Category: Uncategorized

Canada has a di­verse and dy­namic pop­u­la­tion of high net worth in­di­vid­u­als. When it comes to cat­e­go­riz­ing these in­di­vid­u­als, fi­nan­cial ad­vi­sors of­ten use the terms “mass af­flu­ent,” “affluent,” and “ultra af­flu­ent.” While these terms are not clearly de­fined and can vary de­pend­ing on the source, they gen­er­ally re­fer to in­di­vid­u­als with dif­fer­ent lev­els of wealth and fi­nan­cial re­sources.

Mass Affluent

The term “mass af­flu­ent” is of­ten used to de­scribe in­di­vid­u­als with in­vestable as­sets be­tween $100,000 and $1 mil­lion. These in­di­vid­u­als have a com­fort­able lifestyle, but they may not have the same level of fi­nan­cial re­sources as those in higher wealth cat­e­gories. According to a 2020 re­port by Investor Economics, there are ap­prox­i­mately 3.8 mil­lion mass af­flu­ent house­holds in Canada, ac­count­ing for roughly 24% of all house­holds.

Affluent

The term “affluent” typ­i­cally refers to in­di­vid­u­als with in­vestable as­sets be­tween $1 mil­lion and $10 mil­lion. These in­di­vid­u­als have a high level of wealth and of­ten en­joy a lux­u­ri­ous lifestyle, with ac­cess to ex­clu­sive ser­vices and prod­ucts. According to the same Investor Economics re­port, there are ap­prox­i­mately 375,000 af­flu­ent house­holds in Canada, ac­count­ing for roughly 2.4% of all house­holds.

Ultra Affluent

The term “ultra af­flu­ent” is used to de­scribe in­di­vid­u­als with in­vestable as­sets of over $10 mil­lion. These in­di­vid­u­als have a sig­nif­i­cant amount of wealth and of­ten have ac­cess to ex­clu­sive in­vest­ment op­por­tu­ni­ties and fi­nan­cial ser­vices. According to a 2020 re­port by Knight Frank, there were ap­prox­i­mately 10,100 ul­tra-high net worth in­di­vid­u­als (UHNWIs) in Canada, rep­re­sent­ing 0.1% of the global UHNWI pop­u­la­tion.

Sources:

• Investor Economics, “Distribution of Wealth in Canada: The Financial Performance and Preferences of Canadian Households,” 2020.
• Knight Frank, “The Wealth Report 2021,” 2021.

In con­clu­sion, while the terms “mass af­flu­ent,” “affluent,” and “ultra af­flu­ent” are not clearly de­fined, they gen­er­ally re­fer to in­di­vid­u­als with dif­fer­ent lev­els of wealth and fi­nan­cial re­sources. Canada has a di­verse pop­u­la­tion of high net worth in­di­vid­u­als, with ap­prox­i­mately 3.8 mil­lion mass af­flu­ent house­holds, 375,000 af­flu­ent house­holds, and 10,100 ul­tra-high net worth in­di­vid­u­als. These in­di­vid­u­als of­ten have ac­cess to ex­clu­sive ser­vices and prod­ucts, and fi­nan­cial ad­vi­sors must un­der­stand their unique needs and pref­er­ences to pro­vide ef­fec­tive ad­vice and guid­ance.

NEXT STEPS

Are you frus­trated with the level of tax you’re pay­ing? Do you feel like tax ad­vi­sors and fi­nan­cial ad­vi­sors aren’t speak­ing the same lan­guage? Are you of­ten left won­der­ing if you are leav­ing money on the table due to a lack of in­te­grated plan­ning?

Fabio and his team have been help­ing clients plan their tax, re­tire­ment, and es­tate mat­ters since 2002.

If you’re in­ter­ested in tak­ing con­trol of your fi­nan­cial mat­ters, then don’t hes­i­tate to con­tact us di­rectly for an ini­tial con­ver­sa­tion.

No cost, no oblig­a­tions.

Standard year end pack­age for small cor­po­ra­tion – $2,950 per year plus HST

1. Preparation of com­pi­la­tion fi­nan­cial state­ments from your records and fill­ing out our stan­dard spread­sheet (CLICK HERE to down­load)
2. Preparation of an­nual T2 cor­po­rate tax re­turn
3. Preparation and fil­ing of an­nual HST re­turn or pro­vi­sion of ad­just­ments to your quar­terly re­turns.
4. Preparation of an­nual T4/T5 when nec­es­sary
5. Annual owner-man­ager tax com­pen­sa­tion strat­egy
6. Year-round ba­sic tax and gen­eral ac­count­ing sup­port

Standard year end pack­age for small con­trac­tors and con­struc­tion in­dus­try cor­po­ra­tion – $3,250 per year plus HST

1. Includes T5018 sub-con­trac­tor fil­ings.

Optional add-on — QuickBooks Online an­nual rec­on­cil­i­a­tion – $750 per year plus HST

1. Reconcile 1 bank ac­count and 1 credit card on your QBO at year end and/​or…
2. Clean up your QBO for ac­cu­rate year end ac­count­ing.

Family Holding Companies – $750 to $2,500 plus HST per year based on com­plex­ity.

Services not in­cluded in cor­po­rate year ends in­clude:

1. Corporate re-or­ga­ni­za­tions
2. Complex tax memos and strate­gies
3. Personal fi­nan­cial plan­ning
4. Deal sup­port in­clud­ing — pur­chase and sale of busi­ness, com­plex fi­nanc­ing arrange­ments, tax memos to lawyers and other pro­fes­sion­als.
5. CRA au­dit rep­re­sen­ta­tion

Personal taxes:

Corporate or fi­nan­cial plan­ning clients and their fam­i­lies start at $300 plus HST per re­turn per year and scale up based on com­plex­ity.

Non-corporate or non-fi­nan­cial plan­ning clients start at $750 plus HST per re­turn or $1,250 plus HST for a cou­ple.

Investment ad­vi­sory:

All in­vest­ment ad­vi­sory ser­vices are of­fered by Fabio Campanella CA, CPA, CFP, CIM through Queensbury Securities Inc. Fees be­gin at 1% of as­sets un­der ad­min­is­tra­tion on an an­nual ba­sis plus HST. Fees are re­duced for ac­counts ex­ceed­ing $500,000 in as­sets.

Note: We take on a very lim­ited num­ber of non-cor­po­rate or non-fi­nan­cial plan­ning client per­sonal tax re­turns to main­tain qual­ity of ser­vice.

The Campanella Group takes on a very lim­ited num­ber of fee-based con­sul­ta­tions based on the fol­low­ing fee sched­ule:

• Senior part­ner and spe­cial­ists – $400 plus HST per hour
• Partner – $250 plus HST per hour
• Associate – $175 per hour
• Technical Staff – $85 per hour

All fees above are best es­ti­mates and are sub­ject to change at any time.

RRSP (Registered Retirement Savings Plan) is a sav­ings plan in Canada that is de­signed to help peo­ple save for their re­tire­ment. The con­tri­bu­tions made to the RRSP are tax-de­ductible, mak­ing it an at­trac­tive op­tion for many high in­come earn­ing peo­ple. However, de­spite its pop­u­lar­ity, there are sev­eral com­mon mis­takes that peo­ple make when it comes to RRSPs. Here are the top 3 RRSP er­rors to watch out for:

1. Procrastinating – Like any­thing in life, the ear­lier, the bet­ter. RRSP con­tri­bu­tions can be made at any­time dur­ing the year, but in or­der for them to count to­ward a par­tic­u­lar tax­a­tion year the con­tri­bu­tion must be made within 60 days of the year in ques­tion. For ex­am­ple, your dead­line to make a con­tri­bu­tion that counts to­wards your 2022 year is March 1, 2023. Guess what so many peo­ple do… They wait un­til the last minute to con­tribute. While it’s great that you’ve made the con­tri­bu­tion, you’ve missed out on an en­tire year of po­ten­tial TAX-FREE in­vest­ment in­come. Over the long run, this can lead to thou­sands of dol­lars of lost wealth.
2. Low Diversification – Many in­vestors tend to fall in love with one type of in­vest­ment. Whether it’s real-es­tate, tech stocks, 2nd mort­gages, what­ever. Novice in­vestors can some­times pile all their eggs into one bas­ket lead­ing to a port­fo­lio with poor di­ver­si­fi­ca­tion. Investment di­ver­si­fi­ca­tion is the process of spread­ing your in­vest­ments across dif­fer­ent as­sets and mar­kets to re­duce risk and in­crease po­ten­tial re­turns. The idea be­hind di­ver­si­fi­ca­tion is that if one in­vest­ment per­forms poorly, the im­pact on your port­fo­lio will be min­i­mized be­cause you have other in­vest­ments that may per­form well. This helps to bal­ance your over­all risk and re­ward. Additionally, di­ver­si­fy­ing your in­vest­ments gives you ex­po­sure to a wider range of mar­kets and economies, which can lead to greater sta­bil­ity and a more bal­anced port­fo­lio. In short, in­vest­ment di­ver­si­fi­ca­tion is es­sen­tial for man­ag­ing risk and max­i­miz­ing re­turns, and it is a key as­pect of a suc­cess­ful in­vest­ment strat­egy.
3. Improper Allocation – RRSPs should not be viewed as a stand-alone in­vest­ment, but rather, as part of your fam­i­ly’s over­all in­vest­ment strat­egy. I’ve of­ten con­sulted on high-in­come fam­i­lies who’s RRSPs are loaded with eq­ui­ties and their tax­able ac­counts loaded with high in­come gen­er­at­ing se­cu­ri­ties such as mort­gage in­vest­ments. Simply switch­ing these in­vest­ments around (high-income in the RRSP and eq­ui­ties in the tax­able ac­count) can lead to sig­nif­i­cant long term tax sav­ings. Tax and in­vest­ments are heav­ily in­ter­twined and in­vest­ment de­ci­sions should al­ways con­sider tax con­se­quences.

In con­clu­sion, RRSPs can be an ef­fec­tive way to help you and your fam­ily build a tax-ef­fi­cient re­tire­ment strat­egy, but care must be taken to en­sure you’re do­ing it right.

NEXT STEPS

Are you frus­trated with the level of tax you’re pay­ing? Do you feel like tax ad­vi­sors and fi­nan­cial ad­vi­sors aren’t speak­ing the same lan­guage? Are you of­ten left won­der­ing if you are leav­ing money on the table due to a lack of in­te­grated plan­ning?

Fabio and his team have been help­ing clients plan their tax, re­tire­ment, and es­tate mat­ters since 2002.

If you’re in­ter­ested in tak­ing con­trol of your fi­nan­cial mat­ters, then don’t hes­i­tate to con­tact us di­rectly for an ini­tial con­ver­sa­tion.

No cost, no oblig­a­tions.

How Death and Disability Can Affect Young Real Estate Investors

Death and dis­abil­ity are no one’s fa­vorite topic, but they do oc­cur, and they of­ten oc­cur at the worst pos­si­ble time.

Younger real es­tate in­vestors are of­ten busy, busy, busy!

Young kids, work, side-gigs, and of course a newly ac­quired port­fo­lio of rental prop­er­ties all eat up your time and cash-flows, leav­ing you with no en­ergy or cash at the end of the day to con­sider build­ing up a sig­nif­i­cant pool of emer­gency funds.

This is all great when you’re healthy, but what if you’re not?

The fi­nan­cial risk to such fam­i­lies stems pri­mar­ily for the lost earn­ing po­ten­tial when the fam­ily is not yet fi­nan­cially es­tab­lished.

This can be a mas­sive un­de­tected risk for your fi­nances, like a hid­den can­cer wreak­ing havoc on your long-term fi­nan­cial plan.

For ex­am­ple…

Frank and Kristine are a 40-year-old cou­ple:

• Frank works as an IT man­ager for a ma­jor bank earn­ing $150,000 per year
• Kristine works as an HR man­ager for a mid-sized pro­fes­sional firm earn­ing $150,000 per year
• Both are healthy, non-smok­ers
• Own their home (mortgaged) and two rental prop­er­ties (mortgaged)
• Have some RRSP/RPP sav­ings and no TFSA or RESPs
• 2 kids aged 5 and 8
• Not much in the form of emer­gency sav­ings and only lim­ited ac­cess to an un­se­cured line of credit

The fi­nan­cial cost of early death or dis­abil­ity to ei­ther Frank or Kristine would be DEVASTATING.

Have a look at the fig­ures be­low…

The death of ei­ther spouse would cre­ate an im­me­di­ate cash need of roughly $2,000,000! Without this type of sav­ings, the fam­ily would ex­pe­ri­ence a sig­nif­i­cant de­crease in their fi­nan­cial well-be­ing and likely de­rail their long-term fi­nan­cial plans.

Further, a ma­jor ill­ness or dis­abil­ity could leave ei­ther spouse un­able to work, cut­ting their earn­ings to zero and they would still need fi­nan­cial sup­port to main­tain them­selves.

In fact, the chances of ei­ther spouse be­com­ing dis­abled are higher than death, and the fi­nan­cial con­se­quences could be even worse!

SOLVING THE PROB­LEM

Saving $2,000,000 is both im­prac­ti­cal and im­pos­si­ble for this cou­ple. Yet, ac­cess­ing this type of money in a cat­a­stro­phe would be nec­es­sary to en­sure the fam­ily main­tains its stan­dard of liv­ing.

Rather than at­tempt­ing to fund the risk them­selves, the smarter move would be to use in­sur­ance to cover the risk.

Life in­sur­ance is sim­ply a con­tract be­tween an in­sur­ance pol­icy holder and an in­surer, where the in­surer promises to pay a des­ig­nated ben­e­fi­ciary a sum of money upon the death of an in­sured per­son.

In a sim­i­lar man­ner, Critical Illness in­sur­ance and Disability Insurance are con­tracts be­tween a pol­icy holder and an in­surer, where the in­surer promises to pay a des­ig­nated ben­e­fi­ciary a sum of money (or a se­ries of pe­ri­odic sums in the case of Disability Insurance) upon the di­ag­no­sis of a Critical Illness or oc­cur­rence of dis­abil­ity of an in­sured per­son.

Life, Critical Illness, and Disability Insurance al­low in­di­vid­u­als to pool their risk of fi­nan­cially pun­ish­ing out­comes to­gether, thereby spread­ing the risk among many in­di­vid­u­als.

The re­sult is both AFFORDABLE and EFFECTIVE.

In the case of Frank and Kristine, sim­ply set­ting aside a mere 3% of their an­nual in­come pro­vides them with the cov­er­age they need in the worst pos­si­ble case sce­nario.

Further con­sid­er­a­tions

But we don’t end it there.

One of the beau­ti­ful things about the term life in­sur­ance poli­cies that Frank and Kristine chose is the con­vert­ibil­ity fea­ture.

Most ma­jor life in­sur­ance com­pa­nies al­low their term poli­cies to be con­verted to per­ma­nent poli­cies within the first 5 years of the pol­icy, with­out ad­di­tional med­ical un­der­writ­ing.

As Frank and Kristine con­tinue down their real-es­tate jour­ney, they will in­evitably be­gin to grow their wealth through smart in­vest­ing, hard work, pos­si­ble in­her­i­tance, etc. etc.

When the time is right, and the cash flow al­lows, the cou­ple can con­vert their term poli­cies to per­ma­nent poli­cies and em­ploy more com­plex fi­nan­cial and es­tate plan­ning tech­niques.

NEXT STEPS

Are you frus­trated with the level of tax you’re pay­ing? Do you feel like tax ad­vi­sors and fi­nan­cial ad­vi­sors aren’t speak­ing the same lan­guage? Are you of­ten left won­der­ing if you are leav­ing money on the table due to a lack of in­te­grated plan­ning?

Fabio and his team have been help­ing clients plan their tax, re­tire­ment, and es­tate mat­ters since 2002.

If you’re in­ter­ested in tak­ing con­trol of your fi­nan­cial mat­ters, then don’t hes­i­tate to con­tact us di­rectly for an ini­tial con­ver­sa­tion.

No cost, no oblig­a­tions.

The fi­nan­cial is­sues that no-one talks about

Real es­tate is an in­cred­i­ble as­set class. However, there are sev­eral is­sues that are not of­ten ad­dressed in the real es­tate in­vest­ing com­mu­nity:

1. The fi­nan­cial risk of early death and dis­abil­ity
2. The liq­uid­ity risk that your es­tate will in­evitably be sub­ject to when you pass away
3. Missing out on steady, liq­uid, and tax-ef­fi­cient in­vest­ment ve­hi­cles

The best way to un­der­stand these prob­lems, and their pos­si­ble so­lu­tions, is to cover some case sce­nar­ios.

Each of the three sce­nar­ios be­low will cover some of the most com­mon fi­nan­cial is­sues en­coun­tered by ac­tive real es­tate in­vestors along with some prac­ti­cal so­lu­tions to those prob­lems.

The goal is to pro­vide a sim­pli­fied ex­pla­na­tion of how life in­sur­ance and re­lated fi­nan­cial prod­ucts can ef­fec­tively help real es­tate in­vestors (click the links to see the ar­ti­cles):

1. Reduce fi­nan­cial risks
2. Provide for a smooth tran­si­tion of wealth to the next gen­er­a­tion
3. Amplify and di­ver­sify their in­vest­ment hold­ings

Regardless of your cur­rent sit­u­a­tion, if you’re a se­ri­ous real es­tate in­vestor, all three sce­nar­ios will pro­vide you with valu­able in­sights into the ben­e­fits of es­tate plan­ning and life in­sur­ance.

The Benefits of Leveraged Life Insurance For Real Estate Investors

Infinite Banking Concept, Immediate Financing Arrangement, it goes by many names de­pend­ing on who you ask.

I sim­ply re­fer to it as “leveraged life in­sur­ance”

It can be struc­tured in many ways, us­ing dif­fer­ent types of in­sur­ance prod­ucts, but it al­most al­ways fol­lows the same ba­sic prin­ci­pals…

1. Purchase a life in­sur­ance prod­uct with cash value
2. Use the cash value as col­lat­eral for a loan
3. Redeploy the bor­rowed money into an­other in­vest­ment ve­hi­cle

What you end up with is (hopefully) a smart, tax-ef­fi­cient, and am­pli­fied rate of re­turn, and a larger life in­sur­ance pol­icy than you would nor­mally be able to af­ford on its own.

The struc­ture can be based on a sin­gle life, a joint life, a whole life pol­icy, a uni­ver­sal life pol­icy, a cor­po­rate owner, or a per­sonal owner. The devil is in the de­tails.

These are some of the most com­plex, but pos­si­bly most lu­cra­tive tax and in­vest­ment struc­tures avail­able to Canadians. Generally re­served for so­phis­ti­cated in­vestors who un­der­stand the power (and risks) of lever­aged in­vest­ments.

AKA, your typ­i­cal real es­tate in­vestor.

Interested? Then keep read­ing.

THE SIT­U­A­TION

Kim and Jake are a 45-year-old cou­ple with two kids aged 15 and 12. They are sea­soned vet­er­ans of the real es­tate game and have built a strong port­fo­lio of rental prop­er­ties over the course of the last 10 years. In ad­di­tion to the rental prop­er­ties, they have rather large de­fined con­tri­bu­tion pen­sion plans, full ben­e­fits, maxed out TFSAs, and a large pool of RESP as­sets for their chil­dren’s ed­u­ca­tion fund.

Both Kim and Jake are high in­come earn­ers pay­ing tax at the top mar­ginal rate.

They re­cently sold an un­der-per­form­ing prop­erty and re­ceived a mod­est in­her­i­tance from Jake’s un­cle are flush with ex­cess cash.

Not in­ter­ested in di­rectly pur­chas­ing and man­ag­ing any more prop­er­ties them­selves, they de­vel­oped an in­ter­est in en­ter­ing joint-ven­ture pro­jects with less ex­pe­ri­enced in­vestors and high-yield sec­ond mort­gages. They were con­fi­dent that they could gen­er­ate a long term 8.5% re­turn on in­vest­ment on such a strat­egy.

They had a bud­get of $50,000 per year for the re­main­der of their work­ing lives for this strat­egy which they could eas­ily meet as they had ex­cess dis­cre­tionary in­come every year and ac­cess to a pool of un­used cash from the sale of their rental prop­erty.

THE PROB­LEMS

Jake’s un­cle re­cently passed away and Jake’s fa­ther was the es­tate trustee. Jake’s un­cle was a suc­cess­ful real es­tate in­vestor in his own right.

What Jake wit­nessed though was a bit un­set­tling.

Jake’s un­cle did not plan his es­tate trans­fer very well. He had a will, but it had­n’t been up­dated in over a decade. He also had sev­eral ex­tremely high value prop­er­ties scat­tered around the GTA, some of which he had pur­chased in the 1980’s.

Jake’s un­cle’s es­tate ran into the fol­low­ing is­sues:

1. Tax is­sues: since Jake’s aunt passed away many years ago, Jake’s un­cle was not able to achieve a hor­i­zon­tal trans­fer of as­sets to a spouse and his ben­e­fi­cia­ries and es­tate trustee were SHOCKED by the amount of tax due upon fil­ing his fi­nal tax re­turn.
2. Liquidity is­sues: Jake’s un­cle had 3 chil­dren whom he wanted to pro­vide for equally. 2 of his chil­dren were real es­tate in­vestors them­selves, the third had zero in­ter­est in real es­tate and pre­ferred a cash in­her­i­tance.

This com­pli­cated the sit­u­a­tion be­cause the es­tate was ASSET rich but CASH poor, leav­ing very lit­tle to pay the mas­sive tax bill and noth­ing to equal­ize the as­sets among the chil­dren.

The re­sult was:

1. Prolonged fight­ing among the ben­e­fi­cia­ries
2. Significant le­gal fees to rec­tify the sit­u­a­tion
3. The “flash” sales of sev­eral high-qual­ity prop­er­ties to fund the tax bill and other fi­nan­cial oblig­a­tions of the es­tate

Kim and Jake were not in­ter­ested in hav­ing his­tory re­peat it­self with their es­tates.

TAXES, TAXES, AND MORE TAXES

Kim and Jake wanted to en­sure their es­tate trans­fer was as smooth as pos­si­ble. Their chil­dren were young, and it was hard to tell if both would be in­ter­ested in man­ag­ing prop­er­ties down the road. However, they wanted to set their es­tate up in a man­ner that al­lowed for the cre­ation of in­ter-gen­er­a­tional wealth.

We sat down with them and pre­pared an es­tate tax pro­jec­tion…

The re­sults had them ab­solutely floored!

We pro­jected a mod­est 4% growth rate on their prop­er­ties lead­ing to a tax bill of just over $6 mil­lion.

HOW LEVER­AGED LIFE IN­SUR­ANCE HELPED

Lucky for Kim and Jake they were both young, healthy, and non-smok­ers. This al­lowed them to ob­tain a well-priced Whole Life Insurance Policy and im­ple­ment an Immediate Financing Arrangement (“IFA” for short).

An IFA (sometimes called “Infinite Banking”) is a strat­egy for fam­i­lies who:

• Have a need for a per­ma­nent life in­sur­ance pol­icy to fund a sig­nif­i­cant cash need at death
• Have ex­cel­lent cash flow and/​or a siz­able pot of tax­able in­vest­ments
• Have ac­cess to in­vest­ment op­por­tu­ni­ties such as busi­ness ex­pan­sion, real es­tate, stocks, or other as­set classes

The Immediate Finance Arrangement strat­egy of­fers ad­van­tages that may as­sist with cash ac­ces­si­bil­ity while main­tain­ing fi­nan­cial in­ter­ests and pro­vid­ing valu­able life in­sur­ance pro­tec­tion.

Kim and Jake pur­chased a per­ma­nent tax-ex­empt life in­sur­ance pol­icy. They made pay­ments into the pol­icy to cre­ate cash val­ues and then col­lat­er­ally as­sign the pol­icy in ex­change for a loan. The loan pro­ceeds were to be rein­vested to pro­duce in­come from a busi­ness or prop­erty.

If the loan pro­ceeds are rein­vested, the in­ter­est paid on the loan and all or a por­tion of the pol­icy pre­mi­ums may be tax de­ductible. Kim and Jake, along with their ad­vi­sors en­sured the loan and the col­lat­eral as­sign­ment of the life in­sur­ance pol­icy met all re­quire­ments for de­ductibil­ity un­der the Income Tax Act.

The re­sult­ing struc­ture looked like this:

$50,000 per year con­tributed to the pol­icy over a 20-year pe­riod

A high cash-value, whole life in­sur­ance pol­icy was cho­sen to max­i­mize bor­row­ing ca­pac­ity

Upon the sec­ond an­nual pay­ment Kim and Jake ob­tained a line of credit se­cured against the pol­i­cy’s cash value

Kim and Jake im­me­di­ately bor­rowed back the prior year pol­icy pre­mium and re-in­vested the cash into joint-ven­ture in­vest­ments, eq­ui­ties, and 2nd mort­gage in­vest­ments

Kim and Jake paid the monthly in­ter­est on the loan from their own cash-flow, took a tax de­duc­tion for the in­ter­est pay­ments along with a col­lat­eral in­sur­ance de­duc­tion, then bor­rowed back the af­ter-tax cost of in­ter­est

The strat­egy pro­vided the fol­low­ing ben­e­fits:

1. Allows for at­trac­tive 6%+ ROI on the CSV TAX-FREE
2. Borrowing up to 90% LTV is smooth
3. LOC not re­ported to credit bu­reaus in Canada
4. Multiple tax de­duc­tions in­clud­ing:
   1. Interest de­duc­tion on per­sonal taxes
   2. Collateral in­sur­ance de­duc­tion on per­sonal taxes
5. Flexibility to build di­verse sec­ond port­fo­lio in­clud­ing:
   1. Real-estate or JVs
   2. Second mort­gages
   3. Any other tax­able in­vest­ment

In fact, the cou­ple was pro­jected to main­tain ex­cel­lent cash flow and would only be out of pocket in year 1.

THE PRO­JECTED RE­SULTS

Based on the pro­jec­tions, the cou­ple was able to si­mul­ta­ne­ously build:

• An at­trac­tive, tax-de­ferred, whole life pol­icy
• A large and di­ver­si­fied in­vest­ment port­fo­lio
• Continued real-es­tate in­vest­ment through joint ven­tures

The com­bined re­sults were pro­jected to be sig­nif­i­cantly bet­ter than ei­ther the in­sur­ance pol­icy or the port­fo­lio alone.

NEXT STEPS

Are you frus­trated with the level of tax you’re pay­ing? Do you feel like tax ad­vi­sors and fi­nan­cial ad­vi­sors aren’t speak­ing the same lan­guage? Are you of­ten left won­der­ing if you are leav­ing money on the table due to a lack of in­te­grated plan­ning?

Fabio and his team have been help­ing clients plan their tax, re­tire­ment, and es­tate mat­ters since 2002.

If you’re in­ter­ested in tak­ing con­trol of your fi­nan­cial mat­ters, then don’t hes­i­tate to con­tact us di­rectly for an ini­tial con­ver­sa­tion.

No cost, no oblig­a­tions.

Ensuring a Smooth Transition of Real Estate

Mr. and Mrs. Reynolds are a 60-year-old cou­ple who have saved, in­vested, and built a sig­nif­i­cant and di­ver­si­fied port­fo­lio of in­vest­ments for them­selves.

They’ve ac­cu­mu­lated a va­ri­ety of as­sets in­clud­ing stocks, cur­ren­cies, com­modi­ties, and of course a di­ver­si­fied port­fo­lio of real-es­tate.

THE PROB­LEM

The Reynolds have a com­plex es­tate with mul­ti­ple con­sid­er­a­tions that are be­yond the scope of this case study. However, they do have one is­sue that we will cover…

The fam­ily cot­tage was pur­chased 10 years ago for $500,000. It quickly be­came a cen­tral fea­ture in the fam­i­ly’s so­cial life.

The kids were in their late teens and early twen­ties when the Reynolds bought the prop­erty, and it is put to good use.

What’s more, the neigh­bor­hood they are in has boomed over the years with an in­flux of high-net-worth fam­i­lies pur­chas­ing ad­ja­cent prop­er­ties and build­ing/​ren­o­vat­ing their own beau­ti­ful cot­tages.

The Reynold’s lake­front prop­erty is in high de­mand, but the Reynolds have no de­sire to ever let the prop­erty go.

Further, the kids love it. They want to en­sure they keep it in the fam­ily for gen­er­a­tions to come.

TAXES, TAXES, AND MORE TAXES

So, here’s the prob­lem: Taxes.

It’s well known that spouses can hor­i­zon­tally trans­fer their es­tates to each other with­out trig­ger­ing taxes at death. However, in­ter­gen­er­a­tional trans­fers trig­ger tax.

How much tax? Let’s look at the pro­jected taxes ow­ing on the Reynolds’ cot­tage:

Based on a mod­est 4% an­nual pro­jected growth rate in the value of the prop­erty we are look­ing at a tax bill of $573,000.

That’s a lot, and that’s ONLY on the cot­tage!

THE SO­LU­TION

Coming to grips with the tax pro­jec­tion was dif­fi­cult. There were very few so­lu­tions avail­able other than sav­ing the money to fund the tax bill.

The Reynolds had other plans for their other as­sets and were not in­ter­ested in hav­ing the chil­dren fund the even­tual tax bill, nor were they in­ter­ested in forc­ing the chil­dren to re-fi­nance the prop­erty at their even­tual deaths.

The cou­ple was in a good fi­nan­cial po­si­tion, they were both still work­ing and earn­ing a strong liv­ing. They car­ried no per­sonal debts other than mort­gages on rental prop­er­ties. They had am­ple sav­ings and cash-flow and were in­ter­ested in an es­tate trans­fer so­lu­tion that was:

1. As close to guar­an­teed as pos­si­ble to work
2. Presented as close to zero chance of loss as pos­si­ble

Traditional so­lu­tions that met their needs were GICs and fixed-in­come se­cu­ri­ties. But there were two prob­lems with these:

1. They were hor­ri­bly tax in­ef­fi­cient
2. They were not pro­jected to re­turn much at all

For ex­am­ple, ac­cord­ing to FP Canada Standards Council’s 2022 Projection Assumption Guidelines, GICs and other “cash” type of in­vest­ments had a long term pro­jected an­nual re­turn of 2.3% and fixed in­come of 2.8%.

Considering the Reynolds’ tax bracket, their net, af­ter-tax re­turns were pro­jected at 0.98% and 1.3% re­spec­tively. The same guide­lines pro­ject long term in­fla­tion at above 2%.

The out­look was bleak.

UNIVERSAL LIFE IN­SUR­ANCE

The Reynolds be­gan look­ing at life in­sur­ance prod­ucts to help solve their prob­lem. They had ex­pe­ri­ence with more tra­di­tional poli­cies such as term and whole life poli­cies and in fact owned each. Their term poli­cies were set to ex­pire and their whole life pol­icy was al­ready paid up and ear-marked for other pur­poses.

However, nei­ther of these types of fi­nan­cial prod­ucts were ad­e­quate for their needs.

1. Term in­sur­ance was not per­ma­nent, they needed per­ma­nent cov­er­age to meet their fu­ture tax oblig­a­tion
2. Whole life in­sur­ance, al­though at­trac­tive, was more ex­pen­sive than they were pre­pared for

In came Universal Life (UL).

Universal life Insurance is a hy­brid fi­nan­cial prod­uct that com­bines life­time in­sur­ance cov­er­age with the long-term growth po­ten­tial of tax-ad­van­taged in­vest­ing.

At its core, it is a per­ma­nent life in­sur­ance pol­icy that al­lows you to over-con­tribute to a tax-free in­vest­ment ac­count based on leg­isla­tive lim­its.

Now, the Reynolds were not cur­rently in­ter­ested in the in­vest­ment ac­count, they al­ready had a di­ver­si­fied port­fo­lio of in­vest­ments. They were, how­ever, in­ter­ested in the fol­low­ing fea­tures:

1. Lifetime Coverage: for a fixed pre­mium, UL poli­cies can be de­signed to pro­vide a fixed ben­e­fit for life that can­not be can­celled or changed
2. Tax-Free Benefit: the death ben­e­fit of a UL pol­icy, when stripped away from com­plex­i­ties, is re­ceived by the es­tate or ben­e­fi­cia­ries tax-free
3. Death Benefit Options: UL poli­cies can be struc­tured to have level or in­creas­ing pro­tec­tion. The level pro­tec­tion fea­ture was at­trac­tive to them.
4. Flexibility: With their other poli­cies paid-up and no re­main­ing op­tion to in­crease cov­er­age, the cou­ple found it ben­e­fi­cial that the UL pol­icy did pro­vide the op­tion for ad­di­tional con­tri­bu­tions down the road.

THE POL­ICY

The Reynolds set­tled on a Universal Life Policy with the fol­low­ing char­ac­ter­is­tics:

• Fixed amount of per­ma­nent in­sur­ance: $573,000
• Joint last-to-die, costs to last death
  • This led to a Joint equiv­a­lent age of 49!
• Level cost of in­sur­ance to age 100

The over­all cost of the pol­icy was $8,619.60 per year.

In com­par­i­son to their al­ter­na­tives (GICs and fixed in­come) it was a no-brainer…

The UL pol­icy gave them ex­actly what they needed…

• Guaranteed re­sults
• No guess­ing
• Tax-efficient re­sults
• Flexibility to im­prove the re­sults if needed

The PRE-TAX equiv­a­lent rate of re­turn re­quired to match the UL pol­i­cy’s pro­jected per­for­mance would be 15.81%. Not sure if you’ve checked GIC rates re­cently, but that’s highly un­likely.

Are you frus­trated with the level of tax you’re pay­ing? Do you feel like tax ad­vi­sors and fi­nan­cial ad­vi­sors aren’t speak­ing the same lan­guage? Are you of­ten left won­der­ing if you are leav­ing money on the table due to a lack of in­te­grated plan­ning?

Fabio and his team have been help­ing clients plan their tax, re­tire­ment, and es­tate mat­ters since 2002.

If you’re in­ter­ested in tak­ing con­trol of your fi­nan­cial mat­ters, then don’t hes­i­tate to con­tact us di­rectly for an ini­tial con­ver­sa­tion.

No cost, no oblig­a­tions.

Do you in­vest in a tax­able in­vest­ment ac­count, ei­ther per­son­ally or through your pri­vate cor­po­ra­tion?

Do you some­times have in­vest­ment po­si­tions that ex­pe­ri­ence tem­po­rary losses?

If yes, then you need to un­der­stand “tax loss har­vest­ing”. Keep read­ing…

Tax loss har­vest­ing is a tax-sav­ing strat­egy that al­lows in­vestors to off­set cap­i­tal gains with cap­i­tal losses. By sell­ing se­cu­ri­ties that have de­creased in value, in­vestors can re­al­ize a cap­i­tal loss, which can then be used to off­set cap­i­tal gains from other se­cu­ri­ties, ul­ti­mately re­duc­ing the amount of taxes that need to be paid on in­vest­ment in­come.

In Canada, tax loss har­vest­ing can be an ef­fec­tive way to min­i­mize taxes, but it’s im­por­tant to un­der­stand the rules and reg­u­la­tions en­forced by the Canada Revenue Agency (CRA) to en­sure that you are uti­liz­ing the strat­egy cor­rectly and avoid­ing any tax traps.

Problem 1: lim­i­ta­tion of cap­i­tal loss uti­liza­tion:

Capital losses can ONLY be ap­plied against cap­i­tal gains. This means that if you sell an in­vest­ment in a loss po­si­tion and re­al­ize the loss it can only be ap­plied to other cap­i­tal gains. For ex­am­ple, cap­i­tal losses can not be used to off­set busi­ness or em­ploy­ment in­come.

You get around this by match­ing losses and gains on dif­fer­ent se­cu­ri­ties against each other within the same tax­a­tion pe­riod.

Problem 2: The su­per­fi­cial loss rules:

The su­per­fi­cial loss rule pre­vents in­vestors from claim­ing cap­i­tal losses on se­cu­ri­ties that they have sold, and then re­pur­chas­ing them shortly af­ter, with­out ac­tu­ally re­duc­ing their over­all in­vest­ment po­si­tion.

This rule states that if an in­vestor (or a per­son af­fil­i­ated with the in­vestor) ac­quires sub­stan­tially iden­ti­cal se­cu­ri­ties within 30 days be­fore or af­ter a cap­i­tal loss is re­al­ized, the loss can­not be claimed.

It ap­plies to non-reg­is­tered ac­counts, and the goal is to pre­vent in­vestors from ar­ti­fi­cially cre­at­ing cap­i­tal losses for tax pur­poses with­out ac­tu­ally chang­ing their in­vest­ment po­si­tion.

Ways around this…

One way around the su­per­fi­cial loss rules is to re-pur­chase se­cu­ri­ties that are sub­stan­tially dif­fer­ent to the se­cu­rity you sold, but co-re­late in terms of mar­ket move­ment.

For ex­am­ple, let’s say your po­si­tion in “ABC” Bank is tem­porar­ily down and you sell it to re­al­ize the tem­po­rary loss. You don’t want to be out of ABC in the long run and you cer­tainly don’t want to lose out on any gains over the next 30 days.

Instead, what you can do is pur­chase a bank­ing sec­tor ETF (exchange traded fund) that moves in a sim­i­lar di­rec­tion to ABC bank, then af­ter your 30 day time pe­riod has elapsed you can sell the ETF and re­place it with your orig­i­nal ABC bank hold­ing.

In con­clu­sion, tax loss har­vest­ing is a valu­able strat­egy for Canadian in­vestors look­ing to re­duce their tax bill. By un­der­stand­ing and fol­low­ing the rules en­forced by the CRA, in­vestors can min­i­mize their taxes and keep more of their in­vest­ment in­come. However, it’s im­por­tant to be aware of the tax traps and to keep ac­cu­rate records of all your in­vest­ments to en­sure that you are uti­liz­ing the strat­egy cor­rectly and avoid­ing any mis­takes.

Are you ready to take a step for­ward and se­cure a lu­cra­tive fi­nan­cial fu­ture for your­self and your fam­ily? We are al­ways ready to speak to am­bi­tions en­tre­pre­neurs and high-in­come earn­ing fam­i­lies look­ing for an edge.

Feel free to con­tact us for a zero-cost, 30-minute, on­line meet­ing where we can get to know you and de­ter­mine if we can help you pave a path to fi­nan­cial suc­cess.

Stocks are down, bonds are down, real-es­tate is down.

The ma­jor gov­ern­ments of the world are play­ing with in­ter­est rates to curb sky­rock­et­ing in­fla­tion.

You’ve got money on the side­lines, but you’re afraid to dip into the stock mar­ket for fear of an­other ma­jor drop.

I don’t blame you, it’s scary.

But I’m not wor­ried.

One of my key in­vest­ment philoso­phies is “Time IN the mar­ket vs. TIMING the mar­ket”. Basically, at­tempt­ing to time the mar­ket, say, try­ing to find the bot­tom of a bear mar­ket or top of a bull mar­ket has been proven time and again to be im­pos­si­ble. Further, over the long run, even if you are per­fect, it does­n’t re­ally work.

Charles Schwab, a large US based bank­ing and in­vest­ment con­glom­er­ate, ran a study on this in 2021 and their con­clu­sions were:

1. Timing the mar­ket (consistently) is im­pos­si­ble and over the long run in­vest­ing RIGHT NOW re­gard­less of the mar­ket cy­cle is bet­ter for al­most every­one
2. Procrastination is worse than bad tim­ing. Even in­vestors who in­vested when the mar­ket was at ar­ti­fi­cial peaks did bet­ter than in­vestors who tried to time the mar­ket over the long run
3. Dollar-cost av­er­ag­ing works well, es­pe­cially if you’re prone to panic if you ex­pe­ri­ence a short-term drop

When they ran the num­bers over a 20-year pe­riod these were the re­sults (1):

As you can see from the graph above, per­fect tim­ing (which is im­pos­si­ble) does­n’t re­ally beat out in­vest­ing im­me­di­ately, dol­lar cost av­er­ag­ing, or bad tim­ing by much over the long run.

The only con­sis­tent re­sult they got is that stay­ing fully in cash is sig­nif­i­cantly worse.

They even ran the num­bers of the 76 rolling 20-year pe­ri­ods dat­ing back to 1926, and in 66 of 76 pe­ri­ods the re­sults were the same, with some vari­a­tion in only 10 of the 76 pe­ri­ods.

Overall, my fa­vorite tech­nique is dol­lar-cost av­er­ag­ing for sev­eral rea­sons:

1. It elim­i­nates what I call “sideline syn­drome” which is the fear of loss and sim­ply sit­ting on the side­lines with your idle cash lead­ing to missed op­por­tu­ni­ties
2. It min­i­mizes the feel­ings of re­gret if there is a ma­jor down­turn in the mar­ket be­cause you are drip­ping the money in rather than dump­ing it all in at once
3. It forces you to avoid mar­ket tim­ing which is a psy­cho­log­i­cally tempt­ing con­cept to fol­low but leads to sub-par per­for­mance

Are you ready to take a step for­ward and se­cure a lu­cra­tive fi­nan­cial fu­ture for your­self and your fam­ily? We are al­ways ready to speak to am­bi­tions en­tre­pre­neurs and high-in­come earn­ing fam­i­lies look­ing for an edge.

Feel free to con­tact us for a zero-cost, 30-minute, on­line meet­ing where we can get to know you and de­ter­mine if we can help you pave a path to fi­nan­cial suc­cess.

Note: Source: Schwab Center for Financial Research. Invested $2,000 an­nu­ally in a hy­po­thet­i­cal port­fo­lio that tracks the S&P 500® Index from 2001-2020. Past per­for­mance is no guar­an­tee of fu­ture re­sults, small changes in as­sump­tions can lead to large changes in re­sults. Investing is risky, you should al­ways con­sult with a pro­fes­sional be­fore in­vest­ing. This blog post is not in­tended to so­licit in­vest­ment or pro­vide in­vest­ment ad­vice.

The Scenario

Geoff and Maria own three prop­er­ties:

1. A home in Toronto that they cur­rently live in
2. A home in Waterloo that they rent out as an in­come prop­erty
3. A cot­tage north of Toronto that they only use per­son­ally

Geoff was re­cently of­fered his dream job in Waterloo and the cou­ple de­cided to move. Lucky for them, their long-term ten­ants in Waterloo are va­cat­ing their in­come prop­erty within a month.

They’d like to:

1. Convert their Toronto home into a rental prop­erty
2. Move into their for­mer in­come prop­erty in Waterloo

They want to know the tax con­se­quences of these ac­tions.

If you’re in­ter­ested in sce­nario 1, con­vert­ing a prin­ci­pal res­i­dence into a rental prop­erty CLICK HERE.

This blog post out­lines the tax con­se­quences of sce­nario 2: Moving into an in­come pro­duc­ing prop­erty.

Outlining the Tax Law: Change in use

When you change the use of a prop­erty you are con­sid­ered to have sold the prop­erty at Fair Market Value (FMV) and reac­quired it for tax pur­poses. This is the case whether you sold the prop­erty or not. In tax, we re­fer to this as a “deemed dis­po­si­tion”. (ITA 45 (1))

This is the case when:

1. You change part of, or all, your prin­ci­pal res­i­dence into a rental prop­erty
2. You move into a rental prop­erty and use it as your prin­ci­pal res­i­dence
3. You stop us­ing a prop­erty to gen­er­ate or pro­duce in­come

The deemed dis­po­si­tion and im­me­di­ate reac­qui­si­tion will of­ten re­sult in a cap­i­tal gain or loss that must be re­ported on your tax re­turn.

Therefore, pur­suant to sec­tion 45 (1) of the Income Tax Act (ITA), Geoff and Maria have a prob­lem…

Both their prin­ci­pal res­i­dence and their rental prop­erty have ap­pre­ci­ated in value since they were pur­chased.

The deemed dis­po­si­tion of their prin­ci­pal res­i­dence should be tax-free as there is no tax payable on the sale or dis­po­si­tion of a prin­ci­pal res­i­dence in Canada.

However, the deemed dis­po­si­tion of their rental prop­erty is NOT tax-free.

Tax Planning Opportunities:

Lucky for Geoff and Maria they have an op­tion. This op­tion is found in sec­tion 45 (3) of the ITA: “Election con­cern­ing prin­ci­pal res­i­dence”.

Pursuant to this sec­tion of the ITA, Geoff and Maria can elect to post­pone re­port­ing the dis­po­si­tion of their prop­erty un­til they ac­tu­ally sell it.

This is a very use­ful elec­tion as it al­lows them to avoid what would be a large tax bill lead­ing to a cash-flow is­sue for them.

In fact, should it be ben­e­fi­cial, the prin­ci­pal res­i­dence ex­emp­tion can be car­ried back up to 4 years that the prop­erty was rented out.

Watch out for the tax traps!

A sec­tion 45 (3) elec­tion can not be made if the cou­ple de­ducted CCA (depreciation) on the prop­erty for any tax year af­ter 1984, and on or be­fore the day they change its use.

This is an im­por­tant point as it is very com­mon for CCA to be taken to de­fer rental in­come, es­pe­cially for high in­come earn­ing fam­i­lies. Care must be taken when elect­ing to take CCA. If you feel you may want to move into one of your rental prop­er­ties, you may want to re­con­sider CCA.

When the cou­ple sells the prop­erty, they must file:

1. 45 (3) elec­tion let­ter — This let­ter must be filed along with their tax re­turn (T1) in the year of ac­tual dis­po­si­tion and must out­line their de­sire to elect un­der ITA 45 (3) along with out­lin­ing the de­tails of the prop­erty
2. S3 — They must re­port the sale on sched­ule 3 of their T1 in the year of ac­tual dis­po­si­tion.
3. T2091 — “Designation of a Property as a Principal Residence by an Individual” must be filed out­lin­ing the de­tails of their prin­ci­pal res­i­dence al­lo­ca­tion to the prop­erty in the year of ac­tual dis­po­si­tion.

Important traps to watch out for:

• Late filing penalty for T2091 or 45(3) elec­tion — This penalty can be sig­nif­i­cant. The penalty is the lesser of:
  • $8,000 or
  • $100 for each month from the orig­i­nal due date the amend­ment re­quest was made to the CRA

At the Campanella Group we help clients like the Geoff and Maria every day. We are ded­i­cated to help­ing our clients forge the best finan­cial path for their fam­i­lies by care­fully in­te­grat­ing their tax, in­vest­ment, and es­tate plans.

Are you ready to take a step for­ward and se­cure a lu­cra­tive finan­cial fu­ture for your­self and your fam­ily? We are al­ways ready to speak to am­bi­tious en­tre­pre­neurs and high-in­come earn­ing fam­i­lies look­ing for an edge.

Feel free to con­tact us for a zero-cost, 30-minute, on­line meet­ing where we can get to know you and de­ter­mine if we can help you pave a path to finan­cial suc­cess.