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.

Giving While Living - Keeping It In The Family

You may be among the growing group who hope to pass on wealth to their children during their lifetime. A recent research study showed that the majority of Canadians (63 per cent) believe it's best to give children financial gifts while the giftor is alive.

The 'giving while living' trend has significant implications for tax and estate planning - and for your own lifestyle. That's why your first step toward making a 'giving while living' decision should be to take a critical look at your own finances. If you are certain your finances will allow you to make a gift, here are some other things to consider:

What should I give? The simplest answer is cash - but that may not be the best choice. When you give cash, you also give up any control over the amount you have gifted and you may not want to do that. One solution is to characterize your gift as a loan and take back a promissory note with appropriate security - that way, you can maintain a certain amount of control over the funds and the way they are used.

Another option is to give a 'non-cash' gift - maybe transferring stock to a child, or even the ownership of your family cottage - but, in that case, you will likely be triggering any unrealised capital gains. For example, if the gifted stock or cottage has appreciated significantly in value, most of that value will be subject to an immediate capital gains tax (currently the taxable amount is 50 per cent of the appreciated value).

Selling the 'gift' for $1 does not solve the tax problem and may, in fact, make it worse. When assets are given to someone 'at arm's length', the Canada Revenue Agency (CRA) deems that the donor received Fair Market Value (FMV) for the asset, no matter what it was sold for.

Should I put conditions on the gift? You can - some parents elect to 'gift' assets but only under certain clearly stated conditions. For example, you may want the funds back in the event of a marriage breakdown or if your child predeceases you and you don't want one of their heirs (perhaps a new spouse) to receive the funds. Any conditions like these should be specifically set out in writing. You should also check with a lawyer to ensure your wishes are legally binding.

Can I give a gift to a minor? Yes, and if it's a small gift, that's pretty straightforward. But if the gift is significant it may be wise to wait. For instance, a minor can't invest funds in their own name so future use of the gift can become problematic. In most cases, it's best to make a large gift to a minor in your Will.

If you are thinking of giving while living, you should do it in the context of your overall financial and retirement goals. A professional planner or financial advisor can help you make the best decisions for your situation.

Donate To Your Favourite Charity - And Save Taxes, Too!

Thanksgiving is over and even those we many still have leftovers in the fridge, the attention of many Canadians now turns to the Christmas season. In the spirit of the holiday season, you may think about 'gifting' your favorite charitable organization with a donation. That's a very kind and generous act, especially during a time of the year that can get pretty expensive.

So why not give a little gift to yourself - by reducing your income tax bill while contributing to a worthwhile cause. It's simple: instead of giving cash, give securities and you'll likely enhance the tax benefits of your donation.

Here's how it works: Tax rules make it possible for most donations of securities to registered charities and public foundations to escape capital gains taxation. For example:

You want to donate $10,000 and you have the choice of making the donation in cash or mutual fund units. Let's assume your marginal tax rate is 46 per cent, and you originally paid $4,000 to purchase your fund units which are now worth $10,000.

If you donate the cash, you can claim the charitable donation income tax credit for the entire amount, generating $4,600 in tax savings and reducing the net cost of your donation to $5,400.

You'll still have your mutual fund units, of course - but you'll probably pay tax on capital gains when you sell them. If you sold them now, you will realize a $6,000 capital gain which will generate a tax bill up to $1,380 (50 per cent of the capital gain of $6,000 multiplied by your 46 per cent marginal tax rate.)

Instead of donating the cash realized from the sale of your mutual funds, you donate your fund units to charity. You still get the charitable credit for your donation of $10,000 mutual fund units and the resulting $4,600 in tax savings - but you will have avoided paying the $1,380 in capital gains tax on the appreciation of value of those units because you made an 'in-kind' donation to the charity.

There are other tax-saving/donation options and a professional advisor can help you decide which are best for you. But remember, you need to act before December 31st to claim a tax credit for the 2009 tax year.

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.

Why Pay Tax On Money You Never See?

Based on their in-depth knowledge of the investing habits of Canadians, investment professionals estimate that half to two-thirds of all investable wealth in Canada is held outside registered savings plans (RSPs). That's understandable because most conservative investors take a practical approach to investing that seeks to reduce risk and volatility while delivering a desired level of returns over the long term - in other words, creating and maintaining a properly diversified portfolio with the best prospects for long term growth.

Often, those investors seek the safety of 'guaranteed' or 'fixed-income' investments such as bonds, mortgages, Guaranteed Investment Certificates (GICs), and other interest-generating securities, which generally provide a stream of income while preserving capital. (Fixed-income investments are one of the three basic types of investments; the other two are cash and equity).

The problem is that interest income is the least tax-efficient type of income. Every $1 of interest income is fully taxable, just the same as your employment income. So, if you are heavily invested in interest-generating investments, you are likely to incur a stiff tax liability each year -- even though you may not currently need that income. And, your tax liability becomes even more problematic if your investments produce taxable income each year but this income is automatically reinvested (or compounded), creating a tax bill with no corresponding cash flow to pay the tax.

It's your after-tax return that matters

Even though your interest income investments may be delivering a significant return, that return may also be significantly reduced by the high rate of taxes you must pay. One option is to move a portion of your non-registered investments into 'equities' that provide income from dividends and capital gains, which are taxed at a much more favourable rate than interest income. For example, any realized capital gains you receive from an equity investment are taxed at just 50% -- in other words, only 50 cents of every dollar of the capital gain is subject to tax.

Dividend income also benefits from federal and provincial tax credits that provide a fair degree of tax relief.

The Tax-Free Savings Account – Wow! Or Wow?

Last year in the 2008 Budget, the Federal Government introduced the ‘next big thing in tax reduction’ -- the Tax-Free Savings Account (TFSA. The TFSA became effective in 2009 and the question is: Just how much of a ‘Wow’ is the TFSA for everyday Canadians?

The government hails it as ‘the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP)’* and estimates that ‘a person contributing $200 a month to a TFSA for 20 years will enjoy additional savings of $11,045 compared to saving in an unregistered account.’*

That’s because a TFSA will allow you to use your savings to invest in eligible investment vehicles and the capital gains and other investment income earned in your TFSA will not be taxed. Here’s how it works:

• Starting in 2009, any Canadian over 18 years of age can save up to $5,000 each year in a TFSA.

• A person may have more than one TFSA but cannot exceed the $5,000 limit in total.

• ‘Eligible’ investments are generally the same as those allowed in an RRSP.

• Unlike RRSP contributions, which are deductible from income and reduce taxes, TFSA contributions do not qualify as deductions.

• Investment income, including capital gains, earned in the TFSA will not be taxed, even when withdrawn.

• TFSA funds can be withdrawn at any time for any purpose – from buying a new car to starting a business.

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

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

• Neither income earned in a TFSA nor withdrawals will affect eligibility for federal income-tested benefits and credits – such as the Canada Child Tax Benefit, Age Credit, Guaranteed Income Supplement and Employment Insurance Benefits.

• Contributions to a spouse’s TFSA are allowed.

Investment experts suggest that a TFSA may deliver better after-tax value than some non-registered investments, certainly over longer terms. On the other hand, the experts also point out that what is ‘eligible’ for a TFSA and what is ‘suitable’ are two very different issues. For example, an investor may make very conservative – meaning low-earning -- choices for a TFSA because capital losses on more speculative investments will not be deductible – but that strategy may not be consistent with the investor’s overall financial goals and objectives.

Tax Tips For Students

It's that time of year again, students have bought their supplies, and are packing the classrooms. The cost of education rises every year, but what can we do about it? Here are some basic tips to help ensure your student is taking full advantage of the tax relief the government is offering:

• Scholarships and bursaries are not taxable and not reported on the student's income tax return when the student is registered in a program that entitles the student to claim the Education Tax Credit.

• Interest paid on a student loan is eligible for a tax credit when the loan is part of a federal or provincial student loan program. The student cannot claim interest paid if the student loan has been renegotiated with a financial institution or has been consolidated with other loans. If the student has no tax payable in the year the interest is paid, the amount can be carried forward and applied in any of the next five years.

Other tax deductions available to students:

• Moving expenses - if a student moves more than 40 kilometres to be closer to school or to take a summer job.

• Child care expenses may be claimed by the higher earning spouse/common-law partner if the lower income spouse is enrolled in a qualifying secondary or post-secondary program.

• GST rebates - a student must apply for the rebate on his/her tax return each year.

Other tax credits available to students:

• The Canada Employment Credit on the first $1,000 of employment income.

• A Tuition, Education and Textbook Credit for:

• Tuition fees when students are enrolled in full-time or part-time studies and when the fees are more than $100 for the year.

• An Education amount for each month of enrolment -- $400 a month for full-time students (or part-time students with a disability) and $120 a month for part-time students.
  

• Textbooks to a total of $65 a month for full-time students and $20 a month for part-time students.

• A Public Transit Pass Credit for monthly or longer transit passes. Receipts are needed to make this claim.

• Unused Tuition, Education and Textbook Credits can be transferred to a spouse, common-law partner, parent or grandparent when the student first uses the tuition, education and textbook amounts to reduce taxes payable in that year to zero. The maximum transfer amount is $5,000 minus the amount used by the student. Alternatively, any unused tuition, education, and textbook amounts can be carried forward indefinitely by the student.

• Parents may claim for a dependent under 19 years

You can find out more about tax-saving strategies for students and everyone else in your family from a financial advisor.