Crowdfunding raises money … and tax questions

Capture-Tax Matters

My son, Win, is a budding entrepreneur. He’s already asked me for money to help him start his latest venture: A cheese-sculpting business.

“Win, who in the world needs a very large sculpture made of cheese?” I asked. Evidently, thousands – according to Sarah Kaufmann, who started a thriving business with the tag line “So much cheese… so little time.” My son showed me her website. Very impressive.

“Win, I’m not going to fund your business, because you’ve never sculpted anything.”

“That’s okay, Dad,” he replied, “I’ve already started raising money online through crowdfunding. I’ve got $56 so far.”

“Well, son, good luck with that. And by the way, we should talk about the tax implications of crowdfunding.” Here’s a summary of our chat.

The concept

Crowdfunding seems to be taking the world by storm. It’s the idea of matching up people who want to raise capital for a particular purpose with those who are willing to provide it, using the Internet and social media to connect them. Most of the amounts contributed are small, but when you add the contributions of potentially thousands of people, it can be an effective way to raise quite a bit of money.

I’ve seen crowdfunding provide money for charitable causes, personal causes, music or other artistic productions, research, and to start businesses. Take Pebble Smartwatch, for example, which raised $10.27-million (U.S.) from 68,929 backers, or Oculus Rift, a virtual reality headset for gamers, that raised $2.44-million from 9,522 backers.

The models

There are four popular crowdfunding models that you’ll typically find online:

-the lending model (backers offer interest-bearing loans to those looking for funding);

-the equity-based model (where investors take some ownership in the companies they choose to fund);

-the reward-based model (where backers give money to projects and get rewards in return, often in the form of a final product being produced, a discount or advance order of the product, or some other promotional reward);

-the donation model (where backers simply give altruistically to a project without anything in return – there are typically no donation receipts issued either).

The most common of these models has been the reward-based model. The equity-based model, however, is expected to have the greatest growth in the future.

In Canada, equity-based crowdfunding wasn’t legal in the past, but that’s changed. Today, as long as accredited investors make up the “crowd,” it’s possible to raise funds this way. Securities regulation is a provincial matter, and Saskatchewan was the first province to allow equity-based crowdfunding by way of a specific exemption. As an aside: If you’re looking to raise funds using an equity-based model you should consult with a local securities lawyer to understand the rules in your province. Check out the National Crowdfunding Association of Canada’s website for great information.

All of this raises the question: How will the Canada Revenue Agency (CRA) view the funds raised through crowdfunding?

The tax rules

The fact is, the taxman is still contemplating the taxation of crowdfunding. It’s a new concept and the CRA hasn’t said much about it yet, although the first guidance came last fall in the form of technical interpretations (letters to taxpayers who had asked for the taxman’s views). The CRA said that each arrangement must be looked at on its own merits, but that crowdfunding receipts could be treated as a loan, capital contribution, a gift, income, or a combination of these four – depending on the arrangement.

In the end, I expect that the tax treatment will very likely depend on what the backer, or funder, gets in return, which could be nothing (a donation model), a reward of some kind, a presale or advance access to a product, equity, or debt.

In the case of reward-based models, amounts received will generally be included in the income of the recipient as income from carrying on a business (if you’re in fact carrying on a business). The good news is that the recipient, in this case, will be able to deduct expenses incurred in connection with the crowdfunding campaign.

In equity-based models, the funds raised shouldn’t be taxable since they are paid as capital in the company, and in the case of lending models, the funds should not be taxable because they are loans to be repaid; the interest paid on the loans should be deductible.

A donation model is less clear; I expect amounts will be taxable as with a reward-based model if a business is carried on.

Article: Globe & Mail

Do’s and don’ts of deducting interest costs

Do's and don'ts of deducting interest costsI’m not sure if the story is true or not – but it makes for an interesting discussion. I’m talking about the gentleman who wanted to borrow $200.

“What collateral can you provide for the loan?” the banker asked.

“I own a Rolls-Royce and I’ll leave the car with you until I repay the loan. Here are the keys.”

The bank extended the loan of $200 and the man returned six months later, paid back the $200 plus $10 in interest.

“Sir, why would a wealthy gentleman like you borrow $200 from the bank?” the banker asked.

The gentleman looked at the banker and replied: “Where else can I store my car for six months for $10 while I’m travelling?”

The real question, of course, is this: Can the gentleman deduct the $10 interest charge he paid to the bank?

When it comes to saving tax dollars, the ability to deduct interest can make a significant difference if you’re paying more than just a little – which is the case with many Canadians. Today, I want to share some do’s and don’ts when it comes to deducting interest.

The rules

Paragraph 20(1)(c) of our tax law is the key provision that will allow a deduction for interest costs in certain situations. Specifically, the taxman will look at the purpose of your borrowing. To be deductible, the interest must relate to loans that were taken out for the purpose of earning income from a business or property. It’s important that you have a reasonable expectation of earning income at the time the loan proceeds are invested.

Now, it might be the case that you’ve used the borrowed money to invest and your primary objective is capital growth, not earning income. This is okay with the taxman as long as a secondary objective is to earn income.

It’s not necessary that the income you earn be more than the interest costs you’re paying in order to deduct those interest costs (I should mention that in Quebec, you won’t be able to deduct interest in excess of your investment income in a given year; excess interest can be carried back up to three years or forward indefinitely to be deducted in the future when income – including taxable capital gains – is earned. This is strictly a provincial rule and doesn’t apply to your federal tax filings or outside of Quebec).

The nuances

There are a few other points worth noting here. First, interest is generally not deductible when you’re earning exempt income with the loan proceeds. So, if you borrow to contribute to your registered retirement savings plan, or tax-free savings account, for example, you won’t be able to deduct the interest. Similarly, borrowing to acquire a life insurance policy typically results in no deduction for the interest (although there are exceptions in the case of life insurance).

Next, the direct use of your borrowed money matters. The taxman will want to trace the use of your borrowed money to an identifiable income-producing use before a deduction will be allowed.

And it’s the current use of the borrowed funds that really matters. So, if you borrow to invest and then sell those investments, you can continue to deduct the interest if you reinvest the proceeds from the sale of the investments. Similarly, if you make a bad investment and it declines in value, you may be able to continue deducting your interest costs (for example, if you borrow to make a $10,000 investment, watch it decline to $7,000, then sell the investment and use the $7,000 to pay down the debt, the remaining debt will give rise to deductible interest).

Finally, be sure to keep your deductible borrowings separate from your non-deductible. Suppose, for example, that you owe $100,000 on a line of credit, and $40,000 of this was used for a deductible purpose, while the other $60,000 was not. You’ll able to deduct 40 per cent of your interest costs in this case. Now suppose you pay down that line of credit by $60,000, so that $40,000 remains owing. You’d likely want to argue that the $40,000 still outstanding represents the money borrowed for deductible purposes, so that you can deduct the full interest on the remaining $40,000. Sorry, but the taxman won’t allow this.

Any repayment on the line of credit will reduce both the non-deductible and deductible portions of the line of credit, so that you’ll still be able to deduct just 40 per cent of the interest on the remaining debt.

You can avoid this problem by having separate borrowings for deductible and non-deductible purposes.

Article:  Globe & Mail

Ten tax tips for post-secondary students and their parents

Ten Tax TipsIf you have kids or grandkids at the postsecondary level, you should both be aware of planning ideas and opportunities that can result in money in your pocket, or theirs. I want to share 10 ideas today:

1. Claim tuition and education credits.

A student is generally entitled to a tax credit for tuition paid, plus an education credit based on $400 a month of full-time ($120 for part-time) attendance in school.

If she doesn’t need the credits to reduce her taxes to nil, she can transfer up to $5,000 of these costs to a parent, grandparent or supporting spouse, or carry them forward for use in a later year.

2. Claim textbook and ancillary costs.

In addition to tuition and education credits, a student can claim a credit for books, student fees, parking and equipment. The credit is based on $65 a month for full-time ($20 a month for part-time) attendance in postsecondary school.

3. Claim an exemption for scholarships, fellowships and bursaries.

A student eligible for the full-time education credit and who receives postsecondary scholarships, fellowships or bursaries is generally exempt on those amounts required to support the student in the program. Go to and look up instructions for Line 130 of your tax return for more details.

4. Claim student loan interest.

If the student receives a qualifying loan under the Canada Student Loans Act or similar provincial legislation, he should be entitled to a tax credit for interest on the loan. He should receive an official slip to support the claim.

5. Claim moving expenses.

A student can claim moving expenses if the move to school, or home again, is at least 40 kilometres.

He’ll have to earn income (which can include taxable research grants or other awards) in the new location to claim the expenses. Holding down a part-time job while at school can create the income needed to deduct the costs of moving to school.

6. Claim public transit costs.

A student may be able to claim a tax credit for the costs of public transit to get to and from school. The cost of monthly (or longer) transit passes for travel within Canada can be claimed.

These passes must permit unlimited travel on local buses, streetcars, subways, commuter trains or buses, and local ferries. Passes of shorter duration can be claimed if certain conditions are met.

7. Claim child-care costs.

A student (or her spouse) may be entitled to claim a deduction for child-care costs where at least one spouse attends school full- or part-time.

8. Don’t consolidate student debt.

Many students graduate with various types of debt (credit cards, student loans, car loans, etc.) and often roll them into one single loan payment at a more attractive interest rate. Generally, it’s a bad idea to consolidate student loans that qualify for the student loan interest credit. You’ll lose the credit by consolidating.

9. Consider the Lifelong Learning Plan (LLP).

If you’re an RRSP owner, and a resident of Canada, you can generally withdraw funds from your RRSP on a tax-free basis for full-time education for you, or your spouse or common-law partner (but not the kids – sorry). You can withdraw up to $10,000 a year for up to four years, but to a maximum of $20,000 in total. After you’ve withdrawn $20,000, you have the option of repaying your RRSP and then making further withdrawals. Failure to repay the amounts in accordance with the CRA’s schedule can mean paying tax on the withdrawals.

10. File a tax return.

Although a student may not be required to file a tax return if she doesn’t have tax to pay, it makes good sense to file anyway if she has earned any income at all. The reason? She’ll create RRSP contribution room this way (for use later when she’s earning an income), and filing a tax return could entitle your child to a GST or HST credit worth about $268 in cash once she’s 19.

Article:  Globe & Mail

Six tips that can help you minimize your student debt

Student Debt Tax TipsOur youngest son decided that he wanted to earn some money. Like a true entrepreneur, he started his own business: He sold golf balls at a public beach near our cottage. “Dad, this business is amazing! I sold 55 golf balls, and I made $53. The kid next door still owes me two dollars.”

What he didn’t remember was that he owes me $80 for the two rounds of golf that allowed us to find the 55 golf balls. So I explained to him the concept of debt. At the end of the day, I told him that he doesn’t have to pay me back the $80 until he graduates from university – about 12 years from now. By that time, I’m sure I will have forgotten about the money. Time will tell whether he forgets, too.

The truth is, over one half of students will graduate from postsecondary school with debt – primarily from financing their education. A recent poll conducted by Leger for CIBC reveals that 51 per cent of postsecondary students today have borrowed, or will borrow, to help pay for school. No wonder. About three quarters of students won’t earn enough money in their part-time work to fully pay for school.

The last National Graduates Survey conducted by Statistics Canada was almost 10 years ago (2005). At that time, the graduating class of 2005 had an average debt load of $18,800 (which was up from $15,200 a decade earlier), and the proportion of borrowers who graduated with debt of $25,000 or more had increased to 27 per cent (up from 17 per cent 10 years earlier). According to the recent Leger poll, 40 per cent of students today expect to graduate with debt of at least $25,000. So the trend is clear: Students are borrowing more to cover the increasing costs of postsecondary education.

As an aside, student debt can really impact finances after graduation. A past Survey of Financial Security conducted by Statscan showed that student borrowers had a significantly lower probability of having savings and investments than non-borrowers, and that borrowers with postsecondary education were less likely to own their homes. Finally, postsecondary graduates with student loans had, on average, lower assets and correspondingly lower net worth than those who did not have student loans.

Don’t get me wrong – student debt can be worthwhile if it allows a student to create higher earning capacity. But the debt needs to be managed. Here’s some advice for students who want to borrow prudently for an education (some of these ideas come courtesy of Consolidated Credit Counseling Services of Canada):

Rule of 10s. Follow this rule when borrowing for education: For every $10,000 in student debt, you should be able to earn $10,000 over a base of $10,000 annually to be able to pay off that debt in 10 years. For example, if you graduate with $30,000 of debt, you should be able to earn $30,000 over a base of $10,000, for a total of $40,000 annually in order to pay off that debt over 10 years.

Soften the blow. Although you may not earn enough in the summer to fully pay for a year of education, those earnings can make a big difference. You should save as much as possible, and consider working part-time during the school year to help cover education costs. But balance your work hours; it’s tough to work more than 15 hours a week while in school and still excel academically.

Create a budget. You should use loan proceeds wisely. Identifying needs and wants will help, and vow to spend student loans only on needs. Don’t spend your loans on a trip to Mexico.

Live lean. Most students in their late teens and early 20s don’t have other mouths to feed, so take advantage of this time in life. Live frugally. If you can get by without a car, do it. You’ll live with monthly bills most of your life, so avoid them now if you can.

Apply for bursaries and scholarships. Getting free money beats borrowing any day. Start the search for bursaries and scholarships a year ahead of the time you’ll need the money.

Pay it back. After graduation, be sure to reduce your debt as quickly as possible. Start with any credit-card debt (since there is rarely relief for interest on credit-card debt), then follow that by paying down your student loans (you’re generally entitled to a tax credit for student-loan interest). Make more than the minimum payment monthly if you can.

Article: Globe and Mail



Three tax-efficient ways to pay for education


I recall the story a few years ago of Doug Anglin who, at the age of 17, filed a complaint with the U.S. Department of Education against his Massachusetts high school. Mr. Anglin’s complaint was that the school was discriminating against boys by giving better grades to students who “sit down, follow orders, and listen.” According to Mr. Anglin, men naturally rebel against this.

While students can face challenges in achieving good grades, parents face challenges paying for education. Two of the biggest problems for parents are that (1) they have to use after-tax dollars to pay for education, making it expensive, and (2) the cost of private elementary or high school tuition is not eligible for tax credits.

Today, I want to share some ideas on how to pay for education – whether elementary, high school or post-secondary – and to do so using pretax dollars. That is, using dollars that you have earned that have not, and may not, be subject to tax. Here are three ideas to consider.


Consider Peter and Janice. They live in British Columbia and have four children. Their eldest daughter is heading to university this fall. Peter earns about $100,000 annually, and figures they’ll need $15,000 to help cover the cost of tuition, books, supplies, and room and board for their daughter this school year. At a marginal tax rate of 38.3 per cent, Peter would have to earn $24,311 (almost one quarter of his salary) just to be left with $15,000 after taxes to help pay for his daughter’s education.

Janice carries on a part-time business. She decided last spring that she’ll try to earn enough to pay the $15,000 toward their daughter’s education. Janice has had their daughter working in the business as well. In fact, Janice will pay her daughter the $15,000 – reasonable wages for the work performed – that she needs for school. The result? Janice gets a tax deduction for the $15,000 that will be used by their daughter to pay for school, and their daughter will pay no tax on the income because she has a basic personal tax credit that will offset the first $11,138 of income from tax federally, and she has tuition, education, and textbook tax credits to offset the rest. The bottom line is that the family will use pretax dollars to pay for the cost of school.

Family trusts

Aaron and Vonnie have three children who will be attending a local private school again this year. A trust was established for the kids a few years ago with $300,000 provided by Aaron’s parents, with Aaron and Vonnie as trustees (they control the funds in the trust). The funds are being invested in a portfolio of securities, earning income and capital growth. The trust earns about 6 per cent – about $18,000 – in income and growth annually.

The interest and dividend income earned in the trust on the original $300,000 is attributed back to (and taxed in the hands of) Aaron’s parents each year under the attribution rules in our tax law. But the income on the income (second-generation income), and all capital gains, are taxed each year in the hands of the children. The minors each have a basic personal tax credit available which more than offsets any tax owing on the income allocated to each of them each year. The bottom line? It’s expected that a few thousand dollars (perhaps between $5,000 and $10,000) will have been earned, but not taxed, thanks to the kids’ basic personal tax credits in 2014. These dollars can be used to help fund the education costs of the kids.


Rachel and Eldon have two young children, and they’re setting aside $200 each month ($2,400 annually) in a registered education savings plan (RESP) for the kids. In addition to their own contributions, the government is kicking in a Canada Education Savings Grant worth 20 per cent of their contributions – or $480 annually.

The funds inside the RESP grow on a tax-sheltered basis, and when payments are made to their children later in life, once they start to attend a qualifying postsecondary program, the income that had accumulated in the RESP will be taxed in the hands of the kids. The children will have their basic personal amount and tuition, education and textbook tax credits available at that time which could very well offset any tax owing. In effect, the accumulated income in the RESP can be used to fund education costs, potentially with little or no tax.

Article: Globe and Mail

Ten tax tips if you’re married or have a family

Tax Tips if you're married

Bryan is an employee of mine who’s getting married this weekend. Coincidentally, my seventeenth anniversary was last weekend. Bryan was asking me the secret of our successful marriage. I decided to share with him the words of Henny Youngman that I heard at the time I was getting married: “We take time to go to a restaurant two times a week. A little candlelight, dinner, soft music and dancing. She goes Tuesdays, I go Fridays.”

I then told Bryan about the many tax benefits of being married and having a family. Specifically, it’s possible to share the tax bill that he might otherwise pay himself. This is the concept of income splitting – which I’ve been speaking about the last two weeks – and it can save you tax dollars.

Here’s a final instalment on how to split income effectively.

1. Pay an adult child for certain tasks. Consider paying your adult child (age 18 or older in the year) to look after your kids who are 16 or younger. These payments may qualify as child-care expenses for you to deduct – subject to child-care expense rules. Similarly, pay your adult child to help in a move and deduct that cost, subject to moving expense rules. In each case, your adult child will pay the tax on that income.

2. Invest the CCTB in your child’s name. If you receive Canada Child Tax Benefits in respect of a child, you can invest those dollars in the name of the child and there will be no attribution back to you of the income earned on those investments.

3. Transfer pension income to your spouse. You can transfer up to 1/2 of your eligible pension income to your spouse. You’ll claim a deduction for the amount chosen and your spouse will report that income. Eligible pension income is that which qualifies for the pension credit.

4. Split the tax on your CPP benefits. You’re entitled to take up to one half of your Canada Pension Plan benefits and report the amount on your spouse’s tax return, provided you’re both over age 60.

The arrangement is reciprocal so that the same proportion of your spouse’s CPP benefits will have to be reported on your tax return, but you could come out ahead as a couple. You’ll need to set up this arrangement by contacting Service Canada.

5. Consider an RESP for a child’s education. When you contribute to a Registered Education Savings Plan (RESP) the funds can grow in that plan tax-free. When the student beneficiary makes withdrawals, he or she will face the tax on the accumulated income, not you.

6. Report your spouse’s dividends on your return. You can elect to report all of your spouse’s Canadian dividends on your own tax return. If your spouse’s income is quite low, he or she may not benefit from the dividend tax credit on Canadian dividends, so you may be better off as a couple having you report the dividends and claim the credit. To be eligible, the transfer must increase your spousal credit (the credit you can claim for having a low-income spouse).

7. Pay family members a salary. One of the great benefits of self-employment – even part-time – is that you can easily split income by paying family members to work in the business. As long as the compensation you pay them is reasonable, you’ll be able to deduct the salary or wages, and your family member will pay the tax, not you.

8. Become a partner with family members. A partnership doesn’t pay tax itself. Rather, each of the partners reports their share of the profit. By becoming a partner with a family member, you can split the profit in an agreed-upon manner. A true partnership should exist, which requires that it be a real business carried on with your family member(s) with the intention of creating profit. Creating a partnership agreement is important.

9. Use two corporations to transfer money. The attribution rules which will cause income to be attributed back to you can be avoided when you and your family member each have a corporation and money is loaned from your corporation to your family member’s. The attribution rules don’t apply to loans between corporations.

10. The higher-income spouse pays expenses. If the higher-income spouse pays the household expenses, it can free-up any income of the lower-income spouse to be invested. This will allow the lower-income spouse to pay the tax on the investment income.

Article: Globe and Mail

U.S. expats in Canada, the IRS is eyeing your RRSPs

US Expats in Canada RRSP

The Registered Retirement Savings Plan (RRSP) program is fundamental to Canadian retirement planning, and most Canadian residents participate. The beauty of the RRSP is that any contributions in a given year are deductible from income (up to a limit), and growth within the account is not included in the owner’s income as earned. Rather, RRSPs are only taxed upon withdrawal from the RRSP account, presumably occurring after retirement when the taxpayer is earning less and consequently paying less tax.

US domestic law considers RRSPs to be foreign grantor trusts, and the income is taxable to the contributor as earned.

This can cause compliance problems for Canadian-resident US citizens who assume that RRSPs do not need to be specifically dealt with on the US tax side and therefore do not report them.

The Canada-US Tax Treaty (Treaty) does provide some relief in this situation. Under Article XVIII(7), a US taxpayer may elect to defer tax on the growth within an RRSP account for US purposes. Form 8891 must be completed to obtain these benefits under the Treaty, and (of course) the FBAR requirement still applies to RRSPs.

In particular, US law does not allow for a deduction from income for contributions made to an RRSP. As such, maximizing contributions to an RRSP may result in a higher taxable income for US purposes than Canadian purposes. Usually, the higher rate of Canadian tax will still provide sufficient foreign tax credits to offset the US tax payable in that year. However, there could be situations where US tax is payable due to the difference in taxable income levels.

Article: Globe and Mail

Four easy tips for income-splitting to save tax

Income Splitting

Our kids have a way of giving us pause for thought. Take Joel Miggler, 23, who is a body art enthusiast. Mr. Miggler has many piercings, but outdid himself recently by creating “portholes” in his cheeks that are currently about 3.5 centimetres in diameter. He says that he uses custom plugs for the holes when he’s eating. I feel for his parents.

My kids don’t cause me much grief – except when they jump off the garage roof onto the trampoline in the backyard (which has now stopped). In fact, the kids are helpful in many ways, including saving us tax dollars – through income splitting. Here’s a primer on income splitting, and some ways to accomplish it.


Income splitting is the idea of moving income from the hands of one family member to another to save tax. The tax savings arise because each taxpayer resident in Canada is entitled to a basic personal tax credit and also pays tax at progressive rates, meaning that the lower your income, the lower the rate of tax you’ll pay.

So, having two people each pay tax on, say $10,000, will often result in less tax than one person paying tax on the full $20,000. If all family members are in the highest tax bracket, then shifting income from one person to the next doesn’t accomplish anything, but if any family members are in a lower tax bracket due to a lower level of income, splitting income can make sense.


Now, the taxman won’t simply allow you to hand income to your spouse or children to report that income on their tax returns. The “attribution rules” in our tax law will stop this. These rules say that when you try to pass income to your spouse, common-law partner, children, in-laws, nieces or nephews by transferring income-producing property to them, you’ll face tax on the income – not them. That is, the income will be attributed back to you. Not to worry: There are legitimate ways to sidestep the attribution rules.


1. Lend money and charge fair interest.

Consider lending money to a family member and charging interest on the loan. If you charge the prescribed rate of interest under our tax law (currently just 1 per cent), any income earned by your family member on the lent funds can be taxed in your family member’s hands without attribution back to you. The interest must be paid to you by Jan. 30 following any year the loan is outstanding. You’ll face tax on the interest, but your family member can claim a deduction for it. As long as your family member is earning more than the prescribed rate on the invested funds, you’ll save tax as a family. And one last thing: You can lock in the current low rate on the loan indefinitely when you set up the loan.

2. Transfer funds for business purposes.

You’ll avoid the attribution rules if you lend or give money to family members for use in a business. There’s no need to charge interest here. If you’re lending money to, or investing in, a corporation owned by a family member, be sure to speak to a tax pro first. You may be able to set it up so that, if you can’t collect on the loan later, you may be entitled to claim a loss (called an “allowable business investment loss”) against any type of income later.

3. Lend money, then take repayment.

If you’d rather not charge interest on money lent to family members, you could structure the arrangement this way: Lend money to a family member for investment purposes – say, $15,000 – then take back those funds after a few years – say, five years. Those funds will earn, say, $1,000 each year, which in most cases will be taxed in your hands because of the attribution rules. But the $1,000 can be reinvested each year, and any second-generation income – that is, income on the income – will not be attributed back to you.

4. Swap assets with a family member.

Consider “selling” some of your income-producing investments to your spouse or child in exchange for another asset from them. The asset you take back should have a value at least as high as the investments you’ve transferred, and should not produce income of any kind. The swap is considered to be a sale at fair market value, so there could be tax to pay on accrued gains on the assets when you make the swap, but can still make sense if there is little or no tax to pay.

I’ll share more ideas next time.

Article: Globe and Mail

Distributing your estate to your heirs: The methods and the message


I think that being eccentric would be fun. I don’t mean eccentric in a use-your-tea-bag-then-dry-it-out-and-use-it-again sort of way, but in a do-something-crazy-to-help-other-people sort of way. Take Luis Carlos de Noronha Cabral da Camara, for example. This Portuguese aristocrat had no family and few friends, so he left his estate upon his death a few years ago to 70 complete strangers that he randomly selected from the Lisbon phone directory. Most of them thought it was a scam – until they received their cheques.

I’ve been writing about the five D’s of estate planning: define, design, document, discuss and distribute. Today, I want to finish things off by talking about distributing your estate.

The basics

At the most basic level, you can distribute your estate either during your lifetime, or after your death. People who make distributions on or after death usually do so because they aren’t sure how much they’re going to need, and don’t want to run out of money. This is a perfectly legitimate concern.

I would say, however, that you should do the math to determine approximately how much you’re likely to need to look after yourself for the rest of your life. If you can’t do the math, ask an accountant or financial planner to help.

Many people who have more than they’ll need choose to give some away today – to family, friends and/or charity, because they want to see the gift enjoyed. If you’re transferring money to your heirs today, decide whether the amounts will be considered an advance on their inheritance, or gifts over and above what they’ll receive upon your death. If the amounts are an advance, be sure to document these advances, advise your executor where to find that documentation, and clarify in your will that advances will reduce the amount that each heir will otherwise receive.

The methods

To the extent your estate is going to be distributed after your death, there are six key ways this can happen:

1. Through intestacy laws. If you die without a will, these provincial laws will dictate who gets what. This could create more tax and other costs than necessary. This is a default approach to distributing your estate, but it’s not a plan.

2. By naming beneficiaries. You should name beneficiaries on your life insurance policies, pension plans, RRSPs, RRIFs and TFSAs.

3. By owning assets jointly. If you own an asset jointly with right of survivorship, the asset will become the property of the other joint owner(s) if you predecease them.

4. By way of trusts. You can leave assets to others who are beneficiaries of a trust you might set up during your lifetime (called an “inter-vivos trust”) or upon death (called a “testamentary trust”). Trusts are valuable if a beneficiary is unable to manage an inheritance on his or her own, or if you want to add a measure of asset protection to help your heirs.

5. Through a partnership or shareholder agreement. If you’re party to one of these agreements, your interest in that partnership or corporation could be distributed in accordance with the agreement.

6. By your will. Even if you plan to distribute your estate using one or more of the other methods, you should still have a will to deal with any other assets or belongings you might own at the time of your death.

When preparing a will, many people take the view that “fair isn’t always equal”; there can be valid reasons to leave different amounts to different heirs. I do encourage you, however, to avoid a situation where you completely leave a child out of your will altogether. I realize that there can be exceptional circumstances and there is no one-size-fits-all approach here. However, most people who leave a child out of a will do so because of a strained relationship.

There’s no better time than today to mend broken relationships. And if that isn’t going to happen, it could be a healing gesture to remember that child in your will in a meaningful way. It can send one last message that you really do care, despite the issues between you.

On the flip side, leaving that child out of your will sends exactly the opposite message – a message that you don’t care, or that you can’t forgive. That message, unfortunately, will live with that child forever. You can’t change it after you’re gone.

The emotional scars this can create for not only the child, but other family members, isn’t worth it. Swallow your pride. If you can’t reconcile during your lifetime, at least make a positive and meaningful gesture upon your death.

Article: Globe and Mail

How to discuss your estate plan with heirs (and why it’s critical to do so)

Estate Planning

My wife, Carolyn, and I revised our wills recently. The hardest decision was around the guardian of our kids. “Tim, I just want someone who is loving, caring and a good role model to look after our kids if we’re gone.”

“Carolyn,” I replied, “if we knew someone like that, why wouldn’t we just give the kids away today?” Well, we decided to keep the kids. And then we sat down with them to talk about who will look after them if we’re gone. We’re starting to share our estate plan with them.

What have you shared with your heirs about your estate plan? Over the past two weeks I’ve introduced a framework for thinking about that plan. Specifically, I introduced the five “Ds” of estate planning: Define, design, document, discuss and distribute. Today, let’s talk about discussing your plan with your heirs.

The problem

Some people won’t initiate a conversation with their heirs because they don’t want the heirs knowing how much they stand to inherit for fear of fostering a sense of entitlement, or causing the kids to change their own career plans or become less productive.

Kids and other heirs often won’t initiate the conversation because they don’t want to seem greedy or curious about what they might receive one day. And the kids have a point: If they do start the conversation, many parents will think precisely those thoughts. Here’s a message to everyone involved: Get over it. There are some very important reasons why a conversation about your estate planning is necessary.

The importance

Having a conversation about your plan will demonstrate that you’ve given thought to your own financial well-being. It can also prevent confusion – and even legal battles – after you’re gone. Setting up your heirs to live in harmony with each other and with the decisions you’ve made often depends on having a discussion while you’re still alive. I’ve seen more than one case where hard feelings – and even psychological damage – have resulted because parents took an approach to their planning that some surviving family members couldn’t understand. And let’s not forget that sharing your plan with your heirs can often result in some tweaks to the plan that could make it even better.

I can hear some comments already: “There’s no way my heirs are ready or equipped to hear about my planning.” If this is your thinking, barring some incapacity an heir may have, the real issue should not be whether you speak to them, but when you speak to them, and what you share. Perhaps some education or counselling from a trusted adviser today can prepare them to eventually hear your plans.

The approach

Here are some guidelines for having a conversation with your heirs:

Choose the right time. If it’s tough to schedule a formal time for a discussion, have a conversation more casually when you happen to be together, taking a walk or over dinner, for example. You might unveil your plan in stages. We’ve talked to our kids about guardians, but not about dollars yet, given that they’re still in their early teens.

Decide whether together or separately. You could speak to your heirs at the same time, or in separate discussions. In some cases, separate discussions may be best if there are sensitive issues to discuss (perhaps you’re leaving unequal amounts to each child, for example).

Take a team approach. If you have a spouse, you should conduct the discussion together in most cases. Make sure you’re in agreement as to how things will work when you’re each gone, and be of one mind when speaking to the kids.

Agree on what you’ll share. My view is that, in most cases, your heirs should eventually understand the complete plan, including how much they will inherit. How much you share should depend on the maturity of your heirs, and their stage of life. A word of caution: Many people conclude that their heirs are never ready to hear the complete plan. Only in rare cases is this the case. By the way, simply giving a copy of your will to your heirs is not the same as having a discussion about your planning.

Explain why. Make sure you share with your heirs the principles that guided your decisions when preparing your estate plan. If they understand why you’ve created the plan you have, there’s a lower potential for hurt, harm and misunderstandings after you’re gone.

Ask for feedback. Ask each heir individually how they feel about the plan. You may not change your mind on issues of concern, but it will let them know they’ve been heard, and you’ll have had a chance to explain your thinking.

Article: Globe and Mail