SPEAKER_02 0:00

The government can't produce anything. Everything they have is through confiscation, which is taxation. And they will come up with all sorts of gimmicks and tricks to make an efficient job at confiscating your wealth away and your family's future because they just don't care. So the only problems you have are the ones you haven't seen yet. I want you to imagine something like this: two parents working hard for their whole lives, saving, building, providing, and then tragedy strikes. Both parents pass away unexpectedly, their kids still in shock from losing mom and dad, and then another blowlands. A letter from CRA. And what's inside of that letter? A tax bill. For how much? $660,000. That is right. So this family, both parents are gone, and now the CRA just became their biggest heir. This is a true story, guys. And it's not as rare as you might think. Today we're going to be talking about how this happened and why it could happen to almost every Canadian family without proper planning, and what you can do now to make sure it doesn't happen to your family.

SPEAKER_00 1:35

So there's this family in Ontario, and they've been in the news, and primarily the sister, the daughter, and the sister and her brother were that were supposed to be the heirs. And then the story is primarily about the sister. So they lost their parents within 11 months. They didn't actually pass at the same time, but they passed away in the same year, which is the key here. So mother passed away in January at 62, very young age, and the father died suddenly in December of the same year at age 63. So they're both middle class Canadians. Mom was a nurse, dad was in business. They saved diligently, invested in their RSPs, and bought a little cottage back in 1998. They worked their whole lives for their future and for their family's future. And they wanted a place for their family to gather, to rest, and eventually they're going to pass it down to the kids. But after their deaths, the family got this letter. First they got a call and then they got a letter from Canada Revenue Agency, CRA. And they were informed that they had a tax bill for $669,126. Now, how is this even possible? Because both parents died in the same year, their RRSPs, their registered retirement savings plans, which was about $715,000 in total, were suddenly treated as if they had been cashed out. So in uh government CRA terms, this is called a deemed disposition. So their assets were deemed to have been sold on the day that they passed away. Now, with RSPs, you have what's called disposal rollover. So when the mother passed away, her RSPs rolled over to dad. But then when dad passed away, all the RSPs were considered sold on the day that he passed away. Because RSPs are a tax deferral program, they are not a tax savings program. So now the bill was due. CRA wanted their money, and the tax rate because of because of the huge tax uh revenue in that year was about 50%. Now think about that. You want to build wealth for your family, you work your whole life, you save and s and scrimp and save and work really hard and put money away, and you can't use the money because it has to stay there, or else it won't grow if you don't keep it there. And then when you know it comes time that we actually want to use the money and then give it to your family, well now half of it's gone. In this case, more than half. Because on top of that, what the government wanted from that RSP is there was capital gains on the cottage. So even though five years previous to their passing, the parents had now had sold their home and moved to the cottage, and the cottage was now their primary residence. Even though the cottage was their primary residence for the last five years, CRA still wanted capital gains from 1998 to the time that they made it their principal residence. So the combination of the capital gains on the cottage and the 50% tax rate on the RSPs created a tax bill of $669,000. Well, the RSP total was $715, so the kids now had to take cash in all those RSPs and take almost all of it and pay the tax bill. And they did that so that they could actually keep the cottage. So this might sound crazy, and it is crazy, but it's true. And this is how the system works. When you have a registered plan, the government is your biggest heir. CRA now becomes your tax partner, your business partner. So you put in all the money, you take all the risk, you decide when you want to cash in. Now, whether you're alive or not, it doesn't matter. That money's going to be cashed out. And when it is, it's fully taxable. And at that point in time, CRI is going to tell you how much of that is theirs. Because not only are we deferring the tax, the payment, we're also deferring the tax calculation. So what is that calculation going to look like in the future? Well, we don't really know. But is it going to be better for us or is it going to get worse for us over time? I'll let you answer that. So now these poor kids, I mean they're adults, but they're still the kids of these of these pat you know the parents that have passed away. So not only they lost their parents and they're dealing with that grief, they've now lost a future that their parents worked so hard to build. Now, this story has made national headlines, and there's a reason why it made national headlines. It's shocking, but it's also a mirror because the same thing can happen to you. If we don't plan ahead properly, the same thing can happen to us. So that's a little bit of the background. That's the story, and that's what actually happened to this family. And it's important for us to understand what happened and why it happened, and then we have to figure out how we can prevent it in our families.

SPEAKER_02 7:15

Now, I want us to think for a bit about the emotional aspect of this, because you have you have explained, you know, the the technical aspects and how that happened and how something like this happens. But what about the emotional aspects, you know, and what was the reaction of this daughter after losing both parents? Now she has to deal with something like this. I mean, if you stop and think about that for a minute, just you know, I can't just imagine how awful that is. And and she made a statement, actually, that that I found online. She said, it makes me angry to my core. She also said, This is ridiculous, and the biggest problem is there is nobody to talk to. I have nobody to say, hi, I'm an orphan. I have nobody to support me, and the government has taken every cent they earned. Meaning the parents. She said, I didn't expect to be a rich kid or anything, but at the very least, I thought we could maintain their property, which they worked forever to have. My parents were not Elon Musk or anyone like that. I am still young, and this is not income, she said. It is an estate. And she also mentioned how her brother received $50,000 in life insurance following her parents' death. But a lot of that went to the upkeep of the cottage and the funeral expenses. So there is not only a financial but an emotional hit that she had to go through. All because following the cookie-cutter traditional financial advice of just put all you can into RRSP. And let me just say that the middle class just buys that as traditional common wisdom out there. Just put as much money as you can into the RRSP. But hardly anyone talks about this kind of stuff. And uh that's why I think we have such an important uh point to make here. Now, the other thing I want to bring to the table is the RSP. Can we think of that as an asset that you own, or is that also owned by the government? Because like you are basically signing a contract with the government saying, hey, I'm going to work on this money, we're gonna make it grow, and you're not gonna have to deal with all the stress, all the financial stress involving making this money grow. You don't have to deal through the market ups and downs. You are just going to show up and uh you're gonna get your cut. And that's what happens when we defer taxes. When we defer paying taxes for tomorrow, we're making a bet, basically. And that you know, we are told over and over again, oh, well, you know, you're gonna be on a lower income bracket, you're gonna have a lower your lower marginal tax rate, you're gonna pay less taxes, you so you can have your money grow. And it sounds great on paper, but stuff like this should make you think is that actually the way to go? Is that the smart way to go?

SPEAKER_00 10:20

Yeah, I mean, you know, as soon as you have that word registered, so registered means that it is a government program, they control the program, they make the rules, they change the rules whenever they decide to. So you're you're automatically given away control. You are not in control, you are giving your money to someone else, letting them manage it, and the government is your silent business partner. Now, no one tells you that, right? Why do people put their money in RSPs? Because they get a tax break in the year that they put the money in, the tax deduction. So the idea is that you're gonna save taxes. Well, you're not saving the tax, you're deferring the tax. You are you are you are saying when I withdraw this money in the future, I will then pay tax on the full amount. It's taxed as income. And if it's and if and if the income is high enough, now you're gonna be taxed at the highest rates. So that's why the tax rate was up pretty much equivalent to 50%. So if you think about growing your nest egg, and the only way that nest egg is gonna grow is if you leave it alone. You cannot interrupt the growth or else it's not gonna grow. So you're locking it away in jail, you're putting your money in prison, you're hoping that it grows, assuming it grows over time, and then when it comes time that you're gonna actually need it and want to use it for retirement or whatever purpose you choose. Well, the government says, Well, wait a minute. First of all, you're gonna pay a withholding tax, and then when you do your taxes, we're gonna tell you how much more of that money is ours, and you have no control, you have no say, you just have to accept whatever they tell you.

SPEAKER_02 11:59

You know, George, and I will argue that yeah, I will argue that when you do that, you are given a small incentive to then allow the government to gain legal control over a much larger pool of future capital. And I will I will go as far as to say that they know exactly what they're doing. Oh, absolutely, they know exactly what they're doing because of course if they can trick everybody not to pay the taxes today, have that money grow, it's going to be it's it's a handsome source of income for the government in the future, and you don't you don't even realize it. Yeah, and so like and and is that actually your capital? Because this is all we do, like we bring this information to people so that you can understand the importance of capital and how we control it, how we manage, how we create it. Like a pool of money that's not under your control, and someone else has the first legal right to it, in this case, the government. I'm sorry, but this is not this is not capital, you know, and you are not able to leverage it properly and and they have the rights. So yeah.

SPEAKER_00 13:15

No. We've talked in our past episodes about the advantages and that you know the the reason why we want to protect our capital and use it. And these are all the attributes that we want with the vehicle that we use to grow and protect our capital. Well, the registered retirement savings plan has very few of those attributes, if any. The biggest advantage, and this is where they get people, it's that immediate gratification, if you will. I'm gonna get some money back this year. I'm gonna save some tax this year. Now remember, this year you're putting in the seed or the seeds, hoping that those seeds grow into and flourish and become a harvest. Well, do you want to tax the seed or do you want to tax the harvest? Do you want to pay tax on the seed? Do you want to pay tax on the harvest? The government is counting on you to grow your your your seeds into a big harvest, and then they're gonna take half of it for themselves. People don't think about that. So they they look at them, they look at their balance on their on their statement, and they think, oh, I have this money I'm saving for my future, and it's gonna grow because my advisor told me it's gonna grow at 8% a year, 5% a year, 10% a year, which it's not gonna do. It's gonna go up, it's gonna go down. It's gonna go up, it's gonna go down. Every time there's a down, that's a problem. Anyways, over time it it grows, hopefully. And hopefully, when you need it is not when the market is down.

unknown 14:43

Right?

SPEAKER_02 14:44

How do you time that market, George?

SPEAKER_00 14:46

How do you do that? Well, you don't. You don't, you don't. That's the problem, right? That is the problem. So, what happens when the money that you think is there is not really there? What happens then?

SPEAKER_02 14:57

And now and now and now you're introducing an awful amount of stress to your retirement, to your passive income time. Do you really want to do that? Think about that. You now you're 65, and and now you know you say, you know what, I'm done with this job. I'm done. I don't want to do this anymore. I want to retire. And then boom, market correction, the business cycle hits, and all of a sudden you're minus 25 on your retirement, and you don't even know when this is going to get better. Do you want to be in that position? Like, because I don't want to be in that position, and I want to, you know, everybody listening, think about that. Do you want to be in that position? Do you do you want to be in a position where now you have to go to work even though you are sick and tired of that? And let's not even talk about, let's not even talk about um the the opportunities and the options that you get when you control capital to say switch careers, for example. How amazing that is that if you're sick and tired of whatever you're doing, if you have control over capital, you can decide to do something else. But there's people right now with more than half a million dollars on their RRSPs and they're hating their life. Why is that? And why are we allowing that to be the norm? And now I'll also want to add, what is the incentive? What is the financial incentive for bankers, mutual fund managers, financial advisors that have assets under management? What is their financial incentive for you to leave that money there? And what everything, right? But they only get paid if the money stays. Exactly. They only get paid as long as the money stays. And let me just add something else. Even if the market is down, they still get paid. So they're not they're not taking a break. When you need a break, they are not taking a break for you. They're not crying when you're crying and rejoicing when you're rejoicing, they're rejoicing all the time.

SPEAKER_00 16:57

Well, the management fees get paid no matter what, like you're saying, and the government's gonna get their cut no matter what. And that that's that's how it works. But that's not explained up front normally. The other thing, you know, you talk about emotion, the emotion of it all. So, so I mean, it just gets me going, just thinking about it, this poor family and what they went through, and how common this is. So you work your whole life, you do, you do the right thing, right? You do all the things that you're told to do. So they've saved in their RSPs, they bought a second property, they invested in a cottage, they're they're creating a legacy, they're creating these wonderful things for their family, and they're doing it the way they were told to do it. And what happens in the end? In the end, they the pretty much the whole nest egg is gone, and then they have the cottage remains, which is good, but the whole nest egg is gone. And this is a lifetime worth of savings, is gone. And the problem again is what you don't see. The pro the biggest problems that we have are the ones we don't see, don't see coming, and we don't plan for. So the point of this episode is to tell people, show people, explain to people, educate that this is out there, this is gonna happen, this is how it works. So you need to start planning today so that you can avoid or minimize what the government's gonna take. And there are ways to do that. We talk about capital and the proper ways to grow and protect and keep your capital to leverage your capital. So there are ways to do this better so that the government's not taking the biggest chunk of everything that you've tried to create in your whole lifetime. I mean, it's just it's it's it it just makes you angry. Like I feel for these people. Um, because they did all the right things they they were told to do. It's just so infuriating.

SPEAKER_02 18:55

Now, George, let's uh do a quick uh mental exercise for the sake of it. And uh not everything is doom and gloom. We want to also leave you with some uh actional tips. Yeah, what's the Austrian solution? What's the what's the capital build-in solution here? Because I'm here thinking, you know, if if these people had a properly structured participating whole life policy with close to $700,000 in cash value built for 30 years, can we guesstimate how much the death benefit would have been for such a policy? Like I'm I'm thinking a couple million dollars.

SPEAKER_00 19:39

Multiple millions, yeah, probably more, yeah, multiple millions of dollars, which would be tax-free money that those kids would have gotten. Tax-free.

SPEAKER_02 19:49

What say that again?

SPEAKER_00 19:52

What?

SPEAKER_02 19:54

Tax free. So you're saying that if this family would have, instead of storing their hard-earned money and deferring taxation, if they would have paid the taxes up front and then and just store that wealth into a properly structured insurance policy, they could have had possibly multiple millions of dollars inherited tax-free. What a different story that story this would have been.

SPEAKER_00 20:23

Yeah, absolutely. Yeah, and it's not like you have to lock that money away and put it in prison either. So, you know, if the parents had done it the way that we teach people, they would have been, they would have had that money to access in retirement or earlier or later, their choice, right? Yeah, yeah, they could access that money very tax-advantage way, yeah, and have the tax-free death benefit that goes to their kids, right? And avoid probate. So anytime that there's an estate, it has to go through probate, which adds cost, it adds time, then there's lawyers get involved, accountants probably get involved, there are probate fees that go to the government.

SPEAKER_02 21:08

George, and correct me if I'm wrong, but this time insurance policy. This film is in Ontario avoids all that. And now probate in Ontario, it's it's a bit more than other other provinces. Am I am I right there?

SPEAKER_00 21:22

It is, it's a it's a percentage of the of the overall estate. That's right.

SPEAKER_02 21:25

Yeah, so we're not talking peanuts either here in probate.

SPEAKER_00 21:30

So no, exactly. So anything that's an insurance product, you can avoid probate. It goes directly to the beneficiaries and it's private, um, and avoids probate. Because and it's private.

SPEAKER_02 21:42

Probate it probate is a public proceeding, so everybody knows how much money you left. But if you can bypass probate, and we have and we have two ways of of doing that ourselves, is you can usually do that with a policy like that, or you can also use segregated funds to do something like that. But they would both bypass probate, and that it would have been a very different situation. You know, and I want to say this kind of advice is open to everybody. Uh, you don't have to have millions of dollars to have access to this advice. This is why we are doing what we're doing. We are trying to democratize this kind of advice and information. So you get you get you get all this information and take action from yourself and start thinking how you can make this better. And I another thing that just crossed my mind is that, you know, and this is this is speculation, but but hear me out here. Like they died young, this couple, okay. Yeah, so I I don't I don't know them, but it seems odd to me that both died around that age. Maybe they were overworked, maybe there were some stress factors. Because I'm thinking for you to to be able to, and there were there were blue-collar workers also. So for you to be able to amass that kind of money, I think you were working hard. Now, just imagine if we would amass that kind of money in the um Austrian IBC fashion, meaning that you have ready access to capital all the time. Just like Nelson said, opportunity will chase you down. So, what could have been the opportunities that this family could have seen throughout their lives if they had ready access to that money? Maybe a family business, maybe travel more, maybe different sources of income that could have made their lives a bit easier. I don't know. I'm just speculating. I'm just saying that to me, the IBC way is a more it's a most stress-free way of living. And Nelson used to say that. And I I wholeheartedly agree with that.

SPEAKER_00 23:42

Yeah. Because it comes with guarantees, right? So it's a guaranteed contract, so it takes a lot of the stress and worry away, right? Yeah, yeah. You know, George, you're not at the whim of the government, you're not at the whim of the markets.

SPEAKER_02 24:01

Yes, exactly. Now, George, I wanted to ask you for the that's this probably a question that somebody in the audience has. And they are, you know, they have a couple hundred grand in RRSBs, and they're thinking, hey, you know, I want to change course here. Should I just withdraw everything from my RRSP right away and figure it out? Like this sounds awful, you know. How would you recommend that somebody, and of course, uh they also have to to consult with their accountant, and this is by no means financial advice right here, but in in that in that scenario, you know, how would you in in let's say this is George, this is George Frorth. Uh, this has happened to you. How would you proceed, George? What would you do if you were in a position where you wanted to move money away from those RISPs?

SPEAKER_00 24:52

That's a great question. And I have this conversation with clients all the time. Um, it depends, of course. So it really depends on your situation. What is the best option for you? And that's something that we have to figure out together, um, along with your accountant or or whoever you choose. You have to you have to consider the tax consequence, right? So if you withdraw the full lump sum, you're gonna have to pay tax on that full amount. So that is probably not the best idea. But you could potentially, and again, it depends, if it makes sense for you and your family, you could slowly melt down the RSP, pay the tax, smaller portions, smaller percentages, and then put that money to work somewhere else. So you're just what you're doing is you're slowly taking it for one place and putting it into another place.

SPEAKER_01 25:44

You do it slowly.

SPEAKER_00 25:46

There's pros and cons to everything.

SPEAKER_01 25:47

Do you do it slowly so that you don't go to the next tax bracket?

SPEAKER_00 25:52

Well, that's one aspect for sure. You you don't want to go into a higher tax bracket. That's absolutely true. Um that may or may not be a factor, but it certainly could be. It's one to consider. Um but you just really have to factor in, you know, the tax consequence of taking money out of your RSP, and does it make sense?

SPEAKER_02 26:12

Yeah, because all the money that you withdraw all the money you withdraw from the RSP, it goes straight into income and it increases your taxable income that year. You will get a T4 RSP in that year, correct. For that re for that year, yeah.

SPEAKER_00 26:26

Correct. Yeah. So you want to spread it out, and and you know, there's there's strategies involved, and you know, ways to minimize because you always want to minimize tax. You don't necessarily want to avoid it, but you want to minimize it, absolutely. And there's ways to do that for sure.

SPEAKER_02 26:40

Okay, good to know. All right, anything else we would like to to say before uh closing out closing this episode.

SPEAKER_00 26:52

I I would say to end it is crucial that people fully understand what they're doing and why they're doing it, and don't just accept typical planning and typical advice. Make sure that you understand all the factors, short term and long term, and see if that makes sense for you and your family. You have to determine what the best option is for you and your family. But the only way to do that is if you have all the facts. And the problem is, most people don't have all the facts, they're only given portions of the information, portions that suit other individuals, not necessarily you. So that would be my big takeaway is make sure you understand all aspects of what you're doing and why you're doing it. And does it make sense for you?

SPEAKER_02 27:38

I love that. And you know, to pick it back into that, just because everybody's doing it, it doesn't mean it's right. And I would say uh will not say anything else. That's all. That's all I have to say.

SPEAKER_00 27:52

Well, I'll say one more thing, and this is what Nelson said all the time. If the government creates a program and makes all the rules, that is very much like the fox guarding the hen house. So be wary when the government creates a program in your best interests. Just think about that. Do you think they're doing it for you, or are they doing it for them?

SPEAKER_02 28:14

Oh George, and I'm um I said I was not gonna say something else, but um the government can't produce anything. Everything they have is through confiscation, which is taxation, and they will come up with all sorts of gimmicks and tricks to make an efficient job at confiscating your wealth away and your family's future because they just don't care.

SPEAKER_00 28:50

Absolutely.

SPEAKER_02 28:51

Thank you everybody, and uh see you guys on the next episode. Goodbye. Thanks everyone, have a good one. This episode of the Sovereign Capitalist Podcast was provided with the understanding that the staff and contributors of Asteris Capital Advisors are not herein engaged in rendering tax, legal, or financial advice. For such matters, please consult your own tax legal or financial advisor.