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Are you a conservative investor who is tired of seeing the returns generated by GIC’s reduced by inflation and taxes? Or are you a small business owner who wants to make sure your personal savings remain protected in the event of bankruptcy? Perhaps you are in poor health and want to make sure your savings are there for your loved ones should you pass on. In all of these cases, you could benefit from investing in Segregated funds this RRSP season.

What are they?

Segregated funds (or “seg funds”) are basically the insurance industry’s version of a mutual fund…with a few twists. Both mutual and seg funds are pooled investments where the investor deposits money with a professional money manager in return for units of the fund. However, there are a few key benefits to seg funds that you can’t get with their mutual fund counterparts.

Guarantees

Segregated funds are technically insurance products, and therefore must offer insurance protection in the form of guarantees. There are two types of guarantees – a guarantee at maturity, and a guarantee at death. When you invest in a seg fund, you get a maturity date (generally at least 10 years from the date of investment). On this date, you are entitled to the greater of the maturity value, which is between 75%-100% of your initial investment, or the actual market value of your fund. The guarantee at death provides the same benefit at the death of the annuitant, regardless of whether it occurs 10 years or 10 days after the initial investment.

Every insurance company has different ways of calculating the guarantees. Most companies will also allow you to reset the guaranteed value if your investment performs well. It is important to make sure you know the details of your particular fund guarantees before investing.

Creditor Protection

Unlike mutual funds, an investment in a seg fund can also be shielded from creditors in the event of bankruptcy. This can be quite beneficial to small business owners. For the creditor protection to apply however, you must name a beneficiary who is a direct family member, and you must be able to prove that your investment in the segregated fund was not made solely for the purpose of shielding assets from creditors.

No Probate Fees

Since a segregated fund is an insurance contract, you do no have to pay provincial probate fees which can be quite high depending on where you live. Your seg fund holdings will pass directly to your named beneficiaries instead of going to your estate.

One of the biggest difficulties faced by a privately-held corporation is the death of one of the shareholders. The loss of a key shareholder can negatively affect the ongoing viability of your business if immediate steps are not taken to reassure creditors, employees, suppliers and investors. This makes business succession planning so important. One of the more cost-effective tools used by business owners is a Buy/Sell agreement, funded by a Universal Life policy.

How Does it Work?

1. The owners of the business enter into a shareholder agreement, which sets out all of the terms, conditions, rights and values associated with the disposition of the shareholders’ interests.
2. They then purchase a Universal Life policy to fund the agreement. The policy can be set up in various ways depending on the needs of the shareholders.
3. When a shareholder dies, the death benefit is used to transfer the deceased’s interest in the company to the surviving shareholder(s).
4. The deceased’s estate receives the proceeds of the disposition which is distributed to the heirs according to the terms of the will.

Everyone Benefits

The death of a shareholder has a significant impact on the remaining shareholders, the business itself, and obviously on the family of the deceased. By entering into a Buy/Sell agreement, all three parties benefit…

• The business benefits by the reassurance provided to the creditors, employees, investors and customers that business will proceed as usual.
• The surviving shareholders retain full control of the business with out interruption or outside interference.
• The family of the deceased gets a measure of financial security and liquid assets that can be invested for future income.

Using Universal Life to fund a Buy/Sell agreement is significantly cheaper than selling corporate assets, borrowing the needed funds, or using surplus corporate cash. To learn more about how you can help protect your business, contact us. We would be happy show you how using Universal Life to fund a Buy/Sell agreement can help you.

In 2009 Canadians were introduced to a new tax-exempt way to save and invest: the Tax-Free Savings Account (TFSA). What you may not be aware of is the exceptional flexibility that this new account offers in addition to tax savings. Many are calling it the most attractive government savings program since the introduction of the Registered Retirement Savings Plan (RRSP).

If you are a Canadian resident aged 18 years or older, you can open a TFSA that lets you save and invest without being taxed on interest or investment earnings – so you get to keep 100% of what you've earned. You can contribute up to $5000 per year to start, and unused contribution room is carried forward indefinitely.

Withdrawals from a TFSA can be made tax-free any time of the year for any reason, and you don’t lose your contribution room – the amount withdrawn gets added to your unused contribution room the following year. Moreover, withdrawals won’t affect federal income-tested benefits like Old Age Security or the Child Tax Benefit.

That’s just a taste of what awaits you with the TFSA. While RRSPs are mainly intended for retirement, TFSAs are like an RRSP for everything else in your life. Easy access, tax efficiency and exceptional flexibility – there’s a lot to like, whatever your timeline or saving objectives. It’s a great way for Canadians of all ages, income levels and investing needs to make the most of their savings while trimming their taxes!

Find out more about the TFSA. Contact us today, and we will show you how to best integrate a TFSA into your overall financial plan.