Proposed Tax Changes Have Advanced Financial Planners Hard at Work

pexels-photo-541525.jpegBoth Don & Erik have just returned from the annual Institute of Advanced Financial Planning conference. It was a gathering of the leading Financial Planners in Canada, where ideas were exchanged and specialized speakers gave presentations around a common case study from their legal, accounting, estate, and family mediation perspectives. We were glad to attend and take part in conversing and brain storming with Canada’s most elite financial planning professionals.

The hallways and meeting tables at the conference were filled with the buzz of a recent white paper submitted by the federal government around proposed changes to the taxation of small business corporations. These changes are of concern to the agricultural industry, as only about 25% of Canadian commercial farmers are incorporated.

An unintended consequence of the proposed tax changes will be the elimination of the ability to utilize capital gains tax credits in the transfer of the family farm to the next generation. Many family farms have had an increase of value in their land holdings in recent years, by hundreds of thousands if not millions. The restriction in the use of capital gains tax credits on passing assets to succeeding generations could have serious income tax costs for the retiring parents. However, capital gain tax credits could still be available on the sale of the family farm to a third party.

Would it be good public policy to have the succeeding generation assume the farm with an additional $500,000++ tax liability, while the sale to a neighbouring farmer on an equivalent transaction will still qualify for the first $1-2 million of capital gain tax free? This is out of our area of expertise, but from our point of view this could send the wrong political message. We would like to hear your opinions.

Since possible ramifications are huge, the business, agricultural, professional communities and our various associations have lobbied hard throughout the consultation period which ended Oct 2nd. Bill Morneau, the Canadian Finance minister, has recently suggested that the government may take another look these proposed changes. We hope they do. The Forbes Wealth team is closely monitoring the situation. Please call us if you have any questions about your current succession plan structure.

For more info on the Institute of Advanced Financial Planners: https://www.iafp.ca/

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BoC Interest Increase & Charitable Giving

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On Wednesday the Bank of Canada increased their official interest rate from 0.75% to 1%. The BoC official rate is the rate available to the big Canadian chartered banks who wish to borrow from the Bank of Canada. This is normally for short term purposes, literally a day at a time. The chartered banks will set a “prime rate” which is normally 2-3% above the BoC rate for the base rate they begin lending their retail and corporate customers.  The BoC rate is also used as a link to other rates such as the Canadian Treasury bill. Canadian investment interest rates will increase very slightly but dramatically higher rates aren’t likely for the foreseeable future.

At the same time the CAD US dollar exchange rate increased by 1.3% in response to the BoC announcement. The question arises: why is the Canadian dollar more valuable? The most obvious answer is supply and demand factors. An unreported side effect of this rate move was a jump in the market value of Canadian Government bonds. Currently, 5 year Canadian Bonds are slightly higher yield than the equivalent US Government bonds.  Additionally, 19 out of 26 European nations have negative rates. Over 30% of all government bonds worldwide (worth $7.3 trillion dollars) have a negative interest rate if you cared to purchase them. This makes Canadian bonds more attractive to the global interest-seeking investor.  Even with the BoC rate at a measly 1%, investment interest rates are at all time lows using financial engineering never previously recorded in history.

Charitable Giving Through an Estate

We always encourage people to be tax efficient when considering investment products and strategies, with the intention of controlling more of their money longer.

One idea is to consider donating the proceeds of a registered account (RRSP/RIF/LIRA/LIF) to a charity. This can be done either by designating a charity as a beneficiary of the registered account or by specifically designating said charity for a legacy in the will.

Registered accounts are fully taxable when redeemed while living or after death by the estate. All charitable donations receive a tax credit of the highest personal tax rate, which in Manitoba would be either a 46% or 51% tax credit on most estates. Generally, people are in a lower tax bracket throughout life but sometimes forget that their final estate could face income tax rates they wouldn’t have ever thought possible.

Charitable giving through an estate, whether as a beneficiary of a registered account or specified in the will is a good way to legally reduce some income tax while also supporting a charity doing valuable work.

Farming Corp Changes Coming?

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The Canadian Finance Department just released a discussion paper about proposed changes to various aspects of our current capital gains tax regulations with public input until Oct 2nd.

About 25% of all commercial Canadian farmers are incorporated. The corporation is a separate legal entity in which a business can operate or assets can be held. The corporation has a much lower income tax rate for qualified small businesses. With a tax rate of only 11% up front, the corporation has taxing savings to re-invest and grow quicker, deferring the rest of the income tax burden until the end. Due to the capital intensive nature of operating a farm, many owners opt to incorporate their farming enterprises.

The Canadian government has looked favorably on incorporated farmers, giving them additional flexibility in when and how they pay their income taxes, particularly in passing on the farm to the next generation.

The discussion paper is likely to focus on how capital gains rules are applied to estate and succession plans using intricate structures to fully utilize the capital gains tax exemption on company shares.

An interesting news article from Brian Plett goes into further detail:

After the fall harvest, Canadian farmers could face huge tax hit from new rules

Economic update

An interesting news article was published last week noting that European Junk Bond investments now have an average interest rate of 2.42%. Coincidentally, this is very close to the current rate offered for a 10 year US Government bond. By definition junk bonds are issued by a corporation who cannot get bank credit hence the “junk” label. Normally junk bonds are priced with 10-20% interest rate incentive above an equivalent US Government bond due the high default rate of junk bonds.

There is an overwhelming supply of investment money chasing interest bearing investments, pushing the rates down. Most European Government bonds now have either very low rates or negative rates leaving European investors looking for some return to purchase junk bonds.

In Canada we are unlikely to see any effort to increase investment interest rates here. If Canadian rates get too high relative to the US and Europe, we are likely to see a flood of money come in from those locales with lower rates. This will bid up our Canadian dollar, making our exports less competitive in the global market.

Photo by Tim Mossholder on Unsplash

The Value of Inflation and Deflation

olu-eletu-38649Recently there has been some discussion as to the impact of inflation and deflation. They sound like complex terms, but they simply refer to the way we price and re-price our wages and everything we consume over time.

Deflation can actually benefit your household budget. With Deflation you spend less to acquire the same goods and services. For example lets say that a jug of milk cost you $5.00 last week but there is deflation in the economy. This same jug of milk might cost only $4.50 this week because of the deflation. You got the same product but for less money, hanging on to more of your wealth. Deflation increases your Purchasing Power Parity, meaning you spend less to get more. For more information on purchasing power parity see http://www.investopedia.com/updates/purchasing-power-parity-ppp/.

Inflation, in contrast, means you have to pay more for the same product or service.  This happens because the central bank prints money to stimulate growth, higher prices, and an increase in wages. Governments also prefer to keep the economy in inflation because the fixed dollar amount of their debt obligations are paid back in the future with shrinking dollars. By printing more money, the money that we have is now worth less, in turn lowering the actual size of the government debt obligation relative to the amount of taxes they can raise on a percentage basis.

Deflation got a bad name during the 1930’s when wages and commodity prices were dramatically slashed. With limited safety nets, wide spread misery occurred for the average person. My Dad tells the story about the winter of 1935 when he fed a steer over winter for sale in the spring. The steer was shipped from Manitoba to Toronto for sale in the Toronto Stock Yards. By the time the calf got to Toronto the market price had dropped and was not enough to cover the shipping costs, so the shipping company sent my father a bill.

Today’s deflation is less obvious. Maybe exported inflation is a better term. When a company’s locally manufactured good or service is not price competitive, they simply lay off the workers and have the same product manufactured overseas at a cheaper cost. Just walk around a Wal-Mart or Canadian Tire and see how many products are manufactured overseas.

Deflation occurs during periods of slower growth when people spend less and investors hold more cash, lacking confidence in the economy. Without the confidence that markets are likely to continue to gain, stock investors tend to have an emotional response and move to cash and guaranteed income type investment vehicles. This provides an oversupply of interest seeking money, causing the interest rate to be bid lower and lower.

In summary, which is better for savers? 2% interest rate with 0% inflation or an 8% interest rate with a 6% inflation rate.

Weekly World Business Events

Moving into recent news from the business world, we see that recently the S&P hit an all time high of 2,480 last week. The S&P is an index of the largest 500 companies on the New York stock exchange based on market value. For those that don’t know what an index is, or would like further knowledge on indexes, check out the following article: http://www.investopedia.com/university/indexes/index1.asp.

Looking at another piece of news from this past week, the US government statistics division announced that the US GDP grew 2.6% in the 2nd quarter of 2017. Comparing that to the 1st quarter rate of 1.3%.

Photo by Olu Eletu on Unsplash

The Beginning of Your Financial Wisdom

daniel-mccullough-348488This Blog is brought to you by Forbes Wealth Management, a financial planning firm in Carberry Manitoba.

Forbes Wealth Management is lead by Don and Erik, a father and son team with a combined experience of nearly 40 years. Planning the succession of our own business provides us with a unique perspective on accumulating and preserving wealth for family farms and rural businesses that value the family farm legacy and maintaining a sustainable rural lifestyle.

Forbes Wealth Management offers a variety of services; wealth management, succession planning, financial planning, retirement planning, estate tax planning, insurance planning, and corporate structuring.

The purpose of this blog is intended to provide farmers and rural business people with simple knowledge and insight about financial issues that affect their ability to accumulate wealth. All too often farmers and business owners make hasty decisions that can lead to uncomfortable or complex situations. We endeavor to fight against the lack of information and help these people understand the financial world and its complexities. We also seek to shed light on some common misconceptions and ultimately provide simple tips to accumulate wealth more effectively.

We plan on blogging about a varying of topics from farm succession planning complexities and potential solutions, to economic and tax law changes that can affect the way you accumulate wealth. We will blog about topics we think are of most interest to our clients, but welcome your input and suggestions if you have a topic you would like us to cover.

At the end of each blog post we are planning on including a brief update on the economy and other interesting world happenings and technological advancements that will affect the future.

This blog is meant for those that have a grasp on their financial affairs but are seeking a little bit of guidance and wisdom. We plan on keeping the language and concepts as easy to understand as possible, so the reader can rely on us for valuable information that is relevant to their situation.

If you would like to get involved with the blog, please leave a comment down below. Let us know what you think or suggest topics of interest you would like to have us cover. Also feel free to go to our website (www.forbeswealth.ca) and check us out there as well.

Photo by Daniel McCullough on Unsplash