PERSONAL INVESTMENTS HELPING YOUR CLIENTS REACH THEIR GOALS Session 1 – Overview Various Plans

TYPES OF INVESTMENTS CONTRACTS There are so many types of investment plans available, all with their own acronyms, that it can become overwhelming for your clients. Today’s presentation will bring clarity on the features of each type of plan, their impact on their owner’s taxes and how they are typically used. There are other types of investment plans, such as IPPs and RCAs for wealthier clients but for the purpose of this presentation, we will focus on the more common plans that are accessible by the middle-market.

TYPES OF INVESTMENTS CONTRACTS To first start making sense out of all these plans, we can categorize them in the following way. CLICK and CLICK Some plans are primarily built for accumulation of wealth: RRSP and spousal RRSP, as well as LIRA and Locked-in RRSP. This doesn’t mean that withdrawals aren’t possible from these plans, but since they are primarily used for retirement savings, they have corresponding investment vehicles that are better suited for the withdrawal phase, at retirement (CLICK and CLICK): the RRIF and LIF. As you can see, money that goes into a RRIF can only come from an RRSP or Spousal RRSP (or a transfer from another RRIF). Same thing with the LIF, the money can only come from a LIRA or LI-RRSP (or a transfer from another LIF). The TFSA and non-registered plan are used both for accumulation and then withdrawals. There isn’t a corresponding plan specifically for withdrawals linked to these investment vehicles; you just take the money directly out of these plans. One thing that all these investment plans have in common is that the money can be used to purchase a life annuity which pays a guaranteed amount to the annuitant for life. CLICK and CLICK. Once a life annuity is in place, it cannot be changed or transferred. Let’s look more closely at the features of each vehicle and how they are used.

FEATURES, SIMILARITIES AND DIFFERENCES RRSP AND TFSA FEATURES, SIMILARITIES AND DIFFERENCES Most everybody has heard the terms RRSP and TFSA. But hearing about them through various advertisements doesn’t make people understand how they work.

REGISTERED RETIREMENT SAVINGS PLAN Primarily for retirement. Contributions are tax deductible. Investment income is tax sheltered. Maximum contribution established by the CRA is lesser of: 18% of previous year’s earned income Fixed dollar amount updated annually Look at your client’s Notice of Assessment from the CRA. Unused contributions are carried-forward. Amounts withdrawn are 100% taxable. Latest date when an RRSP must be closed: Dec. 31st of the year the annuitant turns 71. While your client probably has various investment goals, the RRSP is primarily used to save for retirement. There are two main benefits to the RRSP: Contributions made are tax deductible so there is an immediate tax savings in the year of contribution. Investment income is tax-sheltered resulting in a higher net return than money invested in the same investment options within a non-registered account. Because of the tax benefits linked to an RRSP, there is a limit to how much an individual can contribute. The easiest way to know your client’s RRSP limit is to look at his latest Notice of assessment from CRA. If you client had unused contributions in past years, they are carried-forward and added to the annual limit so total RRSP room in a given year for some clients can be quite large. Excess contributions up to $2,000 over the limit is tolerated but no tax deduction is allowed on that excess. Contributions over and above that $2,000 “extra” will result in a 1% per month penalty on the amount exceeding the $2,000 excess. Since RRSP contributions are tax-deductible and investment income is tax-sheltered, CRA wants to ensure it recuperates taxes on those amounts. Therefore, withdrawals are fully taxable and you cannot maintain an RRSP later than December 31st of the year you turn 71. If the RRSP is maintained past that age, CRA will assume it has deregistered and will tax the entire amount in the RRSP.

TAX-DEDUCTIBLE CONTRIBUTIONS - EXAMPLE MARGINAL TAX RATE 25% 35% 45% RRSP CONTRIBUTION $10,000 TAX SAVINGS $2,500 $3,500 $4,500 NET COST $7,500 $6,500 $5,500 Individuals in a higher tax bracket will benefit more from the tax deduction they get on RRSP contributions as their tax savings will be higher.

REGISTERED RETIREMENT SAVINGS PLAN Be careful… Because withdrawals are fully taxable, timing of withdrawal is important.* Ideal for retirement savings because withdrawals at retirement replace in part income earned while working. RRSP withdrawals do not increase the contribution limit. Withdrawing money from an RRSP in a year when you earn income is not recommended because the withdrawal will be added to your taxable income. Money in an RRSP should be kept there for retirement. *Withdrawals done through the Home Buyer’s Plan or Lifelong Learning Plan are not taxable immediately.

TAX FREE SAVINGS ACCOUNT Introduced in 2009, available to individuals who are 18 years or older, with a valid Canadian SIN. Contributions are not tax deductible. Investment income is tax sheltered. Maximum contribution established by the CRA is currently $5,500 per calendar year. Annual limit indexed based on inflation and rounded to nearest $500 Unused contributions are carried-forward Withdrawals are not taxable and are added to the following year’s contribution limit. Limit is not per account. It is applied to the total TFSA contribution, no matter how many TFSAs in various financial institutions the client may have.

REGISTERED RETIREMENT SAVINGS PLAN TAX-SHELTERED INVESTMENT INCOME RRSP and TFSA Non-reg. PORTFOLIO VALUE $100,000 ANNUAL INVESTMENT INCOME (4% INTEREST RATE) $4,000 MTR 35% NET ANNUAL INVESTMENT INCOME $2,600 Both the RRSP and TFSA offer tax-sheltered investment income. The net result of this benefit is preferable to that of a non-registered plan.

TAX FREE SAVINGS ACCOUNT Because withdrawals are tax-free, can be used for various financial goals: Emergency fund Family or charitable legacy Major purchase or project Because of its tax benefits, TFSAs are preferable to non-registered plans and can be used for many different financial objectives, contrary to an RRSP which is mainly for retirement. Retirement Trip Any other project…

RRSP AND TFSA - COMPARISON Tax-deductible contributions YES NO Tax-sheltered investment income Fully taxable withdrawals Carry forward of unused contribution room Contribution rights recoverable after withdrawal Maximum age 71 years None Let’s summarize… (slide)

SAVING FOR RETIREMENT: RRSP OR TFSA If expected tax rate at retirement is lower than current tax rate: RRSP If expected tax rate at retirement is higher than current tax rate: TFSA If expected tax rate at retirement is same as current tax rate: RRSP or TFSA Although, for this last situation, an RRSP may be the better option because it is less tempting to withdraw money from RRSP for reasons other than retirement. When it comes to saving for retirement, which vehicle is better, the RRSP or the TFSA? This is a question that comes up a lot. Because RRSP contributions are tax deductible, the net cost of investing is lower than in a TFSA. However, withdrawals from the TFSA is not taxable making those withdrawals more interesting than RRSP withdrawals. One guideline you can use is this (read slide). If you have clients that are very low income earners and they will probably depend on GIS pension, the TFSA is better as withdrawals are not considered as income, which is the case with RRSPs, so they won’t affect the GIS amount (i.e. clawback).

$ $ RRSP SPOUSAL RRSP CONTRIBUTOR ANNUITANT/OWNER ATTRIBUTION RULE Gets tax deduction. Must have RRSP room. RRSP $ ANNUITANT/OWNER Controls the RRSP (investment choice, withdrawals, etc.). Taxed on withdrawals, but beware attribution rule. With a spousal RRSP, the contributor benefits from the tax deduction and the amount he or she can contribute is based on his or her own RRSP limit. So, if the contributor has $10k in RRSP room and puts $4k in his own RRSP, he can put up to $6k in the spousal RRSP. The annuitant is the owner thus it is the annuitant who decides how to invest the money, who to put as beneficiary and when to make withdrawals. The annuitant will be the one who is taxed on withdrawals, unless the attribution rule applies. Attribution Rule If a withdrawal is made in the same calendar as the last contribution or the two following years, attribution rule applies and withdrawal is taxed in hands of contributor. LAST CONTRIBUTION ATTRIBUTION RULE 2012 2013 2014 2015 2016 2017 2018

$ $ RRSP SPOUSAL RRSP CONTRIBUTOR ANNUITANT/OWNER ATTRIBUTION RULE Gets tax deduction. Must have RRSP room. ANNUITANT/OWNER Controls the RRSP (investment choice, withdrawals, etc.). Taxed on withdrawals, but beware attribution rule. With a spousal RRSP, the contributor benefits from the tax deduction and the amount he or she can contribute is based on his or her own RRSP limit. So, if the contributor has $10k in RRSP room and puts $4k in his own RRSP, he can put up to $6k in the spousal RRSP. The annuitant is the owner thus it is the annuitant who decides how to invest the money, who to put as beneficiary and when to make withdrawals. The annuitant will be the one who is taxed on withdrawals, unless the attribution rule applies. Attribution Rule If a withdrawal is made in the same calendar as the last contribution or the two following years, attribution rule applies and withdrawal is taxed in hands of contributor. LAST CONTRIBUTION ATTRIBUTION RULE 2012 2013 2014 2015 2016 2017 2018

SPOUSAL RRSP – INCOME SPLITTING TOOL Splitting retirement income equally between two people in a couple is a tax-effective strategy. Although the government now permits an individual to split income from a RRIF, LIF or life annuity with his spouse or common-law partner, only possible when annuitant is 65 years old. For those wanting to retire before age 65, a spousal RRSP can still help to split retirement income. Employer pension can be split at any age.

ADVANTAGES OF INCOME SPLITTING NO INCOME SPLITTING INCOME SPLITTING HUSBAND - GROSS INCOME $85,000 $50,000 WIFE – GROSS INCOME $15,000 TOTAL GROSS INCOME $100,000 AVERAGE TAX RATE (PROVINCE OF ONTARIO 2013) 23.7% ON HUSBAND 4.7% ON WIFE 17.5% FOR BOTH TOTAL NET INCOME $79,150 $82,500 ANNUAL TAX SAVINGS --- $3,350 As you can see in this example, splitting income can be very beneficial. In this case, the couple saves $3,350 annually by splitting income. Anytime you’re helping a couple plan their retirement, keep income splitting in mind.

SPOUSAL RRSP Typical situations where a spousal RRSP can be used: One of the spouse has a pension plan with employer and the other does not, a spousal RRSP could be open for the latter. When the couple is comprised of a high income earner and a low income earner: High income earner has more RRSP contribution room and will benefit from a larger tax deduction.

RRIF AFTER ACCUMULATION COMES WITHDRAWALS

REGISTERED RETIREMENT INCOME FUND After accumulating wealth within an RRSP, the RRIF is a vehicle used to withdraw that money. Money that goes into a RRIF must come from an RRSP or spousal RRSP. In can also be a transfer from another RRIF. But you can’t for example take money from a savings account and invest it in a RRIF.

REGISTERED RETIREMENT INCOME FUND Client maintains control of investment strategy , amount and frequency of withdrawals. Except for the calendar year in which the RRIF is set-up, a minimum amount must be withdrawn each year. The minimum withdrawal amount is based on the RRIF value and age of client on January 1st of each year. Withdrawals are fully taxable. Money remaining in RRIF is tax-sheltered.

RRIF – ANNUAL MINIMUM WITHDRAWAL Before age 71: [1 / (90 – age at Jan. 1st)] x RRIF market value at Jan. 1st AGE ON JAN. 1ST MIN. WITHDRAWAL 71 5.28% 83 7.71% 72 5.40% 84 8.08% 73 5.53% 85 8.51% 74 5.67% 86 8.99% 75 5.82% 87 9.55% 76 5.98% 88 10.21% 77 6.17% 89 10.99% 78 6.36% 90 11.92% 79 6.58% 91 13.06% 80 6.82% 92 14.49% 81 7.08% 93 16.34% 82 7.38% 94 18.79% 95+ 20.00% For example, if annuitant is aged 65 on Jan. 1st, the minimum amount he will have to withdraw is 4.00% of the market value at Jan. 1st [1 / (90-65)] = 0.04 At age 70, it would be 5.00%.

LOCKED-IN PLANS INDIVIDUAL CONTRACTS FOR PENSION MONEY

LOCKED-IN RETIREMENT ACCOUNT AND LOCKED-IN RRSP Individuals with money in a pension plan of a former employer can transfer that money into a LIRA or Locked-in RRSP: LIRA: Pension plan registered with province Locked-in RRSP: Pension plan registered at the federal level Funds remain tax-sheltered and are locked-in; withdrawal limits nd constraints different in every province and at the federal level. Age limit: 71 years old. Jurisdiction of LIRA is based on pension plan province of registration, not client’s province of residence. Locked-in plans were created to permit individuals to control and invest their money that sits in a former employer’s pension plan. A few decades ago, this was not an issue since people worked for one employer all their life. However, ever since people have started changing employers, many are not interested in leaving money in their former employer’s pension plan. They prefer transferring that money into an individual plan. Locked-in plans such as the LIRA and LI-RRSP fall under pension legislation. The locked-in provision which limits the flexibility in withdrawing money is there to respect the spirit of the law that applies to pension plans. The law is there to prevent individuals from withdrawing too much too fast; the money should last for all of retirement.

LOCKED-IN RETIREMENT ACCOUNT AND LOCKED-IN RRSP As with LIRAs, a few typical exceptions to the “lock-in” rules Shortened life expectancy Small amount in LIF after a specific age (i.e. in Ontario, this exception applies if age is 55 or more) Financial hardship The details of these specific transactions are beyond the scope of this presentation. Before making any recommendations to your clients regarding these transactions, you should familiarize yourself with the rules that apply. Each province has its own rules. The two links on the slide are for the province of Ontario and the Federal legislation for plans that fall under the federal jurisdiction. Ontario rules: http://www.fsco.gov.on.ca/en/pensions/Pages/Default.aspx Federal rules: http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=2660

LIFE INCOME FUND The LIF is to a LIRA and LI-RRSP what the RRIF is to an RRSP. Money going into a LIF must come from a LIRA or LI-RRSP, or even a defined contribution pension plan - CLICK Money can also be transferred from an existing LIF.

LIFE INCOME FUND Similar to a RRIF Control of investments, amounts and frequency of withdrawals Annual minimum withdrawals Fully taxable withdrawals Money in the LIF remains tax-sheltered. There is an annual maximum withdrawal amount. The maximum withdrawal varies depending on the jurisdiction of the LIF. LIF’s jurisdiction is the same as the LIRA or pension plan from where the money comes from. On the last point, if a client moves to Ontario from New Brunswick, and he had money in his former employer’s pension plan which was registered under the New Brunswick pension legislation, the money can be transferred to a New Brunswick LIRA, even though the client is a resident of Ontario.

LIFE INCOME FUND As with LIRAs, a few typical exceptions to the “lock-in” rules Shortened life expectancy Small amount in LIF after a specific age (i.e. in Ontario, this exception applies if age is 55 or more) Financial hardship In addition, for a LIF, most jurisdiction offer the possibility of a one-time withdrawal or transfer of 50% of the amount, starting at a certain age and within a specific period. The details of these specific transactions are beyond the scope of this presentation. Before making any recommendations to your clients regarding these transactions, you should familiarize yourself with the rules that apply. Each province has its own rules. The two links on the slide are for the province of Ontario and the Federal legislation for plans that fall under the federal jurisdiction. Ontario rules: http://www.fsco.gov.on.ca/en/pensions/Pages/Default.aspx Federal rules: http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=2660

AND FINALLY…

NON-REGISTERED PLAN Contributions do not qualify for tax deductions. Investment income is taxed in year it is earned: Interest income = fully taxable Canadian dividends = qualify for a tax credit which reduces the amount of taxes due Capital gains = only half is taxable No taxes on withdrawals except if an unrealized capital gain is triggered. If capital loss is triggered, client can apply it to any other capital gain in the year, or carry it forward. On the last point, capital losses are not recognized in any other investment plans that we discussed previously. But most people don’t invest in the hopes of realizing capital losses.

NON-REGISTERED PLAN When should they typically be used? For major purchases, projects or other goals than retirement, maximise TFSA and then use a non-registered plan. For retirement savings, maximising either the RRSP or TFSA, or both is usually more beneficial. If the client is a company or association, a non-registered plan must be used and the other plans are not available.

LIFE ANNUITY LIFE ANNUITY Money inside any of these plans can be transferred to purchase a life annuity.

LIFE ANNUITY Guaranteed income for life Income payment ends upon death of the annuitant, except if: There’s a guaranteed period added to the life annuity and death of annuitant occurs before end of guaranteed period, payments continue until end of guaranteed period. A joint last-to-die annuity is purchased, payments continue until the last death. Annuity payments are fully taxable if money comes from a registered plan. Only the interest portion of the annuity payments are taxable if money comes from a non-registered plan or a TFSA.

LIFE ANNUITY WHEN CAN IT BE USED? With clients who don’t like volatility. With clients worried about outliving their money. With clients that don’t have enough financial discipline (i.e. risk of withdrawing too much money at a time). As part of a complete retirement income, to cover ongoing fixed costs. (especially if client doesn’t have pension income). In our next session, we will look more specifically at what role a life annuity can play in an individual’s retirement plan.

NEXT SESSION: Determining investments goals, mainly retirement goals and implementing strategies to reach them.

? ? QUESTIONS ?