Darcie Doell and Laurianne Osmak

Lower the family tax bill: Intra-family loans as an income-splitting strategy

April 5, 2021 by Darcie Doell and Laurianne Osmak

With grocery bills and house prices continuing their upward trajectory, budgets are tighter than ever. Most Canadian families might welcome any opportunity to keep a bit more of their hard-earned money in their bank accounts. A good place to look for cost savings is on the family tax bill, and one strategy in particular can lead to significant savings: the use of intra-family loans to split income.

The basics on income splitting

Income splitting involves transferring income from a high-income earner to a family member in a lower tax bracket. Because the lower-income individual is taxed at a lower marginal tax rate, the family pays less tax overall. However, the Canada Revenue Agency (CRA) restricts most forms of income splitting through the Income Tax Act’s attribution rules. A person can’t simply give their spouse $100,000 to invest and have the spouse declare the investment income in their tax return at their lower marginal tax rate. In such a situation, the investment income would be attributed back to the original individual and taxed at their higher marginal rate.

There are, however, a few legitimate and effective ways to split taxable income with a spouse or other family members. One of the most effective strategies in a low interest rate environment is through a loan directly to a family member or, where minors are involved, to a family trust. Provided the loan is properly structured, the recipient can invest the proceeds from the loan, with the income taxed at a lower marginal rate. Of course, one of the keys to a successful income-splitting strategy is to make sure that investment returns are higher than the interest rate charged on the loan.

Interest rates and deadlines

Intra-family investment loans most commonly involve a loan between spouses, either married or common-law. But this strategy can also be effective for funding the expenses of minor children, such as private school or extracurricular activities, through a prescribed-rate loan to a family trust with the minor children as beneficiaries. It’s a good idea to have a formal written loan agreement in place. For this strategy to work, the following criteria must be met:

Interest must be paid on the loan at a rate that’s at least equal to the CRA’s prescribed rate (updated quarterly). If the commercial loan rate is lower than the prescribed rate at the time the loan is made, this lower commercial rate can be used. You can find the CRA’s current prescribed rates here.
In order to be compliant with the CRA’s attribution rules, annual interest payments must be made to the lender no later than January 30 of the following year. Failure to do so may result in the income earned on the borrowed funds being attributed back to the high-income earner. And as a result, the income splitting strategy will no longer work.

Already have a prescribed-rate loan?

Locking in current low interest rates may seem very attractive. But what if you and your spouse already implemented this strategy in the past when the prescribed rate was higher? You can still take advantage of the current lower rate to increase your tax savings opportunities. First, your spouse will need to repay the existing loan – it’s not enough to just re-sign the loan agreement. To repay the existing loan, investments may have to be sold, which may result in capital gains. However, any gains would be taxed to your spouse and, therefore, the tax would be less than if you held the investment yourself. You can then arrange a new loan at the current lower rate and new investments can be purchased.

Making it work – an example

Spouses John and Jill are in different tax brackets – John at 48 per cent and Jill at 20 per cent. John loans Jill $200,000 at a prescribed rate of one per cent. Jill invests the money and earns four per cent, or $8,000. She then pays John the $2,000 loan interest and deducts the same amount as loan interest expense. Jill pays $1,200 in tax on the remaining $6,000, and John pays $960 on his interest income.

Here’s how it stacks up:

John would have had to pay $3,840 in taxes had he invested the $200,000 himself.
By loaning the money to Jill for the purpose of income splitting, the family tax bill is reduced by approximately 44 per cent to $2,160, representing savings of $1,680.

Take action

Income splitting can be a great tax-saving strategy for families that have a pool of non-registered capital that they’re willing to invest, and where a spouse or other family member is in a lower marginal tax bracket. To take advantage of income splitting, speak with your advisor, who can walk you through the necessary steps.

A guaranteed return – and more

March 22, 2021 by Darcie Doell and Laurianne Osmak

Guaranteed interest accounts provide interest income, insurance benefits and flexibility.

There is almost always a place for secure, guaranteed investments in an investor’s portfolio. They can help reduce the volatility of a balanced mix of stocks and bonds, and they can deliver a steady stream of interest income to help support lifestyle goals.

A guaranteed interest account (GIA) offered by an insurance company has some interesting additional benefits that can help investors achieve other objectives.

What is a GIA?

A GIA is an insurance contract that pays interest at a guaranteed rate, like a bank-issued guaranteed investment certificate (GIC). A variety of terms are available ranging from short-term to long-term. Either way, at maturity, investors can choose to reinvest their original investment plus the interest they have earned.

Importantly, once purchased, the interest rate does not fluctuate with the markets. On top of that, a GIA offered by an insurance company offers extras like tax and estate planning benefits, as well as potential creditor protection.

Tax planning benefits

Every dollar saved in tax is an extra dollar available to save or invest – and a GIA can provide tax savings in two ways for non-registered accounts. First, investors can defer taxes on GIA interest for up to one year. Second, when investors are age 65 or older, GIA interest income may qualify for the pension income tax credit and for pension income splitting with a spouse or common-law partner.

Estate planning benefits

Most people want their assets to transfer quickly, cost-effectively and privately to their beneficiaries. Because a GIA is an insurance contract, it allows for the naming of a beneficiary. This means the proceeds can be paid directly to the beneficiary and avoid the estate, and therefore probate where applicable, and potential delays and associated costs, as well as public scrutiny in a probate court.

Potential creditor protection

Professionals and small business owners often worry about protecting their personal assets from creditors. If they’re sued or the business runs into financial difficulties, creditors may have the right to seize what they own personally.

GIAs have the potential to help with creditor protection during the investor’s lifetime, as well as after death when the death benefit passes directly to a named beneficiary outside the estate. It is very important to consult with a legal advisor to discuss the rules surrounding eligibility for creditor protection.

Why choose a GIA?

Many investors choose GIAs primarily to help protect part of their portfolio from market exposure and to guarantee a predictable return. Tax and estate planning benefits and potential creditor protection can be attractive extra features.

Depending on the structure of the GIA, investors may also benefit from flexibility to move in and out of the markets in response to volatility or changing financial needs. That’s because some GIAs are offered in contracts that also offer segregated funds. This means that it may be possible to transfer between the GIA and a segregated fund that provides access to market growth. This transfer would be subject to fees.

For investors looking for security and stability in an unpredictable world, GIAs can help safeguard capital and deliver guaranteed rates. Unlike some market-dependent investments, GIAs also qualify for deposit protection from Assuris on investments up to $100,000. Speak with your advisor about whether a GIA may be appropriate for your needs and goals.

GIA FAQ 1. Can a GIA provide a guaranteed interest rate? Yes. GIAs offer a guaranteed interest rate from the day money is invested until maturity. 2. Does a GIA qualify for deposit protection on investments up to $100,000? Yes. Assuris (which protects Canadian insurance policyholders) provides additional protection. 3. Is it possible to access money invested in a GIA before maturity? Yes. Fees may apply. 4. Are term choices available? Yes. 5. Is it possible to designate a beneficiary on a GIA? Yes. 6. Does a GIA offer the estate planning advantages that come with avoiding probate? Yes. 7. Is GIA interest income potentially eligible for the pension income tax credit and pension income splitting when the owner is age 65 or older? Yes. 8. Is it possible to hold a GIA in an RRSP, RRIF, TFSA or non-registered account? Yes. RRSPs, RRIFs and non-registered accounts can hold short-term or long-term GIAs. TFSAs can hold long-term GIAs. 9. How can I invest in a GIA? You have to get them via a life-licensed advisor, as they are issued by insurance companies.

Planning on taking a trip in Canada? Add insurance to your checklist.

March 8, 2021 by Darcie Doell and Laurianne Osmak

You may be surprised to know that travel insurance isn’t just a necessity for people who vacation outside the country – it applies within Canada, too.

Plans to visit hot, sunny and sandy destinations may be on many Canadian travellers’ wish lists this season, but due to pandemic concerns, venturing out a little closer to home may have to suffice. Thankfully, there’s a limitless selection of exciting places to visit and things to do within the country’s vast borders. To enjoy them to the utmost, in-country travel insurance should be part of your plan.

Travel insurance once had a reputation of being relevant only to older people who travelled internationally, but those days are behind us. Today, it’s helpful for anyone of any age who travels into another province or territory, because each is governed by a different health plan.

WATCH: Travel insurance, a video that outlines some of the things you should know about this kind of coverage.

A recent travel survey conducted by Manulife found that 50 per cent of Canadians think their government health insurance plan will protect them while travelling anywhere in Canada¹. It’s true that a Canadian requiring medical attention while visiting another province or territory will generally be treated the same way as at home, thanks to inter-provincial agreements. However, what’s covered by the government-sponsored insurance in your home province may differ from the coverage in other plans. You may not be insured in the same way you think.

Medical coverage differs depending on where you are in Canada. Here are some costs that aren’t typically covered – but that travel insurance can protect you from.

Ambulance services (air and ground, including transport and paramedic)
Fees charged by private hospitals or facilities
Diagnostic or laboratory services outside of a public hospital
Prescription drugs and other drugs given outside a hospital
Services not covered in the province

Know your situation

If travel plans are on the horizon, the first question you should ask yourself is, “Am I covered?” Many employee group benefit plans include some level of travel insurance – research how extensive your plan’s coverage is. Some stipulate coverage for business travel only. Others may cover only the employee but not dependents. Time limits, eligible and non-eligible procedures and, importantly, coverage for matters related to COVID-19 are certain to vary, depending on the agreement the employer has with its insurance provider. Ensure you understand your situation with respect to insurance and how it might apply to a variety of circumstances if something were to happen to you or your companions while travelling.

Although your provincial or territorial health plan will cover you in the event you need emergency care, be cautious. There can be gaps in medical coverage that could leave you responsible for paying for treatment up front and for recovering the funds from your provincial or territorial government when you return home. This can create a cash flow challenge at a time when you may have already spent a lot of money for a holiday.

Many travel insurance providers have modified or extended their policies to include coverage of COVID-19-related emergency medical costs when travelling within Canada. This is a worthwhile consideration as you decide what extent of coverage best suits your needs.

Bon voyage!

After you have put aside the money and the time to enjoy that hard-earned vacation, taking the next step to protect yourself from unexpected costs can be a satisfying point to check off your list. Reach out to your advisor for some insight on the short-term and long-term insurance options that can help you enjoy your time away that much more.

Insurance embraces digital innovation

February 22, 2021 by Darcie Doell and Laurianne Osmak

It’s easier than ever to get the protection you need.

For many Canadians, buying insurance might summon unappealing thoughts of invasive medical tests, complicated forms and long wait times for approvals. But protecting your loved ones, and everything you’ve worked hard for in your life, is an important part of your financial plan that shouldn’t be overlooked. Thanks to digital innovations, the process of purchasing insurance to get the protection you need is now easier than ever.

Virtual connections

In a recent study, 68 per cent of insurance buyers said they would prefer to conduct their transactions online. And it seems the insurance industry is listening. Insurance applications have become more straightforward, and many can simply be submitted online with a digital signature. Today, medical intervention may not be required, meaning there could be no need for blood tests or fluid samples, depending on your situation and the coverage you’re applying for.

With simpler and more streamlined processes in place, insurers can approve policy applications – and provide coverage – faster. If you need term insurance, for example, you may be able to secure your coverage in as little as one business day after you apply.

A word about AI

Sophisticated new technology has helped make the underwriting process far more efficient than it used to be. Many providers have embraced artificial intelligence to offer better value to their customers. AI can make decisions in seconds, whereas a human needs time to review every part of an application process. AI systems for life insurance applications are trained using thousands of existing policies that have been processed by human underwriters.

The systems are constantly learning and become more intuitive every step of the way. For example, rather than using a standard 38-page form for everyone from toddlers to seniors, AI technology can quickly refine the application process based on answers provided by the customer.

With artificial intelligence handling the straightforward policies, human underwriters can focus on the more challenging cases. The result is much faster data processing and a better experience for customers.

More options

The right coverage is less expensive than people realize. Whether you’re in the market for life insurance, critical illness insurance or disability insurance, cost-effective solutions exist to provide different levels of coverage for specific lengths of time. Some programs even let you earn rewards and save on premiums based on healthy lifestyle choices, and encourage using wearable technology to help you track your progress.

Making a decision that can safeguard you and your loved ones is a great feeling. Regardless of your situation, easy and affordable options are available for all your needs. You can read more about the options in the article Insurance basics. Speak with your advisor about getting the protection that’s right for you.

Insurance basics: What types of protection are right for you?

February 8, 2021 by Darcie Doell and Laurianne Osmak

Over the years, insurance products have evolved to become more specialized with added features and riders. That makes it possible for individuals to build increasingly customized plans – but it also means it takes a little more work to understand the various solutions available to protect Canadians from different risks.

Insurance falls into two major categories:

Life insurance, which pays a benefit when the insured person dies, includes term life insurance, whole life insurance and universal life insurance
Living benefits, which pay a benefit under specific circumstances during the insured’s lifetime, include critical illness insurance and disability insurance

These different types of insurance can be combined to help individuals and families meet many high-priority goals, such as covering immediate expenses after death, building a legacy for the next generation, or protecting income in case of illness or injury.

What is a rider? A rider is a clause in an insurance contract that provides additional protection at an additional cost. Here are just a few examples:

a child protection rider that adds coverage for a child to an adult’s policy
a total disability waiver rider that allows the insured person to skip premium payments while disabled and unable to work
a return of premium rider that pays back all premiums if the insured person doesn’t experience a covered situation, such as a critical illness

What can term life insurance add to your plan?

Term life insurance is the simplest type of life insurance, and it’s often available quickly through an easy application process. It provides protection for a set period of time – the “term.” The term may last for a fixed number of years (e.g., 10 years) or until the insured person reaches a certain age (e.g., age 65). At the end of the term, it may be possible to renew the policy or convert it to a different type of life insurance. Should an individual convert their term policy to a permanent policy, underwriting won’t be required unless they increase their coverage.

One way to use term life insurance:

Taran and Pari have 20 years left on their mortgage and want to make sure that, if one of them were to die, their house would be paid off in full.

They can insure both their lives with a 20-year term life insurance policy, setting the death benefit at the full value of the remaining balance on their mortgage. They will also have the added flexibility of being able to reduce their amount of insurance in the future, as they pay down their mortgage.

What can whole life insurance add to your plan?

Whole life insurance is permanent insurance that provides guaranteed protection for life, as long as premium payments stay up to date. In addition, some whole life insurance build a tax-advantaged “cash value” within the policy that the insured person can access while alive. On death, beneficiaries receive the death benefit, which is an amount equal to the original face amount, plus any paid-up insurance that was purchased.

One way to use whole life insurance:

Min doesn’t want her three children to have to pay for her funeral and cover the taxes on her estate after she dies.

She considers term life insurance, but she also likes the idea of a policy that will protect her for her lifetime with guaranteed premiums and accumulate a cash value she can withdraw if needed. She chooses a whole life insurance policy that allows her to pay all her premiums in 20 years, with a death benefit sufficient to cover funeral and tax costs on death.

What is paid-up insurance?

Available as a dividend option on a whole life policy, paid-up insurance is additional coverage that a policyholder can purchase using the policy’s dividends. It allows policyholders to increase their death benefit, and in some policies, the living benefit cash value.

What can universal life insurance add to your plan?

Like whole life insurance, universal life insurance is permanent insurance that blends life insurance with tax-advantaged investing. It generally offers even more flexibility and features than whole life insurance, including a wider range of investment choices for the “account value” – such as investments linked to equity market growth. It is possible to access the account value during life. Alternatively, the insured person can choose to include the investment portion of the policy in the death benefit to leave an even larger tax-free legacy to beneficiaries.

One way to use universal life insurance:

Elian wants to make sure his two adult children receive equal shares of his estate.

He plans to leave his cottage to his son, who spends a lot of time there with his young family, so he needs an equal-value asset to leave to his daughter. A universal life insurance policy will allow him to increase the death benefit over time by investing in a wide range of tax-preferred investments. He can also adjust the death benefit as needed if property values rise (note that increasing the death benefit may require medical evidence).

What can critical illness insurance add to your plan?

When people are younger, they are more likely to experience critical illnesses such as cancer, a heart attack or a stroke than they are to die. Critical illness insurance, ideally purchased while someone is relatively young and healthy, pays a tax-free lump-sum benefit that can be used for any purpose – for example, to fund health care or treatment, cover household and family expenses, protect retirement savings or manage business expenses.

One way to use critical illness insurance:

Kendra is 40 years old and married with two young children.

Her best friend was recently diagnosed with breast cancer, and Kendra is concerned about the impact a diagnosis like that would have on her family’s ability to pay the bills. With critical illness insurance, she can ensure her family receives a fixed amount of money if she is diagnosed with a range of covered illnesses, including cancer, and satisfies certain other conditions.

What can disability insurance add to your plan?

When people with disability insurance develop a physical or mental health disability that prevents them from working, they can receive regular payments of a percentage of their income. Like a critical illness insurance benefit, this money can be used for any purpose – for example, to replace income, reimburse business expenses or fund a buyout agreement that allows someone else to take over the insured person’s business.

One way to use disability insurance:

Paul is 32 years old, runs his own consulting business and recently had a baby with his wife, Kioni.

He knows both his business’s continued success and his family’s standard of living depend on his remaining healthy and able to work. Because he is self-employed, he doesn’t have access to disability benefits through an employer, but an individual disability insurance policy can provide the protection he needs.

Putting it all together

A wide variety of life insurance and living benefits products are available to Canadians. Some solutions even combine life insurance, critical illness insurance and disability insurance within a single all-in-one policy. Speak with an advisor who help assess your unique needs and then recommend the right insurance portfolio to achieve cost-effective protection in your specific situation.