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              There are currently no regulations governing the financial planning industry.  Any one can call himself or herself a financial planner.  Many of those persons working in the industry have relatively little in the way of training or qualifications.

              Recognizing the need for public knowledge and protection, some national groups have been established to provide for uniform standards and a minimum level of education for those who qualify.  One of the largest and best known of these is the Financial Planners Standards Council which grants the designation of Certified Financial Planner (CFP).  Those who obtain this designation have completed an extensive course of study usually requiring two or more years, followed by a rigorous exam and a minimum of two years of practical experience.  Continuing education is a requirement of license renewal.



              All of us have some sort of vague and ill defined financial plan in mind – usually something like raising and educating our children, work ‘til late 50’s or early 60’s, then retire to a secure, worry free life of comfort, leisure and travel .  Unfortunately, few of us have made any sort of effort to determine whether our goals are achievable and what plans we need make now to achieve those goals. Only by critically analyzing our current lifestyle and expenditures and making reasoned plans and projections can we determine what is required on our part.  One of the first rules of financial planning states that “If you fail to plan, you plan to fail”



            I have been working with clients and their finances for over 25 years.   It still amazes me how few people even have a savings or investment account, much less any savings plan.  The vast majority of persons of all ages and income levels have given no reasoned thought to the future.

            Most people run their finances on a basis of  paying the bills, buying what they wish and, if anything is left over,   put it away for a rainy day.  Nothing could be a better recipe for failure.  The basic and most important rule of financial planning is “Pay yourself first”.   Only by a rigorous and disciplined plan of saving at the beginning and using only what remains can financial goals be achieved.   Whether we save by payroll deduction or automatic deduction and transfer to a savings account does not matter.  What does matter is that it be done before access to the funds for lifestyle expenses. 



            A savings plan, while providing an essential starting point, is only the first step.  To develop a plan for financial security we must set clear and measurable goals and make some hard choices.   Most financial plans will require many compromises and establishing priorities among competing goals.  Setting up the education plan may mean postponing the new car and driving the old clunker for another few years.  Contributing to the RRSP may mean cutting back on the vacation.  The move to the larger home may require a decision to work for another 5 years before starting that life of leisure.

              To have any chance of success, goals must be measurable.  The intention to provide for the education of the children through university, while admirable, has little chance of success without a plan - a plan which starts with a careful investigation of current post secondary costs, anticipated inflation, number of years to save, projected return on investment, and amount of savings required to achieve the goal.  In the following paragraphs I discuss some areas to think about for those who are considering setting up a financial plan.



              Any successful financial plan starts with a critical analysis of the current asset situation and lifestyle expenditures.  If we cannot find some savings, no matter how little, we cannot plan for the future.  Everyone hates to keep records and make budgets. Why?

              Firstly, record keeping is hard work. It is much easier simply to live from day to day, spending what we earn and using plastic if we can’t afford something, than to carefully document and record every purchase and to make difficult decisions to delay purchases which we cannot afford.

              Secondly, budgeting forces us to be honest with ourselves and our spouses.  Few of us are willing to admit that we need assistance with our finances or that we cannot live within our income. How many husbands are willing to come clean on how much that golf club membership really costs.  How many wives are comfortable discussing the cost of the last trip to the hairdresser?  How many are prepared to track the real costs of that frantic lifestyle involving eating out or ordering in as a regular part of life?



              To be successful, education plans, like all others, must be specific and measurable.  The future costs of education must be projected as accurately as possible.  If it is likely that the child will live away from home, residence and food costs must be estimated as well.  With costs for education currently rising much faster than inflation in general, anticipated increases are an essential part of the plan.

              For most people, the starting point should be the establishment of an RESP for each child as early as possible.  Current rules allow for a contribution of $4,000.00 per year per child to a maximum of $42,000 lifetime for each child.  The government contribution of 20% of the contribution on the first $2,000.00 and the tax free accumulation of the funds until they are required make this plan extremely attractive.  Relaxation of the formerly rigid rules under which accumulated income was forfeited if the child did not attend post secondary school make the plan even more desirable.  Group or self administered plans are available from most financial institutions. 

              It is not only parents who may contribute to RESP’s.  These plans are an ideal vehicle for grandparents to provide meaningful assistance to beloved grandchildren while providing often much needed and appreciated help for their children who are just starting families and careers.  Keep in mind that, while more than one plan per child is permitted, the total annual and lifetime contribution limits remain.

              The alternative education plan involves the establishment of a trust for the child.  Many parents have set aside funds “in trust” for the children with the idea that these funds will be used in the future for educating the children.  Very few parents have planned correctly so as to avoid the very rigid attribution rules of  the Income Tax Act.    Even fewer have put in place the necessary documentation to survive an audit by our friends at the CCRA (formerly Revenue Canada).   While the tax people seem to be somewhat tolerant in this area, there is no guarantee that the policy may not change or that any particular plan may not be challenged as part of an overall audit to which we are all subject.

              As a general rule, try to plan investments or gifts to infant children so that they do not earn immediate income since this will be taxed in the donor’s hands.  Instead, prefer assets such as equity mutual funds which add value primarily through capital gains which will be taxed in the child’s hands when redeemed.



              How many of us believe that the numbers required to retire comfortably cannot possibly be attained or that the Canada Pension Plan will be bankrupt before we can gain access to our lifetime of contributions?  How many of us know the details of our pension and whether it will be sufficient to provide for our goals?



              A well conceived plan can, in most cases, provide a scheme for retirement at an income level which does not significantly impair the current standard of living.   Obviously, the sooner in life the plan is implemented, the lower the cost and the greater the chance of success.

              Like all other plans, the retirement plan must be as specific as possible.   It is not helpful to have a vague goal such as retirement in one’s early 60’s with a comfortable lifestyle.  Only by setting specific goals, time frames, and projections can a workable plan be put in place.  An example might be; retirement at 60 with an income of $50,000.00 after tax in today’s dollars, assuming that inflation over the period averages 3%, investments will earn an average of 8% and that income will increase by an average of 5% per year over the period to retirement. 

 With specific and measurable goals, a financial planner can determine whether the goals are achievable and what measures must be undertaken to achieve the goal.  Once implemented, the plan must be carefully monitored on a regular basis to ensure that the assumptions are still valid and that the plan is still on track.



             Contrary to widely held belief, it is likely that the Canada Pension Plan will survive and will be available for your retirement.  Reforms introduced in the mid 1990’s drastically increased the percentage contribution from earnings so that the plan is now actuarially solid.  Required contributions will rise to 9.9% (combined employer and employee contributions) of the yearly maximum pensionable earnings. Regular monitoring of the plan and a much wider range of permitted investments both seek to ensure its ongoing integrity.

              The current maximum payment under the CPP for those who retire at 65 is $9,155.00, indexed annually to the consumer price index.  Those who wish to retire before  the age of 65 may start drawing their plan at retirement any time after the age of 60 with a reduction of .5% for every month before the age of 65.  Those who wish to postpone drawing the pension until after 65 may continue to work and receive an additional .5% for each month up to the age of 70.



             Retirement planning starts with an analysis of the pension for those who are fortunate enough to have a plan through their employer.  A financial planner will use the pension statement which the employer provides annually to make a projection of your pension at retirement.  Some plans, particularly those in the public sector, are fully indexed and can be expected to fully fund a retirement.  Other plans such as those offered by some chartered banks are woefully inadequate and require significant additional funding for a comfortable retirement.



             For those who do not have pension plans or whose plans are inadequate, the best retirement savings plan is the RRSP.  For those with no pension a contribution of 18% of earned income up to a maximum of $13,500.00 per year is permitted. The combination of an immediate tax deduction for the amount of the contribution and the accumulation of funds in the plan free of tax until withdrawal make this the ideal retirement planning vehicle.  Reforms to the regulations introduced in the 1990’s allow unrestricted carry forward of unused contribution room.  Those couples or individuals who simply have too many demands upon their limited resources in the early years have a chance to catch up later.

             Most of us are aware of the “strategy” of borrowing to fund an RRSP contribution and then repaying the loan over the next year.  While these plans may seem to make great sense, few of them provide much, if any, advantage over a simple plan to contribute monthly to an RRSP.



             At times, tax planning at all levels seems like an ongoing battle of wits between the innovative tax planners who dream up schemes for legally avoiding tax and the government which attempts to close loopholes.  Some of the areas of tax planning for individuals which remain are summarized below.   Keep in mind that tax planning and the income tax rules are extremely complex and constantly changing.  Proper advice is necessary before implementing any plan



             Due to Canada’s graduated income tax system, much tax planning involves plans to split income with lower earning spouses or children.  Some basic means of  splitting income are summarized in the following paragraphs.             

        Division of CPP Benefits.  Under current rules, spouses drawing CPP benefits can apply to have the portions accumulated during cohabitation equalized.  This can be particularly important where there is a great disparity between the pensions and a long marriage.   A division of CPP benefits is also available upon separation and divorce. 

        Loans and gifts to spouses and children.  While the income tax has a number of  “attribution rules” which tax income on loans and gifts to relatives in the hands of the donor, a number of quite legitimate schemes remain and can be used by taxpayers to split income.  Some examples are gifts to adult children and market value loans to spouses for investment in that spouse’s business. 

        Spousal RRSP’s.  Current RRSP rules allow contributions to the plan of a spouse.  Careful planning and projection of retirement incomes can equalize incomes at retirement, thereby minimizing total tax. 

        Employment of family members.  Assuming that the family member actually performs a service for a business and is paid a market rate of income, employment of family members is a legitimate and useful means of splitting income and minimizing total tax.



           Incorporation of a business.  This is perhaps the most important single tax avoidance scheme which remains for those who can utilize it.  Under current rules, taxpayers can shelter up to $200,000 of income from an active business within the business at a very significantly reduced rate of tax.  Even more important, the first $500,000 of a gain from the sale of a qualifying business can be realized without tax.  In some cases the gain can be multiplied when shares pass to a new generation as part of an estate plan.


           These remain among the best tax planning schemes which remain for most taxpayers.   Recall that contributions to RRSP’s   realize an immediate tax deduction and accumulate tax free. Contributions to RESP’s are not deductible but accumulate tax free and also receive a grant of  20% of the contribution up to $400.00.  The funds are taxed in the hands of the child when required for post secondary education.  Since most children do not earn enough income to attract tax, the funds are essentially tax free upon withdrawal in most cases


           Sometimes simply timing the receipt of income can have a significant effect upon the tax payable. Since interest on investments up to one year is only taxed upon receipt, simple strategies such as the purchase of a GIC can postpone tax from a high income year to a year of lower income. 

           Much tax planning revolves around converting income from employment to various types of investment income which permit taxation at lower rates and at a future time.  Capital gains are now taxed at only 2/3 of regular income and only when the gain is realized.  Dividend income from taxable Canadian companies receives a tax credit which reduces the overall tax. 


           Probably the most neglected means of reducing taxes is simply to ensure that all available deductions and credits are utilized.  The tax guides which accompany your return are very helpful in alerting you to simple areas of available deductions.  Inexpensive home tax preparation software is extremely useful and is well worth the cost for nearly everyone completing  his or her own tax return. 

Examples are the following: 

         Medical Expenses: Medical expenses are not necessarily restricted only to family members but may be claimed for a large number of dependent relatives.  The list of eligible expenses is extensive and may be accululated for any twelve month period which ends in the tax year.  Since the claim is reduced by 3% of taxable income, the medical expenses should always be claimed by the lower income spouse, assuming that the spouse has sufficient income to use the deduction. 

         Disability Expense: Many people especially seniors are eligible for this important deduction.  Many seniors who reside in retirement homes which provide medical care are able to deduct all or part of the costs of the residence.  In the first year a medical certificate must be obtained certifying the disability.  In most cases, only disability or medical expenses may be claimed and a careful analysis of the return must be completed in order to determine the most advantageous claim and by whom the claim should be made. 

         Charitable Contributions:  Make sure that you retain all of those receipts for donations.  Since the deduction is greater for amounts in excess of $200.00, the contributions should be accumulated and claimed by one spouse.  For those planning major contributions or contributions of assets other than cash, proper advice and advance consultation is necessary in order to maximize the tax deduction and the advantage to the charity.  For the next year, significant advantages are available for the contribution of publicly traded shares to a charity. 

         Education expenses:  Tuition fees and many ancillary expenses are eligible for a tax credit.  Since many students have insufficient income to use the credit, it is important to ensure that the claim is made by a person with sufficient income or to carry it forward to a future year when the claim may be utilized. 

            I hope that you have found this brief discussion of financial planning interesting and that it will stimulate those of you who have been putting it off to take those first important steps toward a rewarding and worry free future.