It’s probably fair to say that most Canadians will be happy to bid farewell to 2020, and there are still three months to go until the end of the year.
The pandemic has taken a heavy toll, from the loss of lives and jobs to the disruption of schooling and retirement. Financially, countless individuals and families across the country have been negatively impacted.
While it’s easy to focus on the negative, we believe there are lessons to be learned from the pandemic that will help us emerge stronger in the years ahead. Here are four of them.
Lesson 1: An emergency fund is essential
This year, countless Canadians have lost jobs, struggled with collapsing businesses or faced sharp declines in their investment returns. For many, this has resulted in a major cash crunch and enormous financial stress.
The current pandemic may be a once-in-a-100-years event, yet we can be confident that other crises will emerge during our lifetime. That’s why a key takeaway from this pandemic is the importance of establishing a financial safety net.
Whatever your financial situation, setting aside enough money to cover at least 3–6 months of your living expenses is not just a good idea – it’s essential.
Lesson 2: We can all reduce wasteful spending
Amid the financial fallout from the pandemic, many Canadians have been reviewing their spending with a more critical eye. With incomes squeezed or disappearing for many, it’s no surprise that people have been looking for ways to trim their monthly expenditures.
From rarely used subscriptions to frequent dining out, it’s up to each of us to decide what we consider essential versus frivolous. Yet for most of us there are opportunities to reduce unnecessary spending.
You work hard for your money, so you owe it to yourself to ensure you’re not wasting it needlessly.
Lesson 3: A portfolio loses value more easily than it gains
The global spread of COVID-19 rocked stock markets in early 2020, with the TSX Composite Index plunging by 21.6% in the first quarter of 2020 compared with end-2019. Although the sharp drop has been followed by a relatively rapid rebound, the index is still short of its February 2020 peak.
For investors, this fluctuation during the pandemic has provided an important reminder for investors: if your portfolio drops by 20%, it will take more than a 20% rise to return to the level it was at before. Why? Because a 20% drop in a $1,000 investment takes you to $800, but a 20% rebound takes you only up to $960.
The lesson here is that it can take longer to rise than to fall. So if you’ll need money in the short term to buy a house or for retirement income, your portfolio should generally favour low-volatility investments.
Lesson 4: Regular portfolio rebalancing should be a priority
Aligning your portfolio with your risk profile is an investment best practice, but it shouldn’t be a one-off event. Without regular portfolio rebalancing, a portfolio that was meant to be 70% equities may have risen to 90% in the pre-pandemic bull market.
The problem here is that when stock markets plunged earlier this year, this portfolio would have been exposed to much higher volatility and risk at 90% equities versus the intended 70%. With regular rebalancing, the portfolio would have locked in gains gradually during the bull market and faced the crash with only 70% equity exposure.
Rebalancing your portfolio regularly can mean forgoing some potential gains when markets are strong, but it also means you’ll be at a more comfortable risk level when tough times hit.
Translating lessons into action
The pandemic has shown us how difficult it is to plan for all eventualities. Yet is has also reminded us of the value of financial planning best practices.
To discuss how to apply these lessons to your situation and get on track to a better financial future, contact us contact us at firstname.lastname@example.org or at 647.349.7070.
Marriage is the perfect time to start shopping for life insurance. Why? Because it’s when you start sharing your life – and your debt – with the one you love.
Here’s why life insurance for married couples should go hand in hand with saying, “I do.”
A shared life means shared responsibilities
While it’s quite unromantic to think about all the legal and financial changes that come with signing a marriage license, I firmly believe in talking about it.
The reality is that marriage comes with a joint responsibility of sharing life together, which includes debt.
Even if you have no outstanding debt at the time of your wedding, you will undoubtedly be sharing some financial obligations with your spouse down the road, whether that’s a car, a house, graduate school or credit card debt.
With this financial future ahead of you, now’s the time for you and your spouse to review your insurance coverage. Having the right type and right amount of insurance will help ensure that your finances are protected from any accidents or lawsuits down the road.
You can lock in a good rate now
In general, life insurance premiums increase with age, so the earlier you lock in a rate, the more affordable it can be.
Some plans even let you cancel later, so it’s possible to get out of a policy if at some point you decide you don’t want it anymore. The one thing you can’t do is go back in time and purchase a new policy 10 years down the road at the lower rate that you’d be able to get at this age.
If you’re starting married life with fewer financial burdens – e.g. no house, no kids – taking on a small monthly premium won’t be a significant burden on your bank account now, but it will set you up with more affordable premiums for the future when you may face more financial stress.
Purchasing life insurance when you’re healthy also makes a lot of sense as it guarantees you’ll be covered no matter what happens to your health in the future.
When it’s not always happily ever after
When you’re preparing for your wedding day, it’s natural to think your love will last forever. Unfortunately, divorce becomes a reality for some couples, and not all of them are prepared for the financial fallout.
A report from the BMO Wealth Institute found that 70% of surveyed Canadians are financially unprepared when going through a divorce. What’s more, divorce can impact women particularly hard: 43% experienced a substantial decrease in household income after their marriage ended.
We hope you never have to go through a divorce. If you do, however, it’s critical to examine your current life insurance policies and any spousal coverage benefits to which you may be entitled. Your beneficiaries – the people you’re leaving money to – should also be re-examined.
Building a shared future together
Marriage is about building a life together with someone you love. And while it may not sound romantic, that includes a financial life.
Chances are you will need to buy life insurance at some point as part of your shared future – particularly if plan to have kids one day. So, as you start building your new married life together, keep in mind that this might also be a good time to apply for life insurance so you can take full advantage of your youthfulness and good health.
For a conversation about how to set your young family on the right financial path, contact us at email@example.com or at 647.349.7070.
Eliminating hunger and poverty. Curing diseases. Building a just society. These are just some of the big, audacious goals that charities are trying to tackle within Canada and around the world. These goals are lofty enough, then you throw in a global pandemic and this proposition becomes exponentially more difficult. Charities across the sector are reporting revenues down markedly, with significant layoffs in progress – and more on the horizon. The size and scope of these shifts is beyond anything that we have seen before, far exceeding what we saw in the 2008/2009 financial downturn and with such broad effects even the most diversified revenue bases are seriously affected.
But much like gazing up from the base of a mountain and imagining the climb to its peak, achieving these goals can seem like impossible tasks. And indeed, they can be if we focus only on our own capabilities or push ahead without a strategy for giving.
Across the country, charities are modifying existing programs, developing new ones, and implementing measures to help prevent the spread of the virus – all in dramatically changed working environments.
However, when communities work together with a clear, well-informed plan, we can not only scale mountains, we can push them aside and achieve a positive impact that shapes the world for the better.
Driving change with intentional giving
As an individual, you may wonder how giving $100 or $200 to a charity can possibly make a difference. But imagine what we can achieve across Canada by working together as a team.
If all of us who can donate a few hundred dollars per year on average – perhaps 1% of our annual income – that’s billions of dollars to put toward solving important social challenges and achieving real impact.
What’s needed to make this happen? Intentionality.
Canadians are happy to donate here and there when someone comes knocking on behalf of a charity, but often not much thought or planning goes into our giving. As a result, our dollars can end up having less impact than we’d hope, or we end up giving less than we can.
Fortunately, we can overcome this by adopting a more intentional approach to giving and working together as Canadians to more effectively drive change.
Overcoming barriers to giving
Of course, the reality is that Canadians already contribute generously to charitable causes. However, together we have the potential to do even more to build up our social infrastructure and achieve those big, audacious goals. Two things that can help us boost our collective impact are clarity and confidence.
- In the Thirty Years of Giving in Canada report, 69% of donors said they did not give more because they could not afford to do so. It is undoubtedly true that many Canadians already give as much as they can. But there are also many for whom uncertainty about their finances is the true barrier.
If you feel uncertain about your ability to give more, a trusted advisor can help you gain a clearer picture by assessing your current financial situation and helping you map out a financial roadmap. With more clarity on what you can afford to give, you’ll be in a better position to achieve significant impact.
- The Thirty Years of Giving in Canada report found that 29% of donors cite concerns about inefficient or ineffective use of money as a barrier preventing them from giving more. A degree of skepticism is certainly warranted: sadly, the occasional news of a charity scam, or an event such as the WE charity scandal, can cast an unfair shadow over the entire sector dedicated to the society’s well-being.
Rather than limiting your giving due to pessimism, however, you can also seek out options for giving with greater confidence. For example, accreditation initiatives such as Imagine Canada’s Standards Program can highlight organizations that are committed to high standards of governance and accountability. When you are more confident that your money will be put to good use, you’re more likely to give more.
Joining forces to shape the world
Companies and individuals give to causes that are worthy. Philanthropy has grown each year, the new year more than the one before. But in difficult times, people dig deeper and give more to the organizations they care most about.
Achieving transformative social change requires us to dream big and join forces. None of us can eliminate hunger and poverty, cure diseases, and build a just society on our own. But working together with a clear, intentional plan, we can move mountains and create a better Canada for the benefit of everyone.
Elke Rubach is President of Rubach Wealth, a Toronto-based firm that helps established professionals and business owners support the people and causes they care about through comprehensive wealth and retirement planning. Contact Elke at 647.349.7070 or by email at firstname.lastname@example.org.
Bruce MacDonald is President & CEO of Imagine Canada, a national non-profit organization that creates programs and resources to strengthen charities, promote corporate giving, and support the charitable sector. Contact Bruce at email@example.com
Guest Contributor – Shawn Rosenzweig, CPA, CA, B.Sc. – Partner SBLR
For business owners, the impacts of COVID-19 can be particularly difficult, and it becomes crucial to be proactive and respond rapidly.
As SBLR works closely with a large number of business owners, who are somehow being affected by the current situation, here are the five things we are asking them to consider doing during these uncertain times.
Make cash flow projections.
Given these unprecedented times, it is inevitable that everyone will suffer losses one way or another. Having said this, it is essential to get an immediate hold on your daily cash needs. Start by reassessing your short and long-term financial goals and create a weekly cash flow projection for the next 6 months.
The recommendation is to make a rolling cash flow for 24 weeks and keep updating your cash position for the beginning of every week. This will allow you to have a ‘picture’ and, since you have a history, you will have a better idea of the position you are going to be in and where the business is headed.
Remember that ‘knowledge is power’, and you need to be prepared with the facts to make business decisions as fast as possible.
Focus on your balance sheet.
Traditionally a business will primarily pay attention to its income statement, which presents profits and losses over a particular period of time. In today’s environment, it is important to shift the focus to the balance sheet, as it is vital to think of an approach that addresses payables and receivables.
Business owners must have the ability to prepare interim financial statements, by means of a financial program, and then have them interpreted properly. This analysis will let you know: how much debt your business has, how much capitalization, if you can take on any additional debt and how best to take advantage of the government programs available.
Your primary business goal should be to make it through the current crisis. Having an up to date balance sheet will provide insight on how to overcome any challenges.
Ensure access to capital.
In times like these, businesses need to preserve cash. There are actions you can take to finance the required capital your business needs to pull through this crisis.
Start by making adjustments to your existing credit facilities by negotiating flexible payments to minimize cash outflows. Look into your financial institution’s assistance programs, as it may allow you to skip payments, increase your line of credit, or utilize a larger percentage of your line of credit. Alternative lenders and Government Relief Programs can also provide added support.
Review your estate and tax planning.
When was the last time you updated your estate and tax planning? Now is the perfect time to review this in detail. More importantly, if you do not have any plan in place, you should consider setting something up. Look into that long-overdue estate freeze, estate re-freeze, transfer of assets to family trusts, capital gains planning or gifts to children/grandchildren. Now that valuations are suppressed in various situations, it will be a good time to carry out a lot of the estate and tax planning mechanisms available.
Make rational decisions.
Given the current economic environment, businesses are being forced to make hard decisions on how to operate. In any business decision that has to be made, it becomes imperative to take emotions out of the equation. The best way to do so is by having discussions with your trusted advisors, be it a family member or an outside professional. This will ensure that no decision is made in the heat of the moment and that you take a calm and reflective approach in taking the next steps for your business.
As previously mentioned, the goal is to come out of this crisis in the best shape possible. View this as a temporary situation and remain certain that, no matter what happens, this too shall pass.
In Canada, corporations can play a key role in personal financial planning.
In this article, we share tips for small business owners to make smart use of their corporation to optimize their tax bills.
Paying yourself efficiently
As a small business owner, how you choose to pay yourself can have significant tax implications.
Consider these questions:
- Do you pay yourself a salary, dividends or both?
- Do you spend every single dollar you earn in your small business or do you have an annual surplus?
- What are the tax implications of leaving a surplus in your company versus withdrawing it?
Imagine your small business generates a profit of $300,000. You can choose to pay yourself this full amount as a salary or to leave some of it in the corporation as retained earnings.
||$124,000 personal income tax
||$46,000 personal income tax
$22,500 corporate income tax
* Assumes the small business owner is an Ontario resident paying the top marginal income tax rate.
Although this is a simplified example, there can clearly be significant differences in your overall tax bill (corporate + personal) depending on how and how much you choose to pay yourself from your corporation.
Any surplus funds you leave in your corporation can be used to run or expand your small business, but you can also choose to invest this money.
Your corporate investment portfolio can then earn passive income for you in the form of interest, dividends, rents, royalties and capital gains. This passive income will be taxed within the corporation, which may result in a lower tax bill compared with holding the same investments in a personal capacity.
Planning for capital gains at death
No matter how successful they are in running their corporation, many small business owners have a blind spot: what happens when they die?
In general, your estate will face a tax bill for capital gains upon your death. There are many variables that go into calculating these capital gains, but the calculation is premised on the idea of your assets being sold at fair market value when you die.
If your corporation is worth, say, $1 million at the time of your death, this could result in a capital gains tax bill of approximately $250,000.
Even if you have this much in cash sitting inside the corporation, the challenge is that the capital gains tax is owned personally and must be paid by your estate, not your corporation.
The corporation could pay a dividend to your estate to pay the capital gains tax, but this would then be subject to a separate dividend tax of potentially up to 50%.
To avoid this double tax hit, it’s important as a small business owner to plan for capital gains at death. One tax-efficient way to do this is with a corporate-owned life insurance policy.
Maximizing tax efficiency with corporate life insurance
Corporate-owned life insurance can be a powerful tool for boosting the tax efficiency of your small business.
Here are two ways it can help maximize the value of both your corporation and estate:
- A participating whole life insurance policy consists of a fixed death benefit and a variable cash value component that participates in the insurance company’s investment pool. When this investment pool grows, so does the cash value of your corporate life insurance policy – tax free! With compound interest, the tax-free growth of your policy’s cash value can offer a significant advantage compared with other types of investments held within your corporation as income generated from these is taxed annually.
- Upon your death, all the money inside the policy (including all the growth) will be paid out tax free to your corporation. This money can then be transferred either completely or mostly tax free from the corporation to your estate. With proper planning, this insurance payout can be used to cover the tax on capital gains at death owed by your estate, potentially resulting in significant tax savings compared to withdrawing money from the corporation as a dividend.
Estate planning advantages
As a small business owner, you want to pass on as much of the hard-earned value within your corporation as possible to your loved ones or other beneficiaries.
In addition to minimizing the impact of taxes on your estate upon your death, corporate-owned life insurance offers two other key advantages related to estate planning:
- Confidentiality. The beneficiaries of a life insurance policy are confidential, allowing you to leave money to others while keeping this information private.
- Speed. Life insurance proceeds do not need to be processed through the estate or pay probate fees, so they can usually be paid out within a few weeks of your death. In contrast, winding down an estate can sometimes take years.
Tax planning for small business owners
For small business owners, understanding Canada’s tax laws can result in enormous savings both during their lifetime and upon their death.
By making smart decisions about how you pay yourself and using tools like corporate-owned life insurance, you can have more money to enjoy during your lifetime and more wealth to pass on to the next generation.
To discuss how tax planning can benefit your small business, contact us at firstname.lastname@example.org to schedule a call with a Rubach Wealth advisor.
While various government programs have helped the country through these challenging times, this support has been incredibly expensive. Sooner or later, the government will need to take proactive steps to tackle an enormous deficit.
Unfortunately, this means tax increases may be on the horizon.
If you are concerned about the prospects of a rising tax bill and want to stay ahead of the curve, we highlight some tax strategies that may help.
Strategies for optimizing your taxes
Effective tax planning is highly dependent on your personal situation, so there is no one-size-fits-all solution. However, here are 4 strategies that may be useful in optimizing your tax situation:
- Estate freeze.
An estate freeze can be used to defer the realization of taxable capital gains in the value of a family business. After a properly structured freeze, any further growth in the company’s value will accrue not to the owner, but rather to their successors or to a discretionary trust set up as part of the freeze.
Estate freezes have many potential benefits, including locking in probate tax liabilities, locking in a purchase price for a business, providing retirement income and strengthening creditor protection.
- Capital losses.
Stock markets around the world have plunged during the pandemic, and despite some strong rebounds, many investors have stock portfolios with unrealized losses. It some situations, it can be beneficial from a tax perspective to sell holdings and trigger capital losses to offset capital gains.
Capital losses can be applied retroactively up to three years and carried forward indefinitely. However, there are restrictions on how such losses can be applied, so any decisions should be made with advice from a tax professional.
- Prescribed rate loan.
A prescribed rate loan allows individuals with high marginal tax rates to transfer investment income to family members with low marginal tax rates.
Under this strategy, the high-income earner makes a loan to a family member or a family trust, which invests the money and earns investment income. The high-income earner receives interest payments at a rate prescribed by CRA (currently 1%) while the remaining investment income can be distributed to the family member(s) and will be taxed at their lower tax rate.
- Spreading corporate losses.
Owners with multiple businesses are not allowed to directly consolidate their profits and losses across their corporate group to minimize their overall tax bill. However, there are permissible tax strategies that can be used to spread at least some corporate losses and achieve similar outcomes.
Management fees are one example, although there are restrictions on how this strategy can be applied.
Being proactive ahead of potential tax increases
Nothing is certain about how the government will navigate these challenging times, but one thing is clear: tax increases are a real possibility as the government determines how to pay for its extensive pandemic relief programs.
Whatever happens in one month or one year, there are steps you can take now to proactively optimize your tax exposure and extract any corporate surpluses in a tax-efficient manner.
To discuss how tax strategies can help to strengthen your financial situation, contact us at email@example.com to schedule a call with a Rubach Wealth advisor.