Rosen Group PWM

With June 24th behind us, what's next?

With so much of our focus over the last couple months being tied to the tax changes to capital gains, where do we turn our attention to now that June 24th is in the rear view mirror?

How about capital losses.

Capital losses can be used to offset capital gains in your corporate non-registered account. And while this strategy known as tax loss harvesting can go a long way in reducing your taxes; this year you may want to give more thought as too when you realize those losses (if you in fact have any).

Why is that?

Because if your financial situation justified realizing capital gains within your corporation prior to June 24th, not only are you going to benefit from an inclusion rate of 50%, but you can also withdraw 50% of those gains from your Capital Dividend Account (CDA) tax free.

Which means if you do have unrealized capital losses, it’s more beneficial to crystallize them after your year end.

By doing so, not only will you ensure you’re not reducing the amount of funds eligible to be withdrawn tax-free from your corporation, but you’ll also be able to carry the losses forward and use them to offset gains at the new inclusion rate of 66.67%.

So, with June 24th now behind us, two things should be very apparent with the announcement of the 2024 Federal Budget:

The importance of financial planning cannot be overstated, and;

The importance of planning never ends.With so much of our focus over the last couple months being tied to the tax changes to capital gains, where do we turn our attention to now that June 24th is in the rear view mirror?

How about capital losses.

Capital losses can be used to offset capital gains in your corporate non-registered account. And while this strategy known as tax loss harvesting can go a long way in reducing your taxes; this year you may want to give more thought as too when you realize those losses (if you in fact have any).

Why is that?

Because if your financial situation justified realizing capital gains within your corporation prior to June 24th, not only are you going to benefit from an inclusion rate of 50%, but you can also withdraw 50% of those gains from your Capital Dividend Account (CDA) tax free.

Which means if you do have unrealized capital losses, it’s more beneficial to crystallize them after your year end.

By doing so, not only will you ensure you’re not reducing the amount of funds eligible to be withdrawn tax-free from your corporation, but you’ll also be able to carry the losses forward and use them to offset gains at the new inclusion rate of 66.67%.

So, with June 24th now behind us, two things should be very apparent with the announcement of the 2024 Federal Budget:

The importance of financial planning cannot be overstated, and;

The importance of planning never ends

Wishing everyone a day filled with laughter, joy, and lots of Canadian pride. Happy Canada Day, to our families, friends, and clients.

We see it often with medical professionals.

MDs approaching retirement, wondering what the best course of action is for their RRSP once they have to convert it to a RRIF as they don’t necessarily require the income.

If you do in fact require the income, then of course, you’ll want to set up monthly withdrawals and make sure this money is earmarked (held in cash earning interest) so you don’t have to worry about the impact a bear market may have on funds that will be needed in the short-term.

But for those MDs that don’t, the best thing you can do from a tax and investment perspective is wait until the end of the year to have this money paid out.

Not only will you benefit from a full year of tax deferred growth, but more often than not, you’ll be ahead at the end of the year by keeping this money invested.

While the long-term history of the stock market has shown it’s up about 70% of the time, the last several years have continued to favour the patient investor as well. So much so that if you were in a balanced portfolio and stuck with this strategy over the last 5 years, only one year - 2022, would you have been better off withdrawing earlier.

That’s right - 2019, 2020, 2021, 2023 and to this point 2024, have all rewarded patience.

Even in an unprecedented year like 2020, when it would have most definitely seemed like this would not be the case after the first quarter of the year; patience, like it always is when it comes to global markets, was rewarded.

So when it comes to your RRIF, the most important thing you can do is to have an exit strategy that coincides with your financial needs, and if that means that you don’t necessarily need this income to fulfill those needs, the best thing you can do, as is always the case when it comes to investing, is to not disrupt compounding growth - until you’re required to.

• The Rosen Group Advisory Team

Why those who are incorporated should remain bullish.

While the recent tax changes relating to capital gains have many incorporated professionals pondering whether their corporation is still a viable vehicle to springboard their investment plan, it’s important to not overlook one major benefit that comes with it – flexibility.

Over the years we have met many professionals who have used their RRSP as their primary savings vehicle only to become frustrated with the tax consequences as they approach retirement.

Why?

Because while the government was providing you with a deduction on the seed (your contribution), they ultimately get paid on the harvest.

Yes, that’s right, at 71, whether you need the income or not, your RRSP has to be converted to a RRIF and the required minimums must come out every year.

And what’s even more eye opening?

The tax bill on second death as your RRIF is deregistered and included as income on your final tax return.

With your corporation, however, not only do you get to benefit from a tax deferral on your active income, but there are no withdrawal requirements and significantly more planning opportunities available to you as well.

The ability to enhance your Capital Dividend Account (CDA) via capital gains (albeit this has decreased from 50% to 33.33%).

The opportunity to shelter money in a participating life insurance plan to create CDA credits at death while using cheaper corporate tax dollars to fund your plan.

Having the option to structure your Critical Illness insurance so the premiums you paid can be returned to you personally (without additional taxes paid) should you never make a claim.

The opportunity to Receive Refundable Dividend Tax On Hand (RDTOH) credits when you earn dividends from Canadian corporations and pay out a taxable dividend to your shareholders.

So, despite the recent tax changes that will come into effect in less than 2 weeks, just remember that your corporation still provides you with a lot of flexibility and tax planning options, so you can continue to put yourself in position to increase your bottom line, both today and down the road.

The Rosen Group Advisory Team

The number 1 reason to love dividend paying companies:

Buy good companies;

Good companies that pay dividends;

Good companies that pay dividends with a track record of increasing those dividends over time.

This is a motto we have always adhered to at the Rosen Group.

After all, there are plenty of reasons to love investing in companies that pay dividends:

The opportunity to re-invest those dividends so your portfolio continues to benefit from com-pounding.

The ability to have the entire 38.33% tax your corporation pays on the dividend income refunded back to your corporation once taxable dividends are paid out to the shareholders;

And, of course, peace of mind.

Yes, dividend paying securities go up and down just like any other investment but what companies who are able to increase the dividends they pay to their shareholders year after year ultimately signify to investors is that you’re investing in a well-run business.

Think about it - the same applies to your company.

At the end of every year if your retained earnings are sufficient enough to not only pay yourself a dividend but increase the dividend you pay yourself from the previous year, your balance sheet looks good and your corporation is in good health.

So, while it can be tempting to obsess over a hot stock tip or how some of this year’s winners are performing, those looking for peace of mind when it comes to investing may want to look where few tend to when the markets are on the up and up:

Companies that have consistently shown they can increase the dividends they pay to their shareholders, no matter how good or bad things may appear to be out there.

The Rosen Group Advisory Team

After days like last Thursday, in which the Dow Jones Industrial Average (DJIA) suffered its worst day of 2024, it’s not uncommon for investors to get fixated on which direction the market may choose to go in going forward.

For investors who are properly diversified, however, days like Thursday are just a minor bump in the road on their journey to achieving their financial goals.

Unfortunately, what so many often fail to realize is diversification applies to a lot more than just your investments – it applies to your biggest investment.

At the Rosen Group, capital protection is our number one priority, which means a properly diversified contingency plan is just as important as a properly diversified investment portfolio - and how that contingency plan is structured can make all the difference.

Which is why we focus on:

1. Ensuring your life insurance policies help you minimize your risk today while allowing you to maximize your wealth tomorrow.

2. Having a critical illness plan that is structured so the majority of your premiums are paid with cheaper corporate dollars, while allowing the premiums you paid to be returned to you personally and tax-free should you never make a claim.

3. Making sure your disability plan pays out based on what your income looks like today as opposed to when you originally set up your plan.

4. Setting up a sufficient emergency reserve to take advantage of the current interest rate environment, so the rest of your money can be invested to maximize risk-adjusted after-tax returns.

During periods of volatility, it’s easy to get caught up with the markets and the impact it’s having on your portfolio, but if you’re an incorporated professional and continuing to build your wealth, remember that diversification applies to more than just the investments inside a corporation.

It applies to protecting your biggest asset - your ability to earn an income.

Every problem has a solution

Investing success isn’t just about understanding what and when to buy, it’s also about being mindful of when you should sell and having the discipline to do so.

And while nobody of course has a crystal ball, it’s not uncommon to see some investors with a large percentage of their portfolio allocated to one investment because they just can’t seem to let go.

Whether this was a security that was inherited or a stock that significantly outperformed the rest of the market, the reality is, the longer you hold on and the larger this investment becomes relative to the rest of your portfolio, the more risk you’re taking as you transition from the wealth accumulation stage to the wealth preservation stage.

To make things even more complicated - those who are incorporated, know all too well that investment decisions solely based on investment management aren’t so simple when the majority of your money is in your corporation and every decision you make comes with tax consequences.

Throw in the fact that the capital gains inclusion rate is more than likely increasing to 2/3 on June 25th, and those decisions now get even more murky.

The good news is that with every problem (especially a tax problem) comes a solution, and Purpose investments has done just that by creating a fund that can help investors who are worried about investment risk and tax consequences due to over exposure to an individual security.

The Purpose In-Kind Exchange Fund provides investors the ability to exchange existing shares of North American companies for shares in one or more Purpose Fund Corp. funds, without triggering a taxable disposition until redemption.

Through this program, the investor will submit a properly completed 85(1) tax election form T2057 in order to transfer the subscription Shares on a tax-deferred basis. The exchange transaction will be a non-taxable event (assuming 85(1) tax election form submitted by client). And upon acceptance of Subscription Shares, Purpose will issue Series XA or XF shares of the of Fund(s) within Purpose Fund Corp. chosen by the investor.

Yes, the investment options relating to this structure does come with additional fees (approx.1%), which your stock did not, but at the end of the day, for investors looking for a prudent fix to a risk/tax problem, this is definitely one solution that should be explored.

After all - cost is only an issue in the absence of value.

With many investors questioning whether it still makes sense to invest in their corporations due to the recent tax proposals that will now see the capital gains inclusion rate increase to 2/3 as of June 25th, make sure you don’t give up on continuing to invest in equities.

Here are 3 reasons why?

1. Flexibility:

Other than a preferential tax rate compared to interest income, the luxury in owning equities is having the ability to only pay tax on the gain when you choose to sell as opposed to automatically being taxed in the year interest is earned.

2. Capital Dividend Account (CDA):

While the amount you can effectively flow through your CDA tax-free when realizing a gain will decrease in a few weeks, the reality is equities still provide you with the opportunity to extract 33% of those realized gains tax-free.

3. Charitable Donations:

In addition to your corporation receiving a tax deduction, gifting publicly listed securities to a registered charity results in any capital gains triggered to be exempt from tax and creates a CDA credit allowing you to extract funds from your corporation tax-free.

As investors look at their portfolio values over the last year, they have certainly been reminded of some of the benefits that came with investing in equities. And despite these most recent announcements, there are still plenty of reasons to remain bullish.

It’s no secret that the majority of incorporated professionals rush to incorporate their practices to benefit from a reduced tax rate on the funds retained in their corporation - 12.2% in Ontario and Quebec on the first $500,000 of net revenue vs 53.53% and 53.31% respectively, if earned personally.

Unfortunately, while the tax incentive to retain funds might seem fairly straightforward, how to extract money from your corporation on a tax-preferred basis isn’t as simple.

That’s because if you plan on simply withdrawing funds from your corporation by way of dividends, for example, this could result in a tax rate as high as 47.74% in Ontario and 48.70% in Quebec.

Not exactly motivating if you’ve done a great job of saving money corporately over the years.

And with strategies such as Capital gain stripping no longer feasible as of this year and last week’s Federal budget reducing the amount of capital gains that can flow through to your Capital Dividend Account (CDA) and transfer tax-free to shareholders, you’re probably asking yourself, what’s the point of incorporation if I’m going to have to give most of the money back when I need it?

And guess what, that’s a fair question.

But here’s another question – who’s bottom line did in fact benefit from last week’s tax proposals, other than the government?

The answer:

Insurance companies.

Among the many benefits of owning a participating whole-life policy within your corporation is the ability to make use of the policy while you’re alive via extracting the cash value in a tax-efficient manner.

This is ultimately accomplished by assigning the policy as collateral to a financial institution to underpin a Line of Credit.
In order to avoid a Shareholder Benefit (s. 15(1)), in which these funds would be considered income to the shareholder, a Guarantee Agreement would be concluded between the shareholder and their corporation, and they would pay a guaranteed fee to the corporation each year for the use of the corporate assets to secure the Line of Credit.

Not only has this strategy been widely used for decades, but it's supported by considerable guidance from taxation authorities.

And because the policy is assigned as collateral and therefore borrowed “against” and not “from”, the death benefit continues to grow tax-free each year. Which ultimately means, potentially more money that will eventually transfer to the next generation even after the death benefit pays off the line of credit.

So, even if interest rates are higher than they were a couple years ago, having a plan in place to extract funds from your corporation in a tax effective manner through the use of life insurance, can help ensure that your bottom line continues to benefit as well.

For those observing Passover, we extend warm wishes for a peaceful, prosperous, and joyful Pesach to you and your loved ones. Happy Passover!

The theme for Earth Day 2024 is Planet vs. Plastics, a commitment to call for the end of plastics "for the sake of human and planetary health." The theme's proposed goal is to reduce the production of plastics by 60% in 2040 and ultimately build a plastic-free future.

Addressing last week's announcement:

Imagine watching a football game and seeing your favorite team giving it their all and driving down the field in the final minutes so they can get in position to kick the game-winning field goal.

With only a few seconds left on the clock, they get the ball within field goal range and bring out their kicker to attempt the game-winning kick.

The ball is snapped.

The kick is up.

It has enough distance.…..

When suddenly, the field goal-post starts to move further away, and the kick is no good.

While the thought of this sounds ridiculous, the reality is, incorporated professionals in Canada have been dealing with these kinds of rule changes for years. At any point in time the rules of the game can change, and this week, the Federal Government was up to their old tricks.

By now you’re probably aware of the increase to the Capital gains inclusion rate - as corporations will now pay tax on two-thirds of their realized capital gains, which is up from 50%.

While tax integration in Canada refers to the concept of ensuring that the combined tax burden on corporations and their shareholders is roughly equivalent to the tax burden that would be paid if the corporation's income was earned directly by the shareholders, these recent announcements suggest otherwise as individuals will receive an exemption on the first $250,000 of capital gains.

So, what does this ultimately mean to those who are incorporated and investing within their corporations?

A net increase of about 33% in the effective tax rate once you factor in the capital gain and the Refundable Dividend Tax On Hand (RDTOH) credit that is paid to the corporation when you pay yourself a non-eligible taxable dividend.

Not exactly encouraging news for those who continue to work hard, save their money, and invest it wisely

The reality is, however, while the rules may have changed this week, the importance of having a financial plan and updating that plan has not.

Should I be sheltering more of my retained earnings within a participating whole life policy?

How can I effectively withdraw funds from my corporation to build up my TFSA each year?

Are there capital gains that should be triggered before June 25, 2024 so I can still benefit from the 50% capital gains exclusion and pay out 50% of the gain tax-free through the Capital Dividend Account (CDA)?

Should I be setting up an Individual Pension Plan (IPP) to help decrease my corporate taxes and shelter the growth within the plan?

These are all questions that will need to be addressed over the coming months and a sound financial plan can help ensure that you have the confidence to know you’re doing everything within your power to increase your bottom line each year - even when it may feel as though the government is doing their best to make it more challenging.

If there’s one thing we’re all guilty of, it’s spending way too much time on our phones throughout the day.

Whether it’s texting, going on social media, or making a call, very few things get a better workout than our smart phones.

In fact, few things can cause us to panic like seeing our phone on low battery with no charger in sight.

Knowing this, we make it a priority to recharge our phones every night, so we don’t have to worry about it running out of juice tomorrow.

If only we allowed our corporate bank/investment accounts to recharge every day.

With tax season in full swing and many incorporated professionals about to file their personal returns, this time of year is always a great reminder that taxes is one of the biggest expenses you incur throughout the year.

So what’s one easy and simple way to reduce that expense?

Be mindful of all of your other expenses.

Why is that?

Because when you’re spending a lot personally and paying at high personal tax rates to do so, you’re retaining far less corporately and therefore not benefiting from a much lower corporate tax rate (12.2% on the first $500,000 of net revenue).

So, if you think that your personal tax bill is too high this year, just remember that a lot of it probably has to do with how high all of your other expenses are.

And unfortunately, those who get lured in by the temptation to spend and not maximize the benefits of incorporation will see their corporation run out of juice down the road.

Those who buy into the importance of saving, retaining, and investing their money, however, will always have peace of mind knowing their accounts will be fully charged tomorrow.

This is our last night in the loge for this season. Thank you to all our amazing clients and friends who helped cheer on the all season long. We made a lot of great memories and look forward to making more next season. A special thank you to our Toronto clients and staff for coming down for this game. Special mention to a certain someone who was flying to China and couldn’t be here tonight, we missed you but loved meeting your extended family!!!!!

Ever notice that when the stock market is on sale, the masses look the other way?

Yet, if you go to the grocery store this weekend and see water selling at a considerable discount, most people would be hoarding the stuff.

Unfortunately, the days of the stock market selling at a considerable discount are long gone after a tremendous run over the last few months, but that doesn’t mean discounts can’t be found elsewhere.

Where you ask?

How about bonds.

“Bonds!?! Why would I want to own bonds?”

Well, the bonds we’re referring to are discount bonds held within your corporation.

“Bonds inside my corporation? When the passive tax rate is 50.2%.....no thanks!”

No, we said discount bonds.

Let us explain:

Imagine how many investors are holding bonds that they bought before interest rates started to spike in 2022. As you can probably imagine the coupon payment on those bonds is probably very low. So, if the coupon, for example, was 2%, who in their right mind would want to buy that bond when they can buy bonds in today’s market with a 5% coupon?

Because of this, those investors looking to sell off their bonds, must do so by selling them at a discount. Meaning if the face value of the bond is $100, they may need to list it for, let’s say, $90 to make the investment worthwhile for the purchaser.

So why is this worthwhile?

Because the spread between $90 and $100 is now treated as capital gains, which means you’ve just converted a portion of your yield from interest income that is fully taxable, to capital gains that is 50% tax free.

And considering that in today’s market, you would need to find a GIC that could generate between 6-7% just to equal the after-tax yield of most discount bonds - this is a sale, that if you’re incorporated, could very well be worth lining up for.

Wishing you all an amazing long weekend! 🌷
Happy Easter to those celebrating.
- The Rosen Group Team

The Unlimited TFSA

If you’re incorporated, like most, you did so recognizing that keeping a dollar is just as important as making a dollar.

After all, 12.2% (the small business deduction in both Ontario and Quebec) is a lot more attractive than 53.53% or 53.31% (the highest marginal tax rate on personal income in Ontario and Quebec).

Unfortunately, what isn’t so attractive is the 50.2% tax rate you pay on passive income inside your corporation - which can often make investing inside your corporation a challenge.

And because of this, it’s common to see investors taking money out of their corporation and flock to investment vehicles like a TFSA.

But with your TFSA come its own set of challenges.

For starters, even with the recent increases to the contribution limit, you can only put in $7,000 this year, if you’ve already maxed out your contributions in previous years.

And in addition to this, that contribution is made with after tax personal dollars. Meaning, if you’re incorporated and don’t have any CDA credits, you could have to take out close to $14,000 (if you’re in the highest marginal tax bracket) just to make your $7,000 contribution.

So where can you find something more attractive with larger contribution room?

Your Participating Whole life insurance plan.

“Insurance!?!” “How could my insurance policy possibly be similar to a TFSA?”

Well before you decide to stop reading, let us explain.

Firstly, the growth inside both vehicles does not generate taxable income.

Secondly, the death benefit has the opportunity to pay out tax-free just like your TFSA as a significant amount of the proceeds from the policy get paid to your Capital Dividend Account (CDA), which then get withdrawn as a tax-free dividend to the shareholders.

And lastly - you can access the cash value of your policy while you’re still alive tax-efficiently and in some cases tax-free.

And one last thing:

By structuring your plan to maximize the Additional Deposit Option - you create significant contribution room inside your plan each year that allows you to solely allocate funds to the cash value component of your policy - aka the investment portion, which you can access so you ultimately have the opportunity to enjoy this money while you’re alive.

So, while the TFSA has quickly grown into one of the most popular tax shelters for many Canadians, just know that many of the same benefits exist within a participating whole life insurance plan.

And if you’re incorporated, those benefits are far more attractive.

While global markets have proven yet again that patience is often rewarded when it comes to investing, the benefits of a properly constructed investment plan go far beyond just long-term investment returns.

With the passive corporate tax rate at 50.2%, incorporated medical professionals know all too well, the tax implications of every investment decision they make.

Fortunately, having a diversified stock portfolio inside your corporation has not only allowed investors to take advantage of a robust market over the last few months, it can also allow you take advantage of some tax benefits as well – not only while your money remains in your corporation, but when you ultimately want to pull it out as well.

Here are a few reasons why:

1. Capital growth – You only pay tax on the capital growth of your stocks, when you decide to sell them and realize a capital gain. Meaning if you’re a long-term investor, continuing to stay invested, can result in a lot more growth over the long run, while minimizing the taxes you pay inside your corporation in the short-term.

2. Capital Dividend Account (CDA) - When you do decide to sell a stock and realize a capital gain, only 50% of the gain is taxable, while the other 50% gets added to your CDA. Your CDA is a notional account that gets credited and allows your corporation to payout a tax-free dividend to its shareholders. The bigger your CDA, the more tax-free money that is available to be paid out to shareholders. Staying invested and continuing to invest will go a long way in building this up overtime.

3. Refundable Dividend Tax On Hand (RDTOH) – This is yet another notional account that incorporated professionals should become familiar with. If the stocks you own are Canadian publicly traded companies that generate dividends, the dividends, although taxed every year, are taxed at a discounted rate of 38.33%. That tax then gets posted to your RDTOH account and is fully refundable to the corporation when the corporation pays out a taxable dividend to the shareholder.

So the next time, you’re contemplating whether or not now is a good time to invest, keep in mind that a long-term focus won’t just help put you in position to make more, it will also allow you to keep more.

What does financial independence look like?

While many might think it has a lot to do with all the things money can buy, the reality is, being wealthy and becoming financially independent means having enough money to purchase the most valuable asset of all - time.

At the end of the day, we all get the same 24 hours, but only the wealthy are in complete control of how they get to spend it.

You would be hard pressed to find a profession that requires the commitment and dedication to one’s craft quite like that of a DMD. Not only have you spent your entire career working on mastering your skills to be at the top of your profession, but you have the added responsibility of being a business owner as well.

The reality is, whether you continue to work or decide to sell your clinic and retire, real wealth is about being able to make that decision on your own terms, and proper planning that takes into account how to maximize the benefits of your corporation and minimize the taxes you pay, while also having a clear understanding of your cash flow today and your retirement needs tomorrow, can go a long way in putting you in position to do so.

This is why our focus has always been more than just about how much you make every year, but rather, how much of that money you and your family get to keep every single year.

Because true wealth is not just about being able to buy whatever you want; but rather, being in financial position to do whatever you want, whenever you want.

And how you decide to spend (and invest) your money today, ultimately determines how you get to spend your time tomorrow.