On June 6, 2024, Cumberland hosted a webinar on a proposal in the last Federal Budget that would see the capital gains tax inclusion rate rise from 50% to 66.67%. A few days later, the government tabled legislation in Parliament to be voted into law. Here are some of the highlights.

Following an introduction by Cumberland partner and CEO, Charlie Sims, the discussion was kicked off by Peter Routly, CPA, CA; TEP, a Partner in the Canadian Tax practice at BDO who was in Ottawa for the unveiling of the budget.

He started by illustrating the impact of the higher inclusion rate using the example of someone who sold a stock for $100 that had originally been purchased for $10, thus realizing a capital gain of $90. Under the current rules, they would only add half of the gain, or $45, to their personal taxable income. Under the new rules, they would owe tax on two-thirds of the gain, or $60. For investors in Ontario’s top tax bracket, this equates to an 8.92% tax increase on capital gains.

He also outlined an important distinction: for individual tax filers, the higher capital gains tax inclusion rate is only applied to capital gains in excess of $250,000 in a given year, but for corporations and trusts, the higher rate is applied from the first dollar of capital gains.

Mitigating the financial impact

Mr. Routly provided an overview of some of the main considerations for those seeking to mitigate the financial impact of the higher tax, including:

• • Considering the sale of capital assets before the law comes into effect after June 24, 2024
  • The deemed disposition of capital assets that occurs upon death or emigration from Canada
  • Planning to crystallize accrued gains, and some of the complexities that can be involved, including Alternative Minimum Tax (AMT) rules
  • Intentionally triggering a gain inside a professional corporation, and the associated risks, such as the potential to lose the small business deduction
  • Expected changes to the Capital Dividend Account that would end the ability to withdraw 50% of a capital gain tax-free from a corporation, and reduce it to one-third

For many Canadians, selling capital assets before the deadline to take advantage of the 50% capital gains inclusion rate before it’s gone may have been the most straightforward tax mitigation strategy, and Mr. Routly outlined some key questions to help assess the potential appropriateness of this strategy:

• • How long were you originally planning to hold the asset?
  • Were it not for an imminent tax increase, would you even be considering a sale?
  • What will it cost you to sell it now?
  • What return would you have expected over your original time frame?
  • What is the total value of the asset versus its accrued gain?

It was suggested that, for many investors with significant private business interests and other valuable assets, the cost of selling before the rule change was not justified by the expected tax savings.

With so many issues to consider and the complexity of each individual situation, Mr. Routly said that it’s difficult to make blanket recommendations, and that each tax payer must conduct their own analysis along with their tax, legal and wealth advisors.

Questions and answers

Following Mr. Routly’s overview of the proposed tax, he was joined by Jeff Noble, CMC; FEW Director of Business & Wealth Transition Private Wealth at BDO for an in-depth Q&A session with Charlie and the webinar participants.

Some of the many topics covered included:

• • Comparing and contrasting the current legislation with the many changes that have been made to the capital gains tax rules dating back to the 1970s
  • The applicability of General Anti-Avoidance Rules (GAAR) to those who seek to sell and then immediately repurchase assets with the intent of avoiding the higher tax rate
  • Estate planning for families who will have significant capital gains from real estate and other assets upon death
  • Charitable giving strategies in the context of the higher capital gains tax inclusion rate and AMT
  • A deeper dive on tax planning considerations for those with capital gains inside a corporation, including the Capital Dividend Account
  • Insights into behind-the-scenes lobbying efforts that could have resulted in changes to the substance or timing of the new rule
  • Coping with the uncertainty of tax planning in a shifting legislative environment

If you have any questions about your personal tax planning situation or would like access to a video replay of the webinar, please contact your Cumberland Portfolio Manager or Financial Advisor.

The Canada Revenue Agency (CRA) will no longer require bare trusts to file a T3 Income Tax and Information Return (T3 return), including Schedule 15 (Beneficial Ownership Information of a Trust), unless they directly request these filings from an individual taxpayer.

This policy change was made to recognize that the new Bare Trust tax reporting requirements, which were only recently introduced for the 2023 tax year, would have had an onerous and unintended impact on many Canadians.

Over the coming months, the CRA will work with the Department of Finance to further clarify its guidance on this filing requirement. The CRA will communicate with Canadians as further information becomes available.

What is a Bare Trust?

A Bare Trustee corporation acts as the title holder to an asset for the benefit of someone else, such as holding the title to investments in a nominee corporation. This arrangement is often used in real estate development and oil and gas and resource exploration, but it is also used by many Canadian families for general estate and probate planning purposes.

Here are some examples of Bare Trusts that, until the recent policy reversal, would have required taxpayers to submit additional annual filings:

• • An individual holds an “in trust” bank or investment account for a child or a parent.
  • A parent corporation holds cash in trust for underlying subsidiaries, such as certain corporate “cash sweep” arrangements.
  • A general partner in a limited partnership arrangement is the title holder to the underlying assets of the partnership. This arrangement is typically used in real estate investments but may also include business operating partnerships.
  • An individual has purchased a property “in trust,” but the actual owner is not clearly identified. This arrangement is commonly used with real estate purchases or certain pooling of private investments where the title holder or purchaser is not the true underlying economic or beneficial owner of the property.
  • An individual is registered on the title of real estate they do not beneficially own, such as having a named interest on a child’s or parent’s home for estate planning purposes.

The above is not an exhaustive list, and legal counsel should be consulted to identify all informal trust arrangements and instances of a Bare Trust that may be subject to new tax reporting policies in the future.

Contact your Portfolio Manager

For now, the Bare Trust annual tax filing requirement is lifted for the 2023 tax year, and we will continue to monitor the situation for our clients. If you have any questions about Bare Trusts and how they might affect your tax, financial, and estate planning, please contact your Cumberland Portfolio Manager.

Many of us avoid discussing financial or health matters with our parents because these conversations can be uncomfortable. However, we believe they are often necessary to protect our parents’ personal and financial well-being.

Here are four specific topics that we recommend discussing with aging parents sooner rather than later, while they still have the physical and mental capacity to put the appropriate protective measures in place:

Name a Power of Attorney. Ensure that each of your parents has a financial Power of Attorney (“POA”) drawn up by a lawyer. This can usually be completed alongside their Will. The POA lets them appoint someone to have either limited or general authority to act on their behalf in financial matters if they are unable to effectively act on their own. The exact method of invoking the POA is specified in the document itself, but it usually involves a letter of opinion from a healthcare professional such as a family doctor or geriatric psychiatrist. The POA must be signed while your parent still has full cognitive capacity, so don’t delay or you may risk facing legal costs and delays.

Name an Attorney for Personal Care. Your parents should name an Attorney for Personal Care who is authorized to make decisions about their personal care in case they become incapable due to illness or injury. Your parents can spell out their specific wishes, such as whether they wish to be resuscitated in the event of a serious medical event, and if a situation arises that is not spelled out in their wishes, then the Attorney for Personal Care has a duty to act in their best interest.

Keep a “Green Sleeve” somewhere accessible. In Alberta, there is a campaign asking elder citizens to place their medical directives and other important information in a green folder on top of their refrigerator so that first responders will know where to find it in an emergency. Although there is no equivalent program in Ontario, you can still follow the spirit of this program by having your parents store copies of their Wills, Powers of Attorneys, medical contacts, and other critical information in a safe place that you can access if needed.

Appoint a Trusted Contact Person on their financial accounts. A Trusted Contact Person (TCP) is a simple safeguard to protect your parents from potential financial exploitation. A TCP does not have the authority to make any investment decisions or financial transactions, but rather is someone that their bank or financial advisor can contact if they detect any unusual behavior that could suggest impaired decision making or fraud, or if they are unable to get in touch with your parents for any reason. It is often suggested that the TCP be a different person than the one named as their POA.

At Cumberland, we believe in holistic wealth management that addresses health, wealth and also family dynamics. Having these recommended elements in place ahead of time will help your parents feel more prepared and in control and can provide clarity for you when it is needed most. If you have any questions or would like professional assistance with these four conversations, please get in touch with us.

With billions of dollars set to transition from Baby Boomers to their children and grandchildren in the coming years, many younger Canadians will grapple with the impact of an inheritance. While the impact will be mostly positive – more money that they can put towards goals such as home ownership and retirement – there is also a degree of pressure to avoid costly mistakes.

Here’s a look at some of the key changes that come with inheriting money, and how they can help you realize, protect and enhance your best life.

Realize your goals

The first fundamental wealth management step is realizing your goals. This requires you to define what you want out of life and set out intentionally to achieve it. When you inherit money, here are some of the areas of your wealth management plan that may need to be adjusted:

Revisit your goals. An inheritance can alter your goals for a number of reasons, including how it changes your personal perspective and how it changes your financial means. Before making any drastic changes to your investments, spend some time thinking about what you are truly aiming for.

Diversify your investments. An inheritance could allow you to consider new diversification strategies. For example, you might want to shift the proportion of your portfolio that it is geared towards ​creating regular income versus generating long-term growth. You might also wish to add alternative investment strategies or a new investment manager to the mix.

Update your risk profile. Your inheritance may have a material impact on the amount of risk that you need or are willing to take. For example, y​ou may be in a position to reduce risk if you no longer require as much growth to reach your goals. Alternatively, you may have new goals that push your time horizon out to future generations, and you may be willing to increase risk in service of achieving greater long-term returns.​

​Review your investment taxation. A final consideration is reviewing if your inheritance changes the taxation of your investments. Most of your current investment assets may be in registered accounts such as RRSPs or TFSAs that avoid annual taxation. Your inheritance may require you to invest outside of these tax-preferred accounts, leading to new forms of taxable income to manage.

Protect your assets

The second fundamental step of wealth management is protecting what you have built. This requires you to put guardrails in place to manage the risks that can impact your financial assets. Here are some key considerations:

Review your will and estate plan. If you have not created or updated your estate plan, make this a priority. Without one, the administration of your estate will be in the hands of the government, causing delays, costs, possible challenges, and the potential to sow the seeds of family dysfunction.​ Make sure your will, powers of attorney, account beneficiaries, and choice of executor are accurate, up-to-date, and consistent with your wishes.

Assess your tax situation. Your inheritance will no doubt be a positive for your financial position, but it will very likely increase the amount you send to the tax man each year. Potential tax implications to consider are​ being pushed into a higher tax bracket, possibly impacting your ability to collect Old Age Security. Potential workarounds include sheltering some of your inheritance via RRSP or TFSA contributions, considering charitable giving opportunities, and exploring legal structures such as family trusts.

Update your insurance coverage. Insurance allows you to transfer the financial risk of dying early, being diagnosed with a serious illness, or becoming disabled and losing the ability to earn an income. An inheritance can increase your financial resources and make you less vulnerable to these risks. When that happens, you may want to reassess the suitability of your current coverage or consider new insurance strategies.

Enhance your life

Once you have checked all the critical boxes like paying down debt, investing wisely, and protecting what you have built, it’s time to think about strategies that can create a richer life for you, your loved ones and your community. ​Here are some ideas:

Update your spending. A rather fun way an inheritance can enhance your life is by allowing you to spend more! This could mean more dinners out and more travel. It could mean achieving your bucket list, taking up a new hobby or educational pursuit, or spending more on your interests and passions. A word of caution though: make sure to stress test any new spending to make sure your primary objectives are not being sacrificed. ​

Define your philanthropic approach. You may wish to use your inheritance to support causes that are important to you or the individual from whom you received the inheritance. Philanthropic initiatives can take the form of individual or annual donations, and can be structured through the creation of a Donor Advised Fund or a foundation to create a lasting legacy of giving. ​

Support younger generations. You may wish to use your inheritance to help your children or other younger family members. There are lots of options to consider, including tax-advantaged investment strategies to fund a first home or post-secondary education, strategically supporting business ventures, and even insurance strategies that can be started when children are young.

Inheriting money can transform how you realize, protect, and enhance your financial life.​ It could wipe out debts​, transform how you invest​, reduce or eliminate your need for insurance​, expose you to more tax​, open up opportunities for your kids or grandkids​, and give you new choices around things like spending, charity, and how you live your life​.

At Cumberland Private Wealth, we help families navigate these changes and come out further ahead. Every situation is unique, so a good first step would be to sit down with one of our Portfolio Managers to discuss where you are in the process and where you want to be. We look forward to meeting you.

A Registered Retirement Savings Plan (RRSP) is a great way to accumulate tax-deferred investments. When you turn 71 years of age, it’s time to convert those investments into a source of retirement income. Here’s what you need to know.

Over your working life, an RRSP offers you a tremendous tax advantage: every dollar you contribute is tax-deductible, and every dollar you earn is tax-free until you eventually withdraw the money.

During the year in which you turn 71, you are required to convert your RRSP into a Registered Retirement Income Fund (RRIF), which effectively reverses its function. While the assets inside your RRIF are still allowed to grow on a tax-deferred basis, no more tax-deductible contributions can be made, and fully-taxable withdrawals must begin.

How much do I have to withdraw and when?

Your first RRIF withdrawal is required in the year after you turn 71, and is equal to 5.28% of the fair market value of your account at the start of the year. This percentage is set by the federal government and gradually increases as you age, surpassing 10% by age 88 and peaking at 20% for age 95 and beyond.

For example, if you turn 71 in 2024, you’d use the value of your RRIF on December 31, 2024 to calculate your minimum withdrawal for 2025. If your account was worth $1 million on that date, you’d be required to withdraw $52,800 ($1 million x 5.28%) in 2025.

Here are a few things to keep in mind:

• Convert before the end of the year. The process is not complicated, but it is crucial. If your RRIF is not established by the end of the year in which you turn 71, all the funds in your RRSP will become taxable income to you in that year.
• Set a withdrawal schedule. You can choose to make withdrawals monthly, quarterly, or annually. The timing you choose might depend on how you intend to use the income. Will it be needed monthly to offset expenses, or is it better to keep the money invested and growing as long as possible, then make one big withdrawal at the end of the year?
• Consider using your spouse’s age. If your spouse is not yet 71, you can use their age to calculate your minimum RRIF withdrawal, which might allow you to keep the funds in the account longer where they can remain tax-deferred.
• Be aware of income tax and withholding tax. All RRIF withdrawals are considered taxable income in the year they are received. If you decide to withdraw more than the minimum in a given year, withholding tax will be deducted from those withdrawals.
• Review your beneficiaries. If you pass away with a spouse or qualified dependent named as your beneficiary, they are eligible to receive the proceeds of your RRIF tax-free. Other beneficiaries will be taxed on any amount they receive.

If you are turning 71 this year, it’s a good time to sit down with your Cumberland Private Wealth advisor. We can help you convert your RRSP to a RRIF before the end of the year. We can also look at whether it makes sense to adjust your portfolio as you shift from accumulating savings to drawing income, and how best to use that income from a tax and cash flow perspective.

Your RRIF conversion year is also the perfect time for us to review your overall financial plan and estate plan, update your goals, and make sure that you are still on track for the financial future that you envision.

When life moves, your money moves. When you have a child, life starts moving. This article provides an overview of the Registered Education Savings Plan (RESP), an excellent tool to save for a child’s education. It explains the three phases of RESP planning and shares a novel approach to funding your RESP that could potentially accelerate its benefits.

The strategies discussed here may or may not be directly applicable to your wealth plan. But if saving for a child’s post-secondary education is in your plan, there’s no denying that an RESP can play a vital role.

A review of RESP basics

RESPs are designed to help parents save for their children’s post-secondary education at a university, college, trade school, or technical school in Canada or abroad. Contributions to the account grow on a tax-sheltered basis until withdrawals are made to support post-secondary education expenses. A unique feature of RESPs is that our federal government matches a portion of the funds contributed.

RESP Account Types

There are Family Plans and Individual Plans. A Family Plan consists of multiple qualified beneficiaries, who are children related by blood or adoption. An Individual Plan is for a single beneficiary. Family Plans offer more flexibility since the contributions, government grants, and growth of the investments can be shared between beneficiaries.

Who can open a RESP?

Anyone can open an RESP, including parents, grandparents, relatives, friends, or guardians. These are known as “subscribers.” It is generally best to open RESPs in the joint names of the beneficiaries’ parents and have others contribute to those RESPs. This can help avoid accidental over-contributions and also provide the most flexibility if a child does not pursue post-secondary education.

Contributions and grants

There is no annual RESP contribution limit, but there is a lifetime maximum contribution limit of $50,000 per beneficiary. RESP contributions are not tax deductible, but they attract a government grant known as the Canadian Education Savings Grant (CESG) equal to 20% of annual contributions, up to $2,500 per year and $7,200 per beneficiary over their lifetime.

The CESG is a federal program. British Columbia and Quebec also offer provincial programs that could be worth up to $1,200 and $3,600 respectively.

Phase one: Accumulation

The first phase of an RESP is all about making contributions, earning grants, and accumulating money. Due to the long-time horizon associated with RESPs, investment strategies focused on growth are generally the most suitable. But as in all investing, it is important to remain within your comfort level and risk tolerance.

The power of tax-sheltered compound growth

A key advantage of RESPs is being able to compound your investment and earn returns within a tax-sheltered environment. And, like all compounding, the sooner you start the better. The graph below compares what would happen if you started investing in 2024, 2026 or 2028 based on annual contributions of $2,500, an annual CESG of $500, and annualized investment growth of 5%.

If you start in 2024, the account will be worth just over $66,000 when the beneficiary turns 15 in 2038. This is $10,000 more than if you delayed two years and $20,000 more than delaying contributions for four years.

A novel approach: pre-funding your RESP

Since there is no annual contribution limit for RESPs, you can pre-fund your account and have more tax-sheltered money growing for longer. The extreme case would be contributing the full $ 50,000-lifetime limit all at once. In this scenario, you would maximize the amount of money that is able to grow in the plan and receive one $500 CESG payment for the initial contribution but sacrifice the remaining $6,700 in grants.

However, if you wanted to boost your tax-sheltered growth and also receive the maximum CESG, you could contribute $16,500 in year one and then contribute $2,500 annually until the $ 50,000-lifetime limit is reached. This mix of contributions will allow you to claim the maximum CESG of $7,200.

The graph below illustrates three scenarios: $50,000 all at once versus $16,500 in year one followed by $2,500 annually versus $2,500 annually and a final top-up in year 15. All three scenarios assume 5% annualized investment growth.

In this illustration, the $50,000 upfront contribution results in the highest end value. More money compounding for a longer period more than compensates for the government grants that were sacrificed. However, there is a caveat: this illustration assumes a level 5% annualized rate of return, and returns are more variable in the real world. This strategy could underperform if there is a period of lower investment performance, or outperform by an even greater margin if returns are higher.

Pre-funding strategies should be assessed in terms of your overall financial priorities, wealth, and life objectives. While post-secondary education is important, other financial commitments or strategies may need to be prioritized if excess funds or cash flow are available.

For the more risk-tolerant, making larger initial deposits may be appropriate. For the more risk-averse, making an initial $16,500 contribution followed by regular contributions to maximize the government grant may be more suitable.

Phase two: Transition

The transition phase is the 3 years leading up to the start of post-secondary education. During this period, you will want to assess the likelihood of your child attending a post-secondary education program, identify other sources of funding if your RESP alone is insufficient, and de-risk your investments as the withdrawal date gets closer

What if you child is not pursuing post-secondary education?

If you have a Family Plan with more than one child named as a beneficiary, you can use the RESP to support your other children’s post-secondary education plans. In a Family Plan CESG, contributions and growth can be shared between family members within certain limits.

If none of your children attend post-secondary education, you can withdraw your contributions and return the grants to the government, however, the growth of the RESP could be taxed at your marginal rate plus a 20% penalty. The way to avoid this tax is to transfer the RESP growth to your RRSP, provided that you have enough RRSP contribution room.

This scenario highlights the importance of naming both parents as joint subscribers to the RESP. If correctly timed, a couple can greatly reduce the amount of RESP growth that could be taxed and penalized. And, if some RESP growth needs to be included as income for tax purposes, you have two incomes to spread the tax over.

When the RESP isn’t enough: Other income sources

RESPs are rarely enough to cover all of a child’s post-secondary education expenses. When the start of the program nears, it is important to evaluate the potential expenses in comparison to your RESP value. If extra funds are required, you can start to plan their potential sources. This could be from your cash flow or savings (TFSAs or non-registered accounts are best).

De-risking your investment strategy

A sharp drop in your RESP’s value just when you need to start making withdrawals is a risk you want to minimize. Options to consider are shifting a year or two worth of expected expenses to cash, or changing your investment strategy to be more conservative overall. With a Family Plan, it’s wise not to get too conservative too quickly, as there are multiple beneficiaries to consider and a need to balance current and future needs.

Phase three: Withdrawal

The withdrawal phase is when you actively withdraw funds from the RESP to support post-secondary education expenses. This phase is all about taxation.

There are two types of RESP withdrawals, non-taxable withdrawals consisting of your contributions, and taxable withdrawals consisting of CESG and accumulated growth. The taxable withdrawals can be attributed to the beneficiary or to the subscriber.

To maximize the benefit of the RESP, you want to prioritize having taxable withdrawals attributed to beneficiaries, since these amounts will be included in their income and taxed at much lower marginal rates. This can be seen in the table below showing the combined Federal and Ontario Tax brackets for 2024.

There is also the Basic Personal Amount to consider, which is the amount of income that can be earned before any tax has to be paid. For 2024, this amount is $15,705, which means that if the child has no other income, they can take $15,705 from their RESP tax-free to cover education expenses.

It is also important to prioritize taxable withdrawals early to ensure all the CESG that has been received is paid out. If it has yet to be fully paid out by the time beneficiaries have finished post-secondary education, it will be returned to the government.

Another helpful tax tool is the Tuition Tax Credit. This is a non-refundable tax credit available for post-secondary students. The credit is equal to 15% of “eligible tuition and fees”. These amounts are usually provided by the post-secondary institution. Unused credit can be carried forward to future years or transferred to a parent.

Key RESP points to remember

• When you contribute to an RESP, you receive a 20% grant from the federal government. The more you contribute and the sooner, the greater the benefits of tax-sheltered compound investment growth.

• When post-secondary education nears, plan to de-risk your investment strategy and consider additional ways to pay for education expenses. If your child is unlikely to pursue post-secondary education, it’s time to implement a backup strategy.

• When it’s time to start withdrawing from the RESP, aim to have them taxed in your child’s name while he or she has little or no other income to maximize the after-tax benefits of the RESP.

If you have questions about the best RESP strategies and approach for your specific situation, a Cumberland Portfolio Manager is available to assist you. We seek ways to optimally integrate education savings goals with a family’s overall wealth management plan.

Wealth management is the process of utilizing financial assets and human capital to realize, protect and enhance the life you are living and the life you are building towards. Wealth management is, therefore, a deeply personal process. It is also multifaceted, requiring the consistent assessment of emerging opportunities and risks.

The rise in interest rates over the past two years has presented a material change in the landscape. Higher interest rates have boosted returns for short-term investment vehicles. This creates opportunity. But if short-term returns interfere with long-term strategy, that is a real risk.

Take advantage of short-term opportunity

The rise in interest rates has boosted cash investment returns from 0.55% at the start of 2022 to over 5% at the end of 2023. That is an increase of almost 1,000%. As a practical matter, it now pays to scrutinize where your cash is held. For example, are you carrying too much money in a bank account that pays little to no interest? Is your current “high interest rate” competitively priced? Could you benefit from locking in a short-term rate? Answering these questions will ensure your cash is working optimally towards your short-term objectives.

The current high returns on cash are a boon for short-term objectives. Enjoy it. But it is critical, in our opinion, to keep this opportunity in the proper perspective. Cash is not a long-term investment solution, and trying to time the market rarely pays.

Market timing is a high-risk proposition

Allow us to share the story of an investor who sold all their long-term investments in 2007 and moved to cash. It appeared to be an amazing investment decision at the time, because they avoided market declines of over 40% when the Great Financial Crisis hit in 2008.

However, this stroke of genius went very wrong as they continued to hold cash. By 2013, the markets had recouped all their losses, yet this investor had not re-entered the market. By 2017, when this investor finally came to see us, the market had gained another 50%, and they had missed out entirely.

This story highlights the reality of timing the market: You can be right about getting out of the market and still end up worse off, because you must also be right about getting back in.

Let’s suppose you are right 50% of the time in exiting the market and 50% correct in getting back in. You will only be right, on average, 25% of the time. Not great odds, especially when your retirement is at stake. The reality is there is never an all-clear signal telling you when to start investing again.

The decision to reenter the market is further complicated by the sequencing of returns. Often the best and worst days in the market are clustered together. Chart 1 shows the 10 best and worst days for the S&P 500 TR index, a broad US equity index, for three time periods. The best days are green and the worst days are red.

Notice that, during the Great Financial Crisis, 17 of the best and worst days occurred within a 78-day period. During COVID, 18 of the best and worst days occurred during a mere 41-day period. In 2022, the market was down over 14% between April and June in 2022, then up almost 14% between October and November.

The windows of opportunity to time the markets are incredibly small – usually just a matter of days. Even if you thought you knew when they were going to happen, would you have the emotional fortitude to execute your investment strategy? And would your lifestyle and schedule even allow you to make such decisions? In practical terms, the task is all but impossible.

How cash actually erodes wealth

Let’s put market timing aside now and consider another risk with moving into cash: in the long run, it provides the lowest expected investment returns.

The blue bars in Chart 2 show the returns for cash, bonds, Canadian equities (represented by the TSX), and US equities (represented by the S&P 500) for the past 20 years. Cash significantly lags the alternatives, and we can expect this to continue because of one foundational principle of investing: taking the least risk means accepting the lowest returns. Bonds and equities offer higher expected returns because investors bear the risk of greater short-term volatility.

But perhaps the more important takeaway is what’s depicted in the green bars, which is the return of each asset class after inflation is accounted for. In the long term, cash has offered negative after-inflation returns. In other words, your future dollars are worth less than they are worth today. Therefore, you need to save more, delay retirement, spend less to compensate, or potentially settle for having less economic power in the future.

Equities provide the highest after-inflation rate of return, and that’s what makes them so well-suited for long-term investment objectives.

Why stocks outperform over time

One key fact has historically enabled equities to stay ahead: well-managed companies have opportunities to grow their profits faster than the rate of inflation. Here’s why:

1. They participate in the overall growth of the economy – when the economy grows, sales increase.
2. When prices increase due to inflation, strong companies can generally benefit by raising their prices too.
3. Many of the expenses incurred by companies do not grow as sales increase. For example, a company may be able to increase their sales volume without having to hire more staff.
4. Companies can use profits to reinvest in the business and further increase sales or reduce costs.
5. Many companies share some of their profits annually by way of dividend distributions paid to their shareholders.

Over time, this virtuous economic circle leads to increasing shareholder value, which then translates into higher share prices. History shows that you don’t really need to pick the right time to invest, so much as you need to invest in quality businesses and remain invested.

Connecting market dynamics to your life plan

Financial planning involves many dynamics, but none are as fundamental as your individual goals. As the saying goes, “If you don’t know where you’re going, any road will get you there.”

By determining your goals, you can create a roadmap to achieve them and avoid potential wrong turns, including short-term distractions, attempted market timing, and choosing the wrong long-term asset classes for the desired objective.

Stating goals in qualitative terms, such as “purchase a home” or “retire early” is a good starting point. However, being as specific as possible will unlock the most opportunity.

For example, the path to “purchase a home next year” is a lot different than the path to “purchasing a home in ten years.” The amount of investment risk that can be taken in one year is substantially less than the amount that can be taken over 10 years. In fact, the high short-term interest rates of today might be a boon to someone with a one-year timeframe, but a bust for someone with a 10-year runway.

Planning for the long term is not easy. Markets can be volatile. Life, too, can be volatile. Balancing the demands of our careers, family, social lives, and passions is not always easy. But by defining what we want from life, prioritizing what is most important to us and aligning our finances to these objectives, we can greatly improve our chances of success.

A guiding question we can always ask is: Are our investments working towards our desired goals? If the answer is no, we need to act as soon as possible and create a plan to align them.

On Tuesday, November 21st, we hosted a wealth management event of particular interest to families who wish to optimize the transfer of wealth from one generation to the next. The focus was on understanding the issue of probate fees, and how to mitigate their impact.

The first speaker was Laura Ross, CEA, MBA, an estate consultant who specializes in working with estate executors on a full range of duties, from selling properties and navigating government agencies to working with lawyers and wealth managers such as Cumberland Private Wealth.

She was joined by Marni Pernica, TEP, an estates and trusts lawyer who focuses on estate, income tax, and succession planning, including cross-border planning, the preparation of wills, powers of attorney and trusts, assisting with estate administration, and the main topic of our session, estate administration tax, also known as probate.

Both experts shared information, insights, and anecdotes that helped illuminate what probate means, how it can reduce a family’s net estate assets, and some of the strategies that can potentially reduce its impact.

Understanding probate

Probate is the process of the courts formally accepting a will, or, if the deceased did not have a will, the process of appointing someone to act on their behalf. The court seeks to verify that the person has indeed passed away, that they are in the fact the author of the will, and that the will is valid.

In exchange for this service, the province of Ontario, charges 1.5% on the total gross value of your estate above $50,000. It is important to note that this tax is not applied only to the capital gains within your estate, but to its entire market value. That’s $15,000 per million, which, when applied to all of your real estate, securities, and other assets, may be not be an insignificant sum.

In addition, when someone passes away, any assets that are subject to probate are frozen and cannot be sold until probate is completed, which can take 6-12 months. Laura shared the example of an executor who was out-of-pocket more than $100,000 because no estate planning provisions were made for funeral expenses and the cost of maintaining the deceased’s home during probate.

Another consideration when it comes to probate is that, once a will is filed with the courts, it becomes part of the public record. Many families wish to minimize the assets that are subject to probate to protect their privacy.

Strategies to optimize your estate

Our speakers shared many pieces of valuable advice – here are just a few of the key points around effective probate planning:

Create a financial asset summary. When someone passes away, their executor will be responsible for locating and valuing all of their assets for the purposes of probate. It is a good practice to create a financial asset summary that lists all of your insurance policies, bank accounts, investment accounts, properties and other assets. This will greatly assist a future executor. During this process, you may also discover opportunities to consolidate and simplify your affairs.

Consider joint ownership. When someone passes away with assets such as a home, investment account or bank account held in joint name with their spouse, those assets can pass to the spouse on a tax-free basis. It is advisable for couples to review which assets may be owned jointly, thus deferring any probate or other taxes until the passing of the second spouse.

Review your beneficiaries. The proceeds from certain types of financial assets, such as life insurance policies and registered investment accounts (RRSPs, RRIFs, and TFSAs), can pass tax-free to named beneficiaries. It is wise to review these accounts to make sure that the correct people have been named.

Consider a Bare Trust. A Bare Trust involves having a “primary will” for certain assets that must be subject to probate, and a “secondary will” that addresses certain other assets that you have transferred to a corporation or to joint ownership with an adult child in order to avoid probate.

Explore an Alter Ago Trust or Joint Partner Trust. These strategies are only available to taxpayers 65 years or older, but might allow you to roll a principle residence, securities, or other assets into a trust without triggering tax, and later transfer those assets to the next generation without probate.

Both speakers explained that there are no one-size-fits-all solutions for probate planning. There are many nuances to consider, including the specific dynamics of your family, set-up costs, ongoing tax filing requirements, and the precise legal language required to execute some of these strategies successfully.

However, with the right professional guidance, probate planning can preserve assets, save time, enhance privacy, and potentially provide protection from creditors. The range of solutions is wide, and, judging by the robust Q&A that followed this presentation, many listeners discovered solutions that may be applicable to their personal situations.

For a more detailed discussion of the event or for access to a video replay, please contact your Cumberland Portfolio Manager.

It is common to use a family trust or other trust structures to allow assets to pass to the next generation in a measured way. But is this always the best strategy to pursue? We believe it’s critical to consider all the relationships, and the operational (among other) implications that come with establishing a trust.

Trusts are typically used to accomplish certain goals when leaving an estate to your spouse, children, or any other named beneficiary. To be effective, it’s important to consider not only the quantitative goals (financial protection, preservation of capital for the long term, and tax optimizations), but also the qualitative outcomes (relationship dynamics, lifestyle, and ultimately the overall impact) of using a trust. Ideally, it is better to avoid the transfer of wealth being viewed as just business and/or a tax transaction.

Author and retired attorney, Jay Hughes describes this well: “This trust is a gift of love. It exists to enhance the lives of the beneficiaries.” And here, he is not referring to materialism or handouts that allow for an expensive lifestyle. He is referring to some levels of preparation, education, core values, maturity and self-sufficiency. The trust should have meaning and emotions attached to it, so the next generation is prepared to receive it with grace and not abuse it.

What is a trust?

A trust is a legal agreement between the named trustees and beneficiaries. The agreement will outline the management, administration, and distribution expectations of the trust. The trustee has the discretion and obligation to follow the terms of the agreement. The beneficiary carries the accountability for the use of the distributions.

Here are three questions that can indicate whether a trust will make sense for your situation and family, and what its ultimate structure might look like:

1. What is the main purpose or reason for using a trust?
2. What is the most important outcome that you would like to see as a result of a trust being in place?
3. Who will you select to take on the role of the trustee?

A trust establishes a mid to long term relationship between the trustee(s) and the beneficiaries. A beneficiary is dependent upon the capabilities, expertise, and knowledge of the trustee to manage the affairs of the trust over many years. This makes the selection of the right trustee a crucial one.

Selecting your beneficiaries is usually the easy part because they are typically your spouse and/or your children. Selecting a trustee is more difficult because you have choices about who it will be, and whoever you choose will have a solemn responsibility to carry out your intentions and make decisions that will impact the lives of your beneficiaries.

Your trustee may be a family member (sibling, aunt, uncle, child but caution is warranted here), a professional (a lawyer, accountant, manager), or a private trust company. It is imperative to have an inclusive selection process so all parties named within the trust have a clear understanding of the trust’s intentions, its management, and distribution expectations, and as such, they can start to work on the relationships that will continue beyond your lifetime.

In conclusion, before you decide to use a trust for estate and tax planning, consider the qualitative outcomes and relationship dynamics that will result. Ensure that family members and other parties involved in the trust comprehend the implications and expectations ahead of time so that when the trust is created, there is a seamless transition.

For a personal discussion about the use of trusts and whether they can assist you in meeting your goals, please contact us so you can speak with a Cumberland Portfolio Manager.

A great deal of financial success comes down to executing the basics well. In this series called Investing Basics, we review some of the fundamental tools that can help you and your family build and protect wealth over time. In this installment: the power of RESPs, especially for grandparents.

Many grandparents are unaware that the total cost of a four-year degree at a Canadian university in 2023 is about $100,000. This includes tuition, books, supplies, housing, meals, travel and $125 for the traditional sweater to represent their university, faculty or program.

The cost of university has risen sharply, and so has the importance of graduating with a marketable set of skills and knowledge. Without a post-secondary education, employment and life opportunities are more limited now than ever before. Contributing to a grandchild’s education can open doors of opportunity and help you stay connected in a meaningful way.

Registered Education Savings Plans (RESPs) began in their current form in 1998 when government grants worth up to $7,200 per child were introduced. If you are a grandparent today, this program may not have been in place when your children were still looking forward to post-secondary education.

How you can use an RESP now

If you want to conscientiously pass wealth between generations and help minimize your children’s and grandchildren’s debt in the future, opening and contributing to an RESP on behalf of your grandchildren is an excellent option.

Here’s what you need to know:

• You are the “subscriber” and the student is the “beneficiary” of an RESP
• The lifetime contribution limit is $50,000 for each beneficiary
• There is no limit to the number of RESPs that a beneficiary can have, but they cannot exceed their lifetime limit of $50,000 without penalties being incurred
• You can receive Canada Education Savings Grants (CESG) worth up to $500 per year (equal to 20% of the contribution) and a lifetime limit of $7,200
• Many subscribers deposit $2,500 per year to maximize this grant
• A catch-up for missed years of up to $1,000 is permitted
• You may also qualify for a Canada Learning Bond (CLB) for colleges, CEGEPs and apprentice programs of up to $500 in the first year and $100 per year thereafter
• Funds can be invested in an investment portfolio of your choice and grow tax-free, like an RRSP
• Money is paid out as an Educational Assistance Payment and taxed in the hands of the beneficiary. In practice, most students pay little or no income tax because of their education-based deductions and credits, and their relatively low total income.

Speak to your Cumberland Portfolio Manager

If you’d like to contribute to the post-secondary education expenses of a grandchild, speak with your Cumberland Portfolio Manager. We can help you open the account, devise the right funding strategy, set up an appropriate investment portfolio, and take care of applying for and collecting government grants on your behalf.