Author Segal LLP

Lighten the Tax Load on Your Heirs

Your Registered Retirement Savings Plan (RRSP) poses the potential threat of a large tax liability, as well as probate fees, when you die. This can place a burden on your spouse or other heirs unless you carefully map out a plan to either minimize or defer taxes.

Here are some considerations:

If your RRSP isn’t paying retirement income when you die, Canada Revenue


Leaving a Mature RRSP

If your RRSP has matured (in other words, it is paying retirement income), you are considered to have received the full fair market value of all remaining payments as income.
That amount, along with any payments already made during the year, must be included on your final tax return after you die.
However, the beneficiary won’t have to pay tax on an RRSP payment if it can reasonably be regarded as included in your income.
If you name your spouse, common-law partner, financial dependent child or grandchild as sole beneficiary, the CRA allows the RRSP to be rolled over to them. The beneficiary simply becomes the successor annuitant and receives all future payments.
But if you also name another beneficiary, the portion of the fair market value that doesn’t go to the qualified beneficiary must be included in the final return as taxable income.
What if you don’t name an RRSP beneficiary in the contract? Your will plays a central role.
The plan’s assets go to the estate. Your spouse, common-law partner, or financially dependent child or grandchild, along with the legal representative, can jointly choose in writing to be the successor annuitant. This is only the case, however, if your will states that one if these people is the heir or is entitled to the RRSP annuities.
The CRA will then assume that the successor annuitant received the RRSP property and it will have to be included in income for the year it was received.
Any post-death decreases in the value of an RRSP or Registered Retirement Income Fund can be carried back and deducted against the year of death inclusion. 

Agency (CRA) considers that you received the entire fair market value of its assets on the date of your death. Thus, the value becomes taxable income on your final return.

What happens next depends entirely on how well you planned and who you named as the beneficiary in your RRSP contract. If you haven’t specified a beneficiary, your heirs may receive very little of the money. The after-tax funds become part of your estate, probate fees are assessed, and what’s left is distributed according to the terms of your will.

If you named a beneficiary, the person will receive all of the value of your RRSP. Probate fees are not assessed, but the income taxes are paid by the estate. This can result in an imbalance of the inheritance — with the heirs of the estate receiving very little after the taxes are paid, and the RRSP beneficiary receiving most of the value of the estate. (If the estate is unable to pay the taxes due on the RRSP at the date of death, the RRSP beneficiary is jointly liable for the taxes owed on the RRSP value.)

The good news is the Income Tax Act contains strategies that allow you either to defer or to minimize those taxes:

Tax Deferral: You can roll over your RRSP tax-free to a spouse or common law partner, or to a financially dependent child or grandchild. To the CRA, this rollover is the same as if that beneficiary had been the annuitant all along. So taxes aren’t due until that person actually withdraws money from the plan or from an annuity set up with the RRSP funds.

This strategy requires two basic steps:

1. In the RRSP contract, you must name the qualified individual as the sole beneficiary.
2. Before December 31 of the year of death, the beneficiary must arrange for the RRSP issuer to transfer the plan’s assets to an eligible RRSP, a Registered Retirement Income Fund (RRIF), or an annuity.
Warning: This tax-free rollover isn’t available if you named a beneficiary other than your spouse, common law partner, dependent child or grandchild, or you named more than one beneficiary.

Tax Minimization: Alternatively, your qualifying beneficiaries can qualify for special treatment by rolling the RRSP amount over into their own RRSPs — your income essentially becomes their income.

Amounts actually received by a qualifying beneficiary can be removed from your income and added to the beneficiary’s income. Then, the beneficiary can deduct the amount contributed to the RRSP, resulting in no taxes being paid. This allows the beneficiary to minimize the total taxes paid.

The beneficiary can transfer any amount of refunded premiums to an RRSP, RRIF or annuity, and claim a deduction to offset some or all of the refunded premiums included in income. This is not the same as a regular RRSP deduction because the beneficiary does not need RRSP contribution room, and the deduction does not use up any contribution room.

If you own an RRSP and are concerned about the taxes your heirs will pay after you die, consult with a professional to ensure you make the proper arrangements. And while you’re at it, make sure your named beneficiaries reflect any changes in your life circumstances to avoid any unwanted results.

Fed Up Customers Can Hurt Profits

Sometimes It Only Takes A Smile and a Friendly Word


Businesses can’t afford to underestimate the influence customer service has on their bottom line. One nearly certain way to lose customers is to make them wait too long.

Breaking Point

   One survey by Maritz Research asked how long individuals thought was an acceptable wait time at  specific types of organizations. Respondents gave the following average times:

  • Doctor – 81 minutes;
  • Public transit – 22 minutes;
  • Grocery store – 15 minutes;
  • Department store – 6 minutes;
  • Fast food restaurant – 6 minutes;
  • Convenience store – 3 minutes;
  • Bank – 6 minutes.

The following percentages of customers left specific businesses after what they considered an unacceptably long wait:

  • Department store, 78 per cent;
  • Public transit, 64 per cent;
  • Fast food restaurant, 58 per cent;
  • Convenience store, 54 per cent;
  • Medical facility, 50 per cent, and
  • Grocery store, 40 per cent.

Customers indicated there are some simple ways to keep them relatively happy while waiting, such as:

  • An apology for the delay, 82 per cent;
  • A greeting with a smile, 74 per cent, and
  • Updates on their status, 67 per cent.

Polls have shown that more than 80 per cent of customers have left a business because of long waits. The amount of time a customer has to wait is a primary driver of customer satisfaction and should be at the top of your business’s list when it assesses how it can better serve consumers.

One survey also showed that bad customer experiences tend to have a ripple effect where customers who perceive negative service are not only less likely to spend money at that business again, but they are also more likely to tell others about their experience.

In a time where shopping research takes place online and people are engaged in social networks to share and collect ideas, businesses risk losing potential customers before they ever set foot in a  store or office.

Knowing that customer service is one of the best routes to a healthy bottom line, here is a management checklist that will help improve your enterprise’s customer-satisfaction ratings:

1. Require executives to personally and regularly serve customers.

By dealing with the public, executives cement relationships with customers or clients and let employees know that service is honorable and rewarding as well as the focus of corporate energy.

2. Survey customers and give immediate feedback.

A customer satisfaction survey can establish performance benchmarks, build relationships, identify customers your business risks losing and can be a catalyst for enhancing overall satisfaction. Surveys should be short, taking no longer than 10 minutes to complete. Ask concise rather than open ended questions and mix topics to force continual thinking about different subjects.

When you get enough results and spot trends, let your employees know. Moreover, be sure staff quickly  hear comments about problems or positive results. This lets them make the connection between their behaviour and customer attitudes toward the company. A quick response to customers shows them that your organization cares and rewards them for taking the time to speak up.

3. Hire people who have a service attitude.

Some people simply enjoy serving others and that urge dominates their personalities. These individuals make the best salespeople, present a good image for your business and help your enterprise grow.

4. Cultivate service heroes.

Your company’s staff and management meetings should regularly feature examples of outstanding customer service. Public praise creates heroes and encourages excellence. Give employees the power to do whatever has to be done to make a customer’s experience pleasant. There will be occasional failures but those are opportunities to find new strategies. When employees deliver the goods, reward them. One way is to link compensation to employee contributions. Companies that do not reward innovation are not likely to be encouraging outstanding service.

5. Devote as much time to service training as you do to technical and procedural training.

Getting it right technically doesn’t count if the customers feel they haven’t received a commitment to a continued relationship. If customers feel they received poor service then they did receive poor service. Your employees represent you, your company, and your brand. Working with customers is the most important thing they will do. Give them the tools by giving them sufficient training. Never let an untrained employee have customer contact.

6. Make customers your only concern.

Let them think you have all the time in the world — even when you don’t. A relaxed tone of voice and patience go a long way toward keeping them happy, even when they don’t get what they want. Take their complaints seriously — they don’t care if you’ve heard the problem before, they want your complete attention. Studies have shown that as many as 90 per cent of customers whose complaints are resolved will purchase again.

7. Keep raising the bar.

Successful organizations continually raise the bar. If your entire enterprise isn’t pushing to do better today you risk being left behind. Create an atmosphere of excellence at your enterprise by spreading the word that everything your company and its employees do must be the best and that you won’t accept less.

8. Comparison shop.

Visit the competition, see what they are doing and then do it better or differently. Customers have more than one choice, so stay ahead of the curve by asking how you can add value to their experience. When you are a customer, get involved with clerks and service attendants.

9. Keep employees up to date.

Let staff know what new products have been ordered, when they will arrive, what kind of advertising promotions you plan and what business changes you may be planning. The more your employees know, the better then can serve the customers or clients.

10. Stay positive.

When a problem or question arises with a customer, say you will try to resolve it rather than that you can’t do anything about it. If a customer demands something that is against company policy, explain the situation but then offer to help come up with an alternative solution.

Final Thought: Always say thank you. A good rule of thumb is to end every interaction with a word or two showing appreciation. Even when customers complain, you can thank them for bringing the problem to your attention.

Consider Some Middle Level Financing

If your company is mature and you are looking for financing to bring it to the next level, but you don’t want to go public and are unwilling to give up any control of your business, mezzanine financing could be for you.

Mezzanine financing —  also known as subordinated debt, junior debt, structured equity, and equity-linked notes — can be particularly useful when your capital needs exceed what your senior secured lender and your equity holders are willing to provide.

Mezzanine Applications

 Mezzanine financing can be a good option if your company has exhausted such secured financing as term loans based on capital assets, or short-term financing based on current assets.

In addition, because this type of financing helps preserve cash flow needed for daily operations, it can be particularly useful if you are raising capital to:

  • Boost market penetration;
  • Improve research and development;
  • Expand payroll;
  • Broaden distribution;
  • Finance marketing programs;
  • Increase inventory;
  • Acquire equipment;
  • Expand geographically, and
  • Develop export markets.

Other reasons to consider subordinated debt include:

  • Management buyouts and succession planning;
  • Leveraged buyouts;
  • Acquiring intangible assets such as intellectual property;
  • Strategic mergers and acquisitions.

What It Costs

This type of financing is a hybrid of debt and equity that lenders expect to generate a 20 per cent to 30 per cent return through capital appreciation and interest. With that expected return, mezzanine financing is not cheap.

First, the lender advances cash through a term loan at interest of between eight per cent and 12 per cent. The interest payments, paid regularly over the term of the loan, are tax-deductible.

Then the lender enhances the rate of return with an “equity kicker,” which is usually some form of participation in the expected success of your company.

These participation features can take the form of royalties on sales; a percentage of net cash flow; participation fees; warrants or options to buy shares, and rights to convert debt into common stock.

And finally, origination fees generally run between two per cent and three per cent of the transaction, although in some cases the lender may waive the fees.

Mezzanine lenders don’t really want an interest in your company, so instead of holding real assets as collateral, as is the case with equity loans and venture capital financing, mezzanine financers prefer rights to convert their stakes into ownership equity should your company default on the loan. As a result, the debt doesn’t dilute your equity stake and you retain control of the business.

Getting in and Getting Out

Given that cash flow and the success of your business account for much of the lenders’ return, they typically will want to see that your company has a sound track record and management team; a history of profits; strong margins; an established line of credit, and a strong business plan. Start-ups and businesses with financial difficulties need not apply.

The lenders will also want a clearly defined exit strategy, which could involve selling the company, recapitalizing, refinancing, or even an initial public offering.

One disadvantage of mezzanine financing comes from its position on your company’s balance sheet.

Subordinated debt is sandwiched between senior debt and equity. So, in the event of bankruptcy or the sale of your business to pay debts, proceeds first would go to pay off senior lenders, then subordinated lenders. Your common and preferred shareholders would come last and likely receive a much smaller share of those proceeds.

A Borrowing Advantage

On the other hand, a mezzanine layer in your financing could help your company raise more total capital.
For example, say you wanted to make a $100 million acquisition through bank debt and equity. The bank might lend you $50 million, leaving you with an equity requirement of $50 million.

If you added mezzanine financing, the bank might lend just $40 million, but the subordinated lender might provide $25 million, for a total capital of $65 million. Your equity requirement then has dropped to $35 million.

Moreover, banks often look more favourably on companies that have institutional backers and may offer more attractive credit terms.

Your financial advisor can discuss the merits of mezzanine financing and help determine if it would be an ideal solution for your company’s growth needs.

Taking it Easy at Your Own Cottage Starts with Smart Planning

062316_Thinkstock_482345735_lores_KKThe living seems so easy on the lake, at the beach or in the mountains.

If you’ve been renting a vacation retreat each year, you may think it’s finally time to dive in and buy one of your own. It can be the right choice, but be sure you go in with your eyes wide open.

Cottages can be pricey, not just because of the cost of purchasing a place but also because of ongoing maintenance, unexpected repairs and perhaps renovations. Don’t forget that what you spend on your cottage can have a significant effect on taxes when you sell it.

Before you sign the mortgage or withdraw from your savings, ask yourself if owning a cottage makes financial sense for you. Do you want to tie up a chunk of your savings in real estate?

Once you’ve mulled over these issues, you’re ready to start.

Choosing a Property.

To ensure your cottage both fulfills your getaway dreams and is a financially smart choice, you need to find the right property in the right location for the right price. Two major possibilities will dictate what you buy and where:

1. Using the place as a retreat and a place to retire. A cottage for the family needs sleeping, cooking, dining and congregation areas adequate for family and guests. A potential place to retire should also have easy access to shopping, gas stations, hospitals and entertainment. If you’re planning to retire there, the place obviously needs to be winterized.

2. Earning extra money by renting out the house. A cottage can be easier to rent out when it’s located in a high-demand, and more expensive, area such as on a lake or near a ski resort. In general, the more isolated and quiet the location, and the further away from the water or other attractions, the lower the rent you can ask.
You also need to consider all of the costs involved. In addition to the down payment, any monthly mortgage payment and interest, you’ll incur costs such as:

Property taxes, insurance Maintenance, repairs
Utilities, propane refills Travel, gasoline
Condo, marina fees Garbage, trash removal

Finally, if you need financing, that also should factor into the type of property you choose. Cottages often fall into one of two categories when it comes to getting a mortgage:

1. All-year winterized properties. These have features similar to residential homes such as insulation, running water all year, central heating and sometimes basements. These are good candidates for mortgages.

2. Rustic properties. These may have wood stoves or fireplaces and sit on blocks or piers. These may be more difficult to finance and may require heftier down payments to avoid mortgage insurance. The worst case scenario: You may have to tap into your savings.

Tax Planning

Once you’ve sorted out these issues, it’s time to turn to tax planning. That’ll involve keeping track of the following:

Capital improvements. At some point, you’ll inevitably give up the cottage, either by transferring ownership (succession, gifting and inheritance) or selling it. Document any capital expenditures you make over time so you’ll be able to calculate an accurate adjusted cost base (ACB). The higher your ACB, the lower any taxable capital gain you’ll have to report.

Your adjusted ACB is the sum of the initial cost of the property plus qualifying capital outlays such as:

  • Making changes to upgrade a property (you’ll have to demonstrate that the original purchase price would have been higher if the repairs hadn’t been necessary),
  • Renovating to winterize a property or add new elements to the structure such as additional bedrooms or new bathrooms,
  • Building a new deck,
  • Installing new windows or a roof that are better than the originals, and
  • Putting in a new well or pump.

General repairs don’t count as capital improvements and you can’t value any work you personally perform on the home.

The excess of the proceeds of disposition deemed or realized over the ACB (and any selling costs) is generally a capital gain for income tax purposes.

As you can see, keeping accurate documentation of outlays is critical, particularly if Canada Revenue Agency (CRA) wants documents to support the ACB. Capital losses. You generally can’t deduct a capital loss on your cottage when you calculate your income for the year. You also can’t use a loss to decrease capital gains on other personal-use property. When property depreciates through general use, the loss on its disposition is a personal expense.

If you’re primarily renting out the cottage, however, you may be able to claim a capital loss. But keep in mind that you may lose the personal-use exemption if you rent it out for most of the year. That exemption can come in handy to help shelter any gain from the disposition if the cottage appreciates in value.

If you rent it out only occasionally to help defray some costs of ownership, talk with your tax adviser about how to report income and expenses on your tax return.

Changing use of property.

Before turning your personal-use property into an income-producer by renting it out, discuss the tax consequences with your accountant. Rental income will be taxable, but you can claim some expenses to offset the income, including:

  • A reasonable portion of the operating expenses, and
  • Costs directly associated with renting the property (such as cleaning, advertising, commissions or fees paid to rental agents, and property management fees).

Estate Planning and Other Financial Implications

There are many other tax implications related to owning a vacation property, including estate planning issues. A cottage is often viewed as common property within generations. If you hope to leave the cottage to your heirs, you’ll need to determine whether you plan to pass it on with a will, a sale or a trust. If you’ve inherited a cottage, there are other tax and financial issues to consider.

Consult with your adviser, who can help you sort through all the tax, financial and estate-planning implications.

How to Deal Sensibly with Boomerang Kids

061716_Thinkstock_475209512-flipped_lores_KKDid your twenty-something kids return to the roost? You’re not alone.

Millennials are the largest cohort in the Canadian workforce, according to 2014 data from Statistics Canada. And in ordinary times, the fact that 36.8% of our employees are between the ages of 18 to 34 would suggest that many of those young adults have moved away from home to live on their own, with roommates or with a spouse.

But these aren’t ordinary times. According to the most recent Statistics Canada census, 42.3% of people in their twenties lived at their parents’ homes in 2011. That’s well up from 32.1% in 1991 and 26.9% in 1981.

And data from a recent Pew Research Center survey, reflecting the earlier Canadian data, suggests that the trend is continuing. For the first time in at least 130 years, young people in the United States between the ages of 18 and 34 are more likely to be living at home with their parents than in any other living arrangement. The study found that 32.1% of Americans in that age bracket were living with their parents.

This isn’t just a North American trend: It’s evident across much of the developed world. Pew Research notes that according to Eurostat, the European Union’s (EU) statistical agency, nearly half (48.1%) of 18- to 34-year-olds in the EU’s 28 member nations were living with their parents in 2014.

They’re sometimes called boomerang kids. The trajectory of a child’s life used to be set in stone — grow up, fall in love, leave home and either get married or move in with a roommate or romantic partner. But that tide has turned and Millennials are more apt to leave, go to college or try their luck in the working world — and then return.

The question is, why? Millennials choose to go back home for many reasons, including:

  • A weak job market,
  • Low earnings,
  • Staying in school longer to compete effectively in the job market,
  • Large college debt,
  • Escalating housing costs, and
  • Postponing marriage.

“Helicopter parenting,” where parents hover over their children and micromanage their lives, may also be a factor in the Millennials’ decision to linger longer at home.

One serious downside for the parents of many Millennials is that they wind up in a sandwich, emotionally and financially supporting both their children and their own parents. One or both of these situations can take a chunk out of retirement savings and delay or tarnish their golden years.

A 2015 survey1 commissioned by CIBC found that one in four Canadian parents surveyed said they spent more than $500 a month to help cover expenses of their adult children, including:

  • Free room and board (71%),
  • Groceries and other household expenses (47%),
  • Cell phone bills (35%),
  • Monthly car payments and other vehicle-related expenses (23%),
  • Subsidized rent so adult kids can live elsewhere (17%), and
  • Help repay loans and other debts (12%).

It is probably no surprise, then, that two-thirds of respondents said their resources were being depleted by their boomerang Millennials.

For many young people, living with their parents is a fiscally-responsible decision that can be an ideal way to save for a house or start a business. However, some observers have questioned whether enough parents are discussing finances and budgeting with their adult children — for example, perhaps they should find a job that may be less than ideal in order to contribute to the household expenses.

If you have one or more adult child who wants to move back, here are some steps to consider taking to help ensure they eventually step out on their own:

1. Share your concerns. What worries you about sharing a house with your child? Do you want your child to pay rent, or cover his or her own cell phone and car expenses? What chores do you expect your child to do? And what does your child want? Vegan meals, sleepovers? Once you come up with a plan, review it every so often to see if everyone’s concerns are being met.

2. Set clear goals, rules and timelines. When your child moves back in, be sure to clarify expectations. Is there an age when you expect the child to leave or an event — such as finding a job — that would trigger a move? Setting these goals and guidelines will help keep your child from overstaying the welcome.

3. Put your financial future first. Decide ahead of time how much money you want to contribute — and can afford — to help out your boomerang kid. You may be close to retirement, or already in it, so don’t back away from requiring the child to help with expenses. The child must be told there are limits on your finances and that your financial security comes first.

4. Keep it short-term. Many adult children may try to hold out for the right job and want to live with you indefinitely. You may want to make it clear that moving back is a temporary fix and set a time limit that you can revisit if necessary.

While your Millennial is still living at home, discuss any of these topics that may apply:

  • Paying off debt. Encourage the child to get rid of bills, particularly high-interest debt, so it won’t compete with future rent or mortgage payments.
  • Establishing a good credit history. The child should get a credit card for small purchases and pay the full balance by the due date.
  • Building an emergency fund. This will help in the case of minor setbacks such as car repairs. The child should build a larger fund when possible to use in the case of losing a job. This can help avoid a return to your doorstep.

Talk with your financial adviser to come up with strategies to help avoid hefty debt and bring your fiscal lives into focus.