Income Trusts: Proposed Taxation Changes

Recently, changes have been proposed regarding the current taxation practices regarding income trusts. Current tax laws have made income trusts a lucrative investment option for many Canadians. However, while the immediate reaction may be to look for other investment options, it is important to remember that these are changes are still in the proposal stages, and would not take effect until 2011.

Income trusts are generally defined as an investment trust that holds income producing assets. Its shares, also known as “trust units” are traded on securities exchanges, in the same manner that stocks are traded. The income is passed on to the investors. These distributions typically yield a higher profit than stock dividends, of up to 10% a year. Income trusts have the ability to generate a constant cash flow, which makes it an attractive option for investors.

Income trusts are structured to avoid the corporate taxes on distributions, thereby paying very little, if any, taxes on its earnings. Traditionally, distributions are taxed on both a corporate level and as dividends. With income trusts however, the trust avoids taxes on its earnings due to the fact that most of the income generated is distributed directly to the unitholders. While these trusts are not infallible, and carry their own brand of risk, the taxation laws have made them a popular choice when Canadians are looking at investment options.

The Tax Fairness Plan has introduced new taxation measures regarding income trusts. A Distribution  Tax will be implemented on all distributions from publicly traded income trusts as well as limited partnerships. For new trusts, this tax applies beginning in the 2007 taxation year. For existing trusts, a 4 year transition period has been proposed, with the new taxation being implemented in the 2011 taxation year. These new taxation laws were announced by the Department Of Finance as a means of curbing the growing trend of Canadian companies avoiding corporate taxes.

If you are currently investing, or are considering investing in income trusts, be aware of these new tax laws. By being informed, you can make the wisest choices in how to obtain your financial goals.

Guaranteed Issue Life Insurance

For many Canadians, purchasing life insurance may appear to be a troublesome prospect. People who have health problems or are advancing in age may assume that they do not qualify for life coverage. Some Canadians unexpectedly find themselves without coverage once they retire, and no longer have group life ibenefits through their employer. Guaranteed life insurance may be the answer for people addressing these specific problems.

Guaranteed life insurance offers coverage regardless of health problems. The only requirements are that you be a Canadian citizen between the ages of 40 to 75. You do not need to fill out a medical questionnaire or submit to a medical examination in order to qualify for a guaranteed life policy. Coverage is available from $5000 to $25,000. Once your guaranteed life policy has been purchased, the premiums do not increase, but remain at the exact same price for the term of your coverage.

Your guaranteed life insurance policy includes a living benefit at no further cost. A living benefit allows the policy holder to receive a cash advance of up to 50% of the benefit in the form of an interest-free loan if the policy holder becomes diagnosed with a terminal illness. The only requirement for this benefit is that the policy must be in force for at least 2 years. The living benefit money can be used in any manner as the policy holder sees fit.

Once your guaranteed life policy has been purchased, it cannot be cancelled. If the policy holder’s health declines, the policy cannot be revoked. Your life insurance coverage can be renewed up to age 95 without having to submit additional medical information. At the age of 95, your insurance will be continued, but you will no longer be required to pay premiums.

All Canadians should have sufficient coverage in order to avoid any possible financial problems. For those Canadians that currently do not have life insurance, but wish to obtain it, ask one of our qualified consultants which life insurance option is the right one for you.

Employee Benefits and Life Insurance

Along with group health insurance, group life insurance is a common benefit that you may receive from your employer. However, it is important to thoroughly investigate whether this coverage is going to be sufficient for your life insurance needs.  If the coverage that is being offered is based only on your salary, it probably will not be enough to provide complete financial protection for your beneficiaries.

Since the group coverage offered through your employer is free, it makes sense to accept it. However, it is important to calculate how much coverage you will need to have in order to sufficiently pay your existing debts and provide for your family. Group life insurance is usually calculated based on your annual salary, usually around 1.5 percent. Read through your policy to fully understand just what your coverage will be. If this amount is not enough, you will need to purchase additional coverage.

Additional coverage can be purchased either in the form of term life insurance or whole life insurance. Term life insurance, while usually cheaper, expires at the end of a certain time frame, and has no cash value. This is a good policy to buy if you need insurance for a specific debt, such as a mortgage. Whole life insurance does not have a time frame, and as long as the premiums are paid, will never expire. Whole life insurance also has a cash value, which can be useful in planning your finances.

Talk to your agent about your group life insurance policy, and whether or not it is providing enough coverage for your needs. You can always purchase additional coverage to top up the group policy, and thereby ensure that your family and loved ones will be provided for. If you are unsure about the amount of life insurance you require, use our calculator to determine your needs.

Living Wills

A "living will" is an important part of your will planning. Your living will states unequivocally your healthcare intentions if you are incapable of verbally stating them. In case of an accident or illness, your family will already know your wishes in regards to what measures you want taken or not taken, and can relieve the enormous burden from your loved ones in having to try and decide these issues.

Although the term "living will" is not a legal term in Canada, it is an important document in that your wishes are expressly stated. Consult a lawyer, and have a legal document drafted stating your exact wishes. In cases of progressive illnesses, such as Alzheimer's Disease, where you can no longer make these decisions, it is a written record of what your intentions to ensure your quality of life issues. A living will is an instrument in where you can retain control over your health care decisions in the event that you are incapable of making those decisions later on.

A living will can also be beneficial in case of an accident. It is important to discuss with your family what your wishes are in regards to such procedures as life support. You can state very specifically the treatments you wish to receive, and what measures you would like to keep you alive. You can also make provisions for not receiving these medical procedures if that is your wish. You can also state in your living will whether or not you would like to be an organ donor, and if so, what organs you would like to donate. Keep a record of these intentions in your wallet or purse, so that emergency medical services are aware of your wishes. It is useful to also discuss your wishes with your physician(s), so that they are aware of your intentions. You can revise your living will as your health care needs dictate. Review your living will, as well as your last will and testament on a regular basis, to ensure that your current wishes are stated. As medical science progresses, you may need to change your living will.

It is a wise decision to designate a living will power of attorney. This does not necessarily have to be the same individual you designate to take care of your financial needs. Discuss this issue with your family and loved ones, and come to a clear understanding of what you wish to happen to you in the event of serious illness or accident. We recommend that you also consult a lawyer, to ensure that your intentions are stated in a legal document. Remember that laws vary from province to province, and your lawyer will be able to advise you on what the laws are in your province.
 

Financial Planning And Re-Marriage

Financial planning for your family can be difficult. However, when one or both spouses are entering their second marriage, finances can be a sensitive subject, especially when there are children from the first marriage involved. Decisions need to be made about what finances are to be held separately by each partner, what will be owned jointly by the couple, and what provisions are made for each partner's child(ren) from the first marriage.

One of the differences between first and second marriages is the accumulation of assets. When couples are young and just starting out, it is usually beneficial to pool financial resources. However, people getting re-married may have more assets, and therefore may need to make arrangements in order to determine who is entitled to those assets.

Wills also become a topic of concern. Partners may want to leave certain assets to their children from the first marriage, and not to the second spouse. Also, the beneficiaries of life insurance policies should also be addressed. You may want to purchase another policy for your spouse, while leaving the original policy for your children.

Although this can be a tricky topic, honest communication with both partners and the children (providing they are old enough to take part) is the key. Financial obligations from the first marriage may precipitate the new couple keeping some money separate. For instance, alimony and/or child support payments may not necessarily have to be a joint financial obligation. Another issue that needs to be addressed is any and all outstanding debt incurred before the second marriage. The partners in the second marriage need to be honest about what financial obligations of their new partner they are willing to assume.

Assets are another factor in the financial planning process. If the home is owned by one partner, but being used as the family home, decisions need to be made about who will be left the family home in the event of the owner’s death. If the family home is to be left to the owner's children, then plans and funds must be made available for the remaining spouse to be able to relocate. If both people own homes, and use one as the family residence, then plans must be made for the proceeds of the sale of the second home.

There is no set formula for these issues. Individuals entering into their second marriage must resolve these issues in the format best suited for their needs. It is important to realize that these issues need to be addressed, and to make sure that all parties involved come to an understanding of their new financial obligations, as well as making sure everyone is adequately provided for.

The old rural Canadian adage,  "If you leave your farm to your son, what of equal value can you leave for your daughter?" is taking on a whole new set of complications. The solution can still be very much the same: purchase life insurance.