Protect your Retirement & Estate

After spending so much time and energy practicing medicine and building your wealth, you want to enjoy it in retirement and pass along the remainder to the next generation.

What impact will the 2018 Passive Investment Income rules have on your retirement planning? Have you considered the impact that taxes will have on the value of your estate when you pass away? Will your estate need to liquidate assets to fund tax liabilities upon your death?

Retirement and estate planning are complex and emotional processes with major financial consequences. Without proper planning, taxes can consume a significant portion of the funds available for your retirement as well as what is left in your estate when you pass away.

Death & Taxes – Understanding what happens to your assets when you pass away

In 1789, Benjamin Franklin famously said, “in this world, nothing is certain except death and taxes”.

As physicians, you already know the benefits of encouraging your patients to take preventative measures to avoid future health problems; it’s good advice for them.  The same principle applies to you.   As insurance professionals, we encourage our clients to be proactive with their estate planning.

In Canada, there is no estate or inheritance tax.  However, under paragraph 70(5)(a) of the Income Tax Act, a taxpayer is deemed to have disposed of all capital property (i.e., Investments in public and private companies, RRSPs/RRIFs, both investment and personally-used real estate, etc.), subject to certain exceptions, for proceeds equal to their fair market value at the time of death.  Unless the capital property is left to a surviving spouse, any resulting capital gain must be reported in the taxpayer’s income tax return for the year of death (terminal return). Included in income at death is the net capital gain recognized under the deemed disposition rules.

Simply put, taxes will be payable by your estate when you pass away.  With proper planning, these taxes can be minimized thus allowing you to leave as much as possible for your family and loved ones (instead of the government!).

Permanent life insurance plays a central role in the estate planning process because it protects and enhances the value of your estate.

The most efficient way to cover a future tax liability upon death is by purchasing permanent life insurance, which effectively transfers the risk away from the estate. This provides peace of mind while at the same time outperforming other alternative methods in terms of financial cost.

Permanent life insurance offers the following benefits:

  • Guaranteed tax-free death benefit at the time when it is needed most.
  • Maximizes the value of your estate.
  • Inter-generational transfer of wealth in a tax efficient manner.
  • Estate equalization.

Learn more about Permanent Life Insurance in Insurance Explained.

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I have been working with Mark and his team since I finished medical school in 2010. He is extremely reliable and knowledgeable and he goes above and beyond when it comes to customer service. His commitment to his clients needs is unparalleled. He has provided me with invaluable advice over the years about financial and insurance planning as I have progressed through the various stages of my medical practice.

Dr. S. Darvish – Cardiologist

Passive Investment Income Rules – Understanding their impact on your retirement and Professional Corporation

In 2018, the Federal government introduced new rules for passive investment income for Canadian Controlled Private Corporations (CCPCs).  One of the groups hardest hit by the new rules was physicians.

For many years, as small business owners, physicians have invested some or all of their retained earnings using a corporate investment account as a financial planning vehicle. Any income from that investment is called ‘passive investment income’. Dividends, interest and 50% of any capital gains are considered passive investment income.

At the same time, businesses apply the Small Business Deduction when they file taxes. Canadian-controlled private corporations (CCPCs) are taxed at the small business rate for the first $500,000 of Active Business Income (ABI) (9% Federal tax rate). For amounts over $500,000, ABI is taxed at the general Federal tax rate of 15%.

Passive Investment Income rules changed as a result of corporate tax rates being lower than personal tax rates. The Federal government felt that corporations could invest higher amounts than individual investors, which gave business owners an unfair advantage over individuals.

In other words, the business had more after-tax dollars to invest than if the money was withdrawn to a shareholder, personally taxed, and then invested. Although funds are taxed eventually when withdrawn from a corporation, the tax deferral advantage allows the investments to compound for years, resulting in a larger after-tax total down the road.

In general, the income eligible to be taxed at the small business rate declines as your passive investment income grows, as shown in the chart below.

The impact on your business will depend on your active income, passive income, and the province in which you do business thus the tax impact for your business may be substantially more significant than the Federal tax impact depicted in the following table. Ontario and New Brunswick decided not to follow the Federal rules so there is no reduction to the SBD for provincial purposes for passive income in these provinces.

Federal Tax Impact of Passive Investment Income*
Passive Investment Income SBD Limit Additional Tax
$50,000  $500,000  $0 
$60,000  $450,000  $2,500 
$70,000  $400,000  $5,000 
$80,000  $350,000  $7,500 
$90,000  $300,000  $10,000 
$100,000  $250,000  $12,500 
$110,000  $200,000  $15,000 
$120,000  $150,000  $17,500 
$130,000  $100,000  $20,000 
$140,000  $50,000  $22,500 
$150,000  $0  $25,000 

*Assuming a corporation has ABI of $500,000 per year

Essentially, the Federal government set a threshold for passive income within a CCPC of $50,000 per year. Every dollar of passive income above the $50,000 per year threshold will reduce the corporation’s Small Business Deduction (SBD) by $5.

Click here to see the impact of the Passive Investment Income Rules on your corporation

The Solution – Corporately Owned Participating Whole Life Insurance

Life insurance can be structured corporately and provide a unique strategy to remove investments from the income threshold test. Participating Whole Life Insurance is an excellent savings vehicle using funds from your Professional Corporation to accumulate wealth in a low volatility environment as well as enhance your retirement & estate planning.

Benefits of Corporately Owned Participating Whole Life Insurance:

  • Corporate Dollars – use corporate dollars that otherwise would have been subject to the Passive Investment Income rules.
  • Tax Advantaged Growth – the growth of the cash value within a Whole Life policy is tax-exempt.
  • Performance – the Participating Account (where premiums are deposited) has a strong history of stable and predictable performance, while at the same time providing low volatility.
  • Guarantees & Vesting – as policyholder dividends are received, their cash values and death benefits are guaranteed and vest immediately, meaning they cannot decrease in value.
  • Access to Cash Values – ability to access the cash value in your policy in a tax-efficient manner while you are alive.

Learn more about Life Insurance as an Asset Class & Corporately Owned Participating Whole Life Insurance in Insurance Explained.

I have worked with Mark and his team since I graduated medical school in 2008. Integrated Financial Strategies has addressed my insurance & financial planning needs in a professional and competent manner. I can rest assured that my finances are in order so that I can focus on the care of my patients.

Dr. Andrew Smith – Bariatric & Minimally Invasive Surgeon