For business owners, making sure your business is financially protected can be overwhelming. Business owners face a unique set of challenges when it comes to managing risk. Insurance can play an important role when it comes to reducing the financial impact on your business in the case of uncontrollable events such as disability, critical illness or loss of a key shareholder or employee.
This infographic addresses the importance of corporate insurance.
The 4 areas of insurance a business owner should take care of are:
Health: We are fortunate in Canada, where the healthcare system pays for basic healthcare services for Canadian citizens and permanent residents. However, not everything healthcare related is covered, in reality, 30% of our health costs* are paid for out of pocket or through private insurance such as prescription medication, dental, prescription glasses, physiotherapy, etc.
For business owners, offering employee health benefits make smart business sense because health benefits can form part of a compensation package and can help retain key employees and attract new talent.
For business owners that are looking to provide alternative health plans in a cost effective manner, you may want to consider a health spending account.
Consider the financial impact this would have on your business if you, a key employee or shareholder were to suffer from an injury or illness. Disability insurance can provide a monthly income to help keep your business running.
Business overhead expense insurance can provide monthly reimbursement of expenses during total disability such as rent for commercial space, utilities, employee salaries and benefits, equipment leasing costs, accounting fees, insurance premiums for property and liability, etc.
Key person disability insurance can be used to provide monthly funds for the key employee while they’re disabled and protect the business from lost revenue while your business finds and trains an appropriate replacement.
Buy sell disability insurance can provide you with a lump sum payment if your business partner were to become totally disabled. These funds can be used to purchase the shares of the disabled partner, fund a buy sell agreement and reassure creditors and suppliers.
Key person critical illness insurance can be used to provide funds to the company so it can supplement income during time away, cover debt repayment, salary for key employees or fixed overhead expenses.
Buy sell critical illness insurance can provide you with a lump sum payment if your business partner or shareholder were to suffer from a critical illness. These funds can be used to purchase the shares of the partner, fund a buy sell agreement and reassure creditors and suppliers.
Life: For a business owner, not only do your employees depend on you for financial support but your loved ones do too. Life insurance is important because it can protect your business and also be another form of investment for excess company funds.
Key person life insurance can be used to provide a lump sum payment to the company on death of the insured so it can keep the business going until you an appropriate replacement is found. It can also be used to retain loyal employees by supplying a retirement fund inside the insurance policy.
Buy sell life insurance can provide you with a lump sum payment if your business partner or shareholder were to pass away. These funds can be used to purchase the shares of the deceased partner, fund a buy sell agreement and reassure creditors and suppliers.
Loan coverage life insurance can help cover off any outstanding business loans and debts.
Reduce taxes & diversify your portfolio, often life insurance is viewed only as protection, however with permanent life insurance, there is an option to deposit excess company funds not needed for operations to provide for tax-free growth (within government limits) to diversify your portfolio and reduce taxes on passive investments.
Talk to us about helping making sure you and your business are protected.
For young families, making sure your family is financially protected can be overwhelming, especially since there’s so much information floating online. This infographic addresses the importance of insurance- personal insurance.
The 4 areas of personal insurance a young family should take care of are:
Health: We are so fortunate to live in Canada, where the healthcare system pays for basic healthcare services for Canadian citizens and permanent residents. However, not everything healthcare related is covered, in reality, 30% of our health costs* are paid for out of pocket or through private insurance such as prescription medication, dental, prescription glasses, physiotherapy, etc.. Moreover, if you travel outside of Canada, medical emergencies can be extremely expensive.
Life: For young families, if your loved ones depend on you for financial support, then life insurance is absolutely necessary, because it replaces your income, pay off your debts and provides peace of mind.
Talk to us about helping making sure you and your family are protected.
The intention for our “Guide to Covid-19: Government Relief Programs in Canada” is to help businesses and individuals to cut through the noise and make sure they’re getting all the help they can receive from the federal and provincial programs.
Now that we are nearing year end, it’s a great time to review your business finances. With the federal election over and no major business tax changes for this year, 2019 is a good year to make sure you are effectively tax planning. Please keep in mind that your business may be affected by the recent tax on split income (TOSI) and the passive investment income rules given they came into effect in 2018. These rules can be complicated, please don’t hesitate to consult us and your accountant to determine how this can affect your business finances.
We are also assuming that your corporate year end is December 31, however if it’s not, this is useful when your business year end comes up.
Below, we have listed some of the key areas to consider and provided you with some useful guidelines to make sure that you cover all of the essentials. We have divided our tax planning tips into 4 sections:
Individuals who own incorporated businesses can elect to receive their income as either salary or as dividends. Your choice will depend on your own situation consider the following factors:
Your current and future cash flow needs
Your personal income level
The corporation’s income level
Passive investment income rules
Please also consider the difference between salary and dividends:
✓ Provides RRSP contribution
✓ Reduces corporate tax bill
• Payroll tax
• Canada Pension Plan (CPP) contribution
• Employment Insurance contribution
• Doesn’t provide RRSP contribution
• Doesn’t reduce corporate tax bill
• No tax withholdings
• No Canada Pension Plan contribution
• No Employment Insurance contribution
✓ Receive up to $50,000 of ineligible dividends at a low tax rate depending on province
As part of this, it’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make. For 2019, salaries of $151,278 will provide the maximum RRSP room of $27,230 for 2020.
Is it worth accruing your salary or bonus this year?
You could consider accruing your salary and / or bonus in the current year but delaying payment of it until the following year. If your company’s year-end is December 31, your corporation will benefit from a deduction for the year 2019 and the source deductions are not required to be remitted until actual salary or bonus payment in 2020.
Stock Option Plan
If your compensation includes stock options, please check if you will be affected by the new proposed stock option rules. This caps the amount of certain employee stock options eligible for the stock option deduction at $200,000 after December 31, 2019. The rules will not affect you if your stock options are granted by a Canadian controlled private corporation.
Tax Free Amounts
If you own your corporation, pay tax-free amounts if you can. Here are some ways to do so:
Pay yourself rent if the company occupies space in your home.
Pay yourself capital dividends if your company has a balance in its capital dividend account.
Return “paid-up capital” that you have invested in your company
Do you employ members of your family?
Employing and paying salary to family members who undertake work for your incorporated business is worth considering as you could receive a tax deduction against the salary that you pay them, providing that said salary is “reasonable” in relation to the work done. In 2019, the individual can earn up to $12,069 and pay no federal tax. This also provides the individual with RRSP contribution room, CPP and allow for child-care deductions. Bear in mind additional costs that are incurred when employing someone, such as payroll taxes and contributions to CPP.
3) Business Tax
Claiming the Small Business Deduction
Are you able to claim a small business deduction? The federal small business tax rate decreased from 9% in 2019 (from 10% in 2018) and not anticipated to increase in 2020. From a provincial level, there will be changes in the following provinces:
Small Business Tax Rate
Therefore, a small business deduction in 2019 is worth more than in 2020 for these provinces.
Should you repay any shareholder loans?
Loaning funds from your corporation at a low or zero interest rate means that you are considered to have benefited from a taxable benefit at the CRA’s 2% interest rate, less actual interest that you pay during the year or thirty days after it. You need to include the loan in your income tax return, unless it is repaid within one year after the end of your corporation’s taxation year.
For example, if your company has a December 31st year-end and it loaned you funds on November 1, 2019, you must repay the loan by December 31, 2020, otherwise you will need to include the loan as taxable income in your 2019 personal tax return.
Passive investment income
If your corporation has a December year- end, then 2019 will be the first taxation year that the new passive investment income rules may apply to your company.
New measures were introduced in the 2018 federal budget relating to private businesses which also earn passive investment income in a corporation that also operates an active business.
There are two key parts to this, as follows:
Limiting access to dividend refunds. Essentially, a private company will be required to pay ineligible dividends in order to receive dividend refunds on some taxes which, in the past, could have been refunded when an eligible dividend was paid.
Limiting the small business deduction. This means that, for the companies mentioned above, the small business deduction can be reduced at a rate of $5 for every $1 over between $50,000 and $150,000 of investment income, or eliminated if investment income exceeds $150,000. Please note that Ontario and New Brunswick have indicated that they will not follow the federal rules.
If your corporation earns both active business and passive investment income, you should contact us and your accountant directly to determine if there are any planning opportunities to minimize the impact of the new passive investment income rules.
Think about when to pay dividends and dividend type
When choosing to pay dividends in 2019 or 2020, you should consider the following:
Difference between the yearly tax rate
Impact of tax on split income
Impact of passive investment income rules
With the exception of 2 provinces, Quebec and Ontario, the combined top marginal tax rates will not be changing from 2019 to 2020 on a provincial level. Therefore, it will not make a difference if you choose to pay in 2019 or 2020.
Combined Marginal Tax Rate
In Quebec and Ontario, because there are slight increases in the combined marginal tax rate, there are potential tax savings available if you choose to pay dividends in 2019 rather than in 2020.
When deciding to pay a dividend, you will need to decide to pay out eligible or ineligible dividends, you should consider the following:
Dividend refund claim limits: Eligible refundable dividend tax on hand (ERDTOH) vs Ineligible Refundable dividend tax on hand (NRDTOH)
Personal marginal tax rate of eligible vs. ineligible dividends
Given the passive investment income rules, typically, it makes sense to pay eligible dividends to deplete the ERDTOH balance before paying ineligible dividends. (Please note that ineligible dividends can also trigger a refund from the ERDTOH account.)
Eligible dividends are taxed at a lower personal tax rate than ineligible dividends (based on top combined marginal tax rate). However, keep in mind, when ineligible dividends are paid out, they are subject to the small business deduction, therefore the dividend gross-up is 15% while eligible dividends that are subject to the general corporate tax rate have a dividend gross-up is 38%. It’s important to talk to a professional to determine what makes the most sense when determining the type of dividend to pay out of your corporation.
Combined Personal Top Marginal Tax Rate on Dividends
Corporate Federal Tax Rate and Gross-up factor
It might be time to revisit your corporate structure given the changes to private corporation rules on income splitting and passive investment income to provide more control on the distribution of dividend income. Another reason to reassess your structure is to segregate investment assets from your operating company for asset protection. (Keep in mind you don’t want to trigger TOSI, so make sure you structure this properly.) If you are considering succession planning, this is the time to evaluate your corporate structure as well.
Ensure your will is up to date
In particular, if your estate plan includes an intention for your family members to inherit your business, ensure that this plan is tax effective following new tax legislation from January 1, 2016. In addition, review your will to make sure that any private company shares that you intend to leave won’t be affected by the new TOSI rules.
Consider a succession plan to ensure your business is transferred to your children, key employees or outside party in a tax efficient manner.
Lifetime Capital Gains Exemption
If you sell your qualified small business corporation shares, you can qualify for the lifetime capital gains exemption (In 2019, the exemption is $866, 912) where the gain is completely exempt from tax. The exemption is a lifetime cumulative exemption; therefore, you don’t have to claim the entire amount at once.
The issues we discussed above can be complex. Contact us and your accountant if you have any questions, we can help.
Before buying insurance from your bank to cover your mortgage, understand the difference between self owned mortgage life insurance and bank owned life insurance. The key differences are ownership, premium, coverage, beneficiaries and portability.
Self: You own and control the policy.
Bank: The bank owns and controls the policy.
Self: Your premiums are guaranteed at policy issue and discounts are available based on your health.
Bank: Premiums are not guaranteed and there are no discounts available based on your health.
Self: The coverage that you apply for remains the same.
Bank: The coverage is tied to your mortgage balance therefore it decreases as you pay down your mortgage but the premium stays the same.
Self: You choose who your beneficiary is and they can choose how they want to use the insurance benefit.
Bank: The bank is beneficiary and only pays off your mortgage.
Self: Your policy stays with you regardless of your lender.
Bank: Your policy is tied to your lender and if you change, you may need to reapply for insurance.
We’ve created an infographic about the difference between personally owned life insurance vs. bank owned life insurance.
When thinking about retirement, it can be overwhelming to figure out all the numbers, like what age you’re going to retire, how much money you need and how long do you need the money to last.
We’ve put together an infographic checklist that can help you get started on this. We know this can be a difficult conversation so we’re here to help and provide guidance to help you achieve your retirement dreams.
Determine how much you need in retirement.
Make sure you account for inflation in your calculations
If you have any debts, you should try to pay off your debts as soon as you can and preferably before you retire.
As you age, your insurance needs change. Review your insurance needs, in particular your medical and dental insurance because a lot of employers do not provide health plans to retirees.
Review your life insurance coverage because you may not necessarily need as much life insurance as when you had dependents and a mortgage, but you may still need to review your estate and final expense needs.
Prepare for the unexpected such as a critical illness or long term care.
Check what benefits are available for you on retirement.
Canada Pension Plan- decide when would be the ideal time to apply and receive CPP payment. (Payment depends on your contributions)
Old Age Security- check pension amounts and see if there’s a possibility of clawback.
Guaranteed Income Supplement- if you client have a low income, you could apply for GIS.
Review your company pension plan. Check if it’s a defined benefits or contribution plan. Determine if it makes sense to take the pension or the commuted value.
Make sure you are saving on a regular basis towards retirement- in an RRSP, TFSA, LIRA or non-registered. Ensure the investment mix makes sense for your situation.
Don’t forget to check if there are any income sources. (ex. rental income, side hustle income, etc.)
Are you planning to use the sale of your home or other assets to fund their retirement?
Will you be receiving an inheritance?
One other consideration that’s not included in the checklist is divorce. This can be an uncomfortable question, however divorce amongst adults ages 50 and over is on the rise and this can be financially devastating for both parties.
Contact us about helping you get your retirement planning in order so you can gain peace of mind that your family is taken care of.
“I already have life insurance from work, so why do I need to get it personally?” or “Work has got me covered, I don’t need it.”
While it’s great to have group coverage from your employer or association, in most cases, people don’t understand the that there are important differences when it comes to group life insurance vs. self owned life insurance.
Before counting on insurance from your group benefits plan, please take the time to understand the difference between group owned life insurance and personally owned life insurance. The key differences are ownership, premium, coverage, beneficiary and portability.
Self: You own and control the policy.
Group: The group owns and controls the policy.
Self: Your premiums are guaranteed at policy issue and discounts are available based on your health.
Group: Premiums are not guaranteed and there are no discounts available based on your health. The rates provided are blended depending on your group.
Self: You choose based on your needs.
Group: In a group plan, the coverage is typically a multiple of your salary. If your coverage is through an association, then it’s usually a flat basic amount.
Self: You choose who your beneficiary is and they can choose how they want to use the insurance benefit.
Group: You choose who your beneficiary is and they can choose how they want to use the insurance benefit.
Self: Your policy stays with you.
Group: Your policy is tied to your group and if you leave your employer or your association, you may need to reapply for insurance.
Talk to us, we can help you figure out what’s best for your situation.
Managing your finances raises a number of topics but none as tricky and potentially unpleasant as planning for your family and finances in the event that you pass away or become incapacitated. Understandably, these questions are often ignored by many—but don’t fall into the trap of avoiding these difficult matters. Good estate planning will help to make sure that your wishes are carried out, and your family and assets are well protected.
With this in mind, let’s take a look at the key areas that you should consider when designing your estate plan:
Choosing a guardian – One of the most important considerations is who you select to become the legal guardian of your children. This is a very personal and complex decision, and you will consider several unique factors depending on your circumstances, but your principal concerns might be how physically able the person is to look after your children, as well as such practical matters as how close they live to you and their personal and financial situation and stability.
Life insurance and trusts – Life insurance gives your family the financial security to continue their standard of living and fulfil their dreams in the event that you are unable to provide for them yourself. Life insurance payouts can be used in various ways, including paying off debts, paying for college education, or simply helping with general living costs.
A trust is a way of specifying how and when you wish to pass money and other resources to your children. It can be an excellent way of ensuring that their inheritance reaches them before the age of eighteen or twenty-one, unlike a court-controlled process, as you will stipulate who manages and distributes the funds.
· Choosing someone to make decisions on your behalf
It is crucial to make sure that somebody trustworthy is nominated to manage and distribute your various assets according to your wishes. This executor can be anybody, though spouses, older children, or close friends are often common choices. Similarly, if you become too sick to make your own decisions about your finances or your family’s care, a health care directive and a power of attorney will give you peace of mind and go a long way towards protecting your assets.
Now that we understand the key areas that should be considered in estate planning, here are some of the important components or documents involved in the process:
· Will, trusts, and beneficiary forms
Both a will and a trust should detail your assets and how you wish them to be distributed when you die, as well as assigning the guardians of your children. However, one benefit that a trust has over a will is that a trust does not have to go through probate prior to being executed, as well as the option of coming into effect before you pass away; it remains under your control and transfers the role of trustee to someone else when you decease.
Beneficiary forms are slightly different. They assign designated beneficiaries to specific financial accounts such as mortgages and bank accounts. As this information holds more legal weight than a will itself, it is crucial to regularly ensure that your beneficiaries are up to date.
· Durable powers of attorney
The term power of attorney refers to the person, or persons, that you nominate to act on your behalf in the event that you are too ill to state or carry out your own wishes. There are various ways to implement this; you can choose specific individuals for particular roles, such as one person to look after your finances and another to make your healthcare decisions, or you can designate one person full power of attorney to manage all of your affairs.
· A living will
Not to be confused with a last will and testament, a living will details the type of medical treatment that you wish if you were ever incapacitated. Along with a general or healthcare power of attorney (see above), this document is known as your advance health care directive, and it not only provides you with peace of mind that your medical wishes will be respected, but it also gives direction and support to your family when faced with difficult decisions about your care.
· Letter of intent
This document is not legally binding and can offer a more personal touch alongside an official will or trust. As the letter is less formal and binding than other documents, many people use it to express their wishes about more personal aspects such as their requests for funeral arrangements, or even preferences and desires for how their family should be brought up.
As with any financial arrangement, changes over time, not only in process and legislation but in your own personal situation, mean that it is imperative to keep your estate planning strategy under review and regularly updated to ensure it’s fit for its purpose and accurately reflects your wishes.
Writing an estate plan is important if you own personal assets but is all the more crucial if you also own your own business. This is due to the additional business complexities that need to be addressed, including tax issues, business succession and how to handle bigger and more complex estates. Seeking professional help from an accountant, lawyer or financial advisor is an effective way of dealing with such complexities. As a starting point, ask yourself these seven key questions and, if you answer “no” to any of them, it may highlight an area that you need to take remedial action towards.
Have you made a contingency plan for what will happen to your business if you are incapacitated or die unexpectedly?
Have you and any co-owners of your business made a buy-sell agreement?
If so, is the buy-sell agreement funded by life insurance?
If you have decided that a family member will inherit your business when you die, have you provided other family members with assets of an equal value?
Have you appointed a successor to your business?
Are you making the most of the lifetime capital gains exemption ($848,252 in 2018) on your shares of the business, if you are a qualified small business?
Are you taking care to minimize any possible tax liability that may be payable by your estate in the event of your death?
The process of freezing the value of your business at a particular date is an increasingly common way of protecting your estate from a large capital gains tax bill if your business increases in value. To achieve this, usually the shares in the business that have the highest growth potential are redistributed to others, often your children, meaning that they will be liable for the tax on any increase in their value in the future. In exchange, you will receive new shares allowing you to maintain control of the business with a key difference – the value of the shares is frozen so that your tax liability is lower and that of your estate when you die will also be reduced.