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In this episode of Financial Planning for Canadian Business Owners, Jason Pereira, award-winning financial planner, university lecturer, and writer, interviews Harris Jones, a well-known estate planner, about how to avoid estate planning disasters!
3 Key Points
Producer: Welcome to the Financial Planning for Canadian Business Owners podcast. You will hear about industry insights with award-winning financial planner and entrepreneur, Jason Pereira. Through the interviews with different experts with their stories and advice you will learn how you can navigate the challenges of being an entrepreneur, plan for success, and make the most of your business and life. And now your host, Jason Pereira.
Jason Pereira: Hello and welcome. Today on the show I have Harris Jones of HarrisJones Advisory Inc. I’ve known Harris for several years and he’s a well-known estate planner in the field. And I brought him on specifically today to talk about what happens when estate planning goes wrong and how to avoid it. And with that, here’s my interview with Harris.
Jason Pereira: Harris, thanks for your time today.
Harris Jones: Thank you, Jason. Happy to be here.
Jason Pereira: Pleasure. So, I brought you on to talk about estate planning going wrong. But before we do that, tell me a little bit about your history and what it is you do.
Harris Jones: Well, my history, I started out as a Chartered Accountant a long time ago, and just continued training, the ongoing keep trying to keep up, and really took an interest in trying to help people sort out issues around estate planning, what happens and tax planning in particular. That’s how it got started and then I said, “Okay, we do the tax planning, but what happens at the end?” And this could go horribly wrong at the end, which invariably it does, and everything’s a mess. Which got me then thinking about the estate planning. And I was involved in the insurance industry, well still am, for quite a number of years, and really liked the concept of an instant estate using life insurance. But ran into the issue where many of my colleagues were concerned about the sale, because that’s what paid the bills, as opposed to what are the issues with the client that really need solving and not worry about … You know, the income will be there from the work you do. Let’s not worry about ramping up and making a bigger sale or making an inappropriate sale. Let’s do what’s right for the client.
Harris Jones: So, which heads into the topic, why we talk, is … Often we’re trying to fix some of these issues and we’re saying, “Well, sometimes it’s … I’ve got to work with what’s there as opposed to doing what was right or what should have been right in the beginning to have us in a better spot.” However, that’s the nature, it’s human nature to do certain things, and I believe we’re on the right track with the work that you’re doing, with the Financial Planning Association of Canada, to talk about how do we do the planning and how do we help our clients be better off and not worry about us being better off because that’ll just come as a result of the work we do.
Jason Pereira: Agreed. So our conversations are always interesting. Typically, it’s almost always bouncing something wrong off each other. Something got screwed up, something needs triaging. And it’s always an amazing conversation because first of all, it’s always valuable to get a peer’s view on it because maybe you hadn’t considered something and sometimes we come up with a different answer where neither one of us had thought of individually. So I brought you on the podcast to have a recording of one of those conversations almost, and talk about what happens when estate planning goes wrong and basically just a couple of horror stories and how to prevent that sort of thing from happening. So with that, I mean, any number of places this can go, let’s talk about what are the more common estate mistakes or big snafus you see that cost people money?
Harris Jones: The biggest one is probably failure to plan. Sometimes we can dance around with some post-mortem planning or structuring if there’s enough money. Failure to have a discussion with family on what your intents are before the fact, so you can head off any major issues, and there always will be. Basically you end up spending the money on professional fees and on taxes that really didn’t need to be paid and could have been delivered to the family. And then squawking about being cheap all the way along the way. It’s … I think sometimes it’s money well spent to get a good advisor that actually knows what they’re doing. They’re not trying to charge based on commission or based on the hour. I’ve actually come to the conclusion that it’s probably based on the case, just what it is overall that you’ve got to do and invariably how you’re making this better for your client.
Harris Jones: So I think the biggest issue is failure to plan. It’s failure to come up with “Where are we going from here?” And I guess that comes from, we don’t know where we want to go. So they haven’t even thought of that completely. Life is good, and so they work hard for their money. You and I talked about doctors most recently and they work really hard for their money, they’re putting in long hours, and when they have time off, they want to have a good time. They don’t want to think about all of this stuff. And to some extent our world is highly complex and we think … There’s a lot of things going on inside our head at one time. It’s just because. We’re prosecuting any number of sets of legislation, from succession law reform, the Bank Act, the Insurance Act, securities law, corporate law, tax law, family law. The probate and wills issues, the accounting presentations, different tax entities. We’ve got corporations, we’ve got trusts, we’ve got individuals, we’ve got many family members.
Harris Jones: We’re trying to manage what we’ve created and then pass it on when we’re not here anymore. And that’s really what we’re talking about, is the passing it on. And many of them find it hard to get their head wrapped around that – “What am I going to do with this?” And then I’ve got family members with various issues, whether it be disability or mental health, invariably tend to be the two big ones, but mental health is probably the bigger one, because it’s mostly hidden. We’re trying to look after lots of people, and then often they just fail to act. So I don’t know if that’s your experience. I think it is, based on our previous discussions and when we’ve sat together at various conferences.
Jason Pereira: Yeah. Well, I mean, life is messy, right? You do the things that are convenient or you think are right or you heard are right without necessarily getting the right advice. And unless you have a planner like myself who has a 50,000-foot view of your life, you don’t really have the professional to turn to who understands where all these different things are. So it’s not unusual suboptimal outcomes happen. And then unfortunately, the estate discussion is almost typically precipitated through some sort of tragedy or terrible thing that happened. COVID has led to so many wills getting written, right? Or it’s somebody died or this happened to my buddy or I had a heart attack. God knows what it is, but it’s almost always, “All right, this thing has reminded me of my mortality, maybe I need to take care of this now.”
Harris Jones: That’s true. The other challenge that I think that you and I both agreed on is many people think they know what’s going on and they believe it to be absolutely so. And how do we share with them that, you know what, that’s a common thought. It just doesn’t work that way. I was thinking of the example of your automobile. When you have a flat tire, you fix a tire and maybe you change your four tires, but we’re talking about life. And when we die, it’s over. When the car dies, we get a new one. Well, we’re not getting a new you. So, the challenge is we’ve got to work with what’s there. So, if the tire goes flat, we have to say, “Okay, we’ve got to repair that tire, and no, the other tires aren’t going flat, but they are wearing out.”
Harris Jones: So it becomes a challenge. How do we keep repairing those and how do we keep it rolling? And we’ve got to work with what we’ve got and look at the options to get it moving, but we need a willing participant from our client. It’s not just about getting another tenth of a percent, another basis point on their investment return. It’s not about totally restructuring solely for tax purposes, because we’ve got investment, we’ve got estate, we’ve got living, we’ve got a whole bunch of things that are trying to go on and compete for the same resources. And even though you could say they’re unlimited, they are, but only in the grand scheme. They’re not necessarily unlimited today. So, I know this is sounding philosophical and it’s not about product, and it’s really not even about the specific planning. It’s about just trying to be comprehensive and holistic and saying there’s lots of stuff going on, you’re right.
Jason Pereira: You’re absolutely right. You’re absolutely right. I mean, so much of this is driven from a philosophical point of view. If your philosophy is, “I’m going to go out and sell insurance”, you’re going to go treat every nail with a hammer. If your philosophy is, “I’m going to basically do everything I can to help people avoid disaster scenarios in their estate planning”, then you’re going to basically cordon that off in any number of ways. Like we talked about previously, the post-mortem plan is one thing, the math is one thing. We talked about the families. In every case, we offer family meetings to our clients when they go and the estate plan is done. Very few of them actually take us up on it, unfortunately, because, whatever reason, maybe they’re not ready to talk through it. But the ones that do, I mean, we typically do it before the will is signed, because at the end of the day you did something you thought was right. You dealt with things you thought were important, but the kids may hold other things important to them, whether it be family heirlooms or access to family cottages or whatever it is.
Jason Pereira: And maybe you thought you had the conversation, but when everybody’s in the room, it becomes a lot more apparent as to whether or not you got it right or not. And that gives us the opportunity to course correct. And I always say it’s a heck of a lot easier to accept what is being told to you by your parents before they die. Because that’s their wishes, and they’ve explicitly told you, versus opening up an envelope and reading a bunch of paper that you can barely understand and being told by a lawyer that, “No, this is the way it is.” You’re in a position of sensitivity and you’re already dealing with grief, and now you have that thrown at you, that mom and dad didn’t treat you the way they thought you were going to be treated. Maybe you think that’s fair, maybe you don’t, and that’s just not a good position to leave your family.
Harris Jones: I agree. The emotional overlay of death is brutal, which is why we will talk, mostly to widows, and I’m sure you’ve done it, I know I have, “Let’s just relax for the first year. Let’s do what we have to do. We want to get through it. We want to get the fog out of our head of losing this loved one. No matter how well or how poorly you got along, you’ve had a significant loss in your life. And it does take time to get the fog out, to be able to think clearly about where you want to go. But some things need to be taken care of immediately.”
Harris Jones: The one thing I’ll say is what I know about plans, and this I learned from a number of my military friends, is all of the plans that you make, they won’t turn out that way. But the good news is, without a plan it’s not going to turn out at all. So, with a plan you have a chance of it turning out, you have a chance of making your objective, whether or not it turns out the way you set the plan up. But you have a much better chance because you had an objective, you had it in mind and you can achieve that objective, notwithstanding, you had lots of course corrections along the way. Family, whether you had the family meeting or didn’t have, they have a much better chance of seeing what your thinking was, and seeing that you actually thought about this whole thing a little bit. And you plan for the liquidity, you plan for the early distributions, you plan for the ultimate distribution and having it looked after.
Harris Jones: Those are things that I push my clients to think about and say, “Okay, what happens? What happens if they want something different? Can they do that?” And we know that you can, but what happens if they do? “Do they really want that cottage? Do they really want your business? Do they really want that gun collection or that stamp collection or that art collection or whatever it is that you’ve got that they might want? They may not want it. Maybe you should sell it during your lifetime.”
Harris Jones: You and I talked about my buddy with the art collection. He’s disposing of it during his lifetime. Yes, he’s single, and he just retired and yes, he’s got family he can leave it to, but they’re not into art like him. So dealing with it early and saying, “I’m not looking at these anymore anyway, so I might as well … I’d like to gift them to my university or to the art gallery or wherever.” And work with them and make the gifting work, get it through the various appraisal processes that it needs to go through because of all the art flips in the past, doing our best to avoid the tax … I don’t know how I’d put it, I’d call them scams, but most of them just really make me crazy. You have to need it first, and then if there’s tax attributes that work in your best interests, then we take advantage of them. If they don’t, well, that’s okay, you’re doing it because you want to do it, not because you’re getting the tax benefit. That’s kind of a side effect.
Harris Jones: I would argue that all the laws are out there for all of us to take advantage of. And are you getting your fair share? So, my world is, I work in the mid-estate value of probably the $5 to $15 million range. It’s generally enough money that we want to do some planning, but not so much that we maybe couldn’t get around it by saying, “Well, what happens if we don’t want to do a lot of planning? Then my comment would be, maybe you want to buy some life insurance to guarantee it. And just say, okay, it can all go in tax. I don’t care because you’ve got the life insurance benefit and I don’t have to pay the planners. I don’t have to turn my attention to that during my lifetime.” So there are ways around it. It’s just a question of where are you at and what would you like to do?
Jason Pereira: So I shared a story with you too where I had developed this really complex system for solving the problem that existed. And I was very proud of myself and patting myself on the back and the person in the know who’s very familiar with the industry looked at me and said, “Okay, that sounds great. Can I just buy some more life insurance?” And it’s just like, “Yeah, you know what, you’re right. I got a little bit too caught up in that.” Sometimes the simplest answers are just the better ones that people are willing to deal with, as opposed to the more advanced planning. So, lots of ways to skin a cat.
Jason Pereira: And too often we get caught up in one way or the other, including like you said, to give it away. And it’s interesting that those are conversations that have to happen with all parties pretty much, because I’ve literally seen people financially hurt themselves to maintain cottages or whatever else it is in the hope of passing it on to the next generation. And the next generation is like, “We don’t go to that cottage. We don’t care about the thing. We don’t want to run that business. Why are you doing this?” And we’ve just got to reframe those conversations about legacy and thinking about their estate a different way.
Harris Jones: You’re exactly correct. So that’s where the talking comes in to say, “Where are you at right now? How often have you visited that cottage? Shouldn’t we take advantage of it now?” I’ve got a case right now that I’m working on that’s cross-border. This guy left Canada in 1994 and he was basically in the building business, a construction guy. Bought a piece of land up north, put a cottage on it that’s today worth about a million and a half dollars, and then got mad at CRA and Canada because he had built it using his construction company and so then he had a taxable benefit. He had a taxable benefit and he didn’t like the way he was treated by CRA. So he said, “I’m leaving Canada”, went to Texas and built a company in Texas worth today about $10 million US and also decided he loved Acapulco. So he went to Acapulco and he built another real estate business worth about $5 million, so $5 million US.
Harris Jones: So here we are dealing with … And I got brought in because of the Canadian property. And we don’t know whether he exited Canada properly in 1994 when he left or ’95 when he left, so that’s the first problem. And then the second problem is, what’s the cost base, because we know what the land cost, but we have no idea what, without looking at his tax returns from ‘94 and ’95, to say what the cottage costs were. So, we don’t even have a decent cost base to work with. So now how do you proceed from that?
Jason Pereira: You don’t know what the cottage cost. You don’t know what is the cost base then, which then trickles down to the fair market value or the values for taxation within the corp. Then you have the corporations themselves. Then you’ve got three regimes that basically are looking to tax this guy based on property there. And then you’ve got US estate tax, which it sounds like he’s over that threshold of $11.5 million.
Harris Jones: Oh, it gets to be more complicated, because in the US he actually embarked on some estate planning. And so he’s got a trust that he formed in the US prior to death, but he’s got three kids, two daughters and a son, they’re all Canadian residents for tax purposes and he’s made them all trustees. So now we’ve got ‘mind and management’ of the trust is in Canada, but it’s [the trust’s] in the US. The US thinks it’s a US trust, Canada’s going to think that it’s a Canadian trust and Lord knows what’s going on in Mexico.
Jason Pereira: And Mexico is the last place he lived. And they claimed that basically he was a Mexican resident, therefore that’s a [inaudible 00:15:47] that he filed taxes properly in Mexico. Oh, God.
Harris Jones: Well, actually he was in Texas, but he vacationed in Acapulco. And so he bought a bunch of property there. And the guy was highly successful, but at the end of the day, a lot of this is going to end up going in taxes and/or professional fees. By the time you figure it all out you say, “I almost want to just throw the keys on the table and walk away.” Many properties in Florida that Canadians own, they just throw the keys on the government’s real estate desk and say, “There you go, it’s yours now.”
Jason Pereira: This is the thing that we tell people a lot, is that sometimes people get frustrated by all the rules and regulations out there and tax law and everything else. And it’s like, look, you may not realize this, but you’re in the middle of a game and there are rules to that game. And whether you choose to listen to them is irrelevant, because the rules are going to come down on you one way or another. And if you want to make the choice of sticking your head in the sand about this, you can go right ahead. But no one’s going to … the ramifications will come home to roost at some point.
Jason Pereira: And it sounds like with this gentlemen, he gets “pissed off” with Canada, because, well, he broke a rule essentially, or didn’t like the rule itself. Moves to Texas, which makes sense, because it’s a very low tax state, but then ignores the rules of exiting Canada, and then kind of ignores the rules of cross-border taxation involving trusts. And then goes down to Mexico, does this thing, ignores those rules again. I mean, maybe he felt like he was making his life easier, but he just left quite the mess for his family. And as you said, the only ones who win in this scenario are the tax authorities and the professionals billing.
Harris Jones: And the individuals … So the one woman who’s a trustee, and I guess the others have renounced, so she’s the only trustee. Now I’m having to tell her saying, “You may have to get a US citizen as an agent, US resident as an agent, in Texas to be the trustee in Texas to keep it as a US trust. Because we don’t really want it to be taxed in Canada. And then it’s you and your siblings need to sit down and knock out what exactly you would like. Given that your father set up a trust, maybe there’s some ways that we can use that trust now that he’s dead. We’ve got to be able to pay all the transfer taxes to get it into your names, but we need to work our way through that. And this is not going to happen in a month.” That’s the other problem – they want it to happen yesterday. So, it’s going to take us a couple of years.
Jason Pereira: Yeah, “When am I going to get my money?” It’s going to be a while. Years. [inaudible 00:18:04]
Harris Jones: Yeah, count out the years. Maybe we can get some interim distributions. So that’s the kind of stuff that you and I think about when we’re working with a client. They’re like, “What’s going to be immediate? What’s going to be in the future?” And we don’t want to sort it out in the courts. So, there’s a recent case that seems to have the insurance industry all wigged out, Calmusky. I’ve got it here, actually came up in a STEP discussion. Where … And it’s a lower court decision, so it’s not precedent setting. But it is disturbing, because they brought in, where somebody named a beneficiary of an investment, an RSP, which was not registered with an insurance company, but with the bank. And many investment advisors, they may have gotten great returns on the RSP or the RRIF, but once it’s out of their hands, they’re no longer making money on it, they have no further interest in that. That’s now the client’s problem. And so, the courts in that case brought it in to be part of the estate as opposed to being to the named beneficiary. And again, many people don’t understand the rules.
Jason Pereira: I mean, correct me if I’m wrong, they extended the pre-court case to it, is to say that the beneficiary designation didn’t properly contemplate or wasn’t properly contemplating the division of assets as such. Now it’s kind of ignored, which, I mean, the lower court, court decisions in this country sometimes, man, did they really go the wrong way for us.
Harris Jones: Well, he used the precedent of Pecore versus Pecore, which was a joint tenancy issue, as opposed to the beneficiary designation. Those are different issues, different rules are in play. So, to my way of thinking, a beneficiary designation is a testamentary disposition. It’s not as a result of how we own this thing. So the courts looked at it and said … I think they tried to make it right saying there were no tax deductions taken on the RRIF prior to its distribution, and the tax liability came to the estate. But presumably that was explained at the time the designation was made. It was understood that the estate’s going to pay the tax and the individual gets the cash. Now, yes, you are jointly liable according to, I think it’s Section 160. However, that’s only if the estate doesn’t have sufficient ability to cover the tax on it.
Harris Jones: So, while it just comes down to understanding what the rules are, like you said, it’s not so much a game, it’s just that there are rules and the rules are available for everybody and they work. And those of us that are putting products in place need to know how those products integrate with the overall plan. Like it’s okay to have that beneficiary outside, because I don’t want to pay probate on that RRIF, because it’s all taxable. So, the tax position comes out of the estate. That’s okay, as long as we understand that maybe we set two beneficiaries for the RRIF instead of just one. You’ve got to know the rules in order to play the game properly.
Harris Jones: In businesses, now all of a sudden we have another taxable entity. And when we add a business, we add a trust. We can do this “fancy planning” that drives the tax liability into the future, maybe a long ways into the future if we do it right. The products are complex and they don’t actually eliminate tax. And we have colleagues that say, “Oh, you just buy this and we eliminate the tax.” Well, no, the tax doesn’t go away, but we may find creative ways of covering the tax when it’s due. And there are some interesting products that can help you do that, but it’s just getting a handle on what that is, and getting them to come in and talk about it. So the biggest challenge I have with business, the biggest screw ups, come as a result of no planning, not having a trusted advisor, never having cultivated a trusted advisor, and solely chasing down what appears to be, today, the best tasting steak or the best tasting product. And that doesn’t necessarily lead to something that works 40 years from now or 30 years from now.
Jason Pereira: And it’s a couple of interesting points, valid points brought up there. I mean, I think one of them that’s important to go over is a lot of times people get caught up when they’re thinking about estate planning and it’s almost, what object are they leaving the people? And that “‘object” thinking extends to accounts, right? And we know it’s second nature that you leave a registered account to a non-spouse and that account, the tax bill is payable by the estate, but the assets flow through to the individual and we’ve all seen or heard of the nightmare cases where the kid gets the million dollar house, the other kid gets the million dollar RSP, but that kid with the million dollar house, which went through probate, got stuck with a half million dollar tax bill so now it’s not equal. Again, not knowing the rules, you thought that was perfectly fine. That’s not how it works. What you don’t know is going to get you for sure.
Jason Pereira: The second point you made, and this is a valid one, comes up a lot here, is that too often this industry, it convolutes the planners with the salespeople and the bright, shiny product or the bright, shiny investment or whatever it is. Okay, that’s fine, that’s one “skillset,” but the planning side of it, which has the far greater impact and requires that far higher professional standard and conduct of care and knowledge base is just too muddied by the product sales in general. And a lot of times people will just avoid, because of their experiences with people who carry the same titles yet at the same time don’t do the same thing as those of us who, we do this level of planning. So it can be very frustrating. But aversion to advice is the single greatest guarantee that something is going to get screwed up.
Harris Jones: Absolutely. And realizing that the advice can change if the rules change. Also, what was true 20 years ago … And I’ve had this issue dealing with my elderly mom. She’s 92 and she’s got certain ideas about how things go. And I say, “Mom, that’s changed. It used to be that way, but not anymore. This is how it goes down now.” And it just, sometimes there’s no convincing her. So it’s really trying to get all the professionals at the table. So get the accountants at the table, get the lawyers at the table. Many of them don’t appreciate that some of this planning work that we do is very highly specialized and what we need to bring together, and I work hard at this, trying to bring the specialty lawyers, the specialty tax advisors, and so on to the table to get the agreements done in a way that we know is going to work. And nothing wrong with the regular lawyer, nothing wrong with the regular accountant. They’re doing regular compliance issues and keeping everything on an even keel.
Harris Jones: But we have a specialty situation that needs a specialist. So if I need a specialty investment person, I’m going to go and get that specialty person. I don’t need them to manage it day-to-day, what I need them to do is get it set up properly in the beginning so that we don’t have some of these issues that just didn’t turn out because we didn’t have the advice. Sometimes we own things in the wrong places. We don’t understand the rules. So an example of a backhanded tax estate planning issue would be debt forgiveness.
Harris Jones: We talked a little bit about it with prescribed rate loans. But in a business setting, we set a child up with a business and I say a child, an adult child, who’s in their 40s or 50s. And we lend them the money to do it, we can forgive that money I’m going to say the moment before death. It’s a little more complicated than that, but basically it becomes either income or it goes to reduce a capital property that the money was used to purchase in the child’s business. And mom and dad, or dad’s business, it becomes a capital loss, which certainly can fit into some of the calculations that we’re going to be forced through on dad’s death or mom and dad’s death.
Harris Jones: So those are things that we can do that you say, “Well, is that estate planning?” Well yeah, absolutely it is. I’ve moved your estate from one to another, but during your lifetime, we haven’t compromised your possession, which is often really important to parents. They say, “Well, I’m only 78, I could go another 20 years.” And absolutely that’s correct. They might only live another year, but they also could go 20. So they’re saying, “I don’t want to give it all away just yet, but if I was going to die next week, if we could figure that out.” Then I guess you have to die first to forgive it just before death. But that works, because I’m no longer here, and I forgave it last week while I still was here. And that may solve a particular problem. It’s unique. So it depends on the circumstances, but that isn’t what business owners think about on a day-to-day … They’re worried about where the next account receivable’s coming from.
Jason Pereira: Operations.
Harris Jones: Exactly.
Jason Pereira: And I want to come back to your point about they may be 78, but they could go another 20 years for all we know. I mean, you and I are generally in agreement, we’re not big fans of things that can’t be undone. A lot of times there’s ways to plan for these things in such a manner as there is no do over button. You cross the line and it’s done. Whereas a lot of the better, I consider the better estate planning, there’s always a way to undo things or go backwards or adapt, because as you said, the rules keep changing. And I’d say there’s been a greater propensity for that in recent years, and I’m sure post COVID there will be a greater propensity for tax law change as well given the deficits we’re going to see, what we’re seeing.
Jason Pereira: But I like to say, I tell people all the time, “Imagine you’re playing a board game and every time you pass go, that the rules change on you.” Well, that’s what budget day is for me. Budget day is, “Okay, what are the new rules of the game? What do I have to try to intentionally forget so that I don’t end up quoting it accidentally?” And, “Here’s the new rules.” And then, “What are they going to walk back before they’ve actually [inaudible 00:26:48].” It can be fun and frustrating all at the same time.
Harris Jones: So, although, I’m going to say once you’ve been around for a while … At the end of the Second World War, we were in substantially greater, in a proportion basis, worse financial position than we are today, or that we likely will be at the end of COVID. And yeah, it took 20 years to get out of it, and we went through one of the most massive expansions in Canadian history. So my view is, am I worried about them going after? Yeah, but maybe they’ll use the opportunity to clean up the Income Tax Act like we did in 1972, cleaned up a lot of problems. Now we’ve got the Swiss cheese effect that’s occurred ever since, and maybe they’ll clean that up and make it, I’d like to think, more fair. And some of the things we’ve struggled with recently, like the tax on specified income, and before that, which deals with primarily dividends, we had to think about wages. They need to be related, that was a big thing.
Harris Jones: So those are actually rules of fairness to a large extent. And even though they don’t always apply in a way that makes them fair, but that was a goal of them, was the concept of fairness. So again, it’s knowing what the rules are and then working with them and then saying, “Okay, I have a need to adjust my affairs to deal with what these rules say. And no, I can’t be so cavalier as I once was.” So to some extent maybe it’ll help us. Maybe it’ll help with bringing people in out of the cold, because they’ve got to plan for these rules, they’ve got to think ahead.
Harris Jones: And you’re right, even though plans are made, they’re made to be changed … We actually think about, how would I change this if I had to? Could I backtrack and take another direction? And life insurance has been a big part of my life for a while. What happens if you own the life insurance in this company and now you want to sell it? Well, it’s a bit of a problem. So now we need to come up with a strategy, how we’re going to deal with this. For some of us it’s a simple strategy, which is I’m going to drop all the operations out of this company and only keep the life insurance in it, and we’ll sell the new company which has the existing operations. A simple move for the most part. Yes, there’s a fair amount of tax planning, but it’s actually quite simple compared to the alternative.
Jason Pereira: It’s interesting, because I mean … And that’s a perfect example of a tail wagging the dog on that. One would think, “Okay, I want to sell the company, but then there’s this insurance policy. Because of this insurance policy, I’ve got to reorganize the entire company.” These are the artifacts of the tax code that there should be a better way, there should be an easier way to create this fairness, but unfortunately, it’s not … I mean, I can just picture the number of business owners [inaudible 00:29:13] that said, “Okay, so this is how we’re going to fix this.” And they’re like, “You want me to reorganize my entire company, set up a new corp, transfer everything, to do all this stuff so I can maintain this insurance policy?” And then the answer is “Yes,” and, “Here’s why you would do it.” And they’re just like, “This seems backwards.”
Jason Pereira: I just picture every … It’s just an insurance policy. This should not be the primary reason for it, but this is how the tax code works. You may not like it, but these are the realities. And accepting them and being aware of them and planning around them and understand that we have to modify as plans change, it’s the only solution quite honestly.
Harris Jones: Well, the other comment I would make is nobody ever bothered to revisit it or have a discussion until we were already in the throws of selling the company. And so we want to keep the company. What’s valuable is the name of the company, because we’re a retail company and it’s got a name. And that’s what the new owner wants to buy, really, is the name. And they have to pay for the inventory, but that’s going to be resold, that’s a receivable that should turn over in a year. But it’s the ongoing name that’s really important. And that’s where the life insurance is, is in this name. So, the original agent that put it in play was probably only so happy to sell the product and really didn’t understand the ultimate tax issues that might come from … This wasn’t a numbered company, this was a company with a name. And if it was a numbered company and it had a name ‘operating as’, now all of a sudden I can sell that ‘operating as’, and I keep the company and … Anyhow, you get the point.
Jason Pereira: Yeah, life insurance [00:30:33].
Jason Pereira: It’s a big issue, unfortunately.
Harris Jones: And yet the rules say, we end up with taxable benefits if we’re having beneficiaries separate from the company that owns it. So, it doesn’t matter how you do it, you’re going to have issues. But the challenge is, with a little planning, we can actually make some of those issues go away.
Jason Pereira: So Harris, thank you very much for the time and conversation. I think originally I framed this as estate planning disasters. I think it’s better titled avoiding estate planning disasters, because that’s really what we talked about. So, I’ve retitled the entire episode. Before we go, any last words of wisdom and where can people find you?
Harris Jones: Well, the last words of wisdom are, “Come in out of the cold at least and talk about it. Whether you move ahead or not, it’s another story.” You can reach me at firstname.lastname@example.org, and there’ll soon be a website up. I’m hoping before the end of November. I was hoping for before the end of October, but these things go through a lot of testing before they end up, at least that’s what I’m told. So, we know the planning routine and we get clients say, “How come the plan’s not ready?” Well, sometimes things change as we move out. So that’s probably the easiest way of reaching me. I could give you my phone number, you can reach me there too, 416-629-4303. And all of that works. Or they can go through you, Jason. I’m sure you …
Jason Pereira: They could. [inaudible 00:31:47] email, I’m happy to [inaudible 00:31:48]. Excellent.
Harris Jones: Thank you. Thank you so much.
Jason Pereira: Thank you for taking the time.
Jason Pereira: So that was my interview with Harris Jones. I hope you enjoyed that and that the message as it always, always, always does come ringing through on this podcast, which is get the right advice and help. It’s complex and convoluted enough for the average Canadian, let alone a business owner where things just get far more complex and convoluted and the stakes are higher. So as always, if you enjoyed this podcast, please leave a review on iTunes, Stitcher, or whatever is your podcast. Till next time, take care.
Producer: This podcast was brought to you by Woodgate Financial, an award-winning financial planning firm catering to high-net-worth individuals, business owners and their families. To learn more, go to woodgate.com. You can subscribe to this podcast on Apple Podcasts, Stitcher, Google Play, and Spotify, or find more episodes at jasonpereira.ca. You can even ask Siri, Alexa or Google Home to subscribe for you.
The Advocis Financial Advice For All website is a great place to start. Helpful topics include Planning Basics, Choosing a Financial Advisor, Questions to Ask & Insurance.
Financial Literacy Resources for Small Businesses from CPA Canada
Financial Tools & Calculators for Canadians
Mortgage Qualifier tool from Financial Consumer Agency of Canada
Mortgage Affordability Calculator from Canada Mortgage and Housing Corporation
HarrisJones Advisory can help you use the information on these websites to your best advantage.