Author Segal LLP

Life Insurance Policies as Investments

lores_insurance_policy_director_officer_board_mbUniversal life insurance and whole life insurance can be an attractive investment tool in the right circumstances.

Technically, the policies are life insurance policies, not investments, and the returns are generally slightly lower than mutual funds, but they have four significant advantages:

  • Proceeds are life insurance and thus not taxable.
  • The policy can specify a beneficiary and thus avoid probate fees.
  • The value of the investment grows tax free.
  • The policy is “creditor proof” because it isn’t subject to seizure by courts as other investments would be.

By paying more than the minimum premium, policy owners build up a surplus that can be put into various investments the insurance company holds on their behalf. The value of those investments is added to the face value of the policy when the insured person dies. That provides a tax-free payment of life insurance proceeds to the beneficiaries.

Since the life insurance company — not the policyholder — holds the investments the growth is not taxed the way other investments would be. This tax sheltering is similar to an RRSP, with the advantage that when the policy is eventually paid out on the death of the policyholder, there will be no tax on the proceeds.

You may also borrow money from the surplus in the policy at a low interest rate. This would allow you to finance your retirement from that surplus with tax-free money because the funds are in the form of a loan rather than income.

The loan is automatically paid off at death, reducing the insurance proceeds by the amount of the loan.

While the return on investment isn’t generally considered stellar compared to other investments because of the life insurance premiums that must be paid, these policies can be an attractive option if you need life insurance for estate planning purposes.

The actual life insurance cost (called the Cost of Pure Insurance) is very similar to term life insurance, and the policies offer the ability to accumulate a surplus that is invested to your advantage as the face value of the policies increase.

The underlying investments available in a life insurance policy have greatly increased over the past few years. Virtually any mutual fund is available through one carrier or another, along with annuities and GICs.

Talk to your financial advisor regarding these products if you think that you might benefit from universal life or whole life insurance.

Universal vs. Whole Life Plans

When discussing investments in universal or whole life insurance plans with your professional adviser, it’s important to know how the two plans differ.

Both contain four elements:

  • Mortality Cost: The part of the deposit that covers the pure cost of the life insurance death benefit.
  • Administration charge: This is the charge for administering the policy and premium tax.
  • Savings or Investment: The amount remaining after the above two charges are deducted. You will be provided with an illustration of how your savings will grow, often called the Cash Value, Fund Value, or Cash Surrender Value of your policy.
  • Return on the savings: This is the interest rate that is credited annually to the cash value in your account.

In addition, some policies guarantee that the costs will not change and guarantee a minimum return on investments.

Whole Life Insurance

These policies have a level cost that does not increase each year. Your first payment will be the same as your last payment. However, whole life policies disclose neither the mortality nor the administration costs.

Once those two costs are covered, the balance of the premium is the savings or investment portion. The returns depend on excess interest and investment earnings, savings in mortality costs, the operating expenses and the insurer’s board decision on what to pay.

Whole life policies also don’t disclose how they calculate returns on your savings portion and you cannot choose where the money is invested.

Universal Life Insurance

These disclose both the mortality charges and the administration charges, which are often guaranteed not to change for the life of the policy. These policies, in their newer forms, also offer a list of investment options that are similar in some ways to mutual funds. Some are even designed to reflect well-known funds and are even managed by mutual fund managers.

Get the Balance Right

Managing workplace harassment is a bit like navigating a minefield: You want to keep your company free of harassing behaviour; act quickly if there are incidents; and be fair to everyone involved. To complicate matters further, each of these issues presents potential liability.

There are several laws involved. The Canadian Human Rights Act, as well as provincial laws, puts the burden on

Identifying Harassment

lores_legal_law_judge_gavel_black_white_bzThe Canadian Human Rights Commission provides the following guidelines for defining harassment:
Unwelcome behaviour that demeans, humiliates, or embarrasses a person. This includes:

  • Actions, such as touching and pushing.
  • Comments, including jokes and name-calling.
  • Displays, such as posters and cartoons.

The Canadian Human Rights Act prohibits harassment related to race, national or ethnic origin, colour, religion, age, sex, marital status, family status, disability, pardoned conviction, or sexual orientation.

Disrespectful behaviour, commonly known as “personal” harassment isn’t covered by human rights legislation, but some employers put it in their policies.

Sexual harassment: This includes offensive or humiliating behaviour that is related to a person’s sex, creates an intimidating, unwelcome, hostile, or offensive work environment, or could reasonably be thought to put sexual conditions on a person’s job or employment opportunities.

Examples include questions or discussions about a person’s sex life; touching in an inappropriate way; commenting on attractiveness or unattractiveness; persisting in asking for a date after being refused, and writing sexually suggestive letters or notes.

Abuse of Authority. This occurs when a person uses authority unreasonably to interfere with an employee or a job. It includes humiliation, intimidation, threats and coercion.

Abuse of authority unrelated to the above legal prohibitions aren’t covered by human rights legislation, but some employers state in their policies that it will not be tolerated.

employers and managers to keep the workplace free of harassment. In addition, the Canada Labour Code requires employers to develop an anti-harassment policy and the Criminal Code protects people from physical and sexual assault.

When the Canadian Human Rights Commission evaluates a company’s liability in harassment complaints, policies and procedures play a major role. Employers are also responsible for monitoring the effectiveness of their policies, updating them if necessary, and ensuring that employees understand the policies and receive anti-harassment training.

It’s a good idea to get professional help drafting a policy. Among the components to include:

A clear and forceful statement. State that any form of harassment is intolerable and will be regarded as serious misconduct. This can help cut down on incidents and help employees feel comfortable filing complaints if necessary.

The consequences. Outline the potential penalties for harassment, including dismissal, and explain the steps that will be taken against individuals who make false accusations.

Definitions. Include examples of unacceptable conduct and list the categories covered under the Canadian Human Rights Act (for example, harassment based on sex, ethnic background or disability). Employees should know what harassment is and that it is against the law.

Rights and responsibilities. Employees need to know what is expected. Spell out the right to be free of harassment, the responsibility to treat others with respect, and, in the case of managers, the obligation to stop harassment.

Procedures. Outline the steps employees should follow if they are harassed. Sometimes employees are able to stop harassment just by speaking up or writing to the harasser. You can encourage them to do so. Keep in mind, however, that differences in power (age, sex, race, and so on) or status (such as a subordinate job) can make this impossible.

Investigations. Provide details of how charges will be investigated and resolved. Assure employees that everything will be confidential and that individuals making complaints or acting as witnesses on behalf of an employee won’t face penalties or retaliation.

A written policy can help employers decide whether to launch a formal investigation. For example, what is being alleged may not constitute harassment under the terms of the policy, because the offensive behaviour either was trivial or not based on a ground of discrimination as defined in human rights law. In such cases, informal discussions or counselling with the people involved may be sufficient.

Finally: Keep in mind that you are also responsible for harassment of non-employees by your employees. This includes potential employees, clients and customers.

(In a future article we’ll look at how to limit your company’s liability if an employee makes a complaint of workplace harassment.)

Be Careful When Dealing with Office Romances

thmb_business_tax_home_office_desk_laptop_amWhen Dealing with Office Romances

Prevent Disruption in Your Business

Professionals are judged for their professionalism. Well, at least they should be. But when it comes to workplace romances, sometimes colleagues judge each other based on who’s dating the boss.

“Sexual harassment does not include voluntary or consensual sexual contact between employees but “the Supreme Court has stated that managers who involve themselves with employees do so at their peril, as employees may later indicate that they felt coerced into the relationship even if that was not the manager’s intent.”

—  From the Manitoba Civil Service Commission’s
anti-harassment policy

 A Love Contract?

A few companies have adopted love contract policies, usually for top-level executives, CEOs, officers and, in some instances, directors.
They typically include:
A statement that each party is freely engaging in a relationship outside the workplace.
An acknowledgment that the parties feel no pressure to continue the relationship and fear no retribution if they choose to end it.
An affirmation that the parties will use the employer’s sexual harassment policy if problems arise as a result of the relationship.
An agreement to use an alternative to the courts to resolve work-related problems that might result.

“Employees flirting with each other, or becoming involved in a romantic or sexual relationship, are not harassing each other, as long as the relationship is consensual. If one of the employees changes her or his mind, and the other person persists in trying to continue the relationship, this is harassment.”

— From the Canadian Human Rights Commission’s
anti-harassment policy

In the past, some companies simply banned intra-office fraternization. But that often turned out to be largely unworkable. Thechemistry of human attraction has its own rules, and with long hours, long commutes and limited social lives, for many people these days, the workplace has become a natural environment for making friends and finding romance.

So much so that in one survey of Canadian employees, 63 per cent of respondents said they had been romantically involved with a co-worker. Another survey found that 17 per cent of working Canadians met their “significant other” at work.

But while workplace relationships may spark improved attendance, higher productivity and reduced illnesses, when those relationships turn sour, the fallout can disrupt the smooth flow of business.

Conceivably, the most destructive relationships are those between a manager and a subordinate. Most experts agree that these couples can promote jealousy and low morale among colleagues and open a company to charges of sexual harassment if the relationship ends badly. Moreover, such relationships can weaken a company’s credibility and destroy trust if co-workers start to think promotions depend more on who you know than on performance.

Fewer than one-third of Canadian companies have a romance policy. Instead, most take the position that relationships are private and inevitable given the long hours spent at work and that they are private. In general, businesses try to restrict activities that can harm business.

If your business is looking to institute guidelines for workplace dating, you want a policy that allows people to make decisions about their personal lives while limiting the possibility of sexual harassment litigation, conflicts and disruptions in the workplace. Here are four considerations:

1. Spell out standards for behaving responsibly with each other and with colleagues. Stress that “corporate couples” are expected to behave professionally at all times when they are on company business.

2. Clearly note that romance between a boss and a subordinate is inappropriate and subject to corrective action. The ethical move would be for the couple themselves to seek a change in the structure of their work relationship. While you don’t want to fire a manager for dating a staff member, you might want to transfer one or both of them to different departments.

3. Discourage displays of affection, sexual innuendo, suggestive comments and sexually oriented joking. As an employer, your business is legally bound to do everything possible to prevent sexually harassing behaviour.

4. Be clear that if an employee is not interested in, or receptive to, an advance from another employee, it should end there. Flirting and other acts of affection can be preludes to dating, but only if the receiving party is comfortable with them. They can also be preludes to sexual harassment claims.

Risky Business: Participating in the Hidden Economy

051317_Thinkstock_614316980_lores_kwRoughly $45.6 billion of the Canadian economy was “hidden” in 2013, according to a Statistics Canada study about the underground economy that was published in June 2016.

That amount was up 7.5% from the $42.4 billion that was off the books in 2012, and it represents about 2.4% of the nation’s gross domestic product. The lost revenue partly helps explain why the Canada Revenue Agency (CRA) tried to up its game by sending “nudge” collection letters to encourage players in the underground economy to pay up.

Unfortunately, the nudge experiment reportedly failed. An internal CRA report obtained by CBC News states: “In conclusion, we failed to find evidence supporting any of the three behavioural outcomes that the nudge campaign expected to produce.” (The campaign involved sending two different types of collection letters to taxpayers who were assessed — but hadn’t paid — their taxes. One version used friendly encouragement. The other contained less-friendly language. The results were compared with those from a standard stern collection letter.)

The CRA defines the underground economy as “business activity that is unreported or underreported for tax purposes.” The problem is so great that Ottawa has made it a priority to collaborate with provincial, territorial and industry partners to reduce it. In Budget 2015, the government earmarked $118.2 million over five years to bolster the CRA’s audit capacity by expanding its Underground Economy Specialist Teams. These teams use advanced data analysis to identify and adopt new approaches to combat the underground economy.

Appealing to the Public

But the CRA also wants help from individuals and businesses. On its current website, it states: “Hiring a landscaper? Paying cash to avoid the tax is risky.”

It goes on to say that the risks are particularly high when it comes to home renovations. In fact, residential construction accounted for nearly one-third (27.8%) of the underground economy in 2013 followed by:

1. Retail trade (12.5%), and

2. Accommodation and food services (11.7%).

Explaining the Risks

The CRA elaborates that when you deal with a contractor in cash, you have no protection against:

 

  • Poor or incomplete work,
  • Lawsuits if a worker gets injured,
  • Cost overruns,
  • Use of substandard materials,
  • Responsibility for damages to your or a neighbour’s property, and
  • Fraud, if you pay for work that’s never done.

 

In another focus area, the CRA is tackling the problem of unreported income in property flipping, which involves individuals buying and reselling homes in a short period for a profit. This includes real estate agents. Flipping is believed to be one of the reasons for overheated housing markets and underreported income.

Starting with the 2016 tax year, in order to claim the full principal residence exemption, taxpayers are required to report basic information (date of acquisition, proceeds of disposition and description of the property) on their income tax and benefit returns if they sell their principal residences. The tax agency also now requires that every sale of a principal residence be reported on Form T1-2016 Schedule 3, Capital Gains (or Losses).

Cautioning Businesses

The tax agency is also taking on businesses. It warns them that there are serious consequences for participating in the underground economy. Businesses must report all sales or income, as well as all work performed for cash. Otherwise, an enterprise owner could wind up paying hefty fines, face a prison term and lose the business. “It’s that simple,” the CRA cautions.

Employer responsibilities generally include:

  • Collecting and remitting payroll deductions for employees,
  • Reporting employees’ income and deductions on T4 or T4A slips, and
  • Registering for the GST/HST if revenue (before expenses) is more than $30,000 a year.

The CRA emphasizes that paying employees under the table is unfair to them as well as against the law. Affected employees are deprived of such benefits as:

  • Employment Insurance,
  • Canada Pension Plan payments, and
  • Workers’ compensation coverage.

Employers who pay in cash put themselves at additional risk. They could face administrative penalties and legal repercussions by provincial workers’ compensation boards for failing to report accurate payroll amounts, or failing to report an accident if the worker is injured on the job. In Ontario, for example, the fines for not following provincial workers’ compensation rules can be up to $500,000.

Take Steps

What can taxpayers do about all of this? Quite a bit actually:

File returns. Those who must file individual, corporate, or goods and services tax/harmonized sales tax (GST/HST) returns should do so accurately and on time.

Check payslips. Employees should check to be certain that their employers are withholding taxes to ensure they’ll receive their entitlements and benefits.

Make deductions. Employers, trustees, estate executors, liquidators, administrators or others who pay various types of taxes should be sure they make the required deductions. They must also remit those amounts, as well as any share they owe, to the CRA and report the income and deductions on T4,T4A or other summary and information returns.

Ask questions and get transactions in writing. Individuals planning to hire contractors or others should obtain written contracts and ask for proof of Workers’ Compensation or equivalent private liability insurance to cover injury and any damage that might occur in their homes.

If someone offers to provide services for cash, or you suspect an individual or business hasn’t reported all their income or GST/HST, you can contact the CRA through its Informant Leads Program. The agency will review the information provided to help identify and follow up with taxpayers who aren’t complying with their tax obligations.

Voluntary Disclosures

The CRA urges individuals who may have participated in the underground economy to come clean and correct their tax situations through the Voluntary Disclosures Program. Under certain conditions, this program allows individuals to correct inaccurate or incomplete information on their tax returns. They can disclose amounts that weren’t previously reported, without penalty or prosecution. They’ll pay the taxes owed plus interest.

An Alternative to RESPs

Statistics Canada estimates that the total cost of a four-year university education is more than $80,000,  including tuition, housing, food, books and additional fees.

lores_diploma_university_degree_bow_white_mb

The Real Costs of College

When you think about how much it’s going to cost to send a child to college, you often concentrate only on the direct costs such as tuition and books. But there are indirect costs that also need to be considered.

Here’s a list of both types of expenses to evaluate when you are planning the costs of giving your child a higher education:

Direct Costs

  • Tuition: Some schools charge a flat fee, but others charge by the credit hours taken. Assume a minimum of 15 hours per term.
  • Room: This depends on whether the student lives in a dorm, an apartment or group house, or with a relative. Colleges usually provide an average figure for dorms, so use that because you won’t know the actual amount until your child has been assigned a room.
  • Board: If your student eats on campus, the school may require all meals to be taken in a dining hall or other campus facility. Some schools offer flexible meal plans, which are handy if your child doesn’t need three full meals a day seven days a week. The school’s estimates won’t include snacks or socializing. If the student lives off campus, calculate based on the usual amount consumed in a week at home.
  • Fees: Some fees are required and others depend on the course of study. For example, if your child takes science courses, you may be charged a lab breakage fee for each course. Some schools charge a student services fee based on participation in certain activities. And there may be fees for uniforms and equipment if the student plays a sport.
  • Books and Supplies: This depends on the student’s field of study. Science books can cost as much as $75 or more, and a literature course could require as many as 10 books. There may also be charges for workbooks, photocopied articles and study guides.

Indirect Costs

  • Transportation and Travel: Include commuting from the local residence to classes unless the student lives on campus, and travel expenses to and from home during school breaks. If the student has a car, include parking fees, insurance payments, and gas, oil, and maintenance.
  • Personal Expenses: Don’t forget the costs of laundry, entertainment, toothpaste, razor blades, haircuts and the like. They add up.

So it is no surprise that parents are looking for efficient ways to finance their children’s educations. Often the parent, or a grandparent, will gravitate to a Registered Education Savings Plan (RESP), the country’s top choice for financing higher education.

The popularity of RESPs stems from tax-deferred compounded growth, lower taxes on withdrawals because they are taxed to the child, and federal grants that help build the savings even faster.

But if the beneficiary decides not to get a higher education you may not be happy with the rules for accessing the money you’ve been putting aside.

For one thing, you must return to the government the grant portion of the RESP.

Then, in order to access the remaining money, three conditions must be met:

1. The account must have been open for at least 10 years,

2. The beneficiary must be at least 21 years old and be ineligible to receive education assistance payments from the plan, and

3.You must reside in Canada.

And then you have only two choices:

1. Transfer the money to a Registered Retirement Savings Plan (RRSP) held by you or your spouse or partner, provided there is contribution room, or

2. Withdraw it as cash and pay both your marginal tax rate as well as a 20 per cent penalty on money that you earned in the plan.

The alternative to these savings plans is an informal trust account.

The key difference between saving in-trust for your child and setting up an RESP is that the child has guaranteed access to the cash when he or she reaches the age of majority in your province. The money does not have to be used for schooling but could instead go toward travel, buying a car or home, or setting up a business.

But the money does belong to the child. You cannot access it unless it is for the benefit of the child. The money in an RESP belongs to you.

These informal trusts differ from formal trusts. The latter require a legal trust agreement, generally cost more to set up and administer, and are usually used for very large sums of money.

Informal trusts are simpler to set up and generally take the form of an in-trust account with a bank, trust company, credit union, investment company or mutual fund company.

Unlike an RESP, there is no limit on how much money may be held in the trust and no limits on when and how much you can contribute. That means you can put aside more than the lifetime maximum of $50,000 per beneficiary allowed by the registered plans. However, the trusts do not qualify for the federal education grants.

While setting up and contributing to an in-trust account is relatively simple, the tax structure is complex.

Income attribution rules apply to in-trust accounts. That means income such as dividends and interest are taxed in the hands of the higher tax bracket parent or adult who set up the trust.  If the trust is used exclusively to save Canada Child Benefits payments, however, interest and dividends are taxed to the lower tax bracket child.

Generally, then, in-trust accounts focus on growth stocks or mutual funds that invest in stocks, where growth is primarily from capital gains. There is no attribution of capital gains, and thus they are taxed to the child.

When money is withdrawn, the beneficiary will not owe taxes on the amounts you contributed. That’s because you put in after-tax dollars, so you have already paid income tax on the principal invested.

Using informal trusts is a complicated and at times controversial strategy that involves complex tax issues often reviewed closely by Canada Revenue Agency (CRA). Be certain to consult your professional advisor for help minimizing taxes and getting the most out of an in-trust education account.