Insurance Planning for Business Owners

For business owners, making sure your business is financially protected can be overwhelming. Business owners face a unique set of challenges when it comes to managing risk. Insurance can play an important role when it comes to reducing the financial impact on your business in the case of uncontrollable events such as disability, critical illness or loss of a key shareholder or employee.

This infographic addresses the importance of corporate insurance.

The 4 areas of  insurance a business owner should take care of are:

  • Health

  • Disability

  • Critical Illness

  • Life

Health: We are fortunate in Canada, where the healthcare system pays for basic healthcare services for Canadian citizens and permanent residents. However, not everything healthcare related is covered, in reality, 30% of our health costs* are paid for out of pocket or through private insurance such as prescription medication, dental, prescription glasses, physiotherapy, etc.

For business owners, offering employee health benefits make smart business sense because health benefits can form part of a compensation package and can help retain key employees and attract new talent.

For business owners that are looking to provide alternative health plans in a cost effective manner, you may want to consider a health spending account.

Disability: Most people spend money on protecting their home and car, but many overlook protecting their greatest asset: their ability to earn income. Unfortunately one in three people on average will be disabled for 90 days or more at least once before the age of 65.

Consider the financial impact this would have on your business if you, a key employee or shareholder were to suffer from an injury or illness. Disability insurance can provide a monthly income to help keep your business running.

Business overhead expense insurance can provide monthly reimbursement of expenses during total disability such as rent for commercial space, utilities, employee salaries and benefits, equipment leasing costs, accounting fees, insurance premiums for property and liability, etc.

Key person disability insurance can be used to provide monthly funds for the key employee while they’re disabled and protect the business from lost revenue while your business finds and trains an appropriate replacement.

Buy sell disability insurance can provide you with a lump sum payment if your business partner were to become totally disabled. These funds can be used to purchase the shares of the disabled partner, fund a buy sell agreement and reassure creditors and suppliers.

Critical Illness: For a lot of us, the idea of experiencing a critical illness such as a heart attack, stroke or cancer can seem unlikely, but almost 3 in 4 (73%) working Canadians know someone who experience a serious illness. Sadly, this can have serious consequences on you, your family and business, with Critical Illness insurance, it provides a lump sum payment so you can focus on your recovery.

Key person critical illness insurance can be used to provide funds to the company so it can supplement income during time away, cover debt repayment, salary for key employees or fixed overhead expenses.

Buy sell critical illness insurance can provide you with a lump sum payment if your business partner or shareholder were to suffer from a critical illness. These funds can be used to purchase the shares of the partner, fund a buy sell agreement and reassure creditors and suppliers.

Life: For a business owner, not only do your employees depend on you for financial support but your loved ones do too. Life insurance is important because it can protect your business and also be another form of investment for excess company funds.

Key person life insurance can be used to provide a lump sum payment to the company on death of the insured so it can keep the business going until you an appropriate replacement is found. It can also be used to retain loyal employees by supplying a retirement fund inside the insurance policy.

Buy sell life insurance can provide you with a lump sum payment if your business partner or shareholder were to pass away. These funds can be used to purchase the shares of the deceased partner, fund a buy sell agreement and reassure creditors and suppliers.

Loan coverage life insurance can help cover off any outstanding business loans and debts.

Reduce taxes & diversify your portfolio, often life insurance is viewed only as protection, however with permanent life insurance, there is an option to deposit excess company funds not needed for operations to provide for tax-free growth (within government limits)  to diversify your portfolio and reduce taxes on passive investments.

Talk to us about helping making sure you and your business are protected.

The Best Way to Buy Mortgage Insurance

Before buying insurance from your bank to cover your mortgage, understand the difference between self owned mortgage life insurance and bank owned life insurance. The key differences are ownership, premium, coverage, beneficiaries and portability.

Ownership:

  • Self: You own and control the policy.

  • Bank: The bank owns and controls the policy.

Premium:

  • Self: Your premiums are guaranteed at policy issue and discounts are available based on your health.

  • Bank: Premiums are not guaranteed and there are no discounts available based on your health.

Coverage:

  • Self: The coverage that you apply for remains the same.

  • Bank: The coverage is tied to your mortgage balance therefore it decreases as you pay down your mortgage but the premium stays the same.

Beneficiary:

  • Self: You choose who your beneficiary is and they can choose how they want to use the insurance benefit.

  • Bank: The bank is beneficiary and only pays off your mortgage.

Portability:

  • Self: Your policy stays with you regardless of your lender.

  • Bank: Your policy is tied to your lender and if you change, you may need to reapply for insurance.

We’ve created an infographic about the difference between personally owned life insurance vs. bank owned life insurance.

Talk to us, we can help.

Insurance Planning for Young Families

For young families, making sure your family is financially protected can be overwhelming, especially since there’s so much information floating online. This infographic addresses the importance of insurance- personal insurance.

The 4 areas of personal insurance a young family should take care of are:

  • Health

  • Disability

  • Critical Illness

  • Life

Health: We are so fortunate to live in Canada, where the healthcare system pays for basic healthcare services for Canadian citizens and permanent residents. However, not everything healthcare related is covered, in reality, 30% of our health costs* are paid for out of pocket or through private insurance such as prescription medication, dental, prescription glasses, physiotherapy, etc.. Moreover, if you travel outside of Canada, medical emergencies can be extremely expensive.

Disability: Most people spend money on protecting their home and car, but many overlook protecting their greatest asset: their ability to earn income. Unfortunately one in three people on average will be disabled for 90 days or more at least once before age 65. Disability insurance can provide you with a portion of your income if you were to become disabled and unable to earn an income.

Critical Illness: For a lot of us, the idea of experiencing a critical illness such as a heart attack, stroke or cancer can seem unlikely, but almost 3 in 4 (73%) working Canadians know someone who experience a serious illness. Sadly, this can have serious consequences on you and your family, with Critical Illness insurance, it provides a lump sum payment so you can focus on your recovery.

Life: For young families, if your loved ones depend on you for financial support, then life insurance is absolutely necessary, because it replaces your income, pay off your debts and provides peace of mind.

Talk to us about helping making sure you and your family are protected.

Guide to Covid-19: Government Relief Programs in Canada

The intention for our “Guide to Covid-19: Government Relief Programs in Canada” is to help businesses and individuals to cut through the noise and make sure they’re getting all the help they can receive from the federal and provincial programs.

Federal programs include:

  • Small Business Wage Subsidy

  • Canada Emergency Wage Subsidy

  • Canada Emergency Business Account

  • Canada Emergency Response Benefit

  • Student Loan Programs

Individual provincial programs include:

  • Utilities

  • Housing

  • Student Loan Programs

Business Owners: 2019 Tax Planning Tips for the End of the Year

Now that we are nearing year end, it’s a great time to review your business finances. With the federal election over and no major business tax changes for this year, 2019 is a good year to make sure you are effectively tax planning. Please keep in mind that your business may be affected by the recent tax on split income (TOSI) and the passive investment income rules given they came into effect in 2018. These rules can be complicated, please don’t hesitate to consult us and your accountant to determine how this can affect your business finances.

We are also assuming that your corporate year end is December 31, however if it’s not, this is useful when your business year end comes up.

Below, we have listed some of the key areas to consider and provided you with some useful guidelines to make sure that you cover all of the essentials. We have divided our tax planning tips into 4 sections:

  1. Tax checklist

  2. Remuneration

  3. Business tax

  4. Estate

1) Business Year-End Tax Checklist

Remuneration

 ☐ Salary/Dividend mix

 ☐ Accruing your salary/bonus

 ☐ Stock option plan

 ☐ Tax-free amounts

 ☐ Paying family members

Business Tax

 ☐ Claiming the small business deduction

 ☐ Shareholder loans

 ☐ Passive investment income: eligible/ineligible dividends

 ☐ Corporate reorganization

Estate

 ☐ Will review

 ☐ Succession plan

 ☐ Lifetime capital gains exemption

2) Remuneration

What’s your salary/dividend mix?

Individuals who own incorporated businesses can elect to receive their income as either salary or as dividends. Your choice will depend on your own situation consider the following factors:

  • Your current and future cash flow needs

  • Your personal income level

  • The corporation’s income level

  • TOSI rules

  • Passive investment income rules

Please also consider the difference between salary and dividends:

Salary

✓ Provides RRSP contribution

✓ Reduces corporate tax bill

• Payroll tax

• Canada Pension Plan (CPP) contribution

• Employment Insurance contribution

Dividend

• Doesn’t provide RRSP contribution

• Doesn’t reduce corporate tax bill

• No tax withholdings

• No Canada Pension Plan contribution

• No Employment Insurance contribution

✓ Receive up to $50,000 of ineligible dividends at a low tax rate depending on province

As part of this, it’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make. For 2019, salaries of $151,278 will provide the maximum RRSP room of $27,230 for 2020.

Is it worth accruing your salary or bonus this year?

You could consider accruing your salary and / or bonus in the current year but delaying payment of it until the following year. If your company’s year-end is December 31, your corporation will benefit from a deduction for the year 2019 and the source deductions are not required to be remitted until actual salary or bonus payment in 2020.

Stock Option Plan

If your compensation includes stock options, please check if you will be affected by the new proposed stock option rules. This caps the amount of certain employee stock options eligible for the stock option deduction at $200,000 after December 31, 2019. The rules will not affect you if your stock options are granted by a Canadian controlled private corporation.

Tax Free Amounts

If you own your corporation, pay tax-free amounts if you can. Here are some ways to do so:

  • Pay yourself rent if the company occupies space in your home.

  • Pay yourself capital dividends if your company has a balance in its capital dividend account.

  • Return “paid-up capital” that you have invested in your company

Do you employ members of your family?

Employing and paying salary to family members who undertake work for your incorporated business is worth considering as you could receive a tax deduction against the salary that you pay them, providing that said salary is “reasonable” in relation to the work done. In 2019, the individual can earn up to $12,069 and pay no federal tax. This also provides the individual with RRSP contribution room, CPP and allow for child-care deductions. Bear in mind additional costs that are incurred when employing someone, such as payroll taxes and contributions to CPP.

3) Business Tax

Claiming the Small Business Deduction

Are you able to claim a small business deduction? The federal small business tax rate decreased from 9% in 2019 (from 10% in 2018) and not anticipated to increase in 2020. From a provincial level, there will be changes in the following provinces:

Small Business Tax Rate

Therefore, a small business deduction in 2019 is worth more than in 2020 for these provinces.

Should you repay any shareholder loans?

Loaning funds from your corporation at a low or zero interest rate means that you are considered to have benefited from a taxable benefit at the CRA’s 2% interest rate, less actual interest that you pay during the year or thirty days after it. You need to include the loan in your income tax return, unless it is repaid within one year after the end of your corporation’s taxation year.

For example, if your company has a December 31st year-end and it loaned you funds on November 1, 2019, you must repay the loan by December 31, 2020, otherwise you will need to include the loan as taxable income in your 2019 personal tax return.

Passive investment income

If your corporation has a December year- end, then 2019 will be the first taxation year that the new passive investment income rules may apply to your company.

New measures were introduced in the 2018 federal budget relating to private businesses which also earn passive investment income in a corporation that also operates an active business.

There are two key parts to this, as follows:

  • Limiting access to dividend refunds. Essentially, a private company will be required to pay ineligible dividends in order to receive dividend refunds on some taxes which, in the past, could have been refunded when an eligible dividend was paid.

  • Limiting the small business deduction. This means that, for the companies mentioned above, the small business deduction can be reduced at a rate of $5 for every $1 over between $50,000 and $150,000 of investment income, or eliminated if investment income exceeds $150,000. Please note that Ontario and New Brunswick have indicated that they will not follow the federal rules.

If your corporation earns both active business and passive investment income, you should contact us and your accountant directly to determine if there are any planning opportunities to minimize the impact of the new passive investment income rules.

Think about when to pay dividends and dividend type

When choosing to pay dividends in 2019 or 2020, you should consider the following:

  • Difference between the yearly tax rate

  • Impact of tax on split income

  • Impact of passive investment income rules

With the exception of 2 provinces, Quebec and Ontario, the combined top marginal tax rates will not be changing from 2019 to 2020 on a provincial level. Therefore, it will not make a difference if you choose to pay in 2019 or 2020.

Combined Marginal Tax Rate

In Quebec and Ontario, because there are slight increases in the combined marginal tax rate, there are potential tax savings available if you choose to pay dividends in 2019 rather than in 2020.

When deciding to pay a dividend, you will need to decide to pay out eligible or ineligible dividends, you should consider the following:

  • Dividend refund claim limits: Eligible refundable dividend tax on hand (ERDTOH) vs Ineligible Refundable dividend tax on hand (NRDTOH)

  • Personal marginal tax rate of eligible vs. ineligible dividends

Given the passive investment income rules, typically, it makes sense to pay eligible dividends to deplete the ERDTOH balance before paying ineligible dividends. (Please note that ineligible dividends can also trigger a refund from the ERDTOH account.)

Eligible dividends are taxed at a lower personal tax rate than ineligible dividends (based on top combined marginal tax rate). However, keep in mind, when ineligible dividends are paid out, they are subject to the small business deduction, therefore the dividend gross-up is 15% while eligible dividends that are subject to the general corporate tax rate have a dividend gross-up is 38%. It’s important to talk to a professional to determine what makes the most sense when determining the type of dividend to pay out of your corporation.

Combined Personal Top Marginal Tax Rate on Dividends

Corporate Federal Tax Rate and Gross-up factor

Corporate Reorganization

It might be time to revisit your corporate structure given the changes to private corporation rules on income splitting and passive investment income to provide more control on the distribution of dividend income. Another reason to reassess your structure is to segregate investment assets from your operating company for asset protection. (Keep in mind you don’t want to trigger TOSI, so make sure you structure this properly.) If you are considering succession planning, this is the time to evaluate your corporate structure as well.

4) Estate

Ensure your will is up to date

In particular, if your estate plan includes an intention for your family members to inherit your business, ensure that this plan is tax effective following new tax legislation from January 1, 2016. In addition, review your will to make sure that any private company shares that you intend to leave won’t be affected by the new TOSI rules.

Succession plan

Consider a succession plan to ensure your business is transferred to your children, key employees or outside party in a tax efficient manner.

Lifetime Capital Gains Exemption

If you sell your qualified small business corporation shares, you can qualify for the lifetime capital gains exemption (In 2019, the exemption is $866, 912) where the gain is completely exempt from tax. The exemption is a lifetime cumulative exemption; therefore, you don’t have to claim the entire amount at once.

The issues we discussed above can be complex. Contact us and your accountant if you have any questions, we can help.

Insured Retirement Program

There are a number of mechanisms available for individuals to save in a tax-efficient manner for their retirement – from employer-sponsored pension plans to government plans, RRSPs (registered retirement savings plan) or TFSAs (tax free savings account). But, for those who earn a higher income and wish to contribute more to their pension savings than they can benefit from under the plans which are subject to annual caps, options can be limited. The insured retirement program is an effective way to bridge the retirement savings gap for such individuals in a cost-effective way.

Who is the insured retirement program best suited to?

  • Individuals who already contribute the maximum allowable amounts to both RRSPs and employer-sponsored pension plans but want to save more for their retirement are ideal candidates for this program.

  • Individuals at least fifteen years away from retirement so they can accumulate enough funds inside their life insurance policy for collateralization.

  • Individuals that are comfortable with the concept of borrowing.

How does the insured retirement program work?

This program works with the concept of collateralization in the following way:

  • Individual takes out a universal life (or eligible whole life) insurance policy and subsequently makes sizable cash deposits into it. These deposits grow within the policy on a tax-sheltered basis providing that the funds remain in the policy and are within the maximum allowable limit.

  • Upon the retirement of the policyowner, the funds within the policy may be used as collateral in order to take out a loan.

  • This loan can provide valuable cash for the retiree, in order to purchase an annuity or to use as income, via a series of short loans.

  • When the retiree dies, the loan is repaid and the remaining balance can be distributed among their beneficiaries.

Are there any pitfalls associated with the program?

As with all investment strategies, there are some risks. Namely, in this case, the fact that the program involves incurring a debt, borrowing funds and interest rate changes means that investors need to be comfortable with the unlikely but possible fact that the bank calls the loan or that changes in tax rules negatively impact them.

The insured retirement program can be smart way for high earners to maximize their retirement income in a tax effective manner. Contact us today to learn more about this opportunity and allow us to work in partnership with you to understand your unique needs and requirements and create a retirement strategy that works for you.

Succession Planning for Business Owners

Succession Planning for Business Owners

Business owners deal with a unique set of challenges. One of these challenges includes succession planning. A succession plan is the process of the transfer of ownership, management and interest of a business. When should a business owner have a succession plan? A succession plan is required through the survival, growth and maturity stage of a business. All business owners, partners and shareholders should have a plan in place during these business stages.

We created this infographic checklist to be used as a guideline highlighting main points to be addressed when starting to succession plan.

Needs:

  • Determine your objectives- what do you want? For you, your family and your business. (Business’ financial needs)

  • What are your shares of the business worth? (Business value)

  • What are your personal financial needs- ongoing income needs, need for capital (ex. pay off debts, capital gains, equitable estate etc.)

There are 2 sets of events that can trigger a succession plan: controllable and uncontrollable.

Controllable events

Sale: Who do you sell the business to?

  • Family member

  • Manager/Employees

  • Outside Party

  • There are advantages and disadvantages for each- it’s important to examine all channels.

Retirement: When do you want to retire?

  • What are the financial and psychological needs of the business owner?

  • Is there enough? Is there a need for capital to provide for retirement income, redeem or freeze shares?

  • Does this fit into personal/retirement plan? Check tax, timing, corporate structures, finances and family dynamics. (if applicable)

Uncontrollable Events

Divorce: A disgruntled spouse can obtain a significant interest in the business.

  • What portion of business shares are held by the spouse?

  • Will the divorced spouse consider selling their shares?

  • What if the divorced spouse continues to hold interest in the business without understanding or contributing to the business?

  • If you have other partners/shareholders- would they consider working with your divorced spouse?

Illness/Disability: If you were disabled or critically ill, would your business survive?

  • Determine your ongoing income needs for you, your spouse and family. Is there enough? If there is a shortfall, is there an insurance or savings program in place to make up for the shortfall amount?

  • Will the ownership interest be retained, liquidated or sold?

  • How will the business be affected? Does the business need capital to continue operating or hire a consultant or executive? Will debts be recalled? Does the business have a savings or insurance program in place to address this?

Death: In the case of your premature death, what would happen to your business?

  • Determine your ongoing income needs for your dependents. Is there enough? If there is a shortfall, is there an insurance or savings program in place to make up for the shortfall amount?

  • Will the ownership interest be retained, liquidated or sold by your estate? Does your will address this? Is your will consistent with your wishes? What about taxes?

  • How will the business be affected? Does the business need capital to continue operating or hire a consultant or executive? Will debts be recalled? How will this affect your employees? Does the business have a savings or insurance program in place to address this?

Execution: It’s good to go through this with but you need to get a succession plan done.  Besides having a succession plan, make sure you have an estate plan and buy-sell/shareholders’ agreement.

Because a succession plan is complex, we suggest that a business owner has a professional team to help. The team should include:

  • Financial Planner/Advisor (CFP)

  • Succession Planning Specialist

  • Insurance Specialist

  • Lawyer

  • Accountant/Tax Specialist

  • Chartered Life Underwriter (CLU)

Next steps…

  • Contact us about helping you get your succession planning in order so you can gain peace of mind that your business is taken care of.

When and Why You Should Conduct an Insurance Audit

As our lives grow and change with variable circumstances, new additions, and job transitions, our needs for insurance will also evolve. Additionally, economic fluctuations and external circumstances that influence your insurance policy will need frequent re-evaluation to ensure that you are making the most appropriate and financially favorable decisions. Perhaps you aren’t sure whether you should conduct an insurance audit or not. The following scenarios are usually a good indication that you should thoroughly assess and review your current policy contract: 

  • Bringing new life into your family? A new baby may not only prompt you to adjust your beneficiary information, but it is likely to change or influence your coverage needs.

  • Changing jobs? Probationary periods may not provide the same level of disability or accident insurance.

  • Is your policy nearing the end of its term? Be sure to compare prices for new policies as they can sometimes be more affordable as compared to renewing the current plan.

  • Has your marital status changed? Your insurance policy will likely need updating to reflect such.

The specific type of insurance policy you carry as well as personal details certainly influence coverage and premium prices, so if any of the following factors apply to you, be sure to update your policy accordingly. You might be eligible for a rate reduction. 

  • Changes to your overall risk assessment like smoking cessation, dangerous hobbies, high risk profession etc.

  • If you have experienced improvements to a previously diagnosed health condition.

  • Do your policy’s investment options still fall in line with current market conditions?

  • Have you used your insurance policy as collateral for a loan? Once that loan is paid off, collateral status should be taken off the policy.

Insurance policies generated for business purposes should also be regularly reviewed to make sure the policy still offers adequate coverage to meet the needs of the company and includes the appropriate beneficiary information. With life happening so quickly, it can be easy to forget about keeping insurance policies up to date, however, major changes can have a profound impact on coverage and premiums. Be sure to conduct insurance audits often to ensure your policies are still meeting your needs. 

Contact us to see how we can help. 

Accessing Corporate Earnings

One of the financial planning issues that business owners face is how to access their corporate earnings in a tax efficient way.

There are 5 standard methods:

  • Salary

  • Dividend

  • Shareholder Loans

  • Transfer Personal Assets

  • Income Splitting

There are also unique ways utilizing life insurance and critical illness insurance to access your retained earnings. Please contact us to learn how we can get more money in your pocket than in the government’s.

Estate Planning for Business Owners

Writing an estate plan is important if you own personal assets but is all the more crucial if you also own your own business. This is due to the additional business complexities that need to be addressed, including tax issues, business succession and how to handle bigger and more complex estates. Seeking professional help from an accountant, lawyer or financial advisor is an effective way of dealing with such complexities. As a starting point, ask yourself these seven key questions and, if you answer “no” to any of them, it may highlight an area that you need to take remedial action towards. 

  • Have you made a contingency plan for what will happen to your business if you are incapacitated or die unexpectedly?
  • Have you and any co-owners of your business made a buy-sell agreement?
  • If so, is the buy-sell agreement funded by life insurance?
  • If you have decided that a family member will inherit your business when you die, have you provided other family members with assets of an equal value?
  • Have you appointed a successor to your business?
  • Are you making the most of the lifetime capital gains exemption ($835,714 in 2017) on your shares of the business, if you are a qualified small business?
  • Are you taking care to minimize any possible tax liability that may be payable by your estate in the event of your death?

Estate freezes 

The process of freezing the value of your business at a particular date is an increasingly common way of protecting your estate from a large capital gains tax bill if your business increases in value. To achieve this, usually the shares in the business that have the highest growth potential are redistributed to others, often your children, meaning that they will be liable for the tax on any increase in their value in the future. In exchange, you will receive new shares allowing you to maintain control of the business with a key difference – the value of the shares is frozen so that your tax liability is lower and that of your estate when you die will also be reduced.