By Fabio Campanella CPA, CA, CFP, CIM

Any business worth its weight in salt has a plan. But what about your personal affairs? In a surprising poll conducted by CIBC in 2017 46% of respondents stated that they do not have a financial plan in place for personal matters.

Considering the recent increases in Canadian household debt coupled with the almost universal decline in defined benefit pension plans this is a worrying statistic. Failing to plan is truly planning to fail.

Fortunately, creating a basic financial plan is not rocket science. Most people can build their own basic plan, but of course, certain individuals (i.e. self-employed, small business owners, high income earning professionals, active real estate investors) would be best served by hiring a professional.

This three-part article will outline the basic components of a financial plan applicable to all people. In future posts I will write about the unique planning needs of small business owners, high income earning professionals, and active real estate investors.

What is a financial plan?

At its most basic level, a financial plan is a written report that assesses your current financial status, outlines your ultimate financial goals, and plots a measurable and realistic path to achieve those financial goals.

What are the components of a financial plan?

Most financial plans include the following components:

  1. Financial management
  2. Insurance and risk management
  3. Investment planning
  4. Retirement planning
  5. Tax planning
  6. Estate planning
  7. Legal considerations

In part 1 I cover items 1 and 2, in part 2 I cover items 3 and 4, in part 3
I cover items 5 through 7

Tax planning:

As the adage goes, there are few guarantees in life beside death and taxes. Tax will have a significant impact on your life both directly and indirectly. Income taxes, consumption taxes and sales taxes can eat up the lion’s share of your wealth if not planned for properly.

Tax planning is a critical, and often complex component of your financial plan. This is the area where you will most certainly require professional help, often by multiple sources such as a professional financial planner (CFP), a qualified accountant (CPA), and sometimes a lawyer.

Common tax planning concerns for “normal” salaried employees will involve:

  • RRSP contributions for retirement savings
  • RESP contributions for education savings
  • RDSP contributions for disability savings
  • TFSA contributions for general savings and retirement

High income earning employees such as executives may want to consider the following:

  • Tax sheltered investments or loss utilization strategies such as Limited Partnerships and flow through shares
  • Derivative based transactions
  • Stock option compensation
  • Family trusts and prescribed interest rate loans for income splitting purposes
  • Tax loss harvesting strategies for stock trading in taxable accounts
  • Financial advisor compensation options such as fees rather than commissions for more tax efficiencies
  • Debt reorganization strategies to effectively deduct interest against investment income

Self-employed individuals and small business owners will want to consider:

  • Holding companies and tax deferral strategies using Canadian Controlled Private Corporations (CCPC)
  • Utilization of family trusts to hold income producing assets
  • Income splitting opportunities by means of salaries and dividends with adult family members
  • Maximization of deductions against taxable income

Tax planning is a complex endeavor and requires knowledge of personal finance, tax laws, tax compliance practices, and other areas of law such as family law and corporate law.

Estate planning:

Estate planning is the process of anticipating and arranging for the management and transition of your estate during your lifetime. The general goals of estate planning include:

  • Ensuring the right people or organizations have access to your estate’s assets after you pass
  • Ensuring that your beneficiaries receive the assets in the manner you approve of
  • Minimization of the tax consequences of death and asset transfer including probate planning
  • Planning on leaving a legacy

Estate planning often involves listing your current assets as they stand, projecting what assets you will have at death, deciding who will receive the assets you will still control at death, ensuring the assets are transferred to your beneficiaries appropriately, and planning to minimize the tax effects of the transfer of such assets.

Your final estate plan is captured primarily in your last will and testament, but other documents and contracts may be required. Typical considerations include:

  • Can you transfer some assets to their intended beneficiaries during your living years?
  • Will assets be directly bequeathed to your beneficiaries or will a trust be utilized
  • How will your final tax bill be paid?
  • Can you enter into a life insurance contract now in order to obtain a tax benefit at death?
  • Who will administer your estate and ensure it is handled in a proper manner?

Simple estates can be relatively straight-forward, but more complex estate may require a professional financial planner, accountant, lawyer, and life-insurance professional.

Legal considerations:

Although tax and estate laws get plenty of attention in typical financial plans there are other areas of law that play an important role:

  • Family law: the union of marriage, children, separation and divorce will all affect one’s financial plan in a material way. With approximately 40% of marriages ending in divorce, family law, the division of assets, support payments and other obligations can seriously complicate an old financial plan and will warrant an update to ensure the applicable family laws are considered.
  • Corporate and business law: Self-employed business owners must be aware of the legal obligations that affect their business which may impact their personal financial plans. Do shareholder agreements or provincial regulations prohibit direct or indirect ownership of company shares by family members? Are there legal limitations to the sale or transfer of businesses to third parties? Are there regulatory bodies that limit what income generating activities may be carried out by a regulated business?
  • Professional regulations: Are you a member of a professional body that is self-regulating? For example, if you are a Chartered Professional Accountant working as a partner at a major firm you may be specifically prohibited from investing directly in many companies due to conflicts of interest or independence regulations. Limitations such as these may affect your asset allocation choices which may influence your expected investment returns or your ability to create a diversified portfolio of investments.

Fabio Campanella CPA, CA, CFP, CIM is a tax specialist and financial planner at Campanella McDonald LLP and Praetorian Wealth Advisory. At Campanella McDonald LLP Fabio heads the tax and financial advisory departments helping small business owners, high income earning professionals, and real estate investors maximize their bottom lines. At Praetorian Wealth Advisory Fabio designs and implements fee for service personal financial plans and provides fee-based investment advisory services.

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