Getting Financially Fit for Your Newborn’s Arrival

By John Tabet, November 10, 2020 This is the second article in a two-part series on charitable giving. Read Part I here. For high-net-worth and ultra-high-net-worth families, leaving a lasting legacy through philanthropy is very often a central priority that spans multiple generations. Many of my own clients – and their millennial children – exhibit a very strong desire to use their wealth to support a wide range of worthy causes, from racial justice to anti-poverty to environmental sustainability. They are often surprised to learn, however, that setting up a foundation and making cash donations is typically not the best approach to supporting their cherished causes. For most wealthy individuals and families, making in-kind donations of shares via a donor-advised fund is the most attractive option for philanthropic giving. Why not a foundation? Setting up and maintaining a charitable foundation is, from an administrative perspective, very much like creating and maintaining a business. The legal and accounting work that goes into establishing a foundation will typically cost in the neighbourhood of $10,000. And while foundations do not pay tax, they are still required to file an annual return. That means yearly accounting expenses, which come on top of the ongoing administrative work of managing assets held within the foundation. If foundations were the only option for carrying out a philanthropic plan, they would be well worth the effort and expense. But there’s a better way. Donor-advised funds A donor-advised fund is a third-party vehicle – offered by most community foundations and some asset management firms – that effectively outsources the functions that would normally be performed by a foundation, while achieving all of the same charitable goals. Donor-advised funds offer tremendous flexibility and convenience, as they allow you to make a large donation in a given year, claim the donation tax credit for that year, but disburse the funds in later years to a variety of charities. With a donor-advised fund, you simply make the gift and provide instructions on how to disburse it, and the organization that runs the fund takes care of the rest. The fee associated with this service is generally low – typically 1.0% to 1.5% for a $250,000 donor-advised fund. In some instances, the fee is based on the number of donation grants you request. In both cases, the fee is not tax deductible, but it does not reduce the amount your donation tax credit is based on. In short, with a donor-advised fund, you’ll save time and money, and you’ll be able to focus your philanthropic efforts on the joy of giving, rather than on administration and accounting. In-kind stock donations One of the best ways to maximize the amount you give – and the tax benefit of giving – is to make in-kind donations of stock, rather than cash donations generated from realized gains. To illustrate, let’s look at a hypothetical example. Geneviève is a 32 year old attorney living in Montreal. Five years ago, she used $500,000 in family funds gifted to her to purchase shares of Facebook. The shares are now worth $1 million, but Geneviève just received a $5 million bequest on the passing of her grandmother. So she decides to use the full value of her Facebook shares to make a generous donation, via a donor-advised fund, to the children’s ward of her local hospital, and a local organization that supports women victimized by domestic abuse. Here are her options: Sell and donate the proceeds The sale of the shares would generate $1 million in cash, and 50% of the $500,000 capital gain – $250,000 – would be subject to a tax rate equivalent to Geneviève’s highest marginal rate, which is about 50%. This would result in a tax bill of about $125,000, leaving $875,000 to donate to her charities of choice. Her tax credit would then be calculated based on the donation amount of $875,000. Donate the shares in-kind Gifting the shares means Geneviève would not be subject to capital gains tax, as our tax code says that when you donate shares to charity in-kind, you don’t have to claim a capital gain. This means the charity would receive a donation valued at $1 million rather than $875,000, and Geneviève would get a donation tax credit calculated on $1 million rather than $875,000. Conclusion With the right planning, you can maximize the benefit received by your charities of choice, and increase the tax benefits of your generosity. Working closely with an experienced and knowledgeable Investment Advisor ensures that each component of your philanthropic vision is planned and executed as efficiently as possible, aligning all aspects of your intergenerational wealth plan – investment management, philanthropy and estate planning – with the values that define who you are.

By John Tabet, November 10, 2020 This is the first article in a two-part series on charitable giving. Read Part II here. Over the last number of years, my interactions with clients have shown a clear and undeniable trend: today’s investor is moving away from the conventional separation of wealth creation and personal values, and more towards the complete integration of socially conscious priorities into the holistic wealth planning process. On the investment side, this often takes the form of increased interest in socially responsible investment funds, which in recent years have gone from a market niche to a core offering for virtually all asset management firms. But the most direct way of expressing a commitment to a cherished cause, apart from the gift of your time, is through monetary donations. In this article series, I’ll provide an overview of how you can incorporate charitable giving into an optimally structured wealth plan, and explain how to maximize the benefit of your monetary gifts – both for your charity of choice and yourself. Different types of donations There are three main ways to make monetary donations: Giving Simple, one-off acts of support, such as buying a raffle ticket at a charity golf tournament or supporting a church bake sale. Being charitable Personal engagement with a specific organization that aligns with your values, and making monthly or annual financial gifts to support it. Philanthropy The option of choice for high-net-worth and ultra-high-net-worth individuals and families. Typically, this involves looking out over a longer time horizon and entails a systematic approach to donating very large sums to one or more causes. In this article we’ll focus on being charitable; in the next installment of the series we’ll take a closer look at philanthropy. Being charitable For most people in the wealth accumulation stage of their financial journey, charitable giving will involve annual donation amounts ranging from hundreds to thousands of dollars, spread out over multiple charities or focused on a single cause. When you donate to a registered charity you become eligible for tax credits, making charitable giving a win-win for both you and your charity of choice. Let’s look at an example: Andrea makes $100,000 a year as an app developer in Toronto. She donates $1,000 in 2019 to a registered charity focused on environmental sustainability. Current tax rules allow for a federal credit amounting to 15% on the first $200 of the donation and 29% on the remaining $800, for a total of $262. On the provincial level, Andrea can claim 5.05% on the first $200 and 11.16% on the remaining $800, for a total of $99.38. The combined federal and provincial tax credit on her $1,000 donation reduces her income tax bill by $361.38. This example represents a fairly straightforward case, but our tax rules include a number of other provisions that can enhance your credit amount and add significant flexibility to how you claim your credits. These include: An enhanced credit rate of 33% on eligible amounts over $200 for taxpayers who earn more than $200,000 annually. The ability to carry forward donation credits to any of the five years subsequent to the year the donation was made. The ability to transfer donation credits to your spouse or common-law partner and combine them on a single tax return. Conclusion Charitable giving is one of the best ways to meaningfully support causes that engage and inspire our natural impulse to help those less fortunate than we are and join with those dedicated to making our world a better place. Working with your Investment Advisor and accountant can make this immensely satisfying activity financially beneficial for you as well.

By iA Private Wealth, March 06, 2020 Meet early retirees Clara and Charlie, both 63 years old. Charlie has a $3,200 monthly defined benefit pension through his employer and still does occasional consultation work. In total, he earns about $60,000 annually. Meanwhile, Clara’s work pension amounts to about $2,300 monthly, or $27,600 annually, putting her in a lower tax bracket than Charlie. Now that the couple is generating less income than they did when they were both working full time, they’re looking for ways to lower their tax burden to keep as much of their money as possible. Thanks to Canada’s pension income-splitting rules, Clara and Charlie have the potential to reduce their overall income taxes by dividing up the money they receive from their respective pension plans. Based on their age and the eligibility requirements, Charlie can give up to half of his pension income to Clara for tax purposes. In short, because Charlie is in a higher tax bracket, he can split his income with Clara and drop into a lower tax bracket without bumping her into a higher one. Once you understand the age and eligible income rules, taking advantage of pension splitting is as simple as completing a tax form each year. No money has to change hands. What is pension splitting? Pension splitting allows you to allocate up to 50% of your eligible pension income with your spouse or common-law partner for income tax purposes. To qualify, you and your spouse or partner must both be Canadian residents, be living together at the end of the tax year, and remain together for a period of 90 days or more at the beginning of the next tax year. What qualifies as eligible pension income? For those under age 65, the most common form of eligible income is from a registered company pension plan, whether defined benefit or defined contribution. Individuals who are age 55 or older are eligible to split pension income with their spouses. Individuals without a registered pension plan can also take advantage of this tax strategy by converting their Registered Retirement Savings Plans (RRSPs) or deferred profit-sharing plans into income through a life annuity or a Registered Retirement Income Fund (RRIF). It’s important to note, however, that this income doesn’t qualify for splitting until after age 65. In terms of government pension sources, the Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) isn’t considered eligible income, although CPP/QPP benefits can be split based on a separate set of “sharing” rules. Old Age Security (OAS) payments also aren’t eligible income. The complete list of eligible pension income sources can be found on the Government of Canada website. Who should take advantage of pension splitting? In general, if one of the pension earners is in a higher marginal tax bracket than their spouse, then pension splitting is worth considering. Take advantage of our retirement planning support Other potential tax-management strategies related to pension income splitting include the pension tax credit for qualifying individuals. When it comes to planning for retirement, there’s a lot to think about, but we can help. Learn more about how you can get the most out of your retirement income by contacting one of our Investment Advisors today.

By iA Private Wealth, November 05, 2019 Stay-at-home parents know that it’s a full-time job, and then some! Taking time to care for young children can include leaving the workforce or reducing your hours. Naturally, this impacts your earnings and how much you contribute to the Canada Pension Plan (CPP), or QPP in Quebec. But it shouldn’t impact the quality of your retirement. Fortunately, there is a special CPP provision called the Child Rearing Benefit that allows you to exclude years of low (or no) income from your benefits calculation. This accounts for periods when you were the primary caregiver raising your children under the age of seven, and can put more money in your pocket to fund your later years. However, the benefit isn’t automatic – you have to apply for it. The application form for the CPP retirement pension includes a section on child-rearing (section 11A). If you’re already receiving a CPP benefit, you’ll need to complete the Child-Rearing Provision (CPP) Request Form. Doing so ensures you’ll receive the highest possible benefit by compensating for periods when you were paid less. Even better news: The benefit is fully retroactive and could also help you meet the eligibility requirements for a CPP disability benefit, should you need it, as well as contributory requirements to pass along benefits to your estate and survivors in the event of your death. Eligibility You must have not worked or had low earnings while being the primary caregiver of a child under the age of seven born after December 1958 (either parent can claim this benefit). You must have been eligible to receive the family allowance or child tax benefit. How to apply You must provide one of the following for each child: The child’s name, date of birth and SIN number, or an original or certified true copy of the child’s birth certificate. When to apply You can apply at the same time you apply for any CPP benefit, or using the Child-Rearing Provision (CPP) Request Form, as noted above. Other provisions that protect benefits include the disability exclusion and over-65 dropout. Knowing the factors that impact your monthly CPP payment and what you can expect to receive is key to retirement income planning. Note to Quebec residents The CPP operates throughout Canada, except in Quebec, where the QPP provides similar benefits. The CPP and QPP work together to ensure that all contributors are protected, no matter where they live. You can find the QPP application form here. Your partners in retirement income planning Caring for young children is hard work – and truly a full-time job. With so much to think about, you may feel overwhelmed, but we’re here to help. Learn more about managing your retirement income sources and getting the most out of CPP by contacting us today.

By iA Private Wealth, October 04, 2019 As a retiree, it’s important to understand how the eligible Canadian dividend income you may receive affects your Old Age Security (OAS) – and whether to do anything about it. Here’s what you need to know to make an informed decision about managing this aspect of your retirement income. Eligible Canadian dividends and your taxes Remember that for the purposes of your tax return, you’re required to gross-up your Canadian dividends by 38% and declare that amount as income. In other words, if you collect $100 in dividends, you report it as having received $138 in income. This gross-up normally doesn’t matter because the tax on dividends is still lower than on, say, employment income. But if you’re a senior, be aware that the dividend gross-up can push you over the OAS clawback threshold. From grossing up to giving up In general, if your net income before adjustments (on line 234 of your tax return) exceeds a certain threshold ($79,054 for 2020), you’ll have to repay part or all of your OAS benefits for that year. If you’re not managing your income sources carefully enough, you could unintentionally compromise how much OAS you’re eligible for. For example, a senior who earns $65,000 from pensions and another $13,000 in dividends may think they come in under the limit, but are actually pushed over it by the gross-up. The clawback is 15% of the amount by which your income exceeds the threshold. Put differently, your OAS will drop by 15 cents for every dollar your net income exceeds the threshold. If your income is high enough, it will result in clawback that brings your OAS benefit to $0. Do you need to take action? Besides dividends, interest and capital gains can serve as other sources of investment income. They’re all treated differently from a tax perspective and the type of accounts in which they’re held. If you’re looking to lower your income from taxable investments on line 234, strategies can include keeping eligible dividends in a Tax-Free Savings Account (TFSA), or focusing on generating capital gains, since only 50% are subject to tax. Because interest income is most highly taxed, there’s no advantage to replacing your dividend earners with interest-bearing investments – even with the OAS clawback, your taxes payable will still be higher than with dividends. Reducing clawback with a T-SWP Most mutual fund companies offer T-SWP (Tax-Efficient Systematic Withdrawal Plan) series of their products, which permit the withdrawal of capital before investment earnings. These “return of capital” (ROC) distributions reduce the adjusted cost base (ACB) of your investment for tax purposes. Because ROC is just your own money coming back to you, it isn’t considered taxable and OAS clawback rules don’t apply. However, capital gains are eventually triggered when you sell your investment or when your ACB reaches zero. While a T-SWP provides the advantage of helping to keep your taxable income low to avoid clawback, you need to stay aware of your ACB and if, or when, it reaches zero. At that point, any withdrawals from a T-SWP would be fully taxable and subject to OAS clawback rules, albeit in a more controlled fashion if anticipated and properly planned for. Let us help Reducing your taxable income and avoiding the OAS clawback starts with understanding and assessing your retirement income sources. We can help you evaluate your tax situation while ensuring you don’t lose sight of the bigger picture about your finances, including your short- and long-term goals, risk tolerance and unique needs. Learn more about maximizing your retirement income by contacting us today.