financial planning

It’s RRSP and TFSA season again

Registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) are always topical at the beginning of the year. And, for anyone considering these options, there are two primary considerations right now: what new available contribution room you may have for your TFSA, and that you have the first 60 days of the year to make an RRSP contribution against your previous year’s income.

To help you understand the differences between the two tax-sheltered investment vehicles, we put together a general FAQ. However, before going over the mechanics, we want to stress how important it is to use these programs in your financial plan. There is almost no circumstance where it would make sense to hold investments that generate growth or income in a non-registered account rather than in a TFSA.

As an example of the power of the RRSP, we ran some numbers to consider. This is based on a high-income earner, age 30, and compares saving within an RRSP and investing the resulting tax savings as well, for 41 years, until age 71, and then cashing it all in and paying tax thereon, versus simply saving in a non-registered account.

In the example, the individual invested $24,000 per year in a portfolio that generated an income of 5% per year. We used a tax rate of 50%. At age 71, the after-tax cash savings in the hands of the individual, having used the RRSP program, is $808,000 greater than the traditional non-registered plan.

As you can see, the advantage of the RRSP is extremely significant and cannot be overstated.

TFSA basics

The tax-free savings account program began in 2009 to provide Canadians with an account to contribute and invest money tax-free throughout their lifetime. Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed, as well as any income earned in the account (investment income and capital gains) are tax-free, even when it is withdrawn.

The allowable contribution room for a TFSA has changed over the years, and can be seen in Table 1.

TFSA has many important features:

to have one, you must be 18 years of age or older with a valid social insurance number,
there is a tax-free accumulation of income and gains,
you have tax-free withdrawals – at any time, for any reason,
they have no impact on income-tested benefits such as child tax benefits and guaranteed income supplement,
you can invest in any RRSP-qualified investment, such as mutual funds, ETFs, stocks, GICs, etc.,
the interest on money borrowed to contribute is not tax-deductible,
no attribution rules apply – it’s good for income splitting between spouses and can be transferred to the surviving spouse’s TFSA if they are the designated beneficiary,
to avoid penalties, you must be careful to not over-contribute, and
you can recontribute amounts withdrawn in previous years, and there is a 1% penalty per month if recontributed in the same calendar year.

RRSP basics

The registered retirement savings plan program was introduced by the Canadian government in 1957 to help Canadians save for retirement. All income accumulates on a tax-deferred basis and contributions are deducted against your taxable income in that particular tax year. As of 2020, the RRSP deduction limit is 18% of your earned income, to a maximum of $27,230. You should always check this amount with your accountant and/or CRA.

The important features of an RRSP include the contribution period, which is from Jan. 1 to the 60th day of the following year, and that the maximum age to contribute is 71. There is no minimum age for contributing, but, starting in the year after the year you turn 71, you must start making specified annual withdrawals from your RRSP, which now becomes a registered retirement income fund (RRIF).

The Home Buyers’ Plan (HBP) allows you to withdraw from your RRSP to buy or build your first home. In this case, the money must be in the RRSP for 90 days before withdrawal is permitted, and you can withdraw up to $35,000. Regarding repayment of the withdrawal, participants must repay 1/15th per year (starting in year 2), with the total amount paid off in 15 years.

The Lifelong Learning Plan (LLP) allows you to withdraw funds from your RRSP to finance full-time training or education expenses for you or your spouse or common-law partner. You can participate in the LLP for yourself, while your spouse or common-law partner participates in the LLP for him or herself; you can both participate in the LLP for either of you; or you can participate in the LLP for each other. Withdrawals of up to $10,000 in a calendar year and up to total of $20,000 are permitted, and participants must repay 1/10th of the amount withdrawn per year, with the total amount paid off in 10 years.

Philip Levinson, CPA, CA, and Brent Davis are associates at ZLC Financial, a boutique financial services firm that has served the Vancouver community for more than 70 years. Each individual’s needs are unique and warrant a customized solution. Should you have any questions about the information in this article, visit zlc.net or call 604-688-7208.

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Disclaimer: This information is not to be construed as investment, legal, taxation or account advice, nor as an offer to sell or the solicitation of an offer to buy any securities. It is designed only to educate and inform you of strategies and products currently available. The views expressed in this commentary are those of the authors alone and are not necessarily those of ZLC Financial or Monarch Wealth Corp. As each situation is different, please seek advice based on your specific circumstance.

Consider soul maintenance

In a recent article, I learned that Gal Gadot, the famous Israeli actor, says the prayer Modeh Ani (“I give thanks”) when she wakes up. Even famous people can be grateful for “getting their souls back” each morning.

In ancient times, sleep was considered analogous to death in some ways. As a study in contrast, the Christian response for children was: “If I die before I wake, I pray the Lord my soul to take.” The Jewish response is “Hey! Thanks so much for keeping me alive each morning!”

I have always been a morning person (annoying, I know). Although my household is busy every day, we always manage an unconventional communal Modeh Ani as we go out the door. Maybe it was before catching the school bus in those pre-COVID days or, now, just before we take a walk with the dog. In any case, by the time my kids are lining up for their pandemic screening checks and hand sanitizer, we’ve sung this happy and grateful prayer.

Once something is a part of our routine, Jewish or not, we often don’t reflect on it again – but it’s worth remembering. Reading that Gadot, also a mom, embraced a similar routine was sort of heartening. Then, I happened to be studying Daf Yomi, a page a day of Talmud, and an interesting question arose in Eruvin 70a. What if one made an arrangement with someone so that there would be an eruv, a symbolic communal space, that allowed for carrying on Shabbat, and that person died? What happens then?

Almost immediately, the Talmud discusses the person’s heir. There’s no elaboration on the details, the heir was apparently known to everyone. There’s no mention of the executor or the lawyer the family must hire. There’s none of that. I imagined what it would be like if somebody near to me died suddenly on Friday afternoon, and what might happen next.

Thousands of years ago, people didn’t live as long. They lacked the kind of warnings we usually have now, through medical diagnoses and tests and surgeries. Mortality in general was higher, although everyone still dies. Rather, without modern medication and medical interventions, one expected a fair number of infants, children and adults to die before their time.

The recent rise in COVID cases in my home province of Manitoba and the rising mortality numbers have brought all this back into focus. In the last little while, two men in their 40s have died here. My husband and I are in our 40s. We have kids in grade school. We have a dog. And a house. And….

Based on recent experiences with the deaths of relatives and friends, we often had an idea ahead of time that the person was ill or that things weren’t looking good. Yet it isn’t unusual to hear of family members still tying up the deceased person’s affairs for many months (or years) later.

This pandemic is a sobering wake-up call. A hundred years ago, during the flu pandemic, young parents died very suddenly and left orphans. There were children, spouses, siblings and parents who remained. We’re facing something similar in 2020.

On the one hand, we’re lucky because Judaism offers us very sturdy mourning practices. We’ve continued to innovate, too, relying on technology to mourn together. The last few days, I have joined a rabbi online as she says Kaddish. She waits, patiently, until she sees 10 people pop up, viewing her Twitter or Instagram live feed, thanks everyone for helping her, announces her mother’s name, and begins Kaddish. Given the pandemic’s enormous effects, this has been an intimate and surprisingly moving way to support someone in need, virtually.

On the other hand, we’re out of practise with the notion that somebody can just “up and die.” Most of us don’t have immediate plans in place, but we should. Parents all over the world are scared by the notion that they might fall ill, die and leave their kids and spouse alone. This goes way beyond how one will have an eruv on Shabbat if someone dies on a Friday afternoon or on Shabbat.

Do we have up-to-date wills in place? Emergency plans for our immediate families and long-term ideas of how to get support for those left behind? There are a lot of questions and they are scary. What’s worse, though, is that the panic caused by thinking about this can cause us to turn irrational and erratic. Fear can make us hard to be around. We become the people who can’t manage basic, polite social encounters, such as social distancing at the grocery store.

What’s the antidote? Well, while careful estate planning helps, nothing really prepares us for sudden illness. No amount of religious rituals can make us immortal. However, many circle back to countering the fear. Some of us say Modeh Ani, to be grateful – for each morning, a ray of sunshine, a toddler learning to count or an older kid triumphant after a hard test at school. It’s a taste of really good sweet potato pie or an unexpected hug.

In other words, take the win when you can get it, wherever you find it. Sometimes, it’s whimsy, like knitting a pair of mittens with lots of colours, polka dots and a thumb ring. It’s remembering why we say a prayer, even if we rush it or say it at the wrong time.

We can wears masks and social distance and wash our hands, but, right now, our souls also need positive, meaningful time and spiritual support. The next time your car needs an oil change? Consider routine soul maintenance, too.

Joanne Seiff has written regularly for CBC Manitoba and various Jewish publications. She is the author of three books, including From the Outside In: Jewish Post Columns 2015-2016, a collection of essays available for digital download or as a paperback from Amazon. Check her out on Instagram @yrnspinner or at joanneseiff.blogspot.com.

What if critical illness strikes?

(photo from flickr)

We all wonder and fear what would happen if we were diagnosed with one of many critical illnesses or suffered a heart attack or stroke.

You work hard to achieve personal and financial goals during your lifetime. Your plan is working and you have accumulated savings and investments, using tax-efficient investment strategies such as your registered retirement savings plan (RRSP). If you have to sell investments prematurely or stop investing in order to manage recovery costs, your future plans may never recover. So what should you do?

The survival rate of these critical illnesses has risen over the years and we are now most likely going to survive “the big one.” In Canada, these are the statistics: 63% likelihood of surviving at least five years after a cancer diagnosis, 90% will survive a heart attack, and there is an 80% survival rate after a stroke and hospitalization.

Here’s the problem

The issue is that there are significant costs associated with the treatment and recovery from such an illness. There can be large medical bills that are not covered by our various healthcare plans. In Canada, many will want to pursue treatments offered by private clinics at home or abroad, which can be extremely costly.

In addition to these costs, we often neglect to consider the other realities that people face, such as not being able to work. The most obvious is the loss of income suffered when one cannot work or run the family business or professional practice for an extended period of time. This might also affect the income of the spouse and other family members, those who are needed to provide home care.

What are the options?

To deal with the unexpected costs and loss of family income there are really two choices:

One may choose to self-insure, meaning that one accepts the risks and has put money aside to cover the eventuality, or
One may purchase critical illness insurance, which provides a lump sum after one is diagnosed with one of the critical illnesses covered in the policy.

The options in more detail

Removing the costs and lost income from one’s financial plan is a considerable setback to the financial plan. The projected retirement income is suddenly reduced and, for most people, it will never be made up. The impact is even greater if one is forced to withdraw from RRSP accounts, as these amounts are fully taxable as income.

As an example, if one needed to cover $100,000 of costs and had to withdraw it from a RRSP account, at a marginal tax rate of 50%, the person would have to withdraw $200,000 of savings intended for retirement.

The eventual impact on one’s projected retirement must be considered carefully, taking into account the income tax issues based on the source of funds, plus the loss of compounding that will no longer be enjoyed on the growth of those funds from the time of the critical illness until the time one planned to retire.

Suffice it to say, the decision to self-insure needs to be taken very seriously. Unfortunately, there are statistics that reaffirm the risks of falling ill with a critical illness are significant.

Critical illness insurance is sometimes referred to as “new insurance,” as it is a newer solution than traditional life insurance. In the past, before the many medical advancements we have enjoyed, life insurance was the solution because it was more rare to survive the illnesses.

Critical illness policies are designed to pay out a lump sum, say $100,000, typically 30 days after the diagnosis. The illnesses are defined and one can purchase a basic plan that covers heart, stroke and cancer, or the more comprehensive plans that have up to 25 covered conditions and include long-term-care insurance as well.

As of the end of 2019, one major life insurance company reported the following statistics:

It has paid out $520 million on 5,360 claims. In 2019, 67% were for cancer, 13% for heart attack, four percent for strokes and the remainder for coronary bypass, multiple sclerosis and other illnesses. The average age of claimants was 53 for women and 55 for men.

The lump sums paid out are used to cover medical costs, replace lost income, retire debt such as loans and mortgages, cover salaries within a business and often pay for time off and bucket list-type vacations.

There are programs available where, if one has been fortunate enough to not have made a claim, in other words, not have fallen ill with a critical illness, the policy can be canceled and all the premiums refunded. The only cost, in that case, is the time value of money on the premiums, as 100% is refunded.

It is even possible to model such a plan where one uses funds earmarked for a RRSP contribution to cover the premiums. This is more effective than one might first think, as the refund of premiums is tax-free.

The first step is to identify and understand the risks to one’s retirement plan. The second step is to consult a qualified professional to consider what protection works best for you.

Philip Levinson, CPA, CA, is an associate at ZLC Financial, a boutique financial services firm that has served the Vancouver community for more than 70 years. Each individual’s needs are unique and warrant a customized solution. Should you have any questions about the information in this article, he can be reached at 604-688-7208 or [email protected].

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Sources: Manulife Insurance – Critical Illness: Asset Protection: Keep Your Retirement Savings for the Future, and Critical Illness: Retirement Protection Handbook.

Disclaimer: This information is designed to educate and inform you of strategies and products currently available. The views (including any recommendations) expressed in this commentary are those of the author alone and are not necessarily those of ZLC Financial. This information is not to be construed as investment advice. It is for educational or information purposes only. It is not intended to provide legal, taxation or account advice; as each situation is different, please seek advice based on your specific circumstance. This commentary is not in any respect to be construed as an offer to sell or the solicitation of an offer to buy any securities.

Transferring our assets

(photo from Alpha Stock Images, photographer Nick Youngson)

After a lifetime of work, most of us would like to know that our assets and legacy are transferred to the next generations, children and grandchildren, in the amounts and percentages we chose while alive. Our hope is that this would happen as painlessly, securely and quickly as possible.

It is a subject I am quite passionate about. I have seen loving families, with the best intentions, fail to adequately plan this transfer of assets and they are faced with disappointing financial and emotional consequences. There is the very real risk that your assets will not land in the hands of the people you intended. In addition, even when your wishes are met, without the proper planning and communication, feelings can be hurt, with long-lasting negative, albeit unintended, consequences.

What is probate

Probate is a legal procedure that validates a deceased’s will and confirms the executor’s authority to carry out the testator’s wishes.

There is no requirement that every will must be probated. Proper planning can eliminate the need for probate, and the type of asset involved will generally dictate whether or not probate is required.

The cost of probate varies by province. British Columbia has fees of $14 per thousand on estates over $50,000, plus a filing fee. Property owned in another province may attract fees based on that province’s fee schedule.

Advantages/disadvantages

When letters of probate are obtained, financial institutions, transfer agents, land registry offices and other third parties can safely transfer the assets to the intended recipients. The time frame for any court challenges to the will or estate is usually measured from when the probate is granted. This limits the period when legal action may be taken.

However, the process can be very expensive, time-consuming and complex, and is open to public scrutiny. This loss of privacy can be very important to the ongoing harmony of the family when assets aren’t divided equally among the beneficiaries.

Avoiding or reducing probate

Make sure you have a will. Probate fees will be applied automatically if you die intestate (without a will).
Gifting prior to death can reduce the value of the estate subject to probate but must be done with care. There are important legal and income tax considerations and possibly property transfer taxes.
Use named beneficiaries whenever possible. Moving assets to vehicles such as life insurance, annuities and segregated funds is a great way to avoid probate. What’s important is that proceeds are paid quickly, typically in a few weeks, and directly to the beneficiary. This avoids lawsuits from family members who may feel they didn’t receive what they felt they deserved from the estate.
Holding assets in joint tenancy with a spouse, child or other family member will avoid probate, as the asset passes automatically upon death to the other individual. Using joint tenancy to avoid probate fees should involve careful consideration: there will be a loss of control once it is jointly held and the asset will be exposed to the joint tenant’s creditors. There are also certain complicated tax issues and other risks associated with this strategy.
Transferring assets to a trust will remove the asset from the estate. Be careful of appreciable assets that may attract a taxable disposition upon transfer. The use of an alter-ego or joint spousal trust can be very effective for this purpose. There are many cases where trusts are necessary to achieve more complicated wishes but they can be expensive to set up and require annual maintenance.
Transfer assets to a corporation. Except for outstanding mortgages on real estate, which are deductible, probate fees are generally charged against the gross value of an estate asset. If an estate asset was purchased with borrowed money, it may be beneficial to transfer that asset to a company. This will reduce the value of the estate and the company share value will be the asset, less the debt used to acquire it.
Have multiple wills. Not all assets are subject to probate. It is becoming popular to have two wills – one for assets that are probatable and one for those that are not. This strategy is not available in all provinces and the use of multiple wills may create problems with the new graduated-rate estate tax with respect to testamentary trusts. It is important to seek professional advice when considering these strategies.
Keep it simple. There are often cases where we can plan to quite easily avoid probate entirely. All assets can be invested within segregated funds (GICs, stocks and bonds are available) with named beneficiaries and others gifted. This can be done where income is still guaranteed for the rest of one’s life, but ownership has been transferred while alive, or will pass straight to beneficiaries later, thus avoiding probate.

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Finally, I like to stress the gifting of assets while one is alive, be it to your family or a charity. There are many advantages, whether it’s the personal satisfaction of supporting your favourite charity, or the love shared with your children and grandchildren. After all, isn’t estate planning really intergenerational legacy planning?

*** Disclaimer: The views (including any recommendations) expressed in this commentary are those of the author alone, and are not necessarily those of ZLC Financial. This information is not to be construed as investment advice. It is for educational or information purposes only. It is not intended to provide legal, taxation or account advice; as each situation is different, please seek advice based on your specific circumstance. This commentary is not in any respect to be construed as an offer to sell or the solicitation of an offer to buy any securities. ***

Financial future of next generation

(image by ZLC Financial)

One of the few things in life that we can absolutely count on is change. Therefore, no matter what age or stage in life, just about everyone has a need for insurance. It is especially important to have a review-revise-repeat approach when it comes to planning for you, your family and your ever-changing lifestyle and situation.

Do you have assets that you don’t plan on spending in your lifetime? Do you want to leave an inheritance but are worried about leaving your family with a large tax burden? A cascading life insurance strategy is a simple way to preserve your wealth for the generations to come.

Cascading life insurance is an intergenerational transfer of wealth, allowing grandparents to provide a significant legacy to their grandchildren without giving up control during their lifetime. It is an efficient tax-advantaged way to preserve your wealth for those you love by taking advantage of the tax-sheltered features of permanent life insurance.

The best way to be prepared is with a well-thought-out plan. Let’s take a closer look at how to use cascading life insurance. Here’s how it works.

Purchase a permanent life insurance policy with your grandchild as the life insured. If your grandchild is not the age of majority, their parent (your son or daughter) can be the contingent owner. When a contingent owner is named, the policy ownership will automatically transfer to the contingent owner without tax.

You or your son or daughter can be named as the beneficiary. Similar to the ownership structure noted above, you can be the beneficiary and your son or daughter can be the successor beneficiary.

Some of your non-registered assets will be used to fund the policy, thus reducing your future annual tax burden. The funds invested in a life insurance policy will allow for accumulation of cash value inside the policy, and you don’t have to pay income tax on its growth. Upon your death, the ownership of the policy is transferred to your adult child as contingent owner (or your grandchild, if the age of majority) without your estate paying any tax on the cash value growth. The transfer is free of probate, executor and legal fees.

The cash value in the policy remains completely accessible and in your control while you’re alive in the event that you do require additional income.

Meet Brian and his family

Brian is 66. He has $300,000 invested that he doesn’t need to meet his own costs of living. Brian wants to minimize the amount of tax he pays on his non-registered portfolio. In addition, he wants to shelter those assets from tax and probate fees when the assets are transferred to his grandson James, Janet’s son, who is a minor today.

Brian purchases a permanent life insurance policy and deposits the $300,000 into the policy over a 10-year period. Brian is the owner of the policy, and he names Janet as the contingent owner. The insurance is placed on his grandson James’s life and his daughter Janet is the beneficiary of the policy.

When Brian dies, Janet will become the owner of the policy, since she was named as the contingent owner. Janet can continue to own the policy indefinitely or transfer the policy to James when she thinks he is fit to be the owner.

The cash value will continue to accumulate in the policy and will be eventually owned by James.

Now, here’s the important part: the policy, when transferred from Brian to Janet and eventually from Janet to James, will pass along with its cash value, free of tax and probate fees.

James will have a few options:

Access cash value from the policy (a taxable event),
Borrow money using the investments in the policy as collateral, providing him with tax-free cash flow, or
Change the beneficiary to his children, ultimately creating a lasting legacy passed down through four generations.

Insurance is a valuable and creative tool that can help provide peace of mind for you, your family and their financial future. The cascading life insurance policy provides several benefits:

Permanent life insurance protection and control of capital in a tax-exempt life insurance policy.
The ability to accumulate tax-exempt cash within the life insurance policy.
The ability to transfer the policy’s cash value growth tax-free to your grandchild, who is the only life insured on the policy.
Death benefit proceeds are paid out tax-free to named beneficiaries at the death of the life insured.
Probate fees are not applicable on the life insurance proceeds upon the death of the life insured with a named beneficiary other than the estate.

The cascading life insurance strategy is designed for individuals who have annual tax obligations from non-registered investments, who would like to reduce the tax burden upon their death and are interested in legacy planning (family and charity).

How to avoid tax trap

(photo from pxhere.com)

One of the last problems you’d expect in creating a power of attorney is to find your company losing a bunch of tax advantages because the Canada Revenue Agency (CRA) decides you and the person you appointed in the power of attorney have related companies.

If your company is small and Canadian-controlled, it gets certain tax advantages; however, CRA doesn’t want you to break a large company into a bunch of small pieces to multiply those tax advantages. If you give each of those pieces to a different person, but maintain control through powers of attorney, CRA will still consider all those pieces to be one company.

Unfortunately, CRA doesn’t recognize the difference between a general power of attorney used to control a company and an enduring power of attorney used to help someone when they’re incapacitated. Here’s an example of the trap that can happen if you’re not careful with a power of attorney.

(Disclaimer: this is not tax advice; it is a simplified illustration of the small business tax rules and how they’re applied with respect to control and powers of attorney.)

I’ll give you two scenarios. The first one illustrates what CRA is trying to avoid, and the second one illustrates what it catches by accident.

First scenario: avoiding multiplication of the small business deduction

Patricia Hindenburg has three adult children: Roberta, Paulina and Bradley. She runs a clothing company, Whole Lotta Cashmere Fashions Inc., with stores in the Kitsilano, Yaletown, Commercial Drive and Marpole neighbourhoods.

Whole Lotta Cashmere Fashions is doing very well. Last year, it earned $2.4 million before tax. The company is a Canadian-controlled private corporation and is eligible for the small business deduction. The deduction means that, instead of paying about 35% income tax on $2.4 million, Whole Lotta Cashmere Fashions only pays that on $1.9 million. The first $500,000 is taxed at about 10%. (Again, these are not the real tax rates and I’m simplifying the calculations.)

Patricia realizes that, if she split the company into four companies, each owned by a different person, the companies would together pay 10% on $2 million and only $400,000 would be caught by the higher tax rate. So, she splits the company into four, giving one to each of her children and keeping one for herself. This way, each of the four companies will be eligible for the small business deduction – each will only pay 10% on its first $500,000 of earnings.

To make sure that the companies remain successful and operating just the way she likes, Patricia asks her kids each to grant her power of attorney over their voting shares in their companies.

She now has control over all four companies. Their combined income is still around $2.4 million, but she believes the collection of companies has a small business deduction of $2 million instead of $500,000. She expects to pay 10% on $2 million and 35% on $400,000.

CRA does not allow this, however. Because of the powers of attorney that give Patricia control over all of the companies, CRA taxes them as one big company the same way it did before the split.

This seems fair. If the companies are truly independent, they should each get the small business deduction but, if you split a big company into a bunch of smaller ones and you maintain control over them, you don’t get a bunch of small business deductions.

Second scenario: getting tax-trapped in incapacity planning

Stephanie Edwards has a metalworks shop, Icarus Metalworks Inc., that is doing very well. She has apprenticed each of her five children, Adriana, Murray, Nicole, Dickens and Jan, in the art and trade of blacksmithing.

A few years ago, Adriana and Dickens decided they prefer ceramics, and they opened their own company, Can I Play With Porcelain Ltd.

Last year, Icarus earned $700,000. Can I Play With Porcelain did pretty well too; it earned about $450,000.

Icarus should pay 10% on the first $500,000 and 35% on the remaining $200,000. Can I Play With Porcelain is under the limit for the small business deduction, and should only pay 10% on all $450,000 of its earnings.

Unfortunately, after all these years of literally bending iron and steel to her will, Stephanie has serious joint problems. She is finding it hard to write. This has her thinking about making sure her kids can take care of things for her if (and when) she’s unable.

Stephanie thinks carefully about her kids, and who would be in the best position to help her. She decides to grant an enduring power of attorney to her eldest, Adriana. The power of attorney is, as is the case with most enduring powers of attorney, unrestricted and it is effective from the moment it is signed. Stephanie wants to make sure that Adriana can help her even while she is still capable, because she doesn’t know for how much longer she’ll be able to sign cheques, etc., given her joint problems.

Here’s the trap: the CRA determines that the power of attorney allows Adriana to use Stephanie’s shares to control Icarus. This is true – Adriana can do anything on behalf of Stephanie that has to do with finances (including business, real estate and legal matters). Therefore, Icarus Metalworks Inc. and Can I Play With Porcelain Ltd. are now considered related companies. Can I Play With Porcelain Ltd. loses its small business deduction. Between the two companies, the first $500,000 is taxed at 10% and the remaining $650,000 is taxed at 35%.

Is there a way around this? Yes.

Two powers of attorney are prepared, both enduring, both restricted – in exactly opposite ways – and one is made “springing.”

In the first instance, Stephanie grants an enduring power of attorney to Adriana, effective immediately and without any limits or restrictions except that Adriana may not use it to vote or in any other way act on Stephanie’s shares of her company, Icarus Metalworks Inc.

This will probably cover about 95% of what Stephanie needs Adriana to do.

Eventually, Stephanie may lose capacity and need Adriana to take control of her company. At that point, the benefit of Adriana controlling Stephanie’s shares will outweigh the tax consequences. There’s also the slim hope that by then, the Income Tax Act will be amended so as not to catch enduring powers of attorney anymore.

Stephanie grants a second enduring power of attorney to Adriana, but this one has two limitations in it. It only applies to Stephanie’s shares of her company, to avoid any confusion regarding which power of attorney applies in any given situation. Also, it is not effective until Stephanie loses capacity – this is called a “springing” power of attorney. It springs into effect only when Stephanie is no longer capable of managing her affairs. This prevents CRA from considering the companies to be related until it’s absolutely necessary, and this is a recognized technique among lawyers who practise regularly in the areas of estate and incapacity planning.

Jeremy R. Costin, JD, is a business, estates and ecommerce lawyer at Costin Law. He can be reached at 604-742-0717 or [email protected].

Find the time to make a will

Aretha Franklin sings “My Country ‘Tis of Thee” at the U.S. Capitol during the 56th presidential inauguration in Washington, D.C., Jan. 20, 2009. Franklin is one of many celebrities who died without a will. (photo by Cecilio Ricardo, U.S. Air Force)

The passing of Aretha Franklin in August sparked a lot of response, once it became known that she did not make a will. It is, in some sense, shocking that, with an estate estimated to this point as valued at $80 million – and, of course, her estate will continue making money, from record sales, merchandising and so forth – somehow she could not find time to make a will.

And she is hardly alone in that conundrum. Many celebrities have died intestate (without a will), as you will see. The real question is why.

Franklin was a brilliant, very hardworking person. She had a gifted voice and she was raised in a musical family – her father apparently sang in church and was a good singer in his own right. Without a doubt, she overcame numerous obstacles, not the least of which was that, at the start of her career, the United States was still a segregated society. The late great singer-songwriter, Otis Redding wrote the song “Respect” in 1965. Franklin turned the well-written song into an earth-shaking song, which was released in 1967. In the Rolling Stone magazine compilation of the top 500 songs of all time, “Respect” was No. 5.

Ironically, perhaps, a relevant portion of the lyrics for this column goes as follows: “I’m about to give you all of my money / And all I’m askin’ in return, honey / Is to give me my propers / When you get home (just a, just a, just a) / Yeah, baby (re, re, re, re) / Whip it to me (respect, just a little bit) / When you get home, now (just a little bit) / Ooh, your kisses / Sweeter than honey / And guess what? / So is my money….”

Excellent lyrics, to be sure, and groundbreaking for the times. Perhaps it was a battle cry for millions of women in the day. And it was hardly her only big hit. As most readers will know, Franklin had many major hits.

With such success and obviously a high level of income over many years – how else do you accumulate an estate worth $80 million? – it is not easily understood why Franklin never made a will. As she grew up poor, perhaps nobody could convince her that a will was needed. Perhaps she was busy enough that she felt she could always “do it later” (a common sentiment in North American society), though, given she had pancreatic cancer, she would surely have had time to do some planning.

What we do not yet know is the status of her relationships with her family members. Perhaps she did not want to make a will and was not overly concerned with the distribution of her estate. Perhaps she wanted to bequeath assets to charities, which might have angered her family. Certainly that won’t happen now, given the nature of intestacy law. The law of Michigan, Franklin’s home state, is that, without a will, an estate is distributed among children. Franklin had four children. But it is presumably possible that the nature of her relationship with her children had a lot to do with her apparent decision to do little or no estate planning.

Some of the other celebrities who did not have wills when they died include:

Sonny Bono, former partner of Cher, died in a ski accident in 1998, without a will. His estate was valued at $4 million. His surviving wife, Mary Bono, had to launch proceedings in probate court to be named executrix.

Prince died in 2016 without a will and with an estate valued at $200 million. Numerous persons claimed to be a former wife, sibling, child or other relative. Though a judge last year ruled in favour of Prince’s surviving sister and five half-siblings (to get the estate), others have filed appeals, so the estate will not likely be resolved for years.

Bob Marley died in 1981, leaving no will. Under Jamaican law, his estate was to be given to his wife and 11 children. However, more than 30 years later, the estate remains in litigation.

Jimi Hendrix died in 1970, also without a will. The estate was fully settled 45 years later, with a resolution regarding the commercial use of Hendrix’s likeness.

photo - Kurt Cobain — Kurt Cobain *(photo by Run Mizumushi-Kun)*

Kurt Cobain, who died in 1994 without a will, left a $450 million estate. The estate was apparently resolved in 2010.

Pablo Picasso died in 1973, leaving an estate that cost $30 million to resolve (in a six-year battle). The incredible artist died without a will … he could have at least painted one!

So, do you really need a will? The short answer is yes, and here are some reasons.

Even if you are a young family with no major assets except for a heavily mortgaged residence, once you have children, you should make a will. A will is the best – and perhaps least expensive – document in which to appoint a guardian for minor children. Without it, grandparents will battle the province for custody of your children.

Another reason to make a will is that an executor is appointed under a will. This means that somebody is there to manage your estate and deal with Canada Revenue Agency, all the beneficiaries, the province, and so forth. Without a will, somebody has to step forward and apply to become administrator. That takes time and, before the Supreme Court of British Columbia grants letters of administration, the would-be administrator has no legal authority, so it ends up taking a lot more time to deal with the estate, and it will probably cost more as well. The beneficiaries will not be pleased.

Yet another reason to make a will is to have control over where, to whom and how much to whom your assets will go. Without a will, chances are that some person you may not have intended will receive something from the estate.

As well, if you own a residence in the Lower Mainland, you have a large estate now. With a will, you can control when a child receives her or his portion of the estate. Without a will, a child will receive their portion when they reach age 19. That may not turn out well because not all 19-year-olds can manage a large inheritance. It may be overwhelming for such a person, having just lost her or his parents.

Having a will brings order to an estate and a family at a time when they need it. And it is a statement of the will-maker’s wishes. A person who owns the assets should be able to decide who gets what, and when. That can really help a family.

Whether celebrities have a sense of invincibility, are not getting good advice, or are just like the rest of us – surveys say that half of all Canadians don’t make wills – too many of them are not making a will. Their agents should be more firm with them, making sure they see a lawyer and get the advice they need. People do not do their families any favours by not making a will. Those who die intestate may be bestowing attorneys with the major portions of their estates.

Jack Micner is a barrister and solicitor at Spry Hawkins Micner. He can be reached at 604-233-7001 or [email protected].

Making money your friend

Marissa Cepelinski during the 2014 Run for Water. (photo from Marissa Cepelinski)

Some people spend their entire lives trying to figure out what they want to be when they grow up. Some know when they’re just a kid.

At a rather young age, Marissa Cepelinski already knew two key things about herself that would lead her to her current position as co-founder of Capital Core Financial: she loved numbers and she wanted to help people.

photo - Marissa Cepelinski not only advises people on how to direct more of their money to causes they care about, she also donates her time and money — Marissa Cepelinski not only advises people on how to direct more of their money to causes they care about, she also donates her time and money. *(photo from Marissa Cepelinski)*

Cepelinski is the daughter of an Israeli computer engineer who spent many hours tutoring her in the art of finances. “He had me tracking all my money in a blue Hilroy notebook when my babysitting career began at 11,” she said. “I had to enter all the debits and credits and I loved it.

“I also loved working with people,” she added. “So I knew I wanted to somehow pair the two.”

After completing her minor in psychology at university, Cepelinski targeted the financial advisor career path, leading to what now has been a 12-year career in the industry.

Doing what she loved was the first step. The second was finding a way to make that career choice satisfy her need to help others.

“I became very clear on what I wanted to build and what we needed more of in the financial world,” she explained. “I wanted to work with people on a goals-based approach rather than just working with the money.”

After teaming up with Franco Caligiuri on a consultation basis for several years, the two realized their goals aligned, leading them to partner in starting their own boutique firm, Capital Core Financial. Through her work at Capital Core, Cepelinski has engaged in many charitable programs, both as a donor and as a participant. Specifically, she advises many individuals, families and businesses on strategies to help direct more funding toward causes they care about.

“We found that many people simply didn’t know or understand how they have the option to choose a cause to donate to rather than ‘donating’ their money to Canada Revenue Agency (CRA),” she explained. “Being able to present a cheque for $100,000 to a charity … is a feeling I can’t even describe.”

Cepelinski said that Capital Core Financial has a goal to help redirect at least $1 billion to be donated to the nonprofit sector.

Community building is one of Capital Core’s main values. As such, Cepelinski also donates a lot of her time to various causes, highlighted in the past year by her participation in the Run for Water ultra-marathon, the Covenant House Sleep Out to raise awareness and the 24-Hour Famine for a Better Life Foundation. She personally raised more than $22,000 for these charities in 2014.

Earlier this year, she and colleague Alli Warnyca spoke at the Recharge Conference at the Jewish Community Centre of Greater Vancouver. They talked about how people could change their attitudes about money and debt, and feel good about their finances.

As for her typical client base, Cepelinski insisted she doesn’t really have one. “We work with people who are committed to their goals, that have values that align with ours,” she explained. “People who are wanting to raise the bar in their life and remove their emotional limitations in regards to building wealth.

“I’ve worked with business owners on corporate planning, young families starting to save to buy a home and struggling artists or actors learning to budget and commit to a plan,” she continued. “Many of us walk around with money stories we created at a very young age. We will spend some time discussing those with clients because it’s important that people look at the patterns they are running in regards to their money.”

To set up a meeting with Cepelinski or any member of her team, contact Capital Core Financial at 604-685-6525 or go to capitalcorefinancial.com.

Kyle Berger is a freelance writer living in Richmond.