Your Cottage And Keeping It In The Family

Ahh, your cottage – a place of sanctuary, family fun and warm memories. But passing along a cottage to the next generation can set off complex financial and family issues. Here are some suggested steps to ensuring cottage continuity.

Know what your kids want - You know that cottage ownership is a big personal and financial responsibility that is not for everyone. Discuss this with your children and if any of them are not interested in inheriting the cottage, avoid family squabbles by making sure they are treated fairly in your will.

If you decide on shared ownership, keep in mind that it can be a difficult proposition. That’s why it can be useful to obtain legal advice when you put an agreement in place – about such things as who uses the cottage and when, who pays for repairs, maintenance and upkeep, and the other nitty-gritty aspects of joint cottage ownership – to avoid protracted disputes and misunderstandings.

Manage the tax burden - If your cottage has appreciated in value, your estate can face a significant capital gains liability that could force its sale by your heirs.

Capital gains taxes are based on the difference between the cost of your property and its current fair market value at the time of your death. The cost of your cottage is what you initially paid for it plus the value of any capital improvements you made to it over the years – a new deck or roof, for example, including the cost of anyone you hired to do the work for you – so keep your receipts to account for all these costs to help offset capital gains. General upkeep costs such as painting the cottage are generally not considered capital improvements.

Consider taking advantage of the primary residence exemption. You are allowed to name a primary residence that is exempt from tax on capital gain. The residence must be a property you ‘ordinarily inhabited’. It can be either your city home or your cottage. You are allowed just one principal residence at a time but you can choose to exempt the property with the bigger gain.

Have a succession plan - Include an effective strategy for passing on your cottage. One option is to purchase life insurance with tax-free death benefits that will cover the capital gains on your cottage and/or other expenses and avoid the forced sale of estate assets. Life insurance is also a good way to equalize an estate where one child wants to keep the cottage, whereas other children would prefer to sell it and divide the proceeds of sale.

Some of these estate planning options may not work in your situation, so it’s a good idea to talk to your professional advisor about your wishes for your cottage and the financial and estate planning options that will work best for you.

Take Advantage Of Tax Savings With Universal Life Insurance

If you're a prudent Canadian, you likely already know the value of life insurance and have your own life insurance plans in place. You know that the primary reason for buying life insurance is to have the funds available to help pay final expenses, to help ensure you family's financial future, and to help ensure your legacy is passed on as you wish.

What you may not know is this: By selecting the right type of permanent life insurance policy, you can save on taxes and accumulate a cash reserve that builds through the years - a cash reserve that is readily accessible should you need a quick money infusion for any reason.

This type of permanent life insurance is called "Universal Life Insurance" and here's how it works:

• Unlike other types of insurance, Universal Life Insurance includes two distinct parts. Each payment you make is divided into an insurance premium and a deposit into an investment (or investments) of your choice.

• The growth in the investment portion of your policy is considered tax-deferred by the Canada Revenue Agency as long as it is not redeemed. For that reason, Universal Life Insurance investments tend to enjoy faster growth than most conventional, non-registered investments.

• Most Universal Life Insurance plans allow you to choose the amount of life insurance you want and to adjust the death benefit and premiums to fit your changing circumstances.

• Your death benefit – including the full value of your investment account – will be tax free to your beneficiaries.

• And, you can access the cash reserve in your Universal Life Insurance policy if needed to pay for unexpected expenses. You can do this by permanently withdrawing some or all of the cash reserve; through a loan secured against the cash reserve of the policy; or by using your policy as collateral for a line of credit.

A Universal Life Insurance policy can be a good option for people seeking financial security while accumulating additional funds for use in an emergency or to carry out certain aspects of their financial plan (such as developing sufficient income for retirement). It should also be considered a long-term investment because the return on the investment portion, combined with the tax savings, deliver the best results when left to grow over time.

If you want insurance and long-term, tax-deferred investment growth, Universal Life Insurance can be a good option for you. A professional advisor can help you select the right policy with the right combination of insurance amount and investments options that fit your personal risk tolerance and your overall financial and legacy goals.

Making The Tax-Free Savings Account Fit For Your Life

As of January, 2009, Canadians have a new tax-free option for saving – the Tax-Free Savings Account (TFSA). TFSAs are a flexible investment vehicle into which you can make non-deductible contributions (up to $5,000 per adult in 2009) that will grow and can be withdrawn without incurring taxation. Withdrawals can be made at any time for any purpose. Unused contribution room can be carried forward indefinitely and any amounts withdrawn in a year will be added back to your contribution room in the following year.

So, how you use your tax-free TFSA dollars is totally up to you. But it’s a good plan to ‘fit’ your TFSA investment uses to your life stage. Here are some tips.

Young adults and young families

• Save for emergencies and large short term expenses -- like a vehicle, vacation or home down payment without having to liquidate investments and paying taxes on the income.

• Save for a home – in addition to or in place of the RRSP Home Buyers Plan.

• Save for education – in addition to or in place of non-registered savings, the RRSP Lifelong Learning Plan or RESPs.

• Save for your children – as a parent, you retain control of TFSA funds and when to disburse them.

• Save to start a business – TFSAs are a tax-effective way to save the initial equity you need and can be used as security for bank financing.

• Save for retirement – in addition to your RRSP contributions.
  

Mature adults

• Save for emergencies, large short term expenses and retirement, in addition to RRSPs.

• Save your tax refund – contribute your RRSP tax refunds to your TFSA.
  

Retirees

• Save for emergencies and large short term expenses.

• Shelter excess income from future taxation – if your combined retirement income (from RRSPs, pension, OAS and CPP) is more than you need to live on, build up a non-taxable reserve in your TFSA.

• Build retirement savings after RRSPs – you can’t contribute to an RRSP after age 71, but you can still invest in your TFSA.

• Build a tax-free inheritance for children – a TFSA can be transferred to a surviving spouse/common-law partner without affecting their TFSA contribution room. On the death of the second spouse, the children may inherit the total amount tax-free.

Your professional advisor can help you make the most of your TFSAs and other investments, at every life stage.

When It Makes Sense To Borrow For Your RRSP

Wealthy people often borrow to invest. They call this 'leveraging' or 'leveraged investing' - but what it really boils down to is using someone else's money to make your own investments. You don't have to be rich to benefit from the value of 'leveraging'. In fact, you may be able to take advantage of a 'leveraging' strategy right now that could help you save on taxes and could increase your potential retirement income at the same time.

If you're like most Canadians, your Registered Retirement Savings Plans (RRSPs) will be an important source of income during your retirement years. And, if you're like most Canadians (a whopping 78 per cent in the 2003 tax year[1]), you probably have unused contribution room in your RRSPs. To make the most of the potential tax-saving and income-building advantages of your RRSPs, you should fill up every bit of your unused contribution room as quickly as you can - and leveraging can be an effective way to do just that.

Borrowing in order to contribute to your RRSPs could pay off in two ways: First, you'll increase the size of your tax refund and second, you'll have more money growing inside your tax-deferred retirement plan. Here's an example: assume that your RRSP contribution limit is $3,000 this tax year. (The actual amount of your RRSP contribution room is provided on the Notice of Assessment you received from the Canada Revenue Agency after filing your tax return last year.) Depending on your tax bracket, a $3,000 contribution could net you nearly $1,500 in tax savings at the time you file your tax return in the form of a larger tax refund, while also potentially adding $30,188 to your retirement plan over 30 years (on a pre-tax basis, at an annual compound rate of 8 per cent ). And, that's for just a single contribution of $3,000!

The government allows you to accumulate and carry forward all your unused RRSP contribution room from previous years back to 1991. You can make up the unused RRSP contribution room at any time, but sooner is better because you'll have more money growing on a tax-sheltered basis inside your RRSPs.

The issues to consider from a leveraging strategy are these: Borrowing at a low interest rate and paying off the loan quickly, otherwise the cost of borrowing can diminish your potential tax savings and investment returns. Financial institutions often offer RRSP loans (which are really loans meant only for the purpose of contributing to your RRSPs) at prime rate or lower. For top-up loans, limit the payback schedule to one or two years.

[1]The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investments.

For larger loans, don't exceed five years. The leveraging strategy often works even better when you use your increased tax refund to repay the RRSP loan even faster.

Your professional advisor can help you map out an RRSP leveraging strategy that works best for you.

Planning For A Longer Life

Congratulations - if you're a senior or close to it, you're part of a terrific good news story: You are likely to enjoy a longer and healthier life than any generation before you.

According to Statistics Canada, life expectancy at the age of 65 continues to improve with Canadian men age 65 expected to live an average of 17+ years and Canadian women age 65 expected to live an additional 20+ years on average.

That is great news, but there is another side to your longer life: the need to extend your income over those years to ensure you continue to have a comfortable lifestyle. That could also include significant additional expenses for health care. You hope to remain healthy, of course, but statistics tell us that:

• 43 per cent of those over 65 will require an average of three to four years of long term care in a nursing home or long term care facility.

• 66 per cent of married couples will have at least one spouse enter a long term care, personal care or health care facility at some point.

• 28 per cent of Canadians age 65 and over who do not live in a health care facility are likely to receive care due to a long term health problem.

• 1 in 13 Canadians over age 65 is affected by Alzheimer Disease or related dementia.

You don't want to outlive your retirement savings or see them eroded by unexpected health care and medical costs. So, more than ever before, an effective retirement financial plan is an absolute necessity. Here are some planning tips to set you on the right path to a long and financially comfortable retirement:

• Add to your retirement income from your Registered Retirement Savings Plan with a well-chosen portfolio of non-registered investments. Look at investments that benefit from preferential tax treatment such as tax-advantaged investment structures.

• Consider Universal Life insurance as a means of sheltering excess capital while maximizing the value of your estate and/or a life annuity that will provide you with guaranteed regular income for the rest of your life, no matter how long you live.

• Protect your income (or your spouse's) with carefully selected insurance coverage that could include life insurance, supplemental health insurance, disability insurance, critical illness insurance, and long-term care insurance.

Planning for retirement has never been more important. A professional advisor can help you develop a retirement plan that will work for you through all the years of your retirement.

Home Equity - Your Retirement Income Key?

Are you ten to fifteen years away from retirement? If so, you probably have two things: A fair amount of debt from raising a family and a reasonable amount of equity in your home.

That debt could be an issue when you retire. When you have to devote a significant portion of your retirement income to paying debts, you'll have much less to support the retirement lifestyle of your dreams. That's why reducing or eliminating debt is an important step in preparing for retirement. Yet, when you look at your current income and 'outgo', you may be a bit perplexed about where that extra debt-reduction money will come from. Think: 'home equity'.

Home equity is the difference between the market value of your home and the balance of your home mortgage debt. Over time, you can build a good amount of equity because your home's value usually increases while your mortgage balance reduces. Here's how you can use home equity money to get out from under debt:

Downsize Your family is gone and your current home now seems 'too big' so replace it with a smaller one at a lower price and use the difference to pay down debt.

Restructure your mortgage By renewing your mortgage for a short term at a larger amount than you currently owe which is usually easy to do because of the appreciating value of your home - you can create extra cash to pay down other more expensive debt. Mortgage interest rates are generally lower than consumer borrowing rates and by keeping the term of your new mortgage short, you can pay it off before you retire.

Debt consolidation simply means paying off a number of higher interest rate loans or other high-cost debt (like credit cards with annual interest rates often in the 19 -28% range) by taking out a single loan at a lower interest rate for a consolidated overall lower monthly payment. You can work out a repayment plan that can allow you to move from simply servicing your debt balances to actually eliminating them and by paying less interest monthly, you'll create additional cash flow that can be used towards your retirement or other financial goals.

Will your home equity be the key to a more comfortable retirement? Be sure about that and every other aspect of your financial life by talking it over with a financial professional.

The Cottage Hand-Off - Who Will Receive?

It's your cottage now, but whose will it be in the future? Your family has always had a great time there, so it's natural to assume you'll simply hand it off to your family after you're gone. But have you asked your adult children if that is really what they want? And if it is, will they be financially able to keep it in the family? Here are a few steps you should take to make sure you don't fumble the cottage hand-off.

Have a cottage conversation

Sure, your adult children have always enjoyed the cottage - but will they in the future, when you are no longer around? You know that owning and maintaining a vacation property is a big responsibility and it's not for everyone. That's why you should talk it over with your children now. Find out who wants to take on the responsibilities of ownership and who doesn't. Then make arrangements so your non-cottage inheritors will be treated fairly in your will. That way family squabbles can be avoided.

Make the hand-off less taxing

Plan now to avoid a stiff tax liability when the hand-off occurs. Unless you're passing assets to a spouse, when you die you're deemed to have disposed of your capital assets at fair market value. If your cottage property has appreciated in value, your estate will face a significant capital gains liability. You do have the benefit of a principal residence tax exemption but it applies to just one property at a time. That can be either your cottage or your city home but the one you don't choose will be subject to tax on its increased value.

There will also be tax consequences if you leave the property to your children in your will. A better alternative may be to transfer the property to your children while you live. You can do that as an outright gift of the property or by making one or more of your children joint owners of the property (with or without you as joint owner). You can also transfer the property to a trust, with your children as beneficiaries. Each of these transfer options may trigger an immediate capital gain - but future capital gains on the property will accrue to your children and are not payable until they sell or transfer the property.

A trust also offers the benefit of allowing you to maintain control of the property during your lifetime or through an independent third party (the 'trustee' - who could by your executor) after you die. This can be an effective alternative to manage conflicts over the cottage. Or, if your children are too young or otherwise not ready to take on the responsibilities of ownership, the cottage may be held in the trust until they are ready.

Life insurance can also be a good strategy for covering capital gains taxes on your cottage. The death benefits from the policy are usually tax-free and can be used as a ready source of cash to avoid the forced sale of estate assets, like your cottage, if other funds are not available to pay the capital gains taxes.

It's a good idea to think about your wishes for your cottage as part of your financial and estate plan. A professional financial advisor can help you work through the options that make the best sense for you.

Does A Tax-Free Savings Account Fit Your Retirement Plan?

Is a TFSA a good addition to your retirement planning? Yes, when you make it a part of your overall financial plan that includes your most important tax-saving, income-building investment – your Registered Retirement Savings Plan.

Here’s a quick comparison of the TFSA and an RRSP:

• RRSP contributions provide an immediate tax benefit because they are directly deductible from income. Contributions to a TFSA cannot be claimed as a tax deduction.

• Withdrawals from a TFSA are not taxed when withdrawn. RRSP withdrawals are added to income for tax purposes.

• The maximum yearly investment in a TFSA is $5,000 (although you can have more than one Account as long as you do not exceed the $5,000 limit in total). The RRSP contribution maximum is determined by your earned income. (In 2009, the maximum RRSP contribution limit is $21,000.)

• Generally, the same investments are ‘eligible’ for either a TFSA or RRSP – mutual funds, publicly-traded securities, government bonds, GICs, and segregated funds.

• TFSA funds can be withdrawn at any time for any purpose. RRSP funds are typically not withdrawn until after retirement.

• Withdrawn amounts can be put back into a TFSA without reducing contribution room.

• Unused TFSA and RRSP contribution room can be carried forward to future years.

• Withdrawals and income earned in a TFSA will not affect eligibility for federal income-tested benefits and credits including, the Age Credit, Old Age Security benefits or Guaranteed Income Supplement.

• There is no time limit at which a TFSA must be wound up or converted to a different investment. RRSPs must be wound up or converted by the end of the year when a person reaches age 71.

In retirement planning, a TFSA can be a good option:

• When your RRSP is maximized. Because the income is not taxed, a TFSA will likely deliver better returns over the long term than other non-registered investments – but the tax-sheltered, tax-saving, compound growth features of an RRSP still make it a much better choice for long term growth.

• As an incentive to save that ‘little extra’ for retirement, especially for those with modest means because the savings will not reduce income-tested benefits.

Is a TFSA in your future? Your professional planner can help you answer that question in the most profitable way.

Life Insurance Can Be Part Of Your Retirement Plan

The right kind of life insurance can do much more than provide a tidy sum to your heirs. It can be a good, tax-deferred place to stash the cash you have left over after maxing out your RRSP contributions.

There are two basic types of permanent life insurance that allow excellent flexibility in building tax-advantaged savings and accessing the cash inside them:

· Universal Life is a type of policy that lets you vary the amount and timing of premium payments as well as allowing you to save money inside your policy, protected from taxation.

· Whole Life is a cash value life insurance policy that provides a specified level protection for a premium that will not change unless the level of coverage changes. It also includes a savings feature similar to a Universal Life policy.

Insurance can be a source of liquid savings

As you pay the premiums on your permanent life insurance plan, the cash value of your policy increases in value over time on a tax-advantaged basis. You can access the cash value of your policy in three ways:

1. Withdrawal - You permanently withdraw some or all of the cash value of your policy. This reduces the future growth potential of policy cash values and may reduce the policy's death benefit. Every dollar is taxable, and the amount withdrawn cannot usually be recontributed.

2. Policy loan - You obtain a loan from your insurer secured against the cash value of your policy and the policy continues to grow uninterrupted. For tax purposes, your loan is considered to be first drawn against the tax-free portion of your policy until that component is reduced to zero. After that any remaining portion of the loan is taxable. Loans can be repaid (or the amount plus any accumulated interest will be deducted from the proceeds paid to your beneficiary), and you will get a tax deduction for your repayment up to the amount of any taxable income you declared when you took the loan.

3. Collateral loan - You use your policy as collateral for a line of credit and your policy is assigned to the third-party lending institution. This option does not result in any taxable income to you. You'll usually pay interest on the outstanding balance of the loan and, if you die, the lender receives repayment of the loan (and any unpaid interest) from the proceeds of the policy, and your beneficiary gets any remainder.

By giving you the ability to accumulate tax-advantaged growth in cash value and tax-free benefits to your beneficiaries, permanent life insurance can be an important tool for you to consider. But keep two things in mind: Make your choices based on an overall plan aimed at reaching your financial goals and remember that tax laws can change - so be sure to consult a professional advisor who can help determine what's best for you.

Time To Step Away From Your Business?

Maybe not today or tomorrow, but one day in the not so distant future, you’re going to do it: Step away from your business and hand the responsibility for its operation to someone else.

But who will it be and how will you do it? There are plenty of tax, legal, financial and estate issues to consider – and that’s where business succession planning comes in. Here are some of the key elements you need to consider.

• Don’t leave things to chance. To avoid the loss of your business or its forced sale at substantially reduced value – and to ensure your family will have sufficient income to sustain the lifestyle you want for them – look to disability, critical illness and life insurance as a means of protecting what you’ve built.

• Make it legal. Establish a buy-sell agreement that sets out the terms and conditions under which your share of the business will be acquired by co-owners, partners or other stakeholders.

• Plan for retirement. If you will be relying on your business as a source of retirement income, you need a plan for converting its value to cash when the time comes. There are three basic ways to do that: Sell your business as a going concern to an outsider; wind it down while you slowly deplete its investments in a tax-efficient manner; or pass it on to a relative, co-owner or key employee.

• Prepare for the tax burden. The proceeds from the sale or transfer or your business could be subject to income and capital gains taxes. By planning now, you can minimize the tax that will be paid by you, your estate, or your heirs. For example, a family trust or estate freeze could effectively reduce taxes when you transfer ownership to family members.

Life insurance can be a cost-effective way of financing the succession without saddling the business with the need to borrow money.

• Put your wishes in your will. It’s critical that you make provision for the disposition of your business in your will, especially if you’re planning on passing it on to a family member after your death. Set out how the family member will acquire the business and avoid disputes by ensuring every family member is taken care of in an equitable way.

The ‘exit strategy’ you choose should be right for you and your family. To be sure you’ve got it ‘right’ get input from your accounting, legal and financial advisors and your family – that’s the best way to a successful succession.

My Retirement Years Will Be …?

You're busy today and you'll be busy tomorrow - but one day in the not so distant future, you'll be retired and then what?

If you wait until you're retired to figure out what you want to do for the next phase of your life, you'll be selling yourself short. The time to start planning for retirement is right now -- because your retirement years could be starting sooner rather than later and likely lasting for a long time. These days, Canadians are choosing to retire earlier than ever before, with the average retirement age now just 62. Add in increases in life expectancy and it is widely believed that the amount of time most people spend in retirement has tripled over the past twenty-five years

People often confuse retirement planning with financial planning - and, while money is a vital tool in achieving a comfortable retirement, financial security alone will not provide a successful and fulfilling retirement. That requires planning and preparation in all areas of your life.

Successful retirees will tell you their retirement plan is fulfilling because it began with a vision - so look into your future and ask yourself some questions. How do you see your life after work? What do you see yourself doing?

To get you started, here are six key factors to a successful retirement abbreviated from extensive research by the Retirement Lifestyle Centre Inc., a North American research and education company focusing on retirement issues:

1. Have a clear vision of the future. Most successful retirees will tell you they have created a structure for their retirement life that replaces the structure they left behind with their workplace.
2. Practice good health and wellness. Look for ways to keep yourself both physically and mentally stimulated through all the years of your retirement.
3. Be positive about making your retirement 'work'. Once, retirement was viewed as 'freedom from work'; now it's seen as 'freedom to work' at something your truly enjoy.
4. Take a balanced approach to leisure. Cast a wide net, be adventurous and find a happy 'life balance'.
5. Enjoy personal relationships. Work on maintaining and developing your social networks - and don't wait to the last minute; it takes time to develop networks of friends and personal interests that will support a fulfilling retirement.
6. Feel financially comfortable. Get the maximum amount of joy out of all your retirement years by making sure right now that your financial plan will support your personal retirement vision.

A professional advisor can also help turn your retirement vision into reality.