Have You Overlooked Assets in Your Estate Planning?

Have You Overlooked Assets in Your Estate Planning?

We have bad news for all the Luddites out there: Technology is here to stay. That means computers and cellphones, and all the software and apps that come with them, are going to become more and more prevalent in the future. 

Technology has infiltrated our daily lives on such a granular level that most of us don’t even realize how much we rely on technology in our day-to-day activities. COVID-19 has made it more difficult to see loved ones in person and even trips to the grocery store carry risks of infection, so many of us have taken to Zoom-happy hours with friends and ordering our groceries online. Whether it is our work meetings, completing tasks and chores, and even social gatherings, technology is everywhere.

How we use technology will continue to expand in the future, but what does that have to do with your estate? Well, as it turns out, a lot. Before we get into the details, let’s discuss what digital assets are. 

Digital assets are essentially anything that has inherent worth that is also in digital form. What establishes their status as an asset is the fact that they come with a “right to use” (e.g. a password). Without a right to use, they are just considered data. Digital assets could include family photos, air miles, hotel rewards, grocery store points, and especially cryptocurrency.

In estate planning, you would keep a list of all your valuable physical assets and you would also consider what would happen to these assets upon your death. Your executor would know these details and would be able to locate these items in your home or safety deposit box and ensure that they are passed on to the right people.  

The same holds true for your digital assets. In your estate plan, you should make a list of all your assets, including your digital assets, and ensure that your executor knows what digital assets you own, where to find them, and how to access them. Remember to include your username and password to all of your accounts on the list, and update that list frequently as your passwords are going to change from time to time.

Additionally, when you are considering your estate and your legacy, you need to decide what you would like to do with your social media profiles. Perhaps you have become a prolific tweeter through your Twitter account, or maybe you use Facebook to remain connected to your long-distance friends and family. Either way, your social media profiles could remain online forever, or they could be deleted per your wishes. Make a decision now about what you would like to do with your social media accounts so that there is no ambiguity regarding how your family should handle them when dealing with your estate. 

Digital assets have been overlooked in the past to the frustration of many estate executors. But as the world continues to evolve, people will rely more and more heavily on technology. This means that people’s wealth and valuables may be held digitally, and therefore, these assets should be included in your estate planning. 

If you are not sure where to start, talk to your trusted executor and write down some notes related to the following information:

  1. What are your digital assets?

  2. Where can your executor find them? 

  3. Update your usernames and passwords regularly. 

  4. Share this information and any updated information with your executor.

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

Don’t Qualify For Traditional Life Insurance? Consider These Options

Don’t Qualify For Traditional Life Insurance? Consider These Options

It’s no secret that traditional life insurance, critical illness insurance and disability insurance offer amazing benefits to those who qualify for the policies. Through these plans, people can protect their families, their businesses, and their livelihoods against the unexpected occurring and disrupting their lives. Unfortunately, however, these policies often don’t extend to people who are facing serious health problems and who may need life insurance the most.

Several years ago, two alternative insurance products were offered to help cover people who may have fallen through the cracks when it comes to life insurance. These two new products fall into one of two insurance product categories: guaranteed issue and simplified issue. 

Guaranteed Issue

Guaranteed issue life insurance is a small whole life insurance policy with no health qualifications. Typically, this type of policy is used for people who suffer from terminal illnesses, who may not have any other options.  

Let’s dig a little deeper to see what benefits and drawbacks you should consider before purchasing a guaranteed issue life insurance policy. 

Policy Benefits

As stated before, there are no medical qualifications for this type of policy, meaning that you do not need to answer any health questions, grant an insurance company access to your medical records, or undergo a medical exam to purchase the policy. This will sound particularly appealing if you have attempted to purchase a life insurance policy in the past but have been denied for a medical reason. 

But here’s where it gets a bit complicated: There is a two-year or three-year waiting period before your beneficiaries can receive the death benefit. This is to prevent people from purchasing this policy when the policyholder’s death is more imminent. The business model could not survive if people paid a few premiums before dying, and then their beneficiaries received a large sum. 

However, if the policyholder does pass on during that initial two-three year period, the insurance company will pay the policy’s beneficiaries the premiums along with approximately 10% interest. 

Policy Drawbacks

Typically, these types of policies are fairly expensive. While it makes sense to purchase this policy if you are in poor health, it is usually the last option for people looking for life insurance. In order to ensure that this is your best option, make sure you don’t qualify for other life insurance or critical illness insurance policies, as some policies that require medical underwriting have lower premiums and offer immediate death benefits.  

Simplified Issue 

This type of insurance can quickly provide coverage and does not require applicants to undergo a medical exam. Instead of going to the doctor or providing medical records, you may have to answer just a few questions related to your health. 

Policy Benefits

People need to be approved for a policy immediately to secure a loan or for a business situation. For whatever reason, if you find yourself needing insurance very quickly, this type of insurance could be for you. 

Policy Drawbacks

These policies are typically not as flexible in terms of their coverage or other options compared to other life insurance options. They also carry higher premiums than other life insurance policies. There are also limitations on the maximum amount of coverage that you can purchase, and typically these policies have a maximum issue amount of $500,000. 

Peace Of Mind 

These two types of life insurance are great options for people who may have underlying health issues and may need a policy quickly. While these policies may be a bit more expensive and have less flexible options than traditional insurance, they are solid alternatives for some people. 

If you feel like you may be a candidate for this type of policy, please reach out today. And as always, feel free to share this article with anyone who may find it of interest.

All in the Family: Estate Planning for Farmers

Many farmers find it difficult to get any interest from their children in continuing to run the farm business – which can cause some complications when developing the best estate plan for farmers looking to retire.

In general, farmers are in an interesting position: they are asset rich due to the increased value of their land but struggle with the increasing costs related to their farming activities.

However, if the farm holds significant value but the children are not interested in working the land, what is a farmer to do?

In some cases, at least one child is interested in farming having grown up in it. If there is only one child interested in taking over the farm, the solution may be simple: gift the farm to the child.

If a child is taking over the business, parents should consider the following:

  • The timing of when the parents will retire.

  • When they will transfer the ownership.

  • Where they will live after retirement.

  • Whether or not they have enough retirement savings without relying on farm income.

If no children are willing to take over the farm business, estate planning and the tax implications become more complicated. However, farmers have some tax planning tools they can use that are unavailable to most people:

  • There is actually a higher exemption from capital gains for both farming and fishing individuals. While qualified small business corporations can claim about $892,218 against capital gains on shares, farmers have an exemption of up to $1 million on either qualified farm property or shares in a qualified farm corporation. This is a really great benefit for sole proprietors or partners in a farming operation.

  • In addition, if a farmer is passing farm property over to a child, they may elect to transfer at the original cost base, rather than the current fair market value. This is essentially passing the gains over to the next generation – much like an estate freeze without all the documentation.

Qualified Farm Property

In order to receive the right exemptions for your situation, it is also beneficial to understand what is considered qualified farm property.

In order to receive the right exemptions for your situation, the property must be used for active farming activities – not rented out or sharecropped.

It is also important to consider who actually owns the farm and if they are actively farming the property. For example, if two spouses own the farm property and farm it then they both get $1 million of exemption. If a spouse is not an owner but is actively farming the property, the current owner can transfer farm property over to the spouse at cost to allow for the use of the exemption. Children may also qualify for this exemption.

The current rules have two important provisions:

  • The owner must be actively farming for two years before selling or gifting the property, and the owner must have earned most of their income from farming during those two years.

  • Any other income earned from other sources has to be significantly less than the total gross income earned from farming.

If this is not the case, then there may be no exemption and no ability to gift the farm to a child at cost.

It is also important to consider what year the farming property was first acquired, as the rules prior to 1987 were significantly different.

The rules after 1987 state that farm property must be used to conduct farming, and it must be owned for two years prior by the individual, spouse, common law partner, children or parent of the individual, a trust or partnership.

However, if a farmer owned the property prior to 1987, then the rules are a bit more generous. For farms acquired prior to 1987, the tax authorities allow you to use the tax benefits if you used the property “principally” for active farming in the year you sold or gifted it, or in at least five years during which the property was owned.

Questions to Outline Future Goals

Finally, probably the most important step a farmer can take in planning their estate is to determine their own goals and ask their children about theirs. Some questions to consider:

  • If the children are interested in farming, can the parents afford to retire without farm income and if not, how many people can the farm support financially?

  • If there are both farming and non-farming children are there other non-farming assets that the parents can leave to the non-farming children to equalize the estate? Would life insurance be useful to provide equalization?

  • Do the parents need the children to “buy” the property, for at least $1 million of it to take advantage of the exemption and get the parents retirement funds? And can the children afford to do that?

Questions? Reach out if you are interested in exploring estate planning options.

Please feel free to share this article with anyone you think would find it of interest.

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Disability Insurance and Small Business: How a Small Business Owner Used Disability Insurance to Stay Afloat While Managing Depression

Sandra ran her own successful insurance agency company for over a decade before it hit her like a ton of bricks – she was chronically depressed and something had to change.

Triggered by a combination of constant stress leading to severe burnout and her 12-year-old son’s recent diagnosis with Type 1 diabetes, Sandra needed some time away from the office to recover and receive treatment. Her depression was absolutely debilitating and could have been devastating to her business and income.

Luckily, Sandra, whose name has been changed to protect her privacy, had purchased two disability insurance policies eight years prior that would help her through such a turbulent time. Sandra worked in the insurance industry and had seen just how important it was to protect yourself from a loss of income in case of a debilitating illness or disease.

“We would see the financial devastation that a disability or an untimely death could cause,” Sandra said. “That had a strong impact on me and I wanted my income and my business to be protected.”

Sandra purchased two disability policies: An office overhead insurance policy in the amount of $10,000 per month that protected her business and covered office expenditures for a period of 18 months. The second policy, personal disability insurance, was an income replacement policy that covered her until age 65 or the length of the disability. It protected her personally by providing her with a $10,000 tax-free, monthly income that allowed her to take the time off work that she needed to receive treatment. Sandra was also happy to learn that she could still spend a small amount of time overseeing her business while continuing to receive the benefits.

“Purchasing the policy gave me peace of mind, knowing what could have happened and ultimately what did happen,” she said.

In general, disability insurance, or commonly referred to as DI, pays a claim due to sickness or accident if the insured is unable to work beyond the normal waiting period. As opposed to critical illness insurance, which is paid out in one lump sum, disability insurance is paid out in monthly installments while the insured remains disabled. The policy that Sandra purchased paid disability benefits until she reached age 65.

After months of treatment, Sandra decided to sell her business and start a new business with her husband: one that allowed her the flexibility to spend more time working on her own needs and the needs of her family. Having disability insurance allowed her to make that transition in her own time and without harming her financially – all while working with qualified medical professionals to get help for her depression.

Sandra’s story is not unique. While most working adults like to believe that they are immune to calamity or harm, unfortunately, that is not the case. According to Statistics Canada, 33% of workers between the ages of 30 and 64 will experience a disability for longer than three months. And most disability claims will come from major illnesses, not accidents.

Which disability insurance policy is best for me?

Working with a financial advisor will help you determine what type of living benefits best fits your needs. But we can outline the basics here to get you started.

Short-term disability insurance: Short-term disability insurance will cover the loss of income due to a temporary illness or accident. The tax-free coverage typically extends between six to 26 weeks, and payments begin after your workplace sick leave expires. Usually, but not always, these plans are provided by employers and typically cover up to 70% of your income.

Long-term disability insurance: As the name implies, long-term disability will cover for a longer period of time depending on your policy. Long-term disability insurance provides monthly payments that commence following the elimination period, which is usually 30 to 90 days after the onset of disability, and can continue up to age 65.

Office Overhead Insurance: Office overhead insurance covers your office expenses if you become disabled. Eligible expenses include rent, utilities and staff salaries.

Group Disability Insurance: This type of disability insurance is typically provided through an employer. If the premiums are paid by the employee, the disability benefit is received tax free.

Questions? Reach out if you are interested in exploring which type of disability insurance would best suit your needs.

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

Copyright © 2021 FSB Content Marketing – All Rights Reserved

Who Should Own My Life Insurance?

The planning considerations of where and how to own your life insurance can be varied and sometimes complicated. It is important to remember that who owns the policy, controls the policy. The owner has the right to name a beneficiary, assign the policy, take cash value loans or even cancel or surrender the policy. The insured does not have to consent to these transactions although there are steps available to require his or her permission when necessary. This article focuses on the main, but not all, issues in determining the ownership of a life insurance policy.

When considering the ownership of a life insurance policy on your life, generally there are three options:

  1. Personal or individual ownership

  2. A company that you own or control

  3. A trust

For many Canadians, option #1 is an obvious choice as most do not own a company and wouldn’t have any complex planning considerations to warrant trust ownership. For those, however, that do have a choice, it is important to review the advantages or disadvantages of each. The beneficiary arrangements should be appropriate for the ownership type selected. This is especially true for corporate ownership as the Canadian Revenue Agency may look closely at the ownership/beneficiary structure.

Personal Ownership

Most life insurance policies are owned by the life insured with a named beneficiary, usually a spouse. A major advantage of naming a beneficiary is that the proceeds at death may be protected against the claims of creditors or litigants. A named beneficiary of the “preferred” class (spouse, parent, child, grandchild) also protects any cash values of the policy from similar claims during the lifetime of the insured. Unless there are compelling reasons for it, do not name your estate as your primary beneficiary. Doing so could expose the insurance proceeds to probate fees as well as potential creditor and legal claims.

There are situations where the ownership of the policy may rest with someone other than the insured. This would include an ex-spouse on a policy to fund matrimonial agreements upon death. It could also be for a blended family situation that a spouse would own coverage on the other spouse to protect his or her children from a previous relationship. Naming a successor owner in these situations is recommended.

Company Ownership

If you own a company, you have the choice of having your insurance coverage held in your company. For example, if you are an incorporated professional, you could have your professional corporation own your policy. The same is true if you have a holding company that you own and control. The benefit of doing so is that the dollars used to pay the premiums are “cheaper” for the company than they are for you personally. Life insurance premiums are generally not tax-deductible and are paid with after-tax dollars. If you are paying the premiums out of corporate earned income, dollars taxed corporately at a low rate (11% in B.C. for example) are cheaper than personal dollars taxed at an average rate of 35% or more.

The after-tax cost of the earnings used to pay for the life insurance is a primary reason why corporate ownership is considered for life insurance that otherwise would be required personally. The ability to pay out the death benefit up to the full amount received by the corporation to the surviving spouse or family on a tax-free basis makes this a very attractive option.

There are, however, a few downsides to corporate ownership. The first of these has to do with the calculation of how much of the death benefit received by the corporation can be paid out tax-free out of the Capital Dividend Account (CDA) to the spouse or family member as beneficiaries or surviving shareholders. Depending on when the death occurs, there may be a portion of the death benefit trapped in the corporation and not eligible for CDA payment. In order to pay this amount (which represents the remaining adjusted cost basis of the policy) out of the corporation, an ordinary taxable dividend would have to be declared. This may be considered a small price to pay, however, based on the after-tax cost savings over the years preceding death. Also, if death occurs at normal life expectancy or a short time thereafter, usually all the proceeds are available for a tax-free CDA payment.

Another disadvantage is that, unlike personal ownership with a named preferred beneficiary, the proceeds are not protected from the creditors of the corporation. There are often other factors to consider when considering corporate ownership of life insurance, so it is important to ensure that you receive competent advice in this regard.

Aside from making sure the proceeds of the insurance end up where they are needed the most, if current and future premiums are being paid from personal funds that have already had the taxes paid, then personal ownership may be preferable.

Trust Ownership

A trust arrangement is often used in more complicated situations. For example, if there are multiple beneficiaries who need to be treated differently, or if there are multiple policies, it may be less complicated to use a trust to allow control over the policies and the distribution of the proceeds by the trustee(s).

Another scenario is where the policy is owned by someone other than the life insured who wishes a successor owner to be named if he or she predeceases the insured. An example of this would be a single parent who purchases a Whole Life policy on his or her child and needs to have a successor owner until the child reaches the age of 18. Should the owner name a sibling, a subsequent transfer of the policy to the aunt or uncle could create a taxable policy gain. It would also not be creditor proof as a sibling is not a preferred beneficiary. Use of a Trust to hold the policy until the appropriate time for the child to become owner is a way to avoid this.

An important use of a trust, specifically an Irrevocable Life Insurance Trust is for holding life insurance on the life of a U.S. citizen living in Canada. Since the trust is resident in Canada, the life insured should not be subject to any potential U.S. estate taxes upon death.

Shared Ownership

A planning opportunity exists with a life insurance policy that contains a cash value. The concept behind Shared Ownership is that the individual insured would own and pay for the cash value portion of the policy while the company would own and pay a reasonable cost for the life insurance component. Under this arrangement, the insured would be investing in a tax-deferred life insurance policy while the cost of the insurance is borne by another entity. This increases the internal rate of return on the cash value growth and would be received tax-free by his or her named beneficiary upon death.

Ownership and beneficiary arrangements are very important aspects of life insurance planning. Make sure that you receive the best advice possible in order to achieve the optimum result.

Copyright © 2020 FSB Content Marketing – All Rights Reserve

Stop Living Paycheque to Paycheque and Start Living

We are now living in a gig economy as a result of wage stagnation and increased globalization. While previous generations have usually worked one full-time job, often with a pension plan, today more and more Canadians are working for several different companies as independent contractors.

While this type of work does offer much-needed flexibility for some, it also creates financial instability for millions of Canadians. A recent survey of all working Canadians by the Canadian Payroll Association suggests that 43 percent of workers were living paycheque to paycheque prior to COVID-19. That statistic does not take into account COVID-19’s impact on the workforce.

Regardless of how we got here, the fact is that income volatility is a huge problem for almost half the country. Not knowing when or where your next paycheque is coming from can create a multitude of issues that can have lasting effects on both your health and your finances.

The Effects of Income Volatility?

A survey conducted by the Canadian Payroll Association in 2019 found that 40 percent of the Canadian population are so stressed about finances that it affects their performance at work.

The survey also found that 40 percent of Canadians said they were overwhelmed by the amount of debt they owe. And a whopping 75 percent of Canadians are saving less than 25 percent of their retirement goals.

Knowing that the problem exists is one thing, but if we want to understand the gravity of the situation, we need to know the implications of living paycheque to paycheque. Below are a few of the most substantial effects.

Financial Stress Can lead to Poor Health Outcomes

Living paycheque to paycheque increases financial instability and exacerbates stress, which can impact the cardiovascular system, degrade your mental health and other bodily functions. Worse, it can become a vicious cycle: You become stressed, so your health deteriorates, which causes you more stress, etc.

Conditions like depression and anxiety can go into overdrive when you experience financial instability, meaning that you have to work harder just to make it through each day.

How to Avoid Financial Stress in the Gig Economy

Make a Plan – This plan can be for six months, one year, or 10 years – whatever you want. The plan should include budgets, saving potential and job improvement. If you’re making incremental steps forward, that should help you relieve some anxiety about the future.

Save Anything – Whether it is $5 or $500, every dollar counts. You may not think it’s much, but it will add up overtime.

Avoid Accruing More Debt – Although this plan is easier said than done, it is sometimes better to pay less on your debt and save more money so that you don’t borrow more when something unexpected happens.

Invest in your Future – Start investing. Nowadays, there are many different options to consider when you think about investing your money. Whether you are a new or a seasoned investor, it is a good idea to make your money work for you.

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

Copyright © 2021 FSB Content Marketing – All Rights Reserved

Extended COVID-19 Federal Emergency Benefits

On Friday, February 19, 2021, Prime Minister Justin Trudeau announced an extension to several of the COVD-19 federal emergency benefits.  The goal of this extension is to support Canadians who are still being financially impacted by the COVID-19 pandemic.

The following benefits are impacted:

  • Canada Recovery Benefit 

  • Canada Recovery Caregiving Benefit

  • Canada Recovery Sickness Benefit 

  • Employment Insurance

Canada Recovery Benefit

The Canada Recovery Benefit (CRB) provides income support to anyone who is:

  • Employed or self-employed, but not entitled to Employment Insurance (EI) benefits.

  • Has had their income reduced by at least 50 percent due to COVID-19. 

You can receive up to $1,000 ($900 after taxes withheld) a week every two weeks for the CRB. The recent changes now allow you to apply for this benefit for a total of 38 weeks – previously the maximum was 26 weeks.  

Canada Recovery Caregiving Benefit

The Canada Recovery Caregiving Benefit (CRCB) helps support people who cannot work because they must supervise a child under 12 or other family members due to COVID-19. For example, a school is closed due to COVID-19 or your child must self-isolate because they have COVID-19.  

You can receive $500 ($450 after taxes withheld) for each 1-week period you claim the CRCB. The recent extension made now allows you to apply for this benefit for a total of 38 weeks instead of the previous 26 weeks. 

Canada Recovery Sickness Benefit

The $500 a week ($450 after taxes) Canada Recovery Sickness Benefit (CRSB) is also getting a boost. If you cannot work because you are sick or need to self-isolate due to COVID-19, you can now apply for this benefit for a total of four weeks. Previously, this benefit would only cover up to two missed weeks of work. 

Employment Insurance 

Finally, the government will also be increasing the amount of time you can claim Employment Insurance (EI) benefits. You will now be able to claim EI for a maximum of 50 weeks – this is an increase of 24 weeks from the previous eligibility maximum.

For full details, go to https://www.canada.ca/en/revenue-agency/campaigns/covid-19-update/covid-19-benefits-credits-support-payments.html

Self-employed: Government of Canada addresses CERB repayments for some ineligible self-employed recipients

Great news for some ineligible self-employed Canadians who received the Canada Emergency Response Benefit (CERB). As per canada.ca:

“Today, the Government of Canada announced that self-employed individuals who applied for the Canada Emergency Response Benefit (CERB) and would have qualified based on their gross income will not be required to repay the benefit, provided they also met all other eligibility requirements. The same approach will apply whether the individual applied through the Canada Revenue Agency or Service Canada.

This means that, self-employed individuals whose net self-employment income was less than $5,000 and who applied for the CERB will not be required to repay the CERB, as long as their gross self-employment income was at least $5,000 and they met all other eligibility criteria.

Some self-employed individuals whose net self-employment income was less than $5,000 may have already voluntarily repaid the CERB. The CRA and Service Canada will return any repaid amounts to these individuals. Additional details will be available in the coming weeks.”

For full details, see full news release at https://www.canada.ca/en/revenue-agency/news/2021/02/government-of-canada-announces-targeted-interest-relief-on-2020-income-tax-debt-for-low–and-middle-income-canadians.html

5 Top Financial Planning Strategies For Small Business Owners

Creating a financial plan for your business is critical not only for your business’ survival but also for its growth. However, many small business owners struggle to create a comprehensive financial plan that considers all of the financial needs of the business – which should include long term growth goals and contingency plans for any unexpected circumstances. Below, we have compiled a list of the strategies business owners should start with when considering a comprehensive financial plan.

Access To Capital And Debt Management

Talk to a professional when your business needs access to capital – especially if you have just opened your doors. Many new companies do not qualify for traditional, low-interest loans, and some new business owners mistakenly turn to loans with high-interest rates. This can turn out to be a problem for the business in the long-run. If sales are slow at the beginning, then the company could struggle with repaying its debt. It is a good idea to explore all loan options with a professional when you are considering options to raise capital to expand your business. Any financial plan should include ways of accessing capital that won’t cripple your business in the long run.

Favourable Tax Strategies For Your Business

We get it. Business owners are often too busy to research the most favourable tax strategies available to them. However, paying more in taxes can be avoided. Examining different tax strategies with a professional could free up cash and allow the business to achieve its maximum growth potential.

Prepare For The Unexpected

As 2020 has taught us, anything can happen. Regardless of the external or internal circumstances, your business should be prepared. It is a solid financial strategy to develop a contingency plan that will allow your business to adapt to new circumstances.

Do you have a key employee or employees that you rely on to run the business? What would happen if they became ill? What if something happened to you? Would your family still receive an income? Luckily, there are insurance policies designed to protect your business and family in the event that any of these possibilities become an unexpected reality.

Prepare For The Expected, Too

Most of us will want to retire at some point. But how do you plan on transitioning out of the business and into retirement? Many successful business owners understand the importance of having a retirement plan for themselves and their spouse independent from the business. Take a moment and jot down some retirement goals to get a general idea of what your retirement will look like for you. Do you plan on passing the business down to your children? At what age would you like to retire? A good financial plan will help you to retire when you want and how you want.

Protect Your Assets From A Lawsuit

Let’s face it. These days lawsuits happen more frequently than business owners like to admit, so it is a good idea to be prepared. When designing a financial plan, investigate what type of liability insurance would be best to protect your small business. Would general liability insurance suit your needs? Or would you be better suited for a professional liability insurance plan?

This is certainly not a complete list of all the main strategies that a financial plan should include, but it is a starting point to work from. Please don’t hesitate to reach out if you think we can help develop a financial plan for you and your business.

As usual, please feel free to share this article with anyone you think might find it of interest.

Impact of Recent Events On Your Estate Plan

A year ago, the projected deficit for 2020 was estimated to be $20 billion. Shockingly, as a result of Covid-19, this projection has risen to over $380 billion by the end of the year. So, what does that mean for tax rates and how will this affect your estate plan?

Even as they continue to unfold, the Covid-19 pandemic and its effects are influencing the way we plan for our future. During the period of lockdown and self-isolation, many people put a great deal of thought as to how to keep themselves and their families safe – not only physically but financially as well. For some, this meant finally looking at the recommendations they had been considering about their life, critical illness and disability coverage. For others, it became a time to reassess their investment, retirement and savings plans, as we all know the results uncertainty can have on the equity markets.

Then, there are the potential long-term effects that this pandemic may have on estate planning and its primary objective of reducing the impact of taxes during life and at death.

As the national deficit continues to balloon, the logical question remains: where is the money going to come from to help cover this? While the government may be loath to raise taxes, and politically that is something it might wish to avoid, there is no question that increased tax revenues are probably necessary.

For the past year or so, financial pundits have predicted that there may be an increase in the inclusion rate for taxation on capital gains. However, there is speculation on the actual amount of inclusion because this percentage has fluctuated historically. For example, when the tax on capital gains was first introduced in 1972, the inclusion rate was 50 per cent, meaning this amount of the capital gain would be taxed. Over the years since, the inclusion rate fluctuated between 50 per cent to 75 per cent. It was lowered again in 2000 to the current inclusion rate of 50 per cent.

In Canada, the top personal marginal rate in most provinces exceeds 50 per cent. This means that the tax payable on a capital gain, realized or deemed at death, could be over 25 per cent. It is highly possible that the inclusion rate will soon be increased to help augment tax revenues to combat the huge deficit. If it increases to 75 per cent, as it was from 1990 to 2000, the effective rate of tax on a capital gain will increase to almost 40 per cent. This assumes that the top marginal income tax rate also does not increase. This will have a significant impact on the future cost of settling an estate due to the deemed disposition of all assets upon death.

One beneficial strategy to avoid leaving family members with an insurmountable tax bill, is to provide sufficient estate liquidity to pay taxes due at death from the proceeds of a life insurance policy. In Canada, we are fortunate to have permanent life insurance policies that insure an individual for their entire life with a premium that is guaranteed not to increase.

In its handling of its $380 billion deficit, the Canadian government could borrow money, and if they do, it is a real incentive to keep long-term interest rates as low as possible. The current yield for 10-year Canadian Bonds is less than 1 per cent, and it is clear that a low interest rate environment will persist for a considerable period of time. This is significant because the life insurance company actuaries pay particular attention to the prevailing long-term interest rates when pricing a product. This current era of low-interest rates indicate that the price of permanent life insurance will increase in the near future.

While Covid-19 is not expected to have a general impact on the cost of life insurance, it is unclear whether possible changes in underwriting guidelines could also result in higher costs for certain individuals. Another factor that could increase life insurance premiums are changes to industry accounting practices in the near future, which would require life insurance companies to modify the disclosures about long-duration contracts, such as permanent life insurance.

The bottom line is this: With higher taxes and increased life insurance premiums on the horizon, now is the time to review your estate planning needs and implement or increase your life insurance. Putting off this important task will increase costs for you – or your family – down the line.