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Developing awareness

Sources of income

Tax issues and strategies

Estate planning and powers of attorney

6. Finance, Taxes, and Estate Planning

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Developing Awareness

Many of concepts in this chapter are highly technical

Awareness of these concepts and issues can be beneficial because you will be able to recognize opportunities and concerns

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Where Do Retirees Get Their Money?

The Government: Old Age Security (OAS), Canada/Quebec Pension Plan and/or low income benefits

Employer: Pension plan (basic and supplementary), group RRSP, deferred profit sharing plans

Personal: RRSP, other savings and investments, employment or business income.

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The Income Mix for Today’s Older Canadians

Age Group

60-64 65-69 70-74 75+

OAS 0% 15% 18% 19%

C/QPP 9% 17% 18% 19%

Pensions, RRIFS, DPSPs, RRSPs

21% 25% 31% 29%

Investments, Rents, annuities

11% 14% 15% 20%

Employment/business income

51% 21% 10% 3%

Other 8% 8% 8% 10%

Total 100% 100% 100% 100%

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You qualify for benefits when you’re 65 if you’ve been in Canada for at least 10 years.

Maximum benefit—based on 40 years of residence—is worth about $6,000 a year

Old Age Security (OAS)

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You qualify for CPP or QPP retirement benefits if you’ve made at least one contribution during your career.

Maximum benefit is just over $10,000 a year

Canada Pension Plan (CPP)

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Part of the OAS program

Is worth an additional $7,500 or so tax-free

Guaranteed Income Supplement (GIS)

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Interest income from bank accounts, Canada Savings Bonds, bond investments and portfolios is taxed at the highest rate

Tax Issues and Strategies

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Dividends from foreign companies are taxed at the same rate as interest income.

Dividends from Canadian companies receive favourable tax treatment.

Tax Issues and Strategies

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Capital gains are not taxed as heavily as interest income and dividend income.

Since October 2000, only 50 percent of the capital gain is taxed.

Tax Issues and Strategies

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In 2009, Canada introduced the Tax Free Savings Account (TFSA), which limits annual contributions to $5,000.

TFSA contributions are not deducted from income for tax purposes.

Tax Issues and Strategies

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Greatest gift the government has ever given Canadians

RRSPs give an immediate tax deduction each year equal to the RRSP investment contribution you make AND shelter tax on all interest and capital gains accruing inside the plan from your investments

Registered Retirement Savings Plans (RRSPs)

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Registered Retirement Savings Plans (RRSPs)

Maximum Contribution LimitsRRSP limits apply to prior year’s earnings.

Year RRSP

2006 $18,000

2007 $19,000

2008 $20,000

2009 $21,000

2010 $22,000

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Convert your RRSP to a Registered Retirement Income Fund (RRIF).

Convert your RRSP to an Annuity.

Take a Partial or Lump Sum Withdrawal.

When You Turn 71, You Must Do 1 of 3 Things with RRSP:

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Defined benefit plans provide a specific amount, usually a percentage of salary or wages based on length of employment.

A defined contribution plan does not guarantee a particular pension amount upon retirement. The employer makes scheduled (monthly, quarterly, annually) contributions to individual employees’ accounts.

Defined Benefit and Defined Contribution Pension Plans

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Enables a senior 62 years of age or older to convert a portion of their existing home equity into cash

Reverse Mortgage

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Can receive between 10% to 45% of the appraised value of his or her home.

Funds can be received in either a lump sum, or fixed monthly payments for life, and can be used for any purpose.

No monthly repayments

You can never owe more than the value of the home at the time the loan is paid off.

Your heirs are entitled to the balance of the equity position.

Payments received are tax-free.

Reverse Mortgage Benefits

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Decrease in home equity

Costs associated with a reverse mortgage are usually quite high

Reverse Mortgage Disadvantages

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Pre-authorized credit line based on the value of the equity in your home

Available for up to 75% of the appraised value of the home

Home Equity Line of Credit (HELOC)

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Set-up costs are about a quarter of those for a reverse mortgage.

Available through most financial institutions

Loan amount of a HELOC can be up to 75% of the appraised value of the home

Funds can be withdrawn from a HELOC at your convenience

There is no age requirement for a HELOC.

HELOC Benefits

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Having financial security when you retire

Providing for your family’s needs

Ensuring your business can continue without you

Reducing the amount of tax you pay the government

Maximizing your investments and assets

Estate Planning and Powers of Attorney

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Disposes the assets, names beneficiaries of the estate, and appoints a personal representative

If you die without a will, your estate is turned over to the state

Wills

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Probate is the government’s way of certifying that your will is indeed your last will and testament

Probate fees vary.

Probate

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Gifting

Joint ownership

Name a beneficiary

Transfer assets to a trust

Four Strategies to Avoid Probate

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Spousal Trusts and Trusts for your Children

Living (Inter vivos) Trusts

Types of Trusts

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Legal document in which you appoint the person of your choice to act as your representative in the event that you are unable to represent yourself or unable to make your own decisions

Power of Attorney

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Power of Attorney for Property - This document authorizes the named person to act on your behalf with respect to your property

Power of Attorney for Personal Care - This designates someone to act on your behalf in matters of personal health care.

Power of Attorney