Category: Financial Planning & Wealth Management

Business owners and CEO’s have written business plans, ship Captains chart their courses on nautical maps, and Doctors have written treatment plans for their patients. What these professionals all have in common is that they have written plans of action that provide them with goals and direction to a defined outcome. Think of the similarities between a written comprehensive financial plan and a course charted on a nautical map. Both have a starting point and a destination, both have waypoints and contingencies for emergencies and both will allow for a change in course should some unforeseen circumstance or opportunity present itself. No competent, trustworthy Captain would undertake a major voyage without first having a plan. The same should be said about our own financial journey and as the Captain’s of our financial future, we should plan for our financial success in a clear and definitive written plan.

Based on a three-year study that surveyed almost 15,000 Canadians, which was conducted by the Financial Planning Standards Council, almost twice as many people with a comprehensive financial plan felt on track with their financial affairs compared to half as many who did not have a comprehensive plan. The results of this study can be found here: value-study.pdf

A written comprehensive financial plan should consist of the following:

• Goals and Objectives
• Net Worth Statement
• Tax Analysis
• Retirement Income planning
• Risk Management Analysis
• Estate Planning
• Defined Assumptions
• Cash Flow Summary
• Cash Flow Analysis
• Investment Recommendations
• Business Succession Planning (if required)

Often spouses assume that they share similar financial goals and objectives, but they never take the time to discuss it. Going through the process of drafting a comprehensive financial plan brings these issues to the forefront and gives you an opportunity to discuss them and come to a common understanding. Imagine approaching retirement, thinking that you’ll sell your home and move to a cottage up North, while your spouse is looking forward to staying in your current home and spending more time travelling South in the winter. This could pose a major obstacle, which you can deal with well in advance of the actual retirement date to ensure a positive outcome for all. Although it’s hard to imagine, many people spend more time planning their summer vacation than they do planning their financial future.

Like the Captain, who continuously reviews her position on the nautical chart, assesses the potential risks and re-plots her course accordingly, you should also review your comprehensive financial plan and assess where you are and what risks lie ahead then make the necessary adjustments in your plan to stay on track to achieve your goals and objectives.

“Having a comprehensive financial plan with the guidance of a CFP® professional can provide a road map towards greater financial and emotional well-being. We urge Canadians to take control of their finances by talking to a CFP professional about their goals and financial planning needs.”

Cary List
President & CEO, Financial Planning Standards Council

Hiring the right professional can make the difference between a successful journey and one fraught with disappointment, and sometimes disaster. A Planner who carries the CERTIFIED FINANCIAL PLANNER® (CFP) designation has achieved and maintains internationally recognized standards of knowledge, skills, abilities and ethics. Working with a CFP provides assurance that you’ve hired a qualified professional who will put your needs above their own to ensure you have a plan to achieve your goals and objectives and assist you with re-plotting your course when necessary.

Month		Helpful Tip
		Create a budget and include lump sum items such as vacations and gifts. Ensure you allocate funds to savings because there is no such thing as “extra” money. Helpful Tips to Create a Budget
		Top up RRSP for the previous year. You can make a contribution for the previous year any time during the first 60 days of the next year. If you’re turning 71 this year you’ll need to make your RRSP contribution prior to converting your RRSP to a RRIF, December 31 at the latest.
		Collect information required for your accountant to file your tax returns on time. The tax filing deadline for individuals in Canada is April 30th each year. If you file a US tax return, the deadline is April 15 and if you administer a Trust, you have until March 31 to file its return.
		If you haven’t already, start monthly contributions to match your budget goals. You can allocate monthly contributions to TFSA, RRSP, or non-registered investments based on your budget and goals. TFSA or RRSP?
		Contribute to your child’s Registered Education Savings Plan. Ensure you are receiving the maximum matching grants and bonds from the government to help build the savings for your child’s post-secondary education. You can double up your contributions if you have previous year’s unused contribution room. WITHDRAWING FROM FAMILY RESPs: Flexible Planning Possibilities Registered Education Savings Plans (RESP) Benefit Information
		Review your employee benefits and pension to ensure you are getting the most value for your money. Determine what benefits you are entitled to and ensure you are using them if needed. When it comes to matching pension or group RRSP contributions from your employer, ensure you are receiving the maximum from your employer. EMPLOYEE GIFTS AND PARKING: Updated CRA Policies Defined Benefit Pension Plans
		Review your life and disability insurance to ensure adequate coverage to protect you, your loved ones, and your lifestyle. Review your life and disability insurance to ensure adequate coverage to protect you, your loved ones, and your lifestyle. Life Insurance: Do I Really Need it?
		Review your Wills and Powers of Attorney and update if necessary. This is also a good time to review the beneficiary designations in your TFSA, RRSP’s, employee benefits & pension and your life and disability insurance to ensure they are aligned with your estate planning.
		Review your non-registered investment portfolio and identify gains and losses generated in the current year. Strategize with your accountant and investment professional to put yourself in the best position come tax time.
		Consider donating to your favourite church or charity. There are many worthwhile causes looking for your hard-earned savings. Have a plan for which organizations you would like to support. You can donate cash, investments, and perhaps even your time. Charitable Gifting
		Review your financial and estate planning and modify if necessary. This is your personal roadmap to reach the goals that you set for yourself. Hold yourself accountable to it, but also be flexible when necessary. Your financial planning should consolidate the planning you are doing in the other eleven months of the year into a single working document. Consider measuring your achievement towards your goals by updating your net worth each year. The Importance of Having a Comprehensive Financial Plan
		Ensure you have a plan to repay your debts. Set a “Debt Free” date and works towards achieving it. Keep in mind that with inflation on the rise, interest rates will be soon to follow. Managing Debt
Click here for a printable version.

John and Mary have worked hard throughout their lives to build a successful business. Each of their three children have worked in the business in different capacities over the years, but they’ve followed their own interests, which have lead them away from the family business. John’s plan was always to keep the business in the family, passing it on to one of his children when they were ready. Mary, on the other hand, wasn’t as sure about John’s plan, as she had watched her oldest brother take over her father’s business, knowing that he was never really happy about it. Mary wanted her children to follow their own passions, wherever it took them. As a result, John and Mary are contemplating selling their business as they near retirement.  Realizing that it will leave them with a very healthy sum of money, they want to leave each of their children an inheritance – but don’t want to leave themselves short either. They are also fearful of creating trust fund babies, which they’ve heard disaster stories about.

What is the Purpose?

First and foremost John and Mary need to determine what the purpose of the inheritance will be. Is it to:

• enhance their children’s lifestyle;
• protect the assets from marital breakdown or litigation;
• provide education funding for their grandchildren; or,
• perhaps the intent is to create multi-generational family wealth?

They will have to decide if they want to gift some of the money now or maximize the inheritance to their heirs after their deaths. Whatever they decide, they will need to be clear about exactly what the purpose is to ensure their inheritance plan is properly structured.

Commit to a Plan

Secondly, they need to commit to a plan. Inheritance planning requires very careful strategizing, with specialized knowledge; which is why they need to build a team of professionals to work with to achieve their goals.

• The Lawyer will draft the documents needed, such as Wills, Trusts, Powers of Attorney, etc.
• The Accountant will ensure the plan is structured in the most tax-effective manner possible and with in-depth knowledge of their business, will ensure a smooth and effective transition of their business as they convert their lifelong working capital into cash.
• A Certified Financial Planner will help John and Mary create a comprehensive financial plan to determine how much of the proceeds of the business will be necessary to fund their lifestyle during their retirement and how much can be immediately allocated to the inheritance plan.

Inheritance planning is not so rigid that it’s carved in stone but it can be costly in the future if it’s not structured well in the beginning.

Take a Disciplined Approach

Taking a disciplined approach will help John and Mary avoid the many nightmares that sometimes come with managing family wealth. We’ve all heard the stories of elder abuse as one child exerts undue influence on the parents, convincing them to pay their debts, buy them a car or provide money for a lifestyle they’ve not earned, all at the expense of the parents and other inheritors. Having a disciplined inheritance strategy in place can protect John and Mary’s wealth to ensure that it’s used for the purposes that they initially outlined in a fair and structured manner.

Practice Open and Honest Communication

The most important issue in inheritance planning is having open and honest communication between those who are passing the wealth on and those who are to receive it. In this case, John and Mary should involve their three children in the process so they understand the goals they have for their wealth, what they are committing to and how their wealth will be distributed. This open communication provides a platform for the children to ask questions and better understand their parents’ wishes to ensure that everyone is on the same page or at least knows what to expect. Having an open communication strategy can have a tremendous impact on maintaining family harmony and minimizing discourse between the inheritors.

Once John and Mary have created their inheritance plan and communicated their intentions to their children, they can get on with enjoying their freedom in retirement. They can spend their days enjoying the fruits of their many years of labour.  Instead of worrying if they are spending their children’s inheritance they can rest assured that they have a plan in place to achieve their retirement goals and pass on their wealth in a strategic and meaningful way.

 

Speaker Profiles

Recall your last vacation? How much time did you spend planning where you were going, how were you going to get there, and what activities you would enjoy once you arrived? Sadly, most people spend more time vacation planning than they do financial planning.

A financial plan is the roadmap for your future and the strategy for your family’s security. It is important for every adult, but it’s particularly important if you have dependants, and even more so if one or more of those dependants are disabled. When you are planning for a disabled dependant, you need to factor in the additional needs and time the financial resources must last for a disabled dependant, along with the healthcare needs and associated costs, managing support needs, dealing with government agencies, and a myriad of other concerns.

Most financial plans will recommend using Registered Retirement Savings Plans, Tax-Free Savings Accounts, Insurance, and Wills along with Powers of Attorney to help achieve goals and protect lifestyle.

However, those requiring Special Needs Planning will likely benefit from having a Life Plan Guide, a special trust referred to as a Henson Trust, Registered Disability Savings Plans, Ontario Disability Support Planning, along with other special investment and insurance options to protect and support loved ones. In addition to the financial planning needs, there are also long-term care planning needs.

• Who will look after my child when I die or if I become incapacitated?
• Where will they live?
• Who will take them to their doctor and therapy appointments?
• How will they pay their bills?
• My whole life has been about looking after my child, but I have other goals that I would like to achieve; how can I do both?

These questions can be overwhelming. Consider building a network of people to provide support for your disabled dependant while you are still healthy and involved is critical. Disabled dependants often rely heavily on their care providers. If their sole care provider is Mom or Dad and they are suddenly out of the picture, it can be devastating for them. Parents should consider aligning themselves with professionals who have experience in dealing with special needs planning, such as Accountants, Lawyers, Certified Financial Planners, Trust Officers, Counsellors, Support Workers, Caregivers and Doctors, as well as Associations, Support Groups and other related networks.

The best advice for families with special needs dependants is to choose a qualified, trusted team of professionals. The financial planning process is similar regardless of whether you have disabled dependants or not.

Develop and implement a comprehensive financial plan and long-term care strategy without delay. Contact us today, we can help!

This is a question I’ve been asked hundreds of times over the years and the answer is: it depends!

Everyone’s situation is unique and the only way to really know if you need life insurance is to complete a Comprehensive Life Insurance Needs Analysis with a licensed insurance professional or a Certified Financial Planner. A proper analysis for personal insurance should take into account the following details:

Financial Liabilities

• Mortgage, loans, or other debts
• Funeral expenses
• Legal & accounting fees
• Taxes
• Education fund
• Emergency fund

Need for Income Replacement

• Amount
• Length of time required
• CPP benefits

Assets

• Savings
• Investments
• Real estate
• Life insurance (personal, group, mortgage, credit)
• Business/farm assets
• Government benefits
• Other assets (vehicles, coin collections, etc.)

In addition to personal protection, some people purchase life insurance to accumulate wealth or to create or enhance their wealth for their family. As an example, Sue and Gord, both age 55, plan to leave $200,000 of their current wealth to their family. If they were to allocate their current savings into a life insurance plan, they could potentially increase the inheritance to their children from $500,000 at death to more than $775,000, assuming they both live to age 90. Others use life insurance to provide a significant donation to their favourite charity.

In addition to personal insurance needs, business owners have other areas of concern for which life insurance may provide the best solution. While insuring debts is important, businesses often use life insurance to fund shareholder or buy/sell agreements to ensure that funds are available when they are needed without having to leverage the business at a time when it’s lost a key stakeholder. It also protects the remaining business owner(s) from being forced into a partnership with the heirs of their recently deceased partner and provides guaranteed funds to the family to ensure a fair and timely settlement after the loss of their loved one.

Imagine that Jen and Berry enter into a business deal, starting with nothing more than a sweet idea and a few start-up dollars, then become successful beyond either of their imaginations! They have each developed a different expertise in the management of their business and have agreed to reinvest the bulk of their profits back into their enterprise to continually expand their growing empire. Jen has become the product developer and professional tester, creating products craved by millions, while Berry is the consummate marketer, getting their product on the shelves of thousands of retailers. Each partner knows that they would not be as successful without the expertise and hard work of the other and that neither would be easy to replace. Jen and Berry work with their accountant to determine a formula for calculating the fair value of their business, should either partner predecease the other. They agree that the remaining partner will pay the deceased partner’s family a fair value for the business and do so in a timely manner at the same time that both agree that their estates will be bound to sell the deceased shareholder’s interest in the business to the surviving shareholder at a fair price. Neither partner relishes the idea of selling their creation to fund the buyout of the deceased partner’s shares and are not sure about borrowing the funds, given that there may be a great deal of upheaval at the loss of either critical partner. Jen and Berry meet with their Certified Financial Planner and discuss their concerns. Their planner connects them with an insurance professional who works with them and their team of professionals to find a life insurance contract that works best in their situation. Now Jen and Berry can get back to what they enjoy doing most and not have to worry about the future of their business or family.

For some businesses, it might be important to insure a ‘key person’. As an example, I was once referred to a client to insure the owner of the business, only to find out in discussion with the owner that he was really not the ‘key person’. He had a salesperson who was responsible for 80% of the business revenue and in our discussions, the owner recognized the significant loss of revenue if he lost this ‘key person’ due to disability or death. Some business owners use life insurance to shelter capital being held in the business owner’s holding company to protect the hard-earned money from significant income tax on the growth and provide a tax-preferred method for the eventual distribution of the proceeds out of the holding company to the beneficiaries. An insurance contract can also cover the cost of capital gains tax or, similar to how it might be used personally, it could be used to enhance the value of the estate for the next generation or as a tax-preferred retirement fund.

Not every person, family, or business needs life insurance, but if you think you might, talk to an insurance professional. If you don’t have an insurance advisor, speak with your other trusted advisors, such as your Certified Financial Planner, Accountant, or Lawyer and ask for a referral to someone they trust. Interview the person and only agree to hire them if you’re comfortable with their competency in dealing with your unique situation. Only agree to engage them as your trusted insurance professional if they agree to work with the other members of your Professional Advisory Team.

The Bank of Canada’s decision this week to hold its benchmark interest rate steady at 5% as it attempts to battle inflation was welcome news for many. But the effects of both higher interest rates and inflation on the tax system will be felt in the new year in at least a couple of ways based on recent economic data available over the past week or so.

First, let’s start with the interest rate environment. It appears that even though the central bank’s rate isn’t rising, the Canada Revenue Agency’s prescribed interest rate will indeed increase (yet again) as of Jan. 1, 2024. The prescribed rate is set quarterly and is tied directly to the yield on Government of Canada three-month Treasury bills, but with a lag.

The calculation is based on a formula in the Income Tax Regulations that takes the simple average of three-month Treasury bills for the first month of the preceding quarter, rounded up to the next highest whole percentage point (if not already a whole number).

To calculate the rate for the upcoming quarter (Jan. 1 through March 31, 2024), we look at the first month of the current quarter (October 2023) and take the average of the three-month T-bill yields, which were 5.16% (Oct. 10) and also 5.16% (Oct. 24). Since the prescribed rate is then rounded up to the nearest whole percentage point, we get 6% for the new prescribed rate for the first quarter of 2024. Contrast this with the historically low rate of 1% we had from July 1, 2020, through June 30, 2022. The last time the prescribed rate was 6% was more than 20 years ago in the second quarter of 2001.

The hike in the prescribed rate has a number of implications. To understand these, we should point out that there are, in reality, three prescribed rates: the base rate, the rate paid for tax refunds, and the rate charged for unpaid taxes. The base rate, which will be increasing to 6% (from 5%) on Jan. 1, applies to taxable benefits for employees and shareholders, low-interest loans, and other related party transactions.

The rate for tax refunds is two percentage points higher than the base rate, meaning that if the CRA owes you money, the rate of interest will be 8% as of Jan. 1. Note, however, that rushing to file your 2023 tax return as early as possible next tax filing season won’t necessarily get you that rate on your refund, because the CRA only pays refund interest on amounts it owes you after May 30, assuming you filed by the deadline.

Finally, if you owe the CRA money, or if you’re late or deficient in one of your quarterly tax instalments, then the rate the CRA charges is a full four percentage points higher than the base rate. This puts the interest rate on tax debts, penalties, insufficient instalments, unpaid income tax, Canada Pension Plan contributions, and employment insurance premiums at a whopping 10% come Jan. 1.

Keep in mind that this interest is compounded daily and is not tax deductible. For example, if you’re a resident of Newfoundland and Labrador and in the highest 2023 tax bracket of 55%, that means you’d have to find an investment that earns a guaranteed, pre-tax rate of return of 22% to be better off than paying down your tax debt.

The other recent economic news that will impact taxpayers in 2024 is the latest inflation number. The tax brackets and most other amounts in the tax system are indexed to inflation. While the inflation indexation factor for 2024 that will be applied to the tax brackets and various other amounts won’t officially be released by the CRA until November, we can do a rough calculation based on the consumer price index (CPI) data released by Statistics Canada last week.

The federal indexation factor for 2024 is calculated as the average of the monthly CPI numbers for the 12-month period ended Sept. 30, 2023, divided by the average of the monthly CPI factors for the 12-month period ended Sept. 30, 2022. The September CPI data released last week showed a 3.8% increase over the past 12 months. We can then use this data to finalize the 2024 indexation factor, which should come in at 4.7%. By comparison, the 2023 indexation factor was 6.3%.

The silver lining in the latest inflationary number is that the tax-free savings account (TFSA) limit for 2024 should go up to $7,000, an increase from the current 2023 limit of $6,500. Note that this marks the first time the TFSA limit has risen in two consecutive years, as it was $6,000 in 2022.

The TFSA was first introduced in the 2008 federal budget and became available to Canadians for the 2009 calendar year. Its initial limit of $5,000 rose to $5,500 and stayed there for a number of years, with a short-lived flirtation at $10,000 in 2015. Under the tax rules, starting in 2016 and for each subsequent year, the annual TFSA dollar limit was fixed at $5,000, indexed to inflation for each year after 2009, and rounded to the nearest $500, which makes the annual limits easy to remember.

The TFSA limit only gets increased, therefore, when the cumulative effect of the annual inflation adjustments is enough to push the limit to the next highest $500 increment. The indexed TFSA dollar amount for 2024 is now at $6,859, meaning that the official limit gets boosted to $7,000, the closest $500 increment.

For someone who has never contributed to a TFSA and has been a resident of Canada and at least 18 years of age since 2009, the total contribution room available in 2024 will rise to $95,000 from $88,000 in 2023.