Part VI – Real Estate: Skipping to Other Generations When Planning Your Estate

With the value in real estate and other holdings, many Canadians have accumulated a significant estate that involves planning.  Talking about estate planning need not be uncomfortable.  For many, this naturally leads to who you would like to receive your estate – either family, friends, and/or charitable groups.  The process involves mapping out a plan that minimizes tax, while at the same time ensuring your distribution goals are met.

The second stage of the estate-planning process is when we ask for clients to bring a copy of the documents they currently have in place. We also obtain a copy of their family tree and information about current executor(s), representative, or other individuals currently named in the will.

To illustrate the process, we will use a typical couple, Mr. and Mrs. Gray, both aged 73. They last updated their wills 24 years ago.  They have what is commonly referred to as “mirror wills” where each leave their estate to their spouse in a similar fashion.  The will also has a common disaster clause that if they were to both pass away within 30 days that the estate would be divided equally amongst their three children.  We will refer this to as the “traditional method”.

Since they last updated their Will, all three of their children (currently aged 56, 54, and 52) have started families of their own. In fact, the Gray’s now have seven grandchildren between the ages of 11 and 32, and two great grandchildren (aged seven and three).  None of which were born when they last updated their Will.

In reviewing their will, we noted that this traditional method of estate distribution left everything to their now financially well-off adult children, to the exclusion of their grandchildren. We highlighted that the current will does not mention the grandchildren or great grandchildren. In exploring this outcome, they expressed they wanted to map out an estate plan that also assisted those that needed help the most.

The last time the Gray’s updated their will they had a relatively modest net worth, but in the last 24 years they were able to accumulate a significant net worth. We had a discussion with Mr. and Mrs. Gray that focused around the timing of distributing their estate.

The traditional method effectively distributed nothing today and everything after both of them passed away.

We discussed the pros and cons of distributing funds early. During our discussion, the plan that was created was combination of components, parts involved a distribution to the grandchildren based on certain milestones.  They also wanted to make sure their grandchildren obtained a good education.  The estate plan details that we outlined in the short term were relatively easy to put in place and were as follows:

  1. For the youngest members of the family they wanted to set up and fund Registered Education Savings Plans (RESP) for all eligible grandchildren and great grandchildren. The RESP contribution shifted capital from a taxable account to a tax deferred structure. This effectively results in income splitting for the extended family. Another added benefit is that RESP accounts would receive the 20 per cent Canada Education Savings Grant based on the amounts contributed.
  2. For the family members already in university, the plan was to assist with the cost of tuition and other university costs up to $10,000 per year per grandchild.
  3. For the grandchildren who were at the stage of wanting to purchase a principal residence, they wanted to set aside a one-time lump sum payment of $50,000 specifically to assist each grandchild with the down payment on a home.

One of the more challenging areas of the Gray’s estate plan dealt with their real estate. In addition to their principal residence, they also owned a recreational property in the Gulf Islands. The recreational property had some significant unrealized capital gains. It was important for the Gray’s to ensure both properties were kept within the family, if possible. We called a family meeting together where we outlined different options to achieve this goal. The key with this part of the estate plan was communication with Mr. and Mrs. Gray and their three children. We were able to obtain a clear plan that was satisfactory to all family members.

The finishing touch to a well-executed estate plan is ensuring the details are clearly documented in an up-to-date will.

 

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the TC. Call 250.389.2138. greenardgroup.com

This is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in  this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a 
division of Scotia Capital Inc., Member Canadian Investor Protection Fund.

Part III – Real Esate: Benefits of Selling Real Estate Early in Retirement

In our last column we talked about CRA cracking down more on individuals who are non-compliant with respect to the principal residence deduction. Certainly individuals who have frequently bought and sold homes under the principal residence deduction will have to think twice and be prepared to be audited.

This article is really about the individuals who are contemplating a change in their life. Health and life events are often the two trigger points that have people thinking about whether to sell or not.   It can certainly be an emotional decision when it comes to that time.  Selling your home when you have control on timing when it is sold is always better than the alternative.

For our entire lives we have been focused on making prudent financial decisions and doing things that increase our net worth. There comes a point where you shouldn’t always do something that is the best financially.  If we only made decisions based on financial reasons you would never retire, you would work seven days a week, work longer days, and never take a vacation.  Throughout our working lives most people try to create a reasonable work-life balance.  In retirement I try to get clients to focus on the life part and fulfilling the things that are important to them.

Selling a principal residence could translate to a foolish move for someone looking at it only through net worth spectacles. I encourage clients to take off those spectacles and focus on what they truly want out of retirement and life.  At the peak of Maslow’s hierarchy of needs is self-actualization where people come to find a meaning to life that is important to them.   I think at this peak of self-actualization, many find that financial items and having to own a house, are not as important as they once were.

About ten years ago I remember having meetings with two different couples. Let us talk about the first couple, Mr. and Mrs. Brown who had just retired.  One of the first things they did after retiring was focus on uncluttering their lives.  They got rid of the stuff they didn’t need, and then they listed their house and sold it.  They then proceeded to sell both cars.  Shortly thereafter they came into my office and gave me a cheque for their total life savings.  Mrs. Brown had prepared a budget and we mapped out a plan to transfer a monthly amount from their investment account to their bank account.  They walk everywhere and are extremely healthy.  They like to travel and enjoy keeping their life as stress free as possible.  If any appliances break in their apartment it is not their problem, they just call the landlord.  Our meetings are focused on their hobbies and where they are going on their next trip.

I met another couple ten years ago, Mr. and Mrs. Wilson. They had also just retired.  They had accumulated a significant net worth through a combination of financial investments and they owned eight rental properties (including some buildings with four and six units).    At that time I thought they would have had the best of retirements based on their net worth.   The rental properties seem to always have things that need to get repaired or tenants moving out.  When I hear all the stories it almost sounds like they are stressed and not really retired.  Every year their net worth goes up.  Every year they get older, Mr. Wilson is now 75 years old and Mrs. Wilson is 72.  In the past I have talked to them about starting to sell the properties, to simplify their life and get the most out of retirement.   They are still wearing net worth spectacles and have not slowed their life down enough to get to the self-actualization stage.

My recommendation to clients has normally been to stay in their home as long as they can, even if this involves modifying their house and hiring help. This is assuming they have their health and the financial resources to fund this while still achieving their other goals.   Even in cases when financial resources do not force an individual to sell a house, the most likely outcome is that the house will be sold at a later stage in life and the proceeds used to fund assisted living arrangements.

Many people are house rich and cash poor. From my experience clients have two choices.  Option one is they can have a relatively stressful retirement trying to stretch a few dollars of savings over many years.  With this option you will likely leave a large estate.   Option two is selling the house and using the lifelong accumulation of wealth to make the most out of your retirement.    Although this option results in a smaller estate, you’re more likely to reach the self-actualization stage.

Kevin Greenard, CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the TC.  Call 250.389.2138. greenardgroup.com 

This is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.

 

Ten Tips on Working With A Portfolio Manager

HEALTHY LIVING MAGAZINE

Over the years, I have had many discussions with people about what is important to them.  Health is nearly always at the top of the list.  Connected to this is having time to enjoy an active and social lifestyle.

Life has become busy, and it is tough to squeeze in everything that you have to do, let alone have time left over for all the things you want to do. Sometimes it is simply a matter of making a choice. One of my favourite concepts I learned years ago in economics is ‘opportunity cost’. It can relate to time, money or experiences. We can’t get it back, borrow or save it. Time is sacred – especially family time and doing your own investing can take time and attention away from your family. So ask yourself – is doing your own investing worth the time you are spending on it?

One way to focus on the things you want to do is to delegate the day-to-day management of your finances to a portfolio manager who can help you manage your investments by creating what is called a ‘managed’ or ‘discretionary’ account. They are able to execute trades on your behalf without obtaining verbal permission, so when the market changes, they are able to act quickly and prudently.

Here are some tips for working with portfolio manager to improve your financial health:

Have a Plan

You are more likely to achieve the things you want if you set goals to paper. With fitness goals it would be things like running your first 10k race or lowering your blood pressure. Financial plans are the same – sit down with your portfolio manager and outline what you want to achieve with your estate, your investments and your retirement. Once a plan is in place, a periodic check-up takes a fraction of the time to ensure everything is on track.

Stay in Control

If you are worried about being out of touch with your investments, there are measures in place to keep you in the driver’s seat. One of the required documents for managed accounts is an Investment Policy Statement (IPS). This sets the parameters with your portfolio manager and provides some constraints/limits around their discretion. For example, you could outline in the IPS that you wish to always maintain a minimum of 40 per cent in fixed income. This lets you delegate on your terms, and ensures a disciplined approach to managing your portfolio. Technology has made it easier and faster for you and your portfolio manager to track your progress, review changes or update the program. Developing a written agenda that gets shared in advance of a meeting, whether in person or virtual, can create efficiencies and ensures nothing is missed. Whether it is email, Skype, or even text messaging – there are many ways for you to stay connected to your finances.

Think About Taxes and Legal Issues

Your finances often involve other professionals such as lawyers or accountants, so it is beneficial to get everyone connected early on. Work with your portfolio manager to complete a professional checklist that includes important names and a list of key documents. If your team can communicate directly with one another, it’s easier to map out planning recommendations and tax-efficient investment strategies. Your portfolio manager can also act as your authorized representative with the Canada Revenue Agency and can even make CRA installment payments on your behalf. Every summer, I am reviewing assessment notices, carry-forwards, contribution limits (i.e. TFSA and RRSP) and income levels to allow my clients to enjoy the outdoors and improve their quality of life

Put Family First

Having a complete picture helps a portfolio manager map out strategies to preserve your capital and to protect your family. If a life event occurs or your circumstances change – from new babies, to inheritances, to critical illness –  your portfolio manager can provide options and solutions. When the family member who manages the finances passes away suddenly, it can be very stressful for the surviving spouse or children during a time that is already emotionally draining. To help in this situation, many families create well thought-out plans that can involve working with their portfolio manager to make discretionary financial decisions in a time of transition. A Portfolio Manager can take care of your finances regardless of the curves that life throws them.

As a portfolio manager, I feel it is critical to be accessible and to keep clients well-informed with effective communication. What I am finding is that conversations are shifting to areas outside of investments, including the financial implications of health issues and changes within the family.

If you are looking for a way to simplify, reduce stress in your life, and proactively manage your finances, a portfolio manager might be a good way to improve your financial health.

 

Let’s make things perfectly clear

CAPITAL MAGAZINE

When hiring an accountant or lawyer, you’re billed after services are rendered. In the investment world, it’s not so transparent. With embedded costs, market-value changes, withdrawals and deposits, it hasn’t always been clear exactly what you’ve been charged.

The introduction of fee-based accounts and recent regulatory changes are making significant strides in providing better transparency to investors.

In the past, most types of accounts were transactional, wherein commissions are charged for each transaction. With fee-based accounts, however, advisers don’t receive commissions. Instead, they agree to a set fee schedule, usually charged on a quarterly basis. This fee is normally based on a portfolio’s market value and composition. Buy and sell recommendations are based on the client’s needs and goals. If an investor’s account increases in value, so do the fees paid; conversely, if an account declines in value, fees go down.

The recent increase in fee-based accounts correlates to the implementation of the second phase of the “Client Relationship Model” (CRM), a regulatory initiative passed by the Canadian Securities Administrators in March 2012. The CRM affects both the Mutual Fund Dealers Association and the Investment Industry Regulatory Organization of Canada.

While the key objective of CRM1 was relationship disclosure and enhanced suitability, CRM2 is designed to increase transparency and disclosure on fees paid, services received, potential conflicts of interest and account performance. All of these mandatory disclosures are being phased in from 2014 to 2016.

Last July, CRM2 mandated pre-trade disclosure of all fees prior to an investor agreeing to buy or sell an investment. With transactional accounts, an adviser must disclose all of the fees a client is required to pay, such as commissions when buying or selling positions. Many investors have complained about hidden fees, especially in mutual funds. With CRM2, all of these fees now have to be disclosed prior to the transaction.

Certain types of transactions had no disclosure requirements in the past. For example, an adviser used to be able to purchase a bond and embed their commission in the cost of the bond on the trade confirmation slip. Now, fixed-income trades also require full disclosure. In other cases, even if there was disclosure in the legal sense of the word, understanding this disclosure required clients to read the fine print in lengthy prospectus documents.

With fee-based accounts, the client has a discussion about fees with their adviser up front, and an agreement with full disclosure is signed by investor and adviser.

Another reason for the popularity of the fee-based platform is that many advisers can offer both investment and planning-related services. Many advisers can offer detailed financial plans and access to experts in related areas, such as insurance, and will and estate planning.

In a traditional transactional account, where commissions are charged for every buy or sell, it has always been challenging for advisers to be compensated for additional services such as financial planning. Consequently, many transactional-based advisers would not offer these services to their clients.

Fee-based accounts also offer families one more opportunity for income splitting by setting up account-designated billing for their fees. The higher-income spouse can pay the fees for the lower-income spouse.

Another benefit of a fee-based structure for non-registered accounts is the ability to deduct investment counsel fees as carrying charges and interest expense. Anyone who has non-registered accounts would be well advised to read Canada Revenue Agency’s interpretation bulletin 238R2. Investment counsel fees cannot be deducted for registered accounts, but there is the benefit of paying the fees for registered accounts from a non-registered account.

Adviser-managed accounts have been the fastest-growing segment of the broad fee-based group. In this type of account, the adviser is licensed as a portfolio manager and able to use discretion to execute trades. In setting up the adviser-managed account, one of the criteria is that the account must be fee-based. Regulators have made it clear a portfolio manager is not permitted to use discretion when it comes to commissions or transaction charges. One of the starting points to setting up a managed account is to get a defined investment policy statement that sets out the relevant guidelines that will govern the management of the account.

Regulatory Change Helps Drive Popularity of Fee-Based Investment Accounts

CPABC IN FOCUS MAGAZINE

The investment services industry is changing at a dramatic pace, with investors demanding more choice, more transparency, and more personalized advice. One of the fastest growing trends within the financial services sector is the use of fee-based accounts. While there are many reasons for the increasing popularity of these accounts among advisers and clients alike, recent regulatory changes have been a major catalyst.

Traditional vs fee-based account structures

In the past, the most common type of account structure has been a transactional one, wherein commissions are charged for each buy or sell transaction. With fee-based accounts, however, advisers do not receive commissions—instead, they agree to a set fee schedule, usually charged on a quarterly basis. This fee is normally based on the portfolio’s market value and composition. Buy and sell recommendations are based solely on the client’s strategic needs and goals. If an investor’s account increases in value, so do the fees paid to the adviser; conversely, if an investor’s account declines in value, so do the fees paid. With a fee-based structure, the adviser has a direct (and overt) incentive to ensure that the investor’s account increases in value.

Client relationship model initiative enters second phase

The recent increase in the use of fee-based accounts correlates to a large extent to the implementation of the second phase of the “Client Relationship Model” (CRM), a regulatory initiative passed by the Canadian Securities Administrators in March 2012 The CRM affects both the Mutual Fund Dealers Association and the Investment Industry Regulatory Organization of Canada.

While the key objective of CRM1 was relationship disclosure and enhanced suitability, the key objective of CRM2 is to increase transparency/disclosure for investors with regard to fees paid, services received, potential conflicts of interest, and account performance. All of these mandatory disclosures are being phased in from 2014 to 2016.

In July 2014, CRM2 mandated pre-trade disclosure of all fees prior to an investor agreeing to buy or sell an investment. With a traditional transactional account, an adviser must disclose all of the fees a client is required to pay, such as any commissions for transactional accounts when buying or selling positions. However, many investors have complained about “hidden” and unexpected fees, especially with respect to mutual funds. With CRM2, all of these fees now have to be fully disclosed prior to the transaction.

This move to greater transparency is a major shift from certain types of transactions that had no disclosure requirements in the past. For example, an adviser used to be able to purchase a bond and embed their commission in the cost of the bond on the trade confirmation slip. Now, fixed income trades also require full disclosure. In other cases, even if there was disclosure in the legal sense of the word, understanding this disclosure required clients to read the fine print in lengthy prospectus documents. Similar CRM2-type regulations for full disclosure were implemented in Australia and the UK in 2013, requiring transparency regarding all fees. Not surprisingly, this resulted in a significant reduction in the number of financial advisers working in the industry in both countries. It’s possible that we could also see a reduction in the number of advisers here, once the new rules are fully implemented in Canada.

Fee-based accounts are already onside of the new rules, as transparency is embedded in their structure: The client has a discussion about fees with their adviser up front, and a fee-account agreement with full disclosure is then signed by both the investor and the adviser. 

Comprehensiveness

Another reason for the growth in popularity of the fee-based platform is the fact that many advisers now offer a comprehensive wealth offering, which includes both investment and planning-related services. This differs from the role of the stock broker of the past.

Clients have a variety of financial planning needs, primarily with regard to retirement and estate planning. Many advisers can offer detailed financial plans and provide access to experts in related areas, such as insurance, and will and estate planning. An adviser will often communicate with the client’s accountant and lawyer to ensure everyone is on the same page.

In a traditional transactional account where commissions are charged for every buy or sell, it has always been challenging for advisers to be compensated for additional services such as financial planning. Consequently, many transactional-based advisers simply would not offer these services to their clients.

Some unique benefits

Certain benefits are unique to fee-based accounts.

Rebalancing without additional cost

For example, this structure enables wealth advisers to rebalance portfolios as needed to reduce risk at no additional cost. Multiple types of rebalancing are important when managing risk. At the macro level, let’s assume a client’s optimal asset mix is 60% in equities and 40% in bonds. After a period of strong equity markets, the client’s equity percentage rises to 68%. Reducing equities by 8% and allocating this to fixed income is rebalancing at the macro level. At the micro level, there is an optimal position size for one holding. In this example, let’s assume the optimal position size is $24,000 for each company held in the portfolio. If one stock rises significantly above or below the optimal position size, then consideration for a rebalancing trade should occur.

Several trades could be required on an annual basis to rebalance a portfolio. With transactional accounts, the commissions for doing multiple small adjustments would likely be prohibitive. However, not doing the trades because of the commission payable in a transactional account means that you’re not managing risk as effectively.

The adviser’s ability to make tactical shifts in an account is another benefit of fee-based accounts. For example, there are times when investors benefit from moving in or out of USD-denominated holdings. Being able to make these changes when the currency is right should be done without concern for the trade’s commission cost. Being able to move between sectors based on current outlook can also be strategic, especially when transaction charges are not a factor (if a transaction charge is 2% to sell and 2% to buy, then the cost of any switch trade has to increase by 4% to break even).

Income splitting and “householding”

Fee-based accounts also offer couples and families one more opportunity for income splitting by setting up account-designated billing for their fees. For example, the higher income spouse can pay the fees for the lower income spouse. Let’s assume the lower income spouse has an RRSP and a TFSA. The higher income spouse can put funds into the lower income spouse’s account as a contribution of fees without attribution. In another example, a client with multiple fee-based investment accounts (i.e. one non-registered and five registered) can arrange to have all of the fees paid out of the non-registered account.

“Householding” is a term used in fee-based accounts to link accounts together for fee-billing purposes. As the total of the householded assets increases, the percentage fee for the adviser’s services decreases. Let’s say we have a middle-aged couple with $400,000 in investments. The couple has parents with $680,000 in investments, over which the couple has power of attorney. The couple also has a corporate account totalling $120,000 in investments. By householding, or combining all accounts under one agreement, the household value becomes $1,200,000, which results in lower overall fees for everyone.

Deducting investment council fees

Another benefit of a fee-based structure for non-registered accounts is the ability to deduct investment council fees as “carrying charges and interest expense.” Many investors are still not aware of these tax benefits. Anyone who has non-registered accounts would be well advised to read the Canada Revenue Agency’s (CRA) interpretation bulletin on this topic (IT-238R2). The investment council fees cannot be deducted for registered accounts, but there is the benefit of paying the fees for registered accounts from a non-registered account, especially for younger clients where registered accounts are deferred for many years.

Adviser-managed accounts

Over the last several years, adviser-managed accounts have been the fastest growing segment of the broad fee-based group. In this type of account, the adviser is licensed as a portfolio manager and able to use his or her discretion to execute trades.

In setting up the adviser-managed account, one of the criteria is that the account must be fee-based. The regulators have made it clear that a portfolio manager is not permitted to use discretion when it comes to commissions or transaction charges. One of the starting points to setting up a managed account is to get a clearly defined investment policy statement that sets out the relevant guidelines that will govern the management of the account. At this same time, a fee-based agreement is signed that clearly outlines the negotiated fee structure.

Shifting to a new model

As the financial services industry continues to change and evolve, so do the solutions being offered. There is now more flexibility and choice in how a wealth adviser and an investor can work together.

High-net-worth clients are looking for advisers who have the credentials and licensing to offer discretionary portfolio management. Within that context, there is also an expectation that financial planning and other related services will be part of the overall fee-based structure. The traditional model of solely doing stock trades for trading commissions is becoming an increasingly difficult business model to sustain.

Kevin Greenard is a portfolio manager and associate director of wealth management with ScotiaMcLeod, a division of Scotia Capital Inc. and ScotiaMcLeod Financial Services Inc.

A proactive advisor can cut your taxes

Clients are often unaware of investment alternatives, credits, loss-recovery options

I ask every new client to sign a Canada Revenue Agency (CRA) form T1013 – Authorizing or Cancelling a Representative. This authorizes CRA to release tax related information to me, referred to as a “representative.” It is an invaluable tax tool to proactively help clients.

Canada Revenue Agency’s website (cra-arc.gc.ca) is a great resource for general information.   On this website, representatives can access their client’s tax information. When I have clients sign the T1013, I request Level 1 authorization which enables me to view information only. There is no ability to make changes. The most obvious benefit for clients in signing the T1013 is that they no longer have to bring in a copy of their annual tax returns and applicable notices of assessments. This information is available online. I use it for a variety of purposes, primarily to give proactive advice to save tax dollars. Here are a few situations clients have encountered to which I was able to provide solutions as a result of having the T1013 on file.

Situation 1: In examining Mr. Red’s tax return, we noted he had to pay $456 in interest and penalties to CRA for not making his quarterly instalments on time.

Solution: We brought this to Mr. Red’s attention and provided automatic solutions that could help him. The first was that we could begin withholding tax on his RRIF payments. The second was that we could contact Service Canada and request that withholding tax be taken on CPP and/or OAS payments. A manual option was that we could make his quarterly instalment payments to CRA for him directly from his non-registered investment account.

Situation 2:   Mrs. Brown is a new client who transferred in a non-registered investment account. During our initial conversations, she said she prepares her own tax return. My evaluation of her past returns showed there was no carry-forward information for realized gains or losses on her investments. I confirmed that she had sold many investments over the years, but had not recorded these on her tax return.  

Solution: I explained that all dispositions in a taxable account must be manually reported on Schedule 3 (no tax slip is issued for this). We assisted her in obtaining previous annual trading summaries to calculate the numbers needed to adjust her previous tax returns.

Situation 3: Mr. Black has been contributing to his RRSP for many years. In the last year, his income dropped substantially and he was comfortably in the first marginal tax bracket. Mr. Black said he projected that his income would continue at the current level or decline as he approaches retirement.              

Solution: It no longer made sense for Mr. Black to continue to contribute to his RRSP account. His savings should be directed to a Tax Free Savings Account.

Situation 4: Mr. Orange received penalties for over-contributing to his TFSA accounts. In our first meeting, he explained that he had several TFSA accounts and had lost track of his withdrawals and contributions.

Solution: We outlined the rules with respect to TFSA accounts and any replenishment for a previous withdrawal must occur in the next calendar year. I also had him sign the T1013 form. I printed out all of his TFSA contributions and withdrawals from the online service. I recommended that he consolidate his TFSA accounts. I also provided copies of the CRA reports, including a report which shows his current year contribution limit.

Situation 5: Mrs. Yellow has been a long time client whose health has deteriorated over the years. In reviewing her tax returns, I noted that he was not claiming the disability tax credit.

Solution: I provided her with a copy of the Disability Tax Credit form T2201. I advised her to bring this to her doctor to have the form signed and submitted. A few months later, Mrs. Yellow received a letter back from CRA with their approval for her application. They also approved backdating her eligibility to 2009. In assisting Mrs. Yellow and her accountant with the T1-Adjustment form, we projected that she would receive a tax refund of $12,490. From now on, Mrs. Yellow will be able to claim the disability tax credit every year, resulting in significant tax savings.

Situation 6: Mr. White has, in the last few years, completed his own tax return using Turbo Tax. He has correctly reported the taxable capital gains on line 127 of his tax return during this period. Unfortunately, Mr. White did not initially key in his loss carry-forward information. Many years ago, Mr. White had a significant net capital loss on a real estate investment, and was not aware that he could apply his net capital losses to reduce his taxable capital gains on the stock sells.  

Solution:   I arranged a meeting with Mr. White and explained to him the importance of keying in the carry-forward amounts when starting to use Turbo Tax. I also showed him how he can use a T1-Adj form to request CRA change line 253 – Net capital losses of other years. Mr. White had to submit four T1-Adj for each year he missed applying his net capital losses. Combined Mr. White received a refund of $47,024 after all reassessments.

Situation 7: Mrs. Green has recently transferred her investments to us. We noted a few investments with significant losses that she has held in her account for many years.   There is little hope that these investments will recover in value. In reviewing Mrs. Green’s online account with CRA, I looked up all of her previously reported taxable capital gains and net capital losses. In this analysis, I noted she had substantial taxable capital gains three years ago that brought her income into the top marginal tax bracket.   Net capital losses can only be carried back up to three years. Mrs. Green was unaware net capital losses could only be carried back up to three years.

Solution: I recommended that Mrs. Green sell most of her investments that were in an unrealized loss situation. By selling these she triggered the tax situation and created the net capital loss. I printed off the T1A – Request for Loss Carryback form and explained to Mrs. Green how the form works. Mrs. Green was able to recover $29,842 after CRA carried the loss back and reassessed her tax return from three year ago.

Situation 8: Mr. Blue had stopped working at the age of 62, but his spouse was continuing to work a few more years. In looking at his CRA online reports, I noted he was collecting CPP and that this represented most of his income, which was below the basic exemption.  He had not thought about taking money out of his RRSP early as Mrs. Blue was continuing to work and they had enough money flowing in from her income and in the bank to take care of the bills. Mr. Blue had a sizeable RRSP account and Mrs. Blue will have a good pension when she retires that can be shared.

Solution: I explained to Mr. Blue that when he starts collecting OAS, pension splitting with his spouse, and having to withdrawal from his RRIF that his taxable income will increase significantly. We recommended that he convert a portion of his RRSP to a RRIF and begin taking income out on an annual basis immediately. We mapped out a plan to keep his taxable income around $35,000. With these early withdrawals, our projections would keep both Mr. and Mrs. Blue in the top end of the first marginal tax brackets throughout retirement.

Situation 9:   Mrs. Purple is extremely busy with work and has a great income. It is definitely advisable for Mrs. Purple to maximize her contributions to her Registered Retirement Savings Plan (RRSP). Unfortunately, Mrs. Purple never seems to find the time to photo copy her notice of assessment and provide this to her advisor. She was frustrated that last year, she missed contributing to her RRSP because her advisor did not phone.

Solution:   When Mrs. Purple came to see me I explained the benefits of the T1013 form. One of the main benefits is that I can go on-line and instantly obtain her RRSP contribution limits and unused portions for the current year.   I proactively contact each applicable client and advise them of their limits and recommended contribution level based on projections of current and future income levels.

Emails – the good, the bad, and the fraud

The Canadian Radio-Television and Telecommunications Commission ­ or CRTC ­ has the authority to administer the Telecommunications Act, including the National Do Not Call List (DNCL). Effective July 1, 2014, Canada’s Anti-Spam Legislation (CASL) will also be administered by the CRTC.  The DNCL and CASL are intended to protect the public from unwanted communications, including annoying phone calls and unwanted SPAM. 

People have to be extremely careful when they receive unsolicited phone calls and emails.  In this age of technology, automatic dialing machines and blanket emails can hit large populations quickly.  Caution should always be exercised when you are asked to provide any personal information. 

Unless you know for certain that the phone call or email is legitimate, you are best not to respond.  If the unexpected email or phone call is of a financial matter, we recommend that you hang up and phone your financial advisor.  Your advisor should be able to assist you after you provide the details of the phone call or email.    

In talking with clients, I explain to them that we put measures in place to protect their capital from fraud. We will not accept trading instructions over email or fax, and we will never carry through with a money transfer request without first confirming with our client either in person or on the phone.  Our team knows to be especially careful if we receive rushed explanations, or explanations that are out of the ordinary.  Extreme caution is necessary for any payments to third parties or to overseas bank accounts. 

While the Do Not Call List deals with unwanted phone calls, the Anti-Spam Legislation deals with Commercial Electronic Messages (CEM). The majority of financial advisors utilize email, or rather CEMs, as a means to distribute timely information quickly and efficiently.   CEM is not just marketing emails. 

For example, a financial advisor may be sending periodic emails with timely economic and market commentary, recent financial news, and investing and wealth management strategies.  Sending out event and meeting invitations electronically also falls under CEM.

Government statistics state that over 80 per cent of emails are considered SPAM.  CASL casts a very large net.  The concern is that the rules could prevent businesses from sending you legitimate emails.    The intention of the legislation is to eliminate the huge number of spam emails, not the legitimate ones.  Businesses should also know that the intention of the CRTC is to prevent businesses and organizations from sending email to people who have not consented to receive it.    

What will happen to the approximately 20 per cent of legitimate emails that you were receiving before July 1, 2014?   Will the anti-spam law’s large net prevent you from receiving emails that have relevant and timely information? 

A couple of smart solutions exist to ensure you continue to receive the good emails.  Businesses are still able to send you a CEM provided they have “consent.”  Consent is best understood by looking at two terms, “express consent” or “implied consent.”

“Express consent” is obtained when a business asks for your permission to continue sending CEM and you provide consent (i.e. you say “yes” or click accept on an email).  Many businesses have already created electronic marketing systems to keep track of those individuals who have provided “express consent”.  Some businesses are proactively sending CEM messages before July 1, 2014 requesting that you confirm continued receipt of CEM.  In asking for permission, the distributor of CEM must explain the reasons why they are asking for consent and provide the following information:  name, address, telephone number, and website.  The sender of the CEM must provide you the ability to unsubscribe from any future email communications if you so wish.  

“Implied consent” is best understood from looking at certain actions.  If an individual business owner receives an incoming email requesting information, then the business owner has implied consent and can respond to that email.  One incoming email does not provide ongoing “express consent.”  If the person who initially emailed a business does not reply to the business’s response email, the email chain ends and so does consent. 

Another example:  If a business relationship is already established in the previous two years, then “implied consent” exists.  Similar to the Do Not Call List, the anti-spam law also has exceptions to the general rules adding to the complexity, including exemptions for family, friends, and certain third-party referrals. 

In addition, when the new CASL rules come into effect, all CEMs must contain an unsubscribe feature so that people have the option to retract their express or implied consent, if they wish at a later date.

If you are concerned that you may not continue to receive some of your legitimate emails after June 30, 2014, then we recommend you contact the respective individuals or businesses to determine how they are managing “consent”.  You can respond “yes” to those businesses which have sent you an email requesting consent.  Another alternative is to proactively send the individual or business an email, such as, “I give you my consent to continue to send me emails to the following email address: jack.jones@email.com.  I reserve the right to unsubscribe at a later date.” 

Financial advisors and companies are taking this very seriously.  The CRTC may impose hefty fines on individuals and businesses violating the Do Not Call List and new anti-spam rules.    If a person breaks the Do Not Call List rules, the penalty could be $1,500 per violation, and up to $15,000 for businesses.  The fine for violating anti-spam law for individuals is as much as $1 million per occurrence.  Businesses breaking the anti-spam rules could be fined up to $10 million per occurrence. 

The importance of teamwork in managing affairs

Couples who both have an equal interest in managing their investments are not as common as you might think.  The best case scenario is, of course, that both are working with a financial advisor to ensure continuity and an easier transition when one spouse passes away.  But that doesn’t always happen.  Even the simplest of investment approaches can be quite overwhelming and confusing to the surviving spouse who has never manager their financial affairs.

Although the spouse who has handled the finances may feel they are taking car of their spouse, it may actually do more harm than good.  The obvious pitfalls are failure to manage risk, getting too emotionally attached, missing out on opportunities and spending a good part of their spare time in order to avoid paying an advisor commissions for trades.  They can easily miss a big picture item that can cost dearly later on.  A good financial planning tip can often cover years of fees for an advisor. Ensuring your spouse has a good adviser after you’re gone is more valuable than trying to save a few dollars today.

There are a few basic suggestions to simplify your finances and hope both you and your spouse.

■ Consolidating accounts is almost always a good move, regardless of your age.  By closing unnecessary bank and investment accounts you reduce the amount of work considerably.  You will have fewer tax slips, and have a much clearer picture of your situation.  The more financial institutions you deal with the more phone calls and paper work that will be left for your spouse and executor after you are gone.

■ Having all monthly registered pension plan payments (employer pensions, Old Age Security, and Canada Pension Plan) automatically deposited into one bank account will make it easier to budget.   This one bank account should be linked electronically to your non-registered investment account.  RRIF payments can be set up for monthly payments to be transferred from your investment account to your bank account.  Having all transactions flow in and out of one account makes it easier to track income and expenses.

■ Organizing your financial papers will be helpful for you and your spouse.   Check with your advisor and Canada Revenue Agency regarding what documents can be destroyed and shredded.  We recommend cancelling charge cards you no longer use.  If you do owe anyone money that is not registered (i.e. mortgage), we recommend you inform your spouse of these amounts.  Insurance policies that have been cancelled should be clearly labelled.  Any valid insurance policies should be organized with your spouse knowing where they are stored.

■ Old share certificate that have value should be deposited into an investment account.  Old share certificates with no value should either be shredded or clearly marked as having no value.  An advisor can search old share certificates to provide assurance whether an investment is defunct.

■ We recommend having one easy to access list of professionals you work with (banking contact, accountant, lawyer, investment advisor, insurance company), including all their contact information.  This list should provide key information, such as where your will is stored and the name of your executor.  It is quite common for couples to name their spouse as their primary executor.  Your advisor can provide a list of some of the main responsibilities of being an executor.  Obtaining an understanding of your duties should be done while you’re updating wills, power of attorney, representation agreements, and other legal documents.  Your spouse should know where your will is located and who is the executor (if your spouse is not the executor).

■ Ensure that you have the correct beneficiary designated on each registered account.  In the majority of cases it is advantageous to name your spouse.  If you are naming anyone other than your spouse then we recommend that you obtain advice to ensure it is appropriate and you understand the consequences.

■ Obtain financial and accounting advice for any non-registered investment and bank accounts that are solely in your name.   There are many benefits for opening joint with right of survivorship accounts with your spouse.  Changing ownerships on accounts should only be done after an informed discussion with your advisor.

Nearly every couple has additional steps they should follow that are unique to their individual needs.  We encourage couples to come in to investment and planning meetings together.  These meetings help your financial advisor formulate a plan that helps both of you.  The best way you can take care of your spouse is to ensure that all is in order today and that a trusted advisor will be available to help after you’re gone.

Trust in financial advisors built over time

During times of volatile market conditions it is challenging to build confidence in the financial system.

A stable financial system is the foundation that trust is built upon. Challenging economic data and political uncertainty can slowly erode the foundation.  People who are investing today must trust that the markets will get through these difficult times and reach higher levels in the future.

In addition to trusting the financial system, it is important to build trust between you and your advisor. Unfortunately trust generally does not come instantaneously.  It is a two-sided process that results from the consistent commitment and open communication between you and your advisor or portfolio manager.

Trust should grow over your relationship. If trust is not being built up over time then the relationship is likely not moving in the right direction.

Every relationship has not only mutual trust, but it also has responsibilities unique to you as the investor and your advisor. An advisor is hired to share his or her investing knowledge with you, develop your unique financial plan, inform you of your portfolio’s performance, notify you of potential opportunities, answer questions, and refer you to other internal specialists and external professionals, such as a lawyer or an accountant, when necessary.

You, as the investor, are required to be clear and honest about your risk tolerance and financial situation. Communicating your investment knowledge and past investment experiences with your advisor is an important start. Keeping your advisor aware of any changes to your current circumstances and preferences are also key components. Have you gathered all of the relevant information to have an up to date and accurate financial plan? Have you set realistic expectations? Are you looking short-term or long-term?

Open and balanced communication is one important component to building trust. As an advisor, if I didn’t do something right, or if it could be done better, I would want my clients to tell me.

Being able to give constructive feedback to your advisor is essential. Personally, I lose trust immediately in advertisements of financial products that only highlight the potential return and exclude the potential risk (or have it in small print). A balanced discussion of a new investment idea should summarize both the risks and potential rewards. No advisor has a crystal ball – market rallies and declines are simply unpredictable.

Competency is a big component to building trust. If an advisor has the related designations and credentials then it shows an effort to obtain knowledge that will help their clients. Ongoing continuing education helps advisors stay current with professional development. Experience is equally as important. An advisor who has helped clients through various market cycles will have a greater depth of knowledge on the psychological feelings that investors go through.

It is important to have total confidence that your advisor will act with integrity on your behalf, is competent in their field, has a personality compatible with your own, and whose actions are consistent with what they say. When searching for a new advisor it can be hard to start a trusting relationship without these things previously established. This is where referrals from friends, family, or other professionals can help you feel a stronger connection with an advisor from the very first meeting. The individual making the referral already believes the advisor to be credible and their trust has grown out of respect for their advisor’s hard work. When you make a referral you are putting your own trustworthiness at stake; therefore, if someone refers an advisor to you they trust the advisor to manage their assets and have confidence that the advisor will be reliable and act with the integrity, competency, and empathy when managing your assets. Although it may be difficult to form a trusting relationship with someone new, trust is crucial for a long term relationship with your advisor.

If you find it hard to trust your current advisor, or one you are meeting for the first time, then the relationship is likely not the best fit for you. Consider asking a friend or family member for a name of a financial advisor they trust. While establishing trust does take time, transferring trust among people can be extremely helpful in forming a solid relationship built on integrity, competency, rapport, and above all, trust.

Communication with advisor is important

An important skill that an advisor should have is the ability to communicate effectively with their clients.  Being able to listen is really the key to understanding the unique needs and situation of each client.  It is important for clients to share information with their advisor.

Before opening a new account an advisor is required to obtain some basic information, such as an understanding of your risk tolerance and investment objectives.  The regulatory requirement for information gathering should be treated as the minimum amount an advisor needs to assist you.

Two written documents can really help an advisor – a family tree and a net worth statement.  A family tree can be prepared on a piece of paper by listing the names of people important to you along with their relationship.  As an example, your family tree could list the following relationships:   parents (deceased and alive), spouse (including any previous marriages), children, grandchildren, siblings, powers of attorney, executor, etc.  Birthdates are also useful on the family tree. This information will help your advisor obtain a quicker understanding of your family situation.   The second useful document is called a net worth statement.  This can be done by summarizing your total assets (financial and non-financial) and total debts.  The net-worth statement will give your advisor an immediate snapshot of where you sit today.  Both the family tree and net worth statement will help your advisor in asking the right questions to assist you with your customized plan.

Life events such as marriage, birth of a child, arrival of a new grandchild, new employment, retirement, death of a family member, divorce, etc., are times when you should be communicating with your advisor.  Updating your advisor on life events will allow them to communicate important information that may be of help to you during these times.  This information can be applied when adjusting your investments and plan.

An important reason why you initially went to see an advisor was to obtain assistance with investments.  The advisor’s approach to investing and the types of products that they are licensed to sell often drives both the volume and timing of communication.  Maturity dates of investments such as bonds and Guaranteed Investment Certificates (GICs) are definite times your advisor should be contacting you.  Passive investment strategies, such as Exchanged Traded Funds (ETFs), may require less contact than active strategies.  Even within active management, the number of phone calls can differ significantly.  As an example, an advisor recommending equity mutual funds for their clients may not require as many phone calls as an advisor who is investing in individual stocks.

Most clients initially look at communication with their advisor in the context of how many in-person meetings they will have in a year.  Many advisors may ask their clients how often they would like to meet in-person, with choices typically being quarterly, semi-annually, or annually.  The frequency of in-person, periodic meetings may fluctuate as you and your advisor determine what is most appropriate.

In-person meetings are essential for new clients, especially when reviewing new types of investments (i.e. preferred shares, common shares, and convertible debentures).  The base understanding of the different type of investments will allow different forms of communication in the future, such as telephone calls.  An advisor may phone you with recommendations between the scheduled in-person meetings.

Comprehensive meetings can also be done over the phone.   Scheduled time can be blocked off on both calendars.  A meeting agenda should be emailed in advance of the scheduled portfolio review allowing you more time to look at the recommendations beforehand.   An agenda for each meeting ensures that the time spent is productive and covers the items important to both you and your advisor.

An example of a meeting agenda relating to investments would be as follows:  1. Review market indices and relevant benchmarks year-to-date; 2. Macro view of current market conditions including a review of commodity prices; 3. Discussion regarding your Investment Policy Statement (IPS), and your current asset mix; 4. Detailed review of current investments with recommendations; 5. Options for any excess cash balances.

Your advisor can often assist you with items beyond investments.  In advance of your meeting, you should ask your advisor to put the topics that are important to you on the agenda.  This will help your advisor determine the amount of time to set aside for the meeting and to determine whether any internal specialists or external experts will be required.   Your advisor has relationships with accountants, lawyers, realtors, etc. who can assist with complex questions.  Within each financial institution their are specialists that can also assist you, including full time financial planners, insurance consultants, trustees, bankers, wills and estate planners, etc.

Providing your advisor with your preferential contact information will enable them to contact you when necessary.   Having all work, home, and cell numbers will enable your advisor to contact you quickly should an opportunity arise.  We recommend our clients let us know the dates that they will not be accessible.   If you are planning a long vacation, or a significant period away from home, then you should meet with your advisor prior to your departure.  One of the challenges with advances in technology is the use of email, especially when you are on vacation.  Many clients may feel that a trade instruction sent by email (written record) is better than a verbal phone call (no written record).  Advisors can not take trade instructions by email for various reasons associated with risk.  The following are a few of the risks:  time difference of instructions, risk of failure to execute (i.e. advisor may meeting with clients out of town at the time of e-mail), inability to confirm that order instruction is provided by a duly authorized person, lack of confidentiality of client information, lack of receipt or untimely receipt of order instructions, difficulty in discussing details surrounding suitability and risk of investment, e-mail delivery and server interruptions, or inability to confirm vague or incomplete instructions (i.e. type of order, account number, quantity of shares) on a timely basis.  Another risk of accepting trade instructions via e-mail is a practice known as “e-mail spoofing”. E-mail spoofing is the forgery of an e-mail header, or sender address, to make an e-mail message appear to have originated from somewhere other than the actual source, thereby making it possible to send a message enhanced to look like it originated elsewhere.

E-mail works well for confirming phone and in-person meeting times, adding items onto a meeting agenda, general discussion items, and for sharing investment ideas.  When it comes to executing investment ideas, these need to be communicated and confirmed verbally.