The following scenarios depict some of the typical questions that we hear from clients. We have
provided some general answers; however, they should not be construed as absolutes and a
professional financial advisor should be consulted prior to undertaking any action.
After reviewing this section, should you identify an area in your financial affairs for which you
need advice, please contact one of our advisors.
Question #1:
My wife and I are in our mid-fifties. We want to retire sooner than
later. We each have significant RRSP savings, some additional mutual
fund holdings, and my wife has a company pension. Can we retire now? We
can continue to work for about 10 more years, but we really don't want
to.
Question #2:
I am leaving a company, and I have a have a decision to make regarding
my defined benefit pension plan. Apparently, I can leave the pension
money in the plan, or I can get it transferred to a locked-in RRSP. Any
advice on which option to choose?
Question #3:
My spouse makes considerably less money than I do. I've read some
literature on something called a spousal RRSP. What is it, and what are
the benefits?
Question #4:
I have RRSP contribution room in the current year; however, I do not
have the cash available to make a contribution. I understand that the
contribution does not necessarily have to be in cash, and I do have some
investments in a non-registered account. Is there anything I should be
aware of before making a transfer of shares into my RRSP?
Question #5:
I am employed by a publicly traded company, which awards stock options
as part of my yearly compensation. Is it true that my options should
always be held until the end of the expiration period?
Question #6:
The cost of education has increased significantly over the past several
years. One estimate I heard said it could cost $125,000 to complete a
four-year degree. My wife and I have two children. What is the best way for us
to assist our children in obtaining their education?
Question #7:
I have a rather substantial asset base that I do not foresee consuming
prior to my passing away. I want to leave the assets to my children and
provide them with any applicable tax savings possible. Are there any
strategies that I can implement that will provide them with lasting tax
benefits?
Question #8:
Why should I have a Will?
Question #9:
I often hear that I should be implementing a financial
plan. Isn't financial planning just another name for investing?
Question #10:
Asset Allocation is constantly being written and talked about by
financial pundits. What does it mean and is it appropriate for me?
Question #11:
My spouse stays at home with our kids and is not earning an income. Can
I simply give him/her money to purchase bonds and stocks and have gains,
losses, interest or dividends taxed in her hands?
Question #12:
Is it true that one should always maximize their RRSP contribution?
Question #13:
I would like to engage in gifting to a few charities, currently and in
my estate planning. I understand that there are various ways to
structure charitable gifting programs. What are some ways to do this?
Question #14:
Should I make RRSP contributions or pay down the mortgage?
Question #15:
I am about to retire and I have a traditional defined benefit pension
plan - what should I do? I want to maximize the pension I am entitled to
receive and ensure my spouse is taken care of if I die first.
Question #1:
My wife and I are in our mid-fifties. We want to retire sooner than
later. We each have significant RRSP savings, some additional mutual
fund holdings, and my wife has a company pension. Can we retire now? We
can continue to work for about 10 more years, but we really don't want
to.
Answer #1:
Retirement is a significant and often scary step for many people. We
can assist you to determine whether your level of accumulated retirement
assets is sufficient to enable you to retire now.
First, we would need to make a realistic determination of the level of
income per year you require in retirement to maintain your desired
standard of living. Using various conservative assumptions, such as
expected return on investment, inflation, and your life expectancies, we
use mathematical analysis to estimate the total amount of assets you
need to fund your retirement years.
We would then compare the assets you require to the assets you have
accumulated (including your RRSPs, your wife's pension, and other
assets). This comparison should assist you to make an informed decision
about whether you have enough assets to retire.
... back to top
Question #2:
I am leaving a company, and I have a have a decision to make regarding
my defined benefit pension plan. Apparently, I can leave the pension
money in the plan, or I can get it transferred to a locked-in RRSP. Any
advice on which option to choose?
Answer #2:
There are pros and cons to selecting either option. If you leave the
money with the pension administrator, for example, you do not have to
look after it, and there is a relative degree of certainty (from pension
legislation that governs pension plans) that the funds will be there for
you in retirement. On the other hand, moving the funds to a locked-in
RRSP means that you are responsible for making the investment decisions
- this is a pro or a con, depending on your comfort level with the
responsibility of managing the funds.
There are many other pros and cons, and the decision you take may depend
upon your age, or other personal circumstances, and also upon the amount
of money involved. There are also survivorship issues, and
specific pension plan details to consider (for example, is the pension
indexed - automatically adjusted for increases in the cost of living).
While the above is by no means a comprehensive list of the factors to
consider when making this decision, you should now realize there are
numerous points to consider. We can assist you to sort through the
details, to determine which option is most appropriate to your
situation.
... back to top
Question #3:
My spouse makes considerably less money than I do. I've read some
literature on something called a spousal RRSP. What is it, and what are
the benefits?
Answer #3:
A spousal RRSP is a plan that allows one spouse to make the
contributions, but the other spouse owns the plan. This is one
opportunity to implement income splitting between spouses. Instead of
the higher income spouse contributing to their own RRSP and paying tax
at a higher rate when they withdraw the amount, they could instead
contribute into a spousal RRSP (the contributor still retains the
deduction for income tax purposes). This allows the transfer of assets
to one's spouse and avoids the income attribution rules that apply to
straight transfers of assets between spouses, provided the funds remain
in the spousal account for the minimum required time. After this period
of time the funds can then be withdrawn by the spouse and taxed in
his/her hands.
... back to top
Question #4:
I have RRSP contribution room in the current year; however, I do not
have the cash available to make a contribution. I understand that the
contribution does not necessarily have to be in cash, and I do have some
investments in a non-registered account. Is there anything I should be
aware of before making a transfer of shares into my RRSP?
Answer #4:
Yes there is. It is important to know what the adjusted cost base is for
the shares you are transferring. The reason for this is that when you
transfer shares to your RRSP they have been disposed of for tax purposes
at their fair market value. This "sale to the RRSP" may result in a gain
for tax purposes. You would have to report the gain on your tax return.
If on the other hand, the shares were "sold" at a loss to your RRSP,
Canada Customs and Revenue Agency does not allow you to use the loss.
... back to top
Question #5:
I am employed by a publicly traded company, which awards stock options
as part of my yearly compensation. Is it true that my options should
always be held until the end of the expiration period?
Answer #5:
In many cases, delaying their exercise until expiration is not the most
appropriate strategy. In fact, it is important to develop an option
strategy regarding when to hold, trigger or dispose. In many cases, a
systematic realization strategy is appropriate. There have been recent
tax changes (Year 2000) that have resulted in a higher degree of
complication. These tax and investment considerations all have to be
inter-related and incorporated into the overall financial plan.
... back to top
Question #6:
The cost of education has increased significantly over the past several
years. One estimate I heard said it could cost $125,000 to complete a
four-year degree. My wife and I have two children. What is the best way for us
to assist our children in obtaining their education?
Answer #6:
There are a number of ways to pay for your children's education: you can
save now, pay for it during their education (from current income) or
after (borrowing). One method to save for the cost of education is
through contributions to a Registered Education Savings Plan. The RESP
is a tax efficient plan to which Canada Customs and Revenue Agency
allows contributions to be made and subsequent growth to compound on a
tax-deferred basis. The growth of the plan is eventually taxed in the
name of the beneficiary, usually at the lowest marginal tax rate. Also,
the federal government now gives 20% of the first $2,000 (max. $400)
contributed each year in the form of the Canada Education Savings Grant
for beneficiaries under the age of 17. These plans need not be set up
for only children as adults can use them for continuing education.
... back to top
Question #7:
I have a rather substantial asset base that I do not foresee consuming
prior to my passing away. I want to leave the assets to my children and
provide them with any applicable tax savings possible. Are there any
strategies that I can implement that will provide them with lasting tax
benefits?
Answer #7:
One possible strategy would be to provide for a discretionary
testamentary trust in your Will. A testamentary trust is a separate
legal entity that, in this case, would hold the assets from your estate
as expressed in your Will. The testamentary trust is administered by a
trustee(s) for the benefit of the beneficiaries. These trusts offer the
following benefits:
- Tax savings for the beneficiaries as a testamentary trust is taxed as
an individual taxpayer. Funds can either be taxed in the trust's hands
at the graduated tax rates, or distributed to the beneficiary to be
taxed as their own income.
- Control over the distribution and use of assets after your passing
away.
- Potential protection of assets from creditors or marital breakdown
claims.
... back to top
Question #8:
Why should I have a Will?
Answer #8:
Here are a few good reasons why a Will is a priority:
- A Will appoints the person who will be your personal representative
to manage your affairs after you die.
- A Will appoints a guardian for minor children.
- A Will designates who will inherit your assets.
- A Will ensures that your selected beneficiaries receive your assets,
rather than have legislation decide how your estate will be divided.
- A Will should assist your estate to take advantage of potential tax
efficiencies
... back to top
Question #9:
I often hear that I should be implementing a financial plan. Isn't
financial planning just another name for investing?
Answer #9:
Financial Planning usually involves investing, but it is much more.
Financial planning involves taking a comprehensive approach to
evaluating all the various aspects of your financial situation. This
would include, but is not limited to:
- Goal Setting
- Risk analysis (including life, disability, home)
- Tax planning
- Estate planning
- Asset allocation and investment planning
- Retirement and financial independence analysis
- Cashflow and Budgeting
In many cases, the financial planning process begins by summarizing your
current situation and suggested future actions in a written financial
plan. The written plan is an important component of the process because
it provides a reference for future follow-up and implementation. Like a
business without a business plan, individuals may become lost in their
finances without a comprehensive financial plan.
... back to top
Question #10:
Asset Allocation is constantly being written and talked about by
financial pundits. What does it mean and is it appropriate for me?
Answer #10:
Simply stated, asset allocation is the process of selecting a mix of
asset classes (such as cash, fixed income, equities, real estate, etc.)
that is appropriate to each individual's situation. It is important, as
research has shown that the asset allocation decision is a significant
determining factor in providing investors with the appropriate returns
in relation to their risk tolerance and investment time horizon.
... back to top
Question #11:
My spouse stays at home with our kids and is not earning an income. Can
I simply give him/her money to purchase bonds and stocks and have gains,
losses, interest or dividends taxed in her hands?
Answer #11:
Unfortunately, introducing income splitting in the family is not as easy
as this based on the rules of the Income Tax Act. This would give rise
to something called attribution. Attribution, while a complicated area
of the Act, implies that any gains, losses, interest or dividends on the
assets transferred would "attribute" or be taxed in your hands. However,
there are some income splitting strategies available which would may be
appropriate in your situation. This is a simplified answer to a complex
area, and prior to attempting any tax strategies, a professional should
be consulted.
... back to top
Question #12:
Is it true that one should always maximize their RRSP contribution?
Answer #12:
Maximizing your RRSP contributions is a reasonable premise to proceed
upon, but there are a number of circumstances where this might not be
the case. It is possible to accumulate too much wealth in an RRSP under
certain circumstances. Also, given one's tax bracket, it may not be
appropriate to make a RRSP deduction.
... back to top
Question #13:
I would like to engage in gifting to a few charities, currently and in
my estate planning. I understand that there are various ways to
structure charitable gifting programs. What are some ways to do this?
Answer #13:
Charitable gifting can include gifting cash, capital property, such as
stocks or mutual funds, life insurance policies, and may be done through
complex structures such as a charitable remainder trust, or even through
a charitable foundation. Currently the gifting of capital property (such
as stocks or mutual funds) in a gain position provides additional income
tax advantages to the donor.
There are a number of nuances in each gifting situation that should be
considered to ensure that either you or your estate realizes the maximum
tax benefits of your charitable activities. Professional advice should
be sought prior to undertaking any complex gifting program.
... back to top
Question #14:
Should I make RRSP contributions or pay down the mortgage?
Answer #14:
This answer depends on various factors, such as your marginal income tax
rates, expected rate of return on RRSP assets, your age, the mortgage
interest rate and pay-down terms, your RRSP contribution room. Each
individual's situation would have to be reviewed and the numbers
crunched in order to present the pros and cons to each option. Of
course, often an appropriate option could be a balance between both.
... back to top
Question #15:
I am about to retire and I have a traditional defined benefit pension
plan - what should I do? I want to maximize the pension I am entitled to
receive and ensure my spouse is taken care of if I die first.
Answer #15:
You have two basic options from which to choose, both are annuities. The
first is a single life annuity (guarantee or no guarantee period) and
the second is a joint/last survivor life annuity. The crux of this issue
is the need to provide for current income versus adequately providing
for the surviving spouse.
To assess which option is appropriate to your
situation, we would prepare a financial independence (retirement)
analysis. This type of analysis uses various assumptions about such
things as inflation, life expectancy, etc. to assess whether your
current assets and pension(s) are sufficient to meet current and
survivor income requirements. The right decision can usually only be
determine in hindsight, the key is for you to understand the implication
of the choices and to make an informed decision. one must also keep in
mind that in the Province of BC, if you have a spouse, they are required
to consent to any option that is less than a joint survivorship at 60%.
