Foresight Financial, Author at Foresight Financial

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.

Navigating Tax Deductions for Life Insurance Premiums

by Foresight Financial | Sep 2, 2024 | Blog, Insurance, life insurance

Considering that the proceeds of a life insurance policy are received tax-free upon the death of the life insured, it is not surprising that the premiums for the policy are not tax deductible. There are two circumstances, however, where premiums would be deductible for income tax purposes;

If the life insurance policy is assigned to a lending institution that requires the assignment as a condition for a loan, for either investment or business purposes.
If the life insurance policy is donated to a registered charity and the donor continues to pay the premiums on behalf of the charity.

Life insurance policies used as collateral security for a loan

The conditions under which the owner of a life insurance policy would be entitled to a collateral insurance deduction are as follows:

The loan advance must be made by a qualified financial institution that is in the business of lending money. This includes banks, finance companies, trust companies, credit unions or insurance companies. It does not include private lending arrangements such as with friends or family members;
The lending institution must require the assignment of the policy owned by the borrower as a condition for granting the loan and a formal assignment of the policy must be made. There should be a letter or other documentation on file to substantiate the lender’s requirement for the life insurance assignment;
The proceeds of the loan must be used for investment or business purposes the income of which would be taxable to the borrower;
The life insurance policy assigned can be either an existing policy or one taken out for this specific purpose.

If all of the above criteria are met the borrower is entitled to a collateral insurance deduction which is the lesser of the premium paid or the Net Cost of Pure Insurance (NCPI). NCPI is calculated from factors contained in the Income Tax Act and is applied against the net amount at risk of the insurance policy. It increases annually and is also used to determine the Adjusted Cost Basis (ACB) of the policy.

For example, let’s consider John, a 45-year-old non-smoker who wishes to purchase shares in his employer’s company. His bank will lend him the money against the collateral of those shares if he will also assign a life insurance policy on his life in the amount of the loan. John purchases a 10- year term insurance policy in the amount of $1,000,000 (the amount of the loan) which he assigns to the bank. The annual premium for this policy for 10 years is $920.00. The NCPI for the first year is $590 increasing each year. For the first year, only $590 of the annual premium is deductible. By year 3, the NCPI has increased to $1,020. In year 3, the full $920 annual premium is deductible.

As of January 1, 2017, NCPI now recognizes insureds who are rated as a substandard risk for life insurance. Prior to this date, the NCPI did not take into consideration the additional premium resulting from a substandard risk. If we assume that John was rated 200% for health reasons his annual premium for the policy would increase to $1,790. If the policy was issued after January 1, 2017, his NCPI (and collateral insurance deduction) would now increase to $1,180. By year 3 the NCPI would have increased to $2,040. For policies issued before January 1, 2017, the deduction would have been the same as if John were a standard risk.

Where the owner is a business

Canadian private corporations are also able to claim the collateral insurance deduction on policies they own on the life of a shareholder or key person that is assigned to a lending institution as a condition of a loan for either investment or business purposes. This can also have the added advantage of the proceeds of the life insurance policies creating a Capital Dividend Account (CDA) which can be paid tax free to shareholders of the corporation.

For example if John, in the previous example, were a shareholder of his company and the bank required $1,000,000 of coverage to facilitate a loan which the company was going to use for expansion, the company would be entitled to deduct the NCPI (or premium paid, if the lesser) from business income. Should John die and the $1,000,000 of insurance proceeds were paid to the bank to repay the loan, the company would still be entitled to credit the death benefit less the ACB of the policy to the Capital Dividend Account even though the company retained none of the proceeds. As a result, retained or future earnings could be paid to the surviving shareholders tax free up to the amount of the CDA balance.

Life insurance policies donated to a charity

Gifting a life insurance policy results in a charitable tax credit based on the value of the policy at the time of the gift. This usually means cash surrender value. Premiums paid for the policy receive the charitable tax credit when those premiums continue to be paid by the donor on behalf of the charity that now owns the policy.

For policies that only have the charity named as a beneficiary there is no immediate deduction. When the insured dies, however, the death benefit is considered to have been immediately donated before the donor’s death. A tax credit is available on the insured person’s final return for the year of death and for the year before death.

Generally, life insurance premiums are not tax deductible. These are two situations that may be deductible if structured properly. It is always advisable to seek the advice of a qualified advisor when dealing with income tax related issues.

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Understanding Early CPP: When and Why to Consider It

by Foresight Financial | Aug 1, 2024 | Blog, pension plan, Retirees, retirement

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

You need the money – number crunching aside, if your circumstances are such that you need the income then you probably should exercise your option to take it early;
You are in poor health – if your health is such that your life expectancy may be shortened, consider taking the pension at 60;
If you are confident of investing profitably – if you are reasonably certain that you can invest profitably enough to offset the higher income obtained from delaying your start date, then taking it early may make sense. If you are continuing to work, you could use the CPP pension as a contribution to your RSP or your TFSA.

Reasons to delay taking your CPP to age 70

You don’t need the money – if you have substantial taxable income in retirement you may want to defer the CPP until the last possible date especially if you don’t require the income to live or support your lifestyle;
If you are confident of living to a ripe old age – if you have been blessed with great genes and your health is good you may wish to consider delaying your CPP until age 70. Using the earlier example and ignoring indexing, if your base CPP was $10,000 at 65 then the pension, if delayed until age 70, would be $14,200. If you took the higher income at 70, you would reach the crossover point over the age 65 benefit at age 84 and after that would be farther ahead.

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 you would like to discuss your retirement planning.

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Strategies for Multi-Generational Planning

by Foresight Financial | Jul 1, 2024 | Blog, critical illness insurance, disability, disability insurance, Estate Planning, Family, Insurance, life insurance, long term care

The Sandwich Generation was a term coined by Dorothy Miller in 1981 to describe adult children who were “sandwiched” between their aging parents and their own maturing children. There is even a term for those of us who are in our 50’s or 60’s with elderly parents, adult children and grandchildren – the Club Sandwich. More recently, the Boomerang Generation (the estimated 29% of adults ranging in ages 25 to 34, who live with their parents), are adding to the financial pressures as Boomers head into retirement.

It is estimated that by 2026, 1 in 5 Canadians will be older than 65. This means fewer adults to both fund and provide for elder care. Today, it is likely that the average married couple will have more living parents than they do children.

What are the challenges?

The truth is that many members of the Sandwich Generation find the circumstances are both emotionally and financially draining. In the past, women have been looked upon to provide the primary care giving in the home while men take care of the income needs. Today, roles have changed with the majority of working age women employed outside of the home. As a result, financially, both parents are looked upon to provide for the family. For The Sandwich Generation helping their parents and their children at the same time, creates stress that can affect both their mental and physical health.

Risk Management in the Sandwich Generation

Having an effective financial plan becomes key in dealing with the challenges. As the main breadwinner in this situation, it is possible that three generations are dependent upon you. One of the first issues to be addressed then is how you protect your revenue stream.

Steps to Minimize risk for the Sandwich Generation

Have an open and clear discussion about family resources and needs – The older generation needs to have a discussion with their children so that everyone knows what steps have or have not been taken to provide for the senior’s care when they are no longer able to care for themselves. This would also be a good time to initiate or continue any talk about what liquidity needs exist for taxes, long term care, funeral costs and last expenses etc.
Complete a life insurance needs analysis – Where there is not sufficient capital to continue family and dependent’s income at the death of a breadwinner, life insurance can provide the necessary funds required to maintain lifestyle, pay debt, reduce mortgages, fund children’s education and provide money for aging parent’s care. Life insurance is an affordable way to guarantee future security.
Review your disability and critical illness coverage – If there is not sufficient income that will continue to be paid should you become unable to work due to sickness or accident, consider long term disability coverage. Critical illness insurance will provide needed capital in the event of diagnosis of a life-threatening illness or condition. Not only will this provide financial support but will also improve your chances of recovery without the financial stress that often accompanies such a condition.
Investigate Long Term Care Insurance – Having the appropriate amount of LTC insurance will help to reduce the stress of having to care for a parent when they are no longer able to fully care for themselves. Consider having all the siblings share the cost.
Draft a Living Will or similar Representation Agreement – Making your wishes known to your loved ones in the event you are no longer capable of making medical decisions will go a long way to providing comfort to all concerned when difficult choices need to be made.

As you can see, being part of the Sandwich Generation can be very stressful – emotionally and financially. Having someone to talk to or being part of a support group dealing with this issue, will certainly help manage the emotional challenges.

Let’s connect soon to discuss what strategies you may need to implement to provide the financial security your family needs.

Preparing Your Heirs for Wealth

by Foresight Financial | Jun 4, 2024 | Blog, Estate Planning, Family, financial advice, Financial Planning

If you think your heirs are not quite old enough or prepared enough to discuss the wealth they will inherit on your death, you’re not alone. Unfortunately, this way of thinking can leave your beneficiaries in a decision-making vacuum: an unnecessary predicament which can be avoided by facing your own mortality and creating a plan.

Avoiding the subject of your own mortality can also be an extremely costly to those you leave behind.

If you have a will in place you are ahead of the game. However, authors of the 2017 Wealth Transfer Report from RBC Wealth Management point out that a will is only a fundamental first step, not a comprehensive plan.

“One generation’s success at building wealth does not ensure the next generation’s ability to manage wealth responsibly, or provide effective stewardship for the future,” they write. “Knowing the value (alone) does little to prepare inheritors for managing the considerable responsibilities of wealth.” Overall, the report’s authors say the number of inheritors who’ve been prepared hovers at just one in three.

Two thirds of the survey’s respondents say their own wealth transfer plans aren’t fully developed – a critical barrier to having this discussion in the first place.

While the report focuses on wealthier beneficiaries in society, the lessons remain true for most: to make the best decisions about your wealth transfer, there needs to be planning and communication with your heirs.

1. Recognize that action today can help you create a better future

First, it’s important to acknowledge that creating an estate plan means contemplating your own death – an inescapable element of the process. It can also involve some awkward conversations, particularly if you’re not in the habit of talking about money with family and loved ones.

Without planning the outcome you leave may not be the one you would choose:

“Despite their efforts, parents don’t always succeed in translating good intentions into effective actions. They tend to resort to the informal, in-house learning methods they received in childhood,” say the RBC report’s authors. “Without intending to, parents repeat the lessons that contributed to the weaknesses of their own financial education. In the end, they are not equipping the next generation with the right skills to build lasting legacies.”

2. Understand the tax implications early.

To many, the taxes due on death will almost certainly come as a shock. In many cases, the single largest tax bill you will pay could be the one that your executor handles for you.

In Canada, leaving your assets to your spouse will defer these taxes until he or she disposes of the property or dies. However, if a spouse is not inheriting your assets and real property, planning for this “deemed disposition” is needed to allow your heirs time to make appropriate decisions about your property and legacy.

You may want to consider strategies that will greatly reduce the impact of the taxes to your estate. These strategies could include the use of joint last to die life insurance.

To illustrate how the growth in value of property can result in taxes payable at death, consider an asset which many Canadians own and enjoy – the family cottage.

Recreational real estate in many cases has “been in the family for years.” It often will have appreciated in value significantly since its purchase. Say you purchased the family cottage for $100,000. If the property is now worth $500,000, half of that gain – $200,000 is added to your income and taxed as such in the year you die. That will result in a tax bill of approximately $100,000.

If your family does not have the liquid funds available to pay this bill, the cottage or some other asset will need to be sold to pay the Canada Revenue Agency. Purchasing life insurance to pay the taxes due at death is one way to bequeath the family cottage to heirs. This will allow your children to continue to enjoy the property without having to raise the money to pay the taxes.

All capital property – except your principal residence and investments held as a Tax-Free Savings Account – is dealt with in a similar manner. If your stocks, real property, and other assets have appreciated in value since you first purchased them, half of that amount will be added to your taxable income in the year you die. If your assets included commercial or rental property against which the Capital Cost Allowance has been claimed, there may also be a recapture of depreciation. Again, deferral is available when assets are left to a spouse but if they are left directly to children or other heirs, the taxes become payable when you die.

As if this is not bad enough, the full value of your RRSPs or your RRIF must also be deregistered and included on your final tax return if the RRSP or RRIF is not left to a surviving spouse.

3. Get help to build your plan, then share it with those who matter.

Estate planning typically isn’t a “do-it-yourself” project. Instead, you’ll probably need to rely on a network of professional advisors who can bring their expertise to different parts of your plan.

Once you have your plan in place, it’s time to ensure that the people who are impacted by it are aware of your wishes.

Members of your professional network can help explain your plan to beneficiaries and help those who inherit your assets to understand your preferences and the decisions you’ve made.

Let’s get together to review or create your wealth transfer plans and discuss how you can get assistance in communicating those plans to the people who matter the most.

As always, please feel free to share this article with anyone you think would find it of value.

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