Articles

Elder Financial Abuse

We hear and read stories about elderly people being physically abused, but seldom do we hear or read about financial abuse that occurs just as frequently.

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Changing Tax Rules For Life Insurance

By R.A. (BOB) Challis, CFP, RHU, TEP, The Nakamun Group, Winnipeg

On January 1, 2017, Canada Revenue Agency will apply new income tax rules that relate to permanent, participating, whole life, and universal life insurance policies issued on or after that date. Generally, those issued before the beginning of next year will not be affected, unless certain changes are made to the existing policy. The new tax rules will result in possible increased cost of these types of life insurance, higher investment income tax, and less room for tax-advantaged value inside the policy over the long term. Policies owned by a corporation will have lower capital dividend account values, which ultimately lowers the tax-free amounts that are distributed to shareholders.

Tax Changes for Insured Annuities

The taxation of prescribed annuities will also change, neutralizing the benefits of an insured annuity. This currently popular strategy involves purchasing a life annuity in order to generate a guaranteed income for life, and at the same time, acquiring a permanent life insurance policy with a death benefit equal to the life annuity. The intent is for cash fl ow from the annuity to finance the annual premium cost while providing net after-tax income that generates pre-tax annual yield greater than the required annuity withdrawal. At the time of death, the annuity income ceases and the original capital is returned to the estate via the life insurance death benefit. Once the 2017 tax rules come into effect, insurance premiums will increase, as will taxation of prescribed annuities, thereby reducing overall net yields.

Window of Opportunity

if you are thinking of life insurance as a part of an overall estate plan, please talk to your Nakamun Advisor soon to ensure you take maximum advantage of the current tax rules. For some, waiting for the new tax rules might be advantageous.

Mutual Fund Updates

New Tax Rules for Mutual Fund Corporations

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What Your Nakamun Advisor Does For You

For more than four decades, your Nakamun Advisors have been helping you to create, implement, and manage your financial plan.

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Good News and Bad News in Budget 2016

By Garry Keiller, The Nakamum Group, Edmonton

On March 22, 2016, the Liberal Government tabled its first Budget. The original forecast of a $10 billion deficit has tripled to $29.4 billion, which is about 1.5 percent of Gross Domestic Product (GDP).

Spending Programs

The Government plans to spend $120 billion on infrastructure during the next 10 years, with the bulk of the spending occurring in 2020 onwards.

Proposed changes to Employment Insurance include reduced waiting periods, expanded access, and extended benefits.

Other spending programs include jobs and training support, enhanced programs for veterans, expanded support for arts and culture, and additional funds for programs that support Canada’s indigenous peoples.

CHANGES THAT AFFECT INDIVIDUALS

Federal Income Tax Rates

No further changes to personal federal income tax rates or income brackets were introduced beyond those announced in December 2015. Since January 1, 2016, those in the middle income tax bracket have had their tax cut from 22 percent to 20.5 percent, while those earning more than $200,000 have had their tax increased by 4 percent.

Budget 2016 introduced the following amendments that affect the new top marginal income tax rate for individuals:

  • 33 percent charitable donation tax credit on donations greater than $200 made by trusts that are subject to 33 percent on all their taxable income
  • A new 33 percent top rate on excess employee profit sharing plan contributions
  • An increase from 28 percent to 33 percent tax on personal services business income earned by corporations
  • Capital gains refund mechanism formulas for mutual funds that refl ect the new 33 percent top rate
  • Recovery tax rule for qualified disability trusts that refer to the new 33 percent top rate

Canada Child Benefit

Currently, benefits are provided through the Canada Child Tax Benefit and the Universal Child Care Benefit. Families with net income of $30,000 and one child receive $4,852 in child benefits, aſter tax, if their child is under the age of 6 and $3,916, for a
child aged 6 through 17.

These benefits are being replaced with the Canada Child Benefit that will provide a maximum annual amount of $6,400 per child under age 6 and up to $5,400 per child between ages 6 and 17. Families with less than $30,000 net income will receive the maximum benefit, with entitlement for the July 2016 to June 2017 benefit year based on adjusted family net income for the 2015 taxation year. Benefi ts will start in July 2016.

An additional amount up to $2,730 will be available to families caring for a child with a severe disability and eligible for the disability Tax Credit.

Other benefits being eliminated are the Children’s Fitness and Children’s Arts tax credits and income splitting for couples with at least one child younger than age 18. (Pension income splitting will not be affected.) Effective the 2016 taxation year and beyond, the Budget proposed elimination of the Family Tax Credit.

Canada Student Grants

The Budget proposed increases of 50 percent to Canada Student Grants:

from $2,000 to $3,000 per year for students from low-income families

from $800 to $1,200 per year for students from middle-income families

from $1,200 to $1,800 per year for part-time students

The increased grant amounts will be available for the 2016 – 2017 academic year.

The Budget also proposed that the current system to determine eligibility for Canada Student Loans and Grants be replaced by a
requirement for students to contribute a flat amount toward the cost of their education. The new eligibility thresholds are expected to be in place for the 2017 – 2018 academic year.

Education and Textbook Tax Credits

The Budget eliminated tax credits for post-secondary education and textbooks, effective January 1, 2017. These credits have helped students and/or their spouse/partner or supporting parent/grandparent reduce their tax bills.

Old Age Security

Old age security eligibility will revert back to age 65, rather than pushing the age to 67 for those born aſt er 1958, as had been proposed.

Guaranteed Income Supplement

Starting July 2016, the Guaranteed Income Supplement (GIS) top-up benefit will increase by up to $947 annually for single seniors. This represents a 10 percent increase in the total maximum GIS benefit available to the lowest-income single seniors.

Single seniors with annual income (excluding OAS and GIS benefits) of about $4,600 or less will receive the full increase of $947. This increased benefit will be reduced and will be completely phased out at an income level of about $8,400. Benefits will be adjusted quarterly with increases in the cost of living.

Mutual Funds

The Government has eliminated the ability to switch between investment funds held inside the same mutual fund corporation.
An exchange of shares of a mutual fund corporation or investment corporation that results in the investor switching funds will be considered a disposition at fair market value.

The new rules apply to dispositions aſter an unspecified date in September 2016, and do not apply to switches to a low-fee or no-fee version of a fund series already held.

Changes That Affect Business and Their Owners

Small Business Tax

Small business tax rates, which apply on the first $500,000 of active business income, were to decrease by 0.50 percent per year until 2019, when the rate would be 9 percent. The Budget held the small business tax rate at 10.5 percent.

Corporate Investment Tax

The Federal Government had already announced that effective January 1, 2016, the tax rate on investment income earned in a
Canadian-controlled private corporation (CCPC) would increase by 4 percent. In addition, also eff ective January 1, 2016, Part IV tax applicable to dividends earned by a CCPC has also been increased from 33 1/3 percent to 38 1/3 percent, with a similar change to the dividend refund rate on taxable dividends paid by a corporation.

Life Insurance Policy Transfers to Corporations

Before Budget Day, an individual shareholder with a non-arm’s-length relationship with a corporation could transfer a term or permanent life insurance policy to that corporation and receive an amount equal to the fair market value of the policy. The proceeds of disposition were deemed to be equal to the cash surrender value (CSV) of the transferred policy at the time of disposition, and tax would be charged on the difference between the CSV and the policy’s adjusted cost base. As a result, the
amount by which the fair market value exceeded the CSV was paid out without being taxed.

Aſter Budget Day, the excess of the fair market value over the cash surrender value of a life insurance policy transferred to a corporation or partnership was no longer a tax-free benefit.

More Budget Information

For complete Budget 2016 information, please visit budget.gc.ca on the Internet.