Life Insurance and the Capital Dividend Account

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Many business owners are unaware that corporate owned life insurance combined with the Capital Dividend Account (CDA) provides an opportunity to distribute corporate surplus on the death of a shareholder to the surviving shareholders or family members tax-free.

Income earned by a corporation and then distributed to a shareholder is subject to tax integration which results in the total tax paid between the two being approximately the same as if the shareholder earned the income directly. Integration also means that if a corporation is in receipt of funds which it received tax-free, then those funds should be tax-free when distributed to the shareholder.

The Capital Dividend Account is a notional account which tracks these particular tax-free amounts accumulated by the corporation. It is not shown in accounting records or financial statements of the corporation. If there is a balance in the CDA it may be shown in the notes section of the financial statements for information purposes only.

Generally, the tax-free amounts referred to, are the non-taxable portions of capital gains received by the corporation and the death benefit proceeds of life insurance policies where the corporation is the beneficiary.

Life insurance proceeds received by a private corporation

The death benefit of a life insurance policy that is owned by a private Canadian corporation less the adjusted cost basis (ACB) of that policy, can be credited to the Capital Dividend Account. The government’s reasoning in deducting the ACB from the CDA credit is that if the corporation had paid the premiums to the individual shareholder to pay for the insurance, those payments would have been taxable.

In calculating the ACB, the following factors are taken into account:

  • Premiums or deposits made to the policy increase the ACB;

  • Policy loans, paying of dividends in a participating policy and partial dispositions reduce the ACB;

  • Repaying policy loans, purchasing paid-up insurance and adding any term insurance riders increase the ACB;

  • The annual net cost of pure insurance (NCPI) reduces the ACB.

The NCPI is the pure mortality cost of the life insurance and is contained in a table in the Income Tax Act. The NCPI, which increases each year with age, is applied to the net amount at risk in determining the reduction of the ACB for that policy year. The net amount at risk is defined as the total death benefit minus the cash value of the policy.

Normally, the ACB of the policy increases each year ultimately resulting in a total erosion. Once the ACB reaches zero, the full amount of the death benefit is eligible for Capital Dividend Account credit.

Frequently asked questions about the Capital Dividend Account

Does the corporation have to be Canadian controlled? No. It is only required that the company is a Canadian private corporation.

Can the corporation be publicly owned? No. Only private corporations qualify.

What is the tax treatment of a Capital Dividend paid to a non-resident shareholder? Capital dividends paid to a non-resident shareholder are subject to a withholding tax. In the absence of a resident of a country without a Canadian tax treaty the withholding tax is 25%. With a tax treaty, the rate will be reduced. For an individual living in the U.S. for example the withholding rate would be 15%. The capital dividend would most likely be taxable to the non-resident in their own country.

Does the company still get a CDA credit when a policy is assigned to a bank and the death benefit is paid directly to the lender? Yes. Although the proceeds of the life insurance policy may never actually be received directly by the corporation, it still creates a CDA balance equal to the total death benefit minus the ACB of the policy.

For many business owners the ability to have life insurance paid with lower taxed corporate dollars and still be able to have the proceeds eventually flow to their families on a tax-free basis is an opportunity that should not be overlooked.

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

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How is Your Retirement Shaping Up?

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Defined Benefit vs. Defined Contribution Pension Plans

If you are one of the lucky ones who participate in a pension plan, consider yourself to be very fortunate. Statistics show that only approximately one-third of paid workers in Canada are covered by a registered pension plan. * If your plan is a Defined Benefit Pension Plan (DBPP) you can consider yourself even more fortunate as this is considered to be the crown jewel of pension plans. The other type of plan available is a Defined Contribution Pension Plan (DCPP). So, how do these plans differ?

Defined Benefit Pension Plan

With a DBPP, your employer is obligated to pay you a pre-determined monthly income for the rest of your life after retirement. The amount of this income, or your pension, is calculated by applying a formula which can vary but is typically based on your highest average earnings and how long you have worked for your employer. For example, one common formula for an annual pension amount is 2% of your average yearly pensionable earnings during the best five earning years, times your years of pensionable service.

Let’s say that the average of your five best years is $75,000 per year and you have been a member of the pension plan for 22 years. Your annual pension would be $33,000 (2% X $75,000 X 22). The pension income is typically paid monthly to the retiree.

Usually, both the employee and the employer contribute to the plan. The employer is responsible for managing and assuming all the risk of the investments (this task is usually given to professional investment managers) and has an obligation to make the pension payments regardless of the performance.

Defined Contribution Pension Plan

Under a DCPP, the employee will contribute a certain percentage of their annual income (for example, 5%) with the employer typically making a matching contribution. Unlike with a DBPP there is some flexibility in how the contributions are invested. The plan may contain the ability for the individual to allocate his or her contributions according to their personal goals and risk tolerance. As in the DBPP, employers would usually avail themselves of investment managers to manage the pension funds.

Upon retirement, the amount of pension that an employee will receive will depend on to what amount the contributions have grown. Unlike a DBPP, there is no guarantee. In this way, the DCPP is similar to a group RRSP but is subject to pension legislation to prevent withdrawals prior to retirement.

Generally, the costs associated with Defined Benefit Plans are considerably higher than with Defined Contributions. This is partially due to the actuarial valuation which is required every three years for a DBPP. There is more cost control with a DCPP. While both plans are very effective in encouraging employee attraction, Defined Benefit Plans are more successful in creating long term retention.

What Plan Do You Have?

One-third of paid workers in Canada are covered by a registered pension plan with public sector workers accounting for a little more than half of all pension plan members. The question is, if you aren’t a member of one of these large plans, how is your retirement shaping up? A 2023 Canadian Retirement Survey conducted by the Healthcare of Ontario Pension plan, found that 32% of Canadians have set aside nothing for retirement. If you are included in this number be sure to contact me as soon as possible so we can discuss your retirement future.

* Statistics Canada.

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Family Business Planning Strategies

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67% are at Risk of Succession Failure

If you are an owner in a family enterprise, the likelihood of your business successfully transitioning to the next generations is not very good. This has not changed over the years. Statistics show a failure rate of:

  • 67% of businesses fail to succeed into the second generation

  • 90% fail by the third generation

With 80% to 90% of all enterprises in North America being family owned, it is important to address the reasons why transition is difficult.

Why does this happen and what can you do to prevent it?

Communicate

Family enterprises are often put at risk by family dynamics. This can be especially true if the family has not had any meaningful dialogue on the succession of the business. And, while we are throwing around statistics, it has been estimated that 65% of families have not had any meaningful discussion about business succession.

  • Family issues can often hijack or delay the planning process. Sibling rivalries, family disputes, health issues and other concerns certainly present challenges that need to be dealt with in order for the succession plan to move forward.

  • Many times, a founder of a family business looks to rely on the business to provide him or her with a comfortable retirement while the children view the shares of the company as their inheritance.

  • Sometimes an appropriate family successor is not readily identifiable or not available at all.

Decide

  • In these times a decision needs to be made as to whether or not ownership needs to be separated from management, at least until the second generation is willing or capable to assume the reins of management.

  • If the founder needs to receive value or future income from the business a proper decision as to who is running the company is vital. If this is not forthcoming, then there may be no other alternative but to sell the company.

Plan

Tax Planning

When planning for the succession of the business an important objective is to reduce income tax on the disposition (sale or inheritance). One of the methods is to implement an estate freeze which transfers the future taxable growth to the next generation. The corporate and trust structure utilized in this strategy may also create multiple Small Business Gains Exemptions which can reduce or eliminate the income tax on capital gains.

Just as it is important for a business owner to plan to reduce taxes during his or her lifetime, it is also important to maximize the value of the estate by planning to reduce taxes at death.

Minimize Management and Shareholder Disputes

This can be accomplished with the implementation of a Shareholders’ Agreement. Often there are multiple parties that should be subject to the terms of the agreement, including any Holding Companies or Trusts that may be created to deal with the tax planning issues. The Shareholders’ Agreement will include the procedures to deal with any shareholder disputes as well as confer rights and restrictions on the shareholders. The agreement should also define the exit strategy that the business owners may wish to employ.

Estate Equalization

Often the family business represents the bulk of the family fortune. There are times that one or more children may be involved in the company while the other siblings are not. Proper planning is necessary to ensure that the children are treated fairly in the succession plan for the business when the founder dies.

One method often employed in this regard is for the children active in the business to receive the shares as per the will or shareholders’ agreement while the non-business children receive other assets or the proceeds of a life insurance policy.

Founder’s Retirement Plan

It is problematic that often a business owner’s wealth may be represented by up to 80% of his or her company’s worth. It is important that the founder develops a retirement plan independent of the business so that his or retirement is not unduly affected by any business setback.

Protecting the Company’s Share Value

Risk management should be employed to provide for any unforeseen circumstances that would have the effect of reducing share value. As previously mentioned, if the bulk of a family’s wealth is represented by the shares the family holds in the business, a significant reduction in that share value could prove catastrophic to the family. These unforeseen circumstances include the death, disability or serious health issues of those vital to the success of the business, especially the founder. Proper risk management will help to ensure that the business will survive for the benefit of future generations and continue to provide for the security of the founder and/or his or her spouse.

Act

Since the dynamics of family businesses differ from non-family firms, particular attention is required in the planning for the management and succession of these enterprises. This planning should not be left until it is too late – it is never too soon to begin.

As always, please feel free to share this information with anyone that may find it of interest.

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Estate Planning Tips for Real Estate Investors

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For many Canadians, the majority of their wealth is held in personally owned real estate. For most this will be limited to their principal residence, however, investment in recreational and real estate investment property also forms a substantial part of some estates. Due to the nature of real estate, it is important to utilize estate planning to realize optimum gain and minimize tax implications.

Key Considerations for Real Estate Investment

  • Real estate is not a qualifying investment for the purposes of the Lifetime Capital Gains Exemption.

  • Leaving taxable property to a spouse through a spousal rollover in the will defers the tax until the spouse sells the property or dies.

  • Apart from the principal residence, real estate often creates a need for liquidity due to capital gains, estate equalization, mortgage repayment or other considerations.

  • Professional advice is often required to select the most advantageous ownership structure (i.e. personal, trust, holding company).

The Impact of Capital Gains Taxes

  • Upon the disposition (sale or transfer) of an asset, there is income tax payable based on 2/3 (66.67%) (proposed as of June 25, 2024) of the capital gain of that asset.

  • Capital gains taxes can be triggered at death unless the asset is left to a spouse in which case the tax is deferred until the spouse sells the asset or dies.

  • In addition, there may be probate fees levied against the estate at death.

Why is Estate Planning Important?

It is recommended that family issues (including estate equalization) be addressed with certain types of real estate assets. Estate planning can organize your assets with the objective to ensure that at your death they are distributed according to your wishes:

  • to the proper beneficiary(s),

  • with a minimum of taxes and costs

  • with the least amount of family discord.

Tax and Estate Planning Strategies for Real Estate Holdings

Principal Residence

  • If your home qualifies as a principal residence, there is no tax on any capital gains upon sale or transfer of the property. An individual can only have one principal residence and the same holds true for a family unit (for example, both spouses have only one principal residence between them).

  • If the property is held as joint tenants, upon the death of a spouse, the ownership automatically remains with the surviving spouse. Upon the death of the surviving spouse, his or her will dictates who will receive ownership of the home (usually one or more of the children).

  • In preparing your estate planning for your principal residence, you may wish to ensure that you have sufficient liquidity to cover the cost of any property tax deferral program that you have exercised. This is especially important if the home is intended to be retained by the beneficiary(s) and you don’t want to burden them with the significant cost of repayment.

  • Planning for the beneficiaries to retain the property often creates discord if the children are not all in agreement about the final disposition of the house. Should you just wish to leave the home to one child and not to the others consider estate equalization and use cash, other assets or life insurance as a replacement to the interest in the home.

To maintain family harmony, considerable thought should be given when making decisions to bequeath or liquidate the family cottage or recreational property.

Recreational Property

  • If the sale, transfer or deemed disposition at death of the cottage or other recreational property results in a capital gain, that gain will be taxable. As in the principal residence, ownership could be in joint tenancy which will defer the tax. The tax will also be deferred if the property is left to your spouse in your will.

  • There may be some concern that if the property is left outright to the spouse and the spouse remarries the property may ultimately end up with someone who was not intended as a beneficiary. To avoid this, a trust could be used to hold ownership of the property. A spousal trust created in the will also accomplishes this while at the same time maintaining the spousal rollover to avoid tax on the gain of the property. In addition, the spousal trust has an added advantage in that it allows the testator to specify who will inherit the property on the spouse’s death.

Real Estate Investment Property

  • Sale, transfer or deemed disposition (at death), usually will result in a capital gain or capital loss. If the property in question is rental property, depreciation (known as capital cost allowance) may be claimed as a deduction against rental income. At death, if the fair market value of the rental property exceeds its undepreciated capital cost, there will be a tax payable on the recaptured depreciation. A value of less than undepreciated capital cost will create a capital loss which, in year of death, can be deducted against other income.

  • If the property in question is performing favourably as an investment, it may be desirable to leave it to the surviving family members. In this case, it is recommended that any liquidity requirement for taxes, costs etc. be funded to alleviate the financial burden.

  • From a planning point of view, it may be advisable to own commercial real estate through a holding company. Depending on the circumstances the same could be true with rental property.

Solving the Liquidity Need

One of the most cost-effective methods in providing the necessary liquidity in these situations is the use of second-to-die joint life insurance.

The Insurance Solution

  • Tax-free cash at the second death. Naming a beneficiary bypasses the will and is not subject to probate.

  • The proceeds are protected against creditor claims.

  • Insurance provides for a guaranteed low-cost alternative to the issue of satisfying the liquidity need at death.

Please call me if you would like to discuss your personal estate planning needs. As always, feel free to use the sharing buttons to forward this article to a friend or family member you think may benefit from this information.

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Critical Illness – Are You Protected?

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Why a Doctor Invented Critical Illness Insurance

Critical Illness insurance was invented by Dr. Marius Barnard. Marius assisted his brother Dr. Christiaan Barnard in performing the first successful heart transplant in 1967 in South Africa. Through his years of dealing with cardiac patients, Marius observed that those patients that were better able to deal with the financial stress of their illness recovered more often and at a much faster rate than those for whom money was an issue. He concluded that he, as a physician, could heal people, but only insurance companies could provide the necessary funds to create the environment that best-promoted healing. As a result, he worked with South African insurance companies to issue the first critical illness policy in 1983.

Medical practitioners today will confirm what Dr. Barnard observed – the lower your stress levels, the better the chances for your recovery. When one is ill with a serious illness, having one less thing to deal with, such as financial worry, can only be beneficial.

Your Life Could Change in a Minute!

Case Study A – Lawyer, Male 55

Tom was a successful lawyer with a thriving litigation practice. He had recently started his own firm and was recruiting associates to build the practice. He was a single father assisting his two adult children in their post-secondary education. Tom had always enjoyed good health, ate well, exercised regularly and was a competitive, highly ranked (senior class) tennis player.

At age 55, he was diagnosed with prostate cancer. In addition to the emotional angst and anger at receiving this diagnosis, he also was concerned about the financial impact this illness could have on both his practice and his support of his children. Fortunately, five years earlier, at the urging of his financial advisor, he had purchased a critical illness policy.

Within weeks of his diagnosis, Tom received a tax-free benefit cheque for $250,000. He immediately called his advisor to tell him how elated he was that the advisor had overcome his initial objectives to purchase the policy five years earlier. He went on to say that with having the financial stress alleviated, he was certain he would be able to tackle the treatment and concentrate on recovery in a positive manner.

Today, Tom is cancer-free, his practice is thriving, and his children are successfully working in professional practices.

Case Study B – Retired Business Owner, Female 52

Christina at age 52 was enjoying a good life that came partially from the sale of her business a few years before. Her investments were thriving and everything looked rosy. Then 2008 came along. Christina suffered a stroke. Fortunately, it was not a severe stroke. At first, the doctors thought that it was actually a TIA as many of her symptoms were minor. The next morning the MRI results confirmed that it was indeed a stroke and it had caused some minor brain damage.

Christina made a remarkable recovery and within a few short months was almost back to where she was before the stroke. If you didn’t know Christina, you wouldn’t have any idea that she had even had one.

As a successful business owner and mother, Christina had always been a big believer in the advantages of owning critical illness insurance. At first, she had some concern that because her stroke was not that serious and she had recovered so quickly, that her claim might not qualify for payment. These fears turned out to be unfounded as days after the stroke she received claim cheques for $400,000.

During her recovery period, Christina was fearful of having another stroke which caused her some stress however, she is certain that not having any financial worries during this time aided in her almost total recovery.

These two case studies, although quite different in circumstances illustrate some key points about Critical Illness insurance:

  • A life-threatening illness or condition can strike anyone regardless of age or health;

  • Financial security reduces stress which can assist in the recovery process;

  • You do not have to be disabled to be eligible for a Critical Illness benefit;

  • Although you need to be diagnosed with a life-threatening illness, you do not have to be at “death’s door” in order to have your claim paid;

  • The benefits are paid tax-free to the insured.

Reach out to me if you have any questions and please feel free to share this information with anyone you think would find it of interest.

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8 Reasons You Should Do Business Succession Planning in Canada

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Succession planning is essential for businesses worldwide, but certain aspects make it particularly important in the Canadian context. Here are eight compelling reasons why business succession planning is crucial in Canada:

1.Aging Population

Canada, like many other developed countries, has an aging population. Many business owners are approaching retirement age, and a significant number of small and medium-sized enterprises (SMEs) are owned by baby boomers. Succession planning ensures a smooth transition as these business owners retire, securing the future of their enterprises.

2.Economic Stability

A well-executed succession plan contributes to the stability of the Canadian economy. SMEs are the backbone of Canada’s economy, accounting for a large proportion of employment and GDP. Ensuring these businesses continue to operate smoothly through leadership transitions is vital for economic stability.

3.Tax Efficiency

Canada has specific tax regulations and incentives related to business succession. Effective succession planning allows business owners to take advantage of tax deferral opportunities, capital gains exemptions, and other tax-efficient strategies to minimize the tax burden during the transfer of ownership.

4.Preservation of Family-Owned Businesses

Family-owned businesses constitute a significant portion of the Canadian business landscape. Succession planning helps preserve these businesses for future generations, addressing issues like family dynamics, management roles, and ownership structures, thereby ensuring continuity and long-term success.

5.Legal and Regulatory Compliance

Canada has a complex legal and regulatory framework that governs business operations. Succession planning ensures that all legal requirements are met during the transition process, avoiding potential legal disputes, fines, or disruptions in business operations.

6.Skilled Workforce Development

Succession planning in Canada often involves developing a skilled workforce to take on future leadership roles. This not only benefits the individual businesses but also enhances the overall skill level of the Canadian workforce, contributing to national competitiveness and innovation.

7.Attractiveness to Investors

Investors and financial institutions are more likely to invest in businesses that have a clear succession plan. It indicates stability and long-term viability, making Canadian businesses more attractive to domestic and international investors, thereby facilitating access to capital.

8.Community Impact

Many Canadian businesses, particularly in smaller communities, play a vital role in local economies. Succession planning ensures that these businesses continue to operate and support their communities, providing employment and services that are essential for local economic health.

Conclusion

Succession planning is a strategic imperative for businesses in Canada. It addresses the challenges posed by an aging population, ensures economic stability, maximizes tax efficiency, preserves family-owned enterprises, ensures legal compliance, develops a skilled workforce, attracts investors, and supports local communities. By prioritizing succession planning, Canadian business owners can secure the future success and sustainability of their enterprises.

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Navigating Tax Deductions for Life Insurance Premiums

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

  1. If the life insurance policy is assigned to a lending institution that requires the assignment as a condition for a loan, for either investment or business purposes.

  2. If the life insurance policy is donated to a registered charity and the donor continues to pay the premiums on behalf of the charity.

Life insurance policies used as collateral security for a loan

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

  • The loan advance must be made by a qualified financial institution that is in the business of lending money. This includes banks, finance companies, trust companies, credit unions or insurance companies. It does not include private lending arrangements such as with friends or family members;

  • The lending institution must require the assignment of the policy owned by the borrower as a condition for granting the loan and a formal assignment of the policy must be made. There should be a letter or other documentation on file to substantiate the lender’s requirement for the life insurance assignment;

  • The proceeds of the loan must be used for investment or business purposes the income of which would be taxable to the borrower;

  • The life insurance policy assigned can be either an existing policy or one taken out for this specific purpose.

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

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

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

Where the owner is a business

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

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

Life insurance policies donated to a charity

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

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

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

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Understanding Early CPP: When and Why to Consider It

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New Rules governing the Canada Pension Plan took full effect in 2016. Under these rules, the earliest you can take your CPP Pension is age 60, the latest is 70. The standard question regarding CPP remains the same – should I take it early or wait?

If you take it at the earliest age possible, age 60, your CPP income will be reduced by 0.6% each month you receive your benefit prior to age 65. In other words, electing to take your CPP at age 60 will provide an income of 36% less than if you waited until age 65.

CPP benefits may also be delayed until age 70 so delaying your CPP benefits after age 65 will result in an increased income of 0.7% for each month of deferral. As a result, at age 70, the retiree would have additional monthly income of 42% over that what he or she would have had at 65 and approximately 120% more than taking the benefit at age 60. The question now becomes, “how long do you think you will live?”

Assuming that an individual has $10,000 of CPP pension at age 65, and ignoring inflation (CPP income benefits are indexed according to the Consumer Price Index), the following table compares the total base income with that if benefits are taken early or late:

Total benefit received CPP Benefit Commencement
Age 60 Age 65 Age 70
One year $6,400 $10,000 $14,200
Five years $32,000 $50,000 $71,000
Ten Years $64,000 $100,000 $142,000

The question of life expectancy can be a factor in determining whether to take your CPP early. For example, according to the above table, if you take your pension at age 60, by the time you reach age 65; you would already have received $32,000 in benefits. With $10,000 in pension income commencing at age 65 the crossover point would be age 73 (the point at which the total income commencing at age 60 equals the total income commencing at age 65). If you were to die prior to age 73, you would have been better off taking the earlier option.

If your choice is to delay taking the pension until age 70 instead of 65, the crossover would not be reached until age 85.

Some individuals may wish to elect to take the pension early and invest it hoping that the income from age 60 combined with the investment growth will exceed the total income that would be received by starting at 65.

Remember, if you elect to take your pension before 65 and you are still working, you must continue to contribute to CPP. After age 65, continuing contributions while working are voluntary. On the plus side, these extra contributions will increase your pension under the Post-Retirement Benefit (PRB).

Reasons to take your CPP before age 65

  • You need the money – number crunching aside, if your circumstances are such that you need the income then you probably should exercise your option to take it early;

  • You are in poor health – if your health is such that your life expectancy may be shortened, consider taking the pension at 60;

  • If you are confident of investing profitably – if you are reasonably certain that you can invest profitably enough to offset the higher income obtained from delaying your start date, then taking it early may make sense. If you are continuing to work, you could use the CPP pension as a contribution to your RSP or your TFSA.

Reasons to delay taking your CPP to age 70

  • You don’t need the money – if you have substantial taxable income in retirement you may want to defer the CPP until the last possible date especially if you don’t require the income to live or support your lifestyle;

  • If you are confident of living to a ripe old age – if you have been blessed with great genes and your health is good you may wish to consider delaying your CPP until age 70. Using the earlier example and ignoring indexing, if your base CPP was $10,000 at 65 then the pension, if delayed until age 70, would be $14,200. If you took the higher income at 70, you would reach the crossover point over the age 65 benefit at age 84 and after that would be farther ahead.

This information should help you make a more informed choice about when to commence your CPP benefits. Even if retirement is years away, it is never too early to start planning for this final chapter in your life. Call me if you would like to discuss your retirement planning.

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Critical Illness – Are You Protected?

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Why a Doctor Invented Critical Illness Insurance

Critical Illness insurance was invented by Dr. Marius Barnard. Marius assisted his brother Dr. Christiaan Barnard in performing the first successful heart transplant in 1967 in South Africa. Through his years of dealing with cardiac patients, Marius observed that those patients that were better able to deal with the financial stress of their illness recovered more often and at a much faster rate than those for whom money was an issue. He concluded that he, as a physician, could heal people, but only insurance companies could provide the necessary funds to create the environment that best-promoted healing. As a result, he worked with South African insurance companies to issue the first critical illness policy in 1983.

Medical practitioners today will confirm what Dr. Barnard observed – the lower your stress levels, the better the chances for your recovery. When one is ill with a serious illness, having one less thing to deal with, such as financial worry, can only be beneficial.

Your Life Could Change in a Minute!

Case Study A – Lawyer, Male 55

Tom was a successful lawyer with a thriving litigation practice. He had recently started his own firm and was recruiting associates to build the practice. He was a single father assisting his two adult children in their post-secondary education. Tom had always enjoyed good health, ate well, exercised regularly and was a competitive, highly ranked (senior class) tennis player.

At age 55, he was diagnosed with prostate cancer. In addition to the emotional angst and anger at receiving this diagnosis, he also was concerned about the financial impact this illness could have on both his practice and his support of his children. Fortunately, five years earlier, at the urging of his financial advisor, he had purchased a critical illness policy.

Within weeks of his diagnosis, Tom received a tax-free benefit cheque for $250,000. He immediately called his advisor to tell him how elated he was that the advisor had overcome his initial objectives to purchase the policy five years earlier. He went on to say that with having the financial stress alleviated, he was certain he would be able to tackle the treatment and concentrate on recovery in a positive manner.

Today, Tom is cancer-free, his practice is thriving, and his children are successfully working in professional practices.

Case Study B – Retired Business Owner, Female 52

Christina at age 52 was enjoying a good life that came partially from the sale of her business a few years before. Her investments were thriving and everything looked rosy. Then 2008 came along. Christina suffered a stroke. Fortunately, it was not a severe stroke. At first, the doctors thought that it was actually a TIA as many of her symptoms were minor. The next morning the MRI results confirmed that it was indeed a stroke and it had caused some minor brain damage.

Christina made a remarkable recovery and within a few short months was almost back to where she was before the stroke. If you didn’t know Christina, you wouldn’t have any idea that she had even had one.

As a successful business owner and mother, Christina had always been a big believer in the advantages of owning critical illness insurance. At first, she had some concern that because her stroke was not that serious and she had recovered so quickly, that her claim might not qualify for payment. These fears turned out to be unfounded as days after the stroke she received claim cheques for $400,000.

During her recovery period, Christina was fearful of having another stroke which caused her some stress however, she is certain that not having any financial worries during this time aided in her almost total recovery.

These two case studies, although quite different in circumstances illustrate some key points about Critical Illness insurance:

  • A life-threatening illness or condition can strike anyone regardless of age or health;

  • Financial security reduces stress which can assist in the recovery process;

  • You do not have to be disabled to be eligible for a Critical Illness benefit;

  • Although you need to be diagnosed with a life-threatening illness, you do not have to be at “death’s door” in order to have your claim paid;

  • The benefits are paid tax-free to the insured.

Reach out to me if you have any questions and please feel free to share this information with anyone you think would find it of interest.

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