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Monthly child support payments from one parent to the other are one of the most common outcomes of a separation. As time goes by, separated parents often re-partner, and step-parent relationships can become part of the matrix of a blended family. But what happens if the parents in the blended family separate? Is a step-parent required to pay child support for a stepchild? In some cases, the answer is yes.

That was the outcome of a recent twelve-day trial before Justice Dale Fitzpatrick of

Monthly child support payments from one parent to the other are one of the most common outcomes of a separation. As time goes by, separated parents often re-partner, and step-parent relationships can become part of the matrix of a blended family. But what happens if the parents in the blended family separate? Is a step-parent required to pay child support for a stepchild? In some cases, the answer is yes.

That was the outcome of a recent twelve-day trial before Justice Dale Fitzpatrick of the Ontario Superior Court of Justice who was asked to decide if a stepfather had an obligation to support two stepchildren.  The trial focused almost entirely on the binary issue of whether the stepfather should pay child support. The length of the trial made it very clear: determining a step-parent’s, or subsequent parent’s, child support obligation is far more complex than determining a first parent’s obligation.

In the case before Justice Fitzpatrick, the parties lived together for only 22 months, of which they were married for 17 months. The husband did not have any children from a prior relationship. The wife had two children, aged 9 and 11 years at the time of separation. The children’s biological father had a fractured relationship with the children and, when the parties began living together, the children were not seeing their biological father at all. The biological father was in receipt of social assistance and was paying child support of $94 per month.

Following the separation, the wife sought child support from the husband. The husband disagreed. A hard-fought trial ensued. To determine if the husband owed child support, Justice Fitzpatrick had to carefully analyze the relationship between the husband and the two children. The judge had to decide if the husband had stood in the place of a parent since, under the Federal Child Support Guidelines, which apply across Canada to divorcing spouses, child support may be payable by a spouse who takes on the role of a parent.

The judge was guided by number of court decisions which find their roots in Chartier v. Chartier, a 1999 decision of the Supreme Court of Canada. In that case, Justice Michel Bastarache noted that spouses “are entitled to divorce each other, but not the children who were part of the marriage” and that when a spouse stands in the place of a parent, children ought to be able to “count on that relationship continuing.”

To determine if a spouse has stood in the place of a parent, a judge will consider a number of factors. According to Justice Fitzpatrick, those factors include, but are not limited to: a) participation in family events, b) the step-parent’s financial contribution toward the children, c) the step-parent’s participation in duties related to the children, d) responsibility for disciplining the children, e) children’s use of the step-parent’s surname, f) reference to the step-parent as “dad”, g) length of the step-parent’s relationship with the children and h) the nature of the children’s relationship with the biological father.

Over the course of the 12-day trial, the evidence given by both parties was remarkably similar on many of these factors. According to Justice Fitzpartrick, the husband testified that “the children were calling him dad commencing with the first three months” of his relationship with the wife and that “he paid for all of the household expenses without contribution from the (wife) who did not work outside the home during the relationship.”  The evidence also showed that the husband participated in the children’s extra-curricular activities such as swimming, hockey and skating. There was evidence of family vacations together to Mexico, Florida and Muskoka.

Despite the depth and breadth of the evidence, the husband denied that he had any closeness or relationship with the children. The husband’s position was grounded in his belief that he was “dominated by the (wife) and somehow coerced to act like a parent against his will.”  Justice Fitzpatrick dismissed the husband’s claims on the basis there “was no meaningful evidence presented during the trial to support his claim that the (wife) forced this relationship on the (husband) or on the children.”

Notably, following separation, the husband did not have any contact with the children. According to the wife, the husband chose to discontinue any contact. Not having contact after separation does not have any bearing on whether a child support obligation exists.

In the result, Justice Fitzpatrick had “no difficulty” finding the husband stood in the place of a parent and is required to pay child support to the wife for the support of the two children.  Recognizing the short length of the relationship, Justice Fitzpatrick ordered the husband to pay child support for a period of three years.

In determining the amount of the husband’s monthly child support obligation, Justice Fitzpatrick deducted the $94 per month paid by the biological father.

Given the nominal amount of child support being paid by the biological father, it is worth noting that a stepparent may be required to pay the full monthly amount of child support in certain circumstances. That issue was discussed by Justice Erika Chozik in another recent case in the Ontario Superior Court of Justice.  According to Justice Chozik: “When the biological parent is not present, and his support obligation cannot be quantified or enforced, there may be circumstances where the step-parent will have to meet the primary obligation of child support in order for the child to continue to enjoy the standard of living he or she enjoyed while living with the step parent.”

In addition to his obligation to pay time-limited child support, the husband was ordered to pay costs of $135,000 to the wife on account of the trial. According to Justice Fitzpatrick, the trial “was a winner-take-all 12-day trial made longer by the (husband’s) incredible denials of any emotional relationship with the children.”

Given the length and costs of a trial to determine if a parent has stood in the place of a parent, separating spouses would be wise to consider settlement options early on in such a dispute.

Adam N. Black is a partner in the family law group at Torkin Manes LLP in Toronto.ablack@torkinmanes.com

In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.

Standing at the altar, nobody thinks they’ll be sitting in a divorce lawyer’s office one day, yet that’s the reality for millions of Canadians each year, and managing the resulting financial hellscape is likely near the top of a divorced couple’s stress list.

“There’s a lot of divorce happening, 2.74 million people applied for divorce in Canada in 2021, 1.88 million in 2020,” Jeanette Power, senior wealth adviser at the Canadian Imperial Bank of Commerce, said. “Divorce is all around us. Everyone goes into relationships hoping for the best, but you do really need to prepare for it.”

Canadians also now have the additional strains of worrying about inflation and rising interest rates when going through a divorce. Never mind the pressure from real estate investments. Yet, according to a recent Love & Money survey by Toronto-Dominion Bank, it may not be all bad news.

“After a couple becomes divorced and are a single-income household, more than half, at 54 per cent of respondents, said it’s easier to manage their finances than it was prior to the divorce,” Michael Nitz, district vice-president at TD Canada Trust, said.

But getting to that point is the hard part. That’s why both Nitz and Power recommend meeting with a professional financial adviser as one of your first steps when going through a divorce.

“Canadians going through divorce need a team of professionals around them. They need their emotional support team, and their financial support team,” Power said. “If they have a good team around them and that team can provide checklists, education, webinars in some cases or refer a client to different applications, that’s a good start.”

Professionals will also inform you about some of the upfront costs associated with a divorce. An uncontested divorce costs an average of $1,860 in Canada, according to the 2021 Canadian Lawyer Legal Fees Survey. That jumps significantly to $20,625 for a contested divorce.

Canadians going through divorce need a team of professionals around them

Jeanette Power

“If taken to court, it could be over $50,000, depending on the complexity,” Power said. “I have clients who are still dealing with divorce through the courts and it’s three or four years later.”

There are also costs that need to be managed right away. For example, if there are children involved, you may have to pay child support. But two separate homes mean two computers, two internet services, and so on. These everyday costs add up, which is why getting your finances in order and creating a budget and personal financial goals with your adviser are a few good first steps.

“There’s a difference between what you need and what you want,” Power said. “So often when we’re budgeting, we have to remind clients that those are two different things.”

In many cases, real estate becomes the largest asset for people going through a divorce. It usually has the largest emotional attachment, too. But again, people need to figure out what they need, and what they can afford.

“Housing and where they live is usually the highest expense, so it’s important Canadians don’t spend beyond their means,” Nitz said. “We suggest you find the best mortgage solution as typically your income is reduced, so finding a mortgage solution that will support clients in their new way of living is important.”

But if you’re able to come to an agreement, Power suggests holding off on the sale of your home. The Canadian Real Estate Association recently reported a 12.6 per cent decline in national home sales on a month-to-month basis. Until the market stabilizes, it could be a good idea to address this large decision down the road when both former partners have their finances in order.

“Maintain the property even for six months until they can get their heads in a space where they can start downsizing and moving,” she said. “It’s easy to sit there and say you need to sell the house. Emotionally, it’s a completely different conversation.”

Once you’ve dealt with these costs and have a budget underway, it’s time to rebuild. That means building up your own credit without your partner. And this can be quite a different experience depending on the age you get divorced.

Power said there has been an increase in “grey divorces,” couples who have been together for 20 years or more. In this case, their credit history has usually been built together, making it difficult for the newly single to even apply for a mortgage for a new home.

“In a lot of the grey divorces, the credit cards or loans were always in joint, but not always individual where they don’t have their own credit established,” she said.

For younger people going through divorce, Nitz said the Love & Money survey noticed a shift away from this joint-financial thinking. But other issues have come up.

In the survey, 49 per cent of Canadians under 40 said they didn’t have a joint account with their spouse, and 63 per cent said they didn’t have shared credit cards. Furthermore, this generation was less tolerant of “red flag financial behaviours,” Nitz said, with 81 per cent saying they would be concerned if a potential partner was secretive about finances.

“Typically, millennials keep their banking more separate,” he said. “About 60 per cent of Canadians say it’s harder to find true love than financial success. We hope it’s easier to find financial success because they’ve met with an adviser.”

That doesn’t mean future relationships are set up for failure. Both Nitz and Power said couples should meet with professional advisers together as often as they can. This allows for better communication and transparency, creating a more open and honest relationship.

After the emotional stress and financial strain of divorce is under control, people say they have become more financially stable. About 57 per cent said they spend less and are more in tune with their budget, according to the Love & Money survey.

“Nobody knows what’s going to happen. Marriage is expensive, but divorce is even more so,” Power said. “If the time comes, you want to be prepared. You don’t want to make decisions based on emotions.”

According to Statistics Canada, the average retirement age for Canadians in 2021 was 64.4 years old. Retirement has been delayed by almost three years since 2001, when the average was just 61.5 years of age. For some, those extra few years of work can seem like an eternity.

There are, however, strategies that those who are approaching retirement can consider to shave time off their financial independence date so they can afford to retire earlier.

For this exercise, we will

According to Statistics Canada, the average retirement age for Canadians in 2021 was 64.4 years old. Retirement has been delayed by almost three years since 2001, when the average was just 61.5 years of age. For some, those extra few years of work can seem like an eternity.

There are, however, strategies that those who are approaching retirement can consider to shave time off their financial independence date so they can afford to retire earlier.

For this exercise, we will consider a notional 55-year-old Canadian couple living in Ottawa, owning their home with no mortgage, with assumptions inspired by the Canadian Real Estate Association and Statistics Canada data.

The median sale price for a single-detached home in Ottawa during the first quarter of 2022 was $818,000. The median after-tax income of a Canadian two-parent family with children in 2020 was $110,700. Average household expenditures in 2019 in Ontario excluding rent, mortgage, tax, pension and personal insurance was $56,407. Finally, average private pension assets for Ontario families with the primary income earner aged 55 to 65 was $400,919 in 2019.

So, we will assume an $800,000 mortgage-free home owned by a 55-year-old couple planning to retire at 60, earning $75,000 each, spending $60,000 per year on basic living expenses, and with $300,000 in RRSP savings invested in conservative mutual funds.

Part-time work

Some employers are open to having a full-time employee transition to a part-time role. Some employees are able to provide consulting services and work part-time as a self-employed contractor in their field. Other workers might be open to a second career doing something completely different at a lower income.

For our couple, if they work from 55 to 60, they will earn about $120,000 of annual after-tax income for five years — roughly $600,000 in total. If they work at half that income and earn $37,500 each instead of $75,000, working for 10 years from 55 to 65, they would earn about $65,000 after-tax each year. This would cover their $60,000 of annual expenses and they would earn about $650,000 after-tax over those 10 years. This is about the same as their expected after-tax earnings over the final 5 years of their career ($600,000), albeit over 10 years.

The point? There are different ways to get to the finish line. Financially, the two income scenarios have similar present value and may result in comparable retirement funding and future estate value. Using conservative assumptions about CPP and OAS pensions, inflation and investment returns, they can afford to pursue either option.

The benefit is they may have grandkids that need child care, a desire to have more free time to work on their tennis game, or another reason to consider a staggered retirement rather than going full tilt until age 60 and retiring cold turkey.

Higher investment returns

Taking on more risk with your investments should lead to higher returns over a long enough time horizon. That is, by having more exposure to stocks, your long-run returns should increase at the expense of short-run stock market volatility.

Lower investment fees may also increase returns net of fees. Morningstar’s Global Investor Experience Study pegged Canada’s average allocation mutual fund fee at 1.94 per cent.

If our notional couple sold their conservative mutual funds and went all-in on equity mutual funds instead, they may be able to boost their returns by two per cent per year. Likewise, if they decided to ditch their mutual funds and build an investment portfolio on their own with a discount brokerage, where they may be able to boost their returns by reducing their fees by two per cent per year.

A two per cent increase in their net investment returns, assuming an age 95 life expectancy, might mean they can retire a little over a year earlier than their age 60 retirement target, holding other factors constant and conservative.

The point? Higher investment returns might help, and retiring one year earlier is meaningful, but it may not be a game changer for most retirees. On the other hand, an overly aggressive asset allocation or a do-it-yourself approach for a less experienced investor could lead to an investment mistake. For example, panicking and selling stocks at a market bottom. Investors should invest based on their risk tolerance and DIY investing is not for everyone despite the potential cost savings.

Lower expenses

The less you spend, the less you need to have for retirement. If our notional couple could find a way to reduce their spending by 10 per cent from $60,000 to $54,000 per year — a decrease of $500 per month — they could afford to retire earlier. In fact, they may be able to afford to retire more than a year and a half sooner using conservative assumptions.

That said, retirees need to be careful about assuming they can spend less in retirement if they have not been able to cut costs already because doing so may provide them with artificial optimism. Aging also comes with other spending risks such as the potential cost of funding long-term care needs.

Home downsize

The average condo apartment sale in Ottawa in Q1 2022 was $420,000. If our couple could sell their detached home for $800,000 and net $760,000 after selling costs, buying for $420,000 plus $10,000 in closing costs, they could net about $330,000. That is equivalent to about three years of after-tax salary for them and the downsize may also lower their monthly spending on housing costs.

This could accelerate their financial independence by about three years, other things being equal. A move to a lower-cost city or province could be even more meaningful, and that much more so for someone approaching retirement and living in a more expensive city or property than an $800,000 detached home in Ottawa.

Summary

Those who are willing to be a little flexible with their retirement planning may be able to consider changes to their job, investments, expenses, or real estate that can impact their ability to retire. Everyone has different goals for retirement and some people work well past the point that they need to work, choosing to work rather than working because they cannot afford to retire.

Some changes might help someone to retire earlier, spend more in retirement, or give more money to their kids or to charity. Financial independence can be immensely powerful, and some who think that power is beyond their control may be surprised when they consider choices that are in fact available.

Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

In October 1998, the stock market was crashing, but the portfolio managers at Burlington, Ont.-based AIC Ltd. were on the road as planned, travelling across Canada to convince clients that the funds they offered remained good investments, even though some of them had lost half their value.

In the car, the managers clung to their briefcases, looking glum. It had been a remarkable run. They had ridden the wave of the booming wealth management industry so well that they had increased the value

In October 1998, the stock market was crashing, but the portfolio managers at Burlington, Ont.-based AIC Ltd. were on the road as planned, travelling across Canada to convince clients that the funds they offered remained good investments, even though some of them had lost half their value.

In the car, the managers clung to their briefcases, looking glum. It had been a remarkable run. They had ridden the wave of the booming wealth management industry so well that they had increased the value of assets under management to nearly $10 billion by 1998 from $12 million at the start of the decade. But, in a matter of weeks, everything had changed.

CEO Michael Lee-Chin turned to them and smiled. “If this all blows up, we had one heck of a good time,” he said.

It didn’t blow up. Lee-Chin and his fellow asset managers pushed through, and eventually sold the firm to Manulife Financial Corp. for an undisclosed amount in 2009. Three decades and many investments later, Lee-Chin is worth some $1.9 billion, according to Forbes.

Lee-Chin is Canada’s only Black billionaire, and just one of 15 Black billionaires worldwide. He’s associated with 4 “unicorns,” privately held startups that have a valuation of over $1 billion: AIC Ltd., Columbus Communications, InterEnergy Holdings Ltd., and ITM Isotope Technologies Munich SE. He’s also associated with three publicly traded companies worth $1 billion or more, including NCB Financial Group Ltd., Telix Pharmaceuticals, and Guardian Holdings Ltd.

He is known for his philanthropic contributions to the Royal Ontario Museum, the Joseph Brant Hospital, the University of Toronto, McMaster University and more.

Lee-Chin has come a long way from humble beginnings in Port Antonio, Jamaica. His mother sold Avon products and worked as a bookkeeper, while his stepfather ran a local grocery store. Lee-Chin bounced between jobs at a cruise line and aluminum bauxite plant, until he applied to universities in Canada. He set off for McMaster University in Hamilton, Ont., to study civil engineering with $2,000 in his pocket, enough for the first year, and no plans on how to pay for the rest of it.

“Most people make decisions and act on their decisions based on: ‘Ready, aim, aim, aim, aim, aim…,” Lee-Chin said in an interview. “What I do, is I ready, aim, and if I’m in the vicinity, I fire.”

He tried to save money for school by working as a bouncer but he still found himself coming up short. “So, I did what any university student would do,” he said. “I wrote the prime minister of Jamaica.”

Seriously. Lee-Chin said he wrote, “Mr. Prime Minister, you cannot reap what you do not sow.” Then-prime minister Hugh Shearer was impressed enough to grant Lee-Chin a $15,000 scholarship.

Lee-Chin got his degree, and then applied to 100 jobs in engineering, receiving 100 rejections. “That was a low point in my life,” he said, “because when you’re not working, and you’re trying to get a job, and you get rejected, it kills your self-esteem.”

Lee-Chin’s three keys to success

‘Make them wealthy’

He switched careers and became a mutual fund salesman. With no clients, he had no choice but to cold-call and knock on the doors of wealthy Canadians. “In 1977, Canada was not as cosmopolitan as it is today,” he said. Lee-Chin suspected buyers were wary of the tall, Black kid on their doorstep.

But eventually, some people took a chance on him. “I asked myself the question, ‘Mike… What is the highest value-add I can give to these people?’ The answer kept coming back to me, ‘Mike, make them wealthy,’” he said.

He studied some of the wealthiest people in the world, including Warren Buffett, and found that self-made millionaires and billionaires had a few things in common. They tended to own a few high-quality businesses in strong, long-term growth industries. Wealthy people, he noticed, hold these businesses for the long run, for as long as the business remains viable.

Lee-Chin joined the game. In 1983, he took out an investor loan of $500,000 to buy into the company whose funds he was selling: Mackenzie Investments. (When I suggest that some might consider this a “gamble,” Lee-Chin is quick to correct me: “It was not a gamble. This, Miss Marisa Coulton, is investing.”)

He had no interest in diversifying his assets, a bread-and-butter strategy that many portfolio managers follow. “There’s another saying for it: die-worse-ify,” he said. He believed then — and still does — that it is better to invest in a single business you understand, than many businesses you don’t.

Lee-Chin’s 5 common qualities of wealthy people

The bigger mistake he sees investors making, however, is that they don’t understand the power of owning stocks. “Most people see stocks as a piece of paper to be traded, to buy and sell,” he said. “But, a stock is a percentage ownership in the business,” he said. “That’s a big difference.”

He advises investors to take a businesslike stance and immerse themselves in a business, buying into it not simply because the stock is going up or down, but because they have identified it as a great business. “You should ask yourself the question, ‘Do I really want to own a piece of that business, and why?'”

Regarding inflation, he said, “If all these micro, macro situations were pertinent to wealth creation, the wealthiest people in the world would be the economists.”

“(Wealthy people) don’t manage their business based on inflation, deflation. They manage their business by delivering a great product that has utility to society.”

‘On a shoestring’

Lee-Chin’s approach worked. Over the course of four years, his investments appreciated sevenfold, climbing from $1 to $7 per share. His $500,000 turned into $3.5 million, giving rise to his lifelong mantra: buy, hold, and prosper. He used the profits to buy a small, Kitchener, Ont.-based investment firm called AIC Ltd.

Jonathan Wellum was one of AIC’s earliest employees. He met Lee-Chin in the weight room at McMaster University, where they were both alumni. Lee-Chin asked if Wellum was interested in coming aboard at AIC, which, in 1990, had around 100 clients, $12 million in assets, and just a few people on staff. Wellum agreed, and would go on to work with Lee-Chin for 19 years.

“(AIC) was very, very small, but the seeds were there,” Wellum said. “Michael had the building blocks… he had an investment philosophy, he had an approach, he had a passion, and he was prepared to invest to grow the business.”

Wellum was conservative when it came to money and had a low tolerance for risk. He said he was stunned by Lee-Chin’s willingness to put his own money on the table. “We were on a shoestring,” Wellum said. “I always admired that about Michael. If he believed in something, he’d put the money behind it.”

Once, when AIC was struggling, Wellum was approached by Royal Bank of Canada for a job. “I was pretty close to jumping,” he said. “And I thought, ‘You know what? I can’t; I really like working with Michael.’”

In under a year, AIC’s business took off. “If I had made that change then… I wouldn’t have worked with one of the most dynamic businesspeople there is.”

Wellum said he witnessed Lee-Chin’s optimism falter only once, when he sold AIC to Manulife in 2009, amid the financial crisis. “He loved the business, we all did,” Wellum said. “But it was a tough time.”

As Wellum announced the sale to the staff of around 200, and encouraged them to congratulate Lee-Chin, Lee-Chin stood off to the side, a pained look on his face. “I don’t think he really wanted to sell AIC. But there was pressure to do it, just to keep a strong financial position,” Wellum said.

“It was the right decision,” he said, adding that the industry was changing and getting more difficult for niche players such as AIC, “but I think that was very tough on him. That was his baby.”

‘Do well, and do good’

As Lee-Chin’s wealth increased, so too did his desire to give back, said Wellum. “He does have a wonderful heart. He loves to help people,” said Wellum. “When I worked with him, people would say, ‘Michael is a hard-nosed businessman,’ just because he was successful,” he said. “I would say, ‘You don’t really know Michael.’

The motto of Lee-Chin’s current company, Portland Holdings Inc., which manages US$20 billion in assets, is “do well and do good.” Lee-Chin donated $10 million to the University of Toronto, establishing the Michael Lee-Chin and Family Institute for Corporate Citizenship, which helps business leaders use their companies to encourage social change.

“He’s a powerful presence, a fascinating and engaging guy,” said Rod Lohin, executive director of the institute. Lee-Chin, he said, was thinking about philanthropy long before it became a norm in the world of big business. “He certainly stands out as an exemplar of someone who is willing to put his money where his mouth is,” said Lohin. “It just seems to be a fundamental part of who he is.”

Lee-Chin’s philanthropy extends to his home country, Jamaica. He purchased Jamaica’s National Commercial Bank in 2002, a move his investor friends questioned.

“I said to Michael, ‘Why do we want to own a bank in Jamaica?’ I didn’t know the market,” Wellum said. “He was like, ‘Jonathan, there are opportunities there.’”

Lee-Chin used the bank as a tool to promote growth in the country, arranging for all profits from the bank to be kept on the island. The company is now the most profitable business in the country with cumulative profits of US$2.2 billion from 2004 to September 2021. Lee-Chin likes to invest in unlikely places that are perceived to be bad investments. Jamaica’s lack of capital and ingrained inefficiencies make it the perfect place to invest, he said.

The government of Jamaica took notice. If Lee-Chin could grow a business, couldn’t he do the same with a country? Current Prime Minister Andrew Holness appointed Lee-Chin to serve as chair of Jamaica’s Economic Growth Council. Over the course of more than 100 day-long meetings, Lee-Chin flew to the island to brainstorm with stakeholders from all walks of life — farmers, civil servants, construction workers — about how to expedite Jamaica’s development.

The council produced what Lee-Chin calls a “magna carta” for Jamaica’s development, the goal being five per cent growth in four years. It was not achieved. Myriad factors, the COVID-19 pandemic included, slowed Jamaica’s growth. “It’s unfinished,” said Maureen Denton, executive director of the council between 2016 and 2017. “Because both of us are so passionately committed to Jamaica, it hurts.”

It’s the one business venture Lee-Chin hasn’t been able to see to fruition.

Lee-Chin’s criteria for a great investment opportunity

A coming health boom

Lee-Chin remains committed to philanthropy and business, but now, at 71 years of age, his focus has shifted to his family, his health, and well-being.

His days start at 5 a.m. He tries not to check his phone, but gives the screen a cursory glance to see if there are any emergencies at Portland Holdings. Lee-Chin exercises for precisely 60 to 75 minutes and then eats an enormous breakfast, lunch, and dinner to help power him through what is bound to be a long day. When I asked whether this was the key to business success, he laughed and said, “No, it’s just the secret to being nutritionally well-fed.”

As he and other members of the baby boom cohort approach retirement, Lee-Chin expects there will be a spike in interest in health. So that’s where he’s putting his money now. He invested in ITM Isotope Technologies Munich SE, a biotechnology group of precision oncology companies working on perfecting techniques such as peptide receptor radionuclide therapy, a cancer treatment where patients are injected with a cell-targeting protein, combined with radioactive material — a radiopeptide. The radiopeptide binds to neuroendocrine cancer cells and zaps the tumour with radiation. “It’s like magnets and iron shavings,” said Lee-Chin.

When the technique cured his friend of colon cancer, Lee-Chin was sold. He asked for equity in the company, and it offered him a role on the advisory board instead. “I will accept only if you find me some shares!” he said, sticking to his long-held beliefs about the merits of stock ownership. Lee-Chin acquired a minority stake in the company.

As always, Lee-Chin is thinking 10 steps ahead. “You don’t create any wealth by doing what people are doing now,” he said. “You create wealth by doing today, what people will be doing tomorrow.”

• Email: mcoulton@postmedia.com | Twitter: marisacoulton

A woman we’ll call Margaret, 60, works in Ontario in high-tech manufacturing. She earns $169,716 per year and takes home $9,713 per month after tax. She wants to retire no later than age 65 if she can attain sufficient income and financial security.

Margaret sold her three-bedroom condo last year and got $310,000 net as a way of downsizing. She currently rents. She would like to get back to ownership with an 800-square-foot condo that, she figures, will cost her $750,000. But that purchase

A woman we’ll call Margaret, 60, works in Ontario in high-tech manufacturing. She earns $169,716 per year and takes home $9,713 per month after tax. She wants to retire no later than age 65 if she can attain sufficient income and financial security.

Margaret sold her three-bedroom condo last year and got $310,000 net as a way of downsizing. She currently rents. She would like to get back to ownership with an 800-square-foot condo that, she figures, will cost her $750,000. But that purchase would erode her savings. Can she have the condo and a secure retirement, she wonders?

Email andrew.allentuck@gmail.com for a free Family Finance analysis

Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Margaret. He notes that she sends money to kin abroad and wants to leave an estate for them.

Renting vs. owning

The problem of buying for the long run, say 25 years, during which time home prices are almost certain to rise vs. renting and investing cash that would otherwise go to a down payment and carrying costs is not a fair balance. Canadian tax law allows profits from the sale of a principal residence to be kept without tax. The money that might not go to a down payment and carrying costs would have to match those tax-free gains. We can’t predict property markets or government tax policy, but the odds favour ownership, Einarson says.

Margaret currently spends $2,400 per month on rent, including taxes and utilities. If she buys a condo, the rent she pays could go toward mortgage payments instead. She also budgets $750 per month for gifts to relatives, $1,080 for RRSP contributions, $500 for her TFSA and $1,000 for other investments.

Margaret’s goal is to have $7,000 per month after tax in retirement.

Present investment assets

Margaret has significant investments: $805,400 in her RRSP, $110,000 in her TFSAs and $48,000 in non-registered investments. She has a $325,000 reserve from the sale of her last condo and a $45,000 car. All that adds up to a net worth of $1,333,400.

Margaret will have $26,400 from a defined-benefit pension at 65, $11,232 from the Canada Pension Plan, and $5,800 from OAS based on 30 years residence in Canada after age 18.

With $12,960 annual additions, her RRSP growing at three per cent after inflation will total $1,004,550 in five years at her age 65 in 2022 dollars and then be capable of generating $49,760 per year for the following 30 years to her age 95 with all capital and income paid out.

Her non-registered investments of $48,000, with annual additions of $12,000 for five years and three per cent growth after inflation will rise to $121,266 in 2022 dollars and then generate $6,000 per year for the following 30 years to her age 95.

Adding up these income streams, at 65 she would have $99,192 pre-tax income. The OAS clawback will take 15 per cent of $20,138 income over the trigger point of $79,054. That would add $3,020 to her tax. Her regular income tax at 20 per cent will leave her with $76,300 per year.

She could use her TFSA to supplement that income.

The current $110,000 balance growing with $6,000 annual additions for five years at three per cent per year after inflation to $160,330 could produce $7,942 per year. That would push total monthly retirement income to $84,240 per year, or $7,020 per month.

Margaret wants to buy a $750,000 condo with a $400,000 down payment. She figures she can get a 25-year amortization at four per cent with monthly payments of $1,670. Over 12 months, the mortgage would cost her $20,040 plus potential assessments. That $1,670 is not much for rent in principal cities and towns in Ontario. Her interest rate is likely to rise, but the cost is a ballpark figure.

Yet ownership would be affordable. $20,040 would be 24 per cent of her estimated after-tax retirement income including TFSA cash flow. If she buys a condo, she will build home equity. If she does not buy a condo and continues to rent, to keep her costs fixed until her rent increases, she can use her $373,000 cash and non-registered funds to invest for income supplements. That would mean she could keep her TFSA intact for her estate.

There is an additional source of cash — Margaret has a life insurance policy with cash surrender value of $30,000 and a death benefit of $169,000. She could cash out and spend the $30,000 on a home of her own, but given her concerns for her family abroad, retaining rather than cashing out the policy seems the wiser course.

Alternatives

A final alternative would be to work to 70, defer home purchase, gain 36 per cent in OAS payouts less increased clawback sums, add as much as 42 per cent to CPP payouts and gain perhaps 30 per cent on the sums and yields of RRSP/RRIF, taxable assets and TFSAs. Yet in that five-year period housing prices might rise further. The bottom line is that a low six-figure income doesn’t buy a grand retirement anymore. But home ownership and the capital gains that usually go with it serve the purpose of having shelter now and an estate for family.

We have to caution that home ownership and renting is more than a current cost question. House owners have repair bills, condo owners have assessments. Owners can avoid some costs by doing their own maintenance and cover flood or hail risks with insurance. In other words, ownership gives more control over fate than renting. But renting does free up capital for other uses. In this case, Margaret has a solid portfolio. She needs shelter more than returns on financial assets.

She could move to a small town with lower house prices and avoid the madness of major metropolitan Ontario property markets. She would have more money for travel and gifts for family.

Retirement stars: four *** out of five

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Financial Post

By Julie Cazzin with Brenda Hiscock

Q: I’m 52 years old, married and have a 12-year-old daughter. Our gross household income is $130,000, and I have a $220,000 mortgage at about four per cent. We have not contributed to our registered retirement savings plans (RRSPs) in 15 years and have not started tax-free savings accounts (TFSAs). We only have savings of about $40,000 for emergencies and it’s sitting in a bank savings account in cash, as well as a registered

By Julie Cazzin with Brenda Hiscock

Q: I’m 52 years old, married and have a 12-year-old daughter. Our gross household income is $130,000, and I have a $220,000 mortgage at about four per cent. We have not contributed to our registered retirement savings plans (RRSPs) in 15 years and have not started tax-free savings accounts (TFSAs). We only have savings of about $40,000 for emergencies and it’s sitting in a bank savings account in cash, as well as a registered education savings plan (RESP) that we fully contribute to annually for our daughter. Recently, we inherited $260,000 from my father who died last year. What’s the best thing to do with this money? Should we pay off the mortgage, contribute to RRSPs or start TSFAs? — Reggie in Moncton, N.B.

FP Answers: My sincere condolences to you and your family on your father’s death, Reggie, and thank you for your question.

With an inheritance of $260,000 and $40,000 in cash in a savings account, you have a total of $300,000 in cash to invest. A simple solution would be to pay off your $220,000 mortgage in full. That would leave $80,000 to contribute to RRSPs and TFSAs. The increase in cash flow from no longer making mortgage payments will result in more money to contribute to these accounts going forward if you’re hesitant to invest it all at once.

You mention that your mortgage is at four per cent, so it is likely a fixed-rate mortgage, which tends to have higher penalties if paid off early. That penalty could have been quite high six months ago when interest rates were low, but it is likely much less now.

Fixed-rate mortgages generally have either a three-month interest penalty or an interest-differential penalty (your mortgage rate compared to current mortgage rates, which have now gone up, thus decreasing this penalty). You should inquire with your lender as to what the penalty might be prior to making any prepayments.

If the penalty is too high to pay it all off, you may consider lump sum prepayments (often 10 per cent to 20 per cent of the original mortgage) as well as doubling up on payments (a common mortgage feature), and then paying it off in full at maturity. Your lender will be able to let you know those options. If you have a high tolerance for risk, consider investing the majority of the funds instead of paying off the mortgage.

You indicate that your gross household income is $130,000, but I am uncertain of the income split between you and your spouse. If you earn $65,000 each, then you are both in a modest tax bracket and RRSP contributions could be somewhat beneficial. If one of your incomes is significantly higher than the other, focus RRSP contributions in the name of the higher-income-earning spouse. If income is significantly higher for one spouse, and early retirement is being considered, you may want to consider contributions to a spousal RRSP. This may allow you to better equalize your incomes before age 65.

There are also company savings plans to consider. If they are available to you or your spouse, any company matching plans should be utilized to maximize savings opportunities. In addition, group savings plans often carry low investment fees.

You indicate that you have not contributed to RRSPs for 15 years. Since there may not be a benefit in reducing your incomes below $50,000 of taxable income, because the tax savings may be similar to the tax you will pay on withdrawal, you can use that figure as a rough benchmark when considering how much to deposit.

Keep in mind, you can contribute to an RRSP in one year but you do not need to deduct the whole contribution in that year. Some can be carried forward to deduct the next year, an attractive option if the tax savings will be higher.

Any funds not otherwise contributed to RRSPs should be contributed to TFSAs, including the emergency fund money, so at least the funds are growing tax free.

If you decide to repay your mortgage, the end of those payments means you will have extra cash every month. It will be important to determine how much of that extra money should go to savings, or whether you can afford to spend more in other areas.

In other words, if you and your spouse are on a good trajectory for retirement, maybe this windfall allows you to spend a bit more on yourselves or your kids.

This could also be a good time to consider retirement planning, set some saving and spending targets, and see what is possible for you. The loss of a loved one is a good time to consider your own estate planning.

There is really no bad choice for you to make here, Reggie. Both debt repayment and investing help in building your net worth as you work towards financial independence and retirement.

Brenda Hiscock is a fee-only, advice-only certified financial planner with Objective Financial Partners Inc. in Toronto.

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Employees are taxable on their salaries, bonuses and any other type of direct compensation they may receive, but they could also end up paying tax on various non-cash employment benefits or perquisites.

Under the Income Tax Act, employees must include in their income the value of any benefits of any kind received by the employee “in respect of, in the course of, or by virtue of his or her employment.” In determining whether an employee must include the value of a benefit

Employees are taxable on their salaries, bonuses and any other type of direct compensation they may receive, but they could also end up paying tax on various non-cash employment benefits or perquisites.

Under the Income Tax Act, employees must include in their income the value of any benefits of any kind received by the employee “in respect of, in the course of, or by virtue of his or her employment.” In determining whether an employee must include the value of a benefit received, the Canada Revenue Agency looks at three determining factors: Does the benefit give the employee an economic advantage? Is the benefit measurable and quantifiable? And does it primarily benefit the employee or the employer?

Two recent CRA technical interpretation letters, each released in the past month, discussed whether certain employer-provided benefits would be considered taxable. The first concerned employer-provided COVID-19 testing, and the second was employer-provided identity theft protection services. Let’s take a look at what the CRA said about each one.

COVID-19 testing

The taxpayer, presumably an employer, wrote to the CRA asking about employer-paid COVID-19 testing, specifically a polymerase chain reaction test where employees mail in the sample to a laboratory for analysis. The results take several days to process and come back. The testing is fully funded by the employer, participation by employees is voluntary, and an unfavourable test result (that is, a positive COVID-19 test result) would prevent the employee from entering the employer’s premises. Notably, the employee would still be able to maintain their employment status through an alternative work arrangement if a positive test result were to occur.

The CRA responded that it was the agency’s “long-standing view” that an employer is considered to be the primary beneficiary of medical testing in situations where such testing is necessary to fulfil a condition of employment. In the situation described in the letter, however, employees are not required to take a COVID-19 test and the test results (whether positive or negative) have no impact on an employee’s employment status. As a result, voluntary COVID-19 testing does not create an employment condition.

That said, in the context of the pandemic, “considerable effort is being made to control the spread of the virus,” with governments encouraging employers to make testing available to employees. As a result, the CRA concluded that where the results of employer-provided COVID-19 testing are mainly for the use of an employer, it is “both unlikely and unintended that an employee would be enriched or considered to have received an economic advantage,” and so the CRA does not view employer-provided COVID-19 testing as a taxable benefit to employees. (Phew.)

Identity theft shield premiums

The second technical interpretation letter was written by an employer asking whether identity theft shield premiums it presumably would pay to a third party on behalf of its employees would be considered a taxable benefit to employees, and whether those premiums would be considered a tax-deductible business expense for the employer.

Identity theft protection services generally provide identity or credit monitoring services to determine if an individual’s personal information has been compromised. According to the details of the plan, the issuer of the policy provides privacy and security monitoring, identity consultation services and identity restoration services. Specifically, the service monitors for matches of an individual’s personally identifiable information: name, date of birth, social insurance number, driver’s licence number, up to five passport numbers, and up to 10 of each of the following: bank account numbers, international bank account numbers, credit/debit card numbers, medical identification numbers, e-mail addresses and phone numbers.

The CRA, after reviewing the details of the plan and services on offer, and in the absence of additional information suggesting a heightened risk of identity theft for the company’s employees or some type of link between the personal information monitored and the employer’s business, determined that the employer-paid plan would appear to provide an economic advantage primarily for the benefit of the employees. As a result, the CRA concluded that employer-paid premiums would, indeed, be included in the employee’s income as a taxable employment benefit.

The CRA then turned to the question as to whether the premiums paid would be tax deductible to the employer as a business expense. Generally, in order to qualify as a tax-deductible business expense, it must be incurred for the purpose of earning business income, must be neither a capital expenditure nor a personal expense, and must be reasonable in the circumstances.

Based on the details of the identity theft protection plan described above, the CRA felt that the services relate to protecting an individual’s personal and financial information, and were not related to either the employee’s employment or business information. That said, the CRA concluded that to the extent the employer-paid premiums are included in the employees’ income as a taxable benefit, the premiums would also be tax deductible for business purposes provided they are also considered reasonable. This conclusion is consistent with most employer-paid perquisites, which are generally tax deductible to the employer.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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MONEY MILESTONES: In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.

Parents say having children is among the very best experiences of their lives, but navigating their offspring’s path from infancy to adulthood will put a serious dent in their finances. 

“Don’t kid yourself about the cost of kids,” said Justine Zavitz, vice-president at Zavitz Insurance & Wealth in London, Ont. “You can be a very frugal person, but kids are expensive and you’re going to be allocating more and more of your monthly budget to them than to yourself.”

As interest rates continue to rise, it’s not surprising that many parents are feeling the financial pinch of parenting. According to a survey by PolicyMe Corp., a Toronto-based digital life insurance firm, 70 per cent of parents say Canada is becoming unaffordable, with 47 per cent noting that food is the most expensive and/or challenging child-related spending expense to manage, followed by clothing, shoes and other accessories at 43 per cent.

The financial impacts come even sooner if couples require fertility assistance through medical procedures such as in vitro fertilization (IVF). One IVF cycle can cost from $7,750 to $12,250 plus additional medication costs, and multiple cycles are often required.

“My wife and I struggled to have a child and went through IVF and no one talks about how hard that can be both emotionally and financially,” said Toronto-based personal finance expert Barry Choi, whose IVF journey totalled $20,000.

During the group consultation when the doctor outlined the procedure’s costs, he recalls that some people broke down in tears because they knew they couldn’t afford it. In some provinces, however, some may be eligible for one cycle of government-funded IVF.

My wife and I struggled to have a child and went through IVF and no one talks about how hard that can be both emotionally and financially

Barry Choi

Although there are no definitive numbers on the cost of raising kids in Canada, experts have conservatively estimated it to range from $10,000 to $15,000 a year. If you’re considering private school, bank on another $4,000 to $26,000 per school year.

But Choi said it’s best to consult with experienced family and friends to get a proper handle on what having a child will cost you.

“Everything you read online is subjective, but when you talk to a parent who has dealt with it recently, that’s where you get the real-life information,” he said.

In taking the plunge into parenthood, doing plenty of pre-planning is key. Choi said he and his wife created a budget for the first year, knowing there would be a reduction in income because of maternity/paternity leave. Maternity and paternity benefits allow you to get only 55 per cent of your income up to maximum of $638 a week, unless your company tops them up.

“The nice thing is that we went on that budget even before our daughter was born to feel it out before things got real,” Choi said.

Don’t forget to create some cushioning for some fun stuff either, he adds, so that stay-at-home parents don’t feel guilty spending on occasion even if they’re not “working.”

Zavitz wishes she had done more research on one-off, child-related expenses, such as baby and toddler accessories, early on instead of being backed into finding the fastest — and often more expensive — solution.

We went on that budget even before our daughter was born to feel it out before things got real

“By doing more backward planning and anticipating future needs, you can give yourself time to shop for the best deals,” she said.

Zavitz points to options such as Facebook Marketplace and online community hubs where parents often offload no-longer-needed children’s items at a fraction of their retail price — or for free.

“That’s where I’m buying a lot of my kids’ sporting equipment now, which can save so much,” she said.

Experts also point out that new parents should remember that child-care costs won’t necessarily go down as children get older. After those early years, there are before- and after-school care costs, babysitters, summer camps and extracurricular activities, plus post-secondary education expenses.

Zavitz said government initiatives such as the Canada Child Benefit (CCB) can help offset some of these costs for eligible parents. In 2022, the CCB equals a maximum of $6,997 per year for children until they are five years old, and $5,903 for those six to 17.

For parents who can afford it, she’s also a big fan of the registered education savings plan (RESP) as a tax-efficient way to save for a child’s education. The federal government will add 20 per cent on top of your annual contribution of up to $2,500, though the lifetime contribution limit is $50,000 per beneficiary.

“You can catch up on past grants if you can’t afford it right away, but only to a certain extent,” she said. “It’s also a nice present from grandparents to put money into RESPs.”

Zavitz also advises parents to ensure they put children on their benefit plans within 30 days of their birth to avoid issues around unforeseen medical expenses, and to add children to their wills as soon as possible.

“The trouble is, you don’t fully recognize the pull on the heartstrings until you do meet your kids,” she said. “You’re going to want to give them everything you can to make their life wonderful and that’s going to cost you.”

A couple we’ll call Peter, 41, and Charlotte, 39, live in Ontario with their two-year-old child, Morgan. They bring home $11,200 per month from their jobs, his in corporate development, hers in strategic planning. They have a $2.3 million house, $50,000 in raw land, $65,000 in RRSPs, $20,000 in TFSAs, $25,000 in taxable securities, $37,500 in gold and a $12,000 car. It adds up to $2,509,500. Take off their $820,000 home mortgage and their net worth is about $1.7 million — a very respectable sum.

A couple we’ll call Peter, 41, and Charlotte, 39, live in Ontario with their two-year-old child, Morgan. They bring home $11,200 per month from their jobs, his in corporate development, hers in strategic planning. They have a $2.3 million house, $50,000 in raw land, $65,000 in RRSPs, $20,000 in TFSAs, $25,000 in taxable securities, $37,500 in gold and a $12,000 car. It adds up to $2,509,500. Take off their $820,000 home mortgage and their net worth is about $1.7 million — a very respectable sum.

Email andrew.allentuck@gmail.com for a free Family Finance analysis

Peter and Charlotte, who moved to Canada nine years ago, have succeeded in material terms, but they yearn for the former country with palms, lapping sea shores and no snow at all. Their goal is to achieve a $3,000 monthly retirement income for a retirement spent back home, and they would like to go sooner rather than later.

Investment strategies

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. of Kelowna, B.C., to work with Peter and Charlotte. For now, they put cash in excess of spending into various investments — their TFSAs in particular. At this stage of their lives as parents, they could instead build up a Registered Education Savings Plan for Morgan and receive a Canada Education Savings Plan bonus of the lesser of 20 per cent of contributions or $500 per year to a maximum of $7,200. Alternatively, they can use RRSPs that provide a 29.65 per cent tax refund in their bracket.

They should pursue tax-efficient investments, for their combined annual income, $180,000 before tax, leaves them with $134,400 per year or $11,200 per month after tax. They spend $9,100 per month, leaving $3,500 savings for investments or debt paydown. Making good use of that surplus is the key to quitting work long before conventional retirement.

The idea of a RESP for a child who may not be a resident of Canada when it is time for post-secondary education may seem odd, but it will work, Moran explains. Contributions made as long as the family resides in Canada together with the CESG boost will be payable to Morgan no matter where the family eventually lives or he studies.

Retirement income

Like the RESP, Peter and Charlotte will be able to apply for Canada Pension Plan benefits no matter where they are living when they retire. At this point, they would have accrued nine years times 2.5 per cent of annual maximum benefit of $15,043, a sum that works out to $3,385 per year each. The longer they stay and work in Canada the larger that benefit will become. It will be hard to match in their destination, but aside from a withholding tax, there will be no impediment to drawing the benefit.

When it comes to Old Age Security, however things change.  Given their circumstances, to qualify for Old Age Security while living in another country, they will have to have been residents for 20 years. In their case, that means living in Canada to age 52 and 50, respectively. That’s longer than they want to stay. We’ll assume they do not make it to 20 years residence in Canada.

Each partner currently has $80,000 of RRSP contribution room. If they were to leave Canada permanently, they would probably leave the RRSP accounts in Canada and then draw them down via Registered Retirement Investment Funds (RRIFs) subject to a 15 per cent withholding tax. If they leave them as RRSPs and do not shift them to RRIFs, the withholding tax would be 25 per cent, Moran notes.

If they are subject to tax in their home country, which has a tax treaty with Canada, they would get credit for tax paid in Canada. They need to check their personal tax details with a cross border tax specialist, perhaps in their home country.

Moving home

Should they keep their Ontario house after leaving Canada permanently? They might keep the house and rent it out for $5,500 per month or $66,000 per year. Their house property tax is $6,000 per year. Their equity is $1,480,000. The math, however is not on their side: If they charge $66,000 gross annual rent and deduct $22,878 mortgage interest (this does not include principal repayment which goes out of one pocket and into another), $2,000 of maintenance, $3,390 for a property manager with a six per cent bite, their income after these expenses would be $31,732 per year. That’s a 2.14 per cent return. If they are then stuck paying the present Ontario non-resident speculation tax of 20 per cent of their $1,480,000 equity — that’s $29,600 net, their costs would rise to $61,332. That would leave net rental income of $4,668 or a third of one per cent. If they can’t avoid the non-resident speculation tax, which has many exemptions, retaining the property would be unwise, Moran advises. They would then do well to cash in their interest and take it abroad.

In their home country, they might need approximately $25 capital for each dollar of pre-tax income based on foreign inflation and tax rates. Moran estimates they would need $41,400 per year for living costs so therefore they would need to invest $1,035,000 capital. That’s less than their present net worth of $1,689,500, meaning they could move today and have more than enough income to support themselves, though not extravagantly.

They could work full or part-time to top that off if they so choose, or could continue to work and save in Canada for a number of years, adding to their potential CPP payouts down the road and padding their savings.

Depending on the balance they choose, life insurance could add certainty to their finances. The annual cost of a policy with a face value of $1 million would be $660 for Peter and $415 for Charlotte. Costs vary with details. Like a good suit, policies need to be tailored to the client.

Morgan would be able to draw on his RESP even if living or studying outside of Canada. The sums already parked in their Canadian RESP plus what they can save in their low-cost country would no doubt produce a six-figure kitty in the 15 or 16 years to Morgan’s age 18.

Is it feasible to transfer two accomplished lives and their accompanying savings to another country with parallel but not identical retirement systems?  The short answer is yes. There will be a cost in terms of financial security, stronger social safety net and more opportunities to work and earn in Canada, but it isn’t hard to understand the appeal of a decidedly warmer country that feels like home and the potential for a much earlier retirement.

Financial Post

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Retirement stars:  Five retirement stars ***** out of Five

FP Answers: Personal Finance:

By Julie Cazzin with Allan Norman

Q: I paid a fee-based planner for some financial advice, but they didn’t tell me anything I didn’t already know. I feel like it was a waste of money. Am I missing something? — Caitlin in Penticton, B.C.

FP Answers: Caitlin, hopefully you said something to your planner — for both your sakes. Your question got me thinking. In future, what is the one thing you can do to feel like

By Julie Cazzin with Allan Norman

Q: I paid a fee-based planner for some financial advice, but they didn’t tell me anything I didn’t already know. I feel like it was a waste of money. Am I missing something? — Caitlin in Penticton, B.C.

FP Answers: Caitlin, hopefully you said something to your planner — for both your sakes. Your question got me thinking. In future, what is the one thing you can do to feel like you’re getting full value from financial planning and it doesn’t seem like a waste of money? Simple: curiosity. Stay curious throughout the planning process and you will get your money’s worth.

Some of the best planning sessions I have had were with engineers who asked me a lot of questions and gently challenged me. I once asked my dad, who was a chemical engineer, why engineers ask a lot of questions, and he told me, “Because a good engineer always wants to know why.”

Caitlin, you need to know “why” as well.

Planning is about learning, making good decisions, dealing with change and building confidence so that you are comfortable living the lifestyle you want without the fear of ever running out of money.

Did you remain curious and ask lots of questions throughout your planning sessions? Did your adviser give you the chance to ask questions? Was your adviser curious about you and your lifestyle?

One thing that helps trigger questions is the use of detailed financial planning software that you and your planner interactively work on together. For example, let’s say you punch in some numbers on an online accumulation calculator and get some results. If you were to give your planner the same numbers to punch into their sophisticated software, they would likely get similar results and you would think, “What a waste of money.”

But a curious adviser will want to know how you spend your money since it’s a reflection of your lifestyle, and will ask you to fill in an expense sheet. I was once working with a client and things weren’t quite working out the way he wanted, so he suggested reducing his retirement income by $10,000. I said sure. But did he want to cut out his trips south? No. What about his fitness spending? No. Some entertainment costs? No.

He wasn’t prepared to give up some of his lifestyle and this led to further discussions of how to make things work. If I had just accepted his suggestion of reducing his retirement income by $10,000, that would have been the end of the discussion and there would have been no learning.

Each planner has their own way of guiding you through the planning process, but there are some general steps. The first is to lay out all your financial chips on the table along with your current lifestyle. This way you learn the truth about your money and what it will do for you. Do you have some gaps? When? Why? Do you have more than you need? Ask questions.

The next step is to see what’s possible. This is where you want to be really curious. “What happens if I buy a cottage? Can I help my kids financially now?” This is also where you want your planner to be curious. They should ask what is important to you about owning a cottage. If you rented the same cottage for two weeks each year, would that satisfy your needs for owning a cottage?

Once you know what is possible, you can set some lifestyle and financial goals and develop a plan that lets you achieve those goals your way. With your goals in place, you need a to-do list, developed by you and your planner. Ask for it if you aren’t given one and make sure the trip to Miami is on there, too. Remember, this shouldn’t just be a financial list. It’s a lifestyle plan.

Finally, your plan needs to be monitored by you or your planner. You can do that by using a net-worth and cash-flow projection itemized annually. Ask your planner for something you can use to monitor your plan. It’s time to review when your actual circumstances start to deviate from the plan’s projections. Ideally, though, you should be reviewing your plan each year.

Think of your planner as your thinking partner or your guide to an amazing life. Meeting on a regular basis and staying curious will help you learn to make good decisions and become more confident with your situation, so that you are in a better position to get the lifestyle you want. Stay curious, Caitlin, and you won’t be wasting your money.

Allan Norman, M.Sc., CFP, CIM, RWM, provides fee-only certified financial planning services through Atlantis Financial Inc. Allan is also registered as an investment adviser with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This commentary is provided as a general source of information and is not intended to be personalized investment advice.

It’s often said that cash is king, but it may not always be the best method of payment when it comes to dealing with the taxman, who may ask you some tough questions to justify tax-deductible expenses or, on the flip side, demonstrate you earned a minimum amount of qualifying income to take advantage of various benefits or credits.

For example, there’s been a slew of recent cases dealing with taxpayers’ eligibility for COVID-19-related benefits, such as the Canada Emergency

It’s often said that cash is king, but it may not always be the best method of payment when it comes to dealing with the taxman, who may ask you some tough questions to justify tax-deductible expenses or, on the flip side, demonstrate you earned a minimum amount of qualifying income to take advantage of various benefits or credits.

For example, there’s been a slew of recent cases dealing with taxpayers’ eligibility for COVID-19-related benefits, such as the Canada Emergency Response Benefit (CERB) and Canada Recovery Benefit (CRB), in which taxpayers had to prove they had earnings of at least $5,000 to qualify for these benefits. If those earnings were paid in cash, and never deposited in a bank account, the validity of various taxpayers’ claims was challenged.

But the difficulty in proving cash earnings can also arise outside the realm of pandemic benefits. Take a recent case involving a taxpayer’s claim for the Working Income Tax Benefit (WITB), since replaced by the Canada Workers Benefit (CWB). The benefit is a refundable tax credit that supplements the earnings of low-income workers, and is available to individuals 19 years of age or older who aren’t in school full time.

For 2022, the CWB is equal to 27 per cent of each dollar of working income above $3,000, to a maximum credit of $1,428 for single individuals without dependents, and $2,461 for families (couples and single parents). The CWB is phased out at a rate of 15 per cent of each dollar of income above $23,495 for single individuals (without dependents), and $26,805 for families. (Note that amounts may be different for residents of Alberta, Nunavut and Quebec.)

In 2018, about 1.4 million Canadians received the WITB. The key to qualifying for the WITB (or the CWB now) is that the individual claiming the credit must have “working income,” which is essentially employment or business income.

But how does one prove working income if you’re paid exclusively in cash?

That was the question before the judge in a recent Tax Court of Canada case involving a Prince Edward Island resident and his WITB claim for the 2015, 2016 and 2017 taxation years. The taxpayer’s claims were denied because the Canada Revenue Agency concluded he “was not actively operating a business” and had “not earned any working income giving entitlement to the WITB.”

By way of background, the taxpayer lives “very modestly” in a trailer with his wife and was described by the court as a man “gifted with an independent spirit.” Throughout his life, he has held various jobs, including as a bar singer in Montreal, as well as gigs in technology and construction and renovation.

In court, the taxpayer was represented by a childhood friend, a tax specialist, who also prepared his tax returns for the three years in question. His friend also happens to own several properties, where the taxpayer carried out all kinds of work, including the renovation of bathrooms, installation of floors, repair of flood damage and construction of galleries and balconies, as well as plumbing and electricity — in short, anything related to renovation or maintenance.

During the tax years in question, the taxpayer only worked during the summer in order to earn enough money for him to spend the winter on a sailboat in the Bahamas. He didn’t need a lot of money because he didn’t have any dependents and had very few personal expenses. The annual expenses for his sailboat amounted to $5,000. Each winter while on his boat, “it cost him nothing to live. He ate what he caught,” and testified, “Life on the sea is not expensive … To live on his sailboat … is … the best possible life; it’s heaven on earth.”

In 2015, 2016 and 2017, the taxpayer declared business income of only $10,000 to $13,500, because he was sailing for six months of the year. He also didn’t incur, nor deduct, any business expenses, as his customers bought any necessary building materials.

His friend paid him in cash, but the taxpayer did not keep any documentation of the income he earned or a register, although, according to the judge, “he has since realized the importance of keeping a record and preserving any supporting documents.” His friend marked the work, or the amounts paid to the taxpayer, on a small calendar and, at the end of the year, did the accounting. The taxpayer didn’t deposit his income in his bank account, but claimed to have declared all his income to the CRA on his returns.

The CRA argued that the income the taxpayer declared was not related to the operation of a business or employment, because he conducted a cash-only business, kept no records, incurred no business expenses and produced no supporting documents to support his claims. The taxpayer and his tax specialist friend relied “almost solely on their memory, which is unreliable in nature.”

The judge acknowledged that “in a self-assessment system like we have in Canada, keeping books and records is very important,” but the failure to keep good records is not, by itself, sufficient grounds to dismiss a case.

Absent good books and records, the burden of proof is certainly higher and the judge must assess the credibility of the taxpayer and any witnesses, such as the tax specialist. As for running a cash business, the court cited prior jurisprudence which concluded: “The use of cash is legal and legitimate … and it does not necessarily lead to a conclusion of tax avoidance.”

The judge weighed all the evidence and was satisfied the income declared by the taxpayer during the years in question did, indeed, relate to the operation of a business, was corroborated by his tax specialist and constituted working income. The judge, therefore, concluded the taxpayer was entitled to the WITB for the three years in question.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

Many people are getting the urge to travel again as countries reopen and relax their COVID-19 restrictions. Even if travelling wasn’t something you did before the pandemic, two years at home is more than enough time to give anyone the travel bug.

But before you spend hours surfing travel websites and researching where you want to go, review your finances. It may feel less spontaneous than simply booking a last-minute special, but ensuring you can afford to fit your dreams into your budget

Many people are getting the urge to travel again as countries reopen and relax their COVID-19 restrictions. Even if travelling wasn’t something you did before the pandemic, two years at home is more than enough time to give anyone the travel bug.

But before you spend hours surfing travel websites and researching where you want to go, review your finances. It may feel less spontaneous than simply booking a last-minute special, but ensuring you can afford to fit your dreams into your budget without accumulating credit-card bills will help prevent buyer’s remorse.

Maybe you’re one of the fortunate ones who can count on receiving a sizable tax refund. If you don’t need the money to catch up on other bills … great. Put it in your travel fund and use it guilt-free. If you aren’t so lucky, then it’s a good idea to start reviewing your monthly budget to determine what you can afford to save towards a vacation. Planning your vacation spending mindfully helps avoid struggling to repay unplanned credit-card bills when you get home.

If your budget feels too tight to fit anything extra in, start tracking where your money is going. We can often control impulsive or unnecessary expenses better when we pay more attention to our daily spending. For example, it may not seem like much at the time, but a daily stop for coffee or lunch adds up. Do the math: spending $10 per working day on lunch out adds up to approximately $200 a month. Over the course of a year, that amounts to $2,400, which can go a long way toward paying for a week at an all-inclusive beach resort.

But what if you have reviewed your budget and, with the increase in living costs, you are barely making ends meet as it is? The next step would be to review what those costs are and if they can be cut back. Some two-car families have found since COVID-19, and the transition to working from home at least part of the time, that they no longer need a second vehicle and the associated expenses. It may take some schedule coordination to work with just one vehicle, so focus on why you’re jumping through those hoops. The savings you create by having only one car could free up enough money to balance your budget or cover that tropical getaway.

If the cost of fuel is hurting your budget, consider trading in your vehicle for something more fuel efficient or improve your driving habits to save more at the pump. If that’s not feasible, consider other ways to reduce your transportation costs. Maybe a co-worker lives nearby and is willing to carpool. Public transportation might not be as convenient, but it is much cheaper than operating a vehicle.

It also never hurts to review your cable, cellphone and internet bills to ensure you are not paying for features you don’t use. Streaming services can be much cheaper than cable, but subscribing to several at a time adds up. If you have several cellphone users in your household, explore changing to a family plan that has lower costs and allows you to share data. Inform your kids about the cost of using data when Wi-Fi is not available to further save on that cellphone bill.

Home and private auto insurance (where permitted) can also be reduced by shopping around for the best price. Some provinces offer lower insurance costs on vehicles that are not driven daily or for drivers who have a good driving record.

If the rising cost of groceries has put a strain on your budget, some savvy shopping can help reduce costs. That doesn’t mean driving all over town to save $2 on a block of cheese; it means knowing where to do your overall shop. Bigger chain stores are often able to offer lower prices than smaller, local stores that can’t pass on significant volume discounts. Also, the more meals you can prepare from scratch without expensive pre-packaged foods, the more you will save. You may find that eliminating processed foods has a positive impact on your health as well as your bank account.

If you’ve done all these things and still find that a vacation is financially out of reach, don’t automatically turn to credit to make your dream come true. Look at staycations, home swaps with friends or family, or taking on a side job to create the necessary room in your budget. For some great ideas on how to make extra money on the side, check out 65 Side Hustles, one of many free, educational webinars offered on the mymoneycoach.ca website.

If your goal is to save $200 per month over the course of a year towards a vacation, break it down to earning an extra $46 per week to achieve it. Taking small steps can add up to help you take a big step away from your day-to-day routine.

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 25 years.

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A couple we’ll call Martin, 52, and Sherry, 55, live in southern Ontario. Both government employees, they earn $11,780 per month from their jobs before tax, and have defined benefit pensions to look forward to.

Their question: Can they retire three years from now when Martin is 55 with $8,000 per month after tax?

Family Finance asked Eliott Einarson, head of the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Martin and Sherry. Einarson says

A couple we’ll call Martin, 52, and Sherry, 55, live in southern Ontario. Both government employees, they earn $11,780 per month from their jobs before tax, and have defined benefit pensions to look forward to.

Their question: Can they retire three years from now when Martin is 55 with $8,000 per month after tax?

Family Finance asked Eliott Einarson, head of the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Martin and Sherry. Einarson says the key to reaching that early retirement goal will be to reorganize assets to boost future income and create more certainty.

e-mail andrew.allentuck@gmail.com for a free Family Finance analysis

Let’s look at the numbers. Martin currently earns $95,000 per year and takes home $57,500 after taxes and deductions. Sherry has gross income of $46,368 and takes home $33,546.  Thus their combined take home income is $91,046 per year or $7,587 per month. From that sum, they allocate $6,625 per month to defined expenses such as $960 per month to their home mortgage, $400 to personal loan payments, $725 for car payments and $525 to monthly RRSP contributions.

Retirement finances

Retirement is going to take substantial reorganizing of assets. Their home has a $400,000 estimated market value. They have a $325,000 three-season cabin. They also have four rental properties with a total estimated market value of $690,000. They cover their costs but have negative returns after inflation. Their RRSPs add up to $276,000. They have just opened TFSA accounts with combined balances of $85,000. They have total assets of $1,856,000 including $30,000 cash.

Debts amount to $347,336 including $6,500 on a personal line of credit, $17,685 for a boat loan, $38,000 for a car loan, $111,000 for their home mortgage and $174,151 for four rental properties. Their net worth works out to $1,508,664.

The transition from working to retirement needs a strategy. They could sell their $400,000 home and their $325,000 cabin. The $725,000 they might realize less $25,000 in costs would net $700,000, They could buy a year-round cabin for $500,000, freeing up about $200,000 to pay off their home mortgage and all other debts, with the exception of their rental properties.

The rental properties have a combined estimated market value of $690,000, $174,151 of mortgages and $12,000 net annual rent. Their equity is about $516,000. The return on equity is just two per cent, which is less than current inflation. It is likely to decline as they roll mortgages into higher rates. Best bet — sell the rentals as well. The transaction would liberate $516,000 and after paying $100,000 tax on estimated $400,000 capital gains, half taxable, they would have $416,000 for investment.

Reorganization

Martin can have an unreduced pension of $58,628 at 55 including a 13 per cent bridge to 65 that will be replaced by Old Age Security at 65. Sherry, three years older, can have a $6,000 annual pension when Martin retires. Their RRSPs with a present balance of $276,000 plus $6,300 annual contributions will grow to a balance of $321,650 in three years assuming compounding at three per cent after inflation, enough to generate $14,533 per year for the following 35 years when all income and capital are paid out.

Their TFSA account with a present balance of $85,000 plus $12,000 of annual contributions for three years would grow to $131,085 in 2022 dollars assuming a return of three per cent per year after inflation and would then generate tax-free income of $5,923 annually for the following 35 years.

Finally, assuming that all rental properties are sold within three years, the $416,000 realized and invested with a three per cent annual return after inflation for the following 35 years would generate $18,796 annually for the following 35 years.

Income by decade

Adding up returns, the couple would have $58,628 pension at Martin’s age 55, $6,000 for Sherry’s pension, $14,533 RRSP income, and $5,923 TFSA cash flow. Capital liquidated by sale of rentals would generate $18,796. That’s a total of $97,957 plus the TFSA. Tax at 14 per cent on all but TFSA income would leave $90,166 per year or $7,514 per month. That’s a little below their $8,000 after-tax retirement income target.

When Sherry is 65, she will be able to add OAS at a present rate of $7,707 per year and CPP at an estimated rate of $7,000 per year, bringing total income to $112,664. After splits of eligible income and tax at an average rate of 16 per cent, the couple would have $100,560 per year or $8,380 per month.  They would be over their goal.

When Martin is 65, income would adjust with the end of the $7,707 bridge replaced by $7,707 OAS and estimated CPP payments of $12,000 per year for total, pre-tax income of $124,664.  After splits and 17 per cent average tax, they would have $109,393 per year or $9,116 per month after tax.

A retirement that could last three or four decades brings into play an important question:  What sort of investments will sustain spending over such a long horizon? Diversification among asset classes is vital, Einarson explains. They can hold Canadian, U.S. and global stocks with a light weighting of Canadian government bonds no more than 10 per cent to 15 per cent of total portfolio value as shock absorbers if equity markets suffer deep corrections as they did in 2000 and 2008. It is also vital to keep asset management costs down to 1.5 per cent or less. That means shopping for low fee mutual funds, exchange traded funds or advisors who offer management services at that fee level. Or less.

“To be active investors, they will have to commit to studying and managing their portfolio,” Einarson explains  “If they are content to be passive investors, they have to shop for managers who deliver value for their fees. Either way, they have to understand what they get from their investments.”

3 Retirement Stars      *** out of 5

Financial Post

e-mail andrew.allentuck@gmail.com for a free Family Finance analysis

By Julie Cazzin with John DeGoey

Q: I was discussing updating my will with friends and a couple of them have included a letter of wishes with their wills. They say it will help preserve wealth and clarify details for executors and beneficiaries. Do I need one and, if so, why? — Thanks, Monica

FP Answers: Monica, most people know it is prudent to have powers of attorney (POA) in place for both property and personal

By Julie Cazzin with John DeGoey

Q: I was discussing updating my will with friends and a couple of them have included a letter of wishes with their wills. They say it will help preserve wealth and clarify details for executors and beneficiaries. Do I need one and, if so, why? — Thanks, Monica

FP Answers: Monica, most people know it is prudent to have powers of attorney (POA) in place for both property and personal care. It would be awful to be incapacitated without a plan and a clear path forward regarding what is best. People also know that wills are critical for all but the most basic estate transfers.

However, many people don’t consider the grey areas surrounding the more mundane elements of one’s life, such as personal effects, social media accounts, and small but prized possessions. Hopefully, people have addressed the big-ticket elements of their lives in their wills before they die. But many small and often highly personal things often escape the attention of the person drawing up the will. Also, things change.

One way to deal with this lack of certainty regarding posthumous intent is to execute a letter of wishes. Depending on the wording, it may or may not be legally binding, even if the intent is clear. If done with proper care, however, the wording can make your decisions binding. But the wording might also be taken as a mere suggestion, so how you give instructions can be critical.

What is the main test in making the distinction? If you want your letter of wishes to be binding, then refer to it in your will and your POA (property), too. Given the need for timeliness, it should be easy to access the document(s) immediately.

There’s a relatively short list of what might be covered. It usually includes decisions about burial versus cremation, organ donations, and any items or personal effects that offer emotional or nostalgic significance to other family members and friends. These days, you also can’t overlook social media accounts (Facebook, Twitter, LinkedIn) and digital accounts (including passwords) for pre-established memberships, billings and donations (Amazon.com, Air Miles, Save the Children).

Unless current passwords are stored in a safe, easily accessible place, gaining access to the digital footprint of the deceased can become a Herculean task and an awful burden. Bank accounts alone can be a nightmare to access.

A good letter of wishes itemizes what is to be done with each of these accounts and provides the necessary tools to complete the desired task quickly and efficiently. Keeping it in your safety deposit box can save your executor a mountain of work, especially if it includes passwords to all your digital accounts. It should be noted that some providers (Google, for example) allow users to specify what happens when an account goes inactive.

As is often the case, much of the responsibility rests with the designated persons, and depends on the good judgment of those individuals. No matter how discerning your closest friends are, they are not clairvoyant. If something unexpected happens to you, it is highly recommended that you have already put down your specific wishes so any potential grey areas can be resolved. If there is something where discretion would be a challenge and no clear guidance is indicated, then that guidance should be provided.

Here are some examples of what might be itemized: details regarding employment, including a contact person at the human resources department where you worked; specific friends and family who need to be notified for any reason; where to find documents, including contact info for your lawyer and accountant; any outstanding debts; any life insurance policies (including account numbers); points and rewards program details; social media accounts; professional and recreational memberships; and subscriptions (cable, internet, phone, e-magazines).

Anything accumulated during your lifetime, no matter how big or small, must be disposed of when you’re no longer around. It’s challenging enough for your closest, most trusted loved ones to cope with your passing. The least you can do is lighten the load by helping them navigate the world without you in a way that removes all uncertainty and makes it easier for them to do what you wanted. Many people may fret over the lack of clear guidance and specifics, but having a letter of wishes will ease the burden for all.

John De Goey is an IIROC-licensed portfolio manager with Wellington-Altus Private Wealth (WAPW) in Toronto. This commentary is the author’s sole opinion based on information drawn from sources believed to be reliable, does not necessarily reflect the views of WAPW, and is provided as a general source of information only. The opinions presented should not be relied upon for accuracy nor do they constitute investment advice. For proper investment advice, please contact your investment adviser. john.degoey@wellington-altus.ca.

Your employer sends you on a business trip. It happens to be to Cancun, Mexico. You give a presentation, schmooze with clients who sell your products and attend a variety of social activities, including a catamaran cruise. Years later, you get hit with a taxable employment benefit because you went on that business trip.

If that result seems ludicrous, you may be interested in a recent decision by the Court of Quebec, after a BMO Insurance employee was assessed a taxable employment

Your employer sends you on a business trip. It happens to be to Cancun, Mexico. You give a presentation, schmooze with clients who sell your products and attend a variety of social activities, including a catamaran cruise. Years later, you get hit with a taxable employment benefit because you went on that business trip.

If that result seems ludicrous, you may be interested in a recent decision by the Court of Quebec, after a BMO Insurance employee was assessed a taxable employment benefit by Revenu Québec (RQ) of $1,872 in respect of a business trip he took in 2015. Before going into the details of the case, however, let’s review the general rule regarding taxable employment benefits.

Under the Income Tax Act, employees must include in their income the value of any benefits of any kind received by the employee “in respect of, in the course of, or by virtue of his or her employment.”

In determining whether an employee must include the value of a benefit received, the Canada Revenue Agency (and RQ) looks at three determining factors: Does the benefit gives the employee an economic advantage? Is the benefit measurable and quantifiable? And does the benefit primarily benefit the employee, as opposed to primarily benefiting the employer?

The taxpayer in question here has been an employee of BMO for the past decade, where he serves as the director of business development. BMO offers a variety of personal insurance products to its customers across Canada. Rather than employ brokers or financial advisers to sell its products directly to the public, it relies on a network of managing general agents (MGAs), which act as intermediaries between the insurer and brokers and advisers. BMO’s primary relationship with brokers and advisers is through MGAs, making it critical that it has visibility with them, especially by participating in their activities.

The taxpayer’s duties were to manage relationships with MGAs, work with dealers and advisers, train them on BMO products, and generally encourage them to sell BMO products to their clients.

In August 2015, BMO was approached to sponsor an Elite Congress to be held in Cancun. The conference brought together the MGA’s top-performing brokers and advisers. The sponsorship included airfare for one person and a week’s hotel stay. By sponsoring the conference, a company is entitled to make a presentation about its products. BMO’s decision to participate in these types of conferences is based on the business volume (or potential volume) of a given MGA. BMO participates in approximately five conventions per year, with each MGA hosting one convention every two to three years.

Since this particular MGA had been a major business partner of BMO for many years, the insurer saw the conference as a good opportunity to gain visibility with brokers and agreed to sponsor it. It decided to send the taxpayer to Cancun to represent BMO.

The conference, the only one the taxpayer attended in 2015, included a number of activities, some were directly related to work, such as a company booth and training sessions, and some were various leisure activities. The taxpayer gave a presentation about BMO’s products, and participated in as many activities as possible with clients, including a catamaran outing, and had various meals with brokers and advisers. In the meantime, he continued to carry on his normal employment activities such as responding to e-mails and returning phone calls.

Upon his return to Canada, the taxpayer sent a “very detailed email” describing all the meetings he had had with advisers or brokers, and the potential that resulted from them. His boss expressed appreciation for the development work he did in Cancun.

The following year, the MGA was the subject of a taxable benefit audit related to the Cancun conference in which RQ divided the attendees into three categories: MGA employees, the brokers and advisers who earned their place by qualifying in a sales contest, and representatives of the insurance companies, including the taxpayer.

RQ concluded that since the MGA employees were sent on the trip in the course of their normal employment activities, the trip did not constitute a taxable employment benefit for them. Conversely, RQ determined that the trip constituted “entertainment” for the winning advisers, and it assessed a taxable benefit equal to 100 per cent of the value of the trip.

But for employees attending on behalf of the sponsors, RQ took the position that only 37.5 per cent of the trip was for business purposes, and the remainder was a taxable benefit. As a result, RQ in May 2018 reassessed the taxpayer for a taxable benefit for 62.5 per cent of the value of the trip, or $1,872.

The taxpayer objected to the assessment and took the matter to court, arguing that his attendance at the Cancun conference should have been treated as a business trip in its entirety, and not classified, in any way, as a taxable benefit.

The judge who reviewed the case noted that prior case law recognizes that while certain activities on these types of business trips may, indeed, be “entertaining in nature,” this does not prevent the primary purpose of the trip being business development. Furthermore, the judge added, it was “not appropriate to make a strict mathematical calculation to determine the proportion of leisure activities in the context of a given conference or trip. Rather, one must look at the overall purpose of attending the conference.”

As a result, the judge concluded that no portion of the cost of the trip should have been a taxable benefit to the BMO employee, since his participation on the trip was neither an award nor a prize. He went to the conference alone, it was not considered or counted by BMO as a vacation, there was an expectation he would be actively involved in meeting with advisers and brokers, and he continued to manage his day-to-day employment duties even while he was away.

The taxpayer was also awarded costs.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com 

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You may feel as though your world has been pulled out from beneath your feet when life changes unexpectedly, whether through the loss of a loved one, a torn marriage, dissolving the family business or an unforeseen illness. Over the past 25 years as an investment adviser, I’ve become a safety net for many professionals when helping a family or individual through difficult times.

Working with women in varying circumstances, from a stay-at-home mother of two, whose high school sweetheart never

You may feel as though your world has been pulled out from beneath your feet when life changes unexpectedly, whether through the loss of a loved one, a torn marriage, dissolving the family business or an unforeseen illness. Over the past 25 years as an investment adviser, I’ve become a safety net for many professionals when helping a family or individual through difficult times.

Working with women in varying circumstances, from a stay-at-home mother of two, whose high school sweetheart never returned from a bike ride, leaving her with a mountain of debt, to a woman in her sixties who built up the courage to leave her unhappy marriage yet never made a financial decision in her life, I understand having financial confidence is not innate.

I’m often asked “Where do I begin?” when clients take on newfound financial responsibility, either by choice or by consequence. These women have courageously committed themselves to learn a new language and a new way of thinking, the weight of their families’ dreams and goals now resting on their shoulders. To dampen a seemingly daunting journey, I begin by guiding them through the following:

Become empowered

Decide what financial independence looks like for you. Is it being able to pay your bills and save? Is it selling your business in eight years for $10 million?

Educate yourself

Have a financial plan and take the time to understand it. Having a sense of your financial position will give you peace of mind when you are in the driver seat.

Gather your team

Surround yourself with professionals who will listen to and understand your needs. Your team will clarify your plan and hold you accountable for actions to attain your goals.

Witnessing my clients gain the confidence to become financially independent is incredible and reaffirms why I chose this as my lifelong career.

We’ve come a long way in tackling the social stigma of women and money, but we still have a journey ahead of us to take control of our financial well-being. Gaining financial confidence is a significant part of that journey.

Kathryn Finn is a portfolio manager at RBC Wealth Management.

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A couple we’ll call Frank, 58, and his wife, Kerry, 54, live in Alberta. They have four children, all married and with families of their own. Frank is an administrator in the provincial government, Kerry a part-time shipping manager. Rental income supplements their salaries.

Frank and Kerry would like to retire within five years and maybe in as soon as a year, and visit perhaps 25 countries in the following 15 years, take five cruises at a cost of $12,000 per cruise over that span, then

A couple we’ll call Frank, 58, and his wife, Kerry, 54, live in Alberta. They have four children, all married and with families of their own. Frank is an administrator in the provincial government, Kerry a part-time shipping manager. Rental income supplements their salaries.

Frank and Kerry would like to retire within five years and maybe in as soon as a year, and visit perhaps 25 countries in the following 15 years, take five cruises at a cost of $12,000 per cruise over that span, then bunk down in southern B.C. or a warm place in the U.S. To support their plans, they have $1,050,000 in rental properties, the $365,000 equity in their home and Frank’s defined-benefit pension, which will pay him $28,750 per year. Their dreams will stress their resources.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. of Kelowna, B.C., to work with the couple.

The challenge

The primary questions — when to retire and how to finance decades of travel — are not easy to solve. Moreover, the couple’s finances are not well diversified. They have $1,290,000 in six rental condos and a home with an estimated value of $700,000 leveraged against mortgages of $240,000 for the rentals and $385,000 for their home. There are no stocks or bonds, mutual funds or exchange-traded funds in their portfolio. They have no TFSAs nor RRSPs. However, they have $215,000 in uninvested cash, much of which they have targeted for paydown of their home mortgage, which has a 20-year amortization and 2.8 per cent interest rate and costs them $2,130 per month.

Their retirement plan is dependent on Frank’s defined-benefit pension, which is a contract rather than his property, and the strength of the real estate markets in small-town Alberta, where they hold their rentals.

Currently, the couple’s income comes from $120,000 in combined pre-tax salary and $50,256 in rental income, for monthly after-tax income of $12,557. After their home and rental mortgages are paid off, their spending will drop to $8,097 per month. That’s $97,164 per year. At 65, tax credits will reduce the gross income needed to meet the net amount, Moran notes. As well, at 65, Frank can draw defined benefits from an unindexed pension of $28,750 per year.

Making adjustments

The couple has too much cash sitting idle. $51,000 should go to Frank’s RRSP, bringing his taxable 2022 income down to the top of the first federal bracket. $19,000 can go to Kerry’s RRSP.  $62,000 can go to a penalty-free payment on their home mortgage. These allocations will generate refunds of $51,000 + $19,000 or $70,000 times 30.5 per cent. That’s $21,350. That capital, generating three per cent after inflation for the following 35 years to Kerry’s age 90, would support pre-tax cash flow of $965 per year for the couple.

After their mortgage anniversary passes, which will be in fall this year, they can add another $62,000, dropping the outstanding mortgage debt to $385,000 less two times $62,000 or $261,000.

The rentals are profitable. They generate returns on equity of 3.12 per cent to 8.44 per cent and their net cash returns will grow as their mortgages are paid down. Moreover, as mortgages head toward zero due, leverage and risk will decline. But Frank and Kerry will still be betting much of their retirement on one asset class in one town. Diversified they are not.

For now, the property values are only slightly above what they paid. If they sell properties to buy Canadian shares, they will have a tax advantage, for the tax rate on their net rental income is about 30.5 per cent compared to their bracket times half the gain if there is a sale. Capital gains tax would be half that or 15.25 per cent and Canadian dividends would have a 10.16 per cent tax rate. The advantage is to Canadian eligible dividends that benefit from the dividend tax credit. In retirement, tax rates would be lower.

Retirement income

Frank and Kerry can apply for Canada Pension Plan benefits at 65.  Frank can expect $13,539, Kerry $7,522, Moran estimates. Each can apply for full OAS, currently, $7,707 per year, at 65. Their RRSPs have zero balances at present, but Frank has $108,190 of room and Kerry has $60,354 of room. Our suggestion is to put $70,000 into their RRSPs. If they retire within a year and spend their balance over the next 35 years to Kerry’s age 90, then, assuming a three per cent return over inflation, they could draw $3,162 of taxable income each year. If they can raise net $1 million and if they obtain four to five per cent from rent or dividends, they would have $47,250 pre-tax income with advantageous tax rates on Canadian source dividend income if they buy Canadian stocks.

From retirement to Frank’s age 65, they would have his $28,750 pension, $3,162 combined RRSP income and assumed rent or dividends if properties are sold of $47,250. That’s a total of $79,162. With splits of eligible income and an average tax rate of 14 per cent, they would have $68,100 per year or $5,675 per month to spend, less than present $6,945 per month with carrying cost of the rentals eliminated.

Once Frank is retired, he can add $13,539 CPP and $7,707 OAS for total income of $100,408. With splits and average tax at 17 per cent, they would have $82,390 per year or $6,945 per month, the same as present spending.

Once Kerry is retired, they can add her $7,707 OAS and $7,522 estimated CPP benefits for total income of $115,637. After 19 per cent average tax, they would have $93,665 to spend or $7,800 per month.

These are conservative calculations built on slim foundations. A crash in Alberta property prices or even failure to realize sale prices of their rentals would require postponement of retirement. If mortgage rates rise a great deal when it’s time to refinance condos, even big boosts in condo fees they pay or failure to rent just one of their six properties would hobble their plans for retirement before Frank is 60. They have hung their retirements on delicate threads.

Retirement stars: 3 *** out of 5

Financial Post

Email andrew.allentuck@gmail.com for a free Family Finance analysis.

This week, the Canada Revenue Agency began sending out Notices of Redetermination, advising some Canadians who may have received COVID benefit payments for which they may have not qualified, of debts that have been established on their CRA accounts. This follows the Notices of Debt that Employment and Social Development Canada began sending out in November 2021 to various benefit recipients who received an advance payment of $2,000 of the Canada Emergency Response Benefit (CERB) in 2020.

You’ll

This week, the Canada Revenue Agency began sending out Notices of Redetermination, advising some Canadians who may have received COVID benefit payments for which they may have not qualified, of debts that have been established on their CRA accounts. This follows the Notices of Debt that Employment and Social Development Canada began sending out in November 2021 to various benefit recipients who received an advance payment of $2,000 of the Canada Emergency Response Benefit (CERB) in 2020.

You’ll recall that as part of its response to the pandemic, the government used an attestation-based process to provide income support to millions of Canadians, which relied on individuals determining for themselves if they were eligible for benefits based on the established criteria. But, it turns out that not all who applied were ultimately eligible to receive benefits, either due to an honest misunderstanding of the rules, or, in some cases, simply applying for CERB, or its replacement the Canada Recovery Benefit (CRB), despite not meeting the qualification criteria, while hoping the government never followed up.

But now the government is, indeed, following up. If you received a letter, but still believe that you’re eligible for these payments, you should contact the CRA and provide any additional information required to validate your claim. If you do need to repay back benefits received, the CRA and ESDC have stated that their call agents will work with individuals on a case-by-case basis to find solutions to your situation, including making flexible payment arrangements. There will be no interest or penalties applied to any repayments.

Meanwhile, we continue to see taxpayers going to Federal Court, challenging the CRA’s decision to deny COVID-related benefits. These cases have had mixed success. Last month, I shared the story of the Quebec taxi driver who went to court to challenge the CRA’s decision to deny him the CRB. This follows a reported case a month earlier of the tutor who allegedly earned $5,250 of income, in cash, and was denied his claim for the CERB. There was also a case earlier this year in which yet another taxpayer was in court challenging the CRA’s decision, which concluded he was ineligible for the CRB in 2020 because he didn’t earn $5,000 of income in the prior year.

A new reported case, just out last month, involved a taxpayer who was challenging the CRA’s decision to deny him the Canada Recovery Caregiving Benefit (CRCB). The CRCB provided a $500-per-week taxable benefit, for up to 44 weeks, for someone who had to miss work to care for a family member in certain circumstances due to COVID. It was available starting Sept. 27, 2020 and ended just last week, on May 7, 2022.

To qualify for the CRCB, you had to be a Canadian resident, present in Canada, and at least 15 years of age with a valid SIN. You must have earned at least $5,000 of (self-) employment income in 2019, 2020, 2021, or in the 12-month period prior to the application date. In addition, you must have been unable to work for at least 50 per cent of your normally scheduled work week because you had to take care of a family member for various reasons due to COVID-19. For example, you may have cared for your child under 12 years old, or another family member who required supervised care, because their regular care was unavailable for reasons related to COVID-19.

In 2020, the taxpayer applied for the CRCB. He subsequently applied for additional periods in 2020 and 2021. Following his application, the CRA followed up with him on numerous occasions requesting further information, notably documentation evidencing his revenue, his reduction in work and his caregiving duties.

According to the CRA officer’s notes, the taxpayer refused to provide the requested documents and provided conflicting information over the course of half a dozen phone calls. In one call, the taxpayer claimed to care for his daughter while in another he informed the officer that he didn’t actually have custody of his daughter. In another call, he claimed that he cared for his father due to a pre-COVID medical procedure and that his father lives with him 24 hours a day, while in another call the taxpayer stated his father and mother live together. In yet another call, the taxpayer claimed to have worked and earned the prescribed minimum income, while in another call he admitted to having not worked since 2017. The taxpayer later argued that he was paid $28,150 in cash, but the cash was not deposited in his bank account, nor was it declared on his tax return.

In September 2021, the CRA denied his benefits. The taxpayer then requested a review of the CRA decision which was conducted, with the CRA concluding, once again, in an October 2021 letter that the taxpayer simply didn’t qualify.

In November 2021, the taxpayer applied to the Federal Court, asking for a judicial review as to whether the CRA’s decision to deny the CRCB was “reasonable.” The Crown brought a motion to strike the taxpayer’s application.

An application for judicial review must set out the grounds to be argued, meaning all the legal bases and material facts necessary to support the relief sought. The Federal Court of Appeal has previously set out the practice and procedures for notices of application for judicial review, as well as motions to strike any applications, saying that “an applicant must set out a ‘precise’ statement of the relief sought and a ‘complete’ and ‘concise’ statement of the grounds intended to be argued.” Indeed, prior jurisprudence has determined that “simply stating, in a notice, that (the CRA’s) findings are erroneous without explaining why or offering particulars, counts for very little, if anything.”

Given that the taxpayer’s court application included “no allegation as to how the CRA decision under review is unreasonable and that it contains no material facts pertaining to the decision,” the judge used her judicial discretion to strike the taxpayer’s application for judicial review, meaning the case will not be proceeding to trial. She also awarded costs to the Crown.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto.

The pandemic has not spelled the death of cash as many suspected it would. In fact, demand for hard currencies as a savings vehicle has gone in the opposite direction as demand reached its highest level in 60 years.

Cash withdrawals surged at the onset of the pandemic as circulating notes increased twice as much as expected in 2020 and remained elevated in the following year, according to an April 14 Bank of Canada report.

The Royal Bank of Canada

The pandemic has not spelled the death of cash as many suspected it would. In fact, demand for hard currencies as a savings vehicle has gone in the opposite direction as demand reached its highest level in 60 years.

Cash withdrawals surged at the onset of the pandemic as circulating notes increased twice as much as expected in 2020 and remained elevated in the following year, according to an April 14 Bank of Canada report.

The Royal Bank of Canada noted in a May 9 report that cash was used more as a savings vehicle rather than for transactions. The Bank of Canada’s data tracking transactions found that the volume of cash purchases dropped precipitously from 54 per cent in 2009 to only 22 per cent in 2020.

RBC analyst Josh Nye has a few reasons why Canadians are clutching onto cash: for one, there is an overall correlation with crises and the need to have hard cash on hand. Nye wrote that the demand for cash was pronounced over 20 years ago amid fears that the Y2K programming bug would wipe out the worldwide network of ATMs and digital payment systems. This “dash for cash” also resurfaced during the global financial crisis in 2008 when consumers were unsure of whether banks could stay afloat.

“On that basis, Canadians appear to be driven by a desire to stash, not spend cash,” Nye wrote.

Nye added that low interest rates, which have been in play during the pandemic, also motivated the demand for larger notes as a store of value. Since 2014, most of the currency demand (as a share of gross domestic product) were taken up by $50 notes. The report added that the $100 bill now account for 60 per cent of all currency in circulation, rising from 50 per cent back in 2010.

While Canada has the second-most ATMs among the countries in the Organization for Economic Co-operation and Development, this number has been steadily declining since 2017 with deposits and withdrawals falling even faster, according to RBC.

No consumer should be refused the right to pay with cash

Steven Meitin

As Canadians flocked online during the pandemic for everything from banking, to shopping, and everything in between – cybercrime had also become a stronger concern. To some Canadians, keeping cash on-hand has been a form of cybersecurity in itself.

Rising interest rates and inflation running at multi-decade highs could take some demand away from cash as a savings vehicle, but it won’t pull out all demand any time soon.

Canadians increasingly relying on e-commerce as the world shut down led many concerns that Canada would go cashless. This was a particular concern for cash-dependent organizations like the Canadian Association of Secured Transportation. In December 2020, CAST had been calling on retailers to continue accepting cash as a form of payment.

“Bank notes are legal tender in Canada, and many citizens rely on cash to obtain essential goods and services, which has become more important than ever in the context of the COVID-19 pandemic and its ongoing social and economic repercussions,” said CAST president Steven Meitin in a press release at the time. “No consumer should be refused the right to pay with cash.”

However, most Canadians plan to keep cash on hand, with 62 per cent of Bank of Canada survey respondents saying they made a cash transaction in the previous week and 81 per cent saying they had no plans to go cashless.

Canada’s commitment to cash has economic implications: a 2019 report by the Boston Consulting Group found that moving to a cashless model could add about one percentage point to the annual GDP for mature economies like Canada. While a benefit, Nye noted that this figure may be an overestimate for Canada given its lower cash-to-GDP ratio compared to other countries in the OECD.

An increasingly digital economy raises questions over what role Canada’s central bank could play in public money. This conversation around the digitization of money comes as the Bank of Canada is exploring its own central bank digital currency (CBDC), a digital currency issued by a central bank rather than a private company.

Most recently, Bank of Canada deputy governor Timothy Lane told a Financial Times panel in late April that he sees the Bank establishing a basic format before the private sector would add innovations to the product.

Nye noted the preference to use cash as a savings vehicle could boost the case for a hybrid of a cash and CBDC future while taking into account this decline in cash as a payment method.

“As hard currency becomes less relevant as a payment method, the Bank of Canada risks losing its role as a payment provider—a role that could prove valuable should private players come to dominate the market for digital payments.”

• Email: shughes@postmedia.com | Twitter: StephHughes95

MONEY MILESTONES: In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.

For those nearing retirement age, choosing a more permanent vacation property to avoid Canada’s dipping temperatures every winter can seem very appealing.

Nearly one million Canadians spend their winters in the United States each year, according to the latest statistics from the Canadian Snowbird Association, with half of them living in Florida.

No surprise then that sales of condos and townhouses in South Florida in October 2021 rose nearly 25 per cent compared to the year prior, but the average home sale price of US$345,000 to $406,500 is a bargain by big city standards on this side of the border. Even those snowbirds who sold off their Florida properties during all the COVID-19 uncertainty are expected to reinvest as economies settle.

“For many people, the pandemic became a little bit like a fire drill for retirement because they realized they could work from anywhere … so this idea of expanding your horizons and being in warmer climates is certainly more attractive after COVID,” said Darren Coleman, senior vice-president, Private Client Group, and portfolio manager at Raymond James Ltd., a cross-border financial services provider.

For many people, the pandemic became a little bit like a fire drill for retirement because they realized they could work from anywhere

Darren Coleman

But he advises all clients investigating property purchases abroad to first spend some serious time in their target destination to experience it like a resident rather than just a tourist.

Coleman said readily accessible services such as Airbnb and Vrbo make it easy to live in many destinations for a month or two, or more.

“That can be very helpful to realize if you have enough proximity to a grocery store, dry cleaners and health-care services,” he said. “We recommend people go and test a few real estate markets so they can see where they can build friendships and experience the lifestyle they really want.”

Keep in mind that living outside typical tourist areas may require having a good grasp of the local language, depending on the country.

Once you’ve determined the right location, look at the entire purchase price, including real estate and legal fees, property taxes, homeowner association and maintenance fees, as well as future income tax implications.

“Many times, we just go online and look at the price tag, but that’s not the full story,” Coleman said. “And if you’re going to earn income from this property, that is going to create some tax reporting obligations, too.”

Many times, we just go online and look at the price tag, but that’s not the full story

Darren Coleman

If considering a condo, he also advises checking the financial health of the condominium corporation.

“One of the things we saw after the financial crisis when properties became inexpensive was that we had to advise clients to go in and see the (financial) books,” he said. “If they’ve run out of money because people aren’t paying, they’re going to hit you with that bill.”

While still a ways from retirement, Elke Rubach, financial adviser and founder/president of Rubach Wealth in Toronto, was seriously contemplating buying a vacation property in Tulum, Mexico, this year because of its warm climate, beautiful beaches and low cost of living. Mexico is home to more North American expat retirees than any other country in the world.

She found a property at the right price, with a built-in maintenance service and an option for rental income, but still decided against purchasing.

The world economy is not stable, inflation is out of control (and while) real estate is arguably a safe bet, it’s not looking great for tourism

Elke Rubach

“The world economy is not stable, inflation is out of control (and while) real estate is arguably a safe bet, it’s not looking great for tourism,” she said. “I will revisit next year as there is no shortage of new projects.”

For any out-of-country property purchase, Rubach said it’s essential to run cash-flow models using different assumptions, such as foreign-exchange fluctuations, rising interest rates and inflation.

“Always run the best- and worst-case scenarios and ask questions such as: How stable is the currency? How reliable is the legal system? And do you have the network in place if something goes wrong?” she said. “Then if you do buy, make sure it’s in your will and you have a succession plan.”

If the numbers work, the next hurdle may be securing financing, Coleman said. It might be theoretically possible to get financing in a foreign destination, but he said banking systems oftentimes aren’t integrated across countries so accessing credit bureau reports can be difficult.

“We recommend having your Canadian financing used first in securing the property,” he said, adding that could entail using, for example, the line of credit on your home to make the foreign purchase. “You really have to get your ducks in a row to make sure it’s done correctly.”

Regardless of where you buy, Rubach said purchasers of foreign properties should seek out local counsel and realtors to work with, even if they have Canadian representation already, to ensure no details fall through the cracks.

“Make sure they are reputable, tried, true and tested,” she said. “Going for the cheapest may end up costing a ton later.”

Finding a financial expert and legal counsel well-versed in both markets is the ideal scenario, Coleman said. “Or at least ensure they are talking to each other as you don’t want any decisions made in isolation.”

In Ontario, a couple we’ll call Leo, 63, and Rose, 55, are moving into retirement. Leo left his job with a bank a few years ago while Rose continues to work. They bring home $8,400 per month. They have three children, two in their early 20s and one age 30. Their net worth is $4.45 million including a $250,000 mortgage with a modest 1.9 per cent interest rate.

Email andrew.allentuck@gmail.com for a free Family Finance analysis

Leo and Rose have spent

In Ontario, a couple we’ll call Leo, 63, and Rose, 55, are moving into retirement. Leo left his job with a bank a few years ago while Rose continues to work. They bring home $8,400 per month. They have three children, two in their early 20s and one age 30. Their net worth is $4.45 million including a $250,000 mortgage with a modest 1.9 per cent interest rate.

Email andrew.allentuck@gmail.com for a free Family Finance analysis

Leo and Rose have spent many years studying capital markets and have achieved an astonishing 12.4 per cent average growth rate with investments, almost entirely in North American stocks they have researched and follow closely. They study markets and practice the saving grace of all investments — diversification. Their investment horizon is multi-generational. It is fundamentally conservative.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Leo and Rose.

Despite their strong finances, they worry about the effect of rising interest rates,  they could boost the $1,200 they pay each month on their mortgage, which has 20 years to run. Those fears are misplaced: Even if their mortgage payments double, they could accommodate the cost either by making a few economies, extending the amortization or just using some of their invested cash to pay it off outright.

“Do we have enough for a long, comfortable retirement?” Leo asks. It is every retiree’s fundamental question.

The mortgage

Leo and Rose have a choice about whether to keep the mortgage or pay it off, Moran says. If they pay it off, they could then borrow the sum back and invest it, deducting any interest on the loan. But is it worth it?

They could tap $1,760,000 RRSPs for the $250,000 mortgage prepayment. It would taxable, so that is not attractive. They could cash in all of their $195,000 in TFSAs with no tax consequence, but if they borrow to replace tax-free investments, the borrowing cost would not be deductible. That is not attractive. Finally, they could cash in $250,000 of taxable securities. However, their adjusted cost base on that account is $170,000, meaning that they would have to pay tax on the $80,000 gain. The tax would be 30 per cent to 40 per cent, wiping out the advantage of the manoeuvre. It’s not worth it, Moran concludes. Better to bite the bullet and pay a little more interest, if needed.

Building retirement income

In retirement, Leo and Rose want to have $8,400 per month to spend, as they have now. To achieve that, they would need $61,000 each or $122,000 in fully taxable income. At that income level, they would pay 18 per cent average tax, assuming income is perfectly split.

In full retirement, the couple will have two defined-benefit pensions, neither indexed, $6,540 per year for Leo and $10,200 for Rose. At 65, Leo will have $12,000 annual CPP, Rose $9,800 per year. Each will get full Old Age Security, $7,707 per year, and proceeds from their investments.

Their RRSPs have a present value of $1,760,000. If the accounts grow at four per cent per year after three per cent inflation, which is easily within his average returns for several decades, they can generate $90,700 annually for the 35 years to Rose’s age 90.

Their taxable investments, $305,000, growing with the same four per cent average annual returns for 35 years would generate $15,713 per year.

Their $195,000 in TFSAs with the same assumptions would return $10,046 per year.

Assuming that Rose quits her job ASAP, they would have $90,700 RRIF income, $10,046 TFSA cash flow, and $15,713 taxable income. That adds up to $116,459. Assuming splits of eligible income, they would pay 15 per cent average tax on all but TFSA income and would have $100,500 to spend per year. That’s $8,374 per month, just a few dollars short of their $8,400 monthly retirement income goal.

Once Leo turns 65, his pension, CPP and OAS would start. Their income would be his $6,540 pension, his $12,000 CPP and $7,707 OAS, their combined $90,700 RRIF income, $10,046 TFSA cash flow and $15,713 taxable income. That adds up to $142,706. Excluding TFSA cash flow, they would pay tax at an average 18 per cent tax rate and have $118,830 to spend per year. That’s $9,900 per month.

Once Rose turns 65, they would have Leo’s $6,540 pension, Rose’s $10,200 pension, his $12,000 CPP, her $9,800 CPP, two $7,707 OAS pensions, $90,700 RRIF income, $10,046 TFSA cash flow and $15,713 taxable income. That’s a total of $170,413. After 20 per cent average tax, they would have $138,340 per year to spend. That’s $11,530 per month.

Risk management

There are risks in these optimistic projections.  First, risk: the four per cent return we have assumed has no bonds to act as shock absorbers when stock markets are falling. However, the couple’s monthly budget allocates $1,000 to travel and entertainment, spending that surely could be shaved if dividend flows shrivel — an unlikely but possible event.

On the positive side, the couple has no contingent liabilities. Their kids are almost gone, the remaining one, a student, will soon find his own home. The mortgage payment, now $1,200 per month, would rise to $1,489 if it were to renew at double the present 1.9 per cent rate and would be $1,650 per month at five per cent. It’s readily affordable given their rising incomes.

Given the couple’s growing cash surplus and their interest in financial security, they could investigate the cost of supplemental medical and hospitalization coverage. They could develop a plan for giving money to good causes, and they could consider creating endowment accounts for the education of any future grandchildren. The plan and the legal structure would require taking advice from counsel experienced in trusts and estates.

“This couple has a bulletproof retirement strategy,” Moran says. “Their mix of defined-benefit pensions, hefty savings, a history of expert portfolio management, and evident fluency with capital markets suggests a secure retirement income. Their outlook is multi-generational.  They have the wisdom to accept market volatility and stick with their allocations to mostly large cap stocks in markets they know.”

Retirement stars: Five ***** out of five

Financial Post

Email andrew.allentuck@gmail.com for a free Family Finance analysis

By Julie Cazzin with Brenda Hiscock

Q: I’m 40 years old and want to retire at age 65 with an after-tax net income of $70,000 annually. I currently earn $120,000 as an engineer. I recently did a quick calculation, and assuming I live until age 100, I will need to save close to $2 million to afford this retirement plan. That’s a lot of money for me to save. Right now, I save $25,000 a year for retirement, and have about $350,000 between my registered retirement

By Julie Cazzin with Brenda Hiscock

Q: I’m 40 years old and want to retire at age 65 with an after-tax net income of $70,000 annually. I currently earn $120,000 as an engineer. I recently did a quick calculation, and assuming I live until age 100, I will need to save close to $2 million to afford this retirement plan. That’s a lot of money for me to save. Right now, I save $25,000 a year for retirement, and have about $350,000 between my registered retirement savings plan (RRSP) and tax-free savings account (TFSA), invested in a mix of exchange-traded funds (ETFs), government bonds and employer-sponsored funds in a group RRSP.

My investment mix is 60/40 equity/fixed income and my annual investment returns have been good, averaging a net six per cent annually for the past few years. I also own a $750,000 condo with my partner, and we have a four-year old for whom we save in a registered education savings plan (RESP). Our mortgage will be paid off in 10 years. My partner and I are not married, and we don’t plan to marry, so I prefer to plan retirement savings as if I were single. Am I on track to retire at 65? — Ava in British Columbia

FP Answers: Ava, you have put some serious thought into retirement and have a long time horizon ahead of you to get it right. Your goal of an annual $70,000 after-tax income suggests spending of $70,000 per year. If this is $70,000 in today’s dollars, that could be nearly $115,000 per year by the time you are 65, assuming two-per-cent annual inflation. Inflation is currently a hot topic, but we’ll project inflation in the long run at about the Bank of Canada’s two-per-cent inflation target.

If we assume you are entitled to the maximum Canada Pension Plan (CPP) and Old Age Security (OAS) benefits, that will provide about $38,000 of pre-tax income for you at age 65. CPP and OAS are indexed to inflation, which will help keep up with your increasing expenses throughout retirement. You could also delay these to age 70 to get a higher benefit, which could work well in your situation. It will be important to review the timing closer to retirement.

If you continue to contribute a total of $25,000 per year to your RRSP and TFSA accounts, you could have far more than $2 million saved by age 65, assuming these contributions keep pace with inflation. But the six-per-cent annual return you have historically earned on your balanced investment portfolio may be tougher to achieve going forward. Assuming a more conservative 4.5-per-cent net return on a relatively low-cost portfolio of ETFs and a group retirement plan, $25,000 of indexed contributions could result in nearly $2.5 million saved by the time you turn 65.

Between minimum registered retirement income fund (RRIF) withdrawals starting at age 65 — the age I’ve used for you to start your RRIF withdrawals at the scheduled rate of four per cent of your RRIF value annually at that time and supplementing this income with tax-free TFSA withdrawals — the numbers show that your investments could last well past age 100. Remember, you don’t have to wait until age 71 to withdraw from a RRIF. Indeed, earlier withdrawals coupled with starting CPP and OAS at age 71 often makes sense because most of the time it provides a higher estate value if you live past age 83.

But there are other things to consider. Your mortgage will be paid off in 10 years. This will result in extra cash flow that could go towards retirement savings as well. Your RESP contributions will be done in 13 years. You could have extra cash flow then as well.

Still, you also need to consider if your expenses may increase or decrease as your four-year-old gets older. Maybe those expenses will decrease if you have been paying for daycare, providing even more opportunity to increase your savings. Future gifting to your child may be something you want to consider in your planning, since more and more parents are helping their kids get started with down payments on a first home, buying a car and wedding costs.

Do you plan to downsize in retirement? Will you receive an inheritance? If so, then you may be saving more than you need to. It could be helpful for you to examine your financial roadmap and re-evaluate your retirement saving target.

If you are saving too aggressively and could otherwise have more room in your budget for vacations, charitable donations or activities for your four-year-old, a retirement planning exercise done with a fee-only financial planner could help you identify those options.

I respect that you and your partner do things separately, but there could be opportunities to focus your tax-deductible retirement savings in the higher-income spouse’s name, or to take advantage of other good options such as company savings plan matches. Regardless, it sounds like you are on a good trajectory.

As the parent of a young child and a family breadwinner, you should also review your life and disability insurance. Your biggest asset is your ability to earn income, so it’s important to ensure adequate coverage is in place to secure your family’s financial security in the event of an unexpected illness or death.

Running projections with a planner can open people’s eyes to what is possible in their lives. In a situation such as yours, Ava, where you exceed your retirement goals on your current trajectory, you may consider other options such as retiring earlier, spending more, gifting and travelling. The possibilities are endless. You are well on your way to a comfortable retirement.

Brenda Hiscock is a fee-only, advice-only certified financial planner with Objective Financial Partners Inc. in Toronto.

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