360 Private Wealth Management Natural Wealth® Process: Tax & Estate 2020
In the second quarter of each calendar year, the Natural Wealth® Process emphasizes tax and estate planning activities in the financial life planning process.
Let’s begin by saying that we live in a pretty incredible country. This has only been reinforced over the last several weeks as the world grapples with the COVID-19 pandemic. As Canadians we benefit greatly from all the services various levels of government provide, not the least of which is our publicly-funded health care system. It may not be perfect, but for the most part Canadians can access medical services and prescription medications with minimal cost on a timely basis. Not all countries can make that claim. Our neighbors to the south live with the constant threat that a significant medical situation can burn through accumulated wealth very quickly, even where households carry private medical insurance. The COVID-19 pandemic has only emphasized the advantage of a public-funded health care system. We are very, very fortunate to have the system we have, even with its weaknesses.
Government services and infrastructure cost large sums of money to operate, build, and maintain. The cost to Canadian citizens is the taxes we pay. Because of our relatively sparse population and large land mass combined with the level of services we as Canadians enjoy, we pay a relatively high level of taxes when compared to some other countries. Most of us understand and accept this.
We pay tax on the income we earn, we pay tax on the net income we spend in the form of sales taxes, and we pay taxes on real estate we own. The layers of tax we pay add up quickly and can total well into the hundreds of thousands of dollars over a lifetime for even the most modest of income earners and property owners. As Canadians, we acknowledge that we must pay taxes. That said, the Income Tax Act and other tax legislation does not say we have to pay any more than our fair share. Given the amount of new spending and the resulting public debt governments are incurring during this extraordinary Covid-19 pandemic, we can only anticipate tax rates will likely rise in one way or another as governments look for ways to pay down the new debt incurred. Tax minimization strategies will become even more important in the years to come as part of a complete financial life plan.
To understand the amount of tax an average Canadian pays, it’s worth a quick trip to the Fraser Institute’s Tax Freedom Day Calculator: https://www.fraserinstitute.org/tax-freedom-day-calculator. The calculator puts the overall amount of tax an average Canadian household pays each year in perspective. It does this by showing how long each year you work to pay all forms of taxes before you get to “keep” (spend or save) the difference based on the amount of income you earn. The result is your “Tax Freedom Day”, after which the amount of income going to various taxes theoretically ends. It is a simplistic calculation and does not take into account the full impact of the types of income an individual will earn, nor does it take into account the saving and spending habits of a particular individual. It is meant to illustrate the impact of taxes in our lives. Note that I do not personally endorse the policies of the Fraser Institute. It is a right-leaning think tank. I like the Tax Freedom Day Calculator tool as a way of bringing to people’s attention how much tax they may be paying. Hopefully, in some cases, the exercise will motivate them to place some emphasis on organizing their finances to minimize tax, as much as possible, as part of the wealth building exercise. The question that the Tax Freedom Day exercise should trigger is “How can I organize my finances and spending in such a way as to minimize my household taxes payable and, make my own household “Tax Freedom Day” a little earlier in the year than the average in my province for my level of income?”. Proper planning and asset and income structuring can minimize our overall tax household tax bill for many households.Tax planning starts with knowing how income is taxed. First there is income tax, the tax we pay on the various streams of income we earn from our work, pensions, and savings and investments. Different types of income are taxed differently. Capital gains and eligible dividends are taxed at a lower rate than net employment income and interest. Certain types of income may be eligible for additional deductions and tax credits. A basic knowledge of income taxation can have a material impact on the amount of net spendable (or investable!) income you have left after paying the income tax you owe.
General Sales Tax (GST), Provincial Sales Tax (PST) and, in certain provinces (i.e. Ontario), the combined Harmonized Sales Tax (HST) are applied on all non-exempt purchases of possessions, services, and entertainment events. Municipalities collect real estate property taxes and may also apply hospitality and event taxes within their jurisdictions. The fact is that consumption and ownership of possessions increases the overall amount of tax we pay as households. Certain purchases are necessary. Others are discretionary. The trick to minimizing sales and other consumption taxes is to be mindful of our spending.
Estate planning can be seen as an extension of tax planning. Estate planning involves the effective management of our wealth while living, the distribution of ones accumulated wealth while alive, and at death to those whom we hope to benefit most from our life’s work and accumulation activities. Estate planning involves titling assets correctly, drafting wills and putting any other estate planning structures in place (i.e. trusts) where sensible, developing gifting strategies and any other strategies to minimize taxes and fees payable, and maximize our estates for our beneficiaries during our lifetime and after our death.
The cornerstone of an effective estate plan is a valid will. We urge all of our clients to draft a will (preferably with a lawyer) and then to review it, and any other estate planning documents, annually and additionally in the event of any significant life event (entering a new relationship, splitting from a life partner, death of a life partner, birth or death of any other intended beneficiaries, significant change in financial situation…). Wills and other estate planning documents are not static documents. Life events can make existing wills and other estate planning strategies obsolete or even invalid, depending on the situation and jurisdiction involved. It’s essential that anyone with assets draft a will to ensure the wealth they amass goes to those whom they wish to benefit most from his or her life’s work and savings. It’s important that we review our wills and other estate planning documents regularly to ensure they continue to reflect our wishes over our lifetimes.
The most unfortunate effect of the current COVID-19 pandemic is the increase in mortality of those who contract the disease. Not everyone who is dying is older than 60 or visibly infirm or unhealthy. A significant percentage of those dying are under age 60 and living productive and fulfilling lives. If you were to be diagnosed with COVID-19 and were required to go into the hospital for treatment, would you be comfortable that your estate plan, and the associated documents and structures, reflect your wishes with regard to how you want your wealth to be distributed, if you don’t make it out of the hospital? If not, there is no time like the present to undertake a review and to update of your estate plans and any documents and structures.
Let’s work together to make sure your tax and estate plans are as effective and efficient as possible. We will highlight some aspects of both in blogposts over the next few weeks and provide strategies for you to apply in your household tax and estate planning. We will also be focusing on a few client service activities around these areas over the next 90 days. Please watch for specific communications about applicable tax and estate planning initiatives we are looking at for your household.
Note that the Government of Canada has extended the tax filing deadline for 2019 for individuals to June 1, 2020 (normally the deadline is April 30 each year) as part of the Covid-19 Economic Response Plan (CERP) programs. If you have a balance owing on filing you will have until August 31, 2020 to pay the balance without any interest or penalties being applied. You can learn more about these changes and other CERP program initiatives at:
As part of our ongoing financial life planning service, we ask all our client households to send us copies of their completed income tax returns as filed for the previous tax year along with the income tax Notice of Assessment (NOA) received from the Canada Revenue Agency (CRA) for our records and review. If you have already filed your 2019 income tax return and received your NOA, please take a bit of time to submit your tax return and NOA to us. Those of you who have yet to file, please commit to doing the same. To those of you who have sent already sent in your 2019 returns and NOA’s, thank you! We will review the tax returns and NOA’s submitted and, where we think an opportunity might exist to reduce taxes, we will connect with you to discuss the opportunity. Thank you in advance for helping us help you!
Stay tuned for additional communications on tax and estate planning matters in coming weeks. If you have questions or need input on tax and estate planning, or any other aspect of your financial life plan, please call or email us.
David J. Luke, CFP, RFP, CLU, CH.F.C., CIM | Financial Advisor
360 Private Wealth Management | Manulife Securities Incorporated
Unit 1 – 25 Scurfield Boulevard, Winnipeg, MB R3Y 1G4
Main Office 204.925.5868 | Direct 204.925.2073| Fax 204.925.2263 | Toll Free 844.688.3656
This publication contained opinions of the writer and may not reflect opinions of Manulife Securities Incorporated. The information contained herein was obtained from sources believed to be reliable, but no representation, or warranty, express or implied, is made by the writer of Manulife Securities Incorporated or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any of the securities. The securities discussed in this publication may not be eligible for sale in some jurisdictions. If you are not a Canadian resident, this report should not have been delivered to you. This publication is not meant to provide legal or account advice. As each situation is different you should consult your own professional Advisors for advice based on your specific circumstances.
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