In its original form, initiative was an email periodical which had about a 200 word count base text, complemented with a graphic to show connections, flows or other dynamics, including labels and other supplementary text. Those graphics were not compatible with later technology, so only the original base text has been preserved for the present archiving purpose. The material was current to the year and month of issue (Vol#,No#) but is not a legal opinion.
Vol.1. Vol.2. Vol.3. Vol.4. Vol.5. Vol.6. Vol.7.
Volume 4
Perhaps the greatest drawback to investing in RRSPs (and in turn RRIFs) is that the accumulated funds are fully taxable at the time of withdrawal from the respective tax sheltered plan.
In extreme circumstances, the plan holder may realize less than 60% of the funds on an after-tax basis. The default tax-reduction strategy some people undertake is to delay withdrawals from such plans for years or even decades.
A tax melt strategy may enable a person to accelerate rather than delay the conversion into after-tax money. What’s more, implemented effectively the strategy can result in the bypass of some or all of the tax on such registered money withdrawals.
The key is to create qualifying tax deductions to offset the taxable income, usually through a leveraged investment program.
RRSP/RRIF withdrawal
LESS tax payable
PLUS tax deduction
The combination of systematic RRSP/RRIF withdrawals in parallel with a controlled series of mirrored deductions can free up trapped registered funds and potentially lead to an earlier retirement.
Advisor has been solicited for referrals (for commission) to a charitable giving program. Included in the glossy promotional kit are sample marketing letters, charts of projected financial results, and tax and legal opinions from leading accounting and law firms.
The thrust of the program is that a person can purchase certain items at ‘wholesale’ (medical supplies, glasses, comic books, etc.) and donate them to charity at a significantly higher appraised ‘retail’ value.
Such plans have come to be known in the tax community as “”buy-low, donate-high” arrangements because they provide a tax benefit greater than the cost of the property.
Effective December 5, 2003, draft Income Tax Act amendments were introduced to curtail the majority of such arrangements, exempting publicly traded securities, certified cultural property, ecological gifts, or real property situated in Canada.
The value of a gift of property for charitable donation purposes will be limited to a donor’s cost of the property, where it is donated within three years of acquisition by the donor or is otherwise acquired through a gifting arrangement or in contemplation of donation.
Advisor is on the planned giving committee of his local church. As with many small charities, the church seems to be in a constant state of soliciting donations, and would like to establish a long-term funding solution.
Advisor has engaged the STEPUP team to assist in putting together a proposal that would enable donors to allocate a small proportion of their existing donations into strategically structured life insurance policies.
Among the benefits of a life insurance based solution:
Certainty for donor & charity
Relatively small premiums
Significantly larger bequests
Virtual incontestability
Potential creditor protection
Can avoid probate
No transfer costs
Immediate payout at death
May self-complete if disabled
Here are the tax results of common ownership structures:
Policy Named Tax benefit Tax benefit
Owner Beneficiary Lifetime at Death
Donor Charity None Death benefit
Donor Estate* None Death benefit
Charity Charity** Annual premium None
* (Charity is a beneficiary in Will)
** (Whether paid to Charity or insurer)
Client has worked hard to build her business, taking it from a basement office to a $10 million dollar corporation. She has now engaged Advisor to provide suggestions on how to structure the succession to her adult children with:
Minimal cost,
Maximum privacy, &
Complete ongoing control in her hands
Part of the solution may be to engage in a multiple Will strategy. Under this type of arrangement, the Client’s lawyer prepares two Ontario Wills that reference one another. The corporation shares and other assets not requiring probate will be listed in the “non-probate” Will. All other assets not listed will be governed by the main Will, which will eventually be submitted to probate (for reasons outside the testator’s control).
Some of the benefits of this simple plan
Bypass probate taxes on selected assets – In this case, this could be as much as $150,000 in Ontario
No disposition taxes (as might occur in an immediate transfer) – Note that such taxes will however likely be incurred at death
Maintain confidentiality of succession plans now and after death – The non-probate Will is not filed with the court
Maintain complete control of the selected assets for life – Unlike an estate freeze, she still has full testamentary control of the business should she decide to change either Will
Advisor is thinking of giving do-it-yourself Will kits to his Clients. As advertised:
You will avoid the cost of a lawyer in drafting the Will, &
The document will be valid and enforceable
Even if this holds true – and despite that the blank forms may be “lawyer-approved” – there is no assurance that Clients will be adequately informed of their tax, estate, family & property rights and obligations beyond the Will.
One of my own Clients originally executed such a document to distribute her house, cottage and RRIF to her three adult children respectively. The potential result:
Estate would have paid the maximum amount of probate tax
Cottage would likely have to be sold to pay capital gains tax
It was unclear who was to pay the tax liability out of the RRIF
A grandchild under Client’s care had a potential support claim
There were no provisions for a son’s pending marital breakdown
The chosen phrasing disproportionately favoured grandchildren
There was a potential intestacy of undistributed assets
Apart from the potential dire impact on a Client, Advisor may wish to consider his own exposure: Such a recommendation from a professional advisor could be construed as legal advice – and most, if not all E&O policy coverage for financial advisors excludes legal advice.
Advisor always recommends that her Clients execute Wills and powers of attorney generally, but is wondering whether those with foreign real estate should be doing something more.
An Ontario Will purports to deal with all personalty, as well as real estate located in the province. The law of a foreign jurisdiction (even another province) will determine whether an Ontario Will or power of attorney for property can be ‘re-sealed’ to deal with real estate there, or if a local document/ procedure may be required.
Some caveats before rushing into this enterprise:
All documents must be carefully coordinated so as not to conflict with one another
Potential application of forced heirship laws
Alternative ownership structures/transfers
Potential conflicting laws of deemed revocation
On marriage, separation & divorce
At insolvency or bankruptcy
Upon mental incapacity
Advisor asked me for a rough summary to characterize the main business-related insurance needs of a potential Client in a small business or professional corporation.
THIS ISSUE: “Purpose” and “Amount”
NEXT ISSUE: “Duration” and “Structure”
PURPOSE:
Buy-sell – Facilitates buy-out of deceased’s interest by surviving owner/shareholder(s) &/or redemption by corporation
Key person – Contributes emergency capital and maintains the ongoing value of the business in the absence of a key contributor
Estate liability needs – Deemed disposition/realization taxes and other liabilities imposed on estate
Income replacement – Replaces lost income-earning capacity of principal breadwinner to spouse and family
AMOUNT:
Buy-sell – Respective needs are proportionate to shares held; increases as business grows; tax effects may cause adjustments
Key person – Includes out-of-pocket costs, lost person’s unique value and replacement cost; often subsumed under buy-sell if closely-held
Estate liability needs – Increases as business grows; tax on excess over cost base; reduced by LCGE; rollover deferrals
Income replacement – Declines over time as number of income-earning years reduce; generally a commuted present value
Advisor asked me for a rough summary to characterize the main business-related insurance needs of a potential Client in a small business or professional corporation.
LAST ISSUE: “Purpose” and “Amount”
THIS ISSUE: “Duration” and “Structure”
DURATION:
Buy-sell – Temporary need until owners dispose of respective interests; may become permanent to support lifetime buy-out
Key person – Temporary for corporation to hold for as long as the person can effectively contribute; truncated if interest is disposed
Estate liability needs – Permanent need up to death; may recoup tax from life sale; deferral opportunity by spousal rollover
Income replacement – Temporary need to retirement; calculated as person’s intended retirement age less current age
STRUCTURE:
Buy-sell – Common options may be: Corporation owner on all; Personally owned on each other; Personal – others as beneficiaries
Key person – Corporation as owner, payor and beneficiary; any other structure will likely have negative tax consequences
Estate liability needs – Respective personal- or spouse-owned, with spouse/family beneficiary/ies directly or via estate or trust
Income replacement – Respective personal-owned with spouse/family beneficiary/ies, preferably via trust
Client’s 83 yr-old father died recently; for the last 10 years, an old family friend (female) had been living in his house.
Father’s Will allowed the ‘friend’ to remain in the house for up to ten years, but otherwise gave little guidance on expenses or situations that would allow or require the house to be sold. The estate beneficiaries are grandchildren and great-children of the deceased.
As it turns out, the house is effectively the entire estate, and there are no financial assets to maintain it. It obviously needs to be sold but the friend is threatening litigation, including claiming support entitlement as common law spouse.
After much hand-wringing, Client (as executor) has agreed to pay resettlement costs and a share of rent for the friend to enter a local seniors’ residence.
With 20/20 hindsight, it would have been nice if one or more of the following had been executed/prepared :
Statutory declarations confirming the non-conjugal status
Formal tenancy agreement (whether or not rent was being paid)
Domestic contract clearly defining the relationship & obligations
More clearly drafted Will terms addressing contingencies, & explicitly giving power to sell despite the gratuitous tenancy
Client’s 62 year old son is visually impaired and mentally challenged; he has never left home. Client is becoming increasingly concerned what will happen to him when she dies — her 86th birthday is just around the corner.
Son receives support payments through the Ontario Disability Support Program (ODSP), but Client is concerned that once he receives her estate he will be disqualified under ODSP income and asset tests.
Ever since the 1989 case of Audrey Henson, it has been considered a planning key to place such funds in a fully discretionary trust for such beneficiaries, as had been done for Audrey under her father’s Will.
Subsequent to this case, the Ontario government has taken the administrative position that trust funds that are subject to a trustee’s full discretion will not be included in the financial tests; other provinces may still include such trust funds in determining a beneficiary’s eligibility for respective provincial disability support benefits.
While it took some legwork for Client to identify an appropriate trustee, she is now comforted that her son will continue to receive his government support, and still be able to enjoy the fruits of her estate.
Client’s wife recently passed away; the couple was resident in Ontario. Wife had no assets to speak of, except some RRSP funds (in the form of bank GICs) naming him as beneficiary.
Creditors of his wife’s estate have been putting pressure on Client to repay the registered funds to his wife’s estate in order for their claims to be satisfied.
Client wants to roll over the RRSP funds to his own plan and has asked Advisor what he should do.
Fortunately for Client, in June 2004 the Ontario Court of Appeal in Perring held that RRSP proceeds flowing to a named beneficiary are completely out of the reach of estate creditors. Prior to this decision, the Ontario courts had followed the Manitoba case of Clarke which allowed estate creditors to ‘call-in’ such funds if an estate was insolvent.
Of course, insurance-based RRSP proceeds were already accorded this protection against estate creditors, in addition to enjoying greater potential creditor protection against lifetime creditors.
Still, creditor exposure of investments remains an area of law that varies by province and certainly warrants an annual review by Advisor of Client’s RRSP/RRIF accounts and non-registered holdings.
It is December and Client has had a great sales year, which in turn has pushed him well into the highest tax bracket. He has $80,000 unused RRSP contribution room, and he expects that making such a contribution will negate (in practical terms) his high bracket tax portion.
Client has left a voicemail message for Advisor to call back in the new year for an appointment to arrange for the contribution ‘in the first 60 days’ so that it will be credited against the current year just ending.
Advisor knows that Client is 2-3 years from retirement and that his wife is a stay-at-home mom with virtually no earned income. Accordingly, it may be beneficial to make the contribution to a spousal RRSP for the purposes of future retirement income splitting … but here’s a benefit Advisor can offer for a potential sooner tax advantage:
Generally withdrawals by a spouse will be taxed in the hands of the contributor spouse, up to the amount of deposits in the year of withdrawal and the two preceding taxation years
While contributions made in the first 60 days are credited to the contributor’s previous calendar year’s return, for the purposes of spousal withdrawals they occur in the calendar year of contribution
If Advisor can get Client into the office before the end of the December, he will give Client’s spouse the opportunity to withdraw those funds almost a year earlier, perhaps even accelerating Client’s own retirement date.