Author Segal LLP

Caution Is the Rule in Naming RRSP Beneficiaries

Selecting beneficiaries of your registered retirement plans is one of the most important financial decisions you will make, and with a little thought you can maximize the benefits to your heirs by deferring taxes and keeping the assets out of probate and away from creditors.

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Review and Revise

Review your Will and other estate documents often to ensure that all the paperwork is consistent or problems can arise.

For example, say you name your daughter the beneficiary of a particular RRSP. You later make out a Will leaving all your RRSPs to all your children, but you leave your daughter’s name on that one plan. A Will can generally override an RRSP or RRIF beneficiary on file at a financial institution when the Will was prepared or updated at a later date. That is an unintended consequence of failing to review and compare documents periodically.

When you have more than one plan, it’s a good idea to list in your Will the number of each, the institution holding it and the intended beneficiaries to help avoid confusion and potential contention.

The most important action is to actually name someone to receive the assets from your Registered Retirement Savings Plans (RRSPs) and your Registered Retirement Income Funds (RRIF). Otherwise, the plans automatically go into your estate, which pays taxes that can devour as much as half the value of the assets.

Your estate will also have to pay probate fees and the assets become subject to creditors’ claims. (See right-hand box for other potential complications to avoid.)

When considering your registered plans it is critical to note that if non-dependent children or others are left plan assets in your Will, the full value will be taxed as income in your final return and only then will they receive their share of the estate.

Tax-Deferring Strategies

You can defer taxes if your beneficiary is:

  1. Your spouse or common-law partner, or
  2. A financially dependent child or grandchild who is either under the age of 18 or is mentally or physically infirm.

When you name your spouse or an infirm dependent, the assets are simply rolled over into the person’s registered plan, including a Registered Disability Savings Plan (RDSP). With an infirm beneficiary, the assets can also be used to purchase an annuity.

Spousal rollovers don’t use contribution room, but RDSP rollovers reduce the lifetime contribution limit of $200,000 and don’t generate a federal contribution.

Healthy financially dependent minors have the sole option of purchasing an annuity that must mature when they turn 18. The annual payments will be taxable.

In all these cases, the beneficiaries will pay taxes on plan withdrawals or annuity payments.

Successor Annuitants

Your options widen a bit when you name your spouse or common-law partner beneficiary of your RRIF. You can:

  1. Name your spouse the “successor annuitant,” where he or she simply starts receiving the payments.
  2. Arrange a lump sum payment. The fund will be collapsed, the investments sold and the proceeds rolled over into the spouse’s RRSP or RRIF. Among the disadvantages of this option is that the timing of the collapse may not be the best for selling the assets and there will be management fees.

Other Beneficiaries

Estate: It may make sense to name your estate the beneficiary if you want to:

  • Spread the tax liability among all your heirs;
  • Distribute assets to several people in different amounts;
  • Impose conditions on an heir in order to receive the assets, and
  • Hold the assets in trust.

Charity: You can name a registered charity and receive a tax credit of as much as 100 per cent, which can effectively eliminate taxes on your final return. You can instruct the charity how to distribute the assets through a Letter of Direction.

These are just some of the complexities involved in choosing beneficiaries for your registered retirement plans and minimizing taxes on your final return. Your accountant can guide you through the maze of estate planning.

Boost Company Success with Performance Measures

lores_project_plan_chart_progress_milestone_strategy_amIf you own a small business, you might consider incorporating performance measures to help it grow and become more successful.

Performance measures comprise aspects of your business that answer a basic question: “What key procedures or operations need to change to ensure our company’s continued success?”

Walmart is a good example of effectively using performance measurements. The company determined that to be competitive it had to streamline purchasing, lower costs and maintain top notch customer service.

The company started using satellite transmission technology to purchase directly from suppliers. That reduced purchasing costs and allowed Walmart to hold just enough inventory to serve its customers’ needs regularly without the cost of maintaining excess stock.

The company also created and hired the famous “people greeters” who welcomed customers as they walked into the stores. The tactics worked — the company successfully trimmed costs and improved customer satisfaction.

Take some time to review the processes that are critical to the success and continued operation of your business. Assess where your business operations can be improved. Most performance measures fall into one or more of the following categories:

Effectiveness: How well does the product conform to company and customer requirements?

Efficiency: How well does a process produce the required output at a minimal resource cost?

Quality: How well does a product or service meet customer needs and expectations?

Timeliness: Are units of work done properly and on time? You will need to define timeliness for discrete units of work, typically based on customer needs.

Safety: How do you rank the overall health of the organization and the working environment of its employees?

You may need to develop additional or different categories depending on the industry your business operates in and its mission.

While this may sound complicated, the process starts out quite simply with these two steps:

  • Review and evaluate how your business is functioning. As the owner you may be too close to the company to be objective about its strengths and weaknesses, so consider consulting with employees and customers for a more objective and accurate assessment.
  • Develop a clear vision of where you want the company to go. Part of this is determining whether you want a company that can simply provide you with a good standard of living in retirement or one you can pass on to your heirs who can expand the business and help it keep up with changing customer needs.

Write down your observations. Many managers understand the direction the company should take but never take the time to record it. Documenting the vision clarifies what the business is for both the employees and the customers. A good company vision can be explained in one sentence. Beauty products company Avon, for example, states it this way: “To be the company that best understands and satisfies the product, service and self-fulfillment needs of women – globally.”

Being aware of the gaps between what the company is now and what you want it to be in the future is critical to determine what actions you need to take. The processes you need to focus on could range from sales through production, but you must know what they are before you can work on closing the gaps between current operations and the future you hope for.

Most successful companies use performance measurements to stay on track and meet their visions and goals. Consult with your managers and advisers to help you measure and monitor key processes and areas at your company.

A Quick Guide to Bankruptcy

lores_bankrupt_business_debt_due_mbHere are some frequently asked bankruptcy questions. However, these answers only provide general information.

Consult with your accountant and legal adviser about how to proceed in your specific situation.

Q. Times have been hard on our business and we’ve been considering bankruptcy. What are the pros and cons?

A. Bankruptcy filings are generally a last resort. They could ruin your company’s reputation and will damage its ability to get credit for years. If you run into a brick wall with your creditors and run out of alternatives, however, your business may have no choice but to file for bankruptcy, primarily under one of the following two federal statutes:

 Types of Bankruptcy and Characteristics
 The Bankruptcy and Insolvency Act (BIA) Available to companies whose debts total more than $75,000 and less than $5 million. Allows for both reorganization under court supervision and liquidation.
 The Companies’ Creditors Arrangement Act (CCAA)  Available to businesses with debts exceeding $5 million. They continue to operate under court supervision while negotiating a Plan of Arrangement to pay creditors.

Creditors can initiate an involuntary bankruptcy proceeding under both laws, subject to certain requirements.

Under the BIA, if your enterprise is insolvent a trustee takes possession of its unsecured assets and liquidates them, distributing the proceeds to creditors. Under reorganization, your business continues to operate while it comes up with a proposal to pay its debts, generally at a discount. A majority of creditors, as well as the court, must agree to the plan.

Once the reorganization is complete, the trustee discharges your business from bankruptcy. If creditors or the court reject the plan, your enterprise automatically is placed into liquidation.

Under the CCAA, the court appoints a monitor to look after the interests of creditors and to report on the reorganization progress. Your company’s management generally remains in charge, but the monitor will have a certain amount of authority.

Talk to Creditors

Talk to your company’s creditors to try to work out lower payments over a longer time frame.

This may buy your company more time to get back on track and you might be able to settle your debts for less than you owe, while maintaining a good credit record. Your accountant and legal advisors can provide guidance on how to go about these negotiations as well as help you find other options.

Q. One of our company’s customers owes us a great deal of money and has told us that the business is declaring bankruptcy. Should we back off?

A. Yes, provided that the customer has actually filed for court protection from creditors and is reorganizing. In BIA reorganizations, an automatic stay of proceedings is imposed on secured and unsecured creditors. The court can lift the stay under certain circumstances. Unsecured creditors can ask for relief from the stay but rarely are allowed to seize assets.

Similarly, under CCAA reorganizations, a broad stay on collections is imposed on both secured and unsecured creditors. As long as the stay is in place, creditors cannot take any action to collect debts. The initial stay is limited to 30 days, but the court may extend that any number of times if it determines that the Plan of Arrangement isn’t prejudicial to the creditors.

Until the customer actually files for bankruptcy proceedings, however, you can take whatever legal means are available to get your money, including repossession or negotiating a deal under which you might get more than you would in a bankruptcy proceeding.

Caution: If a customer pays you in preference to other creditors under a negotiation and then files for bankruptcy, the company may be charged with fraudulent preference.  If that happens, its possible you — or the customer — will have to pay back the money.

Q. If a customer files for bankruptcy proceedings, will we get any of our money?

A. That depends on the nature of the case and your creditor status.

Under the BIA, if the customer goes into liquidation, the trustee sells all inventory, accounts receivable and other property covered by a court order. The proceeds will be used first to pay priority creditors and trustee costs. The balance, if any, is paid to unsecured creditors. Secured creditors aren’t affected by this process, as they have the right to repossess secured assets and liquidate them to recover what they are owed.

If the customer is reorganizing, the amount you  receive  will depend on the terms you and other creditors agree to and your creditor status.

In CCAA reorganizations, there is a lot of flexibility on what the Plan of Arrangement can involve. It often includes offers to pay a percentage on the dollar of the money owed, and can call for swapping stock or a combination of cash and shares for debt. In order to be able to vote on the plan and receive any distribution you must file a Proof of Claim with the monitor.

Generally, creditors are paid in this order:

  1. Super-priority creditors such as the Crown for environmental damage costs and certain unpaid pension plan deductions.
  2. Secured creditors, including lenders and debt holders, who have a claim for debts incurred for a specific purchase (for example, a bank holding a mortgage).
  3. Preferred creditors, including those with certain wage claims, municipal tax authorities and landlords owed rent.
  4. Unsecured creditors such as suppliers and credit card companies who extended credit based on a promise to pay.
  5. Preferred shareholders.
  6. Common shareholders.

Under the CCAA, if a company defaults on a payment to a secured creditor, that creditor has the right to take possession of assets, sell off collateral and sue the company for any amount still owed. Also, if a class of creditors or the court does not approve the plan, the stay is lifted, which increases the likelihood that your business will be placed into bankruptcy.

Q. Will my company’s tax debts be eliminated in a bankruptcy filing?

A. Only if your business actually goes bankrupt. But even then, there are special rules that deal with tax debts in bankruptcy, so you really need to ask your tax accountant to review your company’s situation and confirm that your tax liability will be discharged if your enterprise goes bankrupt.

Q. I am on a corporate board. Are my personal assets at risk if the company files for bankruptcy proceedings?

A. That depends on the provisions of your directors and officers liability insurance policy (D&O policy). Review your company’s policy to determine if it covers defense costs and damage awards in the event of bankruptcy. For example, among other protections, the policy should:

  • Provide separate coverage for directors and the corporation or include excess coverage for directors and officers.
  • Allow continued coverage for innocent board members.
  • Require the insurer to pay covered defense costs and damages in advance or as they are incurred so that you don’t have to pay potentially millions of dollars and wait for reimbursement.

There are many other significant provisions related to bankruptcy that should be included in your D&O policy. Your professional advisers can help you determine what specific coverage you need.

Q. I hold stock in a company that appears likely to file for reorganization under CCAA. What happens to my investment?

A. Holders of common stock are typically last on the list and often get none of their investment back. Holders of preferred shares rank ahead of common shareholders, but often do not get back the full value of their shares. The CCAA allows a company to include shareholders in its reorganization plan and they then typically can vote on the proposal.

Ottawa Tightens Mortgage Rules to Cool Housing Markets

100716_thinkstock_464679012_lores_kkOttawa is acting to curb risks in the housing market, unveiling new measures to crack down on speculation and make it harder for homeowners to take on unaffordable debt. And while the moves are aimed primarily at the overheated Vancouver and Toronto markets, the new rules are likely to affect all home buyers.

It used to be that anyone who sold their principal residence in Canada didn’t have to report the sale — or the profit from it — to Canada Revenue Agency (CRA) as long as they were living in the home.

But that’s changing. Under new rules, taxpayers who claim an exemption from capital gains tax when selling their home will have to report the sale on their tax returns. The CRA will examine tax forms to verify that the beneficial owner of a property lived in Canada and was living in the home.

Families will be allowed to claim an exemption on only one home a year and the home’s owner must live in the property. Capital gains must be paid on the sale of secondary properties, such as cottages and homes that are used as a rental property to generate income.

The change was spawned by concerns that speculative investors, particularly from abroad, are buying and flipping homes in Canada for a quick profit. Moreover, to avoid paying taxes, they’re falsely claiming the primary residence exemption without actually living here.

As a result, many families have taken on high levels of debt to buy a home before it’s too late. Two more changes targeting the mortgage insurance market are aimed at stopping that.

“Stress Test”

First, starting October 17, a mortgage stress test is being expanded to cover all insured mortgages — including those where the buyer has a down payment of more than 20%. The test is aimed at ensuring that home buyers will still be able to afford the mortgage if interest rates rise, or if their income drops. Currently, stress tests aren’t required for fixed-rate mortgages longer than five years.

While many buyers are currently qualifying for five-year mortgages at around 2%, they’ll now have to prove that they can make mortgage payments at the Bank of Canada posted rate of 4.64% — which, in heated markets such as Toronto or Vancouver, can add tens of thousands of dollars a year in interest charges.

Existing rules require home buyers who take out short-term or variable-rate mortgages with down payments of 20% or less to prove they can afford payments at a much higher interest rate than they’ll actually pay. Meanwhile, borrowers who take out fixed-rate insured mortgages of five years or longer have their income tested against the interest rate that they will actually be paying. The end result is that borrowers can now typically qualify for much larger mortgages if they opt for a longer-term, fixed rate mortgage.

The stress test also requires that home buyers won’t be spending more than 39% of income on such housing-related expenses as mortgage payments, heat and taxes. In addition, total debt service (TDS) mustn’t be more than 44%. TDS is the percentage of the borrower’s income that is needed to cover housing costs plus any other monthly obligations, such as credit card and car payments.

Low-Ratio Mortgages

In addition, new restrictions are being imposed on when Ottawa will insure low-ratio mortgages. These measures are aimed at portfolio insurance, a type of bulk insurance that banks use for mortgages with down payments of 20% or more. Starting November 30, the federal government will require portfolio-insured mortgages to qualify under the same criteria used for the insurance taken out on homeowners with small down payments.

The new rules will be based on the following criteria:

  • Amortization is 25 years or less,
  • The purchase price is less than $1 million,
  • The buyer’s credit score is at least 600, and
  • The property will be owner-occupied.

So, under the new stress test, if you were to buy an $800,000 home, you’d need to make a down payment of 5% on the first $500,000 ($25,000) and 10% on the remaining $300,000 ($30,000) for a total of $55,000 or 6.9% of the total purchase price, according to mortgage website Ratehub.ca. Previously, you would’ve only had to put down $40,000.

The new stress tests apply only to new mortgages, not renewals. However, the effect is likely to be significant as a majority of homeowners are thought to take out the types of fixed-rate mortgages that will be affected by the stricter qualification requirements.

While Finance Minister Bill Morneau said the stricter “stress test” will likely have the greatest impact on expensive housing markets such as Toronto and Vancouver, he acknowledged it will also affect home buyers in softer markets. “We’re trying to manage the risk for all Canadians,” he said, adding: “We worry about someone in Halifax or Ottawa or Saskatoon as much as we worry about someone in Toronto or Vancouver.”

Mr. Morneau said he expected the changes would have a “modest” and gradual effect on the Canadian housing market. “It’s hard to state with certainty what the outcome will be,” he said. “For some buyers they might defer their purchase for a little while; for other buyers they might decide to buy a slightly less expensive home.”

How Much Can Lenders Handle?

The Finance Minister also said that the government will release a consultation paper in the coming weeks, to solicit views from mortgage lenders about how they can take on more risk in the market. Because many mortgages are guaranteed by Canada Mortgage and Housing Corporation (CMHC), Mr. Morneau said that too much of the responsibility is currently placed on the government and taxpayers.

Bottom Line: If you’re considering buying a home, consult with your advisors, who can help ensure that your monthly mortgage payments fit neatly within your finances and your financial plans.

Canada Lags Badly as We Head toward the Digital Future

101416_thinkstock_178976393_lores_kwDigital disruption is described as the changes that occur when new technologies and businesses models have a negative effect on existing goods and services. Despite some activity, Canada is lagging the rest of the world in companies transforming to take on the challenge.

Technologies Taking Hold

A recent example of digital disruption is Uber, the smartphone ride-hailing app. If you’re not familiar with the service, you push an icon on your smartphone to order a driver, and the app tells you when a car has accepted the job, when it will arrive and about how much it’s going to cost (generally less that a regulated taxi). The drivers are regular folks driving their own cars.

It’s no surprise the taxi drivers in cities where Uber has made inroads are unhappy and protesting the service. In Quebec, for example, there has been turmoil, protests and arrests all related to the provincial government’s plan for a pilot project where Uber can operate freely until legislators decide what to do.

What Uber is doing to the car industry, Airbnb has done to the hotel industry (people rent out their homes or apartments on a short-term basis at prices lower than hotels charge). Facebook, Amazon and Netflix have also disrupted their respective industries (the most popular media owner creates no content, the world’s most valuable retailer owns no outlets and the world’s largest movie house operates no cinemas).

Digital Definitions

Technically, digital disruption is when new digital technologies and business models affect the value proposition of existing goods and services. Digital transformation is what happens before the disruption or in response, when businesses alter their activities, processes, competencies and models to take advantage of the changes and opportunities of digital technologies.

And because of digital disruption, 78% of business around the globe believes that digital start-ups pose a threat to their organizations and 45% worry that the competition from these up starts may make them obsolete in the next three to five years. These are among the results from Embracing a Digital Future — Transforming to Leap Ahead, a survey performed for Dell Technologies by independent technology market research company Vanson Bourne.

Vanson Bourne surveyed 4,000 business leaders — from mid-size to large enterprises — across 16 countries (including Canada) and 12 industries.

The bad news for Canada? It ranks among the least digitally mature countries, ahead only of China and Japan.

Why? This country faces less digital disruption compared to others — so far (see the box below for a list of some of the many companies disrupting digitally in Canada). A “perfect storm of slow digital adoption and less disruption finds Canada among the bottom three countries in digital maturity,” according to Dell.

Looking at the Past and Toward the Future

Only 35% of Canadian companies have experienced significant industry disruption over the past three years, compared to 52% of companies globally. Additionally, only 48% of Canadian companies have seen new competitors emerge as a result of digital technologies, compared to 62% globally.

According to the survey, 72% of Canadian businesses admit they haven’t acted on digital intelligence, compared to 64% globally.

Other, global results from the survey are:

  • 48% of businesses don’t know what their industry will look like in three years,
  • 60% can’t meet customers’ top demands,
  • 73% confess digital transformation could be more widespread in their organizations,
  • 66% are planning to invest in IT infrastructure and digital skills leadership,
  • 72% are planning to expand their software development capabilities, and
  • 52% have experienced significant disruption in their industries over the past three years as a result of digital technologies and the “Internet of Things” (IoT).

The top IT investments planned over the next three years are:

1. Converged infrastructure that attempts to minimise compatibility issues between servers, storage systems and network devices,

2. Ultra-high performance technologies such as Flash,

3. Analytics, big data and data processing such as “data lakes,” which hold vast amounts of raw data, and

4. IoT technologies, which encompass networks of connected objects that can collect and exchange data using embedded sensors (think of thermostats, lights and cars that can all be connected to the Internet).

Additionally, 35% of respondents have created full digital profit-and-loss statements, 35% are partnering with start-ups to adopt an open innovation model, and 28% have spun-off a separate part of the organization or intend to acquire the skills and innovation they need through mergers or acquisitions. Just 17% measure success according to the number of patents they file, but nearly half (46%) are integrating digital goals into all department and staff objectives.

What Can Your Business Do?

So, digital disruption and transformation is fast becoming the new normal and nothing seems to be able to stop it. If you don’t want to be left behind, here are five ways that may help your business create a digital transformation strategy and meet the challenge head on:

1. Focus on customers. Businesses often view the world through the filters of marketing, sales and maximized revenues. Instead of thinking about business success, target the customer experience. One large hotel chain, for example, uses customer data to discover patterns that help their hotels boost customer service. For instance, the company can combine data it has on flight connections with the buying patterns of it top customers. If one of those customers misses a flight connection, the company will know that. They will also know facts such as he or she has bought martinis, shaken not stirred, and the last three times he or she was at a company property. Consequently, when the customer arrives, regardless of the hour, martinis could be delivered to the room.

2. Make analytics your friend. Stop thinking of marketing and sales data as simply marketing and sales data. Develop a strategy to access, analyse and use that data. Tap the brains of analysts who can think outside the box of departmental silos in order to combine all types of data, including point of sale, sensors and machines, logs and social streams. Then use that big data to innovate.

One large North American fashion retailer operating in Calgary, Ottawa, Vancouver and Toronto, invests heavily in big data analytics to figure out what products to promote to which customers, when, and by what channel. Apart from the data from its website or point-of-sale data, the company generates data from its likes on Facebook and its followers on Pinterest and Twitter.

The retailer has implemented a cross-channel inventory project that lets customers see in real-time where a product is available and when they can expect to receive it. This company (as well as other large retailers) have integrated online inventory as well as in-store inventory.

3. Unify your operations. Best-practice organizations assess digital requirements from across the business and then set objectives. Most organizations have multiple teams and departments involved in digital transformation. It’s crucial to ensure that all of your business is aligned and operating toward the digital goals you’ve defined.

Prepare your team in advance by making it clear that the project will require the business to operate without silos. Every department must be treated as relevant and important to the overall goal. It will help if you can name a Chief Digital Officer who can oversee and direct team members across the business.

4. Think visuals. Digital specialists have defined key performance indicators that extend far beyond revenue. This can include diverse factors such as customer lifetime value and employee satisfaction, as well as a funding model. Decide what visualization format is best for your needs. Data visualization is the ability to see various data in a variety of formats such as charts, graphs or other representations. Infographics often play a role in visualization. If your company has a hard time understanding how data can be used to drive digital transformation, consult an advisor who can help you leverage this critical information.

5. Be nimble and quick. By the time a project is completed, market and customer requirements have often changed. To avoid this problem, develop digital agility that will let your business embrace operational changes as a matter of routine by using digital technologies. Digital agility is rooted in the concept of learn, launch, re-learn and relaunch.

This lets you consistently experiment and adjust, refining your approach in manageable iterations. Successful firms in the digital age must be agile, including in the way they manage innovation and change.

In your digital transformation, the main goal is to continuously evolve digital strategy based on prior outcomes and feedback. The transformation should give your business the ability to sustain its competitive advantage in the face of challenges now and in the future.