Guidance For Evaluating Financial Planning Strategies

Guidance for Evaluating Financial Planning Strategies
CFP® Professional Education Program

GUIDANCE FOR EVALUATING FINANCIAL PLANNING STRATEGIES
CFP® PROFESSIONAL EDUCATION PROGRAM
Guidance for Evaluating Financial Planning Strategies

Table of Contents
Financial Management – Guidance for Evaluating Financial Planning Strategies ......................................................... 3
Strategy 1: A New Car for Personal Use Only: Buy (Using Credit) vs. Lease.............................................................. 3
Case Example ............................................................................................................................................................. 6
Strategy 2: RDSP vs. Formal Inter-Vivos Trust (on Behalf of a Disabled Child) ......................................................... 9
Case Example ........................................................................................................................................................... 12
Retirement Planning – Guidance for Evaluating Financial Planning Strategies ........................................................... 17
Strategy 1: RRIF vs. Annuity (Using RRSP Funds) ..................................................................................................... 17
Case Example ........................................................................................................................................................... 20
Strategy 2: Individual Pension Plan (IPP) vs. Retirement Compensation Arrangement (RCA) (for an Owner
Manager).................................................................................................................................................................. 24
Case Example ........................................................................................................................................................... 28
Investment Planning – Guidance for Evaluating Financial Planning Strategies ........................................................... 35
Strategy 1: Mutual Funds vs. Segregated Funds ..................................................................................................... 35
Case Example ........................................................................................................................................................... 38
Strategy 2: Borrow to Invest vs. Periodic Investment Plan for Long Term Capital Appreciation (in Non-Registered
Plan) ......................................................................................................................................................................... 41
Case Example ........................................................................................................................................................... 44
Insurance and Risk Management – Guidance for Evaluating Financial Planning Strategies ....................................... 49
Strategy 1: Group Owned Insurance vs. Individually Owned Insurance ................................................................. 49
Case Example ........................................................................................................................................................... 52
Strategy 2: Critical Illness Insurance (CI) vs. Self Insure (Assume the Risk) ............................................................. 55
Case Example ........................................................................................................................................................... 57
Tax Planning – Guidance for Evaluating Financial Planning Strategies........................................................................ 61
Strategy 1: Accessing RRSP Amounts Before Age 72 ............................................................................................... 61
Case Example ........................................................................................................................................................... 64
Strategy 2: Spousal Loan for Income Splitting ......................................................................................................... 67
Case Example ........................................................................................................................................................... 70
Estate Planning – Guidance for Evaluating Financial Planning Strategies ................................................................... 74
Strategy 1: Legal Will Versus Ownership of Assets in Joint Tenancy with Rights of Survivorship .......................... 74
Case Example ........................................................................................................................................................... 77
Strategy 2: Spousal Rollover (of Capital Property) at Death vs. Election to Transfer Capital Property at Fair
Market Value (FMV) ................................................................................................................................................. 81
Case Example ........................................................................................................................................................... 84
2
Financial Management – Guidance for Evaluating Financial

Planning Strategies
The purpose of this guidance is to illustrate the application of the “Model for Evaluating Financial
Planning Strategies” as it relates to Financial Management. Examples are provided where two strategies
must be weighed against each other. However, the model may also be used to evaluate a single
strategy.
In a joint engagement, it is important to consider the quantitative and qualitative factors as it relates to
both clients. Where quantitative and qualitative considerations differ materially between the clients,
you may consider a compromise solution that contemplates a combination of strategies.
Strategy 1: A New Car for Personal Use Only: Buy (Using Credit) vs. Lease
Quantitative Considerations
Eligibility for strategy:
Buy Lease
Requires credit approval. Requires credit approval.
Choice of lender. No or limited choice of lender.
May be able to negotiate credit terms. May not be able to negotiate credit terms.
The differentiators are the choice of lenders and the credits terms.
Impact on cash flow:

Buy Lease
Regular payments required. Regular payments required.
100% financing results in higher payments. Less than 100% financing results in lower
payments.
Payments end when loan is repaid. Payments are indefinite (if leasing is done
ongoing).
From a cash flow perspective, leasing offers lower payments and therefore less impact on cash flow
initially. In the long term, purchasing on credit has less impact on cash flow as payments end at a point in
time, freeing up cash flow. Differentiator is size and length of payments.
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Impact on taxation:
Buy Lease
No impact. No impact.
Impact on taxation is not a differentiator between the options.
Costs of implementation:
Buy Lease
May require an application fee. Likely no application fee.
May require a down payment. Typically requires a down payment.
No security deposit required. Security deposit is typically required.
Differentiators will be the size of the down payment and security deposit required for leasing.
Risk exposure:
Buy Lease
No additional costs at the end of the loan term. Additional costs associated with mileage and
damage may exist at end of lease term.
Ability to sell vehicle and pay out loan. Limited ability to end lease early.
Differentiator is the flexibility and relative certainty associated with ownership.
Impact on achievement of other goals:

Buy Lease
Buying requires less cash outflow over time and Leasing requires more cash outflow over time and
could improve ability to save (Financial could impair ability to save (Financial
Management). Management).
Differentiator will be the relative impact on the client’s cash flow and ability to save for other goals.
4
Qualitative Considerations
Priorities:
Buy Lease
Client will have less resources available for Client will have more resources available for
discretionary spending. discretionary spending.
Client will be able to afford a less expensive Client will be able to afford a more expensive
vehicle for the same payment. vehicle for the same payment.
Differentiators will be the relative importance that the client places on discretionary spending and the
choice of vehicle
Values, attitudes and preferences:

Buy Lease
Client has ownership and control over the asset Client has limited control over the asset and lease
and debt. obligation.
The client is less inclined to replace their car The client is more inclined to replace their car
frequently. frequently.
Differentiators will be the relative importance that the client places on ownership, control, and frequency
of changing vehicles.
Financial knowledge and experience:

Buy Lease
Client will require knowledge of debt obligations, Client will require knowledge of lease obligations,
security, and interest rates. security, and interest rates.
No corresponding issue. Leases have additional terms and fees that may
add complexity.
Differentiator may be the knowledge associated with lease contracts and terms that may be relatively
complex in some cases.
Motivation to change/anticipated acceptance level:

Buy Lease
Typically a longer-term strategy with respect to Typically a shorter-term strategy with respect to
the same vehicle. the same vehicle.
Differentiator will be level of client commitment to a short-term strategy where they are motivated to
change vehicles relatively frequently. In a joint engagement this may be different to the individuals and
the relative importance to each will additionally have to be considered.
5
The following case example illustrates the application of the above model.
Case Example
Jordan and his fiancée, Ashleigh, have been discussing the need to replace their vehicle. Both Jordan and
Ashleigh work full time and are able to cover their monthly expenses but have little discretionary
income remaining each month. Jordan does not pay much attention to their spending. Ashleigh makes
sure bills are paid and the couple’s needs are met. Jordan lives for today while Ashleigh is more likely to
take a long-term view of their finances.
To avoid the constant repair bills they have experienced recently with their older car, they both prefer
to have a new car but don’t agree on how to acquire it. The couple meets the criteria for credit approval
and they realize that no matter how they acquire the car, paying for it will remove funds from their
monthly cash flow. Ashleigh has calculated they can afford up to $330 monthly towards a payment.
Jordan wants to lease since they can have a more expensive car for the same monthly amount that they
could by purchasing on credit. Ashleigh prefers a purchase on credit so that they own the vehicle and
eventually the payments will end. She is worried that if they lease, they will never own the vehicle and
they may have additional costs based on mileage and/or car damage. They presently do not have any
savings available to meet the down payment requirements of the lease terms. They can purchase using
credit without any down payment.
Buy Lease
Clients have credit approval. Clients have credit approval.
Lender and ability to negotiate terms has not Lender and ability to negotiate terms has not
been indicated as important to the client. been indicated as important to the client.
Eligibility is not a differentiator.

Buy Lease
Less expensive vehicle for a $330/month More expensive vehicle for a $330/month
maximum payment. maximum payment.
Impact on cash flow is not a differentiator.
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Impact on taxation:
Buy Lease
No impact. No impact.
Impact on taxation is not a differentiator between the options.
Buy Lease
No indication of an application fee. No indication of an application fee.
No down payment required. Client does not have the required funds for the
down payment.
No indication that a security deposit is required. No indication that a security deposit is required.
Differentiator is the down payment that will be required under the lease option.
Risk exposure:
Buy Lease
No additional costs at the end of the loan term. Additional costs associated with mileage and
damage may exist at end of lease term.
Ability to sell vehicle and pay out loan. Limited ability to end lease early.
Differentiator is the reduced risk associated with the flexibility and future certainty associated with
ownership. Ashleigh is concerned about these risks.

Buy Lease
The client has not identified future savings as a The client has not identified future savings as a
goal and does not have any available resources in goal and does not have any available resources in
any event. any event.
Impact on achievement of other goals is not a differentiator.
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Priorities:
Buy Lease
The impact on discretionary spending will be the The impact on discretionary spending will be the
same under both options. same under both options.
Ashleigh prefers the option of a less expensive Jordan prefers the option of a more expensive
vehicle with eventual ownership. vehicle with no eventual ownership.
The impact on discretionary spending is not a differentiator. The differing priority however between the
individual clients with respect to the expense of the vehicle needs to be considered.

Buy Lease
Ashleigh has expressed a preference to ownership Jordan has not expressed a preference to
and control over the asset and debt. ownership and control over the asset and the
lease obligation.
The clients have not indicated their preferences The clients have not indicated their preferences
for frequency of vehicle replacement. for frequency of vehicle replacement.
Frequency of changing vehicles is not a differentiator. Ashleigh however has expressed that ownership
and control are important to her.

Buy Lease
The clients appear to understand the financial The clients appear to understand the financial
difference between buying and leasing. difference between buying and leasing.
Financial knowledge and experience is not a differentiator.

Buy Lease
Ashleigh has a long-term view of the couple’s Jordan “lives” for today.
finances.
There is a clear differentiation in what will be the client’s motivation to change and anticipated
acceptance level of each option.
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Conclusion
Under the current circumstances, the clients may consider the Purchase option.
Quantitatively, the two differentiators are the lack of a down payment for a lease and the reduced risk
associated with purchasing, both result in a conclusion of acquiring their vehicle by purchasing. Both
favour the option to purchase. Though Jordan prefers a lease, purchasing may be the only option unless
the couple can surface an appropriate down payment.
Strategy 2: RDSP vs. Formal Inter-Vivos Trust (on Behalf of a Disabled Child)
RDSP Formal Trust
Plan beneficiary must qualify for the Disability Tax No requirement for the beneficiary to qualify for
Credit (DTC). the Disability Tax Credit (DTC)
Requirement to collapse the plan if DTC No requirement to collapse the plan if DTC
qualification no longer exists. qualification no longer exists.
Differentiator is the qualification for the DTC.
Impact on Cash Flow:

RDSP Formal Trust
Capital amounts can be added at inception or Capital amounts can be added at inception or
incrementally. incrementally.
Eligible for government grants and bonds which No eligibility for government grants and bonds
may result in less requirement for cash. which may result in a greater requirement for
cash.
Subject to contribution limits. Not subject to contribution limits.
Subject to withdrawal rules. Not subject to withdrawal rules.
Income or asset tested government benefits Income or asset tested government benefits may
should not be affected. be affected.
Differentiators are the eligibility for and impact on government incentives and programs and the control
over the size and timing of contributions and withdrawals.
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Impact on taxation:
RDSP Formal Trust
Income and realized gains within an RDSP are tax Income and realized gains within a Formal Trust
sheltered. are taxable to the trust or the beneficiary.
Only growth and income are subject to taxation As income is taxed annually, withdrawals are not
when withdrawn. Contributed capital is not taxed. subject to taxation.
Income to beneficiaries does not impact other Income to beneficiaries impacts other income-
income-tested government programs. tested government programs.
Income loses its characteristics (interest, Income retains its characteristics (interest,
dividends, and capital gains). dividends, and capital gains).
Differentiators are the timing of taxation, the impact on government income-tested programs, and the
retention of income characteristics.
RDSP Formal Trust
Generally, no costs to establish. May incur Legal fees to establish trust and ongoing
investment management fees. maintenance, tax preparation, and trustee fees.
May incur investment management fees.
Differentiator is the initial settlement costs of a formal trust along with ongoing maintenance, tax
preparation, and trustee fees.
Risk exposure:
RDSP Formal Trust
Investment risk for underlying assets. Investment risk for underlying assets.
Risk of plan collapse if DTC qualification no longer No corresponding risk.
exists with return of government grants received
in the prior 10 years and income inclusion for
accumulated income.
Risk of plan collapse upon death of the beneficiary No corresponding risk.
with return of government grants received in the
prior 10 years and income inclusion for
accumulated income.
Limited by contribution and withdrawal rules, No corresponding risk.
which could impact the beneficiary.
No ability to name alternate beneficiaries. Ability to name alternate beneficiaries.
Differentiators are the consequences arising on loss of the DTC or death and the flexibility of the ability
to name alternate beneficiaries in a formal trust arrangement.
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RDSP Formal Trust
Risks, if realized, may impact funds ultimately Costs may impact funds ultimately available for
available for beneficiary. beneficiary.
The costs associated with a formal trust can be quantified and therefore the effects on other potential
savings may be easier to contemplate with a formal trust relative to the potential risks associated with
the RDSP.
Priorities:
RDSP Formal Trust
Grant monies and tax deferral will allow for a No grant monies or tax deferral will result in a
faster and larger accumulation of funds. slower and smaller accumulation of funds.
Differentiator is the priority a client places on size and pace of fund accumulation.

RDSP Formal Trust
A RDSP is less flexible for a client that values A formal trust is more flexible for a client that
control. values control; it is not subject to contribution or
withdrawal rules.
Differentiator is the flexibility afforded by a formal trust over an RDSP.

RDSP Formal Trust
Requires knowledge of investments. Requires knowledge of investments.
No requirement for ongoing attention other than Requires stewardship for the trustee to attend to
plan contributions. annual maintenance and tax filings.
Differentiator is the requirement for a trustee and the duties required of the trustee.
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RDSP Formal Trust
For the client, whose circumstances align with the For the client whose circumstances do not align
RDSP contribution and withdrawal rules, they may with the RDSP contribution and withdrawal rules,
be motivated by this cost-efficient option. they may be more inclined toward the trust, in
particular where the risks associated with the
RDSP appear plausible.
Motivation to change/anticipated acceptance level is based on the client’s goals and expectations and
therefore, the pool of assets desired and withdrawal needs. It may be possible to consider both strategies
for the benefit of government grants that the RDSP provides and the greater flexibility of a trust.
Case Example
Colin and Liz, both age 43, are proud parents of three beautiful children, Ava, age 14 and their twins,
Miles and Lily, age 9. Colin is an Operations Analysis Manager for a major retail chain, earning $98,000
per year. Until recently, Liz was an analyst in the risk department for a major bank, earning $95,000 per
year. They are both financially astute and had successful careers. However, they found it increasingly
difficult to both be career-oriented and to manage the demands of their children. They wondered how
long they could continue until things would have to change.
One year ago, they were forced to make a change. Ava, a competitive gymnast, suffered an accidental
fall in the process of her dismount off the parallel bars. Despite many surgeries, the doctors have
concluded that she will be paralyzed from the waist down. The past year has been filled with medical
appointments and specialists. Initially, Liz took a leave of absence from her work but has since resigned
to take care of Ava.
Colin and Liz sold their home in a major urban center and moved to a small town 100 km away. They
were able to buy a wheelchair accessible family home for 40% less than their city home. They moved
into their new home mortgage free.
Although Colin and Liz had hoped for better recovery for Ava, they are relieved that they had built
enough equity in their home, so they can make the changes necessary to care for Ava. Colin and Liz
would like to take $50,000 from the sale of their home and save it for Ava’s future well-being. As Ava is
already 14, they would like to see their seed capital grow as quickly as possible as she enters adulthood.
Their parents would also like to contribute to this savings fund on an annual basis. Some of their friends
have even given donations to help fund her recovery. Everyone is holding out hope that someday there
may be a way to reverse Ava’s paralysis; however, the doctors are not optimistic. It’s not entirely clear
when Ava may need additional support. However, Colin and Liz feel strongly that the funds will be
dedicated to her needs only.
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Ava’s doctor advised Colin and Liz they may want look into a Registered Disability Savings Plan (RDSP)
for Ava or a formal trust with Ava as beneficiary. They have come to you, their financial planner, for
advice in this situation.
RDSP Formal Trust
It would appear that Ava will qualify for the DTC. No corresponding issue.
It does not appear that Ava will not qualify for the No corresponding issue.
DTC in the future.
Eligibility for either strategy is not a differentiator.

RDSP Formal Trust
Colin and Liz can add capital amounts at inception Colin and Liz can add capital amounts at inception
or incrementally. or incrementally.
Colin’s income level will make them ineligible for No eligibility for government grants and bonds
bonds, but they are eligible for grants which may which may result in a greater requirement for
result in a lesser requirement for cash. Once Ava cash.
is 18, her income will be the test for grant and
bond eligibility.
Subject to contribution limits of $200,000 for Not subject to contribution limits.
Colin and Liz.
Subject to withdrawal rules. Ava cannot access Not subject to withdrawal rules.
funds for at least 10 years without losing any
grants or bonds contributed to the plan.
Income or asset tested government benefits of Income or asset tested government benefits of
Colin, Liz, or Ava should not be affected. Colin, Liz, or Ava may be affected.
For Colin, Liz, and Ava, the differentiators are the eligibility for and impact on government incentives and
programs and the flexibility over the size and timing of contributions and withdrawals.
Impact on taxation:
RDSP Formal Trust
The income and realized gains within Ava’s RDSP Income and realized gains within a Formal Trust
would be tax sheltered. are subject to taxation in either Ava’s hands or the
trust.
Growth and income are subject to taxation in Withdrawals of capital are not subject to taxation
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Ava’s hands when withdrawn. to Ava.

Income to Ava will not impact other income- Income to Ava may impact other income-tested
tested government programs. government programs.
Income loses its characteristics (interest, Income retains its characteristics (interest,
dividends, and capital gains). dividends, and capital gains) when taxed to either
the trust or Ava.
Differentiators are the timing of taxation to Ava, the impact on government income-tested programs for
Ava, and the retention of income characteristics.
RDSP Formal Trust
There should be no costs to establish an RDSP for There will be legal fees to establish a trust for Ava
Ava. and ongoing maintenance, tax preparation, and
trustee fees.
Differentiator is the initial settlement costs of a formal trust for Ava along with ongoing maintenance,
tax preparation, and trustee fees.
Risk exposure:
RDSP Formal Trust
Investment risk for underlying assets. Investment risk for underlying assets.
It does not appear likely that Ava will recover and No corresponding risk.
lose the DTC qualification requiring a return of
government grants received in the prior 10 years
and income inclusion for accumulated income.
Risk of plan collapse upon death of Ava, requiring No corresponding risk.
the return of government grants received in the
prior 10 years and income inclusion for
accumulated income.
Risk of some repayment of government grants No corresponding risk.
and bonds should Ava need to access funds prior
to age 59.
Colin and Liz have no ability to name alternate Colin and Liz have the ability to name alternate
beneficiaries. beneficiaries.
Loss of DTC is unlikely and not a differentiator. Differentiators are the consequences arising on the death
of Ava and the ability for Colin and Liz to name alternate beneficiaries in a formal trust arrangement.
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RDSP Formal Trust
Where risks above may be realized, the funds No impact.
available for Ava may be compromised.
Differentiator is the potential impact to funds for Ava where risks materialize, including where funds are
needed earlier than expected.
Priorities:
RDSP Formal Trust
Colin and Liz would like to see the savings grow as Colin and Liz would like to see the savings grow as
quickly as possible and grant monies and tax quickly as possible and no grant monies or tax
deferral will allow for a faster and larger deferral will result in a slower and smaller
accumulation of funds. accumulation of funds.
Differentiator is the ability to leverage tax deferral and government assistance to allow for faster and
larger capital accumulation.

RDSP Formal Trust
Colin and Liz are adamant about saving for Ava’s Colin and Liz don’t require the flexibility provided
need; they don’t envision using the funds for by a formal trust to add their other children as
anything else. beneficiaries.
Colin and Liz value dedicating their savings to Ava and don’t see the need for the additional flexibility
provided by a trust to add their other children as beneficiaries.

RDSP Formal Trust
Requires knowledge of investments. Both Colin Requires knowledge of investments. Both Colin
and Liz are “financially astute”. and Liz are “financially astute”.
No requirement for the ongoing attention of Colin Requires stewardship for the trustee (likely Colin
and Liza other than plan contributions. or Liz) to attend to annual maintenance and tax
filings.
Differentiator is the requirement for Colin or Liz to be a trustee and take on the associated duties.
15

RDSP Formal Trust
The family’s circumstances align with the Ava’s circumstances do not appear to present
opportunities that the RDSP affords to save for risks of losing the DTC in the future so Colin and
Ava. Colin and Liz may also be motivated by this Liz are not likely to be motivated towards this
cost efficient option. more expensive option.
Motivation to change/anticipated acceptance level is differentiated based on the couple’s goals and
expectations and therefore, the pool of assets desired and the associated withdrawal needs.
Conclusion
Colin and Ava should consider opening a RDSP for Ava. While both options are viable as a savings plan
both quantitatively and qualitatively for Ava, the tax-deferred growth and the government bonds and
grants will allow for a faster accumulation of capital under an RDSP strategy which is most closely
aligned with Colin and Liz’s priorities. As Ava is unlikely to recover, the risk of consequences due to the
loss of the DTC is remote. The overall initial capital of $50,000 may not be significant enough to justify
the upfront and ongoing costs of a formal trust. Due to its cost effectiveness and alignment with their
goals, the couple will likely be motivated to accept a recommendation to open an RDSP for Ava.
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Retirement Planning – Guidance for Evaluating Financial

Planning Strategies
Planning Strategies” as it relates to Retirement Planning. Examples are provided where two strategies
strategy.
Strategy 1: RRIF vs. Annuity (Using RRSP Funds)
RRIF Annuity
Client must have RRSP funds. Client must have RRSP funds.
Requires a transfer from an RRSP account to a Requires an application process with an insurance
RRIF account. company.
Eligibility for strategy is not a differentiator.

RRIF Annuity
A minimum withdrawal based on age and value of Payments are predetermined by the contract with
the RRIF is required annually. No limit on the the insurance company and depend on the
maximum withdrawal. features of the annuity.
Differentiator is the flexibility to withdraw more cash under the RRIF option.
Impact on taxation:
RRIF Annuity
Withdrawals are fully taxable. Annuity payments are fully taxable.
Withdrawals in excess of minimum are subject to No corresponding issue.
withholding tax.
Balance of RRIF is fully taxable at death unless No taxation at death. Payments either cease or
transferred to a spouse. transfer to spouse or a beneficiary if there is a
17
guarantee period as determined by the contract

with the insurance company.
Differentiator is the taxation at death on the remaining balance in the RRIF.
RRIF Annuity
No or insignificant costs. No or insignificant costs.
Costs of implementation are not a differentiator.
Risk exposure:
RRIF Annuity
No corresponding risk. There is a risk that the client and their spouse will
die before realizing the anticipated benefit of the
annuity contract.
A RRIF is subject to market, inflation, and interest An annuity is a contractual obligation for an
rate risks. insurance company to pay a predetermined
amount. Market risk is eliminated, and inflation
risk and interest rate risk can be mitigated with
various negotiated features.
Differentiators are the risks that the client will not live long enough to realize the anticipated benefit of
an annuity contract and market, inflation, and interest rate risks that a RRIF has over an annuity.

RRIF Annuity
Flexible cash flow which may allow for Contract does not allow flexibility to access
unexpected needs or major purchase (Financial additional cash as desired or needed (Financial
Management). Management).
Remaining balance in a RRIF will be available for Aside from a joint annuity with a spouse, there
beneficiaries (Estate Planning). will be no payments for beneficiaries unless there
is a guarantee period in which case payment
would only continue for that period (Estate
Planning).
Differentiator is the capital that is available under a RRIF versus the limited payments that may continue
under an annuity for a client’s possible cash management needs or estate.
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Priorities:
RRIF Annuity
The client that prioritizes ensuring flexibility of The client that prioritizes predictable income to
cash flow and liquidity in their estate for satisfy their retirement needs will favour an
beneficiaries will favour a RRIF over an Annuity. Annuity over a RRIF.
Differentiator is the priority a client places on having flexibility in withdrawing funds remaining versus
predictability of income.

RRIF Annuity
A client may prefer control over their cash flow. A client may prefer the certainty of a consistent
cash flow.
A client may prefer managing their investments. A client may prefer the certainty of a contracted
annuity.
A client may value the ability to access all of their A client may value the certainty of not outliving
capital. their capital.
Differentiators are the degree of control that a client prefers to have over their capital and cash flow.

RRIF Annuity
Ongoing decisions regarding investment choices Initial choice of annuity contracts is required with
are required. no subsequent decision making.
Annual choice is required to draw minimum or No corresponding issue.
more and timing of withdrawal.
Differentiator will be the client’s experience and willingness to manage RRIF investments versus an
annuity that only requires decisions at inception.

RRIF Annuity
A client who has greater investment experience or A client who prefers to delegate investment
knowledge or a desire for flexibility to access cash decisions and gain the benefit of a predictable
or leave an estate may be motivated to adopt a income stream in retirement may be motivated to
RRIF strategy. purchase an annuity.
Differentiator is the client’s knowledge, experience and ultimate desires for flexibility or predictability.
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Case Example
Tim is turning 71 this year and will be required to convert his existing RRSP balance of $500,000 into a
retirement income plan. Tim has no pension income from his former employer but receives a survivor
pension from his late wife’s pension plan. This pension along with CPP and OAS is adequate for his
current lifestyle.
Tim is in good health and enjoys being active with his parents who are in their 90’s. Tim has one
daughter who is a single mother that he helps out financially from time to time. Tim has named her as
the sole heir of his estate and would like to have liquid assets to pass to her from his estate when he
dies.
Tim has moderate to high risk tolerance and always enjoyed managing his RRSP investment choices and
values having control over his money. Tim is looking for advice on converting his RRSP to a RRIF or to
some form of life annuity.
RRIF Annuity
Tim has $500,000 in RRSP funds available to Tim has $500,000 in RRSP funds available to
convert to a RRIF. purchase an annuity.
Tim would have to transfer his RRSP account to a Tim would have to apply for an annuity contract
RRIF account. with an insurance company.
Tim meets all the eligibility requirements for either strategy and eligibility is not a differentiator.

RRIF Annuity
Tim will be required to make a minimum Tim has no fixed pension from his former
withdrawal based on his age and value of the employer but receives a survivor pension. The
RRIF annually. There is no limit on the maximum annuity will provide the benefit of payments that
withdrawal. Since Tim assists his daughter are level and predetermined by the contract
financially from time to time, this provides with the insurance company.
increased flexibility.
The flexibility under a RRIF option to access additional cash flow if required is a differentiator.
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Impact on taxation:
RRIF Annuity
Withdrawals are fully taxable to Tim. Annuity payments are fully taxable to Tim.
Withdrawals in excess of minimum are subject to No corresponding issue.
withholding tax for Tim.
Balance of RRIF is fully taxable at Tim’s death. No taxation at Tim’s death. Payments either cease
or will transfer to his daughter if there is a
guarantee period as determined by the contract
with the insurance company.
The differentiator is the taxation at death on the remaining balance in the Tim’s RRIF.
RRIF Annuity
Tim will incur no or insignificant costs to convert Tim will incur no or insignificant costs to purchase
his RRSP to a RRIF. an annuity.
Risk exposure:
RRIF Annuity
No corresponding risk There is a risk that Tim will die before realizing the
anticipated benefit of his annuity contract. Since
both of his parents are alive and he is in good
health, this risk is mitigated.
Tim’s RRIF is subject to market, inflation, and Tim’s annuity is a contractual obligation for an
interest rate risks; Tim has moderate to high risk insurance to pay a predetermined amount.
tolerance. Market risk is eliminated, and inflation risk and
interest rate risk can be mitigated with various
negotiated features.
Although there is a risk that Tim will die before realizing the anticipated benefits of an annuity contract,
his good health and the fact that his parents are still living mitigates this risk. Remaining differentiator is
the elimination of market risk and possible mitigation of inflation and interest rate risk through the
purchase of an annuity. However, Tim appears to be comfortable with some level of risk.
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RRIF Annuity
Tim wants to have flexibility to assist his daughter Tim wants to have liquid assets to assist his
from time to time (Financial Management). daughter; he will be limited by the terms of an
annuity contract (Financial Management).
Tim wants to have liquid assets available for his Tim wants to have liquid assets available for his
daughter when he dies. A balance in his RRIF will daughter when he dies. Other than any
make this possible (Estate Planning). guaranteed payments that may remain, the
annuity contract will end when Tim dies, and no
assets will be available to his daughter (Estate
Planning).
Differentiator is the flexibility and liquidity provided by the RRIF versus an annuity contract to support
Tim’s daughter.
Priorities:
RRIF Annuity
Tim has identified having liquidity in his estate for Tim has identified having liquidity in his estate for
his daughter as a priority and a RRIF will satisfy his daughter as a priority and an annuity will not
this priority. satisfy this priority.
Differentiator is the liquidity that a RRIF will provide over an annuity for Tim’s estate.

RRIF Annuity
Tim’s values having control over his cash flow in Tim’s values having control over his cash flow in
order to direct cash flow to support his daughter order to direct cash flow to support his daughter
as required. He will be able to continue to do this as required. He will not be able to do this under
under RRIF option. an annuity option.
Tim enjoys managing his investments and will be Tim enjoys managing his investments and will not
able to continue to do this under RRIF option. be able to continue to do this under an annuity
option.
Tim’s pension incomes are adequate for his Tim’s pension incomes are adequate for his
lifestyle, so he values the ability to access his lifestyle, so he does not value the certainty of not
capital. outliving his capital.
Differentiators are the control over cash flow, investment management and capital that are afforded to
Tim under a RRIF option.
22

RRIF Annuity
Tim enjoys managing his investments and this Time has the financial knowledge and experience
would continue under a RRIF option. and a desire to manage his investments beyond
the choice of an annuity contract.
Tim has financial knowledge and experience No corresponding issue.
sufficient to make an annual choice to draw the
minimum RRIF amount or more and the timing of
the withdrawal.
Differentiators are the requirements to have investment knowledge and ongoing attention to those
investments. As Tim has indicated that he enjoys managing his investments, financial knowledge and
experience is not likely a differentiator.

RRIF Annuity
Tim has adequate predictable income, is Tim’s desire to manage his own affairs and help
comfortable managing and making investment his daughter both in the short and long term may
decisions for himself and is seeking flexibility. It’s favour a RRIF vs. Annuity strategy.
likely he would be motivated to convert his RRSP
to a RRIF.
Differentiators are Tim’s existing pension and CPP income which would serve to complement a RRIF
strategy and provide Tim the flexibility he seeks and the opportunity to invest as he wishes.
Conclusion
Both the quantitative and qualitative factors support a decision to convert the RRSP funds to a RRIF
rather than an annuity. It is clear that Tim wants to have control over his retirement assets with the
ability to access capital as required to support his daughter. In addition, his desire to leave liquid assets
to his daughter when he dies and having his other pensions support his lifestyle further support this
decision.
23
Strategy 2: Individual Pension Plan (IPP) vs. Retirement Compensation

Arrangement (RCA) (for an Owner Manager)
Individual Pension Plan (IPP) Retirement Compensation Arrangement (RCA)
Must be an employed individual – business Must be an employed individual – business
owner or high level employee. owner or high level employee.
Must be sponsored by a corporate employer. Must be sponsored by the employer
(incorporated or unincorporated).
Individual is typically over age 40 with T4 income Individual typically has T4 income over $150,000.
over $100,000.
There is a 2% cap on the accrual rate. Once an All earnings under an RCA can be recognized in
individual has eligible earnings (a.k.a. the determination of benefits.
compensation) that exceeds the cap, he or she
has maximized the accrual under the IPP.
Subject to pension legislation (including locking- Not covered by pension legislation (no locking-in
in provisions, and age requirement to convert provisions, no age requirements for withdrawals
IPP to at least minimum income levels at age 71). or minimum income requirements).
Vesting is immediate. Vesting may be subject to meeting certain
conditions (golden handcuffs).
Both strategies are often used later in a client’s career when their earnings are sufficient to make the
strategies effective. Since an RCA is not subject to pension legislation, it offers more opportunity to
benefit higher income earners; as well, it offers flexibility around vesting for the sponsoring corporation.
An RCA can be used for income that exceeds IPP contribution limits.

Contributions to the IPP are made by the Contributions to the RCA are made by the
employer and do not impact cash flow to the employer and do not impact cash flow to the
individual. individual.
Cash flow in retirement is determined by a Cash flow in retirement is not pre-determined.
formula modelled on a defined benefit (DB). The The funds are fully accessible by the client.
funds are locked-in. Some provinces allow partial
unlocking of funds to registered plans, but funds
are not fully accessible by the client.
Creates predictable income in retirement. Opportunity for flexible income in retirement.
24
Differentiators are consistent and predictable cash flow from an IPP where an RCA can be flexible, and
locking-in provisions restricting amounts that can be taken from an IPP where an RCA offers full access.
Impact on taxation:
Contributions and costs associated with the IPP Contributions and costs associated with the RCA
are fully deductible to the employer. are fully deductible to the employer.
Amounts received from an IPP are fully taxable to Amounts received from an RCA are fully taxable to
a client and subject to withholding at source. a client and subject to withholding at source.
Contributions impact the client’s ability to Contributions do not impact the client’s ability to
contribute to their RRSP (pension adjustment – contribute to their RRSP (pension adjustment –
PA). PA).
Assets within the plan grow tax-deferred. Contributions to the RCA and realized income and
gains in the RCA are subject to taxation of 50%
which is placed in a Refundable Tax Account
(RTA); No investment growth in the RTA.
No corresponding issue. Withdrawals from the RCA trigger a refund from
the RTA of $1 for every $2 withdrawn.
Other than administrative differences, income from both strategies is taxed fully as income. Where a
client has RRSP contribution room an RCA strategy allows the room to remain intact. An IPP allows 100%
of contributed assets to grow while an RCA only ever has 50% of contributions invested and growing at
any one time.
The employer will incur registration and set up The employer will incur registration and set up
fees and initial actuarial costs (required). fees (RTA account) and may incur actuarial costs
(to satisfy CRA reasonability requirements).
The employer will incur annual information return The employer will incur annual costs associated
filing costs. with maintaining the RTA.
The employer is required to have an actuarial The employer may periodically conduct an
evaluation every third year. actuarial evaluation to ensure ongoing
reasonableness.
The employer is obligated to keep to the plan fully The employer is not obligated to keep to the plan
funded which may require a top up of fully funded and may choose to cease
contributions. contributions.
An IPP is a registered plan which may require a An RCA is not a registered plan and the client’s
transfer from the client’s RRSP when making RRSP is unaffected by funding.
contributions for past service.
25
Differentiators are the funding obligations for the employer under an IPP and the possibility of the
client’s RRSP assets being required for funding the IPP.
Risk exposure:
The plan sponsor is responsible to make The client has input into investment decisions.
investment decisions and the client may have less
input.
Pension legislation limits the range of investments No limitations on RCA investments.
in the plan.
A target investment return up to 7.5% may be A target investment return may be established
established giving the company the obligation to however the company has no obligation to make
make up shortfalls. up shortfalls.
IPP assets are creditor proof. RCA assets are creditor proof.
IPP assets belong to the client and beneficiaries Once vested, RCA assets belong to the client and
can be named. will form part of their estate.
100% of plan assets are invested and are tax- 50% of plan assets are invested (50% in the RTA)
sheltered potentially requiring a lower rate of and are subject to tax at 50% potentially requiring
return. a higher rate of return.
Pre-determined funding and income levels allow Potential for variable funding and no guarantee of
for greater certainty of retirement planning. income in retirement may introduce uncertainty
into retirement planning.
Differentiators are the limitations on investment options for an IPP, the legislated requirement to make
up shortfalls in an IPP, increased certainty of future income using an IPP and tax efficiency of the IPP,
which may allow for a lower rate of return to achieve the same after-tax outcome.

Residual IPP assets are available to Residual RCA assets are available to
beneficiaries/heirs. Due to minimum income beneficiaries/heirs. Due to the flexibility of capital
requirements, the value of the IPP to a client’s withdrawals, the entire RCA can pass into a
estate may decline over time if the income is client’s estate (Estate Planning).
consumed rather than reinvested (Estate
Planning).
Residual assets are available to the client’s estate or beneficiaries under both options. Using an RCA can
potentially pass on a greater amount if the account is not required for lifestyle needs.
26
Priorities:
If retention of key employees is a priority for a If retention of key employees is a priority for a
company an IPP may be appropriate. company an RCA may be appropriate.
If a company has surplus passive assets that are If a company has surplus passive assets that are
impacting access to the small business deduction impacting access to the small business deduction
or QSBC status an IPP may be a solution. or QSBC status an RCA may be a solution.
If there is a planned sale of a company in the If there is a planned sale of a company in the
future, an IPP may make a sale more difficult due future, an RCA may be preferable to an IPP due to
to the ongoing costs and funding obligations. the discretion surrounding ongoing costs and
funding obligations.
Either strategy is suitable for retention of key employees and purification strategies for either small
business deduction or QSBC purposes. An RCA may be more suitable however where a sale of the
company is contemplated making this a differentiator.

The client that values the security of a defined No corresponding issue.
pension plan will value an IPP.
The client that values having control and The client that values having control and
management over their own assets (RRSP) will be management over their own assets (RRSP) will be
less inclined to opt for an IPP. more inclined to opt for an RCA.
The client that values having control over the size The client that values having control over the size
and timing of withdrawal in retirement will be less and timing of withdrawal in retirement will be
inclined to opt for an IPP. more inclined to opt for an RCA.
Differentiators are the value a client places on the security of a defined benefit pension, the management
and control of their retirement assets, and the control over the access to those assets in retirement.

An IPP is a complex strategy that includes the An RCA is a complex strategy that includes the
client, the company, investment accounts, client, the company, investment accounts,
actuaries, and CRA. actuaries, and CRA.
Both strategies are complex and financial knowledge and experience should not be a differentiator.
27

A client prefers to delegate investment decisions A client seeks flexibility as to retirement age,
and the predictability of a steady cash flow investment types, management of investments
guaranteed to last for life. and flexibility over cash flows in retirement or
funding obligations (such as where a sale may be
contemplated).
A client may be reluctant to transfer RRSP assets No corresponding issues.
to fund past service requirements.
No corresponding issue (vesting is immediate). A client may not accept the conditions attached
to vesting (golden handcuffs).
Differentiators are the possible reluctance for a client to use RRSP assets in the IPP funding; the client not
being amenable to vesting conditions in an RCA and preferences for flexibility over guaranteed and
predictable income.
Case Example
John LaManna, age 50, is the President and CEO of LaManna Noodle Ltd. (LNL), a family owned business
that he founded twenty five years ago. Originally started as a small retail outlet for his grandmother’s
secret recipes in the little Italy part of town, the company has come a long way. LNL is well known across
the city for the best fresh pasta and Italian baked goods. In order to meet the growing demand from
restaurants and stores, the company has expanded substantially over the last ten years. All of the debt
associated with the expansion has since been repaid and the company has begun to accumulate surplus
passive assets.
Prior to the expansion, John restructured the company’s shareholdings through an estate freeze, so that
presently 100% of the LNL shares are owned by a family trust that he is the trustee of and he, his
spouse, and children are beneficiaries of. The preferred shares that were created as part of the estate
freeze have since been redeemed. John’s spouse is not active in the business and his children are young
adults attending university.
John has received a salary of $250,000 annually for the last 15 years. He has been diligent in saving into
RRSP accounts for his retirement and has maximized his contribution annually. John’s spouse is a
physician and their combined income is more than sufficient to maintain their present lifestyle. John
enjoys making investment decision with respect to his retirement assets together with his investment
advisor and is satisfied with the performance they have achieved.
John intends to retire at age 60 and sell LNL at that time. He hopes to structure a share sale in order to
multiply the LCGE through his trust and anticipates that the sale proceeds will be sufficient for the
couple’s retirement needs.
28
In his recent year-end financial review for LNL, his accountant advised him that the build-up of surplus
passive assets in LNL will impact its QSBC status and future access to both the LCGE and the small
business deduction if left inside the company.
His accountant suggested that the LNL could fund either an Individual Pension Plan (IPP) or a Retirement
Compensation Arrangement (RCA) for him as an option to remove the surplus passive assets. An
actuarial report indicates that John would need to transfer almost his entire RRSP into an IPP if he
decides to make past service contributions. He comes to you for your opinion on this suggestion.
John is an employed business owner that is over All earnings under an RCA can be recognized in
40 with T4 income of $250,000. Notwithstanding the determination of benefits. There is no
John’s high income, IPP benefits will be capped maximum income ceiling.
based on pension legislation.
LNL will sponsor the IPP and will make LNL will sponsor the RCA and will make
contributions. contributions.
An IPP for John will vest immediately. John controls LNL and would not impose vesting
conditions (golden handcuffs) on an RCA for
himself.
The differentiator is the ability to contribute to an RCA at levels in excess of the limits imposed on IPPs by
pension legislation. John could benefit from using an IPP up to the income limit and using an RCA for his
T4 income in excess of the IPP limitations.

Contributions to an IPP for John would be made Contributions to an RCA for John would be made
by LNL. As LNL is generating surplus passive by LNL. As LNL is generating surplus passive
assets, these assets could be used to fund the assets, these assets could be used to fund the
IPP. RCA.
John would receive a predictable income Cash flow to John on retirement would not be
determined by a formula modelled on a defined pre-determined. The funds are fully accessible by
benefit (DB) pension. The funds would be John. He can choose to receive no income from
locked-in and although unlocking provisions may the plan or can receive it on an ad-hoc basis.
apply, the funds will not be accessible to him on
an ad-hoc basis.
Contributions to either plan will assist LNL with remaining eligible for QSBC status. For John, the
differentiator is predictable, pre-determined income that an IPP creates versus the less-certain, but
flexible, income from an RCA. Given John’s eligibility to contribute to both plans, he could benefit from
29
receiving an element of predictable income as well as additional income based on the flexibility of an
RCA.
Impact on taxation:
Contributions and costs associated with the IPP Contributions and costs associated with the RCA
are fully deductible to the LNL. are fully deductible to the LNL.
Amounts received from an IPP will be fully taxable Amounts received from an RCA will be fully
to John and subject to withholding at source. taxable to John and subject to withholding at
source.
Contributions will impact John’s ability to Contributions will not impact John’s ability to
contribute to his RRSP as the IPP contributions will contribute to his RRSP as RCA contributions do
use all but $600 of his available contribution room not impact John’s contribution room.
each year.
Assets within the IPP will grow tax-deferred. Contributions to an RCA for John and realized
income and gains in the RCA will be subject to
taxation of 50% which would be placed in a
refundable tax account (RTA).
No corresponding issue. Withdrawals from an RCA for John will trigger a
refund from the RTA of $1 for every $2
withdrawn.
John would ultimately receive fully taxable income from either plan. Differentiators are John’s ability to
contribute to his RRSP as the IPP will use almost all of his contribution room each year, and the difference
in the amount of assets invested between the two options.
LNL will incur set up fees and initial actuarial LNL will incur set up fees (RTA account) and may
costs (required). incur actuarial costs (to satisfy CRA reasonability
requirements).
LNL will incur annual information return filing LNL will incur annual costs associated with
costs. maintaining the RTA.
LNL will be required to have an actuarial LNL may periodically conduct an actuarial
evaluation every third year. evaluation to ensure ongoing reasonableness.
LNL is obligated to keep to the plan fully funded LNL is not obligated to keep to the plan fully
which may require a top up of contributions. funded and may choose to cease contributions.
The IPP will require a transfer of almost all of The RCA will not affect John’s current RRSP
John’s RRSP when making contributions for past savings as transfer into the RCA will not be
service. required.
30
The IPP may incur higher annual costs to maintain, given accounting and T3 filing costs. A further
differentiation is the obligation that LNL assumes when an IPP is created which may restrict buyers or
sale price. Also, the requirement for John’s RRSP to be transferred into an IPP if past service contributions
are made, would place most of his retirement assets into one investment plan.
Risk exposure:
LNL is responsible to make investment decisions John has input into investment decisions.
and the client may have less input. Since John
enjoys working with his RRSP investments.
John may experience some limitations with John will not likely experience any limitations on
regards to the range of investments he can hold in investments that can be held within the RCA.
the plan.
As John controls LNL, they can mutually As John controls LNL, they can mutually
determine a target investment return up to 7.5%, determine any target investment return, with no
with LNL being obliged to make up shortfalls. obligation for LNL to make up shortfalls.
John’s IPP assets would be creditor proof. John’s RCA assets would be creditor proof.
John’s IPP assets would belong to him and John would not attach conditions (golden
beneficiaries could be named. handshake) to an RCA meaning immediate
vesting. Accordingly the RCA assets would belong
to John and would form part of his estate.
100% of plan assets in an IPP for John would be 50% of plan assets in an RCA for John (50% in the
tax-sheltered potentially requiring a lower rate of RTA) would be subject to tax at 50% potentially
return. requiring a higher rate of return.
Pre-determined funding and income levels allow Potential for variable funding and no guarantee of
for greater certainty for John’s retirement income in retirement may introduce uncertainty
planning. into John’s retirement planning.
Differentiators include restrictions on investment options that John could include in either plan. As well,
the obligation on LNL to fund an IPP may create a barrier to a future sale and result in a lower sales
price. On the other hand, an IPP offers increased retirement income certainty for John’s planning. An IPP
also allows for a lower rate of return than an RCA to achieve the same after-tax outcome.

John’s residual IPP assets would be available to John’s residual RCA assets would be available to
his beneficiaries/heirs. As John must receive beneficiaries/heirs. If he wishes, John could
minimum income from the plan past age 71, the preserve most or all of the RCA for his estate.
asset value for his estate may decline if the (Estate Planning).
income is consumed rather than reinvested
31
(Estate Planning).
Residual assets are available to John’s estate or beneficiaries under both options. Using an RCA makes it
possible to potentially pass on a greater amount, if income from the RCA is not required for lifestyle
needs.
Priorities:
John is both a shareholder and employee, so John is both a shareholder and employee, so
retention is not a priority. retention is not a priority.
LNL is presently accumulating surplus passive LNL is presently accumulating surplus passive
assets that are impacting its access to the small assets that are impacting its access to the small
business deduction and QSBC status. John has business deduction and QSBC status. John has
identified that he intends to structure a future identified that he intends to structure a future
sale as a share sale in order to access the LCGE. sale as a share sale in order to access the LCGE.
Accordingly, an IPP would be an appropriate Accordingly, an RCA would be an appropriate
solution. solution.
John intend to sell LNL in the future and an IPP John intends to sell LNL in the future and an RCA
may make a sale more difficult due to the ongoing may be preferable to an IPP due to the discretion
costs and funding obligations. surrounding ongoing costs and funding
obligations.
John’s priority is to use his LCGE and both strategies will help LNL meet QSBC criteria. A differentiator is
the priority John may have with respect to an ongoing liability for LNL and its effect on a future sale
when entering into an IPP versus an RCA.

John may place value on the security of the John may value the ability to have flexibility in the
defined pension that an IPP will provide. timing of income from the RCA to control tax
rates.
John presently has involvement with the control John presently has involvement with the control
and management of his RRSP and may not have and management of his RRSP would likely value
the same level of involvement with an IPP. being able to take the same approach to an RCA.
John may value the increased level of tax-deferred John may be less concerned with the ultimate size
growth an IPP can provide. of the RCA asset since he expects the sale of LNL
to fund his retirement.
32
John may value the income attributes of both plans as he may prefer a level of predictable income but
may also prefer the ability to control income levels and tax rates each year. His preference to be involved
with investment selection does not align with the typical investment management of an IPP.

John’s IPP would be a complex strategy that John’s RCA would be a complex strategy that
would include himself, LNL, investment accounts, would include himself, LNL, investment accounts,
actuaries, and CRA. actuaries, and CRA.
Both an IPP or RCA for John would be a complex strategy and financial knowledge and experience should
not be a differentiator.

A client prefers to delegate investment decisions A client seeks flexibility as to retirement age,
and the predictability of a steady cash flow investment types, management of investments
guaranteed to last for life. and flexibility over cash flows in retirement or
funding obligations (such as where a sale may be
contemplated).
John may not wish to transfer his RRSP assets No corresponding issues.
into the IPP where they will come out as a
defined, inflexible income stream, especially
where he does not own substantial non-
registered assets.
No corresponding issue (vesting is immediate). John would not attach any vesting conditions to
an RCA (golden handcuffs).
John prefers to work with his investment advisor on his retirement assets and may be more accepting of
a strategy where he can remain involved in investment decisions. Where John wishes to have more
control over his retirement income, he may not wish to convert his RRSP assets into a less flexible income
stream and may be motivated to accept the RCA option.
Conclusion
On balance, both options offer John quantitative advantages and disadvantages with one strategy not
emerging as a “best fit”. A combination of both may be optimum.
Quantitatively, both will assist in maintaining the QSBC status of LNL. Further, John is eligible to
contribute the maximum amount to an IPP based on pension legislation and can contribute excess
amounts to an RCA plan. Doing so will provide him a combination of predictable income from the IPP
33
and the possibility of additional income from the RCA. It should be noted, however, an IPP will create
ongoing costs and pension obligations for a purchaser which may result in a lower sale price.
Qualitatively, John prioritizes a sale of LNL that will support his retirement and may be concerned if an
IPP would make that harder to accomplish or result in a lower sale price. The RCA option also allows for
John to have greater involvement in the management of his investments. However, given the couple’s
only source of predictable income in retirement at this time will be from government sources, he may
also value having the certainty that the IPP provides.
34
Investment Planning – Guidance for Evaluating Financial

Planning Strategies
Planning Strategies” as it relates to Investment Planning. Examples are provided where two strategies
strategy.
Strategy 1: Mutual Funds vs. Segregated Funds
Mutual Funds Segregated Funds
Widely available and easily obtainable. Widely available and easily obtainable.

Savings or ongoing contributions will be the same Savings or ongoing contributions will be the same
under both options. under both options.
Fees are embedded and do not affect cash flow. Fees are embedded and do not affect cash flow.
Impact on taxation:
Contributions are RRSP eligible. Contributions are RRSP eligible.
Contributions can be made in non-registered Contributions can be made in non-registered
accounts. accounts.
Annual income is distributed to unit owners. Annual income is allocated to unit owners.
Impact on taxation is not a differentiator.
35
No costs of implementation beyond embedded Higher costs over time for the guarantees
management fees. provided.
Differentiator is the higher cost of implementation for segregated funds
Risk exposure:
Risk lies in the underlying investments of the fund. Risk lies in the underlying investments of the fund.
Capital is not insured and has no guarantee. Capital is fully or partially insured and has a
guarantee.
Fees do not need to cover the insured cost of Fees need to cover the insured cost of capital, so
capital, so less risk that investment returns are greater risk that investment returns are
sufficient to cover fees. insufficient to cover fees.
No creditor protection unless within a registered Potential for creditor protection.
plan.
Differentiators are the insured capital aspect of segregated funds, the potential for creditor protection
and the cost of the insurance reflected in the fees.

Named beneficiaries is an option only for Named beneficiaries is an option mitigating
registered plans mitigating impact on probate, impact on probate, public scrutiny, and will
public scrutiny, and will challenges (Estate challenges (Estate Planning).
Planning).
No guarantee of future value (Estate Planning). Minimum guarantee of future value (Estate
Planning).
Lower fees may allow for faster accumulation Higher fees may result in slower accumulation
(Retirement Planning). (Retirement Planning).
Differentiators may exist where the products are being contemplated for estate or retirement purposes
in addition to Investment Planning.
36
Priorities:
If capital preservation is a priority, mutual funds If capital preservation is a priority, segregated
will not provide that assurance. funds can provide that assurance.
If flexibility is a priority, a mutual fund is not If flexibility is a priority, a segregated fund is
locked in and a client can readily access their locked in and a client can less readily access their
money. money.
Differentiator is the importance the client places over capital preservation.

Mutual funds may be preferred by clients who do Segregated funds may be preferred by clients who
not value insurance or insurance products. value insurance.
Values, attitudes and preferences differentiation depends on the value clients place on insurance.

Both products are common Both products are common
Client requires knowledge of investments and risk Client requires knowledge of investments and risk
No understanding of insurance and its impact on An understanding of insurance and its impact on
fees is required. fees is required.
Differentiator will be the client requirement to understand the insured features of a segregated fund.

Where the client has knowledge of or experience For the client that sees the value in paying for the
with mutual funds or where they do not value the assurance of capital preservation, creditor and
insurance provided by segregated funds, they may estate protections, they may be motivated to
be motivated to invest in mutual funds. invest in segregated funds.
Motivation to change/anticipated acceptance level may depend on financial knowledge and experience
and how highly the client values protection.
37
Case Example
Maria, age 74, is retired after a successful business career. Maria has been divorced twice and
unfortunately, her children of each marriage do not get along and frequently fight amongst themselves.
She recently reviewed her will with her estate lawyer where she was cautioned that her estate may be
more likely to suffer challenges given the relationship between her children and that she should
consider steps to minimize this possibility. She agrees that this is important.
Maria has $1.6M in a non-registered account invested in GICs that she wants to invest for better returns
than it is currently yielding. She values security of capital and has a low risk tolerance but she is
frustrated that the account is not keeping pace with inflation. Maria has other sources of pension
income and does not rely on the investments to supplement her retirement income.
Maria has considered mutual funds for her non-registered account as she can select investments that
meet her risk profile and her desire to increase returns. Since the account will be non-registered, she
will be unable to assign any beneficiary to receive the proceeds of the account should she pass away.
The account will become part of her estate and will be settled according to the terms of her will.
Maria has also considered using segregated funds to invest the non-registered funds given her family
dynamics. As with mutual funds, she can select investments that meet her risk profile and her desire to
increase returns. By using segregated funds, she will be able to name beneficiaries for the non-
registered account, allowing her to direct money to beneficiaries outside of her estate and separately
from her will. She will also avoid probate fees which is important to her as they are high in the province
where she lives.
Maria is disappointed to discover segregated funds often have higher fees than comparable mutual
funds and she will incur these higher fees every year until she dies. She knows that investment fees
reduce returns. She is worried higher segregated fund fees will require higher returns to meet the same
net return as a mutual fund and may require her to take on increased risk. She appreciates that part of
the cost of segregated funds provides for set valuations which guarantee her assets will not be worth
less than a minimum amount when she passes.
38
Maria is able to purchase either mutual funds or Maria is able to purchase either mutual funds or
segregated funds. segregated funds.

Cash is available in the non-registered account. Cash is available in the non-registered account.
Impact on taxation:
Income from the non-registered GIC account will Income from the non-registered GIC account will
decrease. decrease.
Income will be distributed from the mutual funds Income will be distributed from the segregated
to Maria. funds to Maria.
Impact on taxation is not a differentiator.
No costs to Maria beyond embedded Maria will have increased costs over time for the
management fees. guarantees provided.
Differentiator is the higher costs of implementation over time for segregated funds.
Risk exposure:
No corresponding issue. Maria is concerned that greater risk will be
required with segregated funds to cover larger
fees.
Maria’s capital. Maria values the security offered by segregated
funds.
No corresponding issue. Maria has no debt and does not need creditor
39
protection.
Differentiators are the security of capital offered by segregated funds versus the greater risk that may be
required to achieve the same return.

Maria will not be able to name beneficiaries and Maria will be able to name beneficiaries for the
the mutual funds will form part of her overall segregated funds and they will not form part of
estate. Maria is concerned about the probate her overall estate. This will satisfy Maria’s
impact and potential estate disputes. concerns about the probate impact and potential
estate disputes.
Differentiator is the ability to name beneficiaries for a segregated fund which will satisfy both probate
concerns and potential estate disputes.
Priorities:
Maria has indicated that capital preservation is a Maria has indicated that capital preservation is a
priority and mutual funds will not provide that priority and segregated funds will provide that
assurance. assurance.
Differentiator is the preservation of capital afforded by segregated funds.

Maria may prefer mutual funds if she perceives Maria may prefer segregated funds where she
that the cost of insurance is too great. values insurance.
Differentiation is based on the degree to which Maria values insurance.

Maria has demonstrated that she understands Maria has demonstrated that she understands
mutual funds. segregated funds.
Financial knowledge and experience are not differentiators in this case.
40

If Maria does not value the insurance provided by Maria appears to be motivated to avoid conflicts
segregated funds, she may be motivated to invest and challenges to her will and values the asset
in mutual funds. protection provided by segregated funds.
Differentiator is Maria’s gravitation to the benefits provided by segregated funds.
Conclusion
Segregated funds are emerging as the preferred option both quantitatively and qualitatively. Maria’s
concern over having to entertain more risk in a segregated fund over a mutual fund in order to achieve
the same return may be mitigated by the protections segregated funds provide and the fact she does
not rely on her investments for retirement.
Strategy 2: Borrow to Invest vs. Periodic Investment Plan for Long Term Capital
Appreciation (in Non-Registered Plan)
Borrow to Invest Periodic Investment Plan
Must be eligible for credit. No credit eligibility.
May require collateral. No require for collateral.
Differentiators are the ability for the client to obtain credit and the potential requirement for collateral.

Loan payments (interest only or principal and Period investment payments will reduce cash
interest) will reduce cash flow. flow.
Ability to alter payments will be limited. Ability to cease or alter payments.
Differentiators are the potential difference in the size of the cash outflows and the flexibility afforded by
a periodic investment plan to alter or cease payments.
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Impact on taxation:
Investment loan interest and associated fees, No loan interest or associated fees – no tax
including investment fees, are generally tax- deduction. Investment fees are generally
deductible. deductible.
Income from investments will be subject to Income from investments will be subject to
taxation. taxation.
Differentiator is the ability to deduct the interest and associated fees on an investment loan.
May be legal, appraisal, and/or application fees. No legal, appraisal, and/or application fees.
Differentiator is the possible costs associated with an investment loan.
Risk exposure:
Liquidity risk because the client must continue to No corresponding liquidity risk.
service the debt even where the investment
declines in value.
Interest rate risk on the investment loan. No corresponding interest rate risk.
Market risk: capital is invested all at once instead Market risk is reduced based on dollar cost
of over time, exposing the client to the potential averaging.
of buying at elevated market prices.
Collateral risk: If the investment loan is secured, No corresponding collateral risk.
the underlying asset can be impacted if the
investment should decline sharply and the client
defaults on the loan or the loan is called.
Risk in the underlying securities purchased. Risk in the underlying securities purchased.
Differentiators are the various types of risks – liquidity, interest rate, market, and collateral risk -
inherent in a borrowing to invest strategy.
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Unpaid investment loans and their associated No corresponding Estate Planning impact.
assets pledged as security may impact a client’s
estate (Estate Planning).
Unpaid investment loans in retirement may be No corresponding Retirement Planning impact.
more difficult to service (Retirement Planning).
Differentiators are the impacts an unpaid investment loan would have on Estate Planning and
Retirement Planning and the impact that assets pledged as security could have on Estate Planning.
Priorities:
The client may prioritize a higher initial capital The client may be able to satisfy their goals based
contribution. on a slower accumulation of capital.
Differentiator will be how quickly the client wants to have an initial amount of seed capital.

If the client is comfortable with the loss of If the client prefers flexibility in payments a
flexibility in a debt repayment plan, this strategy periodic investment plan may be preferable.
may be preferable.
If the client has an aversion to debt, this is not If the client has an aversion to debt, this is likely
likely a suitable strategy. the preferable strategy.
Differentiators will be the client’s aversion to debt and the value they place on flexibility in payments.

Requires a knowledge of underlying investments. Requires a knowledge of underlying investments.
Requires a knowledge of debt products. No corresponding knowledge required.
Requires knowledge of the risks inherent in a No corresponding knowledge required.
leveraging strategy.
Differentiators are the knowledge of both debt products and the risks inherent in a leveraging strategy.
43

The client who wants or needs to build capital The client who is risk or debt averse or has
quickly may be motivated by this strategy. sufficient time to allow funds to grow for their
future needs may be motivated by a periodic
investment plan approach.
Motivation to change/anticipated acceptance level may depend on the client’s aversion to risk or debt or
how pressed they may feel to accumulate funds for their goals or needs.
Case Example
Jim and Elaine, ages 56 and 55 respectively, are celebrating the fact they have finally made their final
mortgage payment on their home. Cash flow had frequently been tight since they married 20 years ago;
however, they have experienced increased income in the past few years which has made this day
possible.
They have one son together, Patrick, age 18, who is just about to go out of town for post-secondary
education. They look forward to supporting him with some of the $1,000 per month which would have
otherwise gone towards their mortgage. Patrick is named as the residual beneficiary under both of their
wills after each other.
Elaine is a school teacher who has recently reached the top of her pay scale due to her many years of
experience. Jim works for a major electronic product manufacturer in a commissioned role within the
sales division. The past several years have been good in the electronics industry, his division has
performed well, and his commissions were above average exceeding his base salary. Jim thinks this is
great; however, colleagues have reminded him that this aspect of his remuneration can be volatile.
Jim and Elaine used the higher than expected commission income to pay down their mortgage, freeing
up cash for lifestyle spending. They have adapted their lifestyle to Jim’s recent success and hope to
maintain their present lifestyle into retirement. For now, in addition to helping Patrick, they hope to
travel more and enjoy their life.
Elaine is debt-averse, and it was at her urging that they paid down the mortgage first. She feels a sense
of accomplishment now that the mortgage is paid. She wants to set up a savings plan of $750 per month
to ensure they have retirement assets for the retirement lifestyle they want. In the past, all of their
savings have been directed towards their TFSAs which are valued at $120,000. The TFSAs are invested
conservatively in Canadian short term fixed income as an emergency fund. They do not have much RRSP
contribution room due to their pension plans at work.
Elaine knows they will need additional retirement assets and that it will take a long time for the savings
to accumulate. Their investment advisor indicated that the expected rate of return is 7% based on their
risk tolerance. If they invest as their investment advisor suggests, Elaine prefers that the monies are
accessible if any great opportunities for travel should come up.
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Jim’s best friend suggested that they could accelerate their retirement savings if they were to take out
an investment loan. Jim has checked with their banker and has been advised they are pre-approved for a
home equity line of credit of $100,000 with a prime linked interest rate (presently 3.95%), minimum
payments of interest only and all costs of borrowing will be borne by the bank. If their cash is tight, they
can opt for the minimum payment. Otherwise, Jim and Elaine could simply pay the same amount
towards the line of credit as they would otherwise contribute to their retirement savings plan. Jim
imagines that if his commission income continues to be higher than normal, he could pay the loan off
sooner. Jim’s friend says that the more money that is invested from day one, the quicker it will grow.
Totally confused about which approach to use, Jim and Elaine come to see you, their financial planner,
about what is best for them.
The couple qualifies for a home equity line of The couple has earmarked $750 of cash flow per
credit and has earmarked $750 of cash flow per month for investment.
month for investment (more than the anticipated
monthly interest).
The couple’s home would be security on the No requirement for security.
investment loan.
The differentiator is the requirement to have the home pledged as security.

$750/month will go to servicing debt and interest. $750/month will be contributed to additional
investments.
A minimum payment of interest is required. A No requirement for a minimum payment. A
change in Jim’s income or the desire to take an change in Jim’s income or the desire to take an
opportunity travel would be impacted by the opportunity travel would not be impacted by a
minimum payment obligation. minimum payment obligation.
Differentiator is the minimum payment obligation under a borrowing to invest strategy.
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Impact on taxation:
Income on the investments will be taxable to the Income on the investments will be taxable to the
couple (likely higher with a larger upfront capital couple (likely lower with a smaller upfront capital
contribution). contribution).
Interest on the investment loan and investment Investment fees are generally deductible.
fees will be deductible.
Differentiator is the interest deduction under the borrow to invest strategy which can be expected to
offset the investment income earned.
Jim and Elaine may incur registration costs, but no No corresponding costs.
appraisal costs based on pre-approval of the loan.
Differentiator are the potential registration costs of the loan.
Risk exposure:
Jim and Elaine are subject to liquidity risk as the No corresponding risk.
investment loan must be serviced monthly
notwithstanding possible fluctuations in Jim’s
income.
Jim and Elaine are subject to interest rate risk as No corresponding risk.
the investment loan fluctuates with prime.
Jim and Elaine are subject to market risk as the Jim and Elaine can reduce market risk based on
initial capital is all invested up front exposing dollar cost averaging.
them to buying at elevated market prices; they
are also planning to invest in a portfolio with an
expected rate of return of 7% annually; this would
suggest a growth oriented portfolio though it’s
unclear if this is consistent with their risk
tolerance.
Jim and Elaine are subject to collateral risk as their No corresponding risk.
home is the security for the investment loan.
Differentiators are the liquidity, interest rate, market, and collateral risks associated with the borrow to
invest strategy.
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The remaining investment loan would encumber No corresponding issue.
the estate for Patrick.
Outstanding loan amounts could impact their No corresponding issue.
ability to retire when they wish or to enjoy the
lifestyle they planned.
Differentiator is the possibility of an outstanding investment loan having an impact in either death or
retirement.
Priorities:
Elaine has indicated a need for additional Elaine has indicated a need for additional
retirement savings. A leveraging strategy could retirement savings. A periodic investment plan
result in increased retirement assets through a will take a longer time to accumulate capital.
larger initial capital investment.
Elaine’s priorities make a leveraging strategy attractive.

No corresponding issue. Elaine is debt averse.
This strategy will impair Elaine’s preference to This strategy will not impair Elaine’s preference to
travel when the opportunity presents itself. travel when the opportunity presents itself.
Differentiators are Elaine’s aversion to debt and the flexibility to redirect payments to travel options
when the opportunity arises.

Jim and Elaine’s investment knowledge appears to No requirement to make a better return than the
be limited to conservative fixed income funds. A loan’s interest rate.
leveraged strategy requires investment in higher
risk investments to make a better return than the
interest being paid on the loan.
Jim and Elaine have never borrowed to invest in No corresponding issues.
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the past and need to fully understand the

inherent risks.
Jim and Elaine are familiar with borrowing with No corresponding issues.
their home as security.
Differentiators are the required knowledge of higher risk investments and the inherent risk of a leveraged
strategy. Jim and Elaine have not demonstrated that they have knowledge or experience regarding
leveraged investing.

Jim’s best friend suggested that they could Elaine is debt averse; she may be motivated to
accelerate their retirement savings if they were to consider a periodic investment plan.
take out an investment loan.
High risk exposure, lack of financial experience and knowledge and Elaine’s concerns suggest a
motivation to pursue a regular investment plan.
Conclusion
The differentiators that emerge from the quantitative and qualitative considerations are Elaine’s
aversion to debt, the value she places on the flexibility to direct extra cash flow to travel, the couple’s
past investment history. All of these considerations favour a periodic investment plan strategy over a
borrow to invest strategy.
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Insurance and Risk Management – Guidance for Evaluating

Financial Planning Strategies
Planning Strategies” as it relates to Insurance and Risk Management. Examples are provided where two
strategies must be weighed against each other. However, the model may also be used to evaluate a
single strategy.
both clients. Where quantitative and qualitative considerations differ materially, you may consider a
compromise solution that contemplates a combination of strategies.
Strategy 1: Group Owned Insurance vs. Individually Owned Insurance

Group Owned Insurance Individually Owned Insurance
No individual application or underwriting Individual application and underwriting.
Automatic coverage. Coverage may be denied or subject to a rating.
Level of coverage is typically subject to limits. Level of coverage is negotiated.
Differentiators are the automatic coverage and lack of application and underwriting requirement under
group insurance and the coverage limits that exist for group insurance.

Premiums may be paid by client’s employer. Premiums are paid by the client.
Group rates are generally less expensive for the Individual rates are generally more expensive for
same coverage. the same coverage.
Differentiators are who is responsible for premium payments and the cost of those payments.
Impact on taxation:
Group life insurance premiums paid by an No corresponding issue.
employer are a taxable benefit.
With the exception of life insurance, where No corresponding issue.
premiums are paid by an employer, benefits are
taxable (i.e., disability insurance).
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Differentiator is taxation of premiums and benefits when employer paid.
Typically no application costs. Typically no application costs.
No medical costs. May be medical costs.
Differentiator is the possible medical costs for specific tests for individually owned insurance.
Risk exposure:
Can be canceled or altered by the employer or Cannot be canceled or altered without the client
lost on termination of employment. consent.
No opportunity for insurance with participating Insurance products are available with
features – no investment risk. participating features – investment risk.
Differentiators are the control over the policy under individually owned insurance and the investment risk
that may exist with an individually owned policy with participating features.
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Loss of coverage (Estate Planning). No corresponding issue.
Differentiator is the impact a loss of coverage might have on a client’s estate planning.
Priorities:
Client may feel group owned insurance will Client may place a high priority on having
provide adequate coverage. additional coverages over group owned insurance.
Differentiator is the importance of insurance coverage that is not dependent on employment.

Client must perceive value in insurance. Client must perceive value in insurance.
Differentiator is the degree to which the client values insurance.

Coverages tend to be basic and limited in options. Coverages can be more complex, and more
options exist.
Differentiator will be the variety of options that can range in complexity; a more knowledge or
experienced client may feel more comfortable navigating the options.

No corresponding issue. Client must value the coverage to budget for a
new payment.
Differentiator is the requirement for a client to perceive sufficient value from insurance to pay for the
benefit.
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Case Example
Anik has just received an offer of full-time employment at an assembly factory. The offer includes a
benefits package that includes employer-paid health care benefits and life insurance coverage for him
and his spouse. This comes at an opportune time as Anik and his spouse have been living within a tight
budget, barely making ends meet since he became unemployed almost a year ago.
Anik’s spouse wonders if they could stop paying for their individual life insurance policies now that they
will have life insurance paid by Anik’s new employer. She feels the money saved from not having to pay
for their individual policies would be helpful in meeting their cash needs not only now, but also because
the couple are hoping to start a family in the near future.
Anik is reluctant to cancel the personal policies in case his new job is not permanent. If he leaves the
company or is let go for any reason, he will lose his benefits, including the life insurance and he may not
be able to convert his group coverage to a personal policy. Although they are healthy now, he knows
that any change in his health may impact his ability to get coverage in the future.
Anik is eligible for coverage. Anik has existing coverage.

Anik’s employer will pay the premiums. Anik’s premiums will cease if the coverage is
canceled.
Differentiator is the additional cash flow to the couple if the individually owned insurance is canceled.
Impact on taxation:
Anik’s employer paid life insurance premiums are No corresponding issue.
taxable benefits.
Although the premiums are a taxable benefit, the amount is not likely to be large enough to be a
differentiator.
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No costs associated with Anik joining the plan. No costs associated with Anik canceling coverage.
Risk exposure:
A loss of employment for Anik at the new job will Anik would have to requalify if he lost his job. He
result in a loss of coverage. would be older, and premiums would be
correspondingly larger; in the worse case
scenario, he may not qualify at all.
Differentiator is the risk associated with the loss of coverage under group owned insurance and the
potential for either denied coverage or coverage at an increased cost if individually owned insurance is
again required.

Loss of employment for Anik would result in a loss Existing insurance provides protection, which is
of coverage which could impact cash flow to fund particularly important as the couple contemplates
the couple’s lifestyle and future savings goals. starting a family.
If Anik is unable to requalify in the future, cash
flow to fund the couple’s lifestyle and future
savings goals could be impacted.
Differentiator is the risk of a potential lack of insurance on the couple’s current lifestyle and future goals
should they give up the individual coverage.
Priorities:
Anik’s spouse favours reliance on group owned Anik’s spouse sees the increased cash flow from
insurance to increase cash flow. canceling the individually owned insurance as a
priority.
Differentiator is the increased cash flow that Anik’s spouse sees as a priority.
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The clients value insurance. The clients value insurance.
Values, attitudes and preferences are not differentiators.

Anik appears knowledgeable about the Anik appears knowledgeable about the benefits of
shortcomings of group coverage. an individually owned policy.
Financial knowledge and experience are not differentiators.

No corresponding issue. Anik’s spouse is motivated by the opportunity to
increase cash flow by eliminating the premium
Anik, however, understands the benefits of
individual coverage.
The differentiator is Anik’s spouse’s motivation to have increased cash flow from the eliminated
premium.
Conclusion
The quantitative factor that emerges is the increased cash flow that the couple would realize from the
elimination of a premium which is a priority for Anik’s spouse. Qualitatively however, Anik understands
the advantages associated with individually owned insurance. The risks associated with canceling the
existing coverage may outweigh the benefits associated with increased cash flow. To satisfy both, a
balance may be possible by reducing existing coverage rather than canceling it outright.
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Strategy 2: Critical Illness Insurance (CI) vs. Self Insure (Assume the Risk)
Critical Illness Insurance (CI) Self Insure
Client must be between 18 and 65. No corresponding issue.
Client may need to provide evidence of No corresponding issue.
insurability.
No corresponding issue. Client must have other assets available or be
willing to forgo other goals.
Differentiator is requirement to qualify for CI and the transfer of risk from the client to the insurer.

Premiums for coverage. No premiums.
Insurance proceeds on a claim. No insurance proceeds available.
Differentiators are the premiums and insurance proceeds associated with CI.
Impact on taxation:
No tax implications. No tax implications unless taxable assets are draw
upon.
Impact on taxation is not a differentiator unless taxable assets are used.
Medical costs in underwriting may be incurred. No corresponding issue.
Medical costs may be incurred during CI underwriting but will not likely be large enough to be a
differentiator.
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Risk exposure:
Mitigates financial risk for illnesses covered under Client bears all risk associated with the costs
the policy. related to the illnesses that would otherwise be
covered under a CI policy.
Differentiator is the transfer of financial risk to the insurer for the illnesses covered under a CI policy.

Payment of premiums will decrease potential Absence of premiums will increase potential
savings towards other goals. savings towards other goals.
Insurance proceeds will preserve assets saved for Client may have to draw on assets saved for other
other goals. goals.
Differentiators are the premiums which could otherwise be directed to other goals and the insurance
proceeds that could help preserve the client’s assets.
Priorities:
Clients who prioritize asset preservation may A client may be comfortable with relying on other
favour CI. assets and favour asset accumulation.
Differentiators will be the extent to which the client is comfortable with reliance on other assets.

Clients who experience piece of mind through Clients that perceive risk of illness as low will likely
lowering risk may favour CI. favour self-insurance.
Differentiator will be the extent that the client perceives an illness as a possibility.

Clients need to have knowledge of the coverage Clients need to have knowledge of the coverage
and premiums associated with CI. and premiums associated with CI in order to self
insure instead.
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Where a client has greater financial knowledge, direct or indirect experience with an illness and its
impacts, they may favour insurance where the impacts were significant.

Clients may be motivated by personal experience, Clients may be motivated by personal experience,
their current or family health history or the value such as good health or not having witnessed a
they place on insurance. friend or relative experience a critical illness.
Differentiator will be the motivation a client may feel after witnessing illnesses of family or friends, their
own health or the degree to which they value insurance generally.
Case Example
Janice and Derek, age 42 and 44 respectively, are happily married and have two children, Connor, age 11
and Reese, age 8. Derek is self-employed and has recently experienced great success in his business
earning $150,000 per year. Before the success of the last few years, Derek and Janice went through
difficult years, experiencing financial losses while Derek worked to establish his business.
Janice works part time as a sales representative selling cosmetics and skincare products through in-
home sales and referrals. Her income fluctuates and can be $20,000 one year then $50,000 the next.
The part-time nature of her work helps Janice maintain her household, take care of her children and
ensure they make it to all of their hockey-related activities. Janice is proud of her children who both play
competitive hockey. Connor plays for a top team in their town and Reese has recently been recruited for
a girls’ team at the regional level.
Janice and Derek have little in the way of RRSP savings and have just begun to budget $400 monthly to
replace funds taken from their TFSA emergency savings during the early years of Derek’s business. They
have a small savings account they currently rely on for unexpected expenses.
They own Term-20 life insurance policies that provide adequate coverage. They are in good health and
do not have any family health issues. Derek was able to secure private disability insurance based upon
his average net income of the past three years. As his income was growing through these years, the face
value of the disability insurance is relatively low, but the premium is affordable.
Janice recently helped a good friend who had breast cancer. At the time that her friend was undergoing
chemotherapy, Janice was able to help by taking her friend’s children to all their activities. In fact, her
friend’s children came to stay with Janice and Derek for extended periods during this time. It was very
difficult for the young children to be uprooted from their home life. Given this experience, Janice
wonders how they would manage if she or Derek came down with a serious illness, given the children’s
hockey schedules and the need for Derek to stay focused on his work.
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One of their friends mentioned looking into critical illness insurance. Out of curiosity, they asked their
insurance agent for a quote. They were told that they could get a $50,000 20-year renewable policy for
annual premiums of $610 for Derek and $495 for Janice and the insurer would cover the cost of any
medical evaluations. They come to you and ask for your opinion on purchasing this coverage
The client’s health and family health history will No corresponding issue.
likely qualify them for coverage.
No corresponding issue. The client must be willing to use other assets of
which they have little or forgo other lifestyle
choices.
As the clients likely will qualify for coverage, the differentiator is the client’s lack of resources to self
insure without forgoing their present lifestyle.

Derek and Janice will incur premium costs $610 The absence of premiums will allow for cash flow
and $495 annually. to be directed to their TFSA savings goal.
In the event of illness, they could each receive In the event of illness, they would have to direct
$50,000. savings and cash flow away from other goals.
Differentiators are the cash flow savings that would be realized from the absence of premiums and the
insurance proceeds that would allow for the preservation of other savings and cash flow.
Impact on taxation:
No tax implications. There will only be a tax implication if the couple’s
taxable assets (RRSPs) are used.
Differentiator is the potential use of taxable assets (RRSPs) in the event of an illness.
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The insurer will cover the cost of any medical No corresponding issue.
evaluations.
Risk exposure:
There is a risk that an illness is not covered by the No corresponding issue.
policy.
There is a risk that medical costs will exceed the There is a risk that medical costs will exceed
$50,000 coverage. savings and other cash flow.
Differentiators are the possibility of not all illnesses being covered and the financial cushion that CI
provides, even if costs exceed coverage.

Premiums will reduce savings towards Derek and Lack of premiums will allow planned savings to
Janice’s TFSA (Retirement Planning). the TFSA to be maintained (Retirement Planning).
Insurance proceeds of $50,000 would preserve Derek and Janice may have to draw on assets
assets (TFSA and RRSP) saved for other goals (TFSA and RRSP) saved for other goals (Retirement
(Retirement Planning). Planning).
Differentiator is the impact that payment of premiums will have on future retirement savings goals and
the impact that insurance proceeds would have on preserving assets.
Priorities:
The client has identified replenishing their savings The client has identified replenishing their savings
as a priority. CI premiums will impair that ability. as a priority. A lack of CI premiums will improve
that ability.
The client would like to accumulate savings and a CI premium would impair that goal.
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Janice shows preference for protecting the family Janice wonders how she or Derek would manage
in the event of an illness. in the event of an illness.
Differentiator is Janice’s preference to insure the risk of illness; she feels that they would not be able to
manage in the event of an illness.

Derek and Janice appear to understand CI Derek and Janice appear to understand the
insurance. consequences of not being insured.
Based on Janice’s experience supporting her
friend, she indicates concerns if something were
to happen to Derek or herself.
Differentiator is Janice’s experience supporting a friend through illness.

Janice helped a friend though a critical illness and Given a lack of surplus funds, Janice reflects a
has first-hand experience. This may increase her desire to avoid the negative impacts that her
motivation to purchase CI. friend has experienced through her illness.
Janice appears highly motivated to transfer risk to an insurance company based on her preferences and
experience.
Conclusion
From a quantitative perspective, the couple has identified savings as a priority and there is risk that a
future illness will fall outside the definition of critical illness in any specific insurance policy.
Qualitatively, it’s clear that Janice sees value in critical insurance. Options for the couple could include a
balance between savings for the future and CI coverage to provide a certain level of protection at an
affordable price.
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Tax Planning – Guidance for Evaluating Financial Planning

Strategies
Planning Strategies” as it relates to Tax Planning. Examples are provided where a single strategy has
been identified. However, the model may also be applied when evaluating multiple strategies.
Strategy 1: Accessing RRSP Amounts Before Age 72
Accessing RRSP amounts before age 72
No restrictions on withdrawals for cash withdrawals.
Withdrawals under the Home Buyers Plan (HBP) or the Lifelong Learning Plan (LLP) must meet certain
conditions to be a qualifying withdrawal.
Eligibility is not a consideration since all individuals are eligible.

Cash withdrawals are subject to tax withholdings – less than 100% will be received.
Qualifying HBP and LLP withdrawals are not subject to tax withholdings – 100% will be received.
Withdrawals from an RRSP will increase cash flow.
Impact on taxation:
Cash withdrawals are subject to taxation with client’s other income sources. Withdrawals are taxed as
regular income (characteristics are lost). Increased income may affect marginal tax rates, income
tested credits, benefits, and government assistance. There is no opportunity to recontribute amounts
withdrawn as contribution room is lost.
Qualifying HBP and LLP withdrawals are not subject to taxation unless not repaid. Amounts withdrawn
can be recontributed.
Reducing accumulated assets in an RRSP before age 72 will have a direct correlation with minimum
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future withdrawals that may impact marginal tax rates, income tested credits, benefits, and
government assistance.
Withdrawals are subject to full taxation as income and will impact marginal tax rates, credits, benefits,
and government assistance along with the loss of tax-deferred growth. The impact on income tested
credits, benefits, and government assistance both today and in the future needs to be considered.
They may be minimal fees associated with RRSP withdrawals.
Cost of withdrawals, including transaction fees, should be considered.
Risk exposure:
Possible impacts to asset allocation if withdrawals are made from a single asset class.
Risk of misalignment of the client’s portfolio with their risk tolerance should be considered.

Reduced assets available for retirement (Retirement Planning).
Potentially lower tax liability to estate (Estate Planning).
Consider the impact that drawing on RRSP assets today will have on future retirement assets and estate
planning.
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Priorities:
A client may prioritize education and want to take advantage of an LLP withdrawal.
A client may prioritize home ownership and want to take advantage of a HBP withdrawal.
A client may prioritize enhanced lifestyle today
Consider the priorities a client places on education, home ownership, and lifestyle.

Importance of current lifestyle rather than future lifestyle.
Consider the value that a client places on lifestyle vs. tax-deferred growth over the longer term (a current
vs a future oriented perspective).

The client needs to understand the repayment terms and consequences of not repaying HBP and LLP
withdrawals.
The client needs to understand the income tax implications and loss of re-contribution room of cash
withdrawals.
Consider the client’s understanding of the tax implications of RRSP withdrawals and re-payment rules
(related to HBP and LLP withdrawals).

. Clients that have a cash flow shortfall or a cash flow emergency may be motivated to use this
strategy.
Where the client has a lack of resources to meet their goals and they have RRSP assets, they may be
motivated towards accepting this option
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Case Example
Greta recently retired at the age of 60. Her husband passed away a few years ago and she was the
beneficiary of his RRSP which is presently valued at $550,000 and a TFSA valued at $90,000. Her
investment accounts do not have redemption fees. She is fortunate to have also earned a generous
indexed defined benefit pension plan that covers almost all of her retirement income needs of $55,000
after-tax annually. She has not yet started receiving CPP benefits.
Greta would like to travel early in retirement, while she is young and healthy, but feels nervous about
accessing her savings as she has always been cautious and careful with her money and values having
financial reserves. She finds it to be a big adjustment in her thinking to consider withdrawing savings
instead of creating them. She is worried about the extra tax an RRSP withdrawal will attract and not
being able to recontribute to her RRSP like she can with her TFSA. She does not intend on leaving behind
a large estate.
Greta recognizes that she will need to choose which investment plan to receive income from. A friend of
Greta’s, who prepares tax returns, suggested that she use her RRSP funds for this purpose. He said her
RRSP will cause her to experience significant OAS clawback beyond age 72 if it continues to grow.
However, she is hesitant to use her RRSP now as she always believed she wouldn’t draw from it before
she had to. She wants to better understand the value of this option.
Greta does not have any restrictions on withdrawals from her RRSP.
Eligibility is not a consideration for Greta.

Any cash withdrawals Greta makes will be subject to tax withholdings – less than 100% will be
received. The net additional income will increase her available cash flow for travel.
Greta will increase her cash flow for travel by accessing RRSP amounts.
Impact on taxation:
Any cash withdrawals that Greta makes are subject to taxation with her other income sources. The
withdrawal is taxed as regular income (characteristics are lost) and increased income may affect
marginal tax rates, income tested credits, benefits, and government assistance. Greta will not have the
opportunity to recontribute amounts withdrawn.
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By reducing accumulated assets in her RRSP before age 72, Greta will reduce the required future
minimum withdrawals. Based on the size of her RRSP, it is highly likely that her Old Age Security
benefits will be clawed back entirely if the RRSP is not drawn down prior to receiving the benefits. In
addition, receipt of RRSP amounts today will likely be at lower marginal tax rates before both OAS and
CPP begin being received.
Greta needs to consider the impact that higher marginal tax rates and taxable income will have on her
overall taxation level. In the long term, Greta will benefit from reduced future taxation rates and will
likely reduce any potential OAS claw back. It is more than likely that long term tax efficiency will
outweigh any tax deferred growth by leaving RRSP funds untouched
Greta does not have any redemption fees in her investment accounts
Costs of implementation are not a consideration for Greta.
Risk exposure:
Greta will want to ensure that her asset allocation continues to align with her risk tolerance.
Greta needs to consider possible changes in her risk exposure depending on where she draws funds from
her RRSP.

Greta will have reduced assets available for retirement (Retirement Planning).
Greta will have a potentially lower tax liability for her estate (Estate Planning).
Greta does not intend on leaving a large estate and she has a generous pension to rely on. Impact on
other goals is therefore not a consideration.
Priorities:
Greta has identified travel today as a priority and is concerned that health may prevent it in the future.
Greta has identified travel as a priority today over the future.
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Greta has previously focused on savings and values having financial reserves.
Greta’s preference to save and value on having financial reserves is the differentiator that would favor
leaving assets in her RRSP.

Greta understands that RRSP withdrawals are taxable and that she will not be able to recontribute
amounts withdrawn.
Greta understands the consequences of an RRSP withdrawal and financial knowledge and experience is
not a consideration.

Greta wishes to pursue travel opportunities today and does not have excess cash flows and therefore
will be more accepting of this option.
Greta’s motivation to pursue travel opportunities today while her age and health permit, combined with
an available pool of assets and a lack of excess cash flow may cause her to be accepting of this option.
Conclusion
Quantitatively and qualitatively, it should be recommended to Greta to access her RRSP funds today.
She has the certainty of an indexed pension to rely upon and there are quantifiable income tax benefits
to drawing on the RRSP funds today. She has no plans to leave a large estate and would like to access
funds today to travel while she is young and healthy.
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Strategy 2: Spousal Loan for Income Splitting

A spouse in a higher income bracket is seeking to transfer income producing assets to a lower income
spouse in order to save taxes as a couple.
Spousal Loan for Income Splitting
The transferor spouse must have income producing assets to transfer.
The transferee spouse must have the ability to pay interest annually on the spousal loan.
Income from the assets transferred must exceed the interest on the spousal loan in order for the
strategy to be effective.
It can reasonably be presumed that the transferor spouse has income producing assets, so the key
consideration will be whether the income produced will be sufficient to cover the interest on the loan.

Notwithstanding a change in the underlying assets, income from the assets will remain unchanged. The
only change will be the recipient spouse – nil impact on cash flow.
Interest on the spousal loan will be a cash outflow for one spouse and a cash inflow for the other
spouse – nil impact on cash flow.
Impact on cash flow is not a consideration.
Impact on taxation:
Interest on a spousal loan will be taxed at a higher MTR for the transferor spouse. Interest must be at
least at the minimum rate prescribed by CRA.
Interest on a spousal loan will be deductible at a lower MTR for the transferee spouse. Interest must
be at least at the minimum rate prescribed by CRA.
Future income from transferred assets will be taxed at a lower MTR for the transferee spouse.
Spousal rollover rules must be elected out of (to avoid attribution) which may trigger capital gains
and/or recapture on transferred assets for the transferee spouse, which would have otherwise
remained tax-deferred. Consequences of additional income. recognition could include impact on
income tested programs (OAS/EI).
Consider the relative shifts in MTRs for the future net income of both spouses and the upfront cost of
early recognition of capital gains and/or recapture.
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Documentation costs for spousal loan.
There may be registration costs for title transfers.
There may be brokerage fees for the transfer of investments.
Considerations are the documentation costs, registration costs, and brokerage fees that may apply.
Risk exposure:
Transfers between spouses must take place at FMV in order to avoid punitive tax consequences. Risk is
that FMV may not be readily determinable.
The income from the underlying assets may not exceed the interest on the spousal loan.
The value of the transferred assets may decrease.
Portfolio investments must be in line with the risk profile of the transferee. This may make achieving a
break-even with the spousal loan interest rate unattainable.
Considerations are the risks associated with determining the FMV of some assets, the value of the
underlying assets decreasing after transfer and the income on the transferred assets not exceeding the
spousal loan interest.

Increased after-tax cash flow may allow for other saving goals (Financial Management and Retirement
Planning).
Change in asset ownership (including the spousal loan itself) may require revisiting client wills (Estate
Planning).
Considerations are the impact a change in ownership of assets might have on an estate plan and the
ability to direct increased after-tax cash flow to other savings goals.
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Priorities:
This strategy is appropriate for a couple that prioritizes tax efficiency for a family unit.
Consider the priority a couple places on family tax efficiency.

This strategy is appropriate for a couple that values tax efficiency over personal ownership of specific
assets within a family unit.
Consider whether a couple places value on having personal ownership on specific assets within a family
unit and their attitude towards tax.

Both spouses should have knowledge of the requirements associated with a spousal loan and the
conditions under which it has opportunity to add value.
Transferee spouse should have an understanding of the investments transferred.
Consider the requirement for the transferee spouse to understand the investments transferred and the
knowledge required to benefit from the borrowing to invest strategy.

Both spouses need to prioritize tax efficiency and not place value on asset ownership/control.
Consider the motivation to change based on the priorities of both spouses for tax efficiency and control.
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Case Example
Jim is excited that he has retired at the age of 61. His net income this coming year from his defined
benefit pension and CPP benefits is expected to be $45,000. He can afford to retire because his wife,
Nancy, was recently promoted to a role as a CEO resulting in net employment income of $250,000.
Nancy recently inherited a large stock portfolio from her father that is anticipated to yield annual
dividend income of $25,000. She inherited it a cost of $380,000 and it has increased slightly in value
since then to $385,000. The portfolio holds investments that are similar to investments in both Jim and
Nancy’s RRSPs and consistent with their risk profiles. However, as they get older, they’re starting to
wonder about whether a more conservative portfolio should be considered.
Given Nancy’s marginal tax rate, the couple is looking at ways to reduce taxation on the anticipated
dividend income from the portfolio. They are wondering if there is any way in which Nancy can transfer
the portfolio to Jim and have him taxed on the future income. While they have some investment
experience, they have limited knowledge of financial affairs.
They come to you, their financial planner, for your recommendation.
Nancy has an income producing portfolio that is available for transfer to Jim.
Jim either from the income from the investments themselves or his own means has the ability to pay
interest annually on the spousal loan.
Income from the assets transferred ($25,000) is expected to exceed the minimum prescribed interest
on the spousal loan ($385,000 x 2% = $7,700) making the strategy effective.
Strategy appears appropriate today based on the expectation for income on the investment to exceed
the prescribed interest on the loan. However, this will need to be revisited based on any potential
portfolio changes.

As the current investments are in line with Jim’s other investments, it is unlikely that any change in
investments and income will occur. The only change will be that Jim will receive the income instead of
Nancy – nil impact on cash flow.
Interest on the spousal loan will be a cash outflow for Jim and a cash inflow for Nancy – nil impact on
cash flow.
There is no net change in cash flow for the couple.

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Impact on taxation:
Interest on a spousal loan ($7,700) will be a deduction to Jim at his lower MTR.
Interest on a spousal loan ($7,700) will be an inclusion at Nancy’s higher MTR.
Anticipated dividend income of $34,500 ($25,000 subject to gross-up of 38%) will be taxed at Jim’s
lower MTR.
Election out of the spousal rollover rules by Nancy will trigger a taxable capital gain of $2,500
(($385,000 - $380,000) x 50%) that would have otherwise remained tax-deferred.
Overall income inclusion for Nancy will decrease by $24,300 ($34,500 - $7,700 - $2,500) in the year of
disposition and by $26,800 thereafter. Jim’s income will increase by $26,800 annually. The couple will
benefit by the difference in their MTRs on the $26,800. In addition, any growth in the portfolio will be
taxed as capital gains to Jim versus Nancy.
There may be some costs to document the spousal loan from Nancy to Jim.
There may be some brokerage fees for the transfer of investments from Nancy to Jim.
There may be some documentation costs and brokerage fees to consider; however they may not be
material.
Risk exposure:
The assets in question are portfolio investments allowing the FMV of the assets transferred from
Nancy to Jim to be determined (and avoiding punitive tax consequences).
The income from the portfolio assets transferred from Nancy to Jim may not exceed the interest on the
spousal loan.
Attribution rule should Jim fail to pay interest to Nancy by January 31 each year.
Although there is a risk that the portfolio assets may decline in value, the expected return exceeds the
prescribed interest rate by a large margin; it’s unlikely that risk exposure will be a significant
consideration. This could change with a more conservative portfolio.

Increased after-tax cash flow may allow for other savings for Jim and Nancy (Financial Management
and Retirement Planning).
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Change in asset ownership (including the spousal loan itself) may require revisiting Jim and Nancy’s
wills (Estate Planning).
Jim and Nancy may wish to review their wills. The ability to direct additional after-tax cash flow towards
other savings goals is a consideration that favours an income splitting strategy.
Priorities:
Jim and Nancy want to explore opportunities to reduce their taxes.
Tax efficiency is a priority for the couple.

Jim and Nancy value tax efficiency over personal ownership of specific assets within a family unit.
Jim and Nancy are not concerned about personal ownership of assets and value tax efficiency. However,
they are also showing a preference for capital preservation as they get older.

Both Jim and Nancy have limited financial knowledge.
Since the couple has limited knowledge of financial matters, they will need to feel comfortable with the
risks associated with this strategy should Jim not pay Nancy interest, and should they ultimately move to
a conservative or income oriented portfolio with more limited return expectations.

Jim and Nancy both prioritize tax efficiency and do not appear to place value on individual asset
ownership.
As both spouses view tax efficiency as a priority, their anticipated acceptance level could be expected to
be high.
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Conclusion
Both quantitatively and qualitatively, a spousal strategy is appropriate as a recommended course of
action for Jim and Nancy. There is a clear difference in their MTRs that makes the net income from the
strategy suitable for them. However, the strategy will need to be reconsidered should the couple’s risk
tolerance change significantly. As well, they couple will need to feel comfortable with the rules
associated with the spousal loan strategy to avoid negative tax surprises (potential double taxation and
income attribution).
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Estate Planning – Guidance for Evaluating Financial Planning

Strategies
The purpose of this guidance is to illustrate the application of the Model for Evaluating Financial
Planning Strategies as it relates to Estate Planning. Examples are provided where two strategies must be
weighed against each other. However, the model may also be used to evaluate a single strategy.
In a joint engagement, it is important to consider quantitative and qualitative factors as it relates to both
clients. Where quantitative and qualitative considerations differ materially between the clients, you may
consider a compromise solution that contemplates a combination of strategies.
Strategy 1: Legal Will Versus Ownership of Assets in Joint Tenancy with Rights of
Survivorship
Legal Will Joint Tenancy WROS
Client must have testamentary capacity to create Client must have capacity to own and make
a legal will. decisions on property; a lower standard than
testamentary capacity.
Can cover all assets Not all assets can be covered.
Client must age of majority in their province of All parties need to be of age of majority.
residence.
Differentiators are the limitation on the types of assets that can be placed into joint ownership and the
requirement for a client to have the capacity to create a legal will.

No impact. Where beneficial ownership of income producing
assets is divided, the client’s cash flow will be
reduced.
Differentiator is the division of income where beneficial ownership of income producing assets is divided.
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Impact on taxation:
Deemed disposition of assets at death may trigger Disposition of assets may result in taxation where
taxation at that time. beneficial ownership is transferred at time of
transfer.
Tax on income producing assets will continue in Future tax on income producing assets will be
the client’s hands until death. reduced where beneficial ownership is
transferred.
Differentiator is timing of taxation where beneficial ownership is transferred. Under a legal will, ongoing
taxation of income producing assets stays with the client and gains are realized at death. Where assets
are beneficially transferred during the lifetime into joint tenancy, the disposition may result in taxation
and the portion of the assets retained by the client is subject to taxation in their hands.
Costs associated with legal or notary fees. Possible registration fees or land title costs.
Probate fees may apply. Assets pass outside of will and are not subject to
probate.
Costs of will preparation are likely higher, but neither option will likely have fees or costs material
enough to be a differentiator. Probate fees on assets of significant value can be large enough to be a
differentiator.
Risk exposure:
Assets are exposed to the creditors of the owner. Assets are exposed to the creditors and ex-
spouses (on marriage breakdown) of any one of
the owners; assets are also exposed to the
creditors of the joint tenant.
Only the owner has the ability to deal with an Each of the joint owners have the ability to deal
asset. with an asset.
Wills can be subject to disputes and can be varied Assets pass outside the will and are not subject to
by the courts if a challenge is successful. variation but may still be open to claims by
disgruntled heirs.
Wills are intended to deal with all property. Joint tenancy WROS may risk not accounting for
some property.
Differentiators are the loss of control over an asset, the exposure of assets to creditors, and the certainty
of assets passing as desired.
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No impact. As the risk exposure of Joint Tenancy WROS is
higher than a legal will, there may be higher
impact on other goals should the risks be realized.
The differentiator is related to the risk exposure which may impact the achievement of other goals (i.e.,
retirement, education, etc.) if funds fall into the hands of someone other than what was intended.
Priorities:
Concern over ensuring assets pass efficiently to Assets pass automatically to intended beneficiary.
intended beneficiaries (disputed will).
Differentiator is the priority that a client places on ensuring that particular assets pass to their intended
beneficiaries in a timely fashion.

A client may prefer to have sole control over an A client prefers to ensure an efficient transfer of
asset until death. assets at death.
Differentiator is the degree to which a client prefers to have control over assets during their lifetime.

A client needs to be able to understand the
No impact. potential implications and risks associated with
joint tenancy WROS.
The primary differentiator is related to understanding the implications and risks associated with joint
tenancy WROS to ensure that a decision to transfer assets to Joint Tenancy WROS is made based on full
knowledge of actual and potential impacts.
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Where a client has an existing will or has not Where a client does not have a will in place or has
specifically identified a joint tenant, they may be identified a joint tenant for easy transfer of
motivated to adopt a legal will strategy. specific assets, they may be partial to the Joint
Tenancy WROS.
Motivation to change/anticipated acceptance level may be a differentiator based on prior experience or

a clear view on one or more joint tenants.
Case Example
Elise is a widow, age 78. She has a daughter, Marie, who lives nearby and a son, Marc, who lives several
provinces away. Elise lives in a home she owns valued at $400,000. She receives pension income, CPP
benefits and full OAS payments. She supplements her income by drawing from her non-registered
investment account valued at $400,000 (ACB $190,000). She has no other assets or property aside from
a chequing account which never has more than a minimal balance.
Marie spends a lot of time with Elise and helps her with household maintenance and other tasks. She
owns a local flower shop which allows her to set her own hours. The business has recently struggled to
be profitable.
Elise recently saw a television commercial from a law firm advertising estate planning. As she presently
does not have a will, she would like to organize so that her children can share equally in her estate when
she dies. She is unsure if a will would be suitable or if would be easier if she makes Marie a joint owner
with her on the investment account and bank account while making Marc a joint owner of her house.
That way, when she dies, each child would own one of her assets and no estate proceedings will be
necessary. Elise trusts both her children completely to make decisions that in her best interest. Elise
lives in a province that has a flat fee for probate and minimal land transfer taxes.
Elise has the capacity to create a legal will. No corresponding issue.
A will can cover all of Elise’s assets. All of Elise’s assets can be registered in joint
tenancy WROS.
Eligibility for either strategy is not a differentiator.

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No impact. If Elise registers a portion of her beneficial
ownership in her investment account with Marie,
her cash flow will decrease from that portion of
income.
The decrease in Elise’s income that would arise from registering beneficial ownership with Marie is a
differentiator as Elise relies on that income to supplement her pension income.
Impact on taxation:
There will be a deemed disposition of Elise’s The portion of the investment account beneficially
investment account at death that will be subject transferred to Marie in joint tenancy WROS will
to taxation. Her home should qualify as her result in a deemed disposition and will be subject
principal residence and should not be subject to to taxation. This may also impact income tested
taxation at death. benefits such as OAS. Registration of a beneficial
interest in the home with Marc will also result in a
deemed disposition, however this should qualify
as her principal residence and should not be
subject to taxation. Future appreciation on the
portion beneficially owned by Marc may not be
eligible for tax sheltering as a principal residence.
Elise will continue to be taxed on the income from Future tax on the investment account will be
the investment account until her death. reduced on the portion of the account beneficially
transferred to Marie in joint tenancy WROS.
Differentiators are the immediate taxation to Elise that would arise on the registration of assets in joint
tenancy WROS with Marie versus the future reduction in taxation and the ability to defer taxation until
death.
Elise would incur legal or notary fees to create a There should not be any fees associated with
legal will. Her will appears to be simple and should registering the investment account in joint
not be a significant cost. tenancy WROS with Marie. There may be minimal
registration fees or land title costs to place her
home in joint tenancy with Marc.
Elise lives in a province that has a flat probate fee. If Marie registers the investment account and the
home in joint tenancy WROS with Marie and Marc
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respectively, they will pass outside of will and will

not be subject to probate.
All costs of implementation are small and are not a differentiator.
Risk exposure:
Elise’s assets are exposed to her creditors (none) Assets are exposed to the creditors of any one of
during her lifetime. the owners. The investment account could be
subject to the creditor of Marie and her flower
shop. Similarly, the home could be at risk to
Marc’s creditors although none have been
identified.
Only Elise has the ability to deal with her assets Marie (investment account) and Marc (home) may
during her lifetime. be able to deal the assets without either the
knowledge or consent of Elise.
Elise’s will could be subject to disputes and could Assets that pass outside of Elise’s will are not
be varied. subject to will variation but may still be open to
claims by disgruntled heirs.
Differentiators are the loss of control over that Elise will have over her assets and the potential exposure
of her assets to Marie and Marc’s creditors versus the greater certainty of her assets passing as desired.

No impact. As the risk exposure of Joint Tenancy WROS is
higher than a legal will, there may be higher
impact on other goals should the risks be realized.
Differentiators are the loss of control that may result in Elise’s assets falling into others’ hands and
impacting her future goals.
Priorities:
Elise wants to have half her estate pass to each of There is no certainty that the two assets
her children. A will ensures that taxes and other (investment account and home) will have the
liabilities are addressed prior to distributions and same value at the time of Elise’s death. In
will ensure that each child receives one half of the addition, one asset (investment account) will
value. likely have a tax liability associated with it.
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Elise’s priority of ensuring that each child shares equally in her estate is a differentiator. A legal will
provides greater certainty of ensuring this occurs.
Elise will continue to have complete control over Elise will give up control the house and
her assets until death. investment account if she transfers them in joint
tenancy WROS to Marc and Marie respectively.
As she has complete trust in her children this does
not appear to be an issue.
Because Elise trusts her children, giving up complete control over her assets is not a differentiator.

Elise has no experience with estate planning or Elise may not understand the potential
estate documents. implications and risks associated with joint
tenancy WROS.
Elise may have limited understanding of the risks associated with Joint Tenancy WROS. While it may
sound like the easier option, it may not ultimately meet her estate goals.

Elise may be motivated to name her children as
Elise has no experience with estate planning or joint tenants WROS as she doesn’t have
estate documents. experience with estate planning and has identified
her children as appropriate joint tenants.
Elise may be motivated to select the Joint Tenancy WROS option based her lack of experience and
trusting relationship with her children.
Conclusion
Elise should consider the Legal Will strategy.
Quantitatively the immediate impact of taxation and loss of cash flow point toward a decision to create
a legal will. Any fees and costs are minimal, but the potential risks especially with respect to Maria’s
business are high. This direction is supported qualitatively as Elise has identified as a priority her desire
for her children to share equally in her estate and a will provides the best assurance of that outcome.
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Strategy 2: Spousal Rollover (of Capital Property) at Death vs. Election to

Transfer Capital Property at Fair Market Value (FMV)

Spousal Rollover Election at FMV
Property must be capital property to the Property must be capital property to the
deceased. deceased.
Rollover is automatic, no election is necessary. Will must give executor discretion to make
election under the Income Tax Act (ITA).
Differentiator is based on the discretion to elect out of spousal rollover rules.

No corresponding issue. Additional taxes to the estate may be triggered.
Differentiator is the additional taxes that may arise to the estate on a transfer at FMV.
Impact on taxation:
Unused loss carryforwards and personal tax Ability to use unused loss carryforwards and
credits of the deceased (medical, charitable, etc.) personal tax credits of the deceased (medical,
may go unused. charitable, etc.). Result will be higher ACB on
capital property transferred to survivor spouse
but potential tax liability to the estate.
Lifetime Capital Gains Exemption (LCGE) on Ability to use the deceased’s LCGE on QSBC
Qualified Small Business Corporation (QSBC) shares. Result will be higher ACB on capital
shares may go unused. property transferred to survivor spouse.
No corresponding issue. Additional taxes to the estate may be triggered.
Result will be higher ACB on capital property
transferred to survivor spouse with less remaining
estate assets to other beneficiaries.
Differentiator is the ability of the executor to optimize the deceased’s tax position. Trade-off is the
increased cost base in the capital assets to the spouse versus the impact to other estate beneficiaries.
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Estate will incur final tax preparation costs for the Estate will incur final tax preparation costs for the
deceased. deceased with additional costs to elect out of
rollover rules.
Differentiator is the additional costs that are associated with the executor electing out of the rollover
rules.
Risk exposure:
No corresponding issue. Risk to the executor that the tax liability of the
deceased will exceed the liquid assets of the
estate.
No corresponding issue. Risk to the executor that specific bequests will not
be able to be satisfied once the tax liability of the
estate is paid.
No corresponding issue. Risk that FMV of the capital property is not easily
determinable. Obtaining a clearance certificate
from CRA in this case may be time consuming.
Differentiators are the risks to the executor that taxes will exceed the liquid assets of the estate, specific
bequests may not be able to be satisfied, and that delays in the administration of the estate may occur
based on uncertainty surrounding the FMV of the capital property.

No corresponding issue. Risk that the deceased wishes may not be
realized.
Differentiator is the potential for the deceased’s wishes not to materialize.
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Priorities:
Tax minimization to the estate is a priority to the Tax minimization to estate and spouse combined
executor. is a priority to the executor.
Ensuring all bequests are satisfied is a priority to Ensuring all bequests are satisfied is a priority to
the executor. the executor.
Differentiators are the priorities an executor places on tax minimization to the estate versus future tax
minimization for the spouse as well.

The executor may prefer a timely wrap up of the The executor may be satisfied to wait for CRA
estate where uncertainty over FMV of capital clearance where uncertainty over FMV of capital
property exists. property exists in favour of a better tax outcome.
Differentiator is the executor’s preference to wind up the estate as quickly as possible versus getting a
better tax result where uncertainty over the FMV of capital property exists.

A spousal rollover occurs automatically. The executor needs to have knowledge of the
opportunity to transfer assets at FMV and
potential benefits under certain circumstances or
engage professionals accordingly.
Differentiator is the additional financial knowledge associated with taking proactive steps to elect a
transfer at FMV.

Where there are insufficient assets in the estate Where the executor is able to satisfy all bequests
to pay the tax liability, an executor client may be while minimizing overall taxes, making an election
motivated towards a spousal rollover strategy. at FMV, acceptance is anticipated to be high.
Motivation may be higher for spousal rollover Motivation may be higher where there is
where there is no or limited opportunities to opportunity to reduce the tax liability of the
reduce the tax liability of the deceased. deceased.
Motivation may be higher for spousal rollover Motivation may be higher where the executor
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where the executor may have limited estate/tax may have estate/tax knowledge and experience.
knowledge or experience.
Motivation may be higher for spousal rollover Motivation may be higher where the spouse
where spouse has no need or objectives to wishes to maximize their after-tax asset values
increase their after-tax asset values. their expected lifestyle expenses or to pass on to
the next generation.
Differentiators may be the available liquidity in the estate, the potential to reduce the deceased’s taxes
by using loss carryovers, credits and exemptions, the financial knowledge and experience of the executor
and the spouse’s financial needs/goals.
Case Example
Ernie passed away in early January and is survived by his spouse Joyce. Joyce and Ernie held their home
in joint names and Joyce was named as the beneficiary of Ernie’s RRIF and TFSA. In addition, Ernie had a
land parcel that is capital property with an ACB of $100,000 and a FMV of $500,000. In order to mitigate
probate fees, the parcels were held in joint tenancy by the couple, but beneficial ownership was always
100% Ernie’s, and it thus forms part of his estate. Joyce intends to sell the parcel and has already
identified a buyer willing to purchase it at its FMV. The only remaining asset that is left to administer
under Ernie’s will is a GIC valued at $100,000.
Ernie’s will names Joyce as the executor. The will provides that after the payment of final costs
(estimated to be $10,000) and taxes, $40,000 is to go to each of Ernie and Joyce’s two grandchildren and
any remainder will go to Joyce.
Ernie and Joyce have always been careful with their money and have sought ways to lower their family
tax bill. Ernie made sure in his will that Joyce would be given wide powers as the executor to make any
tax elections as appropriate. Ernie was very fond of his grandchildren and wanted to ensure they would
be left a small inheritance to help get them established and Joyce would like to be respectful of this
wish.
Joyce has significant pension income and a non-registered portfolio worth over $3,000,000. Her annual
income from her pension and investments places her in the highest marginal tax bracket annually and
are more than sufficient to satisfy her needs and estate planning aspirations. Because Ernie passed away
early in the year, his total income for the year will approximate his personal tax credits and he will not
have any taxes to pay absent an election. Ernie did not have any unused tax credits or loss
carryforwards.
Joyce as the executor has come to you and asked what her options might be in the administration of the
estate and assist in the preparation of Ernie’s final tax return. You have determined that should she
make no election to opt out of the spousal rollover rules, the estate will have no taxes to pay, but she
will personally pay $100,000 in additional taxes on her return when sells the parcel. If she elects out of
the spousal rollover rules, the estate will pay $70,000 in additional taxes but she will pay no additional
taxes when she sells the parcel.
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The parcel was capital property of Ernie’s. The parcel was capital property of Ernie’s.
Rollover is automatic, no election is necessary. Ernie’s will gives Joyce, as the executor discretion
to make elections under the ITA.
As the parcel was capital property of Ernie’s and Joyce has the power as the executor to make income tax
elections, eligibility for either strategy is not a differentiator.

There will be no additional taxes to Ernie’s estate An election at FMV will result in an additional
if the property rolls over to Joyce. $70,000 in income taxes to Ernie’s estate.
Differentiator is the additional $70,000 cash demand on Ernie’s estate assets for income taxes if an
election at FMV is made by Joyce as the executor.
Impact on taxation:
Ernie did not have any unused loss carryforwards Ernie did not have any unused loss carryforwards
or personal tax credits (medical, charitable, etc.) or personal tax credits (medical, charitable, etc.)
to use. to use.
Ernie’s capital property was a land parcel, so the Ernie’s capital property was a land parcel, so the
availability of LCGE is not a consideration. availability of LCGE is not a consideration.
No corresponding issue. An election in Ernie’s final return by the executor
will result in additional taxes of $70,000 to the
estate. Result will be a higher ACB of $500,000 on
the parcel transferred to Joyce. After the payment
of taxes and final costs of $10,000, only $20,000
of estate assets will remain for other
beneficiaries.
Ernie does not have any unused loss carryforwards or credits to consider. Differentiator is the trade off in
additional taxes for Ernie’s estate versus the increased cost base of the parcel for Joyce.
85
Ernie’s estate will incur final tax preparation costs. Ernie’s estate will incur final tax preparation costs
with additional costs to elect out of rollover rules.
Differentiator is the additional costs associated with electing out of the rollover rules.
Risk exposure:
No corresponding issue. Taxes on Ernie’s estate if the election is made by
Joyce as the executor will be $70,000. This, plus
the final costs of $10,000, is less than the
$100,000 GIC. There is no risk to the executor that
the taxes will exceed the liquid assets of the
estate.
No corresponding issue. Taxes on Ernie’s estate if the election is made by
Joyce will be $70,000. This, plus the final costs of
$10,000, will leave $20,000 out of the $100,000
GIC. There is a risk to the executor that the
specific bequests totaling $80,000 to the
grandchildren will not be able to be satisfied.
No corresponding issue. Joyce has identified a purchaser for the capital
property that established the FMV, eliminating
the risk that the FMV of the capital property is not
easily determinable. Although she should still
pursue a clearance certificate from CRA as the
executor, which may be time consuming, it will no
longer be as much of a concern for the valuation
of the parcel.
The differentiator is the risk to Joyce as executor that the specific bequests to the grandchildren will go
unfulfilled if an election out of the spousal rollover rules is made.

No issues. Risk that Ernie’s wishes may not come to pass.
Differentiator is the potential for the grandchildren not to be provided for as Ernie had intended.
86
Priorities:
Ernie and Joyce have always seen lowering their Ernie and Joyce have always seen lowering their
family tax bill as a priority. A spousal rollover will family tax bill as a priority. Electing out of the
result in a family tax bill of $100,000. spousal rollover by the executor will result in a
family tax bill of $70,000.
Joyce wants to be respectful of Ernie’s wish that Joyce is in the highest marginal tax bracket and
his grandchildren each receive $40,000. Joyce can wants to reduce her tax bill. However, Joyce has
ensure that this bequest is satisfied by not more than adequate resources to support her
electing out of the spousal rollover rules in her lifestyle and future needs/goals.
capacity as executor.
Differentiators are a reduction in the family tax bill of $30,000 and the inability for Joyce to satisfy Ernie’s
bequests to the grandchildren if she elects out of the spousal rollover rules.

The FMV of the parcel is determinable, so a timely The FMV of the parcel is determinable, so it is not
wrap up of the estate should not be a concern to likely that Joyce will be concerned with waiting for
Joyce. CRA clearance by making an election out of the
spousal rollover rules.
Since the FMV of the parcel is determinable, Joyce should be indifferent in preference to a spousal
rollover or the election at FMV.

Joyce is engaging professional advice in the Joyce is engaging professional advice in the
administration of Ernie’s estate including the administration of Ernie’s estate including the
preparation of his final tax return. preparation of his final tax return.
Joyce is seeking professional advice for tax preparation and administration of Ernie’s estate. Accordingly,
financial knowledge and experience is not a differentiator.
87

Joyce as the executor will not be able to make an
election at FMV and also satisfy Ernie’s bequests
to the grandchildren. This may result in some
reluctance on her part to elect out of the spousal
rollover rules.
Joyce will be unable to satisfy Ernie’s bequests to the grandchildren if she elects out of the spousal
rollover rules. Accordingly, motivation to change/anticipated acceptance level may be a differentiator.
Conclusion
Both quantitatively and qualitatively, Joyce, as the executor, will be faced with a dilemma. From a tax
minimization perspective it is clear that an election out of the rollover is in her interest. However in
doing so, she will not be able to honour Ernie’s bequest to his grandchildren, which is something she
would like to be respectful of. As well, while Joyce and Ernie have been diligent about reducing their tax
liability, Joyce has more than adequate resources to fund her current and future goals.
88
GUIDANCE FOR FINANCIAL PLANNING STRATEGIES
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and used under license. All other trademarks are those of FP Canada™.
Copyright © 2019 FP Canada. All rights reserved.
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Guidance for Evaluating Financial Planning Strategies

CFP® Professional Education Program

Guidance for Evaluating Financial Planning Strategies

Financial Management – Guidance for Evaluating Financial

Impact on cash flow:

Impact on taxation is not a differentiator between the options.

Differentiator is the flexibility and relative certainty associated with ownership.

Impact on achievement of other goals:

Values, attitudes and preferences:

Financial knowledge and experience:

Motivation to change/anticipated acceptance level:

Eligibility is not a differentiator.

Impact on cash flow:

Impact on cash flow is not a differentiator.

Impact on taxation is not a differentiator between the options.

Impact on achievement of other goals:

Impact on achievement of other goals is not a differentiator.

Values, attitudes and preferences:

Financial knowledge and experience:

Financial knowledge and experience is not a differentiator.

Motivation to change/anticipated acceptance level:

Differentiator is the qualification for the DTC.

Impact on Cash Flow:

Impact on achievement of other goals:

Values, attitudes and preferences:

Differentiator is the flexibility afforded by a formal trust over an RDSP.

Financial knowledge and experience:

Motivation to change/anticipated acceptance level:

Eligibility for either strategy is not a differentiator.

Impact on cash flow:

Ava’s hands when withdrawn. to Ava.

Impact on achievement of other goals:

Values, attitudes and preferences:

Financial knowledge and experience:

Motivation to change/anticipated acceptance level:

Retirement Planning – Guidance for Evaluating Financial

Strategy 1: RRIF vs. Annuity (Using RRSP Funds)

Eligibility for strategy is not a differentiator.

Impact on cash flow:

guarantee period as determined by the contract

Differentiator is the taxation at death on the remaining balance in the RRIF.

Costs of implementation are not a differentiator.

Impact on achievement of other goals:

Values, attitudes and preferences:

Financial knowledge and experience:

Motivation to change/anticipated acceptance level:

Impact on cash flow:

Costs of implementation are not a differentiator.

Impact on achievement of other goals:

Values, attitudes and preferences:

Financial knowledge and experience:

Motivation to change/anticipated acceptance level:

Strategy 2: Individual Pension Plan (IPP) vs. Retirement Compensation

Impact on cash flow:

Impact on achievement of other goals:

Values, attitudes and preferences:

Financial knowledge and experience:

Motivation to change/anticipated acceptance level:

Impact on cash flow: