November 1, 2023
Taxes owing for the current year are based on your income realized that year. It is important to look at your income to date and your potential income in future years to optimize your tax bill. In 2023 we have seen significant increases in CPP, OAS and employment pension plans payments due to indexing for inflation. The tax brackets are indexed to inflation as well, but they are not necessarily in lockstep with your income. Tax installments are calculated based on previous years income and there is a possibility that you may owe more taxes in April than you thought. A review of your year-to-date income, withholding taxes and installment amounts prior to year-end, may present opportunities to defer income, realize more income at a lower bracket or reduce your installments next year.
RESP, RDSP and FHSA contributions are all based on the calendar year. Grant availability on Registered Education Savings Plans and Registered Disability Savings Plans are age determined. It is important to review what carryforward grant is available and the ages of the beneficiaries. Grant money can easily get left the table because of a missed contribution deadline. The First Time Home Savings Account is a new plan that allows $8,000 to be contributed to a plan for the purpose of saving for a home purchase. The contributions create a tax deduction similar to an RRSP, but the contribution needs to be processed by December 31. (See this link for a detailed review of the FHSA)
New taxes and reporting requirements: I spend a good portion of my time in professional development workshops and studying changes to taxes and regulations that may affect our clients. In the past few weeks, I have heard a number of presenters comment that they were looking forward to retiring soon as the tax changes and reporting requirements are becoming so complex. While tax advice is outside my area of expertise and the scope of our financial planning engagements, the following are a few items that would be worth discussing with your tax advisors this winter:
Underused Housing Tax (UHT): if you have a secondary residence that is owned by a partnership, corporation or trust you may have reporting requirements. The good news is you probably do not owe taxes, but the penalties for not filing with the CRA are substantial. CRA announced today that they are extending the filing deadline to April 30, 2024. Many people that are unaware of the requirements. Farmers may find that houses on corporate land or land owned jointly fall under this rule. If you own a rental or vacation property in joint names or if you have added a child to property as joint owner, you may be considered to be in partnership or have a bare trust which may be subject to filing requirements. The best advice is check with your tax advisor sooner than later.
Trust Reporting Requirements: starting this year for Trusts with a reporting period ending December 31, 2023, there are new reporting requirements of the trust including the Beneficial Ownership Information of a Trust. This may not apply to many, but the new requirements include bare trusts, which may include naming an adult child as an owner on real estate or bank accounts for estate planning purposes, or in-trust for accounts in excess of $50,000. RSM has provided a commentary piece worth a read. Recommendation -- discuss with your tax professional. The penalties are steep for not filing.
Bill C-208, Intergenerational Farm and Business transfers: in 2021 a private members bill was introduced and approved through parliament to make more fair the tax treatment of transferring a family business or farm on to family members. The previous tax treatment was that you would pay less tax to sell to a 3rd party than you would selling to family. The current rules under Bill C-208 are being changed for 2024 and all subsequent years. The tax treatment has not changed, but the process is more complex with more requirements at the time of transfer an in future years. BDO's update discusses some of the changes coming in 2024. If you are considering a transfer of your farm or business to the next generation, it is important to discuss these new rules with your tax and legal advisors. Farm and business succession should include not only the tax and legal work, but also an analysis of your retirement, estate and investment plan. LifeLegacy is here to work with you and your advisors as part of a comprehensive team.
Contingency Planning: It's human nature to be focused on the now, this seems more prevalent today than ever. We are living with increased costs of living, uncertainty in the economy, social media and mainstream media bombarding us with the seemingly ever worsening news. It is easy to go through day to day just keeping our heads above water. Financial planning is about balancing today's lifestyle with the lifestyle and legacy we want to create and preserve. A plan cannot be successful if it only considers optimistic outcomes. Developing a contingency plan in the event of undesired outcomes is just as important as planning for our goals. Consider the following:
Record keeping: We have created and shared with a number of our clients and other professionals, a resource to track the many items in our complex lives. These may include where our will and estate documents are stored, to the password to our online photo storage, or access to our bank accounts. If you are unable to do the things that you do each day, have you appointed someone that can do them for you and, do they know where/what everything is? Email Ed @ firstname.lastname@example.org for our most recent update of our complementary Contingency Planner Worksheet. Your family will appreciate your efforts in completing this for them, should it be necessary.
Preparing your estate documents: In my opinion it should be a requirement of becoming an adult that we all complete and maintain a current valid will, enduring power of attorney and personal directive (other provinces and jurisdictions may use other terms). These vital documents allow you to determine; while you have health, sound mind and a relationship with your loved ones, who will help make medical decisions for your, who will manage your financial affairs should you be unable to, and who looks after your final affairs at your passing. Without these documents, the administration and costs of competing these tasks are substantially higher than if you prepared for them ahead of time. Yet, according to a study commissioned by Willful, over 70% of Albertans don’t have an up-to-date will.
Preparing your representatives: Many people delay creating or updating a will because they don't have someone that they feel comfortable appointing as their representative. Those that do have proper estate documents, may have appointed representatives that are no longer able to do their duties, are out of province, or are busy with careers and families. LifeLegacy's relationship with Fiduciary Trust of Canada includes access to the Trust and Estate department. They provide corporate executor and trustee services that are always available, are independent from family conflicts, and they are experts in the administration and processing of estates. With the ever-complex lives we all live, naming a trust company as you representative or to work with your representatives, can streamline the administration of an estate. The duties of an executor are many and in most cases our families will need some help.
Cash flow planning: With the rise in interest rates, and the increasing cost of living, managing cash flow has become top of mind for many. How can one set up a contingency plan for cost of living? A few things to consider:
Emergency Funds: for many years the return on short term savings has been so low that the idea of setting aside money for an emergency seemed to have no reward. The use of secured lines of credit at low rates of interest increased. Since the cost of borrowing was low, and you could "put your money to work" rather than let it languish in a low interest savings account. Currently High Interest Savings account offer as high at 4.45% to 5.0% with daily liquidity. This may not keep pace with inflation but will provide a nice cushion of return on emergency funds. Oh, and by the way at Prime plus 1% a Home Equity Line of Credit now costs 8.2% in borrowing costs. A review of cash flow is important to see if you can build up 3 to 6 mos. income in an emergency fund.
Mortgage Payments: Interest rates are up, as are mortgage rates. A current 5yr Term mortgage is around 6.5%. If you like many homeowners locked in rates over the past few years are probably paying around 2% on your current mortgage. Even if we see rates drop to 5%, on a $250,000 original mortgage, your payment is going up by over 26% or $280/mo. at renewal. Putting a plan in place to adjust to this reality is an important step.
Protection planning: Most understand the concept of life insurance. In reality it is death insurance. You pay a premium and when you die your beneficiaries receive a payment of the death benefits. Seems simple, but insurance may be one of the most complex areas of financial planning. Insurance isn't all about dying, there are many living benefits that help in contingency planning. At its root, insurance is sharing the financial risk of an outcome with an insurance company. If "A" outcome happens there will be a cost "B" and the insurance company will pay "C" to help defray that cost. A simple example is house insurance. If "A" your house burns down, "B" you need build a new house, "C" insurance will provide funds to build the new house. Not many of us would own a home and not have it insured, in fact if you have a mortgage, the lender makes it a requirement of the loan.
What other outcomes come at a financial risk?
The biggest may be your ability to earn an income and provide for your families' lifestyle.
Some smaller ones are if you have health expenditures like dental procedures, prescription drugs or eyeglasses.
What about if you had a health event like a heart attack, stroke or a diagnosis of cancer?
Are you aware that there are insurance options that can protect you financially from the costs of each of these? In many cases you may qualify without medical questions or testing.
An important step in contingency planning is assessing the risks, and costs of various outcomes, and seeing what options are available to offset the financial impact. LifeLegacy is contracted with many insurers and has the resources to find ideal coverage for your family's specific needs.
As we progress through to year-end we will be scheduling meetings for portfolio reviews, optimizing tax situations and updating financial plans, please reach out if you have any questions or want to prioritize your review meeting.
All the Best!!
The new First Home Savings Account is available. I asked Christie Hayes to provide some commentary on the new plan. For more details see this link: FHSA and please share with anyone in your circle that is saving for a home.