A COVID tax season—Are you ready?
A COVID tax season—Are you ready?
Thank you for attending our presentation today called a Covid tax season. Normally, we'd see many friendly faces in an audience at a venue, but of course, today is not like that. We're presenting virtually for the fourth time this past year due to the circumstances we're all faced with. My name is Colin Andrews. I'm a First Vice President and Portfolio Manager with the CM Group at CIBC Wood Gundy in Calgary. And joining me today are Blair Howell and Jamie Golombek. Blair will be moderating the discussion, is a certified financial planner and wealth manager on our team, the CM Group. And he has over 20 years of experience working in finance and banking. And of course, we have our presenter, Jamie Golombek, who is the Managing Director, Tax and Estate Planning with CIBC, is a member of the CIBC Retail Markets team, working closely with Private Wealth Management and CIBC Wood Gundy to support their high net worth clients and deliver integrated financial planning and strong advisory solutions. So Jamie joined the firm in 2008 after 12 years of working in a global investment company where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie, before we get started, I just have a couple of housekeeping items to address for the crowd. There is an option to ask questions during the presentation. The questions will be managed by the organizer and we will answer them as best we can. And I know you have a question. Answer session, heat up at the end. But if for some reason we cannot get to your question during the presentation, we will email you back response or set up a call to answer that question. Now, technology is a great thing when it works, as we were just talking about before launching this. If for some reason there's any glitch in today's presentation because it does happen, I'm sure today will go off without a hitch. But if it does, the presentation is being recorded and will be available for viewing at a later time. Indeed that works best for you. And at this time, I usually tell people where the washrooms are located and what food and beverage we're having, because usually it's a lunch and learn format. Of course, given today's global pandemic and lock down in our current situation, everybody is viewing this from their own remote location. So I guess you're on the hook for your own your own food and beverage. Which reminds me, you can see the presenters myself, Jamie and Blair. You can see the presentation. However, we cannot see or hear any of the attendees and you cannot see or hear each other. So you can sit back and relax, enjoy the presentation. Although, Jamie, I got to tell you, discussions about tax and relaxation don't always go hand in hand. So we're going to get into it in a minute. I just want to carry on introducing Jamie. Jamie is quoted frequently in the national media as an expert on taxation, writes a weekly column called Tax Expert in the National Post, has appeared as a guest on BNN, CTV News, The National. And I got to tell you, Jamie, probably your most famous presentation was when you joined us for a podcast, Free Lunch back a few a few months ago. And thanks for doing that again. In his spare time or in your spare time, I guess you also find time to be to teach MBA course at the Schulich School of Business, which is pretty remarkable considering all of these list of accolades that I could go on and on. And and different organizations you are part of, and things like the Investment Funds Institute of Canada's Tax Working Group, the Ontario Institute of Chartered Accountants, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. And that's quite a mouthful, Jamie. So obviously I wanted to get those out there so that our our viewers can see that we have a real expert today and we're really keen to have you here and welcome, Jamie.
Well, thanks very much, Colin. And welcome, everyone. Thanks to Blair and Paige and everyone else who organized this today, I'm going to spend 30 minutes to take you through the hot issues. My agenda is three parts. Number one, filing your tax returns and just some tips for the next six weeks. Number two, our best three ideas. Number three, our crystal ball. What can we expect in a budget next month or perhaps later in the year from a wealth planning or perspective? So let's begin with the basics. Filing your tax return. I'm going to go pretty quickly. I think a lot of you are familiar with some of the material, but then, of course, we have the Q&A at the very end. So, again, just a reminder to type your questions into the chat. We'll try to address as many as we can before the top of the hour. So, again, the due date has not changed as of today at 12:00 p.m. Mountain Time. That could change this afternoon. That could change tomorrow. As you saw yesterday, the US IRS extended the deadline by a month to May the 17th. From April the 15th. I had to call into the CRA I heard from this morning. As of today, there have been no changes. I wouldn't be surprised if they extend it in the next few days. However, you didn't hear it from me. The deadline is still April 30th. If you have self employment income, it's June the 15th. However, if your income was under seventy five thousand dollars and you received some Covid related benefits, even if you file on time, you will not be charged interest if you don't pay as long as you make the payment by April 30th 2022. So a bit of relief there for those whose income is under seventy five thousand dollars. In terms of the other things to think about taxable Covid benefit. So we have a number of covered benefits in 2020 that were received. Some of them were are subject to tax. Some of them are not subject to tax. These are all the ones that were subject to tax. And again, some of them have received withholding and some of them have not. So I think it's important to remember that all these things must go on the tax return for the CERB or the student benefit. There was no tax or could not be a tax owing to the other things like the recovery benefit. There is a 10% withholding that was already applied, which may not be enough. So many people might actually owe money when they file a tax return for 2020, depending on your personal situation. Of course, all these benefits would have been received on a T slip. So again, you'll know about it. It's on the T4A or the T4E, depending on how you apply. It's all considered to be other income on the tax return. The biggest question a lot of people are asking is working from home, you can clearly see that I'm working from home also home office expenses, right. A few things different for this year. Two methods to do it, temporary Flat-Rate method of the detailed method. There's a special form for Covid. The T77S can be followed with your tax return as part of all the software. And a tax preparer, of course, would certainly have that have that information.
So let's go into it. The temporary method, that's the easy method. Two dollars a day for every day you work up to two hundred days. Again any full or part time days, count sick days, days off vacation. Obviously, those don't count. The best thing about the temporary method is you don't have to keep track of any expenses. You don't have to have your receipts. You don't even need a form from your employer saying that you are working from home. So two dollars a day, that's a simple method. The detailed method, on the other hand, is a little bit more complicated obviously. The detailed method, if you qualify, you've been working for as a result of Covid, then you can take the actual expenses and then you prorate them by the ratio of work to use the personal use. You're going to need a signed form from your employer, the T2200 or the short form version of that, to be able to claim those on your return. Now people ask me all the time, what do you mean detailed method? What's deductible, what's not deductible?
Well, again, on the detailed method, you can deduct your rent, utilities, your access to the high speed internet. Certain maintenance and repairs. And if you're a commissioned employee, can even write off your home insurance and property tax. That being said, what's not deductible is your mortgage. Which means, as you'll see in a second, for most people that are home owners, it doesn't make sense to use the detailed method because when you add up utilities, you really prorate it. And then if using a shared space you prorate it further by the number of hours you work in a week. You'll see that it's not a lot in terms of deductions. So again, not deductible capital expenses, furniture, wall decorations, things like that. For the whole workspace to be using the detailed method, you can really only use the portion of the space that you use for work. So, again, if you've got a designated workspace, so this here is a designated space. This is a spare bedroom. I'm in my daughter's spare room. She's off at university, although, of course, there's no classes there. They're all doing it remotely. I guess it's more fun to do it remotely from a home that's not your parent's home. But anyway, this is a spare room. I use this full time for work. No one else uses this room. So this is a designated space. On the other hand, if you're working from a dining room table or kitchen table, you'd have to prorate it based on the work size, other words the square footage that that room is part of the home and also about the number of hours that you work at that kitchen table divided by the 168 hours in a week. There's more than one worker, by the way, you could calculate your own workspace. So very simple example. We've got Brit, Brits a renter, and she works 37.5 hours a week, 9.5 months. And she's renting. She rents a thousand square foot home or condo, and effectively she has a spare room and she's working from that spare room full time, so we calculate out of the detailed math and she takes her twenty seven hundred dollars a month of expenses for 9 months. She prorates it by 20%. And you can see that her deduction is very generous. Her deduction in this case is approximately five thousand two hundred and thirty dollars. If she used the two dollars a day method, of course, that would only be a maximum of four hundred dollars. So our renter is generally better off using the detailed method than a homeowner. Let's take a look at a homeowner. Sasha works the same amount of time during the same type of home, but this time Sasha owns his home. Texture condo, he pays condo fees of 600 bucks a month and utilities of two hundred dollars, the condo fees are not deductible. So effectively, what you have to do is take the two hundred dollars a month of utilities multiplied by the ratio of the square footage of the kitchen, which is 20 percent, and then multiply that by 37.5 hour work week over one hundred and sixty eight hours. You can see that under the dump method, Sasha can only claim eighty five dollars for the year. As a home office deduction. Better off using the two dollar day method. So again, for homeowners, two dollars a day makes sense. If you don't know what to do, just go online, use the CRA calculator. You can calculate the Home Office expenses. It will tell you what method is best for you.
Let's move right on. What else is new on the 2020 return? It's not a lot, but if you're a digital news junkie like myself and you get a digital newspaper on your iPad or On your phone or your PC, you can write off 15% of nonrefundable federal credit on any amount you spend for eligible digital news, up to five hundred dollars. So at 15% that's a credit, that's worth seventy five dollars. By the way, if you're like me and you have a combined digital and print subscription, that gives you the digital copy, but you've got a physical paper on a few days a week, let's say like me, the weekend, you can only use the digital portion of that for the expense. You can go online and see what the cost of a digital only subscription would be and use that on your tax return.
All right, let's move on now to our best three ideas. The second part of our presentations that we're going to move on from the tax season and talk about what can we do for 2021, because not a lot you can do on your tax return. Because that's basically retrospective. It's last year. What can we do this year? Number one, maximize all registered plans. We just run a brand new piece of a few weeks ago on building family wealth or registered plans. If you're interested, take a look at it. In terms of building wealth with RRSPs and TFSAs and RESPs and even disability plans. Just spend a few minutes on this for you. Reminder, we're in a new year. RRSP limit for this year, twenty seven thousand eight thirty. You had income of at least one hundred and fifty four thousand last year at 18 percent. You're going to hit that maximum less any pension adjustment. Or in the New Year of TFSAs. If you haven't already made your 2021 TFSA contribution, great time to do it. That's another six thousand dollars. And by the way, TFSAs, of course, have only been around since 2009. So, again, depending on how old you are and how old your kids are and how old your grandkids are. This is an amazing opportunity to catch up on TFSA room to a maximum of seventy five thousand five hundred. In other words, if you're at least 30 years old this year and you never had a TFSA, you could put it seventy five five. You can give your spouse another seventy five five to open up their own TFSA. If you've got kids that are at least 18, you can give them money to open up their own TFSA. Some of our wealthiest clients are using TFSA for intergenerational wealth transfer. So again, take a look at this. It's certainly a great opportunity. We've written a lot of reports on RRSPs versus TFSA versus paying down the mortgage. You see, mathematically, they're all the same. So five fifty hundred dollars income when I choose to contribute to my RRSP and I'll pay tax now. That money grows and at the end of the year, if I cash it in, I pay tax. I have a thousand and fifty dollars. TFSA works exactly the same way in reverse, right? If I earn fifteen hundred dollars of income, I pay tax on the income. I put the after tax amount into my TFSA and grows tax free if I'm paying down debt and my rate on my mortgage was five percent. That again exactly the same thing I'm using after tax dollars to pay down my mortgage, I save a thousand dollars capital fifty dollars of principal of interest and again I'm ahead by a thousand and fifty.
So again, mathematically that's all the same. In reality, of course, we know it's not the same. So I think the common rule that we all say is that if you're at a high rate now, you're going to be a lower rate when you retire. Do RRSPs, then do TFSAs. When it comes to paying down debt, if your mortgage rate is 1.5, 1.6, 1.7%. To me, it doesn't make any sense at all to aggressively pay down a mortgage no matter how big it is. If you're not maximizing your tax free savings inside of your RRSP and TSFA. We actually wrote a report a few years ago called Mortgages or Market, which is all these reports are available online through CIBC. We'll give you a website at the very end of have you download them, but basically said, you know, people are aggressively paying down their debt. But if your mortgage was at three percent, but you can get a rate of return over the next 30 years on average of six percent, you'd be crazy not to do your RRSP or TFSA before pay down any of that debt. And that close to true in this scenario, because simply you're already taxed for investment returns, there are simply higher than a low interest rate mortgage. So, again, it's something to talk about, certainly with your advisors. But this is certainly a strategy that's worked for for many of our clients. Register plans are also very helpful for business owners. I've heard so many people say, well, you know, a business owner, I own a professional Corp, I'm a doctor, I'm a medical Corp, I'm a lawyer, I'm a legal Corp. I just have a small business. I leave all my money in the business every year. I don't bother with RRSPs or TFSAs, you're wrong. You're basically wrong. You don't believe me, take a look at our brand new research reports. RRSPs and TFSAs where we prove mathematically that most, not all, but most business owners would do well, paying themselves enough salary to make a maximum RRSP contribution and, pay enough income every year, whether it's salary or dividends, to be able to pay out enough money to make a six thousand dollar annual TFSA contribution. Remember, at the end of the day, yes, you got a deferral in the corp, but that corp is paying tax at about 50 percent on the investment income, whereas if it's inside of a TFSA at the tax rate on that income is zero. So, again, something to look at. And again, if you believe me, please read my reports and then call me.
Let's move on to the next strategy, personal insurance. Again, I'm not here to sell any one life insurance, but I can tell you that among our very successful clients, life insurance plays a huge role, whether it's universal or life, a whole life in terms of a replacement for fixed income. I call it insurance for people who don't need insurance, the opportunity to use a portion of your wealth park it into a permanent life insurance policy to increase the value of the estate on a tax free basis, because the income inside the policy is reinvested on a pretax basis and on death, the entire amount goes Tax-Free to the beneficiaries as a tax free benefit down death. So again, this is a great alternative to fixed income. We've seen some very, very high yields on some of the whole life product being offered right now. I think it's worth taking a look at it.
Our third idea is to prescribe rate loan idea that just confirmed recently that the CRA prescribed rate will remain at 1% until June 30th. That gives you three more months. If you haven't done this already, to set up an income splitting family loan, prescribed rate loan. We call it the 1% solution.
We wrote about this last year. Happy to get you a copy of this material. But basically, there's a big spread right between the top rate number and the bottom rate on interest income, regular income. Forty eight percent of the high rate. Twenty five percent of the low. That's a twenty three percent spread. So if we can move income from a high income family member, low income family, a spouse, maybe it's a partner, maybe it's children, we can actually save some sort of amount of tax within the family. Got a simple example here of Jack and Diane. If you know the reference, you can probably age where I was in about grade seven in this case is our high income earner. Jack is our low income earner. We're going to do a prescribed rate loan to show you how the math works. But again, if Diane's not top Alberta rate of forty eight percent. Jack's my bottom rate of twenty five percent. We're going to do is going to take Diane's money instead of giving it to Jack, because if we gave it to Jack, all the income gains would attribute back to Diane. We're going to loan it to him. We're going to make a five hundred thousand dollar loan. We're going to charge the minimum CRA prescribed rate at one percent. By the way, if you do this before June 30th, you can lock in the rate for life. So even if rates go up one day, you'll be able to lock in a prescribed rate for life at one percent. So on this example, on a five percent rate of return, we get twenty five thousand dollars of income again. Normally, this is a mix of Canadian dividends with the dividend tax credit, capital gains realized deferred, 50 percent tax, a little bit of foreign income for a tax credit. To make the math really simple today, just pretend that it's all just straight income. So you got twenty five thousand dollars of income. We got to pay five percent sorry, one percent interest on the loan for this to work for CRA, not one percent on five hundred thousand. Five thousand dollars. That's a deduction to Jack, but it's taxable to Diane. That's a real opportunity. There is not twenty five, it's only twenty. Well, we income split the twenty if we have the top rate of forty eight, the bottom rate at twenty five to twenty three percent spread. So in twenty thousand forty six hundred dollars of tax savings every year and a half million dollar loan, so this works great with spouses and different tax rates partners, it also works with children.
I got three kids I would never hold my youngest, who is now 15 and half a million bucks because you never pay me back. So instead, what I would do is set up a family trust, get a lawyer, of course, get this done properly, set up a family trust, make a loan to the family trust, have the family trust, do my investing, and then have all the investment income paid or payable on behalf of the kids. The kids are in private school. They have summer camp that doing hockey was doing lacross. Any expenses the kids can be paid for out of the trust. So effectively what you're doing is using pretax dollars to pay all the kids expenses that the kids have no tax and no income. They're going to pay zero if any tax. In fact, the magic number for Alberta for 2021 is fifty four thousand dollars in Canadian dividends. In other words, an individual in Alberta with no other source of income can earn fifty four thousand dollars a year of Canadian dividends without paying one cent of federal Alberta tax because of the basic personal amount and the dividend tax credit. So again, this is a great strategy. Many of our clients are using a dividend portfolio in a family trust to pay all the kids expenses. They're doing this for grandkids as well. So, again, certainly a great opportunity for income splitting in 2021.
RESPs again, if you've got kids or grandkids, there's any remote chance I get to go to school, post-secondary education, I hope your maximizing RESP. Typically what happens is we tell clients to open up the areas the year the kid is born. The parents say, you know, these kids are expensive. I've got diapers, I've got childcare. I got to buy a car seats. Expensive. So they wait, they wait and wait. And finally they start at age 10 they put it in a box and they try to catch up. Because there's the kind of education savings grants which are worth 20 percent on the first thirty six thousand dollars of contributions. So the maximum grant is seventy two hundred dollars, which means you've got to put in thirty six thousand. But they wait, they do at age 10 and they try to catch up because you only catch up to years at once and that works out OK. Because if you start at age 10, by the end of the four years of school, they're able to take out about thirteen thousand dollars a year for four years. Now, could you do better? Obviously, you could right, because if we convince a client to put in the same thirty six thousand dollars, which started in the year zero, the year the kid is born, we put in twenty five hundred dollars a year to maximize those annual grants of five hundred dollars. And we stop. We hit thirty six thousand dollars. We got the seventy two hours of grants for all of a sudden if we wrote again, we're using a very conservative three percent compound annual rate of return, all of a sudden we've boosted four years of education at sixteen thousand three hundred fifty four dollars three hundred fifty dollars a year. That's about sixty five thousand dollars over four years. And all of it in many cases, as you'll see, is tax free. The best strategy is the ability to over contribute and actually put in fifty thousand to an RESP, not just thirty six. You're not going to get a grant anything above thirty six. So the strategy is to put in the 16,500 at birth, which is the extra 14 plus the twenty five hundred. You need to get the grant and then continue on twenty five hundred dollars a year to age 14. Effectively what happens here is you because you upfront funded the RESP, that I'll pay for twenty three thousand dollars a year. Four years of education and using just a three percent conservative rate of return, as I alluded to earlier, this twenty three thousand a year, which is barely four times that's about ninety thousand bucks, is all tax free. Why? Because when I take out that ninety thousand dollars, fifty thousand after tax contributions that comes out tax free, the other forty thousand dollars is educational assistance payments payable to the child. The child has the basic personal amount and they have tuition as a credit. Remember the tuition right now at six thousand dollars is the average undergrad tuition in Canada, that's twenty thousand dollars your income, but only taking out ten thousand of income annually from the RESP. And our best case scenario, we're basically talking zero tax or minimal tax on RESPs. I think of RESPs as a TFSA for education. Again, if the kid doesn't go to school, he can give the money to another kid. You don't have any kids that are going to school. Always take your contributions back then all the income and growth you take back if you have RRSP room, great. You put it into RRSP. If not, there is a 20 percent penalty tax. So the government grants have to be repaid downside and all that stuff is pretty minimal. So you're seeing lots of parents and sometimes grandparents set up RESP for all of the children.
Finally, five minutes left, we'll open up for your questions, What's my crystal ball? We did a video on this a few months ago. I want to give you some of the highlights of what could happen in tax policy in Canada. Number one, tax rates. How high can you go? And I've been asking this question for years. I thought we could go no higher than 50, but I was wrong because in Alberta, 8 of the 10 provinces have a top rate of 53 or 54%. So a question, can you go much higher? And I'm not sure that you can. You've seen the arguments, the Laffer Curve. You know, higher rates don't necessarily mean more revenue. There is certainly a psychological disincentive to work with your rates over 50%, not only that. People start hiring accountants and lawyers to do tax planning and use all the things that I just showed you the last 20 minutes to reduce their tax below the top rate. So I'm not sure we're going to go much higher. In fact, if you look at our statutory rate, we're number seven in the world in terms of tax rate. So could you go much higher like Sweden or Japan? I guess it's possible, but I think we're pretty high, especially compared to the US. The top rate, California, federal California's rate about 50%. You move to Florida, the top rate, is only 37 because there's no state income tax. So, again, we have very, very high rates, obviously, Alberta is a tax haven, that's what we call it, out in Ontario. Lowest province in Canada other than Saskatchewan, if you exclude the territory. So, again, most of Canada, very, very high rates. I don't think we're going to go any higher, although there is rambling, rumblings of a super high rate. We saw the announcement yesterday by Joe Biden that the United States is going to tax U.S. people making over four hundred thousand dollars as a family at a higher rate. So, again, we're seeing these changes globally could it come to Canada. There is rumors that there could be an ultra high rate in Canada as well.
Now, in terms of who's paying taxes, we already have the top 10% paying the majority of taxes. If you look at some of the research done by the Fraser Institute, the top 10% of income earners in Canada are already paying 50% of all the personal income taxes paid. So I'm not really sure that we can go much higher than that. If you break it down, one final slide here, if you look at all the different tax payers in Canada, we have 28 million people file the tax return for the 2017 tax year. That's the most recent data we have. Of those, those with income over one hundred thousand comprise about 9% of all tax payers. But the income is not evenly distributed. Most of that income, in other words, if you look at the top 9% of people, 35% of all the income in Canada was reported by the top 9% of income earners. But what's more astounding is the tax. The top 9% of Canadians paid 55% of all personal income tax in Canada. So I don't know. I think we're already pretty taxed very highly on the high.
Capital gains, inclusion rate, that's probably the question I get most every single day, almost every single week. The capital gains inclusion rate used to be zero before 1972. It jumped up to 50 percent with tax reform. The current provision, they had that for many, many years until 1988. It went up to two thirds. After that, we peaked at 75% in 1990. It stayed that way for a long time until it dropped twice in the year 2000 and now we're back at 50%. So again people ask, could we raise the inclusionary? I think it's possible because look at what this government has basically said, in terms of taxing the wealthy, bringing in that top rate five years ago. This is not a well friendly government. So, again, if they look at who earns capital gains, who pays capital gains tax is for the most part, the wealthy. And therefore, I think that's certainly on the table. I'm not sure they'll do it in a budget next month because politically, with a minority government, it's very unpopular. But if they get re-elected, if they have a confidence vote and a spring election, they get re-elected, especially if the majority. I wouldn't be surprised, if you see an inclusion rate bump.
Principal residents concerned the sacred cow of taxation, you would never tax a principal residence, would you? Right now in Canada, there's an unlimited gain on the principal residence, which can be tax free. That's very, very different than the situation in United States. United States, the only tax the gain above two hundred and fifty thousand dollars per person. Five hundred thousand US per couple. So, again, politically, I think it's political suicide. I don't think they're going to do it. But that being said, I think at some point you're going to see some type of tax. I don't think it would be retroactive. That would be unfair, would punish people who've been saving their entire life via their principal residence, assuming it was going to provide tax free retirement. However, I think what they could do is prorate the gain. So if they start taxing this in 2022, they could basically say years of ownership prior to 2022 are tax free, years after that are taxed. Well, they wouldn't get you wouldn't have to get a valuation. That's too messy. So what they would do is just prorate it. So if you sell your home next year and 2022 and you had it for 20 years, they would take one twentieth if 20 years is the year of ownership and then say you have to pay tax on the gain one twentieth of the gain. So I guess it's possible it won't be in a budget, but it could come as future tax policy.
What about wealth tax? We got lots of questions about a wealth tax rate. Last summer, the Parliamentary Budgetary Office said if they imposed a one percent wealth tax on people with over 20 million dollars, there'd be about fourteen thousand families that would pay to bring it about five and a half billion dollars of revenue. That's not an insignificant number. Now, they tried this November of course, it was defeated in the house was proposed by the NDP. So, again, the wealth tax is controversial. If you look at the pros and cons, you can read dozens of articles about it, whether it makes sense, double taxation, you've already paid tax once on it. Do you pay tax a second time? It is certainly a way of trying to deal with some of the inequality. Canada doesn't have a wealth tax. Again, very few countries do. You go back to 1990, 30 years ago, you had 12 countries of the wealth tax. If you advanced to the year 2000, you only had about nine countries that still had a wealth tax and have actually, if you go to today, today, right now, as of 2020, there's only four countries in the world that still have a wealth tax. And in fact, could Canada be the fifth? I'm not sure that's a lot of problems with measuring it, with double taxation, with policy. How do you measure the value of the family farm? How do you measure your artwork hanging on your wall? How do you measure small businesses? There's no liquidity. I'm not sure we're going to go with a wealth tax. What might be happening, though, is an estate tax. We don't have any form of estate tax. Some provinces, not Alberta, some provinces have a significant prorate. Significant like one and a half percent. But that's not an estate tax. Take a look at the United States. Right. The United States has a 40 percent estate tax. And if you read the Biden proposal, he wants to bring that to 45 percent and he wants to bring the US exemption from 11.7 Million, US down to 3.5 Million, the rate it was in 2009. So right now, very few people pay the estate tax. Only two thousand people are estimated to have died last year and paid the estate tax in the United States. But again, this is a way of getting money for very, very wealthy people before it transfers to the next generation. In Belgium, the rate is 80 percent. So could we see some form of the estate tax? It's possible we already taxed capital gains on death on a realize basis, they don't do that in the US, but they're talking about that as part of the Biden proposal as well. So, again, I think all those ideas that I just thought about, the inclusion rate, some kind of estate tax federally, it could happen. It probably won't happen in a budget next month, but long term down the horizon, I wouldn't be surprised if we see some of this. Now, all of the information that we talked about today, certainly available online. We can get you copies of our slides afterwards. However, if you want details of the bulletins or any of the brochures, anything we really talked about, certainly all available CIBC.com under a section called the Advice Center. We have a tax tip area. My own website, jamiegolombek.com authorized by CIBC. I have everything I've ever written in 20 years. All my National Post columns are updated three times a week. In addition, in all 100 bulletins we've read, the first part of CIBC are all posted online. So I think with that I will stop talking and I guess we'll turn it back to you for maybe some questions.
Well. Thanks, Jamie. I don't see any questions coming in. If anybody has one, you can ask questions to the webinar screen or the chat. Just kind of going back, there was a lot of great stuff there, Jamie, a lot of information. But one thing you did talk about is, you know, the planning for 2021, as you know, seeing groups very big on having goals and plans and looking for efficiencies ahead of time. A lot of clients have asked about kind of doing the spouse alone or or the prescribed rate. But that's always just want to clarify. That's always after we've used up RRSP and TFSA. And these are your dollars.
But what if you have one major income earner and they're putting money in their RRSP and they're tax free, would the loan apply to kind of an RRSP loan from one spouse to another in terms of just making sure they're topped up or going into a tax free savings account?
Yeah, you certainly can gift money. You don't even need a loan. Right. You can give money to the other spouse to make their own contributions. So while the money is inside of the recipient TFSA, there's no attribution of any kind. So that's a very common strategy as well. If the other spouse doesn't have the cash to give them the money to make their own contributions, that's sort of our strategy for sure.
Another question I had, and it came up just to kind of your views, you know, we have a lot of clients who make regular RRSP contributions or even lump sums for the year earlier on in the year. But as we know, a few people have lost income for the year. And if they had made RRSP contributions, obviously, is there a strategy or is there any point putting that off to claim it for the following year just to.
Yeah, thought also at the time value of money question, so I think for the most part, unless you have a really wildly high swinging income from one year to the other, it's usually good to claim it right away, assuming you've got some kind of tax payable. Might as well get 25% back now that maybe 30% back next year, because you've got the time value of money. Obviously on the refund perspective. That being said, if you're really in the low bracket this year, I wouldn't claim it. You might wait till next year when you're back in a higher bracket. People that are on maternity leave, paternity leave. People lost their jobs. Certainly is a valid strategy. Obviously you want to make that contribution to get the income all tax free while it's inside the plan? But certainly you may not decide to claim that for a year or two to be able to claim that deduction when it's more valuable to you.
Jamie, I got one for you. You speak with passion and conviction, which is great, and I know you're going to speak passionately about this when I listen to you on BNN, maybe a week or so ago and a caller called in and made some comment about the conspiracy theory that all of the wealth management firms have around RRSP investment, how silly it is. And you I just want to make it clear for all of our viewers, listeners and future listeners, your opinion on is an RRSP worth it? I know you can speak professionally.
I would say for most people, it's worth it. I mean, maybe 90% or more, because what's the alternative? So we can get into a debate of RRSP versus TFSA. That's not the debate we're having. So for some people, they shouldn't do RRSPs if they have maximize their TFSA. The question that I try to answer most common that the viewer had on TV is if I do an RRSP I lose the benefits of the capital gains at 50%, I lose the dividend tax credit, which is beneficial for Canadian dividend stocks and funds. So wouldn't I be better off without an RRSP? In other words, the question doesn't become RRSP versus TSFA. The question becomes RRSP versus no RRSP. So I ask them what's the alternative to the RRSP? And the answer is, well, just open up a regular non registered investing account. I said, but the problem with that is you're going to pay tax on that money, with an RRSP you actually pay no tax on the investment income. So we can prove to you mathematically, we have a report called Just Do It, just like the shoe company Google, just do it Golombek. That'll be the first hit on Google. We already prove mathematically that no matter what scenario you're in, an RRSP will be a non registered account. Because there simply no tax on the investment income. Remember when you put money into the RRSP then the deduction from your income. In other words, if you're in a 50% or 40% tax bracket, you actually have double the amount working for you, then you would have you pay tax on your income first. Then you invest in a non registered account. So in fact, the mathematics, people get confused with this refund. We wrote another report called Blinded by the Refund. So take a look at that. Google Blinded by the Refund Golombek. First hit on Google. Very easy to find. But basically we prove mathematically the refund is of no consequence to you at all. Because of that tax later on right? So it just depends on what rate you're in today, versus what rate you'll be at in the future. That's where the RRSP versus TFSA. But in all cases, the RRSP is going to be a non registered investment hands down. So take a look at our report that we have the seven common myths of an RRSP. You can take a look at that one as well, because we go through all these in great detail. We put all the math behind it. Analyze this to the depth.
And as I said, I could speak with passion and conviction about it, so I wanted to ask it the I have a follow up to that. And that is, could you maybe just spend a minute talking about the benefits of doing a spousal RRSP contribution versus not.
Oh, absolutely. I mean, the idea of a spouse RRSP is that you contribute based on your contribution room, you get the deduction, but your spouse gets the money. So assuming you're okay with that. The advantage for that is that when the spouse takes the money out in retirement, they're theoretically at a lower rate than you. So we see this very common way. There's a big difference in income levels between two spouses or partners. Once a high income spouse, the other one's a zero or a stay at home or low income spouse. And this is where the spouse RRSP works perfectly because the high income person has all his income and all of these assets in their name that they have a pension plan. The lower income has nothing or virtually nothing. So the idea is by every year the high income spouse contributing to the RRSP of the other spouse, the high income person gets the deduction. They need it to reduce their taxes by 48% and over the long spouse get the cash, which means that when they take the money out there, the bottom rate, they're basically paying 25% tax on the withdrawal or no tax if they have no other income in that particular year on the first 40 thousand or so. So spousal RRSPs are the way to go when there is a massive difference in tax rates between both spousal or partners. Absolutely.
And one follow up to that, and this would be the last time I bug you about that, but let's say you're this isn't a personal situation, by the way. But let's say you want to make a Spousal RRSP contribution, but maybe you're hesitant about where your relationship is going in the future. Doesn't the assets still fall under like a family asset that would be split in a marital situation anyways? Or could you talk about that?
Absolutely. People asked this question all the time. There's zero risk. I mean, the end of the day, whether the RRSP is in your name or their name on a division of property upon marriage breakdown, doesn't matter whose name it's in, it's all going to be split anyway. And you can always split it on a tax free basis. You can move assets between spouses, RRSPs between spouses. And we have some things on TFSAs. All tax free upon divorce or breakdown of the common law relationship. So there's really no concern there. You're giving them all the money. But at the end of the day, unless they spend that money, because there's nothing left, right, that's always a risk. But if the money is there, then, of course, absolutely nothing that would be part of the family property and you'd split that no matter whose name it is. So no concern there Colin.
Right. Blair, you had a question about RESPs we were talking about before the recording.
Well, yeah, I mean, it was yeah, it was kind of nice you brought that up, you know RESPs are obviously a very important part for not only younger families, but growing families, kids going to school. Maybe talk a bit about, you know, we always go through family RESPs kind of having that group RRSPs compared to having a separate RESP for each child. And I guess really kind of what comes out, because it's kind of a combined the end of the day, a combined income, but all of a sudden child one's starting university. It's expensive. And, you know, you're taking it is going to be enough left for child three and how that's calculated.
Yeah, a big fan of the family plan. I set up a family plan, you know, twenty years ago. My daughter is now 19. She's in her second year of school. It's working fantastic. So I'm very happy. I have all three kids on the same plan. The kids are only two years apart each. Right. So in six years, I guess four years, really, they're all two years apart. So I think RESPs worked very well for families. I would keep one family plan if the kids are relatively close in age, relatively close meaning like under ten years, I would say from oldest to youngest, because they're all within ten years. It makes sense because really these RESPs can last for thirty five years. That's more than enough time for your kid to graduate medical school. So, you know, I'm not worried about it in terms of running out of time where we see second marriages, where we see kids, where there's a big age gap, that's when you want to start another plan for that new young kid or that kid of the second marriage, etc. third marriage, whatever it is, because then you could run out of time before they're ready to go to school or finish medical school or whatever. You're up at the thirty five. You're thirty nine. You're actually thirty nine years I think. Thirty contribute for thirty five to thirty nine. So a lot of flexibility. That wasn't always the case. Right. That's recently. But in terms of the hodgepodge of money, that's the part I like the best, because the only requirement for these family plans is that no, not more than seventy two hundred dollars of grants can be paid to any one child. So like other than that, it's game on. Like, you can do whatever you want. So you don't have to ever give money to kids two and three. If you want to give all the money to kid one great. It's family plan, you're the controller. The only restriction is that kid A cannot get more than seventy two dollars of grants. So once you've taken out EAPs, in which case they do proration based on totally EAPs to total grants, once they receive more than that, those grants can't get paid to that kid. So the end of the day could be stuck paying back some grants. If you have the kids going to school, but you have such flexibility. Remember, the contributions are your money as the parent. You always get your money back, right? So if you put in fifty thousand dollars for three kids, that's one fifty. That's the parent's money. You can do whatever you want with that money. It's only the income and the growth that's used for education and the grants. So I love the family plan. It gives me enormous flexibility. Now, I might I do have a spreadsheet where I am tracking how much I'm spending on kid A and then how much I want to spend on kid B, because I want to be fair, not to give one kid a disadvantage over the other and start applying for student loans, but I don't have any legal obligation to do so. So I love the family plan.
Hey Jimmy, we actually do have a question coming in, and I think you spoke to it, I think it's a bit more of a clarification. But sorry, let me just the question is, you mentioned loaning money to a child with the current one percent prescribed rate to be taxed in their hands. All they see is their concern and then manage it properly. But is there a minimum age you could provide a loan to a child that have those gains taxed in their hands?
So, again, I would never do a loan directly to a child if they're under the age of majority. I think it's 18 in Alberta is that right?
Yeah, so if they're under 18, I wouldn't give a loan directly. I would do a lawyer, do a family trust because you don't want children entering into binding contracts that they are going to sue you if something goes wrong. So at the end of the day, I don't want to do loans to minors. There's legal issues with that and we strongly discourage it. The strategy still works. You can do it with a two year old. We've got clients doing this to pay for their families' nanny for their two year old and their four year old and all their preschool and all that stuff. Right? So I would do it for a family trust. If you want to do a direct loan to a child, make sure that child is at least 18 years of age and has the ability to sign for that loan.
I don't think I'll be giving my 17 year old any money in the form of a loan or a gift, because I know that it will go away quickly. Are there any final points you want to make before we wrap it up for today, Jamie?
Well, I think the most important thing to remember is that we just scratched the surface today. I went super fast and I don't expect anyone to even remember anything. I want people to understand that just there are things that can be done. So they should book an appointment, come and talk to us. They are not going to charge you. Just come in and we'll go through the strategy. We can sit down and go through this deck with the one page at a time. In other words, make an appointment. Let's talk to you. We can do it virtually, be doing whatever you want, but there's lots of great ideas here. I give you at least seven or eight different ideas. There's got to be at least one thing that applies to every single client that's on the call. So I think it's a wonderful opportunity to really engage. Now is a great time to get ready for 2021. Last year is already history. We're already filing our returns. It's not much you can do. Claim some home office expenses. Good for you. You already paying those expenses. That's historical. What are you going to do in 2021 to be able to reduce the amount of tax that you pay and effectively save for retirement, kid's education and the future.
Excellent, excellent. Well, that's great, thanks. Thanks again, Jamie. We really appreciate it. And we're looking forward to I'm going to have you back on the Free Lunch podcast at some point in the in the near future and encourage everybody that joined the call to take advantage of those resources. And Blair and I were talking before the presentation that it really all comes down to planning. What kind of planning have you done? What kind of planning can you do? So please reach out to us. We're always happy to talk about this stuff with with all clients we deal with and friends and family members of those people to get a lot of questions. So thanks, Jamie, and thanks, everybody, for joining us.
Yeah, thanks, Jamie.