U.S. and Canadian stocks have continued their sharp sell-off in what is shaping up to be the markets’ worst week since late March, as rising coronavirus infections have shaken investors’ confidence in the global recovery. Also weighing on N.A. markets are uncertainties over the looming U.S. election, along with the failure of U.S. lawmakers to pass a much-needed fiscal stimulus package.

U.S. stocks fell sharply on Monday, with the S&P 500 posting its biggest daily decline in four weeks, as most U.S. states experienced record numbers of new coronavirus cases, increasing the probability of further lockdowns. By Monday’s close, the Dow was down 650 points, while the Nasdaq surrendered 189. The S&P/TSX Composite Index closed down 224 points as the energy sector fell more than 3%. Falling oil prices and a cold reception to Cenovus Energy’s takeover of Husky Energy weighed on the sector.

Markets were largely mixed on Tuesday as the Dow and S&P declined on disappointing earnings and failed stimulus, while the Nasdaq registered a small gain. The TSX also closed lower, despite a modest rebound in crude prices.

It was an especially rough Wednesday for N.A. markets, as the U.S. reported more than 73,000 new coronavirus cases Tuesday. The Dow lost 943 points – its fourth losing session in a row and worst day since June 11 — while the Nasdaq tumbled 425. Canada’s benchmark index was also hit hard, losing 434 points as oil plunged more than 5%.

U.S. stocks bounced back a bit Thursday after new data showed 751,000 Americans applied for new jobless benefits, down from 791,000 last week. Also boosting markets was news that U.S. GDP for Q3 increased at a 33.1% annual rate, by far the strongest quarterly pace of growth in records going back to the 1940s. While that’s good news, the U.S. economy is still smaller than it was before the pandemic, output is down 3.5% since the end of 2019, and the prospects for Q4 are anything but promising as coronavirus cases surge.

Read more…

source https://richarddri.ca/markets-drop-sharply-over-surging-coronavirus-cases-looming-election/

Over the last four weeks, I have explained simple tax strategies for business owners and incorporated professionals to learn about and consider.

In each case, I have reminded you that the Canada Revenue Agency is a silent partner in your life’s journey from employment to retirement and beyond—however you define retirement (you know me—I’m in the Never Retire camp!).

In Part 1, I explained the tax problems associated with the strategy of accumulating surplus cash in a corporate account and offered easily implemented strategies that may reduce the corporation’s passive income, hence preserving the small business deduction limit.

In Part 2, I offered effective ways to split income from the higher income spouse to the lower income spouse, sharing strategies that were easy to comprehend and apply (if/when appropriate).

In Part 3, I clarified Individual Pension Plans and explained how an IPP could be expanded by adding three individual plans within one account. Both options allow business owners to accumulate a bigger pension plan (compared to the typical RRSP), minimize passive income earned in the corporation, and provide an opportunity to implement the generational transfer of pension assets at death (if children are employed by the corporation).

This week I’m going to talk about how you can avoid double taxation upon the death of a loved one.

If you’re still confused about where to start, I would suggest booking a tax planning appointment with your advisors to discuss the ideas and strategies. If needed, bring my four blogs with you and start with my simple strategies.

Or give me a call, and I’ll come to the meeting with you and help translate all of the information into understandable options and action items.

After the meeting, take some additional time to reflect on how the recommended strategies may reduce and defer your corporate and personal taxes.

As with all my blogs, please don’t assume the strategies presented automatically apply to your individual situation. Seek out competent advisors and, together, discuss whether any of them fit your unique situation.

So this, my fourth and final blog in the series “Your silent partner—the CRA,” discusses strategies to minimize the tax effects on death.

Before diving into the topic, let me say that minimizing taxes due on death has been a very divisive subject in my practice. About half of business owner clients feel that they have no responsibility to forgo present cashflow in order to minimize taxes on death and increase cashflow for the estate. This group believes that the estate will inherit whatever is left and not a penny more. They feel that they have already given their children enough in providing a loving home, food, tuition, and so on, and they don’t need to do any more.

The other camp feels that they have worked their whole life to build a successful business and can’t sleep at night knowing that their death may cause double taxation of business assets. This group believes that they have a responsibility to take the necessary steps to structure a tax efficient exit plan.

Regardless of where you pitch your tent, this blog will present some strategies I think you will find interesting.

First, let’s set up the problem…

Mr. Electric owns a successful corporation that manufactures parts for Tesla cars. He is the sole shareholder and is married with teenaged children.

On a business trip to sign a big contract with Elon Musk, Mr. Electric suffers a massive heart attack and ultimately dies. After the funeral, Mrs. Electric begins the painful work of settling her husband’s estate. (For simplicity, I will keep this example focused solely on one issue arising from Mr. Electric’s death.)

In Canada, when taxpayers die, they are deemed to have sold all their assets on the date of death at fair market value. This rule applies to Mr. Electric.

Since he started the company from scratch, his shares have an adjusted cost base of zero and have a current value of $10. This creates a deemed taxable capital gain of $5 per share and taxes of $2.50 per share (assuming a 50% tax rate).

Mrs. Electric inherits the shares at the same fair market value. This is the first level of taxation.

Assuming Mrs. Electric who is the beneficiary of the estate and becomes shareholder of the corporation decides to withdraw $1M from the corporation to buy a cottage in Muskoka, and the corporation issues her a taxable dividend for this amount.

Since she receives a dividend, it is taxable in her hands and she is required to report the dividend and pay the appropriate taxes. This is the second level of taxation.

Consequently, the value of the assets of the private corporation may be taxed twice, the first time as a capital gain on the deemed disposition at death, and the second time as a dividend on the distribution of the assets (or substituted property) of the private company to its shareholder (i.e., the deceased’s estate).

Now let’s assume that the corporation doesn’t have the cash to make the dividend payment, so it sells and leases back the building that holds it operations. The building was bought for $500,000 and is now sold for $1M.

The sale creates a capital gain of $500,000 for the corporation and a $250,000 capital gain tax, adding a third level of taxation.

Potentially, three layers of taxation arise from the death of Mr. Electric. That’s why you should consider the CRA as a silent partner in the Electric family’s life—both before and after death.

Now, let’s look at some solutions to this problem.

1) An estate freeze

This is a somewhat complicated corporate reorganization that usually leads to freezing the value of the corporate assets on a designated date and transferring any future growth to the next generation.

If the freeze works properly, the tax on the future growth of the company is reflected in an increase in the value of the shares owned by the children and in the tax paid by the children on their passing.

This establishes a multi-year tax deferral.

In addition, the freeze allows the shareholder (Mr. Electric ) to calculate the amount of tax that is due on his passing, and he can take appropriate actions to fund the liability (assuming the shareholder is enjoying life in the second camp as outlined above).

2) Tax exempt life insurance

During an estate freeze, the amount of tax due on the shareholder’s death is calculated, providing the shareholder an opportunity to create a cost-effective method to fund the tax liability.

One effective method is for the corporation to purchase life insurance equal to the amount of the tax liability due on the shareholder’s death—and designating the shareholder as the life insured. The corporation would be designated as the beneficiary and policy owner

On the death of the shareholder, the death benefit less the adjusted cost base of the policy is added to the Capital Dividend Account and can be distributed to the new shareholders (the beneficiaries of the shares) free of tax.

The death benefit can make the estate whole, which means it replaces the portion of the estate that was lost by taxes arising from the deemed disposition.

3) Post- Mortem Tax Planning

Usually the solution to double or triple taxation is:

a) A loss carryback.

This approach carries losses realized in the first taxation year of the deceased’s estate back to the year of death and applied any capital gains caused by the deemed disposition.

b) Pipeline transaction.

If you’re not clear what a pipeline transaction is, let me share an excellent explanation with you.

“The pipeline structure is intended to permit the estate of the deceased taxpayer to extract the assets (or substituted property) from the private corporation without triggering any additional tax.

A typical pipeline transaction, for example, is implemented after the taxpayer’s death (i.e., after the deemed disposition at fair market value) and involves the estate incorporating a new corporation (“Pipelineco”) that will acquire the shares of the private corporation held by the estate. As consideration for the shares, Pipelineco will issue a noninterest bearing promissory note in an amount equal to the fair market value of the shares of the private corporation.

The private corporation is subsequently wound-up into Pipelineco and all of its assets are transferred to Pipelineco. Pipelineco uses the assets received on the wind up of the private corporation to repay the promissory note to the estate.”

The benefits here are evident. But if you want to hear more or have any questions about how this could work in your particular situation, give me a call and I’ll take you through the details.

c) A combined approach.

Of course, one could also use both approaches in combination.

Here are my final thoughts on this entire topic.

Be deliberate with your tax planning and include the voices of a competent group of advisors: accountants, lawyers, bankers, and wealth advisors.

Be comprehensive in your tax planning and ensure that the tax plans complement your financial and wealth plans.

Be transparent in your tax planning by discussing and obtaining feedback from everyone connected to the business (such as your spouse, children, employees, and so on).

This wraps up my four-part series on your close and personal relationship with the CRA. I hope I have provided much food for thought.

The process of finding a financial advisor can be overwhelming. It is our job to make that process simpler and easier. Dri Financial Group’s proprietary Wealth Navigator Process is designed with you in mind. Its structured framework helps you make an informed decision and feel confident in our team and management practices before we get started.

We offer you a range of services from creating bespoke financial plans and providing investment advice to helping you take advantage of our investment models. If you would like more information on the Wealth Navigator Process or our team, call me any time at 416.355.6370 or email me at richard.dri@scotiawealth.com.

Beyond helping you manage your finances, we take pride in motivating, educating and helping you expand your financial literacy. We are here to answer any questions you have and to help you feel in control of your financial destiny.

If you are ready to dive deeper into your financial literacy journey, we have a wide range of free tools and educational resources available.

• Subscribe to our Never Retire Newsletter
• Contact us to order a complimentary e-book
• Check-out our latest Wealth Navigator Podcast
• Follow me on LinkedIn

source https://richarddri.ca/double-taxation-and-the-cra/

You’ll have noticed a pattern by now: today’s post is Part 3 in a series on the role the Canada Revenue Agency plays in our lives. In total, this will be a four-post series, so stay tuned for next week as well.

In Part 1 and Part 2, I challenged business owners and incorporated professionals to stop whining about our silent partner and instead acquire working knowledge of corporate and personal taxation in Canada.

If you believe that taxation is beyond your level of expertise and blindly follow the advice (or lack thereof) from your advisors, I ask you to consider the following question: If Canada is expected to post a deficit in 2020-21 of $300+ billion, is it reasonable to assume that taxes will increase?

Given the possibility of higher taxes in the near future, business owners must make it a priority to defer and minimize their tax payments. I suggest this starts with a working knowledge of the tax code.

In Part 1, I discussed strategies for minimizing passive income and preserving as much of the Small Business Deduction limit as possible. I introduced a strategy called an Individual Pension Plan for corporate owners.

Today, I will discuss how we can add specific provisions to the IPP and enhance its usefulness for certain business owners.

Please note, these strategies are for illustration purposes and do not constitute as recommendations. I won’t and can’t cover all the different possible scenarios, so please speak with your advisors to determine if the strategies mentioned in the blog are appropriate for your unique circumstances.

Let’s start with the basics. What is a registered pension plan?

“A registered pension plan is a plan that provides you with a source of income during your retirement. Under these plans, you and your employer (or just your employer) regularly contribute money to the plan. When you retire, you’ll receive an income from the plan.”

So in short, it’s a plan that collects and invests funds during an employee’s working years and distributes the funds plus growth to the employee during retirement.

There are two main types of employer pension plans:

• defined contribution plans
• defined benefit plans

1) What’s a defined contribution plan (DC plan)?

In a DC plan, the employer and maybe employee (sometimes yes, sometimes no) contribute money to a pension plan, and the employee (again not always) selects the investment vehicle for the funds. When the employee retires, the pension plan is usually transferred to a locked-in registered retirement plan in the employee’s name, and the employee begins receiving a monthly pension until the plan is depleted or death occurs.

So the employee knows how much will be invested into the plan but doesn’t know how much will be available at retirement.

Here’s an example: assume X Corporation agrees to match employees’ contribution into a pension plan up to 3%, and assume employee John earns $100,000 in 2020.

If John contributes 3% to his company’s DC plan, X Corp. will match the contributions and John will see $6,000 added to his plan in 2020. John is responsible for selecting an appropriate investment vehicle, and we assume he invests in a five-year GIC with a 1% annual interest rate.

If we assume that his income, his employer and his investment choices don’t change for 25 years, John will save approximately $170,000. If we also assume John now retires from X Corp., he may transfer his pension to a locked in RRSP and may begin withdrawing income from age 55 or, alternately, start as late as age 71 (subject to minimum and maximum withdrawals).

Of course, there are many small-print items connected with DC plans which are not relevant for this general discussion. However, I want to emphasize that the risk of good or bad investment returns (before and after retirement) are borne by John and not X Corp.

Instead of purchasing a 1% GIC, John could have selected a successful investment strategy (like the Richard Dri Dividend Growth Model) and averaged, say, 10% during the same period. If he had, his retirement pool would then be approximately $590,000. And he would transfer this balance to his locked-in RRSP.

In short, the investment return risk is solely on John’s shoulders. If the returns are strong, John enjoys a better retirement. If the returns are poor, his retirement income suffers. On the other hand, X Corp.’s financial responsibility ends when John retires.

In real life, many employers are switching from defined benefit plans to DC plans, because a DC plan allows them to quantify their payments into the plan and limits their liability at the point of the employee’s retirement, not at the employee’s death.

2) What’s a defined benefit plan (DB plan)?

Under a DB plan, the employer agrees to pay the employee a specific pension income after they retire. The pension amount calculation is usually based on the employee’s salary, years of service, and an agreed participation percentage. The contributions are usually made by both the employer and employee (but can also be non-contributory for the employee).

As a simple example, Z Corporation has a DB plan which pays a pension at retirement based on the following formula: average salary during the last five years x number of years of service x participation percentage. Using John’s numbers, it looks like this: $100,000 x 25 x 1.5% = $37,500 per year in pension income (inflation coverage may also be included in some plans).

Without going into the weeds with the fine print, suffice to say that the risk of the pension plan lies with the employer. For example, if over the employee’s career, the pension plan’s investment returns are below projected or the employee lives to 100 years of age, causing a pension shortage, the employer is required to make up the shortfall with additional contributions.

In short, if my client had the choice of working with X Corp. or Z Corp. (all other things being equal), I would strongly suggest they accept employment with Z Corp. A DBP shifts the investment and longevity risk to the employer.

3) What’s an Individual Pension Plan (IPP)?

An IPP is a defined benefit plan for the shareholder(s).

In practice, the corporation that sets up the IPP is usually owned by the shareholder and their spouse; the shareholders are employees of the company; the shareholders wish to create a retirement plan; and the shareholders plan to reduce passive income earned in the corporation.

Using the above examples, John is the sole shareholder of X Corp. and his T4 income is still $100,000 per year. John hires an actuary to set up an IPP and plans to use the same formula mentioned above (average salary during the last five years before retirement x number of years of service x participation percentage).

During the IPP set up and every three years thereafter, an actuary determines the amount of money that is required to fund the pension, and the corporation follows the funding schedule and contributes annual tax-deductible payments to the pension. John starts receiving income from the IPP when he retires but no later than age 71.

An IPP allows business owners and incorporated professionals to create a defined pension plan similar to the DBP offered by large blue-chip corporations or organizations like the Ontario Teacher’s Pension Plan, the Ontario Municipal Employees Retirement System or Healthcare of Ontario Pension Plan.

4) Why should a business owner consider an IPP?

Here are some considerations:

a) IPPs allow more money to be saved for retirement than an RRSP.
b) IPPs recognize the years of past service and allow the corporation to make a one-time, tax-deductible contribution to fund the past service and increase the retirement income for the shareholder.
c) Customization of retirement benefits are possible, such as inflation protection, early retirement or CPP bridge benefit.
d) Assets in an IPP grow tax free until withdrawn by the employee/shareholder.
e) The assets are generally not subject to creditor seizure. Note: RRSPs in Ontario are not creditor-proof and may be included in a personal lawsuit.
f) All investment management and actuarial fees may be tax deductible by the corporation—unlike RRSPs where investment fees (such MERs) are not an expense for the individual.
g) All corporate contributions to the IPP are tax deductible, and any investment income is not attributed back to the corp.
h) Contributions reduce shareholder equity and may facilitate the eventual sale of the corporation.
i) The corporation may make additional tax-deductible contributions during negative markets.
j) Children employed by the corporation and earning a salary are eligible to become members of the plan, ensuring that assets pass to the next generation without taxes or probate fee.

Without going into too much actuarial jargon to answer this question, suffice to say that a business owner can add two additional accounts: a defined contribution (DC) account and an additional voluntary contribution (AVC) account to the IPP’s defined benefit (DB) account.

Yes, I am recommending three accounts in one plan: a DB plan, a DC plan and an AVC plan.

The defined benefit components hold the current and past service (including qualifying transfers). The defined contribution component holds 1% of T4 income. The additional voluntary contributions (VC) hold transfers in kind of RRSP assets in order to deduct investment management fees and provide creditor protection.

RRSP contribution limits are higher for shareholders under the age of 40; hence, IPPs are best suited for shareholders/employees over 40. However, with the additions I have described for you, an IPP allows younger shareholders to contribute to their AVC account until they turn 40, which means they can start accumulating funds sooner and may have a higher balance at retirement.

Conclusion

An IPP is a defined benefit plan (DB plan) for shareholders of a corporation. Because of the benefits mentioned above, it generally results in retirement balances greater than what’s available from RRSP contributions.

For additional cashflow flexibility and tax deductions (from transferring RRSPs into the additional voluntary contribution account), leading to a possible larger pension asset at retirement, shareholders should consider including a DC and AVC plan to their IPPs.

We offer you a range of services from creating bespoke financial plans and providing investment advice to helping you take advantage of our investment models. If you would like more information on the Wealth Navigator Process or our team, call me any time at 416.355.6370 or email me at richard.dri@scotiawealth.com.

Beyond helping you manage your finances, we take pride in motivating, educating and helping you expand your financial literacy. We are here to answer any questions you have and to help you feel in control of your financial destiny.

If you are ready to dive deeper into your financial literacy journey, we have a wide range of free tools and educational resources available.

• Subscribe to our Never Retire Newsletter
• Contact us to order a complimentary e-book
• Check-out our latest Wealth Navigator podcast
• Follow us on social!

Never Retire Profile

Nancy Pelosi

Nancy Pelosi made history in 2007 when she was elected the first woman to serve as Speaker of the House of Representatives. Now in her third term as Speaker, the 80-year-old was first elected to Congress in 1987 and is currently representing California’s 12th congressional district, which contains most of San Francisco. Pelosi was born and raised in a political family, with her father a Democratic congressman from Maryland who later became Mayor of Baltimore. Involved in her father’s campaign events as a child, Pelosi began her own political career soon after graduating from university, first working as an intern and then gaining an elected position 1976 as a Democratic National Committee member. With such a long career, Pelosi is best known these days for being the architect of President Obama’s Affordable Care Act (and then holding House Democrats united against Republican attempts to undermine it) and supporting Wall Street reforms, student aid, the end of pay discrimination for women, the repeal of the “Don’t Ask, Don’t Tell” policy, and energy legislation to help relieve the climate crisis. All this and so much more, while Pelosi has also raised five children, enjoys time with her nine grandchildren, and has no plans to retire. Nancy Pelosi

source https://richarddri.ca/what-are-individual-pension-plans/

With the instability in the United States and a highly contentious election campaign underway, I get asked this question a lot: should I be worried about the upcoming U.S. election as a Canadian investor?

The answer is “yes, you should worry” for many reasons, but as a financial advisor, I would say that “no, you shouldn’t worry” when it comes to your investment plan.

Why “yes”?

Well, because what happens to our neighbours in the south always has an impact on us: their trade relations, their ​EPA regulations​, even the way they are handling the ​pandemic​. So yes, the choice of the 46^t​h​ President will no doubt be felt here at home.

And the ​stock market​ will also no doubt respond to that choice…

Why “no”?

Despite all of this, the answer is “no” when it comes to making decisions about changing your investment approach.

Though we may see ​market volatility​ once election results are known, that doesn’t mean we can predict what that volatility will be or that we should even try.

It’s never possible—or wise—to predict short-term changes in the market. Or to change your portfolio based on what you think might happen next week or next month.

If you do that now, you are operating on fear, not evidence. Or putting your faith in your crystal ball. Neither of those are reasonable approaches.

Here are a few facts to consider:

No matter who has occupied the White House over the past 85 years (ever since the ​Great Depression​), the market has continued to trend upward. Whether a Democratic or Republican president, the result is the same: continued long-term growth. This is also true here in Canada, no matter who occupies 24 Sussex Drive.

This also means that no matter the national or even international events during that same period of time—violent conflicts, social upheaval, tragic episodes—the same is true.

However the market responds in the short-term, it continues to trend upward over time.

So why shouldn’t you be worried, despite possible short-term fluctuations? Well, your investment plan takes all of this into account!​ (or at least it should!)

What do I mean by that? You already have a plan that reflects your personal values, goals and life circumstances and is based on historical evidence and proven models. Your plan does not say, “But I will ditch those reasonable and careful considerations in the event of a major national or international incident.” Of course not.

It’s natural to feel anxious over what is happening in the United States right now. But as I always say, it’s unwise to make buy and sell decisions based on emotion.

Successful investors follow an approach based on evidence, analysis and a proven track record. That’s what my proprietary investment models are based on, and that’s why they work.

I can’t say what will happen to your portfolio over the next few weeks or months or even year. Neither can you or anyone else. But I can say that no matter who wins this election, we will all see continued growth in the market over time. That’s what evidence tells us.

So unless you have other reasons to change your investment plan—life circumstances, risk tolerance, or anything else—stay the course. That’s what’s best for your portfolio in these uncertain times.

source https://richarddri.ca/should-i-be-worried-about-the-upcoming-u-s-election-as-a-canadian-investor/

It was an auspicious start to the trading week on Monday as U.S. stock indexes hit their highest closing values in nearly six weeks. Once again, the surge was largely fueled by tech names, which propelled the Nasdaq nearly 300 points higher, its third-highest close to date. In Canada, the TSX was closed for the Thanksgiving holiday.

However, U.S. stocks wavered Tuesday as mixed earnings reports from airlines to banks weighed on indexes. Investor optimisms also waned Tuesday as uncertainty about a second wave of coronavirus infections and the prospect of new lockdowns threaten to derail the global economic recovery. By Tuesday’s close, the Dow was down 158 points, while the TSX was off 52, with the energy, materials and financial sectors all ending the day with losses.

Wall Street indexes were down again on Wednesday as hopes for a pre-election fiscal stimulus package continue to fade. Key tech names faltered as the Nasdaq dropped nearly 100 points, while the Dow and TSX shed 166 and 55, respectively. Stocks opened lower Thursday and investors fled to U.S. treasuries as tightening coronavirus lockdowns in Europe and a weakening U.S. jobs picture weighed on markets. On Wednesday, France declared a state of emergency and imposed a nightly curfew for Paris and other key regions areas across the country. Meanwhile, U.S. employers continue to shed workers at an alarming pace as a resurgent pandemic and lack of fiscal stimulus weigh on economic growth. New jobless claims data released Thursday revealed that nearly 900,000 Americans last week filed for unemployment benefits–well above analysts’ initial estimates of 830,000. By Thursday’s close, all three major U.S. indexes were slightly in the red, while the TSX inched up 46 points.

N.A. Markets Mixed

For the four trading days covered in this report, the Dow shed 93 points to close at 28,494, the S&P 500 inched up 6 points to settle at 3,483, while the tech-heavy Nasdaq held on to a 133-point gain to close at 11,713. In three days of trading, the TSX dropped 62 points to end at 16,501.

Read more…

source https://richarddri.ca/markets-slide-as-hopes-for-stimulus-continue-to-fade/

Last week, I challenged business owners and incorporated professionals to take deliberate steps to reduce or defer the CRA’s take-home pay.

Here is part of what I said:

“The CRA is a devious partner. It shares in our profits but doesn’t participate in our losses. It’s never around when we need help landing a new client or have trouble paying the rent. Yet somehow, many of us have a partner that takes approximately 50% or more of everything we earn.”

I explained how shareholders of Canadian Controlled Private Corporations (CCPC) could lose some or all the small business deduction (SBD) if their corporation earns more than $50,000 of investment (passive) income.

I also provided several methods for reducing their corporation’s passive income and preserving all or some of the SBD.

This week, I am going to explain how loans and transfers may lower a family’s combined taxes.

Please note that these blogs are for informational purposes only. I won’t and can’t cover every possible scenario, so please speak with your advisors to determine if these strategies are useful for your specific situation before implementing.

So, here we go!

I’ll start by reminding you that in Canada, a married couple is taxed as two separate tax-paying individuals.

For example, assume Couple A both work and each earns $50,000 per year or $100,000 combined. In Couple B, one spouse doesn’t work and the other earns $100,000 per year.

(For now, assume there are no other sources of income or deductions and both couples reside in Ontario.)

Couple A pays approximately $10,775 each for a total of $21,550 in tax, and Couple B pays $27,133 in tax.

In short, both families earn the same $100,000, but because of our tax system, Couple B pays approximately $5,600 of additional tax per year.

If we take the future value of $5,600 for 30 years at 4% return, Couple B ends up with approximately $500,000 less money. And that’s a lot of money!

In the spirit of transparency, my late wife and I were Couple B.

Not a fair system, but neither is life. So I challenge business owners to spend time and money to consider effective and legal tax minimization strategies.

Many business owners have in the past paid dividends and/or salary to family members in lower tax brackets, such as school-aged children and stay-at-home spouses. It was called income splitting and would lower the family’s overall tax liability by spreading money to family members with little or no income.

Unfortunately, all good things eventually come to an end. In 2018, the federal budget restricted income splitting by introducing the new Tax on Split Income (TOSI) rules.

Due to the complexity of the TOSI, the blog will not explain the rules nor the exceptions to TOSI , we suggest this review is best completed with your advisors.

Despite the changes to the TOSI rules, there are some existing strategies that remain effective for high-income individuals.

Below are a few.

1) SPOUSAL LOANS

When one spouse earns a higher income than the other, like Couple B above, the overall tax bill may potentially be reduced by shifting investment income to the lower-income spouse.

For example, Richard (the working spouse in Couple B) lends his stay-at-home spouse Mary $100,000 for the purpose of buying investment assets and charges Mary the prescribed rate of interest. At the end of the year, the investment earns $4,000 of investment income, and the interest charged was $1,000.

The attribution rules would normally transfer the $4,000 of investment income back to Richard, but because the money was loaned and formalized by a legal agreement including charging the prescribed interest rate (which is 1% as of July 2020), the attribution rules don’t apply.

(note: interest must be paid by January 30 for the attributions to not apply).

So in summary, Mary records the investment income of $3,000 ($4000 less $1000). Because she didn’t earn any other income, her tax payable would be nil, and Richard records $1,000 of investment income and pays tax on the balance. The total family tax payable is lower under this approach.

Note that in this case, Mary’s income was nil, but it doesn’t have to be zero. The strategy works if one spouse is in a lower tax bracket and the prescribed rate is low.

Also note that the rate applied to the loan can remain unchanged even if the prescribed rate increases in the future, which could result in significant tax savings, especially if the loan remains outstanding for an extended period.

These types of loans are often structured as due on demand loans with no set repayment terms and could be outstanding for an unlimited amount of time.

I suggest considering a spousal loan now while interest rates are historically low.

2) TRANSFERRING ASSETS TO A SPOUSE

Instead of transferring cash to a lower-income spouse, this strategy entails transferring an asset such as a stock.

In order to avoid the attribution rules, Richard transfers a stock to Mary at fair market value and records the accrued capital gain in the year the transfer is made.

As in the above example, Mary provides Richard with a promissory note equal to the fair value of the stock and includes an interest rate equal to the prescribed rate.

All future capital gains and investment income sits with Mary, and Richard records the interest on the loan.

After a market decline as we experienced in March, 2020, I suggest reviewing assets with zero or very small accrued capital gains and investigate a transfer to the lower-income spouse.

3) PERSONAL GIFTING

In some cases, business owners have adult children who are in a lower tax bracket when compared to their parents.

Under this circumstance, it’s possible to gift money to an adult child, and any future investment income earned by the child would be taxed at the child’s lower rate and would not attribute back to the higher-income spouse.

I suggest business owners consider this option in connection with the pros and cons of providing an early inheritance.

4) SPOUSAL RRSP

Let’s go back to Couple B. Richard’s RRSP room is $18,000, and he has the option of either contributing to his personal RRSP or to a spousal RRSP. Either way, Richard gets the tax deduction.

In this strategy, Richard makes a spousal contribution on behalf of Mary and claims a $18,000 tax deduction. Note that this contribution doesn’t affect Mary’s ability to make her own RRSP contributions, assuming she has contribution room.

If Mary withdraws the $18,000 after three years, the withdrawal is taxed in her name and not attributed back to Richard.

(note: if Mary withdraws the RRSP within three years, attribution rules apply, and the strategy fails.)

Again, if Mary is in a lower tax bracket, she would be taxed less on the withdrawal (when compared to Richard’s tax rate), and any future investment income would be taxed in her name.

5) PENSION SPLITTING

This strategy enables the higher-income spouse to shift up to 50% of eligible pension income to the lower-income spouse, resulting in a lower tax bill within a family

Most tax preparation software offers the ability to test all possible pension splitting options and recommend the optimal pension split.

CASE STUDY: Taking a closer look at spousal loans

I get a lot of questions about this, so if you’ve read this far and want a little more detail on how this works, read on. Below is an example of prescribed rate loans to a lower-income spouse.[1]

Here are the basic assumptions:

• Mrs. X is a high-income earner with a tax rate of 50%.
• Mr. X is the lower-income spouse with a tax rate of 25%.
• Mrs. X wishes to invest $500,000.

Scenario 1

Mrs. X invests $500,000 in income-producing assets generating a 5% return, or $25,000 of investment income.

Mrs. X’s taxes payable is $12,500 ($25,000 x 50%).

Scenario 2

Mrs. X lends the $500,000 to Mr. X, with Mr. X issuing a promissory note bearing interest at the prescribed rate of 1%.

Mr. X pays tax of $5,000 ($25,000 less $5000 x 25% = $5,000).

Mrs. X pays tax on the interest earned of $2,500 ($500,000 x 1% x 50% = $2,500).

Total tax in scenario 2 is $7,500 ($5,000 + $2,500).

By loaning $500,000 to the lower-income spouse with the prescribed rate as the applicable interest rate, Family X pay $5,000 less tax annually, which could be significant over a long period of time.

Overall, prescribed rate loans may be a method for reducing a family’s overall tax liability, particularly where one spouse earns significantly more income than the other.

Any strategy is best considered as part of a comprehensive financial plan, where an individual’s overall goals and entire financial situation can be factored into any and all recommendations. The process of finding a financial advisor can be overwhelming. It is our job to make that process simpler and easier. Dri Financial Group’s proprietary Wealth Navigator Process is designed with you in mind. Its structured framework helps you make an informed decision and feel confident in our team and management practices before we get started.

We offer you a range of services from creating bespoke financial plans and providing investment advice to helping you take advantage of our investment models. If you would like more information on the Wealth Navigator Process or our team, call me any time at 416.355.6370 or email me at richard.dri@scotiawealth.com.

Beyond helping you manage your finances, we take pride in motivating, educating and helping you expand your financial literacy. We are here to answer any questions you have and to help you feel in control of your financial destiny.

If you are ready to dive deeper into your financial literacy journey, we have a wide range of free tools and educational resources available.

• Subscribe to our Never Retire Newsletter
• Contact us to order a complimentary e-book
• Check-out our latest Wealth Navigator podcast
• Follow us on social!

Never Retire Profile

Martin Scorcese

Like his close friends Brian DePalma, Francis Ford Coppola, George Lucas and Steven Spielberg, Martin Scorcese helped to introduce a new kind of American filmmaking in the 1970s. A film school graduate, he broke out in 1973 with Mean Streets, his first film with Robert De Niro. His next De Niro film, Taxi Driver, was nominated for four Academy Awards, won the Palme D’Or at the 1976 Cannes Film Festival, and is considered so historically significant that the US Library of Congress has selected it for preservation in the National Film Registry. In addition to repeatedly working with De Niro, Scorcese also regularly collaborates with Leonardo DiCaprio, with The Departed winning Academy Awards for Best Picture and Best Director. In total, Scorcese has directed 20 films, won more awards than can be counted, and has three films in the American Film Institute’s top 100 American films of all time list (Raging Bull, Taxi Driver and Goodfellas). Scorcese’s visual, kinetic style has had a significant impact on modern filmmaking, and he’s at it again with Killers of the Flower Moon, a movie in pre-production starring both De Niro and Di Caprio. The 77-year-old master has no plans to retire. Martin Scorcese.

source https://richarddri.ca/take-advantage-of-cra-policies-to-minimize-your-tax-burden-as-a-business-owner/

It’s been a Trump-centric week for financial markets–and world news in general–as all eyes have been predominantly focused on U.S. President Donald Trump, who last week tested positive for Covid-19 and was hospitalized Friday. Although conflicting health reports continued over the weekend, U.S. stocks rose sharply on Monday, as investors were calmed after it was reported that Trump would be leaving Walter Reed Hospital Monday evening. By Monday’s close, the Dow was up nearly 470 points, while the TSX gained over 200, as crude prices climbed more than 5%.

Although U.S. markets were up for most of Tuesday’s trading, U.S. stocks fell sharply late Tuesday after Trump reportedly ended negotiations with Democrats over a new economic relief package until after election day. The news hit especially hard given that Fed Chair Jerome Powell, just hours earlier, had warned of potentially tragic economic consequences if the administration doesn’t provide more relief to households and businesses hit hard by the pandemic. In response, the Dow fell 376 points, while the TSX dropped 218, led lower by the materials sector and declining gold prices.

Trump news once again held U.S. markets in thrall Wednesday after the U.S. President reversed course and appeared to soften his position on a possible relief package before the November election. The news sent U.S. markets surging, with the Dow adding 531, while the Nasdaq climbed 210. It was also a strong day for the TSX, which climbed nearly 200 points. Cautious optimism over the aforementioned relief package again modestly boosted all four N.A. markets on Thursday.
In U.S. economic news, the number of U.S. job postings fell in September from a month earlier, after posting solid gains during the summer, according to Glassdoor.com. Meanwhile the U.S. posted its largest monthly trade deficit since August 2006, the Commerce Department said Tuesday, as exports of services and manufacturing products stalled. Finally, the number of new jobless claims remains high at 840,000 for last week, once again outpacing economists’ estimates.

Read more…

source https://richarddri.ca/trump-news-takes-hold-of-financial-markets/

N.A. Stocks rallied to close sharply higher on Monday as investors went bargain shopping among sectors hardest-hit by the coronavirus recession, including financials and energy. By Monday’s close, the Dow was up more than 400 points, while the TSX added 177.

However, U.S. markets declined Tuesday after two sessions of solid gains as investors looked ahead to the first debate between President Trump and former VP Joe Biden. Fears of a second wave of coronavirus in the U.S. and slim prospects for a relief package also weighed on sentiment. In Canada, the TSX declined 31 points, dragged lower by losses in the energy sector, which saw a significant drop in crude prices. By Tuesday’s close, the TSX energy sector had fallen 4.26%. All three U.S. indexes climbed Wednesday to end the quarter on a strong note. Despite a stretch of volatility that stalled momentum in September, the S&P 500 and Dow gained 8.5% and 7.6%, respectively, over Q3. Both indexes are up more than 26% since the end of March, while the Nasdaq has risen 45% over the past six months, its biggest two-quarter gain since 2000. All three major U.S. indexes jumped after House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin both expressed hope for a breakthrough in partisan stimulus negotiations, but gains were pared later in the day after key Republicans dismissed the likelihood of anything passing before the U.S. election. In Canada, the TSX lost 90 points on Wednesday, closing out Q3 with a 1.3% decline. Over the quarter, the health care sector was up more than 30%, while the materials, consumer discretionary and energy sectors were the weakest performers.

U.S. indexes edged slightly higher Thursday as investors continued assessing the prospects of Congress passing an additional stimulus package before next month’s election. In Canada, the TSX started off Q4 with a modest gain of 63 points.

Read more…

source https://richarddri.ca/u-s-markets-decline-in-september-but-register-strong-quarterly-gains-tsx-down-for-q3/

Each week, I share Live Well, Stay Rich, Never Retire strategies directed to business owners and senior professionals. But too often, I underestimate one of our most important but very silent business partners: the CRA.

Tax planning and paying your taxes are critically important in your financial planning and cannot be overlooked. So let’s review the role the CRA plays in your financial plan as a business owner.

I would consider the CRA a somewhat devious partner…

It shares in our profits but doesn’t participate in our losses. It’s not around when we need help landing a new client or have trouble paying the rent. Yet somehow, we have a partner that takes approximately 50% or more of everything we earn.

Given the impact our business partners can have on our Stay Rich principle, it makes sense to examine our relationship with the CRA and find ways to reduce or defer their portion of our money.

I am not suggesting that business owners enroll in advanced tax planning courses on weekends. Instead, I’m encouraging you to acquire a general understanding of how businesses are taxed. This information is readily available from books, blogs or listening to podcasts. Including this one!

Ask yourself this question: “If a business expense was approximately 50% of your net income, how much time/money would you allocate to reduce that expense or at least become more efficient with its usage?” Compare your answer to how much time you spend in tax planning.

From my experience working with business owners like you over the last 25 years, you might be too busy, a touch complacent, or lack the right advice. Which means you may just default to paying whatever your advisor calculates.

Dear business owners: I challenge you to be deliberate and allocate enough time to tax planning.

So for the next four weeks, I will examine ways that you—and also senior professionals—can reduce or defer CRA’s take-home pay.

Please note that these blogs are for informational purposes only. I won’t and can’t cover every possible scenario, so please speak with your advisor to determine if these strategies are useful for your specific situation before implementing.

1) Tips for mature businesses

After years of working long hours in your business, missing family events and some weekends, many of you may have accumulated savings in your corporation. I’m referring to funds over and above the cash requirements of operating your business.

First, if you are in this situation, congrats!

You’re on your way to achieving financial independence. But at the same time, you have made your silent partner very happy.

Historically, when owners of Canadian Controlled Private Corporations (CCPC) earned funds in excess of personal needs, they were inclined to leave the surplus funds within their CCPC (usually limited to the first $500,000 of surplus funds).

This strategy allowed business owners to pay tax on the first $500,000 of active income at the small business tax rate, which in Ontario is currently at 12.5%. Additional taxes would be paid when funds were distributed to the shareholders.

This strategy allowed for a tax deferral opportunity for those with excess corporate earning.

In 2018, CRA passed new rules that causes business owners to lose some of or the entire benefit connected to the small business tax rate on the first $500,000 of active business income when their corporation earns more than $50,000 per year of passive income.

The rules here are somewhat complicated but in simple terms, if the corporation earns between $50,000 to $150,000 of investment income (i.e. passive income), then the small business deduction limit is reduced from $500,000. For example, $150,000 of investment income reduces the small business deduction limit to zero.

Simply put, if a business owner earns more than $50,000 in passive income, the benefit of leaving annual savings in your corporation and deferring the tax over many years is significantly reduced.

My suggestion is to speak with your advisors and evaluate ways to reduce your passive income.

Here are a few ideas to get you started:

1. Consider investments that increase in value rather than distribute interest or dividend income. For example, consider non-dividend paying stocks or real estate that generate zero net rental income.
2. Consider withdrawing sufficient funds to maximize your RRSP and TFSA contributions. Given sufficient time, RRSPs and TFSAs would outperform corporate investing when earnings come from interest, eligible dividends, or annual capital gains.
3. Consider repaying shareholder loans, which are tax free withdrawals from your corporation. For example, if you loaned your corporation funds and the corporation no longer needs the loan, consider repaying the loan to the shareholder.
4. Determine if your corporation has a balance in its Capital Dividend Account (CDA). If so, this portion may be distributed to shareholders tax free. Consider establishing an Individual Pension Plan (IPP). Since the corporate contributions are not owned by the corporation, any income earned within the IPP has no effect on the small business deduction limit. As well, the annual contribution limit to an IPP is generally higher than the limit available to a RRSP. Remember, higher annual contributions may lead to higher tax-deferred accumulation.
5. Consider corporate-owned life insurance. In most cases, income earned from investments inside a life insurance policy is not considered passive income and will not reduce SBD limit. Be aware that this option should only be considered if there is a life insurance need AND a need to reduce the corporation’s passive income.
6. Consider making an in-kind donation of publicly listed securities with unrealized capital gains. No tax is triggered on the accrued capital gain. The capital gain is not included in your investment income and, best of all, the entire capital gain is added to your CDA and may generally be withdrawn tax free.

In summary, if your business’s investment income reduces its SBD limit, resulting in a reduction in tax deferrals and consequently reducing the amount of money that is eventually withdrawn from your corporation, it’s time to speak with your professionals.

2) Tips for a start up

Two frequent questions I receive from new business owners is whether they should incorporate and, if so, whether they should draw salary or dividends.

As discussed above, corporations have a significant tax deferral on your business income (the national average is about 30%) if you earn active business income that qualifies for the Small Business Deduction (SBD). The tax deferral can provide significant tax savings that can be reinvested.
But before rushing into a corporation, ask yourself the following questions:

1. Does the nature of your business revenue qualify for the SBD? For example, passive income in the form of rental income doesn’t qualify for the SBD, unless your entity is not considered a specified-investment business. (One way to avoid that classification is for the corporation to have more than five full-time employees throughout the year.)
2. Is the business operating at a profit or a loss? If the business isn’t yet profitable, consider postponing the incorporation process and try to deduct the loss from other personal income. However, if the business is profitable or you anticipate significant taxable income in the future, then seriously consider incorporating.

If after careful consideration, you decide to incorporate, the next question is: “How do I take money out of the corporation to pay for my lifestyle expenses?”

Generally, there are two options: salary or dividend withdrawals.

Lets examine both options:

1. Salary is taxable as employment income to the owner and is taxed at the graduated rates in the province in which the owner lives. Also, salary creates RRSP contribution room for the owner and for the corporation, and the salary is considered a business expense. However, salary creates payroll taxes, CPP and EI considerations for the corporation.
2. Dividend income doesn’t create RRSP contribution room and is not an expense for the corporation but can be more advantageous for the shareholder because it generally results in lower personal tax.

The question of salary or dividends depends on the needs of the owner and the corporation. The optimal mix is typically a combination of the two, and business owners should consult a professional to find that balance.

In conclusion, financial independence for a business owner involves recognizing and minimizing your silent partner’s share. This includes acquiring a general understanding of how our corporate tax system works and participating in deliberate tax planning with your professionals.

Don’t assume accountants include tax planning when computing your annual tax returns. This is generally not a moment when proper tax planning is accomplished.

Taxes are a big expense.

Make an appointment today with your professionals and start planning strategies for legally minimizing your tax burden and maximizing your returns.

The process of finding a financial advisor can be overwhelming. It is our job to make that process simpler and easier. Dri Financial Group’s proprietary Wealth Navigator Process is designed with you in mind. Its structured framework helps you make an informed decision and feel confident in our team and management practices before we get started.

We offer you a range of services from creating bespoke financial plans and providing investment advice to helping you take advantage of our investment models. If you would like more information on the Wealth Navigator Process or our team, call me any time at 416.355.6370 or email me at richard.dri@scotiawealth.com.

Beyond helping you manage your finances, we take pride in motivating, educating and helping you expand your financial literacy. We are here to answer any questions you have and to help you feel in control of your financial destiny.

If you are ready to dive deeper into your financial literacy journey, we have a wide range of free tools and educational resources available.

• Subscribe to our Never Retire Newsletter
• Contact us to order a complimentary e-book
• Check-out our latest Wealth Navigator podcast
• Follow us on social!

Never Retire Profile

Ruth Bader Ginsburg (1933-2020)

Only the second woman ever to serve on the US Supreme Court, Ruth Bader Ginsburg was also—not surprisingly—one of only a few women in her class at Harvard Law School and then, later, at Columbia Law School. In fact, the Dean of Harvard Law once asked Ginsburg why she was taking the place of a qualified male student. She graduated from Columbia in 1959 first in her class, already married and the mother of a young child, and then faced barriers to employment as a woman when she was refused clerkship positions offered to fellow male students who had earned fewer honours. Throughout her career, Ginsberg fought for women’s rights under the law, arguing six landmark cases on gender equality before the Supreme Court in the 1970s. In 1980, President Carter appointed Ginsburg to the US Court of Appeals for the District of Columbia, where she served until President Clinton appointed her to the Supreme Court in 1993. With too many career milestones to enumerate, Ginsburg can aptly be summed up as a “tireless and resolute champion of justice” who never retired.

Ruth Bader Ginsburg

https://enrichedthinking.scotiawealthmanagement.com/2019/11/29/quick-tip-benefits-of-an-individual-pension-plan-ipp/

source https://richarddri.ca/how-to-maximize-tax-benefits-for-your-business/

It was a rough start to the trading week as the Dow dropped more than 500 points on Monday, sparking fears over increased volatility in the months ahead. Meanwhile, U.S. oil prices tumbled 5%, and gold, traditionally a safe haven, fell 2.6%. The simultaneous declines across a range of assets spurred anxiety for some investors who fear a repeat of March’s market turmoil. Sentiment has certainly soured in September, with many investors growing uneasy as the prospect of a second fiscal-stimulus package looks especially bleak in the midst of a bitter U.S. election campaign. Meanwhile, the TSX fell over 200 points, hitting its lowest level in over two months.

N.A. markets bounced back on Tuesday with the tech-heavy Nasdaq leading the way with a 1.7% gain, while the TSX added 161. Although markets stabilized somewhat Tuesday, the mood this week remains precarious as new coronavirus cases have begun spiking across the globe.

It was another brutal session on Wednesday. Wall Street’s main indexes dropped sharply as the tech selloff continued and data revealed that U.S. business activity remains flat. The TSX was also hit hard, tumbling 2% in a broad selloff that gained momentum in late trading. The materials sector had a particularly rough session, as gold prices fell more than 2% to two- month lows, leaving many investors questioning gold’s safe-haven status. By Wednesday’s close, the Dow and Nasdaq had lost 525 and 299 points, respectively, while the TSX shed 326.

Before trading on Thursday, the U.S. Labor Department reported that new weekly jobless claims totalled 870,000–up from 866,000 last week and well above the 840,000 analysts had been forecasting. Further weighing on sentiment was President Trump’s refusal Wednesday evening to commit to a peaceful transition of power if he loses the November election. The major U.S. indexes were especially volatile Thursday, with the S&P 500 briefly entering correction territory. However, by Thursday’s close, all four major N.A. indexes registered slight gains for the day.

Read more…

source https://richarddri.ca/markets-turn-volatile-as-fears-over-u-s-recovery-mount/