capstone samplefinancialplan

7/22/2019 Capstone SampleFinancialPlan

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CIFP FPSC-approved Capstone Course

Sample Financial Plan

PLEASE NOTE:

This sample financial plan is intended for the sole use of students registered in the CIFP FPSC-

approved Capstone Course and can only be used for purposes approved by The Canadian

Institute of Financial Planning within the context of this course. Please do not share or distribute

this document.

Be advised, The Canadian Institute of Financial Planning vigorously defends its intellectual

property in all cases of unauthorized use or where its copyright has been violated.

Copyright 2011, The Canadian Institute of Financial Planning

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system,transmitted or used in any form without written permission from the Canadian Institute ofFinancial Planning.


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Financial Plan for

Anil and Savita Kumar

Prepared by Liam Birt, CFP

RUSH Financial Services

January 5th

, this year


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Canadian Institute of Financial Planning Page 1 of 20

Financial Goals for Anil and Savita Kumar

During our meeting on January 3rd, you articulated the following three goals as your primaryconcerns in relation to the initial phase of this financial planning engagement:

providing for Nishas post-secondary education arranging your finances so that your tax burden is minimized ensuring your investmentsboth inside and outside your RRSPsare sound and appropriateThis document is narrow in scope and is designed to address only these specific concerns. Asmuch as this document deals with these goals in the context of your overall financialcircumstances, it should not be construed as a comprehensive financial planit is only an initialset of recommendations meant to alleviate your main concerns. A comprehensive financial planthat incorporates all financial planning components (i.e. financial management, retirementplanning, asset management, tax planning, risk management and estate planning) will bedeveloped in accordance with our letter of engagement following future meetings.

Based on the information gathered from you, I have compiled the following statements to helpassess your current financial situation:

statement of net worth annual cash flow statement for last year detailed list of investments in your respective RRSP and non-RRSP accounts


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CIFP FPSC-approved Capstone CourseSample Financial Plan: Anil and Savita Kumar


Statement of Net Worth for Anil and Savita Kumar

as at December 31st of Last Year

Assets Mark Sarah Total

Non-Registered AssetsChequing Account $ 7,600 $1,400 $ 9,000

Total Non-Registered Assets $ 7,600 $1,400 $ 9,000

Registered Assets

TFSA $ 10,200 $ 0 $ 10,200

RRSP (pre-tax market value) $310,000 $180,000 $490,000

Total Registered Assets $320,200 $180,000 $500,200

Non-registered Assets

Investment portfolio held at AB Bank $980,000 $0 $980,000

Total Non-registered Assets $980,000 $0 $980,000

Personal Assets

Home $1,600,000 $ 0 $1,600,000

Cottage $ 0 $ 350,000 $ 350,000

Personal Effects $ 75,000 $ 20,000 $ 95,000

Automobiles $ 55,000 $ 20,000 $ 75,000

Total Personal Assets $1,730,000 $ 390,000 $2,120,000

TOTAL ASSETS $3,037,800 $ 571,400 $3,609,200

Liabilities

$ 0 $ 0 $ 0

TOTAL LIABILITIES $ 0 $ 0 $ 0

NET WORTH $3,037,800 $ 571,400 $3,609,200


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Annual Cash Flow Statement for Anil and Savita Kumar

for Last Calendar Year

Income / Expenses / Savings Mark Sarah Total

IncomeNet business income $150,000 $ 0 $150,000

Employment income $ 0 $ 50,000 $ 50,000

Realized investment income $ 72,000 $ 0 $ 72,000

Total Gross Income $222,000 $ 50,000 $272,000

LessDeductions

Income taxes (at source or installments) $ 77,000 $ 8,850 $ 86,550

Total Deductions $ 77,000 $ 8,850 $ 86,550

TOTAL NET INCOME $144,300 $ 41,150 $185,450

Expenses

Home

mortgage $ 0

property taxes $ 17,400

utilities $ 8,400

maintenance $ 12,000

Food $ 32,000

Major purchases $ 9,000

Automobiles

fuel $ 3,900

maintenance $ 3,600

insurance $ 2,100

Clothing $ 3,600

Personal $ 7,400

Entertainment $ 2,400

Vacations $ 12,000TOTAL EXPENSES $113,800

NET AVAILABLE FOR SAVINGS $ 71,650

Savings

Non-registered accounts $ 50,000

TFSA contributions $ 10,000

RRSP contributions

RESP contributions

TOTAL SAVINGS $ 60,000

UNALLOCATED CASH FLOW $ 11,650


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Market Value of Assets Held in RRSP for Anil Kumar


Investments Fair MarketValue

% of TotalInvestments

Cash and Cash Equivalents

Cash $18,500.00 5.97%

Fixed Income

Calloway Cv 6.65% 30Jn13 $10,600.00 3.42%

H&R Reit Sr0c Cv 6% 30Jn17 $15,375.00 4.96%

Hydro-Quebec, series Hl, 11.00%, 2020/08/15 3.74 $15,125.00 4.88%

Pembina Cv Red 5.75% 20Nv20 $15,062.50 4.86%

Macs S-A Cb12 Cv 7% 31Dc51S $15,155.00 4.89%

Municipal Finance Authority of British Columbia, 4.80%, 2017/12/01 $17,183.00 5.54%

New Brunswick (F-M) Project Co. Inc., 6.47%, 2027/11/30 2.11 $16,000.00 5.16%

Sun Life Assurance Co. Of Canada, variable rate, 2022/06/30 1.43 $17,000.00 5.48%RBC Capital Trust, Series 2011, callable, 7.18%, 2011/06/30 1.23 $17,000.00 5.48%

407 International Inc., Series 06d1, 5.75%, 2036/02/14 1.16 $16,000.00 5.16%

Toronto-Dominion Bank (The), variable rate, callable, 2016/12/14 $17,000.00 5.48%

Bell Aliant Regional Communications L.P., Callable, 5.41%, 2016/09 $16,000.00 5.16%

Bank of Nova Scotia, Callable, 6.65%, 2021/01/22 0.94 $18,000.00 5.81%

Greater Toronto Airports Authority, Series 2009-1, 5.96%, 2019/11 $17,000.00 5.48%

Vancouver International Airport Authority, Series B, Variable Rate, $19,000.00 6.13%

EnCana Corp., Callable, 5.80%, 2018/01/18 0.83 $15,000.00 4.84%

Fairfax Financial Holdings Ltd., Callable, 7.75%, 2017/06/15 0.82 $18,000.00 5.81%

Westcoast Energy Inc., 8.85%, 2025/07/21 0.80 $17,000.00 5.48%

TOTAL PORTFOLIO $310,000.00 100.00%

Market Value of Assets Held in RRSP for Savita Kumar


Investments Fair Market

Value

% of Total

Investments


Cash $ 0 0%

Fixed Income

IShares CDN UNIV BOND ETF $53,176.00 29.54%

IShares CDN SCO ST BD ETF $68,322.00 37.96%

MACS Ser-A CB12 CV 7% 31DC51S $58,502.00 32.50%



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Market Value of Non-RRSP Assets for Anil Kumar


Investments Fair Market

Value

% of Total

Investments


Cash $39,494.00 4.03%

Common Shares

Royal Bank of Canada $64,386.00 6.57

Toronto-Dominion Bank (The) $57,330.00 5.85

Suncor Energy Inc. $53,998.00 5.51

Bank of Nova Scotia $51,548.00 5.26

Canadian Natural Resources Ltd. $48,804.00 4.98

Canadian National Railway Co. $44,688.00 4.56

Goldcorp Inc. $44,198.00 4.51

BCE Inc. $41,258.00 4.21

Bank of Montreal $47,138.00 4.81

Barrick Gold Corp. $47,138.00 4.81

Canadian Imperial Bank of Commerce $46,942.00 4.79

Manulife Financial Corp. $45,276.00 4.62

Research In Motion Ltd. $45,276.00 4.62

Teck Resources Ltd., Class B $44,394.00 4.53

TransCanada Corp. $42,042.00 4.29

Talisman Energy Inc. $29,400.00 3.10

Cenovus Energy Inc. $19,600.00 2.00

Potash Corp. of Saskatchewan Inc. $27,636.00 2.82

Enbridge Inc. $25,382.00 2.59

Agnico-Eagle Mines Ltd. $25,088.00 2.56

Canadian Oil Sands Trust $24,892.00 2.54

Rogers Communications Inc., Class B $24,892.00 2.54Sun Life Financial Inc. $24,696.00 2.52

Agrium Inc. $14,504.00 1.48



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Current Financial Status, Obstacles and Opportunities

for Anil and Savita Kumar

Following a review of your current financial situation, you should be congratulated on your

accomplishments to this point. You have excellent cash flow and you have accumulated a highnet worth of over $3.6 million with no meaningful debt. With the average Canadian householdhaving a debt-to-income ratio of 150% (i.e. the amount owed on debt such as mortgages, loansand credit cards in relation to after-tax income), the fact that you have no debt is trulycommendable and places you in an enviable situation.

Based on your current spending habits, which you have maintained at reasonable levels, and yourproven capacity to save, there are no obvious obstacles that would prevent you from achievingyour long-term financial goals. In fact to the contrary, your discipline presents variousopportunities which we will delve into as part of developing a comprehensive financial plan.

Further to this, once we address your initial concerns as part of this document, our subsequentmeetings will involve a more detailed look at opportunities and constraints relating to riskmanagement, estate planning, retirement planning and financial management. Also, as much aswe are looking at asset management, education planning and taxation in this initial plan, thecomprehensive financial plan I will be developing, will examine these financial planningcomponents more closely and in greater context to your overall financial affairs.

Areas for future consideration

The immediate area that represents an opportunity is likely to be risk managementin otherwords, how well are you positioned to offset the financial risks to which you are exposed? Again

the fact you have no debt and you own your home outright, eliminates the primary financial riskto which most Canadians are exposed which is the mortgage on their home. This said, mypriority as part of an overall financial plan is to assess if you have a need for disability, long-termcare and/or critical illness insurance to protect your most valuable asset: your ability to earn anincome.

Second in priority, would be to establish an emergency fund whether this is in the form of cashin some sort of savings vehicle or by way of a home equity line of credit.

We will turn our attention to these and other issues once we have addressed your three mainconcerns.


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Financial Planning Strategies for Anil and Savita Kumar

The discussion in this initial document is contained to what you identified as issues that requireimmediate attention:

i) saving for your daughter, Nisha's post-secondary educationii) tax planning opportunities based on your current situationiii)asset managementAs previously stated, we will address other financial planning components such as riskmanagement, estate planning and retirement planning in upcoming meetings.

Saving for Nishas post-secondary education

You believe Nisha will pursue post-secondary schooling and you would like to start dedicatedsavings for this purpose. This is an important and realistic goal as families and students already

bear more than one-third of the cost of post-secondary education following the reduction inprovincial government funding since the 1990s. Current estimates of the cost of a four-yearuniversity degree in approximately 15 years (when Nisha will likely start attending university)are in the vicinity of $135,000.

While your non-registered investments could be used for this purpose, it is not the most tax-effective means of saving for your child's post-secondary education. There are two major taxeffective ways to save for a childs post-secondary education: an RESP and an in-trust account.The major differences between the two vehicles are summarized in the following chart.


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Comparison of RESP and In-trust Accounts

RESP In-trust Account

Use of accumulated funds post-secondary education only forNisha or continuing education foreither of you

any purpose benefiting the child

Contribution limits $50,000 per child no limitTax deductibility ofcontributions

no noTax implications on incomeearned within account

tax-free compounding for income,dividends, and capital gains

dividend and interest incomeattributable to contributor aslong as child is under age 18

capital gains taxable to the childAccessibility of funds tocontributor (and penalties) ifchild does not pursue post-secondary education

principal returned to subscriberwithout penalty

accumulated CESG repaid togovernment

accumulated income can be rolledover to RRSP of subscriber or his orher spouse subject to RRSPcontribution room and a $50,000lifetime limit

if RRSP rollover is not possible,income is withdrawn in cash fromRESP and included in total incomeof subscriber; also, 20% penaltyapplies to this amount

none

Eligibility for governmentgrants

basic CESG consists of 20% onfirst $2,500 contributed

no

Benefits of an RESP

For your purposes, I believe a registered education savings plan (RESP) is the more ideal vehiclein which to save for Nisha's education as it shelters investment income from annual taxation andyour savings are complimented by generous grants from the government. The major drawbacksof an RESP come into play if the beneficiary of the plan does not pursue post-secondaryeducation. Whenever you make forecasts, especially over a 15-year period of time, there arenever any guarantees however, based on your assumptions at this moment, the probability ofNisha attending a post-secondary institution appears to be high and therefore, the penaltyassociated with withdrawing money from an RESP for non-educational purposes becomes less ofa concern. Therefore, I recommend you start an RESP at this stage.

You can contribute to an RESP over a maximum of 31 years subject to a cumulative lifetimelimit of $50,000 per child. RESPs can hold a variety of investment options including mutualfunds, segregated funds, stocks, bonds GICs and cash deposits and there are no foreign contentrestrictions. Contributions to an RESP are not tax-deductible but, any investment income earnedin the plan accumulates on a tax-free basis until the child enters a post-secondary institution andstarts to receive payments from the plan. Similar to the treatment of investment income earnedinside an RRSP, dividends and capital gains lose their preferential status when withdrawn froman RESP and are simply taxed as incomethat is, it is fully taxable. Therefore, RESPs should


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ideally hold interest-bearing investments first and only once the desired allocation to fixedincome investments has been satisfied should we be looking at investments that trigger capitalgains.

Canada Education Savings Grant (CESG)

Human Resources and Skills Development Canada (HRSDC) will supplement your contributionsin the form of a Canada Education Savings Grant (CESG). The CESG is calculated as 20% of thefirst $2,500 of annual contributions.1 Keep in mind, the purpose of these grants is to help fundthe child's education, so, if for some reason Nisha does not attend a post-secondary institution,these grants will essentially have to be repaid.

Tax implications of RESP withdrawals

Once Nisha starts attending a post-secondary program and starts withdrawing funds from herRESP, the portion of the withdrawal that represents growth will be taxable in Nisha's hands.Since most post-secondary students have little or no taxable income, any potential tax burden islikely to be inconsequential. If withdrawn by full-time students with very little other income,effectively, the funds in the RESP have not only been sheltered from tax during the accumulationperiod but also, sheltered upon withdrawal. Moreover, you have achieved income splitting withNisha. The capital portion of the withdrawal is not taxable because when you made contributionsto the RESP, you did not receive the benefit of claiming a tax deduction.

RESP contributions

It is important to keep in mind that the major benefit of an RESP is the tax-free compounding ofreturns, followed by the less valuablebut more heavily advertisedgovernment grants. Ifeducation funding is being done in an RESP, you have two basic choices: make annual

contributions up to and including the year Nisha turns 17 years of age and collect the maximumCESG each year or make a lump sum RESP contribution immediately and forego most of theCESGs that would otherwise be payable during the accumulation period.

Option #1: lump sum contribution of $50,000

Contrary to popular belief, you would benefit by making the lifetime maximum contribution of$50,000 to an RESP right awayeven if it means you are giving up CESG payments insubsequent yearsrather than making annual contributions in order to maximize the governmentgrants.

We will assume Nisha will start withdrawing these accumulated funds in 16 years, when sheturns 18 years of age. Delaying the withdrawal phase by a year or two will not materially changethe ranking of the two options I am about to present.

We will also assume that the RESP will earn an investment return of 5% per annum over the next20 years [16 year investment period (including this year) + 4 years of annual withdrawals].

1 Parents in lower income groups are eligible for more generous grants on the first $500 contributed


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If you deposit $50,000 into an RESP today, it will attract a one-time CESG grant of $1,000 (20%of the first $2,500 you contribute for this year + 20% on the remaining $2,500 contribution as a'catch-up' payment given that Nisha began accumulating CESG room effective the year of birtheven though she was not a beneficiary under an RESP). At the end of 16 years when Nisha startsuniversity, the $51,000 contribution to the RESP will accumulate to a value of $111,327,

calculated as $51,000 (1.05)

16

.

In other words, Nisha will have access to $111,327 of accumulated capital from which to draw

for her four years of post-secondary education. If she withdraws the capital in four equal annual

installments and has no other income, the amounts would not be eroded by taxes.

It is important to note that the total government grant received over this period will be only

$1,000all of it being paid in the first year with no further CESGs payable for the balance of the

investment period.

Option #2: annual installments over16 years

If the RESP lifetime contribution limit of $50,000 was instead met by way of annual installments

at the beginningof each year over the next 15 years (including this year), you would benefit by

receiving the maximum CESG payable of $7,200. However, these annual contributions plus the

CESGs would still only result in an RESP value of $88,716.62 at the end of the investment

period.

Therefore, contributing a lump sum of $50,000 today in an RESP for Nisha should yield a

significantly larger amount compared to annual contributions even though it will mean foregoing

much of the government grants.

In-trust account for Nisha

Implementing Option #1 means approximately $111,000 of capital will be available to Nisha

when she turns 18 years of age to help fund her education costs over four years. However, keep

in mind, the cost of a four-year post-secondary education program is expected to cost

approximately $135,000 at that time. To make up the $25,000 annual shortfall in RESP savings

over the duration of Nisha's education, it is advisable to begin saving in an in-trust account

simultaneously with your RESP contribution.

In order for Nisha to be able to withdraw $25,000 at the beginning of each school year starting at

age 18, Nisha will require a pool of savings in the amount of $93,081.20. You can accumulatethis sum over the next 16 years by saving $3,747.18 at the beginning of each year (starting this

year).


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Investments within the in-trust account

Unlike the RESP, the in-trust account should hold investments that generate capital gains rather

than property income (e.g. interest and dividends). This will be advantageous because tax

implications on the appreciation of the capital investment is deferred until the gain is actually

realized (i.e. generally, when you actually dispose of the investment). In Nisha's case, this couldtheoretically extend as far out as the year she begins post-secondary schooling or 16 years from

this year. Even when part of the capital investment is disposed of at that time, only 50% of the

capital gain is taxable. In contrast, if Nisha's in-trust account generates interest income each year,

100% of this interest income will be taxable and the tax implications will arise every year of her

16-year investment period. Investments in vehicles that pay dividend income can receive more

favourable tax treatment than interest income but, similar to interest income, dividend income is

also taxable each year.

In addition to tax deferral, holding investments that generate capital gains within Nisha's in-trust

account will mean the gains are taxed in Nisha's hands as opposed to being attributed to you.This is because capital gains earned by a minor child are not attributable. However, if that same

minor child earned dividend or interest income within an in-trust account, that income will be

attributed to one or both of you (depending on who contributed the funds to set up the trust) and

thereby, increase your tax liability. Clearly, this is not desirable and is counter to your goal of

reducing your tax liability.

If Nisha does not pursue post-secondary education

If Nisha decides not to pursue post-secondary education, you should be aware of the implications

for the funds accumulated in the RESP which can be segregated into three components:

capital contributions: The original capital contributions made into the RESP can bewithdrawn tax-free by you, the subscriber, since you did not receive a tax deduction upon

making the contribution.

CESGs: The cumulative CESGs paid into the RESP must be repaid to the government. investment income: One of two options exist for the investment income earned in the RESP

(both on the capital contributions and the CESGs):

i) you, the subscriber, can transfer up to $50,000 of RESP income (i.e. accumulated incomepayments) to your RRSP or your spouse's RRSP subject to RRSP contribution room andother conditions

ii)withdraw the income from the RESP at which point, it must be included as part of yourtotal income for tax purposes (i.e. it will be subject to taxation based on your marginal

rate)plus an additional tax of 20%


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Tax planning opportunities

Another financial objective on which you requested immediate insight is on tax planning

opportunities.

Anil's marginal and average tax rates for this year are 43.7% and 35.2% respectively; Savitasmarginal and average tax rates for this year are 29.7% and 17.8% respectively. This discrepancy

in tax rates presents the following three tax saving opportunities:

i) Savita should save as much of her income as possible; Anil should pay for householdexpenditures.

ii) Implement an asset swap.iii)Anil should lend funds to Savita.i) Using Savita's income for saving and investing and Anil's income for household

expendituresCurrently, Savita's income is allocated to paying household expenses and childcare for Nisha

while Anil's income is primarily used for saving and investing. Being in a high tax bracket, this

means that any investment income realized by Anil in his non-RRSP portfolio will be subject to

a greater tax liability than if this investment income was earned and taxable in Savita's hands.

This negative tax situation becomes even more pronounced if the investment income earned by

Anil is in the form of interest income because unlike dividend income and capital gains, interest

income does not receive favourable tax treatmentin other words, it is fully taxable.

To remedy this, the current situation should be reversed: Savita should stop using her income to

cover non-deductible household and childcare expenses and instead save her entire after-tax

income; all household expenses should be paid out of Anils after-tax income. Given her lower

tax rate relative to Anil, Savitaand by extension, the Kumars as a family unitwill keep more

of the investment income she earns rather than losing it to taxation.

It is important that Savita invest her own money. If Anil simply gifts or transfers his money for

Savita to invest in her name, any property income (e.g. interest, dividend and rental income) and

capital gains or losses earned on those investments will be attributed back to Anil. In other

words, Anil will incur the tax liability on this income based on his higher tax rates.

If Savita saves her annual after-tax income of approximately $40,000 and invests this amount inan instrument growing at 5% per annum, then approximately $2,000 of annual income will

effectively be diverted from Anils tax return to Savitas tax return, calculated as (after-tax

income x rate of return) or($40,000 x 5%). The annual tax savings will be approximately $280,

calculated as [(income shifted to Savita x (Anil's marginal tax rateSavita's marginal tax rate)]

or[$2,000 x (43.7%29.7%)]. This savings would continue indefinitely until such time that

Savitas tax rates start approximating Anils tax rates.


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The above calculation assumes investment returns are in the form of interest income which is the

most inefficient type of income to receive given that it is 100% taxable (investment growth in the

form of unrealized capital gains would not need income splitting).

Savita could use the after-tax income that she is now saving rather than spending, to catch up on

her unused RRSP contribution room and her unused TFSA room. The TFSA contribution canactually be made through Anil's funds given that attribution is not a concern with TFSAs.

ii)Implementing an asset swapFrom a tax perspective, the current ownership structure of your assets is not optimal. Anil is

holding investments in his non-RRSP account that spin off significant amounts of inefficient

taxable income each year. With his high tax rate, this is resulting in an undesirable tax liability.

In contrast, Savita, who is in a comparatively low tax bracket, owns a cottagea non-income

bearing vehiclethat offers the deferral of taxation on any capital appreciation until the property

is ultimately disposed.

I recommend you implement a swap of some your assets such that Anil ends up holding the

cottage, currently worth $350,000 and Savita ends up holding some of Anil's financial assets of

the same $350,000 fair market value. In order to make sure that attribution rules are avoided, this

exchange of assets will have to be done formally with a legal agreement after establishing the

fair market values of both assets. The end result of this barter will not change the amount of

investment income that is subject to taxation; what it will change significantly however, is the

rate of tax payable on this income. Phrased another way, a portion of the investment income that

is currently reported on Anil's return and is therefore subject to a high rate of tax will be shifted

to Savitas tax return where it will be taxed at a more favourable rate.

If Savita ends up holding $350,000 of financial assets on which she earns 5% per annum,

effectively $17,500 of realized investment income will be diverted from Anil to Savita,

calculated as $350,000 x 5%. The annual tax savings will be approximately $2,450 calculated as

[income diverted to Savita x (Anil's tax rateSavita's tax rate)] or[$17,500 x (43.7%29.7%)].

Once again, this would continue indefinitely until Savitas tax rates start to approximate Anils

tax rates.

Savita also has unused TFSA contribution room. Maximizing these contributions, would further

increase tax savings in the first year.

Anils non-registered investments are all shares of publicly traded companies and therefore, can

be easily liquidated. However, a barter arrangement would not require liquidating these shares,

which would eliminate the concern of triggering a superficial loss.


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While I am recommending an asset swap at this time, we will need to investigate this strategy in

greater detail in an upcoming meeting to determine what specific assets will be included as part

of the swap transaction. Once this is done, I will prepare a plan of action to carry out the swap.

iii)Lending funds to SavitaTransferring $350,000 of financial assets from Anil to Savita will leave Anil with $630,000 in

financial assets calculated as (value of assets prior to transferfair market value of assets

transferred) or($980,000$350,000). As detailed earlier, Savita will have to report an

additional $2,000 in investment income due to saving her income rather than spending it to cover

household expenditures. She will also have an additional $17,500 in investment income due to

implementing the asset swap of the cottage with Anil. However what is notable is that this

additional $19,500 of annual income for Savita does not increase her marginal tax rate; similarly,

the corresponding reduction of $19,500 of annual income for Anil does not decrease his marginal

tax rate (the relevant tax brackets are fairly wide). This gap in marginal tax rates provides an

additional opportunity to shift taxable income from Anil to Savita.

Anil should consider liquidating some of his non-registered assets and lending them to Savita at

the prescribed rate dictated by the Canada Revenue Agency (CRA). Family loans made at the

prescribed rate and for which at least interest payments are made by January 31st each year,

ensure there will not be any attribution of investment income. These types of loans are

particularly attractive during times when interest rates are relatively low.

I recommend Anil lend $400,000 from his non-registered investment portfolio to Savita at the

current prescribed rate. If we assume Savita can earn a 5% rate of return on this $400,000 and the

CRA prescribed rate is 1%, the 4% net annual yield has been effectively shifted from Anil's hightax bracket to Savita's relatively low tax bracket. In dollar terms, $16,000 of income will be

shifted from Anil to Savita. The annual economic benefit of this tax planning strategy will be

$2,240 calculated as [investment amount x (rate of return on investmentprescribed rate) x

(Anil's tax bracketSavita's tax bracket)] or[$400,000 x (5%1%) x (43.7%29.7%)].

The prescribed rate used at the time of the loan can be locked-in and will continue to apply even

if prescribed rates increase in subsequent quarters. However, if prescribed rates go down, Anil

could demand the repayment of his loan and then renegotiate another loan at the lower

prescribed rate.

This spousal loan should be documented and reviewed by a lawyer to make sure that attribution

rules are not inadvertently triggered. Savita will also have to take care not to invest in the same

assets that were sold by Anil for a 30-day period in order to avoid triggering superficial loss

rules.

Implementing this strategy would require Anil to liquidate a significant part of his investment

portfolio. In order to minimize the immediate tax liability, Anil should first liquidate assets that


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have minimal unrealized gains at present but, nevertheless have the potential for growth in the

future. This can be followed by disposing of assets with unrealized losses. Anil could also

dispose of a combination of investments with gains and losses in a way that any capital gains are

approximately offset by capital losses.

As with previous strategies, we will have to examine Anil's investment portfolio in upcomingmeetings to identify what assets should be liquidated bearing in mind the prospects for that

investment, how it fits into your portfolio and the potential tax implications.

The first year of this strategy may not result in a net family benefit since the annual tax savings

of $2,240 will likely be needed to pay for legal fees and capital gains taxes triggered on

disposition. However, a $2,240 net family tax savings will be realized annually thereafter.

Note that in all of the above strategies, the income being shifted from Anil to Savita is assumed

to be fully taxed interest income. If the income being shifted was dividend income or realized

capital gains, tax savings would still result but, would be approximately halved.

For example, Anil and Savita differ by 14 percentage points in their marginal tax rates on interest

income calculated as (Anil's tax rateSavita's tax rate) or(43.7%29.7%). However, the

difference is only seven percentage points in their marginal tax rates on realized capital gains

calculated as (Anil's tax rateSavita's tax rate) or(21.85%14.85%).

The table that follows illustrates the annual savings resulting from the tax planning strategies

identified above.

Strategy

If income shifted from Anil to Savita is assumed to be...

Interest IncomeDividend Income or

Capital Gains

Savita saves her after-tax income $ 280 $ 140

Asset swap between Anil and Savita $2,450 $1,225

Loan at CRA prescribed rate $2,240 $1,220

Total annual savings for family $4,970 $2,485

If properly implemented and documented, these tax planning strategies do not result in any

additional market risk or liquidity risk. In all cases, if so desired, the investments held by Savita

could be identical to those held by Anil (keeping in mind the 30-day restriction imposed by the

superficial loss rules).

Asset Management

Your third immediate concern based on our discussions was whether or not the assets you hold

are sound and appropriate.


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RRSP portfolios

Anils RRSP Portfolio is well diversified across different industries such as financial institutions,

real estate, energy and infrastructure, without a disproportionate amount of the portfolio being

invested in any single security. It also appropriately consists of mostly income-earning

investments that would otherwise attract a high level of taxation outside an RRSP. It does not

have investments with significant potential for losses. This is good from a risk standpoint but

also, from the standpoint that since capital gains cannot be offset by capital losses within an

RRSP, it reduces the appeal of holding more speculative investments within such a plan.

Savitas RRSP portfolio also seems to hold appropriate income-bearing investments. Holding

iShareswhich are exchange traded funds (ETFs) with low management expensespromote

diversification in a cost efficient way.

Non-RRSP investments

Anils non-RRSP portfolio is comprised of common shares of blue-chip Canadian companies

representing various sectors of the Canadian economy. Anil's portfolio mirrors the holdings of

mainstream Canadian equity funds and should perform well over a long time horizon.

This said, an obvious opportunity with both your RRSP and non-RRSP investments arises from

the lack of global diversification. You do not currently have a meaningful exposure to US

securities or to emerging markets like Brazil, India and China. In light of your age and the

discussions we have had about your investment time horizon, risk tolerance and financialobjectives, I think you will benefit from global diversification by holding 10-15% of your assets

in foreign securities. Implementing the tax planning strategies recommended in the previous

section, which call on the disposition of some assets, presents you with the perfect opportunity to

rebalance your non-RRSP portfolios and introduce foreign equities.

In addition, if Savita is going to be more actively allocating funds towards investments, she

should consider holding equities to emphasize capital appreciation over the long term. Again,

based on our meeting, we have learned that Savita has the requisite investment time horizon, risk

tolerance and attitude to justify investment in high quality, low volatility stock investments.


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Implementing the Financial Plan

Subject to your agreement on the recommendations contained in this document, the next step is

to implement the plan. Although these recommendations have been made with your overall

situation in mind, it is important to note, this plan is only meant to address specific aspects ofyour financial situation in keeping with what was discussed in our initial meetings. Once we

have addressed these immediate concerns, we will retrace our steps as part of developing a

comprehensive financial plan that touches on all financial planning components.

The immediate strategies we can put into place are as follows:

Establishing an RESP for Nisha and contributing $50,000 to the plan

Subject to Nisha having a social insurance number, you should open an RESP at your bank or

financial institution as soon as possible and deposit $50,000 into the plan. You can open a basic

RESP in which you will be able to hold GICs and mutual funds. This type of plan has the

advantage of being easy to open and absent of annual fees. Alternatively, you can open a self-

directed RESP with the brokerage arm of your financial institution. This type of plan will enable

you to hold a broader selection of investments including individual securities such as stocks,

ETFs and bonds should you choose to do so now or at some future point. On the downside, a

self-directed plan will involve an annual administration fee (although, this annual fee is typically

waived if your household assets with the financial institution exceed a minimum threshold as in

your situation). For the flexibility in investment options and given that an annual administration

fee will probably not apply, I would recommend a self-directed RESP for Nisha.

Upon contributing $50,000 to the RESP, a $1,000 CESG will be paid into the account once the

financial institution you are dealing with has submitted the applicable paperwork to HRSDC.

Given the long time horizon and your comfort with equities, I would recommend allocating the

cumulative funds earmarked for Nisha's education (i.e. RESP holdings plus savings in an in-trust

account) as follows: 70% equities and 30% fixed income. As previously mentioned, the tax

deferral benefits of the RESP will mean the 30% fixed income component should be held within

the RESP. Ideal fixed income investments would be 20% in a Canadian bond ETF with the

remaining 10% invested in a global bond ETF.

Once the 30% fixed income investments have been taken care of, the balance of the $50,000

RESP investment should be allocated to equity investments to emphasize growth for the next 15

years. I would recommend the 70% equity component to be invested as follows: 60% Canadian

equity ETF, 15% U.S. equity ETF, 15% global ETF and 10% precious metals ETF.


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The specific investments to be used in Nisha's RESP can be selected following a consultation

with your investment advisor. Similarly, your investment advisor can assist you with the ongoing

buy, hold and sell decisions related to these investments. I would recommend gradually shifting

from a 70% equity / 30% fixed income allocation to overweight cash, cash equivalents and fixed

income investments as Nisha nears post-secondary schooling. As part of the monitoring function

of this plan, I will advise you as to when we should begin deemphasizing equities and shifting to

a more conservative asset allocation.

Establishing an in-trust account for Nisha

The purpose of contributing funds into an in-trust account for Nisha is to make up the projected

shortfall in the cost of her education in light of the anticipated value of her RESP savings. You

will need to consult a lawyer to establish a formal in-trust account for Nisha. While you can also

create an informal trust account relatively easily through your financial institution, the very fact

that it is an informal arrangement, I would not recommend doing so.

As per calculations detailed earlier, ideally, you will contribute $3,747.18 at the beginning of

each year for the next 16 years (including this year) to the in-trust account. If it is better suited to

your cash flow, you could instead set up a monthly contribution plan to the in-trust account in the

amount of $313 to arrive at approximately the same annual investment. Bear in mind, opting for

a monthly installment plan will yield a slightly lower savings total in 16 years.

To maximize tax efficiency, the funds invested in the in-trust account should be allocated to

equities and should mirror the same asset allocation of the equity component of Nisha's RESP.

Savita invests her after-tax income; Anil uses his after-tax income for

household expenditures

Effective immediately, Savitas after-tax employment income should be allocated to saving and

investing while Anil's income should first be used to fund household expenditures before being

used for saving and investing.

Savita's priority should be to allocate her income to maximize her RRSP and TFSA contribution

room. Based on our discussions in previous meetings, we determined that Savita should have anasset allocation of 60% equities and 40% fixed income. However, since Savita currently has all

of her funds in fixed income investments, for the foreseeable future, further savings should be

invested in equities to increase her equity component based on the following allocation: 55%

Canadian equities, 20% U.S. equities, 10% global equities, 7.5% emerging markets, 7.5%

precious metals.


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Again, your investment advisor will help you with the selection of specific securities and with

the timing and frequency of making buying and selling decisions.

Barter $350,000 of Anils non-RRSP assets with Savitas cottage

Upon your request, I can recommend three lawyers from which to choose or you can use your

existing lawyer to draft an agreement in which the two of you exchange assets of equal fair

market value. A properly documented paper trail will ensure that attribution rules are not

triggered in the event the CRA elects to review the transaction. The lawyer can also help with the

withdrawal of financial assets from Anils non-RRSP account and the transfer of ownership of

Savitas cottage to Anil.

Family loan at CRA prescribed rate

Your lawyer can also help you document an interest-only family loan from Anil to Savita at the

current prescribed rate. We will need to meet again to identify what specific investments should

be liquidated as part of this transaction. In large part, this decision will be tied to the adjusted

cost base (ACB) of the investments in your non-RRSP portfolio in relation to their current fair

market value as we want to minimize any immediate tax implications. We will then have to

decide what investments to hold in Savitas non-RRSP portfolio being mindful not to trigger the

superficial loss rules.

Diversifying your investment portfolios

As addressed earlier, an opportunity with respect to asset management is to diversify globally.

To the extent that business cycles are not positively correlated across jurisdictions,

diversification can reduce expected volatility (or risk) without a corresponding reduction in

return.

This strategy can be phased in over time by allocating new investments for both of you towards

foreign bonds and equities. Again, your investment advisor should be able to select specific

foreign investments that align with your financial objectives, your investment time horizon and

your risk tolerance.


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Monitoring Your Financial Plan

As stated in my letter of engagement, we will arrange a face-to-face meeting at least once each

year. During this time, we will do an extensive review of your circumstances, ensure the

assumptions used in the plan remain relevant, identify what, if any, changes have taken place inyour life and employment situation and confirm that your investment time horizon and your risk

tolerance have not changed. We will also review the performance of your investment portfolios.

Based on this review, we can determine if we should simply stay the course or if changes need to

be made to your plan.

This said, given that this document is only targeting specific elements of your financial situation

as per your request, we will schedule a series of meetings to step back and take a more detailed

look at your situation in relation to allthe financial planning components: financial management,

retirement planning, tax planning, asset management, risk management and estate planning. It is

only following these meetings that I will be able to generate a comprehensive financial plan as

contracted in our letter of engagement.

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