Taxed by COVID-19?

Whether you were an employee laid-off due to the COVID-19 pandemic, a city dweller escaping an urban center to cottage country or a business owner looking to keep the lights on, there have been significant impacts to many of our ways of living.

The Federal and Provincial governments have assisted in deploying capital and cash into the economy like we have never seen before! The rate of government spending per-capita is comparable to post-WWII.

This significant moment of our generation will have both financial and non-financial (e.g., emotional, mental health, societal) consequences for years to come. With so many variables changing at a rapid pace, how can your financial advisor guide you to a well-planned financial future? Let’s look at some talking points advisors and clients should be having:

Buying or Selling a Cottage

With so much attention to the cottage lifestyle and a corresponding flurry of activity we have seen in cottage country, are buyers and sellers aware of their tax consequences to these transactions? Are Canadians having the conversation on whether it may or may not be appropriate to utilize their principal residence exemption? If a family unit (as defined by the Income Tax Act (Canada)) has more than one property during a particular year, which property should be designated for exemption, and why? Having these broader conversations can allow for the appropriate financial guidance to shed light on the ability of Canadians to make a well-informed financial decision. If both a city home and a cottage have appreciated in value, a comparison on the appreciated gain-per-year and the timing of the disposition can play an integral role in determining which property should be designated and sheltered from a capital gain.

The Canadian home continues to represent one of the most significant tax-free investments many continue to enjoy, so this topic should be one that you discuss seriously with your advisor.

Withdrawals from RRSPs

With such great marketing attention being paid to RRSP contributions, are any Canadians discussing the benefits of RRSP withdrawals? As a result of lower incomes, Canadians have lower marginal tax rates – should you be discussing the ability to remove funds from an RRSP at a lower tax cost with your advisor? If additional cash is required to fund lifestyle costs, this may be a worthwhile conversation to have.

Insurance as an Asset

Many business owners will look to rebuild their investment portfolios within their corporations from retained earnings. For business owners with passive assets subject to a tax rate greater than 50% – and whose personal income tax rates are also greater than 50% – having a proper tax integration strategy is essential. Business owners will need to carefully rebuild their nest eggs and making use of corporate-owned life insurance can be a part of that solution. This alternative asset class can allow for the necessary portfolio growth to meet retirement income needs in a tax-deferred and efficient manner and should be something that is discussed with a financial advisor.

Connect with an Advisor

Whether your financial situation has flourished during the COVID-19 pandemic or greatly suffered, the financial planning conversation has never been more important. Make sure to connect with your advisor to discuss any of the above situations that might apply to you – I’m sure they’ll have even more ideas on how you can make the most of whatever your tax situation may be because of COVID-19!

Tony Salgado, CPA, CA, CFP, CLU is an estate and tax planning accountant and life insurance advisor. Before founding AMS Wealth, Tony held various director positions within wealth advisory firms and began his career with PricewaterhouseCoopers providing tax compliance and planning to high net-worth individuals and business owners.