual net take-home amount. 

For high income individuals earning $200k+, our rather unique tax strategy may be able to provide some significant annual tax savings.  Take note of these potential tax savings highlighted in the bottom section of our calculator*.

*Time is running out to participate in this strategy for 2016.  Contact a TriDelta advisor soon to see if it can work for you.

Lorne Zeiler
Written By:
Brad Mol, CFP, CIWM, FMA
VP, Wealth Advisor
brad@tridelta.ca
416-802-5903

Should I take CPP before age 65?

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Two thirds of Canadians take their CPP benefits before age 65, but determining what’s best for you demands that you better understand your options. First let’s consider the rules around taking CPP – which changed January 1, 2012. The chart below from www.moneysense.ca provides a nice summary.

whatnewscpp

You can start collecting CPP (Canada Pension Plan) any time after age 60, but this will result in a reduced amount based on how many months prior to age 65 you are when you begin collecting. Given this reduction, part of answering the question on whether or not to take CPP early will involve crunching some numbers. Our new ‘Early CPP Calculator’ can help, and is found in the Resources section of our website.

Understanding how much CPP you may be entitled to is an important first step, but is not the only variable to consider. Other factors to consider include:

  1. Cash flow. If you need the funds in order to pursue interests while you’re still healthy, this would likely trump any other factor.
  2. Poor health. This likely means that you will have a shorter life expectancy than average and as a result you should start drawing CPP earlier.
  3. Excellent health and longevity in the family. This would suggest you consider delaying the start of your CPP payments because you’ll collect more over time if you live a long life.
  4. Tax implications. Taking CPP increases your taxable income and may affect your decision on when to take it (OAS, GIS thresholds).

The most difficult variable of course is not knowing when you will die. For this reason, outside of a few scenarios that may strongly suggest certain action, the CPP decision will always remain a calculated guess. A personal financial plan can help identify how CPP should fit within a broader retirement income strategy. For more information on CPP visit the Service Canada website.

Lorne Zeiler
Written By:
Brad Mol, CFP, CIWM, FMA
VP, Wealth Advisor
brad@tridelta.ca
416-802-5903

Turn a spouse’s loss into your gain

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Before rebalancing a portfolio for a new client, I make it a habit to confirm the Adjusted Cost Base (ACB) of any holdings in non-registered investment accounts.   In knowing the ACB, I’m able to know the capital gain (or loss) that would be triggered and the associated tax liability (if any) of selling the portfolio.  Now, we don’t want to let the ‘tax tail wag the dog’ so to speak; if the portfolio needs to be changed it needs to be changed.  But if we can save taxes while doing so clients certainly appreciate it!

I recently came across a situation where using a little known strategy, I was able to do just that.  Let’s call these clients Bob & Sue.

Sue is a high income earner (48% marginal tax rate) while Bob earns less and has a marginal tax rate of 20%.  Sue has a non-registered investment account in her name only, with a capital gain position of $30k.  Bob also has a non-registered investment account in his name with a capital loss position of $30k.  The tax liability for the household ‘as is’ would be $4,200 as follows:

Sue:  ($30,000 gain x 50%) x 48% = $7,200 owing.
Bob: ($30,000 loss x 50%) x 20% = $3,000 value of carrying loss forward.

If Sue had capital losses from previous years she could use them to offset her taxable capital gain.  In this instance, she did not.

Bob has a capital loss which he can carry back three years, or carry forward indefinitely to offset gains in other years.  However, being the lower income spouse the loss is less valuable to the household.  This is where the strategy comes in.

Bob sells the securities in his account for $40k (with an ACB of $70k) incurring a capital loss of $30k.  Sue immediately buys the same number of shares of the securities for $40k.  This step triggers the superficial loss rule, which comes into play when a taxpayer sells securities at a loss, and the identical property is acquired by the taxpayer, their spouse, or a corporation controlled by the taxpayer or their spouse within a 61-day period around the sale (30 days before the sale and 30 days afterward).  Under this rule Bob is denied use of the $30k loss, and the amount is added to the cost base of the securities purchased by Sue.

Sue’s cost base has now increased to $70k.  She must hold the securities for at least 30 days, but can sell them any time after that.  If we assume the share prices stay the same during that period, she will be able to declare a loss of $30k on the sale.  This loss can be applied against the capital gains in her account thus eliminating the $4,200 tax liability for the household.

While this wouldn’t apply to too many clients, it is an example of the types of strategy that we at TriDelta try to consider for all clients – wherever it can add value.

Brad Mol
Written By:
Brad Mol, CFP, CIWM, FMA
VP, Wealth Advisor
brad@tridelta.ca
(416) 802-5903

Ever Considered Loaning your Spouse Money?

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Here’s why you might.

We all look for ways to reduce the amount of tax we pay.  Sometimes I come across situations where one spouse has accumulated a larger non-registered investment account than the other.  This can happen over time when one spouse has a higher income than the other, or perhaps when one spouse receives an inheritance.

This often leads to higher taxes being paid by the household.  In an effort to reduce taxes, income splitting strategies can help shift income from a high tax bracket family member to a low tax bracket family member.

This is not as simple as making a non-registered account ‘joint’ with a lower income spouse or minor child.  CRA would consider this a gift to a non-arm’s-length person and attribution rules would apply, essentially attributing most if not all of the income back to the higher income individual and taxing it in their hands.

One income splitting strategy where attribution rules would not apply is to use a spousal loan.

A spousal loan works like this:

  •  The higher tax bracket spouse (lender) loans funds to the lower tax bracket spouse (borrower) at the prescribed rate.
  • The prescribed rate is set quarterly and is based on the 90-day Treasury bill rate.  Today that rate is at a historic low of only 1%!
  • The borrower must pay interest on the loan annually by January 30 of the following year ($1,000 for a $100,000 loan).
  • The investment income generated is taxed in the hands of the borrower, not the lender.
  • The interest paid on the loan can be deducted by the borrower and is taxed in the hands of the lender.
  • A written agreement should be put in place documenting the loan.  This also locks in the rate of 1% for the life of the loan, regardless if the prescribed rate increases in the future.

coupleTo illustrate the potential benefits of this strategy, let’s look at a hypothetical couple Tom & Mary Connor.

Tom recently inherited $500,000 from his mother.  Tom faces a marginal tax rate of 46.41% while his wife Mary’s marginal tax rate is 31.15%.  Tom plans on investing the money and can earn 5%.  For simplicity, let’s assume the 5% return is simple interest.

If Tom invests the funds himself, his after-tax return would be $13,397.

$500,000 x 5% x (1 – 46.41%) = $13,397.

Instead, Tom can lend Mary $500,000 at the prescribed rate of 1%, thereby shifting the growth on the money to Mary who is in a lower tax bracket while avoiding attribution rules.

Tom would include the $5,000 in interest on the loan as income, providing an after-tax return of $2,680.

Mary would include $20,000 in interest as income (5% return less 1% in interest costs), providing an after-tax return of $13,770

The total after-tax return for the household is $16,450.

The spousal loan strategy has provided an incremental family return of $3,053 after one year.  As the portfolio grows and the resulting income from the portfolio increases, the incremental improvement in family return also increases.

This tax-planning strategy does however have potential non-tax consequences that should be considered:

  • You may be more likely to be reassessed by CRA.
  • Tax returns become a bit more complicated.
  • If the marriage breaks down, the situation will become more complex and will be subject to family law provisions.

Your entire financial situation, goals & objectives should be considered before employing any strategy.  If you find yourself in a similar situation to Tom, a spousal loan may work very well, especially considering the historically low prescribed rate of 1% that can be locked in today.

Written by Brad Mol, Senior Wealth Advisor, TriDelta Financial

 

 

The Top Ten Family Wealth Transfer Mistakes

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Most Canadians intuitively believe they should have a wealth transfer plan, but most of us have not created one.

A business owner thinks of how to pass on the business to children at retirement.  A husband thinks about what will happen to his family if he has a heart attack and dies.  A wealthy retired couple wants to contribute to a favourite charity.

Few people want to pay extra tax while they’re alive, let alone on their wealth when they’re gone.

Yet surprisingly, an Ipsos Reid survey found that almost half of Canadians have never had a detailed discussion with their family about their final wishes.  Even more surprising is that fewer than 40% of Canadian boomers have a will!

Discussing ones inevitable death can be uncomfortable, but the failure to do so can lead to stress and hardship on loved ones during a very difficult and emotional time.

A wealth transfer strategy is an integral part of any comprehensive financial plan.  It provides:

  • Peace of mind that family is protected.
  • Ensures your assets are passed on in a manner that is consistent with your values and beliefs.
  • Can reduce excessive taxation and probate fees

This is the first installment of a series of more detailed articles on the topic of wealth transfer.

The Top Ten Wealth Transfer Mistakes

1.   Failing to have a current will

A will or other transfer vehicle needs to be in place, and these documents need to be updated when circumstances change.

2.   Having no integrated game plan

Wealth transfer involves legal, financial, tax, and emotional issues.  All must be balanced for the plan to be effective.

3.   Failing to consider all assets

All assets that must be distributed need to be considered, and their valuations need to be kept current.

4.  Not considering the tax consequences of wealth transfer and protecting assets

This includes improperly owned life insurance.  Insurance can be an important planning vehicle, but not considering who owns it could cost your estate or business.

5.   Ignoring the need for liquidity

An estate with a large portion of illiquid assets will be difficult to settle quickly and may not meet the goals set out in the original plan.

6.    Not taking into consideration all the potential beneficiaries

This includes people who either should be looked after or must be looked after.

7.    Keeping too much money in the estate

Distributing assets prior to death may be an important task.

8.    Not considering creating a living legacy

Making use of assets to benefit others while alive is an important consideration.

9.    Not considering the potential tax consequences of gifting or asset transfer between family members

Beware the attribution rules!  This failure can also affect family businesses, if an attempt to distribute the assets equally among family members compromises the business.

10.   Not taking steps to reduce taxes

Individuals have the right to find ways to decrease the amount of tax paid, increasing the amount available for distribution to people & causes that are important to them.

Article written by Brad Mol, Senior Wealth Advisor at TriDelta Financial

Tel: 905 845 4081 Email: brad@tridelta.ca

Give More, Spend Less: The Strategy for a Financial Donation

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major-charity-contribution-giftThis is a story about a couple that wanted to make better use of their hard earned money by leaving a significant legacy to the Alzheimers Society. They came to us for advice on how to execute their charitable contribution strategy, so we devised a plan. Let’s call them Joe and Susan.

As the retirement phase approached, Joe and Susan had some concerns to consider. They traveled frequently and wanted to maintain their lifestyle in retirement without fear of running out of money. At the same time, they wanted to pay as little tax as possible and help advance Alzheimer’s research to rid the world of this cruel disease.

We told them:

  • They have lots of financial flexibility to travel.
  • They will not outlive their money, but would likely have a $2 million Estate and a lifetime tax bill of $530k.
  • The $530k in taxes can be cut significantly with proper planning.
  • A good part of the tax savings can go towards charitable causes like the Alzheimer’s Society with the right strategy.
  • They can even afford to retire earlier, and potentially spend more time volunteering.

The strategy:

Joe & Susan already contributed $5,000 a year to charity, but after learning how efficient we could structure their situation, they felt they could afford to give more, and wanted to. We showed how they could substantially increase donations without it costing them much more than they had already been contributing. The Alzheimer’s Society would benefit greatly from this decision.

What we did:

  1. We set up a joint insurance policy that will pay out when they both pass away.
  2. Fund the policy with $11,000/year for 20 years. After 20 years, the policy will be fully paid for and their favourite charity will be the beneficiary of the policy.
  3. Because of the structure, Joe and Susan will receive a full donation tax credit every year of $4,400, so their net cost is just under $6,600 a year.
  4. As a result, the charity will receive a $1 million benefit!
  5. Essentially, Joe and Susan put $6,600/year in for 20 years, a total of $132,000, and the total benefit to their favourite charity will be $1 million.
  6. If Joe and Susan live to full life expectancy, the AFTER TAX rate of return on this charitable investment will be over 10%, guaranteed. There is not likely a better investment return available – especially given the low level of risk.

Joe and Susan can still give roughly $9,000 a year to charity – either through cash or stock – and help make a more immediate impact. You don’t need to donate $11,000 for this to work for you. The strategy is scalable and can be structured to match your particular situation.

To get a quick sense of your financial possibilities and what you can afford to give, use our free online calculator. Be sure to connect with us on Facebook or Twitter. This article was written by Brad Mol, Senior Financial Planner

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