My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, November 29, 2021

Tax Gain/Loss Selling 2021 Version

In keeping with my annual tradition, I am today posting a blog on tax-loss selling, except this year, I changed the title to tax gain/loss selling (to include some planning for stocks with capital gains). I am posting on this topic again because every year around this time, people get busy with holiday shopping (or at least online shopping these days) and forget to sell the “dogs” in their portfolio and consequently, they pay unnecessary income tax on their capital gains in April. Alternatively, selling stocks with unrealized gains may be beneficial for tax purposes in certain situations.

Hopefully, based on the strong stock markets of both 2020 and 2021, you do not have many unrealized capital losses. However, the last half of 2021 has been very sector oriented and you may have stocks that were hit on the sector rotation. In fact, in a November 22nd Globe and Mail article by Tim Shufelt, he noted that 17% of S&P/TSX composite stocks were down by at least 10% year to date. That was before the large market drop on Black Friday.

In any event, if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options by next week and if you are a DIY investor set aside some time this weekend or next to review your 2021 capital gain/loss situation in a calm, methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling.

I am going to exclude the detailed step by step capital gain/loss methodology I usually include in this post. If you wish the detail, just refer to last year's post and update the years (i.e., use 2021, 2020 & 2019 in lieu of 2020, 2019 and 2018). 

You have three options in respect of capital losses realized in 2021:

1. You can use your 2021 capital losses to offset your 2021 realized capital gains

2. You can carry back your 2021 net capital loss to offset any net taxable capital gains incurred in any of the three preceding years

3. If you cannot fully utilize the losses in either of the two above ways, your can carry your remaining capital loss forward indefinitely to use against future capital gains (or in the year of death, possibly against other income)

Tax-Loss Selling

I would like to provide one caution about tax-loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes with the intention of re-purchasing those stocks, and one or two of the stocks take off during the 30-day wait period—raising the cost to repurchase far in excess of their tax savings.

Thus, you should first and foremost consider selling your "dog stocks" that you or your advisor no longer wish to own. If you then need to crystallize additional losses on stocks you still wish to own, be wary if you are planning to sell and buy back the same stock. Your advisor may be able to "mimic" the stocks you sold with similar securities for the 30-day period or longer or utilize other strategies, but that should be part of your tax loss-selling conversation with your advisor.

Identical Shares


Many people buy the same company's shares (say Bell Canada for this example) in different non-registered accounts or have employer stock purchase plans. I often see people claim a gain or loss on the sale of their Bell Canada shares from one of their non-registered accounts but ignore the shares they own of Bell Canada in another account. Be aware, you must calculate your adjusted cost base over on all the identical shares you own in all your non-registered accounts and average the total cost of your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell is higher in one of your accounts, you cannot pick and choose to realize a gain or loss on that account; you must report the gain or loss based on the average adjusted cost base of all your Bell shares.

Superficial Losses

One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchases an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and is added to the cost base of the new shares acquired.

Tax-Gain Selling 

While typically most people are looking at tax-loss selling at this time of year, you may also want to consider selling stocks with gains for the reasons discussed below.

Donation of Marketable Securities

If you wish to make a charitable donation, a great way to be altruistic and save tax is to donate a marketable security that has gone up in value. As discussed in this blog post, when you donate qualifying securities, the capital gain is not taxable and you get the charitable tax credit. Please read the blog post for more details. 

2022 Budget

While I don’t comment on rumours and conjecture, there are many tax commentators who feel there is a good chance the capital gains inclusion rate will increase from 50% to a higher rate in a future budget. If you are in that camp, you may wish to lock in capital gains at the lower rate. As no-one knows if the capital gains rate will change, you need to review this with your advisor as the sale will be taxable immediately, even if you buy-back the same security (there are no superficial gain rules).

Settlement Date

It is important any 2021 tax planning trade be made by the settlement date, which my understanding is  the trade date plus two days (U.S. exchanges may be different). See this excellent summary for a discussion of the difference between what is the trade date and what is the settlement date. The summary also includes the 2021 settlement dates for Canada and the U.S.

Corporations - Passive Income Rules


If you intend to tax gain/loss sell in your corporation, keep in mind the passive income rules. This will likely require you to speak to your accountant to determine whether a realized gain or loss would be more effective in a future year (to reduce the potential small business deduction clawback) than in the current year.

Summary


As discussed above, there are a multitude of factors to consider when tax gain/loss selling. It would therefore be prudent to start planning now with your advisors, so that you can consider all your options rather than frantically selling at the last minute.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, November 15, 2021

Some People are so Poor, all they have is Money

The quote “Some people are so poor, all they have is money” has been attributed to Patrick Meagher (a Canadian journalist and author), Bob Marley (the famous reggae singer) and others. I cannot confirm who first uttered these insightful words, however, for purposes of today’s blog post, it is the words that matter, not who said it and the attribution. 

When I first read this quote, it reminded me of two blog posts I wrote in 2012, “Are Money and Success the Same Thing” and “Are Money and Success the Same Thing – Part 2”.

In Part 2, I looked at money and success and how they impacted five key aspects of all our lives: family, career, health, spiritualism, and impact on society. My conclusion was that money and success are not one and the same but do impact one another. Meaning in certain circumstances, money can influence success, and success can determine how much money you have. These 5 key aspects can also be applied to understand why “some people are so poor” even when they have money. 

During my personal and professional life, I have met many people who have made substantial fortunes and are also rich in many non-monetary ways. But unfortunately, I have also met many people who in my opinion have only money and yet are very poor in other aspects of their lives. Today I will delve into how this can be (for some readers, entitled children of wealthy individuals often come to mind when considering this quote, however, for today's post, I am only considering those who worked to create the wealth, not their children).

How can you have Money and be Poor?


In searching the internet for comments on this quote, some commentators assumed being poor meant being spiritually poor. My interpretation is that they think such a person is spiritually poor if they are lacking in religious, human and societal values. Others focused on the concept money does not buy happiness and that there are things money cannot buy such as values and relationships. Finally, some people took for granted many people want money and/or success. Yet, they felt it was important people chasing the almighty dollar also attempted to find happiness in day to day living as chasing wealth without chasing happiness would leave you empty and only with money.

Monetarily Successful People


While some successful people may sacrifice spiritualism, in my experience, spiritualism is typically not present or strong to begin with in those who sacrifice that aspect of their life. 

There are people who in the name of money that have impacted society negatively, either environmentally or in other nefarious ways. But those are typically a small minority. Societal values are one area where successful people can sometimes just use their money to improve society, by just signing their name to a cheque. This can be done by funding projects for those less fortunate or giving generously to charitable causes even if they have limited personal involvement or are just donating for image purposes. 

Based on the above, it is therefore my perception that those who are “poor because all they have is money” typically sacrificed family and health to achieve their monetary wealth.

Sacrificing Family and Health


Health

The health topic is unfortunately often clear-cut. Many people work so hard to make money that they do some or all of the following: don’t exercise, don’t eat properly, drink to much or take time to deal with their mental health, which often leads to poor health or even death.

Family

For me, family is the largest casualty of those who are so poor, all they have is money. These people are just so busy chasing money and/or their dreams that they have no time left for their family. I personally do not think most people have any intention to “sacrifice” their family in their chase for financial success. It just incrementally occurs as they excuse themselves to meet a client, work all weekend to meet a deadline, go to business dinners or travel to that extra convention to drum up more business. The energy spent trying to earn every last dollar and workaholic behaviour leads to missing a child’s birthday party, play/recital/teacher parent meeting and Valentine’s dinner with your spouse and the trip you promised your family after you closed that “big deal”. Suddenly, you are not there as a parent, spouse or friend and you compensate by buying gifts and material things, rather than giving your time. 

This is the cost I have seen over the years. Marriages dissolved and children estranged and spouses and/or children with personal, mental or health issues. In the end, the parent becomes solely a bank with little to no actual familial involvement. That is my interpretation of “Some people are so poor, all they have is money.”

Life Balance


At the risk of being simplistic (I am sure some psychologists have 100 page papers on this topic) and/or “preachy,” in my experience, the difference between those who had money and were not poor versus those that were poor was life balance. They did not need to make that last dollar by sacrificing their family time for every deal. Yes, they did occasionally or more than occasionally work too hard or too late and yes, they did sacrifice family time where the business or job demanded it, but overall, they ensured they had their date night with their spouse, attended as many children functions as possible, showed their children charitable actions both financially and by personal actions and just made family time a priority.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, November 1, 2021

Gifting or Loaning Money to your Children to buy a Home

Last week, CIBC Economics released a report titled “Gifting for a down payment -perspective” by its Deputy Chief Economist, Benjamin Tal. The report provides a wide range of statistical data in relation to the value and type of gifts parents are providing to their children to purchase houses.

Some of the key statistics in the CIBC report include the following:

1. Over the last year, CIBC estimates gifting totaled just over $10 billion for family member house purchases, which accounts for 10% of total down payments in the market as a whole for that period

2. Almost 30% of first-time home buyers received assistance from family members 

3. The average gift is now approximately $82,000 

4. Where the gift is the primary source of the down-payment, the gifts average $104,000 for first-time home buyers no less than $157,000 for mover uppers 

5. CIBC reports that only 5.5% of the gifting parents used debt to finance the gifts (that percentage rises substantially for gifts for homes in Vancouver and Toronto) and therefore it appears parents are using their savings to make these gifts

Whether a gift is $50,000 or $200,000, the amounts are substantial and many parents never planned or conceived of gifting such large amounts of their savings. Whether parents are encroaching upon their retirement savings for these gifts is an interesting topic for another day.

However, what I want to discuss today is; whether some parents should be making loans in lieu of gifts, to protect their family money under the various provincial family law acts (in the case of a marital breakdown), where the child will use the gift to buy a home.

Before I go any further, I want to note that I am not a family lawyer. This blog post is general in nature and should not in any manner be considered as legal advice. This blog is being posted to caution parents who are considering making a housing gift to seek family law advice before doing such. I say this because not only is the family law complicated in regard to monies used to purchase a matrimonial home, but the question of whether the monies are better made as a loan versus a gift is a legal minefield of its own. I humbly suggest the legal costs will be worth the piece of mind and/or the potential financial savings to the family.

Gifts vs Loans


Where there is a marital breakdown, one of the key issues in respect of money given to a child to purchase a home is whether the money was a gift or loan. That characterization can be the difference between a family keeping or losing thousands of dollars. I will assume for purposes of this discussion, there is no pre-marital agreement dealing with this issue, which is often a suggested option by lawyers, but very rarely acted upon.

Gifts


Family lawyers (in Ontario) have told me, that in general, gifts or inheritances received during a marriage that are kept separate from the family property will typically be excluded property and not be considered family property subject to division (I am not aware if all the provinces have the same general rule, you will have to check with a family lawyer in your province). Thus, children are often told by their lawyer or their parent’s lawyer to keep a gift or inheritance invested only in their name and not to co-mingle these funds in a joint spousal bank/investment account or pay joint expenses. I have also been told however, that if a gift is used to buy a matrimonial home, it will no longer be excluded property. Again, confirm this all with a family lawyer.

Loans


A loan would typically be secured by a promissory note, which lawyers have told me in general should be deducted as a liability as net family property. Sounds simple, but as per this article "Promissory Notes Between Parents and Their Married Children" by Nathalie Boutet, Managing Partner, Boutet Family Law & Mediation, properly documenting and executing a promissory note is far from just writing a note out on a piece of paper. The importance of legal advice is further strengthened when you read in Ms. Boutet’s article that a debt can be discounted even if a promissory note is valid and has not been forgiven, if there is a low probability that the parents will collect it. Ms. Boutet notes the discount can be as high as 90%-100% making the promissory note effectively a gift.

Legal Interpretation of a Gift vs Loan


But what constitutes a gift vs a loan? This is far beyond the scope of this post, but the case of Barber v. Magee, 2015 ONSC 8054 (Ont. S.C.J.) provides some clarity of the documentation required for a family transfer to be categorized as a loan. The characterization of whether funds advanced are a gift or loan are detailed in this law firm’s summary, "Inter Family Gifts vs. Inter Family Loans". As I understand this as a layperson, in this case the husband received $157,000 or so from his father which was used to purchase the matrimonial home and pay for other costs. The husband argued the $157k was a loan he still had to repay, and it would still form a liability and be deducted from his net family property. 

The wife argued the funds were a gift and since the funds were used to purchase the matrimonial home, the husband had to record the house as an asset to be split as part of the family property. The courts held the funds were a gift.

It was my intention in writing this post to:

1. Reflect the complexity of family law and the jurisprudence in respect of whether funds given to a child are a loan or gift 

2. Urge you to consult a family lawyer before making a gift or loan to your child/ren to help in buying a house, since as the CIBC report reflects, 30% (likely rising even higher) intend or will be asked to assist our children in buying a starter or mover upper.

I hope I accomplished these objectives.

Bloggers Note: On my @bluntbeancountr Twitter account, a tax expert tweeted that the last couple times their clients wanted to reflect monies from the parents as loans for house down payments, the banks instead requested a written parental declaration that the funds transferred were a gift (this is related to the payment tests for CMHC and mortgaging) and they were unable to use a promissory note loan backed by a 2nd mortgage. You should discuss this upfront with your real estate and family lawyer and bank to see if this is problematic in your case.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, October 18, 2021

Considerations in selecting an executor and accepting the executor appointment!

Last week, Rob Carrick the personal finance columnist for The Globe and Mail, in his Carrick on Money Newsletter (the newsletter is generally only available to Globe subscribers) asked David Edey a Certified Executor Advisor questions on his experience as an executor. These experiences and frustrations are detailed in Mr. Edey's book Executor Help: How to Settle an Estate Pick an Executor and Avoid Family Fights.

The book summary states “The grief, frustration, and stress of that experience were life-altering for David. He was determined to write this book in order to help others successfully navigate the difficult tasks of estate planning and executorship—so that their families could stay together”. 

I have not yet read the book, but as an accountant on numerous estates and a multi-time executor, I understand what drove David to author the book. Rob’s discussion of the topic in his newsletter provided me the impetus to offer a few comments of my own on the topic. So today, I discuss some considerations in selecting an executor and some of the less pleasant tasks that may be part and parcel of being appointed an executor.

Who Makes a Good Executor?


I have noted in blog posts over the years that a potential executor should have the following characteristics:

(1) Financial acumen and investing experience
(2) Be detailed oriented
(3) Handle stress well
(4) Be able to deal with people, including those acting irrationally (inheriting money does funny things to people)
(5) Be results driven

I have been involved with a couple of executors who did not have the above characteristics, especially the financial acumen and ability to handle stress. Those estates went off the rails and took years to settle. So carefully consider the above characteristics in selecting an executor.

Should you name your children as executors?

This is the $64,000 question. Assuming there are no “black sheep” in the family and all the siblings get along, you would think naming all your children would be a good idea. Sometimes the answer is yes, as they can share the burdensome and time-consuming duties as co-executors and utilize their individual strengths. Other times, being named co-executors can adversely affect your children’s relationship as the stress of settling the estate and distributing money creates discontent amongst the children.

So, should you select only one or two children who meet the above characteristics? Again, the answer can sometimes be yes, where the other children trust they are competent and even-handed. On other occasions, children may feel resentment that the parent did not name them as an executor and their siblings are favoured or given preferential treatment by their parents.

You may be saying to yourself, Mark has not answered whether I should name my children as executors, he has just given me a maybe yes and maybe no answer. But that is the reality. You need to look at your children with a cold realistic view and not your rose-colored glasses to decide if they have one of more of the characteristics to be an executor. You also need to speak to them and ask them if they feel they can work together (see discussion below). If you are not satisfied on all accounts, you may want to consider a professional corporate executor so that your children will only have to deal with an independent third party.

Do you think the executor would like to know they are being named?


Many years ago, I wrote a blog post titled "Speak to your Executor – Surprise only works for Birthday Parties, not death". You would be shocked at how many people are named an executor without prior notice. You always want to inform your executor they are being named and confirm they are comfortable with being named an executor. The last thing you want is to die and have your executor renounce their executorship. As noted above, where you have more than one executor, you want to ensure they are willing to work together, whether they are your children, friends, professional advisors, or any combination of the above.

Does an executor have to do all the work?

A well-run estate utilizes accountants for tax preparation and estate planning advice and a lawyer for estate and legal advice. You may also have to hire a specialist to prepare the passing of accounts (a summary for the court of the estate). While these costs can add up, the expression penny wise pound foolish has applied to many executors. The accountants and lawyers can also act as buffers for the family, as they act as independent advisors and can deflect some of the pressure put on the executor(s) by the beneficiaries. I have heard many an executor say, "it was the accountant's/lawyer's suggestion".

There is typically a significant amount of mundane work in settling an estate. Writing and dealing with financial institutions, games of hide and seek to find assets etc. An executor may consider asking for the assistance of their family members who are not executors to help with some of these administrative tasks; assuming they are willing and the other family members are fine with their assistance.

Sadly, I must inform you, even where you delegate and use professionals, you are likely in for a very time consuming task as an executor.

I want my Money!

In my experience, an executor will be asked to distribute money sooner than later by one or more of the beneficiaries. This is one of the most stressful aspects of being an executor, since in many cases you are unsure of what will be left of the estate following the sale of the estate's assets and the income taxes on the estate. 

It is important you do not make an interim or final distribution (see this blog post on obtaining a clearance certificate) of money until you consult with your accountants and lawyers. The last thing you ever want to have to do, is go back to the beneficiaries and tell them they were overpaid, and they must return money. This is very messy, and you could end up having personal liability for the estate. So always ensure you review any distributions with your professionals before distributing any money or assets to the beneficiaries.

An executor’s job is arduous, time consuming (it can take years to settle some estates), stressful and a messy estate can fracture family relationships. You therefore need to consider the selection of your executor(s) very carefully (especially when you will involve your children), ensure you advise them and confirm that they are willing to accept the appointment. If you are asked to become an executor, consider carefully whether you wish to accept the appointment; you may also want to consider buying David's book.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, October 4, 2021

The Implications of Receiving an Inheritance

There is a large wealth transfer occurring in Canada, with estimates as high as $750 billion dollars.

While I have written on issues and concepts related to inheritances (with a bit of a caustic tone, based on my actual experiences), I have written very little on receiving an inheritance. Thus, today, I will discuss the income tax implications of receiving an inheritance and some of the issues to consider upon receiving an inheritance.

If you are interested, the posts I referenced in the prior paragraph are:"Is it Morbid or Realistic to Plan for an Inheritance?", and “Taking it to the Grave or Leaving it all to your Kids?” and “Inheriting Money – Are you a Loving Child, a Waiter or a Hoverer”.

The Income Tax Implications of Receiving an Inheritance


In Canada, there are generally no direct income tax consequences to receiving an inheritance. I say generally because there are a couple very rare circumstances where you could pay tax. The first is where you are the beneficiary of a deceased’s RRSP/RRIF and the estate does not have enough money to pay the estate taxes. Surprisingly to most people, the CRA has the right to go after the beneficiary of a RRSP as the CRA considers the beneficiary jointly liable with the estate. The second rare situation is where a will makes a beneficiary liable for taxes arising on the transfer of assets from the deceased. However, both these exceptions are highly unusual and in almost all situations, there are no taxes due upon the receipt of an inheritance.

So, to be clear. If your inheritance is in cash, you receive those funds tax-free. If your inheritance is a capital property of some kind such as stocks or real estate, you again receive the capital property tax free.

However, in the case of capital property, you generally inherit the cost base of the property to the deceased, which is typically equal to the deemed proceeds of disposition for the deceased. Usually, this amount is the fair market value ("FMV") of the property right before the person's death.

So for example, if your mother passes away as the last surviving spouse (it is likely when your father passed away he left his estate to your mother – which is typically a tax-free spousal transfer at his passing) and she owned 100 shares of Bell Canada that originally cost $25 a share, but were worth $65 a share at her passing; her estate would file a final (terminal) income tax return reporting a deemed capital gain of $4,000 (FMV at death of $6,500-$2,500 original cost). This deemed capital gain is known as a deemed disposition on death and occurs despite the fact the Bell Canada shares were not sold, because your mother was the last surviving spouse. Your mother’s deemed disposition FMV of $6,500 becomes your new cost base of the inherited shares. So, if you sell the Bell Canada shares in the future, the gain would be equal to your sales proceeds less $6,500.

If you wish to learn more about how your estate is taxed on death if you are the last surviving spouse, see this blog post I wrote a few years ago, The Two Certainties in Life: Death and Taxes - Impact on Your Personal Income Tax Return

Dealing With an Inheritance


Receiving a large inheritance can be overwhelming, especially if you are not financially sophisticated. I wrote a detailed blog on this topic in 2011 if you wish to read it Dealing with Financial Windfalls & how to stave off the Money Leeches

However, today I will give you the Coles notes version.

Practically, it is almost impossible for a large inheritance to go unnoticed. A family member or friend will advise someone of the passing of your parent /sibling/relative etc. and somehow someway it is likely an investment person will be amongst those to find out and you will get a call. If you avoid the above, a large deposit at the bank will likely trigger someone at the bank to speak to you. It is almost unavoidable.

If you already have an investment advisor/manager you work with and trust, selecting an advisor is a non-issue. But if you have not really worked with an investment advisor/manager or their practice is built around smaller net worth clients and your inheritance is substantial, you will want to review your situation. The best advice is often to “park” the money in a GIC for a couple months until you have regained both your emotional and financial equilibrium and have had time to speak to family and friends to get a couple good referrals and absorb your new situation.

The “parking” of the inheritance would also apply to any decision to give money away (as you may receive subtle or less than subtle hints about gifting part of your inheritance to various family members) as well as holding off investing part of your inheritance.

Putting the money in a GIC or similar investment also provides you a built-in excuse to not be able to make any decisions in the near-term, since if anyone has the audacity to ask, you answer, “my money is locked in for 3 or 6 months and I cannot touch it”.

Inheritances typically come on the heels of emotional distress and in many cases, significant changes in your financial situation. The good news is that in almost all circumstances the cash or capital property inherited is tax-paid money and you have no additional tax concerns. However, the “new-found” wealth can be stressful from both an investing and gifting perspective and you need to ensure you have a clear mind before making any decisions on both fronts.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, September 20, 2021

The Basics and Uses of Term and Permanent Life Insurance

I am back after a summer of R&R, which proved more golf does not mean you will play better golf. 😊 I hope everyone had a good summer and had a chance to decompress from the stress of the last year and a half.

With the ability to finally get together with friends and family (socially distanced) this summer, there was lots to catch-up on and discuss. I guess because of COVID contemplation, the topic of insurance surprisingly came up a couple times during these get togethers and I noted some confusion on the topic.

So, I thought today, I would post on the basics and uses of insurance and discuss the two main types of insurance: term insurance and permanent insurance.

Term Insurance

In its most basic form, term insurance covers you if you die during the term of the insurance; but there is no cash value, guarantee or payment if you die once your term insurance has lapsed. Term insurance is often limited to a certain age (75-85) and becomes very expensive as you age (for example, my term insurance increased substantially when it renewed at the end of the 10-year term when I turned 60 years old). Thus, many term policies are either cancelled as your need for term insurance diminishes (see discussion below) or people allow them to lapse due to the age/premium cost constraints. It should be noted there are variations on term insurance and certain polices allow you to convert the term policy to permanent insurance.

On an overly simplistic level, term insurance can be compared to renting versus buying a home. When you pay rent on your apartment, condominium, or home, you have a place to live, but the rent paid does not build any equity and the monthly rent paid is cash forgone. The same holds with term insurance. If you are healthy throughout the term of the policy, you do not build any cash value/equity and the monthly insurance cost paid is forgone (although obviously, if you die while owing term insurance, your estate is paid the insurance).

As term insurance is temporary and has no cash value, it is the most cost-effective type of insurance available and is generally used to insure a specific need or a couple needs, such as one or two of the following:

1. Income replacement – term insurance can be used as a "replacement" of income for the deceased person. This is particularly important where one spouse/partner is the breadwinner, but is still often, a very good idea even when both spouses work. The objective of the term insurance in this situation is to allow your family to live in the manner they are accustomed to even if you or your spouse/partner passes away.


2. Financial security for dependents – this is really just a subset of #1, but term insurance ensures your spouse/partner is taken care of the rest of their life, and your dependents are financially covered until they are ready to join the workforce.

3. Debt and Mortgage protection - insurance can be used to pay off debt, typically the mortgage on your home when you pass away so that your family is relived of the debt burden.

4. Funding of University - many parents want to ensure their children are educated and use insurance to backstop that goal in case they were to pass away.

Permanent Insurance


The two main types of permanent insurance (although there are several variations and permutations) are:

1. Whole Life

2. Universal Life (“UL”)

These policies provide insurance coverage for life, so your estate is guaranteed an insurance payout of some quantum. I provide some brief comments on whole and UL insurance below:

Whole Life


With a whole life policy, the risk is typically shared between you and the insurance company. The insurance payments are generally fixed, have a cash surrender value (that can be borrowed against during the life of the policy or withdrawn if the policy is surrendered) but the premiums growth of the cash and death benefit can be affected by a calculation called the dividend scale. If the dividend scale drops too low, there will be less cash value and potentially require further premium payments by the policyholder to ensure the policy does not lapse. So, when looking at a whole life policy, you should ensure your advisor provides different dividend scale scenarios in their proposals, so you have an expected scenario and a worse case scenario to compare.

Universal Life


The premiums for a UL policy are typically more flexible and generally do not provide a significant cash surrender value and the risk of the policy typically falls to the insurance company. There is an insurance component and a tax sheltered “savings” component.

There are various opinions on whether whole life or UL are better choices, but really, they are dependent upon your personal risk and insurance needs. In all honesty, both whole life and UL are complex to understand. I plan in the future, to have a guest post to discuss in greater detail the differences, advantages and disadvantages of whole life and UL.

Where to use Permanent Insurance


Whether you purchase whole or UL, permanent insurance usually makes sense for the following situations: It should be noted that because insurance proceeds are credited to the capital dividend account (see this prior blog post on the capital dividend account) permanent insurance if very often used by corporations, which can make the policies tax effective.

Uses of Permanent Insurance


As noted previously, unlike term insurance which typically covers temporary needs, permanent insurance if often used for longer term needs, such as the following:

1. Estate planning – Upon death, your estate will be allocated in some combination to the CRA in taxes, your family or charity. Permanent insurance can be used to provide the liquidity for paying your estate tax liability (typically in a much more tax effective manner than self-funding), estate equalization with your family or even estate growth/maximization by leaving a larger estate to your family from the insurance pay-out.

2. Business or partnership agreements – Permanent insurance can be a very tax effective way to buy out a deceased partner or shareholder under the terms of a partnership or shareholder agreement. As noted above, permanent insurance if very often utilized where corporations are involved because of the capital dividend account.

3. Passive Income rules- Permanent insurance can shelter income tax free within a policy, which effectively reduces taxable passive income for a corporation and therefore can potentially reduce the small business claw back for corporations.

4. Charitable – You can name a charity as beneficiary of a policy or make a bequest of the death benefit from a permanent policy to a charity of your choice and your estate will receive a charitable tax credit upon your death. You can also purchase or transfer a policy (this may result in a taxable deemed disposition, so speak to your accountant first) to a charity and you would receive a tax credit on the yearly premium payments.

5. Alternative for Fixed Income – I have seen some sophisticated investors use a permanent insurance policy to replace the fixed income component of their portfolio, as even when you factor in the cost of insurance, the return of a permanent policy may exceed the return from fixed income investments.

When you use the word insurance most people wince and only focus on the premium costs. But as discussed above, insurance can protect you short-term or be used to assist with longer term business and estate planning needs. In addition, with permanent insurance, the after- tax returns of an insurance policy versus alternative investments are often higher even after accounting for paying the insurance premiums.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, June 28, 2021

Gone golfing for the summer—Plus sign up for newsletter

This summer, as usual, I will take a break from the blog and spend some time golfing and enjoying the good weather—I hope with family and friends. I will likely post a couple Best of The Blunt Bean Counter posts during this time.

I will also use my time this summer for some life contemplation, including where and how the blog fits into the picture as I wind down to my retirement.

I wish my readers a great summer and ensure you take some time off; you deserve it after the last 16 months or so.

With my summer break approaching, it’s a great time to sign up for BDO’s newsletter. It goes out every two weeks and gives great business insights on a variety of timely and critical business topics. I often link to them in my posts.







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