6. Finance, Taxes, and Estate Planning
 Developing awareness
 Sources of income
 Tax issues and strategies
 Estate planning and powers of attorney
6-1
Developing Awareness
 Many of concepts in this chapter are
highly technical
 Awareness of these concepts and issues
can be beneficial because you will be able
to recognize opportunities and concerns
6-2
Where Do Retirees Get Their Money?
 The Government: Old Age Security
(OAS), Canada/Quebec Pension Plan
and/or low income benefits
 Employer: Pension plan (basic and
supplementary), group RRSP, deferred
profit sharing plans
 Personal: RRSP, other savings and
investments, employment or business
income.
6-3
The Income Mix for Today’s Older Canadians
Age Group
6-4
60-64
65-69
70-74
75+
OAS
0%
15%
18%
19%
C/QPP
9%
17%
18%
19%
Pensions,
RRIFS, DPSPs,
RRSPs
21%
25%
31%
29%
Investments,
Rents, annuities
11%
14%
15%
20%
Employment/bus
iness income
51%
21%
10%
3%
Other
8%
8%
8%
10%
Total
100%
100%
100%
100%
Old Age Security (OAS)
 You qualify for benefits when you’re
65 if you’ve been in Canada for at
least 10 years.
 Maximum benefit—based on 40
years of residence—is worth about
$6,000 a year
6-5
Canada Pension Plan (CPP)
 You qualify for CPP or QPP retirement
benefits if you’ve made at least one
contribution during your career.
 Maximum benefit is just over $10,000 a
year
6-6
Guaranteed Income Supplement (GIS)
 Part of the OAS program
 Is worth an additional $7,500 or so
tax-free
6-7
Tax Issues and Strategies
 Interest income from bank accounts,
Canada Savings Bonds, bond
investments and portfolios is taxed at
the highest rate
6-8
Tax Issues and Strategies
 Dividends from foreign companies
are taxed at the same rate as interest
income.
 Dividends from Canadian companies
receive favourable tax treatment.
6-9
Tax Issues and Strategies
 Capital gains are not taxed as heavily as
interest income and dividend income.
 Since October 2000, only 50 percent of the
capital gain is taxed.
6 - 10
Tax Issues and Strategies
 In 2009, Canada introduced the Tax Free
Savings Account (TFSA), which limits
annual contributions to $5,000.
 TFSA contributions are not deducted from
income for tax purposes.
6 - 11
Registered Retirement Savings Plans
(RRSPs)
 Greatest gift the government has ever
given Canadians
 RRSPs give an immediate tax deduction
each year equal to the RRSP investment
contribution you make AND shelter tax on
all interest and capital gains accruing
inside the plan from your investments
6 - 12
Registered Retirement Savings Plans
(RRSPs)
Maximum Contribution Limits
RRSP limits apply to prior year’s earnings.
6 - 13
Year
RRSP
2006
2007
2008
2009
$18,000
$19,000
$20,000
$21,000
2010
$22,000
When You Turn 71, You Must Do 1 of 3
Things with RRSP:
 Convert your RRSP to a Registered
Retirement Income Fund (RRIF).
 Convert your RRSP to an Annuity.
 Take a Partial or Lump Sum Withdrawal.
6 - 14
Defined Benefit and Defined Contribution
Pension Plans
 Defined benefit plans provide a specific
amount, usually a percentage of salary or
wages based on length of employment.
 A defined contribution plan does not
guarantee a particular pension amount
upon retirement. The employer makes
scheduled (monthly, quarterly, annually)
contributions to individual employees’
accounts.
6 - 15
Reverse Mortgage
 Enables a senior 62 years of age or older
to convert a portion of their existing home
equity into cash
6 - 16
Reverse Mortgage Benefits
 Can receive between 10% to 45% of the
appraised value of his or her home.
 Funds can be received in either a lump sum, or
fixed monthly payments for life, and can be used
for any purpose.
 No monthly repayments
 You can never owe more than the value of the
home at the time the loan is paid off.
 Your heirs are entitled to the balance of the
equity position.
 Payments received are tax-free.
6 - 17
Reverse Mortgage Disadvantages
 Decrease in home equity
 Costs associated with a reverse
mortgage are usually quite high
6 - 18
Home Equity Line of Credit (HELOC)
 Pre-authorized credit line based on
the value of the equity in your home
 Available for up to 75% of the
appraised value of the home
6 - 19
HELOC Benefits
 Set-up costs are about a quarter of those for a
reverse mortgage.
 Available through most financial institutions
 Loan amount of a HELOC can be up to 75% of
the appraised value of the home
 Funds can be withdrawn from a HELOC at your
convenience
 There is no age requirement for a HELOC.
6 - 20
Estate Planning and Powers of Attorney
 Having financial security when you retire
 Providing for your family’s needs
 Ensuring your business can continue
without you
 Reducing the amount of tax you pay the
government
 Maximizing your investments and assets
6 - 21
Wills
 Disposes the assets, names
beneficiaries of the estate, and
appoints a personal representative
 If you die without a will, your estate
is turned over to the state
6 - 22
Probate
 Probate is the government’s way of
certifying that your will is indeed your last
will and testament
 Probate fees vary.
6 - 23
Four Strategies to Avoid Probate
 Gifting
 Joint ownership
 Name a beneficiary
 Transfer assets to a trust
6 - 24
Types of Trusts
 Spousal Trusts and Trusts for your
Children
 Living (Inter vivos) Trusts
6 - 25
Power of Attorney
 Legal document in which you appoint the
person of your choice to act as your
representative in the event that you are
unable to represent yourself or unable to
make your own decisions
6 - 26
Power of Attorney
 Power of Attorney for Property - This
document authorizes the named
person to act on your behalf with
respect to your property
 Power of Attorney for Personal Care
- This designates someone to act on
your behalf in matters of personal
health care.
6 - 27