Foresight Financial, Author at Foresight Financial

Family Business Planning Strategies

by Foresight Financial | Feb 3, 2025 | Blog

67% are at Risk of Succession Failure

If you are an owner in a family enterprise, the likelihood of your business successfully transitioning to the next generations is not very good. This has not changed over the years. Statistics show a failure rate of:

67% of businesses fail to succeed into the second generation
90% fail by the third generation

With 80% to 90% of all enterprises in North America being family owned, it is important to address the reasons why transition is difficult.

Why does this happen and what can you do to prevent it?

Communicate

Family enterprises are often put at risk by family dynamics. This can be especially true if the family has not had any meaningful dialogue on the succession of the business. And, while we are throwing around statistics, it has been estimated that 65% of families have not had any meaningful discussion about business succession.

Family issues can often hijack or delay the planning process. Sibling rivalries, family disputes, health issues and other concerns certainly present challenges that need to be dealt with in order for the succession plan to move forward.
Many times, a founder of a family business looks to rely on the business to provide him or her with a comfortable retirement while the children view the shares of the company as their inheritance.
Sometimes an appropriate family successor is not readily identifiable or not available at all.

Decide

In these times a decision needs to be made as to whether or not ownership needs to be separated from management, at least until the second generation is willing or capable to assume the reins of management.
If the founder needs to receive value or future income from the business a proper decision as to who is running the company is vital. If this is not forthcoming, then there may be no other alternative but to sell the company.

Plan

Tax Planning

When planning for the succession of the business an important objective is to reduce income tax on the disposition (sale or inheritance). One of the methods is to implement an estate freeze which transfers the future taxable growth to the next generation. The corporate and trust structure utilized in this strategy may also create multiple Small Business Gains Exemptions which can reduce or eliminate the income tax on capital gains.

Just as it is important for a business owner to plan to reduce taxes during his or her lifetime, it is also important to maximize the value of the estate by planning to reduce taxes at death.

Minimize Management and Shareholder Disputes

This can be accomplished with the implementation of a Shareholders’ Agreement. Often there are multiple parties that should be subject to the terms of the agreement, including any Holding Companies or Trusts that may be created to deal with the tax planning issues. The Shareholders’ Agreement will include the procedures to deal with any shareholder disputes as well as confer rights and restrictions on the shareholders. The agreement should also define the exit strategy that the business owners may wish to employ.

Estate Equalization

Often the family business represents the bulk of the family fortune. There are times that one or more children may be involved in the company while the other siblings are not. Proper planning is necessary to ensure that the children are treated fairly in the succession plan for the business when the founder dies.

One method often employed in this regard is for the children active in the business to receive the shares as per the will or shareholders’ agreement while the non-business children receive other assets or the proceeds of a life insurance policy.

Founder’s Retirement Plan

It is problematic that often a business owner’s wealth may be represented by up to 80% of his or her company’s worth. It is important that the founder develops a retirement plan independent of the business so that his or retirement is not unduly affected by any business setback.

Protecting the Company’s Share Value

Risk management should be employed to provide for any unforeseen circumstances that would have the effect of reducing share value. As previously mentioned, if the bulk of a family’s wealth is represented by the shares the family holds in the business, a significant reduction in that share value could prove catastrophic to the family. These unforeseen circumstances include the death, disability or serious health issues of those vital to the success of the business, especially the founder. Proper risk management will help to ensure that the business will survive for the benefit of future generations and continue to provide for the security of the founder and/or his or her spouse.

Act

Since the dynamics of family businesses differ from non-family firms, particular attention is required in the planning for the management and succession of these enterprises. This planning should not be left until it is too late – it is never too soon to begin.

As always, please feel free to share this information with anyone that may find it of interest.

Deciding Between TFSA and RRSP: Which Investment Option Is Right for You?

by Foresight Financial | Jan 1, 2025 | Blog, rrsp, Tax Free Savings Account

One of the most common investment questions Canadians ask themselves today is, “Which is better, TFSA or RRSP”?

Here’s the good news – it doesn’t have to be an either-or choice. Why not do both? Below are the features of both plans to help you understand the differences.

Tax-Free Savings Account (TFSA)

Any Canadian resident age 18 or over may open a TFSA. Contribution is not based on earned income. There is no maximum age for contribution.
There is carry forward room for each year in which the maximum contribution was not made. The maximum annual contribution for 2025 is $7,000. For those who have not yet contributed to a TFSA, the cumulative total contribution room for 2025 is $102,000.
While the deposit is not tax-deductible, the funds accumulate with no income tax payable on growth.
Withdrawals may be made at any time on an income tax-free basis. Withdrawals create additional deposit room commencing in the year after withdrawal.

Registered Retirement Savings Plan (RRSP)

No minimum age for contributing but must have earned income sufficient to generate RRSP contribution room.
Maximum contribution is 18% of earned income based on your previous year’s earnings to a maximum of $31,560 (for 2024). The maximum contribution for 2025 is $32,490.
There are carry forward provisions for years not contributing.
Contribution is tax-deductible from earned income, and the funds accumulate on a tax-deferred basis.
All withdrawals are taxable as income at the top rate of tax based on earnings in the year of withdrawal.
RRSP ends in the year the contributor turns age 71 when the RRSP must be converted to a Registered Retirement Income Fund (RRIF) or life annuity and taxable income taken.

The Advantages and Disadvantages of Both

Both programs provide for no tax on the earnings on the contributions, no difference there; however, only the TFSA allows for tax-free withdrawals.
A good habit to get into is to reinvest the tax savings from your RRSP contribution. This maximizes your retirement savings with additional tax-deferred growth.
Or you might want to consider using your tax savings or refund created by your RRSP contribution to fund your contribution to your TFSA.
Be careful not to over value your RRSP balance. The total value of your RRSP will be reduced by the tax payable upon withdrawal. Tax is also payable upon death if the beneficiary is anyone other than your spouse.
RRSP works best for those people who will retire in a lower tax bracket.

The Bottom Line?

Unless the tax savings from the RRSP are routinely reinvested, at the end of the day, there is little or no difference between the results of a TFSA or an RRSP.

Want maximum results? Take your RRSP tax savings and reinvest it to have a great impact on your retirement savings.

Consider This:

If you invest $5,000 per year in an RRSP for 20 years at 5% compound growth, tax-deferred at the end of 20 years you will have $173,596.
If you were to invest the $1,750 tax savings (based on a 35% tax bracket) for 20 years your RRSP will grow to $234,355. That is an additional $60,759 in your retirement savings!
Of course, you could choose to reinvest the RRSP tax savings of $1,750 in a TFSA where it will accumulate tax-free to the same $60,759 but the advantage here is you can withdraw this without tax.

Connect with me to discuss how you can optimize the use of both of these retirement vehicles. As always, please feel free to share this information with anyone who would find it of interest.

Estate Planning Tips for Real Estate Investors

by Foresight Financial | Dec 2, 2024 | Blog, Estate Planning

For many Canadians, the majority of their wealth is held in personally owned real estate. For most this will be limited to their principal residence, however, investment in recreational and real estate investment property also forms a substantial part of some estates. Due to the nature of real estate, it is important to utilize estate planning to realize optimum gain and minimize tax implications.

Key Considerations for Real Estate Investment

Real estate is not a qualifying investment for the purposes of the Lifetime Capital Gains Exemption.
Leaving taxable property to a spouse through a spousal rollover in the will defers the tax until the spouse sells the property or dies.
Apart from the principal residence, real estate often creates a need for liquidity due to capital gains, estate equalization, mortgage repayment or other considerations.
Professional advice is often required to select the most advantageous ownership structure (i.e. personal, trust, holding company).

The Impact of Capital Gains Taxes

Upon the disposition (sale or transfer) of an asset, there is income tax payable based on 2/3 (66.67%) (as of June 25, 2024) of the capital gain of that asset.
Capital gains taxes can be triggered at death unless the asset is left to a spouse in which case the tax is deferred until the spouse sells the asset or dies.
In addition, there may be probate fees levied against the estate at death.

Why is Estate Planning Important?

It is recommended that family issues (including estate equalization) be addressed with certain types of real estate assets. Estate planning can organize your assets with the objective to ensure that at your death they are distributed according to your wishes:

to the proper beneficiary(s),
with a minimum of taxes and costs
with the least amount of family discord.

Tax and Estate Planning Strategies for Real Estate Holdings

Principal Residence

If your home qualifies as a principal residence, there is no tax on any capital gains upon sale or transfer of the property. An individual can only have one principal residence and the same holds true for a family unit (for example, both spouses have only one principal residence between them).
If the property is held as joint tenants, upon the death of a spouse, the ownership automatically remains with the surviving spouse. Upon the death of the surviving spouse, his or her will dictates who will receive ownership of the home (usually one or more of the children).
In preparing your estate planning for your principal residence, you may wish to ensure that you have sufficient liquidity to cover the cost of any property tax deferral program that you have exercised. This is especially important if the home is intended to be retained by the beneficiary(s) and you don’t want to burden them with the significant cost of repayment.
Planning for the beneficiaries to retain the property often creates discord if the children are not all in agreement about the final disposition of the house. Should you just wish to leave the home to one child and not to the others consider estate equalization and use cash, other assets or life insurance as a replacement to the interest in the home.

To maintain family harmony, considerable thought should be given when making decisions to bequeath or liquidate the family cottage or recreational property.

Recreational Property

If the sale, transfer or deemed disposition at death of the cottage or other recreational property results in a capital gain, that gain will be taxable. As in the principal residence, ownership could be in joint tenancy which will defer the tax. The tax will also be deferred if the property is left to your spouse in your will.
There may be some concern that if the property is left outright to the spouse and the spouse remarries the property may ultimately end up with someone who was not intended as a beneficiary. To avoid this, a trust could be used to hold ownership of the property. A spousal trust created in the will also accomplishes this while at the same time maintaining the spousal rollover to avoid tax on the gain of the property. In addition, the spousal trust has an added advantage in that it allows the testator to specify who will inherit the property on the spouse’s death.

Real Estate Investment Property

Sale, transfer or deemed disposition (at death), usually will result in a capital gain or capital loss. If the property in question is rental property, depreciation (known as capital cost allowance) may be claimed as a deduction against rental income. At death, if the fair market value of the rental property exceeds its undepreciated capital cost, there will be a tax payable on the recaptured depreciation. A value of less than undepreciated capital cost will create a capital loss which, in year of death, can be deducted against other income.
If the property in question is performing favourably as an investment, it may be desirable to leave it to the surviving family members. In this case, it is recommended that any liquidity requirement for taxes, costs etc. be funded to alleviate the financial burden.
From a planning point of view, it may be advisable to own commercial real estate through a holding company. Depending on the circumstances the same could be true with rental property.

Solving the Liquidity Need

One of the most cost-effective methods in providing the necessary liquidity in these situations is the use of second-to-die joint life insurance.

The Insurance Solution

Tax-free cash at the second death. Naming a beneficiary bypasses the will and is not subject to probate.
The proceeds are protected against creditor claims.
Insurance provides for a guaranteed low-cost alternative to the issue of satisfying the liquidity need at death.

Please call me if you would like to discuss your personal estate planning needs. As always, feel free to use the sharing buttons to forward this article to a friend or family member you think may benefit from this information.

Critical Illness – Are You Protected?

by Foresight Financial | Nov 1, 2024 | Blog, critical illness insurance

Why a Doctor Invented Critical Illness Insurance

Critical Illness insurance was invented by Dr. Marius Barnard. Marius assisted his brother Dr. Christiaan Barnard in performing the first successful heart transplant in 1967 in South Africa. Through his years of dealing with cardiac patients, Marius observed that those patients that were better able to deal with the financial stress of their illness recovered more often and at a much faster rate than those for whom money was an issue. He concluded that he, as a physician, could heal people, but only insurance companies could provide the necessary funds to create the environment that best-promoted healing. As a result, he worked with South African insurance companies to issue the first critical illness policy in 1983.

Medical practitioners today will confirm what Dr. Barnard observed – the lower your stress levels, the better the chances for your recovery. When one is ill with a serious illness, having one less thing to deal with, such as financial worry, can only be beneficial.

Your Life Could Change in a Minute!

Case Study A – Lawyer, Male 55

Tom was a successful lawyer with a thriving litigation practice. He had recently started his own firm and was recruiting associates to build the practice. He was a single father assisting his two adult children in their post-secondary education. Tom had always enjoyed good health, ate well, exercised regularly and was a competitive, highly ranked (senior class) tennis player.

At age 55, he was diagnosed with prostate cancer. In addition to the emotional angst and anger at receiving this diagnosis, he also was concerned about the financial impact this illness could have on both his practice and his support of his children. Fortunately, five years earlier, at the urging of his financial advisor, he had purchased a critical illness policy.

Within weeks of his diagnosis, Tom received a tax-free benefit cheque for $250,000. He immediately called his advisor to tell him how elated he was that the advisor had overcome his initial objectives to purchase the policy five years earlier. He went on to say that with having the financial stress alleviated, he was certain he would be able to tackle the treatment and concentrate on recovery in a positive manner.

Today, Tom is cancer-free, his practice is thriving, and his children are successfully working in professional practices.

Case Study B – Retired Business Owner, Female 52

Christina at age 52 was enjoying a good life that came partially from the sale of her business a few years before. Her investments were thriving and everything looked rosy. Then 2008 came along. Christina suffered a stroke. Fortunately, it was not a severe stroke. At first, the doctors thought that it was actually a TIA as many of her symptoms were minor. The next morning the MRI results confirmed that it was indeed a stroke and it had caused some minor brain damage.

Christina made a remarkable recovery and within a few short months was almost back to where she was before the stroke. If you didn’t know Christina, you wouldn’t have any idea that she had even had one.

As a successful business owner and mother, Christina had always been a big believer in the advantages of owning critical illness insurance. At first, she had some concern that because her stroke was not that serious and she had recovered so quickly, that her claim might not qualify for payment. These fears turned out to be unfounded as days after the stroke she received claim cheques for $400,000.

During her recovery period, Christina was fearful of having another stroke which caused her some stress however, she is certain that not having any financial worries during this time aided in her almost total recovery.

These two case studies, although quite different in circumstances illustrate some key points about Critical Illness insurance:

A life-threatening illness or condition can strike anyone regardless of age or health;
Financial security reduces stress which can assist in the recovery process;
You do not have to be disabled to be eligible for a Critical Illness benefit;
Although you need to be diagnosed with a life-threatening illness, you do not have to be at “death’s door” in order to have your claim paid;
The benefits are paid tax-free to the insured.

Reach out to me if you have any questions and please feel free to share this information with anyone you think would find it of interest.

8 Reasons You Should Do Business Succession Planning in Canada

by Foresight Financial | Oct 1, 2024 | Blog, Business Owners, Estate Planning

Succession planning is essential for businesses worldwide, but certain aspects make it particularly important in the Canadian context. Here are eight compelling reasons why business succession planning is crucial in Canada:

1.Aging Population

Canada, like many other developed countries, has an aging population. Many business owners are approaching retirement age, and a significant number of small and medium-sized enterprises (SMEs) are owned by baby boomers. Succession planning ensures a smooth transition as these business owners retire, securing the future of their enterprises.

2.Economic Stability

A well-executed succession plan contributes to the stability of the Canadian economy. SMEs are the backbone of Canada’s economy, accounting for a large proportion of employment and GDP. Ensuring these businesses continue to operate smoothly through leadership transitions is vital for economic stability.

3.Tax Efficiency

Canada has specific tax regulations and incentives related to business succession. Effective succession planning allows business owners to take advantage of tax deferral opportunities, capital gains exemptions, and other tax-efficient strategies to minimize the tax burden during the transfer of ownership.

4.Preservation of Family-Owned Businesses

Family-owned businesses constitute a significant portion of the Canadian business landscape. Succession planning helps preserve these businesses for future generations, addressing issues like family dynamics, management roles, and ownership structures, thereby ensuring continuity and long-term success.

5.Legal and Regulatory Compliance

Canada has a complex legal and regulatory framework that governs business operations. Succession planning ensures that all legal requirements are met during the transition process, avoiding potential legal disputes, fines, or disruptions in business operations.

6.Skilled Workforce Development

Succession planning in Canada often involves developing a skilled workforce to take on future leadership roles. This not only benefits the individual businesses but also enhances the overall skill level of the Canadian workforce, contributing to national competitiveness and innovation.

7.Attractiveness to Investors

Investors and financial institutions are more likely to invest in businesses that have a clear succession plan. It indicates stability and long-term viability, making Canadian businesses more attractive to domestic and international investors, thereby facilitating access to capital.

8.Community Impact

Many Canadian businesses, particularly in smaller communities, play a vital role in local economies. Succession planning ensures that these businesses continue to operate and support their communities, providing employment and services that are essential for local economic health.

Conclusion

Succession planning is a strategic imperative for businesses in Canada. It addresses the challenges posed by an aging population, ensures economic stability, maximizes tax efficiency, preserves family-owned enterprises, ensures legal compliance, develops a skilled workforce, attracts investors, and supports local communities. By prioritizing succession planning, Canadian business owners can secure the future success and sustainability of their enterprises.

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