Cash and tax planning

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Cash and tax planning
Situation Recommendation Purpose
You are recommending

that the client eliminate some personal loans as quickly as possible.

Non-deductible Debt Reduction Strategy –

Increase your monthly loan payments from $250 to $500 in order to shorten your loan payment period from four years to two years.

Client is carrying expensive

non-deductible debt, which they are in a position to eliminate quickly.

Client is currently

carrying investment leverage and you recommend they reduce the level of debt.

Deductible Debt Reduction Strategy – Increase

your monthly investment loan payment from $250 to $500. This will reduce the outstanding investment loan to zero by the time you retire.

To position the client to be

debt-free upon retirement. Alternatively, it might be that the client’s MTR has been reduced so that leverage is not as appropriate as it once was.

Client needs to position

some capital for emergency purposes.

Emergency Reserve – It is recommended that

three months of lifestyle expenses be maintained in a liquid reserve. At this time you have $5,000, which is less than three months’ lifestyle expenses. It is recommended that you set up a $10,000 line of credit for emergencies, keeping in mind that it should be used only for this purpose.

To have sufficient liquid funds

available in the event of an emergency or opportunity.

Client must make

quarterly tax instalments.

Quarterly Tax Instalments – Plan your cash

flow to anticipate your quarterly tax instalments as follows: Date Client Spouse Total March 15 $3,000 $2,000 $5,000 June 15 $3,000 $2,000 $5,000 September 15 $3,000 $2,000 $5,000 December 15 $3,000 $2,000 $5,000 Should the Canada Customs and Revenue Agency request less than the above projection, remit what they ask for. Save the rest in your bank account or money market fund to pay any shortfall in April when filing your tax return.

To ensure that the client

maintains sufficient resources over and above normal living expenses to allow them to pay their quarterly instalments on time and thus avoid late penalties.

Client is approaching

retirement and will be eligible for CPP benefits.

Apply for CPP Benefits – Apply for CPP

benefits six months prior to anticipated commencement date to ensure that benefits start on time.

Reminder to the client to apply

for benefits well before they are eligible to ensure that benefits will start immediately upon becoming eligible.

Client is approaching

retirement and is a member of a defined benefit pension plan.

Defined Benefit Pension Plan Quotes – Obtain

pension quotes from your employer six months prior to commencement date to ensure that you have adequate time to make a decision on the options best suited to your situation.

To give you and the client

sufficient time to review the pension options and select the one (including survivor options) that is appropriate for the client.

You have a client who

has not been a resident of Canada their whole life and who may be eligible for benefits from their source country.

Out-of-country Benefits – Since you have not

resided in Canada for all of your working life, determine whether you are eligible for any outof- Canada pension benefits from previous employers or through governmental plans in your country of origin.

any clients who have been

residents of Britain, the U.S.A., or other countries are eligible for benefit programs from their home country. If they don’t apply, they won’t get these benefits.

Client has non-deductible

debt and also has nonregistered holdings that could be repositioned to make their debt tax deductible.

Make Loan Interest Tax Deductible – Sell

some of your non-RRSP assets and use the proceeds to pay off non-deductible debt, then reborrow with a “low cost” investment loan to reacquire investment assets. This will immediately reposition a personal debt to be tax deductible and thus increase your cash flow.

Convert non-deductible debt

into deductible debt, thus reducing the net after-tax cost of debt.

Client is anticipating

receiving a severance award as part of a separation or retirement package.

Rollover of Funds to RRSP – Use rollover

provisions for any severance pay or retirement allowance into an RRSP to benefit from taxdeferred income. This rollover provision was removed in a past federal budget with respect to years of service after 1995, but still applies to previous years of service.

To minimize taxes payable on

severance awards.

A high MTR Client is

maximizing their RRSP contributions and can still save significant dollars into their non-registered portfolio.

Tax-sheltered Open Savings Program – Use

universal life for its tax-deferral and incomesplitting benefits. Reposition and/or accumulate investment capital into the contract on a maximum-funded basis to utilize the tax-exempt features of the contract to the maximum extent possible. Tax rules limit the maximum “cash” deposit that a contract may initially absorb but increases with the age of the contract.

Tax shelter investment income

inside of the universal life contract. Particularly attractive if there is also an insurance need.

You need to ensure that

your client is not subject to attribution on funds that are in their children’s names.

Prevent Unnecessary Income Attribution –

Your children’s own money (earned, gifted, inherited, including any child tax benefit cheques) should be placed into segregated and individual investments, in trust, to minimize current and future taxes within the family. This ensures recognition of each child's own source of funds to avoid attribution rules. However, any gifts of money from parents, grandparents, or aunts/uncles to minor children will be subject to attribution on the future income generated (except for capital gains which are not subject to attribution), until the year the child reaches 18 years of age.

To ensure an adequate paper

trail if available so inappropriate attribution is not triggered at some point in the future.

Clients currently have a

lopsided net worth with the highest taxed partner holding the bulk of the family holdings.

Income Splitting – Income-splitting should be

used whenever possible to reduce your total tax paid. In your situation, we recommend the following:

Open the client’s eyes to the

need to look down the road at the tax situation they are creating with their current behaviour.

Need to change the

client’s current savings approach.

Current Savings to Be Done in Lowest Taxed

Partner’s Name – The highest income earner should pay for all living expenses, and the lowest income earner should save their income to equalize your asset base for future incomesplitting. The higher income earner can even pay the lower income earners taxes, provided the taxes are not deducted at source.

To start building an asset base

in the lower taxed spouse’s name. Thus reducing current and future years’ taxes.

Clients have done a poor

job of structuring their savings in the past to facilitate income splitting and now need to fix the problem.

Using Leverage to Equalize Past Mistakes –

The spouse with the lowest asset base should consider borrowing to invest, to equalize assets for future income-splitting. This strategy assumes both spouses are in similar marginal tax rates for the near future. If it is necessary to obtain money from the higher income spouse to help with the loan payments, interest should be charged by the latter at the Income Tax Act “prescribed” rate, which is very low at the present time. The great advantage is that the rate stays at this low rate once the loan is made, even if the prescribed rate goes up in the future.

Reduce taxes now and in the


Client holds significant

holdings in stock options and should diversify into other assets to be less vulnerable to market fluctuation of the company stock.

Exercise Stock Options – Consider the timely

exercise of stock options for maximum tax relief. Current position is as follows:


  1. of Date market Tax on

options exercisable Cost value disposition dd/mm/yy $ $ $ dd/mm/yy $ $ $ dd/mm/yy $ $ $ dd/mm/yy $ $ $ dd/mm/yy $ $ $

Planning for disposition of

stock options takes planning to avoid excess tax liabilities. It may be necessary to work with an experienced accountant or IDA-licensed advisor in the exercise and disposition of holdings.

You want to stay up to

date on your client’s situation. A good technique to facilitate this is to have the client routinely furnish you with copies of their tax returns.

Copies of Your Tax Returns – Please forward

copies of your complete tax returns and your notices of assessment each year as they are completed.

To review the returns to ensure

that no deductions/credits are missed and so that you are aware of their situation in detail.