Financial Planning for Dentists: PART THREE

April 26, 2022

I also cover this in a YouTube video. Click here to watch!

ATTENTION DENTISTS!

Do you have a comprehensive financial and retirement plan – written down – that maps out when you can afford to retire and what your retirement paycheque will look like? 

This is the third and final blog in a series of three on this important topic. 

Here’s a quick recap of what we’ve covered so far:

In the first blog we talked about the structure of your dental practice and when you are ready to sell the practice; we highlighted some of the key differences between selling the shares of your corporation versus selling the assets of your corporation.

The second blog talked about putting necessary bumper guards in place, to protect you and your family in the event life throws you a curveball.

In today’s blog, we are going to talk about how to leverage your practice to build a tax-free “personal” retirement paycheque. In addition, I’m going to explain why it is important for you to have a second corporation. 

If you remember back to the first blog, I brought up the issue of “passive assets” inside your corporation. I mentioned that if you wanted to sell the shares of your corporation down the road, then you would need to restructure – or “purify” – your corporation prior to sale, to ensure that the business qualifies for the $850K+ Lifetime Capital Gains Exemption. 

In order to “purify” your Dental Practice Corporation, you will need to open up a second corporation as part of that process – it will simply be an “Investment Corporation.” I don’t want to get too far into the weeds, but this second corporation is considered “connected” in the eyes of Revenue Canada. Meaning: the Small Business Tax Rate on the first $500K of active income will now be shared between the two corporations… But, if you do this correctly, this will not become an issue.

Now that you have this second corporation opened, we can now “loan money” from the Dental Corp to the Investment Corp and you only have to charge what is called the “Prescribed Rate of Interest” – which is currently sitting at 1%. So, you could move 99 cents on the dollar from your active Dental Corp over to the Investment Corp, you’re looking at 99 cents on the dollar to go out and purchase rental real estate. Now because this rental real estate is inside the Investment Corp, this will make it easier down the road to sell the “shares” of your Dental Corp in order to qualify for the $850K of the Lifetime Capital Gains Exemption.

Let’s change gears 

We want to build a pension plan for you that will lead to a Tax-Free Retirement Paycheque – using either your Dental Corp or your Investment Corp. If you are confident that you will be selling your Dental Corp down the road, then I would highly recommend that we implement this strategy through your Investment Corp.

The Pension Plan is called the Insured Retirement Program (or IRP); it has both an insurance component to it as well as a cash investment component.

Now some of you reading this blog may have heard of this strategy, but I guarantee you’ve probably never seen the IRP designed the way that I design it. 

Most advisors design an IRP the wrong way. How? Because they design it such that you have to wait 10, 14, or even 20 years to get access to the cash sitting inside the Whole Life Policy. In short: they have designed it for when you die and not for while you are alive.

Now I’ll let you in on a little secret: the way they designed that policy will maximize the commissions for your advisor.

In my opinion, it has not been designed for your best interest, which is what’s most important.

Let me explain.

With Whole Life Insurance, you have a component of the premium that is strictly paying for the death benefit and you have a component of the premium that can go into the Cash Investment Account. The design of the IRP mentioned earlier in this blog – where you have to wait 14 or more years to get access to the cash – means that most of your premium is going to pay the death benefit. 

But what if I told you that with the way that I design the IRP, you can write a cheque for the premium on Monday and we could give you access to up to 90% of the cash value inside the policy by Tuesday.

Full Disclosure – I make a lot less commission designing it this way, but typically after four or five years, you could have access to up to 100% of the money you have put into the IRP. 

So what does this all mean for you and why would I design it this way?

I have three key reasons –

1. Because I truly believe this design is in the best interest of you and your family.

2. If you think back to what happened when Covid-19 first hit, cash flow might have been an issue for you. What if I told you that based upon my design of the IRP, you could have taken a premium holiday in 2020, thereby conserving your cash flow?

3. I design the IRP this way because after four or five years, if you change your mind, you could still get up to all of your money back.

Think about it this way: if you wrote a cheque for $100K on a Monday and I told you that you could have access to $90K of that premium on by the next day… what could you do with that money?

Think about it –  the $100K premium is paying for much-needed life insurance coverage for you and your family, but now you have access to $90K of that money which could be used to purchase rental real estate or to reinvest back into your business.

Now there is a fourth key reason of why I design my IRPs this way that I haven’t shared yet…

Picture this, you are making these premium payments either out of your Dental Corp or out of your Investment Corp, it doesn’t matter… We are giving you immediate access of up to 90% of the cash value inside the policy. When you decide to retire down the road, we can take that policy to a lending institution and they can turn on a 100% tax-free retirement income.

I’d say that’s kind of like having your cake and eating it too!

I’ve covered a lot about financial planning for dentists in these last three videos… now just imagine what we can do for you in person.

If you are interested in developing a comprehensive written Financial & Retirement Plan, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544

Financial Planning for Dentists: PART TWO

April 19, 2022

I also cover this in a YouTube video. Click here to watch!

Welcome back, dentists! This blog is part two in a series of three on this very important topic: having a comprehensive, written financial and retirement plan.  My focus is on developing a financial plan for a dentist, because it is very different than developing a financial plan for a doctor.

In last week’s blog – Financial Planning for Dentists: PART ONE – we talked about the structure of the dental practice and when you are ready to sell the practice. We also walked through some of the key differences between selling the shares of your corporation versus selling the assets of your corporation.

In today’s blog, we are going to talk about putting bumper guards around you and your family in the event that life throws you a curveball. 

Here’s what I know for a fact – 

Your most important asset is your ability each and every day to get up and go to work to earn a living. And so, if something had happened to you last night and you couldn’t work today, the question I always ask is…

What is going to be your paycheque?

If the worst happened to you, the best way to address this issue is something called Disability Insurance – it will step in to become your paycheque for the rest of your working life.

Disability insurance premiums should always be paid for with personal tax dollars. Because if you are ever diagnosed with a disability, all of the income you would receive would be “tax-free income.” This is very important!

When designing a disability policy, you have to look at certain features that are “must-haves” in order to fully protect yourself.

The first feature is called “Own Occupation”. If you don’t have this feature, then after two years into the disability benefits, the insurance company can force you to do any other job you are capable of doing. BUT, if you do have the “own occupation” feature in your plan, then the insurance company can’t force you to do any other job than the job you were doing the day before you became disabled.

In addition to “own occupation,” you should also have a feature called Cost of Living Allowance (or COLA) because if you ever went on claim, you want to make sure that your monthly benefit is keeping up with inflation.

The third feature you should look into is Future Income Option (or FIO). As long as your income has gone up, this feature allows you to purchase additional monthly benefits, but you do not need to undergo any future medical underwriting.

The fourth and final feature we should look at is called the Return of Premium (or ROP).  This works like clockwork – every seven or eight years, if you haven’t filed a disability claim, then you get 50% of the premiums back that you paid and you receive this money “tax-free”. So, either you get a disability and you receive the monthly benefit, or you get 50% of your money back.

Now that we have taken care of you and your family should you get a disability, we now need to focus our attention on your dental practice. 

Most, if not ALL dentists who own a practice – which includes frontline staff as well as hygienists – will need something called “Overhead Insurance”. This type of coverage kicks in to protect your practice should you be diagnosed with a disability. It will pay for your rent, wages of your staff, etc. For more details on this, follow the coordinates at the very bottom of this article to get in touch with us.

The next bumper guard to look at in protecting you and your family is “Critical Illness” insurance. I have a number of videos on my YouTube channel that go into great depth on this subject, so I won’t repeat myself. 

Here’s what I want you to know and remember 

We design “guaranteed” Critical Illness policies for our clients – either you are going to get a covered critical illness and the policy will pay out, or once the surrender clause kicks in, you can ask for 100% of your money back. You can’t ask for more guarantee than that!

In next week’s blog – Financial Planning for Dentists: PART THREE – I will get into how to leverage your practice to build a tax-free “personal” retirement paycheque, purchase rental real estate, and offer a brief overview on why it is important for you to have a second corporation.

If you are interested in developing a comprehensive written Financial & Retirement Plan, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544

Financial Planning for Dentists: PART ONE

April 12, 2022

I also cover this in a YouTube video. Click here to watch!

I have good news.

I’m starting to see a number of dentists – from all across Canada – reaching out to connect with me via LinkedIn and YouTube. So, I thought I would dedicate my next three blogs to – as the title suggests – Financial Planning for Dentists. Because developing a financial plan for a dentist is very different from developing a financial plan for a doctor.

So here’s the thingthere is a key difference between dentists and doctors

Almost 100% of dentists can sell their practice, but when it comes to doctors, the numbers flip around and 99% of doctors do not get a chance to sell their practice. Usually, family doctors wind down their practice and most often the patients need to find their own replacement doctor.

So for dentists there needs to be extra care involved in structuring – and then implementing – the financial and retirement plan.

Now this is critical

Ideally a dentist will want to sell the “shares” of their corporation to the incoming buyer so that they can take advantage of the $850K+ Lifetime Capital Gains Exemption. Meaning that the first $850K of the purchase price is 100% tax-free money to the Dentist. 

However, when somebody purchases the shares of a Dental Corporation, they are also purchasing any potential hidden issues that might not be apparent at the time of the sale. So, sometimes, incoming buyers of a dental practice would prefer to pay for the “assets” of the Dental Corp. If this happens there is still a way to structure the sale so that some of the money is received in a more “tax-preferred” way by using an accounting term called “Goodwill”.

Now, personal goodwill can be present when the dentist’s reputation, expertise, skill, knowledge, and relationships with customers are critical to the business’s success and value. 

Think about it this way 

Personal goodwill may be deemed as an asset of the corporation where the shareholder – in this case the dentist – has transferred the goodwill to the corporation through employment, or other agreements with the corporation.

Here is another key point

A sale of corporate assets and personal goodwill should be planned carefully and executed to establish that personal goodwill exists – that it is being sold in a separate transaction from the sale of the assets of the corporation. 

Now, as a result, you might also be able to negotiate a higher sale price so the after-tax proceeds of an asset sale are similar to a share sale. 

Because a dentist is most likely to sell their dental practice, you also have to be very careful in the period of time leading up to the sale of the practice. 

If you have investment assets inside the Dental Corporation – and they are not being used to run the practice – then they are considered “Passive Assets”.

If at the time of the sale there are passive assets inside the corporation – such that less than 90% of assets are being used to run the business as a dental practice – then you may have to restructure or “purify” your corporation prior to sale. This is to ensure that the business qualifies for the Lifetime Capital Gains Exemption.

Now, some provinces across Canada allow dentists to actively “purify” their assets on a regular basis, while other provinces are not supportive of this accounting procedure. You will need to work with a Licensed Financial Planner and a Certified Accountant to determine how you will plan for the sale of your dental practice.

Here is something else to know and remember

If you do sell the assets of your corporation instead of the shares, then you do get to keep the corporation; if you decide to give up your license to practice dentistry, then the corporation will no longer be a Dental Professional Corporation, but it will turn into an Investment Corporation. The proceeds of the sale would then go into the Corporation and you could continue to pay yourself dividends out of the Investment Corporation in retirement.

In summary

We have covered the structure of the dental practice and the difference between selling the shares of your corporation versus selling the assets of your corporation. In my next blog, I will get into the importance of protecting you and your family if life throws you a curveball. We will also get into the importance of having a second Corporation. 

Now, in some provinces your Dental Association frowns upon you having a Holding Company… but I will overview why it is important for you to have this second Corporation and how we get around any issue with regards to having a Holding Company.

If you are interested in developing a comprehensive written Financial & Retirement Plan, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544

How to get Critical Illness Insurance coverage for FREE

April 7, 2022

I also cover this in a YouTube video. Click here to watch!

I’m going to let you in on a little secret about how you can get Critical Illness Insurance coverage completely free. 

It starts with my asking you this simple question: if you could purchase an insurance contract and get a guarantee in writing that if you never ended up using the coverage while you are alive – and you could get 100% of your money back, tax-free – would you be interested? 

Now who wouldn’t be!

Only 5% of Canadians have Critical Illness coverage, while 85% of Canadians worry about getting a critical illness. 58% of all Canadians have admitted that they would be in financial trouble if they were diagnosed with a critical illness.

So what if I told you there is a better way to get Critical Illness coverage and it doubles as a great strategy for getting money out of your corporation on a tax-free basis. 

The strategy that I am referring to is called a “Shared Ownership” Critical Illness policy. It is structured in such a way that your corporation pays a huge part of the premium for the actual Critical Illness coverage and you are paying for both the Return of Premium on Death and the Return of Premium on Surrender.

Here’s how it works

The corporation pays around 60% of the premiums with corporate dollars and you are paying the remaining 40% of the premiums with personal dollars. 

If you contracted one of the 25+ covered critical illnesses listed in your policy – and live for at least 30 days – then the policy will payout the benefit. If, however, you have qualified to surrender the policy, you can ask for 100% of your money back. You would get both the corporately paid portion of the premiums, as well as the personally paid portion of the premiums 100% tax-free. This would allow you to pay much of the costs of the premium corporately at a much lower corporate tax rate, but if you remain healthy for a period of time – generally until you stop working or the coverage expires – you can have 100% of all premiums paid repaid to you personally. 

So overall, this is a great strategy for getting money out of the corporation tax-free, while simultaneously protecting you and your family in the case you are diagnosed with a critical illness.

Let’s look at a case study

Let’s say you are 42-years-old and you are a successfully incorporated business owner. We’ll assume that you need to get $350,000 of Critical Illness coverage. So, we apply for $350,000 of Critical Illness coverage with a Return of Premium upon Death (ROPD) and a Return of Premium upon Surrender (ROPS) after 15+ years. The total annual premium is $6,100.00

In this example, the corporation would pay for the specific Critical Illness coverage – or $3,700 of the premium per year – and you would pay for the Return of Premium features – or $2,400 of the premium per year.

After 15+ years, you now have choices. You can continue to pay the premiums both corporately and personally, or you can execute the 15+ year surrender clause and ask for 100% of your money back. 

In this scenario, you would be 57-years-old at this point. You can continue to pay the premiums, or if you asked for 100% of your money back, you would get 100% of what you paid personally as well as what the corporation paid. All that dough would be coming back to you tax-free.

Both you and the corporation paid $6,100.00 combined, per year, for 15 years… so you can now ask the insurance company to cancel the coverage and send you a personal tax-free cheque in the amount of $91,500.00.

As you can see, this is a great way to get the coverage that you need now, and when you no longer want or need the coverage, you can simply ask for your money back, tax-free.

My team and I design “guaranteed” Critical Illness policies for our clients – either you are going to get a covered critical illness and the policy will pay out, or once the surrender clause kicks in, you can ask for 100% of your money back. You can’t ask for more guarantee than that.

Who benefits from a Shared Ownership Critical Illness Policy?

The company is protected against financial loss and is provided liquidity in the event a shareholder is diagnosed with a critical illness and needs to take time off to recover.

A shareholder will benefit if they remain healthy, do not develop a critical illness, and do not make a claim; they just wait for the surrender clause to kick in and they can collapse the policy, at which point they can ask for 100% of the premiums paid back.

If you’d like to learn more about how you can incorporate a Shared Ownership Critical Illness policy into your own personalized financial & retirement plan, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544

What is a Needs Analysis and Why Do You NEED It?

April 4, 2022

I also cover this in a YouTube video. Click here to watch!

Let me ask you a question

If something happened to you last night and you passed away unexpectedly – would your family be fully protected?

Let me ask you another question 

If you were at home cleaning out the gutters or washing the windows, and you fell off the ladder and hurt yourself so badly that you could never go back to work – what would be the value of your monthly paycheque for the rest of your life?

Let me ask you one more question

If you were not feeling well, you went to see your family doctor, they ran some tests and then told you that you had stage two or stage three cancer – what is your game plan? And, are you protected?

All of these questions lead to something called a “Needs Analysis.” In this short article, I’ll be giving you all the necessary facts you’ll need to consider when making an informed decision for you and your family about why you need one. 

A Needs Analysis is something my team runs so that if life happens and you get hit by a curveball, you can rest assured that you and your family are protected.                                                                      

In the case of death, the Needs Analysis calculation needs to take into consideration all of the family debt, your children’s future post-secondary education costs, the financial contribution that you make to the monthly budget, and of course, your funeral costs. Depending upon how old you are and the ages of your children, it could mean that you need to have $2M to $4M of life insurance coverage in order to make sure that if you passed away unexpectedly, your family can continue to live their current lifestyle. Now I know your spouse will wear black for a number of weeks, but they also need to get on with their lives, so you want to make sure there are no financial worries.

In the case of injury, where you cannot return to work, the Needs Analysis calculation needs to take into consideration the financial contribution that you make to the monthly budget. So, if your monthly budget is $10K or $12K and your “net pay” makes up 50% of this number, then you need to make sure you have at least $5K or $6K per month in Disability Insurance coverage. If you don’t, then pressure will start to rise and you will need to find another job that you can do in order to survive.

In the case of critical illness – like cancer, heart attack, or stroke – the Needs Analysis calculation needs to take into consideration that we are starting to survive these critical illnesses, but we are off work for a period of time while we recover. So, if you are making $100K or $200K per year after taxes, then for the average male you will be off work for 18 months and will need at least $200K to $300K in Critical Illness Insurance coverage. For the average female, they are typically off work for 18-24 months, and so they will need at least $300K to $400K in Critical Illness Insurance coverage.

A Needs Analysis calculation takes a number of factors into consideration. As you can see, depending on what happens in your life, you need to make sure that you are working with somebody who actually knows how to calculate a Needs Analysis… otherwise, you might end up with a gap in coverage and have to tap into reserve funds in order to survive.

Covid-19 has taught us a lot when it comes to the recognition of front-line workers and our own mortality; make sure you’re protected, and that you get a proper Needs Analysis done for you and your family.

If you’d like to learn more about getting a Needs Analysis for you and your family, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544

Are You Working with a Real or Fake Financial Planner?

March 31, 2022

I also cover this in a YouTube video. Click here to watch!

Now here’s a question you may have never thought of needing to ask yourself: are you really working with a Financial Planner or just somebody who calls themselves a Financial Planner?  Well, by the end of this article I’ll have supplied you with all the necessary information needed to determine if your current Financial Planner really knows what they’re talking about – and if the recommendations they’re making to you and your family are correct.

Right now, in so many provinces across Canada, anybody can call themselves a Financial Planner and get away with it. 

As an industry, we are asking for reforms and regulations to protect the public from rogue people who pretend to be Financial Planners – the ones whose sole pursuit is selling products, moving onto the next opportunity and leaving many mistakes behind.

When I am in need of a doctor – a specialist – I want to find a doctor that has a number of degrees and designations after their name. I am seeking out someone who has gone to school for a number of years, someone who is a real expert in their field. Ultimately, I’m looking for someone who knows what they are actually talking about.

This same practice should be used when seeking out a Financial Planner to work with. We have similar acronyms after our names that you should be looking for to ensure the person that you are sitting down with is actually a Financial Planner.

So – you want to make sure the person has a business or a math background; additionally, they should have at least their Certified Financial Planners designation (CFP), which is the gold standard when it comes to Financial Planning. The second designation you should be looking for is the Chartered Life Underwriter (CLU) designation. The CLU designation really focuses in on working with business owners and complex estate planning. Those two designations – either the CFP or the CLU – are what’s really required in order to call yourself a Financial Planner.

Starting this year, if you want to enroll in the CFP program, you must already have a university degree – just like lawyers and accountants need to have a university degree, so will Financial Planners. This is just one step of many that the industry needs to take in order to protect the public.

Currently, I am working on a number of client files and you can see during the information gathering process that many business clients have no clue if they are maximizing the effectiveness of their corporation, and whether or not they are paying way too much in taxes to Revenue Canada.

Just to give you an example… 

One client I dealt with had a Critical Illness Policy that they owned, but when I reviewed the documents, I noticed that the brother was listed as the beneficiary of the policy. Now, if this was a Life Insurance Policy, that might be correct, but this was a CI policy. So, I explained to the client that they were making the premium payments, but if they contracted a critical illness, the payout would be going to the brother. Boy, were they displeased when I showed them their own documents. Needless to say, they fired their previous Financial Planner since they clearly didn’t know what they were doing.

Life insurance is a no-brainer to have inside a corporation. Time and time again I see business owners owning life insurance policies personally instead of corporately and that is just not being wise.

Why would you take money out of the corporation – paying 30% or 40% in personal taxes in order to pay for the life insurance premiums – when that policy could be inside the corporation?

Plus, depending on which province you are in, you’re using 11-12% corporate dollars to pay those life insurance premiums. And, if you did pass away unexpectedly, the death benefit would be paid into the corporation, at which point your accountant would prepare paperwork to declare a “Capital Dividend” and the life insurance proceeds would come out of the corporation tax-free. What I’m trying to say is: there is no downside to owning the Life Insurance Policy inside the corporation.

So, again, I ask the question: why are business owners still owning Life Insurance Policies personally? Part of the answer is that the person who “sold” them the product didn’t know what they were doing.

Cash flow management is key to running a successful business. However, during my analysis of many client files, I find out that their current Financial Planner has never taken the client through a Cash Flow Management exercise. Never!

In a more recent client engagement, once we took them through a Cash Flow Management exercise, we were able to save the client $33,000 a year in personal cash flow – which meant we reduced their personal taxes by at least $10,000-$15,000 each year. If we hadn’t come into their lives, they would have continued to make Revenue Canada rich.

If you’d like to learn more about working with an actual Financial Planner, and not somebody who is just trying to sell you products, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544

What is a TFSA?

March 28, 2022

I also cover this in a YouTube video. Click here to watch!

What is a Tax-Free Savings Account (TFSA) and why should every Canadian citizen have one?

In this blog, I will give you all the necessary facts you need to consider so that you can make an informed decision about a TFSA for you and your adult family members.

Let me start out by saying – in my opinion – I think the government named the account incorrectly. It should have been called a Tax-Free Investment Account or TFIA because most Canadians are under the false impression that they can only have a TFSA at one of the major banks, all because of the word “Savings” in its name.

However, a TFSA is allowed to invest in almost anything, and I will share some ideas later in this blog on what I’m doing with my own TFSA in order to maximize my return by taking on additional risk.

So here is the history of the TFSA

It was first introduced in 2009 and you needed to be at least 18 years of age to open up a TFSA. Initially, you were only allowed to contribute $5,000 of after-tax money. This is key, because the money you are putting into the TFSA has already been taxed in your hands. Gradually, the annual contribution increased to $5,500, and then in 2015 – as a part of an election promise – the annual contribution was increased to $10,000. But, like most promises by politicians, once they got elected, they reduced it again to $5,500. Today the annual contribution sits at $6,000.

Now why is this important to you?

Because if you haven’t opened up a TFSA account yet, and you were at least 18 years of age or older in 2009, then you can put at least $75,500 into a TFSA today.

Each year a new contribution room is automatically created and if you forget or don’t have extra money to put into a TFSA for that particular year, then you get to carry that contribution room forward.

Now, it is very important that you don’t over-contribute to a TFSA. If you put too much into a TFSA, then Revenue Canada (the CRA), will charge you an interest penalty equal to 1% per month on your excess contribution. So be careful when calculating your contribution room.

I also advise you to be aware of this: if you take money out of your TFSA in, say, 2021, then you are only allowed to put that money back into your TFSA the following year – in this case, 2022. Because you were contributing “after-tax” dollars into the TFSA, when you take money out, it is completely tax-free money.

Think about it for a minute, if you were to contribute $6,000 per year for the next 25 years – and you received a conservative 5% net rate of return each year – then you would have a bucket of $300,000 in tax-free money. Plus, if you received a higher rate of return – say 7%, for example – then you would have a bucket of $406,000 in tax-free money.

Now, I did promise to tell you what my strategy is for my own TFSA… 

For background purposes, I will share with you that I have a high-risk tolerance – which means that I don’t look at my investment statements when the markets are down. I also don’t look at my investment statements when the markets are up. Why? Because whatever that number is, it is not my number. I am not planning on touching my TFSA for at least another ten or 15 years, so why would I be looking at the value today?

My TFSA is fully funded with shares of a private start-up company. If you research my background, you will know that I initially started my career in the Information Technology world of Corporate Canada before moving into the world of start-up software companies. 18 years ago I left that world to become a Financial Planner. In other words, I know the stats: only one in eight start-up companies survive. So for me, based on my risk profile, I am okay with those odds. 

I will tell you it has been over six years since my first round of financing, and I have since participated in three additional rounds of financing; the company I have invested in happens to now be cash flow positive, with plans to possibly go public in the next two to five years. 

For the record, I did not tell any of my clients about what I was doing with my TFSA, because it brings with it a higher level of risk than what most Canadians are looking for. So investing in start-up companies is not for everybody, but it’s absolutely something we can talk about. 

If you’d like to learn more about TFSAs, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544

How does a return of premium work?

March 24, 2022

I also cover this in a YouTube video. Click here to watch!

So, what is the super cool feature called Return of Premium and which insurance products offer this coverage? By the end of today’s blog I’ll have not only shared with you how you can get this feature, but I will also warn you about some of its potential pitfalls.

I find insurance policies a necessary evil – but if we can purchase policies that protect us and our families, plus give us an opportunity to get a portion or 100% of our premiums back… Well, sign me up!

There are 3 common Return of Premium options in the marketplace: 

  1. Return of Premium on Death. This is somewhat obvious in how it works, meaning the pitfall is that you have to die to collect. So really this means the money is going back to your estate. 

  2. The Return of Premium that allows you certain risk management products, or in other words the “50% Return of Premium after so many years of coverage.” I will explain later how you can take advantage of this offer

  3. Finally the Return of Premium that says “Give me 100% of my money back after a certain time period.”

So for Critical Illness Insurance – otherwise known as CI – you can add on the feature of Return of Premium on Death. You’re either going to get a covered policy and receive the CI benefit, or if you die while it’s being processed, your estate will get 100% of the premiums that you paid back, 100% tax-free.

A Critical Illness Policy can also be designed with a term to the age of 75 – meaning you will have coverage from now until 75, and you can add on a 15+ years ROP on Surrender. So while you are alive, after paying premiums for 15 years, you can decide to either continue to pay the premiums each year, or you could ask for 100% of your money back tax-free. In this case, you are either going to get a covered CI benefit, and if you don’t, you qualify to receive 100% of your money back. This is what I call the Cadillac version of CI.

There is another Critical Illness Policy for business owners that is kind of cool. 

It is called Shared Ownership CI. This means that the Corporation pays the premium for the CI benefit and you personally pay the premium for the ROP on Death and the ROP on Surrender. Why is this cool? Because after 15+ years you can decide to surrender the policy and not only will you get back all the premiums that you paid personally, but you also get back all the premiums that the corporation paid – you get them all back personally and it is 100% tax-free money.

With Personal-Individual Disability Policies you can add on an ROP feature that allows you to receive back 50% of the premiums that you have paid if you haven’t claimed on the Disability Policy. This feature usually kicks in for every eight years you own the Disability Policy, and continues all the way up to the expiry date for the coverage. So if you haven’t contracted this policy, and you hit your eighth, 16th, or 24th anniversary, then you will receive 50% of your premiums back. The best part? That is 100% tax-free money.

If you’d like to learn more about how you can incorporate the ROP feature into your Risk Management Coverage or if you have already decided that you need to get the coverage in place, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544

Estate Planning Testamentary Trusts

March 21, 2022

I also cover this in a YouTube video. Click here to watch!

If you have children and your plan is to leave them the bulk of your estate, how do you make sure – in the case they get married and then divorced – that their ex-spouse doesn’t get 50% of the assets that you left for your child? Today I’m sharing with you a key strategy that will fix this problem. 

Here’s the thing, you can leave money “directly” to your child, but if they are married or get married in the future, they “commingle” this money – along with other assets they have to enjoy their lifestyle with their spouse – and end up getting divorced, their ex-spouse could end up with 50% of the remaining money that you left your child. 

So how do we correct this problem?

The solution is something called a Testamentary Trust. You can’t go out and set one up today, but it is created upon your passing and must be designed properly inside your Will.

Back when Jim Flaherty was the Federal Finance Minister, he took away a key feature of Testamentary Trusts, and so, some lawyers – who are not familiar with the Financial Planning Benefits of a Testamentary Trust – sometimes give the wrong advice about not using this strategy in your Wills.

Here are some key Financial Planning Benefits of a Testamentary Trust:

  1. It is set up upon the death of an individual.

  2. The Trust is considered an “Individual” for Tax Purposes – which just means it has a separate tax return.

  3. For the first three years of the Trust’s existence, it has graduated tax rates the same as an individual.

  4. Provides for Income Splitting with the Beneficiaries.

  5. Creditor Protection.

  6. Family Law Act – Divorce.

In this blog, I’ll be drilling down into those last three Benefits.

Income Splitting 

Let’s use me as an example. I have 3 children, and let’s assume my estate is worth $3M upon my passing. I have set up Testamentary Trusts in my Will for each of my children and my future grandchildren. That means each of my children would get $1M in their Testamentary Trust. 

Now, as I write this, none of my children have children… at least, that I know of! However, down the road when they do have children, they could take money out of the Testamentary Trust in the name of the grandchild. Now you’re taking the money out on your grandchild’s tax return, who should be in a lower tax bracket, thereby reducing your overall tax bill. So when it comes to income splitting or what some accountants like to call “income sprinkling,” this strategy is very strategic. 

Creditor Protection

If you leave money in your Will directly to your son, and he ends up getting sued, then the lawsuit can go after the money that you left your son. However, if you leave the money to your son in a Testamentary Trust, and your son then gets sued, the lawsuit can’t go after the money in the Testamentary Trust. This is huge. 

Family Law Act – Divorce

As I mentioned earlier, if you leave the money directly to your daughter, and she ends up getting married and then divorced, then the ex-spouse could end up with 50% of the money you left to your daughter. However, if you left the money to your daughter in a Testamentary Trust and she gets married and divorced, then the ex-spouse will end up with nothing from the Testamentary Trust. Now, the spouse might be able to go after the cash if your daughter commingles the money from the Testamentary Trust, so it comes down to making sure she is educated properly.

If you’d like to learn more about how to set up a Testamentary Trust in your Will, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544

Group & Individual Disability Insurance in Canada

March 17, 2022

I also cover this in a YouTube video. Click here to watch!

What is the difference between Group Disability Insurance coverage at your place of work versus an individually-owned Disability Insurance policy? Well, in this blog I’ll be sharing with you the key differences between the two plans, so you can make sure you have all of the important features. 

Now, if something happened to you last night and you couldn’t work today, the question I always ask is… what is going to be your monthly paycheque?

If this happened to you, the best way to address the issue is something called Disability Insurance – it will step in to become your paycheque for the rest of your working life.

With a Group Disability Plan at work, you are limited to the features that have been negotiated by someone in the Human Resources Department or the Benefits Department. Depending on where you work, you might have what are called “Flex Dollars” that you are allowed to use when designing your Benefits package. These Flex Dollars can be used to purchase Life Insurance, Disability Insurance, and Dental or Medical Plans.

The key mistake I sometimes see people make is that they use some, or all, of their Flex Dollars to pay for their Group Disability Plan. This is such a mistake because if you use your Flex Dollars to pay a portion or all of your Group Disability Plan, and then you go on a disability claim, any money that you receive would be fully taxable as regular employment income. However, if you don’t use any of your Flex Dollars to pay for your Group Disability premiums, and then you go on claim, then any money that you receive would be 100% tax-free money

So this is a huge no-brainer: would you rather have fully taxable income or tax-free money?

Also, if you are an incorporated business owner, you must make sure that you pay for your disability premiums with personal tax dollars, otherwise you would have the same issue of taxable income versus tax-free income if you went on claim.

Both plans usually allow you to add in a Cost-of-Living Allowance – otherwise known as COLA – which means that once you go on claim, your benefits each year would go up by the Cost of Living and would be indexed to inflation. This is good.

 

HERE’S THE THING: every Group disability plan in Canada has one huge flaw with it – it is called “Own Occupation.” Now, most of you reading this blog probably haven’t read your benefits plan in years, but if you read the fine print in your Group Disability Plan, you will find that if you go on claim, then you have “Own Occupation” for the first two years of your claim. That means that in the first two years of your claim, the insurance company CANNOT make you do any job other than the job that you were doing the day before you became disabled. 

Here’s the catch: in all Group Plans in Canada, after being on claim for two years, your definition of “Own Occupation” changes to “Any Occupation,” and the insurance company can now force you to do “Any Job” that you are able to perform, and with it, any money you make is subtracted off the Disability Benefit that you are receiving.

Here is how we fix that problem with your Group Plan

You can purchase a “cheap and cheerful” Individual Disability Policy, however, I would include a two-year waiting period before the benefit kicks in – so your Group Plan would cover you for the first two years. Then, when the definition changes in the Group Plan, we turn on your Individual Disability Insurance Plan with “Own Occupation” to solve this problem. This turns out to be very cost-effective because of the two-year waiting period.

Only an individual plan can have the following feature: Return of Premium (ROP). I recommend you do a calculation of the cost of this feature versus the payback. This works like clockwork: every 8 years, if you haven’t filed a disability claim, then you get 50% of the premiums back that you paid and you receive this money “tax-free”. So either you get a disability and you receive the monthly benefit, or you get 50% of your money back.

If you are a professional, like a doctor or dentist or you have a university degree or a Masters, then you will qualify for additional discounts on your Individual Disability Insurance.

If you’d like to learn more about Disability Insurance or if you have already decided that you need to get the coverage in place, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544