There is Nothing so Certain as Death and Taxes

Or so the saying goes.  This certainly is true in Canada where there is a “deemed disposition” when a taxpayer dies.  What this means is that a taxpayer is deemed to dispose of all his or her assets at fair market value immediately preceding death. 

How does this affect your assets?

  • For certain assets (e.g. stock investments, company shares, revenue property, collectibles), if the fair market value is greater than the adjusted cost base then capital gains will result.
  • Fifty percent of capital gains are included in the deceased taxpayer’s income.  
  • Revenue property could also attract additional tax in the form of recaptured depreciation.

There are some exceptions

  • Assets which are left to a spouse will have the gain deferred until the spouse dies or disposes of the asset.
  • A principal residence is not subject to capital gains.
  • Shares that the deceased owned in a Qualifying Small Business Corporation may qualify for the Lifetime Capital Gains Exemption where the first $750,000 of capital gain is exempt from taxation.

Registered Funds receive different tax treatment

RRSP, RRIF, TFSA and Pension Funds

  • A spouse who is left registered funds by her husband or his wife may roll those funds into his or her Registered Savings Plan or Retirement Income Fund and avoid paying income tax.
  • Registered funds left to anyone other than a spouse or qualifying disabled child are fully taxable as income.  Some rules also apply to minor dependent children which involve spreading the tax by purchase of a qualifying annuity for 18 years less the age of the child at the time of acquiring the annuity.
  • Amounts paid to a beneficiary of a Tax Free Savings Account are not subject to income tax.

Other fees and costs

  • Funeral and other last expenses;
  • Probate fees;
  • Administrative costs and possibly legal fees.

Reduce or avoid the impact 

Estate planning and life insurance solutions

Freezing the estate which has the effect of fixing the amount of tax payable on assets upon death and passing future growth to the next generation;

  • In conjunction with the above, the use of a family trust with the objective of multiplying the number of Lifetime Capital Gains Exemptions on shares in a Qualifying Small Business Corporation distributed to other family members.
  • The use of joint accounts.  This strategy should be used with careful consideration and professional guidance.
  • Effective use of life insurance, both personally and corporately owned, which can provide sufficient liquidity at death to pay taxes with insurance proceeds rather than “hard dollars”.  This can be especially true by using Joint Second-to-Die life insurance which will provide proceeds to pay the deferred tax upon the death of the surviving spouse.

While we often complain about the cost of living, the cost of dying can also be extremely high and could create significant problems for those we leave behind.  With sound advice and planning the financial impact on your family and business partners can be softened and, sometimes, even eliminated. 

Do You Fly South for the Winter?

What Snowbirds Need to Know About Residency Rules

After another harsh winter, many Canadians dream of joining the large number of Snowbirds who make their way to the dry warmth of California, Arizona and Florida each winter season.  If you are contemplating, or already are, becoming a Snowbird and whiling away the winter months in warmer climes south of the border it is important to understand how the new U.S. Tax laws apply under these circumstances. The last thing you would want is to find that the Internal Revenue Service considers you a US resident making you liable for U.S. income tax or subject to U.S. penalties or both.

There are many Canadians who have the long held belief that as long as they spend less than 183 days in the US there is no problem.  This is no longer the case as the IRS has introduced a complicated formula as part of their Substantial Presence Test under which you will be considered to be a U.S. resident if:

  • The weighted total of the number of days you have spent in the U.S. over the last three years (as determined by the formula shown below) equals or exceeds 183 days, and:
  • You have been in the U.S. for more than 30 days in the current year.

The Substantial Presence Test uses the following formula in determining U.S. Residency:

  • Number of days in the U.S. this year,


  • 1/3 of the number of days in the U.S. last year,


  • 1/6 of the number of days in the U.S. the previous year.

If this formula returns the answer of 183 days or more, then you will be considered to be a resident of the United States making you subject to U.S. tax and filing requirements.  Under the calculations above, if you were to regularly spend 4 months a year in the U.S. you would be considered to be a U.S. resident.

It is also important to consider what the IRS considers to be a “day”.  Any portion of a day spent in the U.S. (for example, leaving in the early morning on a flight home) is considered a full day.  There are some exceptions to this, such as an inability to leave due to a medical condition that developed while in the U.S. or days in transit while en route to another country.

Should you be considered a U.S. resident there are two courses of action.  The first of these is to claim the closer connection exception allowed under the Internal Revenue Code.  To claim the closer connection exception and show that you have closer connections to Canada than the U.S. you must file IRS Form 8840 no later than June 15th of the following year.  Some factors which indicate a closer connection with Canada include:

  • Having a permanent residence in Canada;
  • Having family in Canada;
  • Banking in Canada;
  • Carrying on a business in Canada;
  • Having a Canadian driver’s licence;
  • Voting in Canadian elections;
  • Having personal belongings in Canada.

You are prevented from claiming this exception if you have spent more than 183 days in the U.S. in the current year or if you have or applied for a U.S. green card.  Also your request will be denied if you do not meet the June 15th filing deadline.

The second course of action is to claim a treaty exemption.  This applies in situations where a Canadian cannot claim the closer connection exception and now is considered to be a dual resident of both Canada and the U.S. In this event there are “tie-breaker rules” under the U.S. – Canada Tax Treaty which would alleviate the requirement to pay income tax in the U.S. but would still require you to comply with filing requirements.

In those situations where the closer connection exception is being claimed, and even in the rarer situation where the tie breaker rules indicate a U.S. and not a Canadian residency, professional advice should be sought as the rules become more complicated.

Since many of us aspire to spend extended periods of time in the sun during our winter months, it is a good idea to be well acquainted with the U.S. rules governing residency when that day comes.

1 in 3 Canadians Will Become Disabled Before the Age of 65

What You Need to Know About Your Group Long Term Disability

Having a source to replace your earned income in the event of an illness or accident is vital considering that on average 1 in 3 Canadians will become disabled for a period of more than 90 days at least once before the age of 65.  For those that are disabled for more than 90 days the average length of that disability is 2.9 years.

If you are one of the approximately 10 million Canadians covered under a group long term disability plan (LTD) it’s important to understand what your coverage provides. Don’t wait until after you’re disabled to read the employee handbook, because you could have a few surprises!


  • Generally, employee benefit LTD plans are designed to replace up to 85% of your pre-disability after tax income.
  • The amount of your benefit is determined by formula. These formulas vary so you know what yours is.


Usually, you are eligible for benefits to commence after being disabled for a period of 90 or 120 days.


  • If the LTD premium is paid by you personally then the benefit will be received tax free.
  • In groups where the employer pays the LTD premium, then the benefit when received will be taxable.
    • Should this be the case, make sure you discuss with your employer or insurer what your options are for having tax withheld if disabled so there will be no nasty surprises come tax time.


  • Pay attention to the Non-Evidence Maximum (NEM).  This is the maximum amount of disability benefit you would be entitled to without providing medical evidence.  You may be eligible to receive higher coverage if you take a medical examination.
  • You should also be aware that LTD benefits are usually offset (reduced), by any disability benefits you might receive from CPP/QPP or Workmen’s Compensation.
  • Any benefits paid as a result of an accident from an automobile insurance plan may also reduce your LTD benefits.
  • Most group plans have a waiting period, usually three to six months, before a new employee is eligible to join the plan.
    • If you were formerly a member of a plan at another employer, request that your new employer waive the waiting period.
    • If you’re an employee who was actively recruited or is considered a valuable addition, you should also make this request.


  • All of the above could certainly result in you receiving less disability income than you thought you were entitled to.  If this is the case, consider purchasing an individual disability policy to “top up” your coverage.
  • The good news here is that most Group LTD plans do not offset against personal disability income policies.

I hope you never experience a disability in your lifetime but if you do, make sure you do not suffer unnecessary financial hardship by being prepared.  If you are a member of an LTD group plan, I can help you to review this coverage and, if necessary, co-ordinate it with personal disability benefits to ensure that you have the right amount of income when you need it most.

Don’t Wait Too Long to Convert Your Term Insurance

If you require permanent life insurance coverage for family, estate planning, business, or tax planning purposes or you just wish to accumulate money in your life insurance program it may be time to look at a permanent, level cost solution.

Many of us purchase large amounts of low cost term insurance to cover our needs while we are raising our families or growing our businesses.  However, as the saying goes, “there is no free lunch”.  Eventually this low cost term insurance starts to become expensive and other options should be considered.  If you are unable to qualify for
a new permanent insurance policy don’t
worry, your safety net is the conversion
option in your existing policy.


  • A change in your health – you are no longer able to qualify for life insurance or you have received a sub-standard rating.  
  • A change in your residency – after you obtained your policy you relocated to another country.  Most insurers in Canada will not offer new coverage if you are living abroad.  Since the conversion feature in your policy is contractual converting to a permanent plan is allowed no matter where you reside.  
  • A change in occupation – health is not the only reason an insurer may rate (apply substandard rates) or deny your application for new coverage.  If you have changed occupations and now are employed in a more dangerous job, conversion allows you to obtain permanent coverage at standard rates. 
  • Convenience – Once you have decided that permanent insurance is required converting your existing term insurance is the easiest way of getting it.  Usually just your signature on a conversion form is all that is required.


  • Sooner rather than later – The low interest rate environment has resulted in the insurance companies regularly raising their long term insurance premiums. In this case, age is more than just a state of mind.  As you age your premiums increase significantly so it is always best to convert as early as possible. And to add insult to injury, insurance age changes 6 months prior to your birthday! 
  • Before your term insurance renews – If you are unable to replace your term insurance at renewal because of health, residency or occupation, your premium to renew will be substantially higher than what you are paying now. Converting to a permanent plan usually makes sense plus the converted premium is locked in and guaranteed for the rest of your life. 
  • Before Conversion Option expires – Conversion options vary but usually policies are convertible up until age 65, 70, or 75.  Waiting to convert will cost you more, increasing the risk of it becoming unaffordable when you may need it most.  It is important not to let your option pass without full consideration. 
  • Prior to December 31, 2015 – The government is making changes as to how the cash value growth of a life insurance policy will be taxed.  Generally, policies issued on or after January 1, 2016 will not perform quite as well as ones issued before that date.  If you are planning on obtaining a cash value life policy (Universal or Whole Life), you should do so before that date.

The Conversion Option contained in your term insurance policy is a very valuable feature that varies from company to company.  It may be appropriate to schedule a review to determine if you have a permanent need for insurance.

How Stable is Canada’s Life Insurance Industry?

Over the past decade, the number of life insurance companies operating in Canada has decreased dramatically because of mergers and acquisitions.  For example, people who had policies issued by Maritime Life, Commercial Union, North American Life, or Aetna Life now find themselves insured by Manulife Financial.  How concerned should we be about the state of the life insurance industry in Canada as a result?

As it turns out, insurance is one of the most closely-regulated industries in Canada.  Unlike the United States, in Canada there is a government organization that supervises all federally-incorporated and foreign insurers to ensure that these companies operate in a prudent manner.  This organization is the Office of the Superintendent of Financial Institutions (OSFI).  Companies that are provincially chartered are overseen by the province in which they do business.  Don’t worry, though: all of the major life insurance companies are federally regulated by OSFI.

OSFI oversees the stability of life insurance companies by requiring them to maintain adequate reserves, known as “actuarial liabilities,” to meet their future contractual obligations.  Life insurance companies are required to put money aside and invest it prudently in order to pay future benefits on policies that they have sold in the past.  These reserves are generated both from premiums paid to the insurer and the investment income earned on those premiums.  

Under the Insurance Companies Act, insurers are required to invest in a “reasonable and prudent manner in order to avoid undue risk of loss.”  OSFI requires an amount over and above these reserves, known as the Minimum Continuing Capital and Surplus Requirement (MCCSR) to be maintained by the insurer.  OSFI also requires that life insurers maintain an amount of capital equal to 150% of the MCCSR.  As of the end of 2012, the MCCSR ratio maintained by Canadian health and life insurance companies was 213%.

A not-for-profit organization called Assuris offers additional protection to life or health insurance policyholders.  This organization works in a manner similar to the Canadian Deposit Insurance Corporation and protects policyholders should their insurance company fail. Assuris guarantees contractual benefits to a minimum of 85%, with 100% protection for the following:

  • Death benefit: $200,000
  • Health expenses: $60,000
  • Monthly income (disability, annuity etc): $2,000
  • Cash surrender values: $60,000.

This combination of strong, effective oversight and regulating prudently-invested actuarial liabilities has resulted in a robust financial industry that has assets of more than $514 billion in Canada. In fact, 10% of all Canadian and provincial government bonds and 15% of all Canadian corporate bonds are held by the insurance industry.  Canadian insurers also hold $500 billion in assets abroad.

It is important to remember that no insured individual has ever lost any contractual benefits due to their insurance company being acquired by another.  Even though the life insurance industry in Canada has gone through significant changes in the past decade or two, the industry remains stable and capable of meeting its contractual obligations in the future.