Here is a collection of some the most common questions we receive on a regular basis. We have tried to answer the questions in a straight-forward and non-technical manner. Please browse through the various categories to see if the question you have has been answered.
General Financial Questions
Capital gains and children
Attribution does not apply to capital gains earned on disposition of property by a child. So it could be advantageous to loan or transfer funds to a child to invest in assets that tend to generate more capital gains than income over time. This will reduce the income attribution to the lender or transferor and ensure that the gains earned are taxed in the child’s hands.
Child tax benefit
Like the old family allowance payments, the child tax benefits received by some families may be invested in the child’s name without any attribution of income back to the parents. Parents no longer receiving child tax benefits lose the advantage of having this source of funds available to invest for their children.
Canada Pension Plan benefits
Spouses or common-law partners who are each receiving their CPP benefits can get a portion of each other’s pension, if they choose. Since each spouse or common-law partner pays income tax only on the amount he or she actually receives, this can be an effective income-splitting technique.
Income on income (secondary income)
The attribution rules apply to income from property that is transferred or loaned. If this income is reinvested by the transferee or borrower, it will earn a secondary stream of income. This “secondary income” is not attributed back to the transferor or lender because it is not income from the transferred property. It will be taxed in the transferee’s or borrower’s hands. It can therefore be advantageous to loan or transfer property to a spouse or common-law partner or minor and allow the income attribution to occur on the income from the original investment. Then that income can be removed from the account and invested elsewhere, where it continues to earn a secondary stream of income on which no attribution occurs. This secondary income is taxed in the hands of a lower-income family member.
Loan or transfer made to earn business income
If a loan or transfer is made to earn business income (as opposed to income from property such as interest, dividends, rent or royalties), attribution will not apply.
Payment of expenses and taxes for lower-income family members
One of the easiest ways to split some income is for the high-income earner to pay all of the family’s daily living expenses. This leaves more income in the hands of the lower-income earners to invest, thereby increasing their investment income, which will be taxed at lower rates. Payments of taxes on behalf of other family members also fall into this category. These payments will not attract attribution since they are not invested (the payment goes to the government), and therefore there is no income that can be attributed back.
Registered Education Savings Plans (RESPs)
Contributions of up to $4,000 per year (to a maximum of $42,000 over 21 years) may be made to an RESP to save for someone’s post-secondary education. And, if certain conditions are met, the beneficiary may qualify to receive the Canada Education Savings Grant (CESG), which is equal to 20 per cent of the RESP contributions to a maximum of $400 per year. The contributions are not tax-deductible, but the contributor can withdraw these contributions at any time tax-free.
Salary to spouse or common-law partner or children
If a person carries on a business, either personally or through a corporation, some income splitting can be achieved by paying a salary to a spouse or common-law partner and/or children. You must ensure, however, that services are genuinely being provided and that the amounts paid in salary are reasonable in relation to these services.
Spousal Registered Retirement Savings Plans (Spousal RRSPs)
Contributions made to a spousal RRSP are deductible by the contributing spouse or common-law partner within the applicable contribution limits.
- You can contribute as much money as you want
- All capital gains may be taxed in the hands of the child.
- You, as the donor, are taxed on all income including interest, dividends, foreign, and other income if earned while you are a resident of Canada during the applicable year
- If funds for an in-trust account come solely from Child Tax Benefit payments or an inheritance, income is taxed in the hands of the child
- Money stays in the hands of the child if he/she decides not to pursue a post-secondary education
- Who is responsible for distributing your assets
- Who gets what and when will they get it
- Who will take care of your children
- Who will manage any trust accounts
- Who will make financial and medical decisions if you’re incapacitated
- Determine your estate planning goals
- Consider which estate planning tools fit you situation best
- Choose the people you would like to speak for you
- Start raising estate-planning issues with your family
- Keep your estate plan up to date
- Will: the core document in your estate that identifies an executor distributes your assets and names a guardian for your children if they are still minors.
- Trust: is established to take care of assets you don't want transferred immediately after your death or to manage investments for beneficiaries who are incapable of doing so themselves.
- Life insurance: can ensure your heirs aren't negatively impacted by their inheritance, or to pay your funeral expenses or final taxes. Power of attorney for finances ("Mandate" in Quebec): allows a trusted family member or friend to make financial decisions for you should you become incapacitated but only while you're alive.
- Power of attorney for health care ("Mandate" in Quebec): allows someone close to you to make medical decisions based on your own previously expressed wishes.
- Living will: sets out your preferences for medical care if you're unable to express them yourself. This concerns continuing life support and similar important decisions.
- Organ donor cards: is an official statement of whether you would like your organs to be salvaged for someone who would benefit from a transplant. You will also need to discuss this with your family as doctors may need their consent as well.
- Funeral arrangements: helps decide how you would like to be remembered.
- Business succession plan: decides what will happen with a business you own in part or whole. There are complex rules regarding selling a business or passing it to heirs.
- Don't get any deeper into debt. Save the credit card with the most favorable terms and cut the rest up. Put the one you saved in a safe place (not in your wallet) and use it only for emergencies (not to include a big sale at The Bay!)
- Pay more than the minimum balance. Much more.
- Shop around for cards with low interest rates, but beware of come-ons that offer a low introductory rate and then take a big jump. The Internet makes choosing a credit card easy, but be sure to read ALL the fine print.
- Move balances on cards with high interest rates to cards with lower interest rates.
- Use your savings to pay down debt. It makes no sense to earn 1 to 3% interest on your savings account while paying 12 or 15 or 18% interest on credit cards.
- Come up with a written plan for reducing your debt systematically.
- Add up all the money you spend each month on credit card payments, and think about what you could do with this money if you weren't paying it to the credit card company.
They include the establishment of the client-planner engagement, gathering client data, determination of the client's current financial situation, developing and presenting the financial plan, executing the plan, and then providing ongoing monitoring to ensure the plan continues to meet the objectives.
Please click the link below to view a page on our site that details each of these important steps:
- Don't try to time the market by jumping in when you think it's going to go up, and out when you think it's going to go down. The odds for success are low, even for the experts. People tend to have the most confidence to buy at market highs, and the strongest tendency to sell at the lows. By the time they feel comfortable buying back in, the market is well on its way up again and they've missed much of the gains.
- Keep tax consequences in mind. For example, interest from bonds or GICs is fully taxable as income, while only one-half of capital gains on stocks are taxable. Dividends are also taxed less than interest, making preferred shares a good alternative. If you hold both interest bearing securities and stocks, you may want to consider holding a good part of your interest-bearing securities in your RRSP, where taxes are deferred.
- Set up a regular contribution plan. If you find it hard to come up with your RRSP contribution at deadline time, make regular monthly contributions, automatically deducted from your bank account. This is known as "paying yourself first." Money that you never see is much harder to spend, and you get used to living without it. This avoids having to come up with a lump sum.
- Start saving as early as possible for children's post-secondary education. Compound growth can make a huge difference over time. If you invested $10,000 at your child's birth and never added another cent, with an average 10% annual compounded return it would grow during 18 years to more than cover the estimated $70,000 cost of a four-year post-secondary degree.
- Consider holding foreign content. Canada accounts for less than 4 per cent of world markets, and investors can benefit by shopping the world for opportunities. Many international markets have outperformed Canada over the years and the Canadian market has had a lot of gains recently largely in only 2 sectors; energy and financials. A portfolio including a mix of Canadian and foreign investments actually lowers risk and has historically offered better returns.
- Include your whole family in your investing and financial planning, taking into account such issues as the financial situation of your parents, any assistance you may want to give your children for various life events – including post-secondary education, weddings or home-buying – and estate planning concerns. Saving and wealth issues usually cross intergenerational lines, so don't plan in isolation. Talking about money can be awkward, but it can help everyone.
- Set life goals for investing, know your objectives and risk tolerance. Before deciding if a particular type of investment is right for you, consider whether you will need the money in the short, medium or long term. Also consider whether you are looking for income, or for growth. Equity investments can fluctuate in the short-term, although they offer the best long-term returns.
- Avoid overreacting to the recent short-term behavior of your investments. It usually results in selling last year's loser after it's had most of its losses, and buying this year's winner after it's had most of its run, or vice versa. Choose your investments wisely to begin with, and weather the ups and downs. Investors who sell during temporary periods of underperformance miss out on subsequent recoveries and long-term gains. (Short Term 0 -24 months; Medium Term 2 – 5 years; Long Term 5+)
A globally diversified portfolio can help reduce risk Global investing is an important and widely recommended part of an investment strategy that seeks to build an optimal portfolio – one that achieves the best possible balance between risk and return. Those investors who believe that investing abroad is more risky than investing in domestic equities may be surprised to learn that, in fact, overall portfolio risk may be reduced by adding foreign equities to the mix. Global investing can increase the potential for higher returns.
History has shown that global investments can outperform their domestic counterparts. So, by allocating all your investments to domestic markets, you could be substantially reducing your investment portfolio’s performance potential.
Spread risk across several types of investments Another way to potentially maximize the value of your portfolio over the long term is to allocate money among various types of investments, such as stocks, bonds, money market instruments or mutual funds.
Avoid hindsight investing The clever investors will tell you that investing is a gradual process and that without a consistent strategy, you are essentially gambling on the stock market. Some investors put most of their money in technology stocks, some of which ran up eye-popping returns in 1999 and in early 2000. The meltdown of the technology sector is an illustration of the dangers of hindsight investing, or putting your money on yesterday’s “hot” investments. Meanwhile, investors who allocate their investment dollars among a diversified group of assets (both geographically and by asset class) and let them perform over time seem rare these days.
Market volatility is becoming more widespread For many investors, buying and selling in an attempt to pick the highs and avoid the lows poses a great temptation, and volatile markets subsequently can take their toll on their portfolios. In the year 2000, the NASDAQ Composite Index swung more than three per cent on 72 occasions.** In 1998 and 1999 combined, there was a total of 35 days when this index shifted by three per cent or more.
A diversified portfolio can bring peace of mind Indeed, investing globally, and spreading risk across a variety of investments and avoiding chasing yesterday’s “hot” investments are essential to building a portfolio that can help you realize your long-term financial goals. You’ll move closer to your goal and benefit from the peace of mind that comes from owning a diversified portfolio.
Provided by AIM Trimark Investment
How do you choose which investments are the right ones for you? That’s where your investment advisor comes in. Your advisor works with you to determine your risk tolerance, your investment time horizon and your after-work goals to assemble a portfolio of investments that work for you. And if your objectives, comfort level or timelines change, your advisor can alter your portfolio to reflect your new goals – an added benefit.
A financial advisor can help you create a suitable financial plan; keep you focused on your short-term and long-term goals; explain economic and market activity and how it affects your investments; keep you on track with your investment objectives, regardless of short-term market direction.
A financial advisor helps you identify your financial goals - and what holds you back from attaining those goals. He or she works with you to construct a financial plan and makes a number of recommendations. He or she then implements the elements of that financial plan and provides you with periodic reviews to assess the success of the plan and to consider any changes necessary to better meet your original - or revised - goals.
How to select a financial advisor Just as with any other professional there are various ways of finding someone whose skills and experience are suitable to your needs. Asking a friend or relative for a recommendation is a very good way of making contact with someone as is asking another professional you work with such as an accountant or a lawyer. Your selection process should be based on a variety of issues such as:
- What are his or her experience, qualifications and credentials?
- Can the advisor supply you with references?
- Does he or she have the appropriate depth of knowledge and experience in the particular financial issues you face, such as estate planning, education planning, insurance, and tax strategy?
- How will the advisor keep you informed of the progress of you financial strategies, and with what frequency?
- How will you pay for the advisor's services, such as fees, commissions etc?
Mutual Funds and RRSPs
Mutual Funds Offer:
- Professional money management - Your money is invested by experts
- Diversification - Your money is spread across many different investments
- Flexibility - Mutual funds can be bought and sold on any business day
- Choice - You can choose from a wide variety of funds
- Liquidity – Mutual Funds can be easily liquidated
The advantages of investing in RRSPs
RRSPs and RRIFs offer unlimited tax deferral until funds are withdrawn. When withdrawn, funds are treated as income and taxed at the full marginal rate at the time of withdrawal. Any withdrawals are taxed as straight income notwithstanding the fact that they may have been the result of Canadian dividends or capital gains earned inside the registered account. With RRSPs and RRIFs, the annuitant can choose to rebalance his or her portfolio as appropriate. If gains have been realized on some of the investments inside the registered plan, they remain tax sheltered as assets are reallocated from one asset class (e.g., equities) to another (e.g., bonds). With a non-registered equity investment, generally, no tax is payable until the investment is sold. However, not many investors buy and hold an individual security or mutual fund in a non-registered account for 20 or 30 years. Also, an investor may be reluctant to dispose of a property that has gone up tremendously in value because of the potential for large capital gains tax on such rebalancing. This may have the added effect of discouraging a reallocation of the investment mix where such a reallocation may be the appropriate choice for the investor as he or she approaches retirement age.
Most importantly, RRSPs offer a tax deduction in respect of contributions made. For example, a $14,500 RRSP contribution would result in a tax savings of $6,525 for an individual with a marginal tax rate of 45 per cent. The tax refund received from making a contribution can be invested into a non-registered account.
Over time, the combined after-tax value of the registered and non-registered accounts with reinvested tax refunds will generally surpass the after-tax value of a non-registered account alone, even though income from the registered account is fully taxable.
The advantages of investing in a non-registered account
Now, let’s assume that instead of contributing funds to an RRSP each year, the investor deposits the same amount in a non-registered account that holds a mix of equity investments. Upon ultimate disposition, any profits earned on these investments will result in capital gains to the investor, taxable at only 50 per cent of the investor’s marginal tax rate.
There are a few, more specific situations where ceasing to make RRSP contributions makes the most sense. This may be the case for investors who:
- Have already accumulated a significant amount of assets inside their registered plans
- Are approaching the age at which they will begin withdrawing from the plan
- Expect to be in a higher tax bracket when withdrawing the funds than they were when the RRSP deduction was taken
- Provides a replacement income when you become sick or injured.
- Unlike plans provided through employers that can end if you lose your current job, personal disability insurance plans cannot be taken away from you.
- Disability insurance costs and options are highly dependent on one’s occupation; a person with a dangerous occupation is more likely to become disabled, so they will have higher costs and fewer options.
- After age 65, modified coverage may be continued on an annually renewable basis as long as the insured continues to work full time. The benefit period is typically 24 months.
- The amount of coverage you purchase cannot exceed approximately 66% of your current earnings (ie/ cannot insure what you do not have). 66% of your income may not sound like enough to survive on, but the money paid from a disability insurance claim is tax free. After taxes, it is approximately equal to your regular income.
Features of Critical Insurance:
- Provides a lump sum of tax-free money 30 days after you are diagnosed as having an insured illness (ie/heart attach, stroke, cancer).
- Is independent of your ability to still work.
- Thanks to modern medicine, most people now survive critical illnesses, but the financial costs can be staggering. Critical Illness insurance helps you maintain your financial footing, while getting the best treatments possible.
- Must survive at least 30 days in order to collect.
- If the insured dies, all premiums are refunded to the beneficiary (standard feature for most critical illness insurance plans.)
- Available to people between the ages of 18 and 65.
- Available as a stand alone policy or as an additional feature within another life insurance policy.
- Important Statistics: 1 in 3 Canadian will develop a life threatening cancer. Many drugs used in the treatment of cancer are considered experimental and are therefore not covered by provincial medical plans. The average age of people who go on claim for Critical Illness Insurance is 43 years old.
- Benefits range from $25,000 up to $2,000,000
- Coverage can be for 20 years, to age 65, to age 75, or to age 100 (permanent coverage)
- Return of premium: premiums will be returned to you if you do not claim after 10 years or by age 75
- Available in two forms: Basic & Comprehensive. Basic plans cover heart attach, stroke, and cancer. Comprehensive plans cover heart attack, stroke, and cancer, as well as up to 18 other illnesses.
- Less expensive than all other types of insurance, so it is good for individuals with limited budgets.
- Coverage is for a limited time period, which is perfect for temporary insurance needs.
- The limited-time nature of term life insurance is also what makes it less expensive, since the odds are that the insured will outlive the term minimal, translating into lower premiums.
- Can be renewed at the end of the term but the premiums will typically be higher.
- You could qualify for the lower premiums if you are in good health and live a healthy lifestyle.
- Provided money for family to continue living a similar lifestyle after your death.
- Pay down the mortgage or other loans when one’s spouse dies.
- Leave an inheritance to the family.
- Business uses: buy-sell agreements and business continuation
Features of Universal Life Insurance:
- Permanent insurance with a tax-sheltered investments portion built into the plan.
- Most versatile of all insurance types, so it can be highly customized to fit your unique needs.
- Flexible premium payment structure.
- The only type of permanent insurance that allows you to modify your policy as your needs change (i/e insurance coverage amount, add/remove insurance features.)
- If funded properly, after 15 – 20 years the tax free savings in the policy should equal or exceed the cost of insurance, therefore this form of insurance can pay for itself.
- The only remaining plans in Canada protected from taxation outside of RRSP’s, making it a great way to save for retirement.
- Perfect for people who think long-term and wish for their insurance plan to increase in value over time.
Dynamic Mortgages is a professional full service mortgage broker based in Vancouver British Columbia. They will assist you in securing the right mortgage with the best possible lender, which essentially means they will help you get the best deal possible for your individual situation.
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