Monthly Archives: February 2012

We’ve all heard the saying – nothing’s certain in life except death and taxes. In the accounting business, we have lots of experience with both. When we meet with clients to talk about estate planning, we hear one issue all the time: when there’s a death, how do we pay the lowest amount of probate fees in Ontario?

If it sounds Greek to you, here’s a little more on why you should be interested. Probate is a procedure. A court will approve a will, and officially confirm the person named in the will as the estate trustee. It’s not mandatory, but you need probate when the estate owns certain types of assets such as real estate, publicly traded shares or funds held in a financial institution.

Where you need third party help to deal with a particular asset, you’ll need probate. The third-party institution will want official confirmation as to who has legal authority to deal with that asset.

Now that you understand probate better –here’s why you need to care. There’s a fee attached to the process, and it often carries sticker shock. In Ontario, probate fees are currently one half of 1% for the first $50,000, and 1.5% for the total estate value over $50,000. For an estate worth $1 million (including the value of the personal residence), you’re looking at fees of almost $15,000.

There are a number of techniques that can help reduce probate fees in Ontario. They include:

• Place the asset in joint names with the person who will ultimately be the beneficiary upon death. On your death, the property will automatically pass to the other person—and won’t be part of your estate. A warning: there can be immediate (and adverse) tax consequences if you transfer some types of property to a joint tenant who is someone other than your spouse.
• For certain assets, such as life insurance proceeds and RRSPs, you can designate the beneficiary as someone other than your estate.
• You can transfer property to the ultimate beneficiary during your lifetime either directly or to a trust on the beneficiary’s behalf.  Again, this could have immediate adverse tax consequences.
• You may have assets that can be transferred to beneficiaries without probate, like shares in a private company. You can reduce fees by making a secondary will just for these assets. Your executor will only need to apply for probate on the primary will.
• If you’re over 65 you can create an “alter ego” or “joint partner” trust to keep assets outside your estate, and reduce its value for probate purposes. You won’t give up your right to those assets during your lifetime. This type of planning offers a number of other benefits in addition to lowering fees. Next week I will offer more detail on this type of planning.

Sure, trying to minimize probate costs is an important part of estate planning. But at Silver+Goren we believe it shouldn’t be the primary driver of the will. Probate fees in Ontaro represent a one-time cost of 1.5% of your estate’s value. Setting up an estate with long-term tax savings for your beneficiaries is usually a much more important consideration than reducing fees in the short term.

As usual, we’ve given you a simple summary of some big ideas. Don’t forget the implications are extremely broad. Estate planning is a complex area for an accountant – and best done with professional help.

You want to make sure your financial future is bright, secure and comfortable. Knowing that is the easy part. Getting there can be challenging. At Silver + Goren, we believe you need to start financial planning as early as possible in your working life. This lets you meet day-to-day family obligations and build assets for the future, at the same time.

It sounds simple. But every day, we see people struggling to get started and follow through on the right steps. Let’s take a look at some of the most common roadblocks so you can avoid them, and stay on the smart money track.

The first and biggest issue crops up when people don’t define their financial goals.  The easiest thing you can do is document them on paper. By taking the time to detail what you want to achieve and then writing those objectives down, it’s much easier to focus and set up an appropriate strategy to accomplish your objectives.

Procrastination is a mortal enemy to effective financial planning. Sometimes, not making important financial and life decisions is worse than making bad decisions. Waiting for the perfect time for everything to be in place to start your financial plan usually means nothing gets done—that perfect time never arrives. You’re almost always better off taking actions and making decisions, for better or worse, than doing nothing at all.

Another big drain is when people don’t take the right steps to minimize taxes payable on income and investments. Failing to take advantage of things such as Registered Retirement Savings Plans, Registered Education Savings Plans, Tax-Free Savings Plans, Income Splitting and incorporating your business can significantly increase your overall tax burden. By properly planning your income taxes, you can dramatically increase the amount of assets you accumulate over time.

Inflation is another big problem. Ignoring the impact it has on your future purchasing power can have a very dramatic negative impact on your financial plans. This is especially an issue for people who invest assets with the sole objective of protecting the dollar amount of that investment, such as with term deposits. They’re so focused on protecting capital they fail to see that when you take into account inflation and income taxes, the actual investment value deteriorates over time.

Taking unnecessary risks with your investments can also result in major losses. Many people decide to enter the stock market only when it’s close to its peak. Usually this is because they’ve read in the papers and heard from their friends how easy it is to make money in the market….then they panic, and decide to get out after there’s been a significant decline. This will invariably maximize your losses. What you want is a long-term, value driven approach that diversifies your investments among different types of asset classes, geographical areas and industries so you can most effectively minimize risk.

Making financial decisions ad hoc without having an overall financial plan increases your risks. It’s a mistake because there’s no context to guide your decisions. If you react to specific events in your life or the economy without being clearly focused on your goals, you tend to make bad decisions.

Failure to get appropriate advice from professionals such as financial planners, accountants and lawyers can also increase your risk of loss and make it harder to achieve financial success.

Effective financial planning requires a mix of planning, implementation, consistency and…sometimes most challenging…patience.

In case you didn’t notice, February has crept up on us. That means the deadline to buy RRSPs, and, most importantly, to get a tax deduction for 2011, is February 29^th.  A lot of Canadians leave these decisions to the last minute – and in the end, only about a quarter of us will contribute to RRSPs at all.

In this season, we’re often asked: “Are we better off buying an RRSP, paying down our mortgage or contributing to a tax-free savings account?” Of course, there’s no easy answer. Each investment vehicle offers different advantages.

Putting money in an RRSP creates a tax deduction that can save you in Ontario up to 46% in taxes of the amount of your contribution. It also allows your funds to accumulate income on a tax-deferred basis. You only pay tax on your RRSP when the monies are withdrawn. And you don’t need to withdraw money from the plan until you turn 71. This tax-deferred feature allows your investments to compound much faster than if they were held outside the plan.

For most people, interest on home mortgages isn’t tax-deductible. Let’s look at an example  If you pay 4% interest on your mortgage, you would need an investment that pays 7.4% pre-tax, which would then net you 4% after-tax. That gives you an equivalent return as the payments on your house mortgage. In today’s market, it’s very hard to find a low-risk investment with a 7.4% return. By paying off your mortgage at a rapid rate, you can generate a return on your investment equal to 7.4% per year in this example.

Also, if you pay down your mortgage quickly, the amount of non-deductible interest you’ll pay in the future will shrink. If you’re paying 4% on your loan, you’ll pay almost $58,000 in interest on a $100,000, 25-year mortgage. Paying it down quickly will substantially reduce your total interest payments—leaving extra cash for RRSPs and other investments.

Tax-free savings accounts don’t offer any tax deductibility when you make a contribution. But, any income you make in the plans is tax-free. This is attractive when you have an opportunity to make an investment you think will generate substantial returns.

So how do you choose what to do before this February 29^th? The best way is to look carefully at your circumstances. For example, if you’re young and you want to be able to retire debt-free, you may want to maximize your RRSP contributions and be content to make your regular monthly mortgage payments. Since most mortgages are amortized over 25 years, you would be debt-free after that period of time while also having built up substantial monies in your RRSP for retirement.

One option we recommend is to maximize your RRSP contributions annually and then take whatever taxes you save there and make a lump sum pay-down of your mortgage. If you are in the top tax bracket in Ontario, for every $1000 you contribute to your RRSP, you can pay down your mortgage by $460. This solution gives you the best of both world and  helps you maximise your year end tax planning opportunities.

Whichever path you choose, the most important part is to consider your future and design an appropriate financial plan to get where you want to go. Getting that plan off the ground early in your career is very important to build enough money for a comfortable and debt-free retirement.

Real estate investments can be an important part of your financial plan. They’re considered a viable alternative to investing in the stock market, and can also diversify your investment mix. Toronto is a great example of a real estate hot spot – the market has climbed steadily over the last few decades. Combine that with very low vacancy rates and you can see why, over time, the potential for serious capital appreciation is high.

Generally speaking, the net income earned from real estate is taxed at your marginal tax rate for the particular year. But what happens when you sell? Most people expect gains to be taxed as a capital gain, and taxes to be payable at your marginal tax rate, times one half the gain amount.

But there are situations where gain from a real estate sale can be taxed as regular business income (and not a capital gain). This will put you on the hook for double the tax.

If you have a proposed sale on the table, you want to know how you’ll be taxed. To figure it out, you have to go back to the beginning – the key criteria here is your intent when you bought the property. The distinction is in whether you bought to earn rental income through leasing, or if you were just renting it out in the short-term to eventually sell the property at a profit.

That divide may sound straightforward. There have actually been many court cases litigating this issue trying to determine whether gain from a real estate sale was on account of income or capital. Over the years the courts have looked at a number of factors to figure it out. They include:

• The original intention of the taxpayer when they bought
• How feasible the taxpayer’s original intent was, and how far he got in accomplishing this
• The probability of success in accomplishing the objective
• The particular zoning of the property
• How much borrowing was needed to buy, and what were the borrowing terms
• How much work was done to the property
• Was the property actually able to earn income
• How long was the property owned by the taxpayer
• How frequently does the taxpayer engage in this type of activity
• How experienced was the taxpayer in real estate matters

No single factor on the list is a specific determinant. Courts look at the big picture around the acquisition and sale of the property when they make decisions.

If you’re in a situation where there could be any doubt as to whether a transaction is considered income or capital gain, make sure you have all your paperwork in line to support whichever position you take.

Appropriate tax planning for the acquisition and disposition of real estate involves not only understanding but documenting your intent when you buy, to make sure you can justify the outcome you’d like to achieve. If you are contemplating a sale and think you may run into a roadblock, please contact us at Silver + Goren and we will happily provide you a free consultation.

Sometimes the biggest problem with being a small business is that…you’re small. You’re the David, fighting to gain foothold in industries with lots of competition and dominated by a few Goliaths. It’s tough to find a way to stand out to customers and differentiate your work from everyone else’s.

Any course in Marketing 101 will talk about setting yourself apart from competitors, so you can gain market share and support premium pricing. If you can do it right, differentiation can add significant value to your business, especially if starting your own business.

Sounds simple, right? In theory it is, however in practice it’s no easy task.

Fortune Magazine occasionally runs a piece on Best Practices called David vs. Goliath. It looks at several small businesses successfully competing against dominant companies. I enjoy reading it – it’s reassuring to see this type of differentiation is possible, and successfully achieved by creative entrepreneurs. You can pick up insights from their strategies.

Here are a few of my favourite examples.

Kayos Productions vs. Rogers and Cowan (December 6, 2010): Rogers and Cowan is a dominant publicity firm with offices around the world. By offering a personal touch together with a full line of services, Carol Kaye was able to generate a client roster including some very high-profile musicians.

Ace Hardware vs. Lowe’s: The same piece also looks at how the local Ace Hardware franchise can compete with Lowe’s—a national big box competitor. By focusing on niche products not sold at the big box stores, and providing more in-depth service and support than the competition, Ace was able to create a different space for themselves.

The Gelato Fiasco vs. Haagen Dazs (November 7, 2011): This piece shows competition is possible even in consumer products. Fiasco produces about 32 limited-edition flavors a season, compared to 5 or 6 from its competitors. They partner with independent shops including Whole Foods to distribute their product rather than developing their own stores.

Jack Black vs. L’Oreal: A small local manufacturer competes in another consumer product area with the cosmetics giants. It developed a macadamia-nut-oil-infused shaving cream and skin treatment that retails for about $16 for a six ounce bottle, and is distributed through premium retailers such as Neiman Marcus and Nordstroms.

In all these cases, it’s all about effective strategies. That can mean more personal attention, better product education and support, higher quality ingredients and products, or targeted distribution channels. Whatever the strategy, the goal is to create space between small businesses and multinational competitors—and as you can see, it can work. These are inspiring examples of how new businesses can create effective strategies for differentiating their business in cluttered marketplaces.