CIFP FPSC-approved Capstone Course Sample Financial Plan

PLEASE NOTE: This sample financial plan is intended for the sole use of students registered in the CIFP FPSCapproved Capstone Course and can only be used for purposes approved by The Canadian Institute of Financial Planning within the context of this course. Please do not share or distribute this document. Be advised, The Canadian Institute of Financial Planning vigorously defends its intellectual property in all cases of unauthorized use or where its copyright has been violated. Copyright 2011, The Canadian Institute of Financial Planning All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, transmitted or used in any form without written permission from the Canadian Institute of Financial Planning.

Financial Plan for Anil and Savita Kumar

Prepared by Liam Birt, CFP RUSH Financial Services th January 5 , this year

Financial Goals for Anil and Savita Kumar

During our meeting on January 3rd, you articulated the following three goals as your primary concerns in relation to the initial phase of this financial planning engagement: providing for Nishas post-secondary education arranging your finances so that your tax burden is minimized ensuring your investmentsboth inside and outside your RRSPsare sound and appropriate

This document is narrow in scope and is designed to address only these specific concerns. As much as this document deals with these goals in the context of your overall financial circumstances, it should not be construed as a comprehensive financial planit is only an initial set of recommendations meant to alleviate your main concerns. A comprehensive financial plan that incorporates all financial planning components (i.e. financial management, retirement planning, asset management, tax planning, risk management and estate planning) will be developed in accordance with our letter of engagement following future meetings. Based on the information gathered from you, I have compiled the following statements to help assess your current financial situation: statement of net worth annual cash flow statement for last year detailed list of investments in your respective RRSP and non-RRSP accounts

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Statement of Net Worth for Anil and Savita Kumar as at December 31st of Last Year
Assets Non-Registered Assets Chequing Account Total Non-Registered Assets Registered Assets TFSA RRSP (pre-tax market value) Total Registered Assets Non-registered Assets Investment portfolio held at AB Bank Total Non-registered Assets Personal Assets Home Cottage Personal Effects Automobiles Total Personal Assets TOTAL ASSETS Liabilities TOTAL LIABILITIES NET WORTH $ 0 $ 0 $3,037,800 $ 0 $ 0 $ 571,400 $ 0 $ 0 $3,609,200 Mark $ 7,600 $ 7,600 Sarah $1,400 $1,400 Total $ 9,000 $ 9,000

$ 10,200 $310,000 $320,200

$0 $180,000 $180,000

$ 10,200 $490,000 $500,200

$980,000 $980,000

$0 $0

$980,000 $980,000

$1,600,000 $0 $ 75,000 $ 55,000 $1,730,000 $3,037,800

$ 0 $ 350,000 $ 20,000 $ 20,000 $ 390,000 $ 571,400

$1,600,000 $ 350,000 $ 95,000 $ 75,000 $2,120,000 $3,609,200

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Annual Cash Flow Statement for Anil and Savita Kumar for Last Calendar Year
Income / Expenses / Savings Income Net business income Employment income Realized investment income Total Gross Income Less Deductions Income taxes (at source or installments) Total Deductions TOTAL NET INCOME Expenses mortgage property taxes utilities maintenance Mark $150,000 $0 $ 72,000 $222,000 Sarah $0 $ 50,000 $0 $ 50,000 Total $150,000 $ 50,000 $ 72,000 $272,000

$ 77,000 $ 77,000 $144,300

$ 8,850 $ 8,850 $ 41,150

$ 86,550 $ 86,550 $185,450

Home

Food Major purchases Automobiles Clothing Personal Entertainment Vacations TOTAL EXPENSES NET AVAILABLE FOR SAVINGS Savings Non-registered accounts TFSA contributions RRSP contributions RESP contributions TOTAL SAVINGS UNALLOCATED CASH FLOW fuel maintenance insurance

$ 0 $ 17,400 $ 8,400 $ 12,000 $ 32,000 $ 9,000 $ 3,900 $ 3,600 $ 2,100 $ 3,600 $ 7,400 $ 2,400 $ 12,000 $113,800 $ 71,650

$ 50,000 $ 10,000

$ $

60,000 11,650

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Market Value of Assets Held in RRSP for Anil Kumar as at December 31st of Last Year
Investments Cash and Cash Equivalents Cash Fixed Income Calloway Cv 6.65% 30Jn13 H&R Reit Sr0c Cv 6% 30Jn17 Hydro-Quebec, series Hl, 11.00%, 2020/08/15 3.74 Pembina Cv Red 5.75% 20Nv20 Macs S-A Cb12 Cv 7% 31Dc51S Municipal Finance Authority of British Columbia, 4.80%, 2017/12/01 New Brunswick (F-M) Project Co. Inc., 6.47%, 2027/11/30 2.11 Sun Life Assurance Co. Of Canada, variable rate, 2022/06/30 1.43 RBC Capital Trust, Series 2011, callable, 7.18%, 2011/06/30 1.23 407 International Inc., Series 06d1, 5.75%, 2036/02/14 1.16 Toronto-Dominion Bank (The), variable rate, callable, 2016/12/14 Bell Aliant Regional Communications L.P., Callable, 5.41%, 2016/09 Bank of Nova Scotia, Callable, 6.65%, 2021/01/22 0.94 Greater Toronto Airports Authority, Series 2009 -1, 5.96%, 2019/11 Vancouver International Airport Authority, Series B, Variable Rate, EnCana Corp., Callable, 5.80%, 2018/01/18 0.83 Fairfax Financial Holdings Ltd., Callable, 7.75%, 2017/06/15 0.82 Westcoast Energy Inc., 8.85%, 2025/07/21 0.80 TOTAL PORTFOLIO $18,500.00 $10,600.00 $15,375.00 $15,125.00 $15,062.50 $15,155.00 $17,183.00 $16,000.00 $17,000.00 $17,000.00 $16,000.00 $17,000.00 $16,000.00 $18,000.00 $17,000.00 $19,000.00 $15,000.00 $18,000.00 $17,000.00 $310,000.00 5.97% 3.42% 4.96% 4.88% 4.86% 4.89% 5.54% 5.16% 5.48% 5.48% 5.16% 5.48% 5.16% 5.81% 5.48% 6.13% 4.84% 5.81% 5.48% 100.00% Fair Market Value % of Total Investments

Market Value of Assets Held in RRSP for Savita Kumar as at December 31st of Last Year
Investments Cash and Cash Equivalents Cash Fixed Income IShares CDN UNIV BOND ETF IShares CDN SCO ST BD ETF MACS Ser-A CB12 CV 7% 31DC51S TOTAL PORTFOLIO $0 $53,176.00 $68,322.00 $58,502.00 $180,000.00 0% 29.54% 37.96% 32.50% 100.00% Fair Market Value % of Total Investments

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Market Value of Non-RRSP Assets for Anil Kumar as at December 31st of Last Year
Investments Cash and Cash Equivalents Cash Common Shares Royal Bank of Canada Toronto-Dominion Bank (The) Suncor Energy Inc. Bank of Nova Scotia Canadian Natural Resources Ltd. Canadian National Railway Co. Goldcorp Inc. BCE Inc. Bank of Montreal Barrick Gold Corp. Canadian Imperial Bank of Commerce Manulife Financial Corp. Research In Motion Ltd. Teck Resources Ltd., Class B TransCanada Corp. Talisman Energy Inc. Cenovus Energy Inc. Potash Corp. of Saskatchewan Inc. Enbridge Inc. Agnico-Eagle Mines Ltd. Canadian Oil Sands Trust Rogers Communications Inc., Class B Sun Life Financial Inc. Agrium Inc. TOTAL PORTFOLIO $64,386.00 $57,330.00 $53,998.00 $51,548.00 $48,804.00 $44,688.00 $44,198.00 $41,258.00 $47,138.00 $47,138.00 $46,942.00 $45,276.00 $45,276.00 $44,394.00 $42,042.00 $29,400.00 $19,600.00 $27,636.00 $25,382.00 $25,088.00 $24,892.00 $24,892.00 $24,696.00 $14,504.00 $980,000.00 6.57 5.85 5.51 5.26 4.98 4.56 4.51 4.21 4.81 4.81 4.79 4.62 4.62 4.53 4.29 3.10 2.00 2.82 2.59 2.56 2.54 2.54 2.52 1.48 100.00% $39,494.00 4.03% Fair Market Value % of Total Investments

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Current Financial Status, Obstacles and Opportunities for Anil and Savita Kumar
Following a review of your current financial situation, you should be congratulated on your accomplishments to this point. You have excellent cash flow and you have accumulated a high net worth of over $3.6 million with no meaningful debt. With the average Canadian household having a debt-to-income ratio of 150% (i.e. the amount owed on debt such as mortgages, loans and credit cards in relation to after-tax income), the fact that you have no debt is truly commendable and places you in an enviable situation. Based on your current spending habits, which you have maintained at reasonable levels, and your proven capacity to save, there are no obvious obstacles that would prevent you from achieving your long-term financial goals. In fact to the contrary, your discipline presents various opportunities which we will delve into as part of developing a comprehensive financial plan. Further to this, once we address your initial concerns as part of this document, our subsequent meetings will involve a more detailed look at opportunities and constraints relating to risk management, estate planning, retirement planning and financial management. Also, as much as we are looking at asset management, education planning and taxation in this initial plan, the comprehensive financial plan I will be developing, will examine these financial planning components more closely and in greater context to your overall financial affairs.

Areas for future consideration

The immediate area that represents an opportunity is likely to be risk managementin other words, how well are you positioned to offset the financial risks to which you are exposed? Again the fact you have no debt and you own your home outright, eliminates the primary financial risk to which most Canadians are exposed which is the mortgage on their home. This said, my priority as part of an overall financial plan is to assess if you have a need for disability, long-term care and/or critical illness insurance to protect your most valuable asset: your ability to earn an income. Second in priority, would be to establish an emergency fund whether this is in the form of cash in some sort of savings vehicle or by way of a home equity line of credit. We will turn our attention to these and other issues once we have addressed your three main concerns.

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Financial Planning Strategies for Anil and Savita Kumar

The discussion in this initial document is contained to what you identified as issues that require immediate attention: i) saving for your daughter, Nisha's post-secondary education ii) tax planning opportunities based on your current situation iii) asset management As previously stated, we will address other financial planning components such as risk management, estate planning and retirement planning in upcoming meetings.

Saving for Nishas post-secondary education

You believe Nisha will pursue post-secondary schooling and you would like to start dedicated savings for this purpose. This is an important and realistic goal as families and students already bear more than one-third of the cost of post-secondary education following the reduction in provincial government funding since the 1990s. Current estimates of the cost of a four-year university degree in approximately 15 years (when Nisha will likely start attending university) are in the vicinity of $135,000. While your non-registered investments could be used for this purpose, it is not the most taxeffective means of saving for your child's post-secondary education. There are two major tax effective ways to save for a childs post-secondary education: an RESP and an in-trust account. The major differences between the two vehicles are summarized in the following chart.

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Comparison of RESP and In-trust Accounts

Use of accumulated funds RESP post-secondary education only for Nisha or continuing education for either of you $50,000 per child no tax-free compounding for income, dividends, and capital gains principal returned to subscriber without penalty accumulated CESG repaid to government accumulated income can be rolled over to RRSP of subscriber or his or her spouse subject to RRSP contribution room and a $50,000 lifetime limit if RRSP rollover is not possible, income is withdrawn in cash from RESP and included in total income of subscriber; also, 20% penalty applies to this amount basic CESG consists of 20% on first $2,500 contributed In-trust Account any purpose benefiting the child no limit no dividend and interest income attributable to contributor as long as child is under age 18 capital gains taxable to the child none

Contribution limits Tax deductibility of contributions Tax implications on income earned within account

Accessibility of funds to contributor (and penalties) if child does not pursue postsecondary education

Eligibility for government grants

no

Benefits of an RESP
For your purposes, I believe a registered education savings plan (RESP) is the more ideal vehicle in which to save for Nisha's education as it shelters investment income from annual taxation and your savings are complimented by generous grants from the government. The major drawbacks of an RESP come into play if the beneficiary of the plan does not pursue post-secondary education. Whenever you make forecasts, especially over a 15-year period of time, there are never any guarantees however, based on your assumptions at this moment, the probability of Nisha attending a post-secondary institution appears to be high and therefore, the penalty associated with withdrawing money from an RESP for non-educational purposes becomes less of a concern. Therefore, I recommend you start an RESP at this stage. You can contribute to an RESP over a maximum of 31 years subject to a cumulative lifetime limit of $50,000 per child. RESPs can hold a variety of investment options including mutual funds, segregated funds, stocks, bonds GICs and cash deposits and there are no foreign content restrictions. Contributions to an RESP are not tax-deductible but, any investment income earned in the plan accumulates on a tax-free basis until the child enters a post-secondary institution and starts to receive payments from the plan. Similar to the treatment of investment income earned inside an RRSP, dividends and capital gains lose their preferential status when withdrawn from an RESP and are simply taxed as incomethat is, it is fully taxable. Therefore, RESPs should
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ideally hold interest-bearing investments first and only once the desired allocation to fixed income investments has been satisfied should we be looking at investments that trigger capital gains.

Canada Education Savings Grant (CESG)

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

Tax implications of RESP withdrawals

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

RESP contributions
It is important to keep in mind that the major benefit of an RESP is the tax-free compounding of returns, followed by the less valuablebut more heavily advertisedgovernment grants. If education funding is being done in an RESP, you have two basic choices: make annual contributions up to and including the year Nisha turns 17 years of age and collect the maximum CESG each year or make a lump sum RESP contribution immediately and forego most of the CESGs that would otherwise be payable during the accumulation period.

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

Contrary to popular belief, you would benefit by making the lifetime maximum contribution of $50,000 to an RESP right awayeven if it means you are giving up CESG payments in subsequent yearsrather than making annual contributions in order to maximize the government grants. We will assume Nisha will start withdrawing these accumulated funds in 16 years, when she turns 18 years of age. Delaying the withdrawal phase by a year or two will not materially change the ranking of the two options I am about to present. We will also assume that the RESP will earn an investment return of 5% per annum over the next 20 years [16 year investment period (including this year) + 4 years of annual withdrawals].

Parents in lower income groups are eligible for more generous grants on the first $500 contributed Page 9 of 20

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If you deposit $50,000 into an RESP today, it will attract a one-time CESG grant of $1,000 (20% of the first $2,500 you contribute for this year + 20% on the remaining $2,500 contribution as a 'catch-up' payment given that Nisha began accumulating CESG room effective the year of birth even though she was not a beneficiary under an RESP). At the end of 16 years when Nisha starts university, the $51,000 contribution to the RESP will accumulate to a value of $111,327, calculated as $51,000 (1.05)16. In other words, Nisha will have access to $111,327 of accumulated capital from which to draw for her four years of post-secondary education. If she withdraws the capital in four equal annual installments and has no other income, the amounts would not be eroded by taxes. It is important to note that the total government grant received over this period will be only $1,000all of it being paid in the first year with no further CESGs payable for the balance of the investment period.

Option #2: annual installments over16 years

If the RESP lifetime contribution limit of $50,000 was instead met by way of annual installments at the beginning of each year over the next 15 years (including this year), you would benefit by receiving the maximum CESG payable of $7,200. However, these annual contributions plus the CESGs would still only result in an RESP value of $88,716.62 at the end of the investment period. Therefore, contributing a lump sum of $50,000 today in an RESP for Nisha should yield a significantly larger amount compared to annual contributions even though it will mean foregoing much of the government grants.

In-trust account for Nisha

Implementing Option #1 means approximately $111,000 of capital will be available to Nisha when she turns 18 years of age to help fund her education costs over four years. However, keep in mind, the cost of a four-year post-secondary education program is expected to cost approximately $135,000 at that time. To make up the $25,000 annual shortfall in RESP savings over the duration of Nisha's education, it is advisable to begin saving in an in-trust account simultaneously with your RESP contribution. In order for Nisha to be able to withdraw $25,000 at the beginning of each school year starting at age 18, Nisha will require a pool of savings in the amount of $93,081.20. You can accumulate this sum over the next 16 years by saving $3,747.18 at the beginning of each year (starting this year).

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Investments within the in-trust account

Unlike the RESP, the in-trust account should hold investments that generate capital gains rather than property income (e.g. interest and dividends). This will be advantageous because tax implications on the appreciation of the capital investment is deferred until the gain is actually realized (i.e. generally, when you actually dispose of the investment). In Nisha's case, this could theoretically extend as far out as the year she begins post-secondary schooling or 16 years from this year. Even when part of the capital investment is disposed of at that time, only 50% of the capital gain is taxable. In contrast, if Nisha's in-trust account generates interest income each year, 100% of this interest income will be taxable and the tax implications will arise every year of her 16-year investment period. Investments in vehicles that pay dividend income can receive more favourable tax treatment than interest income but, similar to interest income, dividend income is also taxable each year. In addition to tax deferral, holding investments that generate capital gains within Nisha's in-trust account will mean the gains are taxed in Nisha's hands as opposed to being attributed to you. This is because capital gains earned by a minor child are not attributable. However, if that same minor child earned dividend or interest income within an in-trust account, that income will be attributed to one or both of you (depending on who contributed the funds to set up the trust) and thereby, increase your tax liability. Clearly, this is not desirable and is counter to your goal of reducing your tax liability.

If Nisha does not pursue post-secondary education

If Nisha decides not to pursue post-secondary education, you should be aware of the implications for the funds accumulated in the RESP which can be segregated into three components: capital contributions: The original capital contributions made into the RESP can be withdrawn tax-free by you, the subscriber, since you did not receive a tax deduction upon making the contribution. CESGs: The cumulative CESGs paid into the RESP must be repaid to the government. investment income: One of two options exist for the investment income earned in the RESP (both on the capital contributions and the CESGs): i) you, the subscriber, can transfer up to $50,000 of RESP income (i.e. accumulated income payments) to your RRSP or your spouse's RRSP subject to RRSP contribution room and other conditions ii) withdraw the income from the RESP at which point, it must be included as part of your total income for tax purposes (i.e. it will be subject to taxation based on your marginal rate) plus an additional tax of 20%

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Tax planning opportunities

Another financial objective on which you requested immediate insight is on tax planning opportunities. Anil's marginal and average tax rates for this year are 43.7% and 35.2% respectively; Savitas marginal and average tax rates for this year are 29.7% and 17.8% respectively. This discrepancy in tax rates presents the following three tax saving opportunities: i) Savita should save as much of her income as possible; Anil should pay for household expenditures. ii) Implement an asset swap. iii) Anil should lend funds to Savita.

i) Using Savita's income for saving and investing and Anil's income for household expenditures
Currently, Savita's income is allocated to paying household expenses and childcare for Nisha while Anil's income is primarily used for saving and investing. Being in a high tax bracket, this means that any investment income realized by Anil in his non-RRSP portfolio will be subject to a greater tax liability than if this investment income was earned and taxable in Savita's hands. This negative tax situation becomes even more pronounced if the investment income earned by Anil is in the form of interest income because unlike dividend income and capital gains, interest income does not receive favourable tax treatmentin other words, it is fully taxable. To remedy this, the current situation should be reversed: Savita should stop using her income to cover non-deductible household and childcare expenses and instead save her entire after-tax income; all household expenses should be paid out of Anils after-tax income. Given her lower tax rate relative to Anil, Savitaand by extension, the Kumars as a family unitwill keep more of the investment income she earns rather than losing it to taxation. It is important that Savita invest her own money. If Anil simply gifts or transfers his money for Savita to invest in her name, any property income (e.g. interest, dividend and rental income) and capital gains or losses earned on those investments will be attributed back to Anil. In other words, Anil will incur the tax liability on this income based on his higher tax rates. If Savita saves her annual after-tax income of approximately $40,000 and invests this amount in an instrument growing at 5% per annum, then approximately $2,000 of annual income will effectively be diverted from Anils tax return to Savitas tax return, calculated as (after-tax income x rate of return) or ($40,000 x 5%). The annual tax savings will be approximately $280, calculated as [(income shifted to Savita x (Anil's marginal tax rate Savita's marginal tax rate)] or [$2,000 x (43.7% 29.7%)]. This savings would continue indefinitely until such time that Savitas tax rates start approximating Anils tax rates.
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The above calculation assumes investment returns are in the form of interest income which is the most inefficient type of income to receive given that it is 100% taxable (investment growth in the form of unrealized capital gains would not need income splitting). Savita could use the after-tax income that she is now saving rather than spending, to catch up on her unused RRSP contribution room and her unused TFSA room. The TFSA contribution can actually be made through Anil's funds given that attribution is not a concern with TFSAs.

ii) Implementing an asset swap

From a tax perspective, the current ownership structure of your assets is not optimal. Anil is holding investments in his non-RRSP account that spin off significant amounts of inefficient taxable income each year. With his high tax rate, this is resulting in an undesirable tax liability. In contrast, Savita, who is in a comparatively low tax bracket, owns a cottagea non-income bearing vehiclethat offers the deferral of taxation on any capital appreciation until the property is ultimately disposed. I recommend you implement a swap of some your assets such that Anil ends up holding the cottage, currently worth $350,000 and Savita ends up holding some of Anil's financial assets of the same $350,000 fair market value. In order to make sure that attribution rules are avoided, this exchange of assets will have to be done formally with a legal agreement after establishing the fair market values of both assets. The end result of this barter will not change the amount of investment income that is subject to taxation; what it will change significantly however, is the rate of tax payable on this income. Phrased another way, a portion of the investment income that is currently reported on Anil's return and is therefore subject to a high rate of tax will be shifted to Savitas tax return where it will be taxed at a more favourable rate. If Savita ends up holding $350,000 of financial assets on which she earns 5% per annum, effectively $17,500 of realized investment income will be diverted from Anil to Savita, calculated as $350,000 x 5%. The annual tax savings will be approximately $2,450 calculated as [income diverted to Savita x (Anil's tax rate Savita's tax rate)] or [$17,500 x (43.7% 29.7%)]. Once again, this would continue indefinitely until Savitas tax rates start to approximate Anils tax rates. Savita also has unused TFSA contribution room. Maximizing these contributions, would further increase tax savings in the first year. Anils non-registered investments are all shares of publicly traded companies and therefore, can be easily liquidated. However, a barter arrangement would not require liquidating these shares, which would eliminate the concern of triggering a superficial loss.

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While I am recommending an asset swap at this time, we will need to investigate this strategy in greater detail in an upcoming meeting to determine what specific assets will be included as part of the swap transaction. Once this is done, I will prepare a plan of action to carry out the swap.

iii) Lending funds to Savita

Transferring $350,000 of financial assets from Anil to Savita will leave Anil with $630,000 in financial assets calculated as (value of assets prior to transfer fair market value of assets transferred) or ($980,000 $350,000). As detailed earlier, Savita will have to report an additional $2,000 in investment income due to saving her income rather than spending it to cover household expenditures. She will also have an additional $17,500 in investment income due to implementing the asset swap of the cottage with Anil. However what is notable is that this additional $19,500 of annual income for Savita does not increase her marginal tax rate; similarly, the corresponding reduction of $19,500 of annual income for Anil does not decrease his marginal tax rate (the relevant tax brackets are fairly wide). This gap in marginal tax rates provides an additional opportunity to shift taxable income from Anil to Savita. Anil should consider liquidating some of his non-registered assets and lending them to Savita at the prescribed rate dictated by the Canada Revenue Agency (CRA). Family loans made at the prescribed rate and for which at least interest payments are made by January 31st each year, ensure there will not be any attribution of investment income. These types of loans are particularly attractive during times when interest rates are relatively low. I recommend Anil lend $400,000 from his non-registered investment portfolio to Savita at the current prescribed rate. If we assume Savita can earn a 5% rate of return on this $400,000 and the CRA prescribed rate is 1%, the 4% net annual yield has been effectively shifted from Anil's high tax bracket to Savita's relatively low tax bracket. In dollar terms, $16,000 of income will be shifted from Anil to Savita. The annual economic benefit of this tax planning strategy will be $2,240 calculated as [investment amount x (rate of return on investment prescribed rate) x (Anil's tax bracket Savita's tax bracket)] or [$400,000 x (5% 1%) x (43.7% 29.7%)]. The prescribed rate used at the time of the loan can be locked-in and will continue to apply even if prescribed rates increase in subsequent quarters. However, if prescribed rates go down, Anil could demand the repayment of his loan and then renegotiate another loan at the lower prescribed rate. This spousal loan should be documented and reviewed by a lawyer to make sure that attribution rules are not inadvertently triggered. Savita will also have to take care not to invest in the same assets that were sold by Anil for a 30-day period in order to avoid triggering superficial loss rules. Implementing this strategy would require Anil to liquidate a significant part of his investment portfolio. In order to minimize the immediate tax liability, Anil should first liquidate assets that
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have minimal unrealized gains at present but, nevertheless have the potential for growth in the future. This can be followed by disposing of assets with unrealized losses. Anil could also dispose of a combination of investments with gains and losses in a way that any capital gains are approximately offset by capital losses. As with previous strategies, we will have to examine Anil's investment portfolio in upcoming meetings to identify what assets should be liquidated bearing in mind the prospects for that investment, how it fits into your portfolio and the potential tax implications. The first year of this strategy may not result in a net family benefit since the annual tax savings of $2,240 will likely be needed to pay for legal fees and capital gains taxes triggered on disposition. However, a $2,240 net family tax savings will be realized annually thereafter. Note that in all of the above strategies, the income being shifted from Anil to Savita is assumed to be fully taxed interest income. If the income being shifted was dividend income or realized capital gains, tax savings would still result but, would be approximately halved. For example, Anil and Savita differ by 14 percentage points in their marginal tax rates on interest income calculated as (Anil's tax rate Savita's tax rate) or (43.7% 29.7%). However, the difference is only seven percentage points in their marginal tax rates on realized capital gains calculated as (Anil's tax rate Savita's tax rate) or (21.85% 14.85%). The table that follows illustrates the annual savings resulting from the tax planning strategies identified above.
Strategy Savita saves her after-tax income Asset swap between Anil and Savita Loan at CRA prescribed rate Total annual savings for family If income shifted from Anil to Savita is assumed to be... Dividend Income or Interest Income Capital Gains $ 280 $ 140 $2,450 $1,225 $2,240 $1,220 $4,970 $2,485

If properly implemented and documented, these tax planning strategies do not result in any additional market risk or liquidity risk. In all cases, if so desired, the investments held by Savita could be identical to those held by Anil (keeping in mind the 30-day restriction imposed by the superficial loss rules).

Asset Management
Your third immediate concern based on our discussions was whether or not the assets you hold are sound and appropriate.

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

RRSP portfolios
Anils RRSP Portfolio is well diversified across different industries such as financial institutions, real estate, energy and infrastructure, without a disproportionate amount of the portfolio being invested in any single security. It also appropriately consists of mostly income-earning investments that would otherwise attract a high level of taxation outside an RRSP. It does not have investments with significant potential for losses. This is good from a risk standpoint but also, from the standpoint that since capital gains cannot be offset by capital losses within an RRSP, it reduces the appeal of holding more speculative investments within such a plan. Savitas RRSP portfolio also seems to hold appropriate income-bearing investments. Holding iShareswhich are exchange traded funds (ETFs) with low management expensespromote diversification in a cost efficient way.

Non-RRSP investments
Anils non-RRSP portfolio is comprised of common shares of blue-chip Canadian companies representing various sectors of the Canadian economy. Anil's portfolio mirrors the holdings of mainstream Canadian equity funds and should perform well over a long time horizon. This said, an obvious opportunity with both your RRSP and non-RRSP investments arises from the lack of global diversification. You do not currently have a meaningful exposure to US securities or to emerging markets like Brazil, India and China. In light of your age and the discussions we have had about your investment time horizon, risk tolerance and financial objectives, I think you will benefit from global diversification by holding 10-15% of your assets in foreign securities. Implementing the tax planning strategies recommended in the previous section, which call on the disposition of some assets, presents you with the perfect opportunity to rebalance your non-RRSP portfolios and introduce foreign equities. In addition, if Savita is going to be more actively allocating funds towards investments, she should consider holding equities to emphasize capital appreciation over the long term. Again, based on our meeting, we have learned that Savita has the requisite investment time horizon, risk tolerance and attitude to justify investment in high quality, low volatility stock investments.

Canadian Institute of Financial Planning

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

Implementing the Financial Plan

Subject to your agreement on the recommendations contained in this document, the next step is to implement the plan. Although these recommendations have been made with your overall situation in mind, it is important to note, this plan is only meant to address specific aspects of your financial situation in keeping with what was discussed in our initial meetings. Once we have addressed these immediate concerns, we will retrace our steps as part of developing a comprehensive financial plan that touches on all financial planning components. The immediate strategies we can put into place are as follows:

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

Subject to Nisha having a social insurance number, you should open an RESP at your bank or financial institution as soon as possible and deposit $50,000 into the plan. You can open a basic RESP in which you will be able to hold GICs and mutual funds. This type of plan has the advantage of being easy to open and absent of annual fees. Alternatively, you can open a selfdirected RESP with the brokerage arm of your financial institution. This type of plan will enable you to hold a broader selection of investments including individual securities such as stocks, ETFs and bonds should you choose to do so now or at some future point. On the downside, a self-directed plan will involve an annual administration fee (although, this annual fee is typically waived if your household assets with the financial institution exceed a minimum threshold as in your situation). For the flexibility in investment options and given that an annual administration fee will probably not apply, I would recommend a self-directed RESP for Nisha. Upon contributing $50,000 to the RESP, a $1,000 CESG will be paid into the account once the financial institution you are dealing with has submitted the applicable paperwork to HRSDC. Given the long time horizon and your comfort with equities, I would recommend allocating the cumulative funds earmarked for Nisha's education (i.e. RESP holdings plus savings in an in-trust account) as follows: 70% equities and 30% fixed income. As previously mentioned, the tax deferral benefits of the RESP will mean the 30% fixed income component should be held within the RESP. Ideal fixed income investments would be 20% in a Canadian bond ETF with the remaining 10% invested in a global bond ETF. Once the 30% fixed income investments have been taken care of, the balance of the $50,000 RESP investment should be allocated to equity investments to emphasize growth for the next 15 years. I would recommend the 70% equity component to be invested as follows: 60% Canadian equity ETF, 15% U.S. equity ETF, 15% global ETF and 10% precious metals ETF.

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

The specific investments to be used in Nisha's RESP can be selected following a consultation with your investment advisor. Similarly, your investment advisor can assist you with the ongoing buy, hold and sell decisions related to these investments. I would recommend gradually shifting from a 70% equity / 30% fixed income allocation to overweight cash, cash equivalents and fixed income investments as Nisha nears post-secondary schooling. As part of the monitoring function of this plan, I will advise you as to when we should begin deemphasizing equities and shifting to a more conservative asset allocation.

Establishing an in-trust account for Nisha

The purpose of contributing funds into an in-trust account for Nisha is to make up the projected shortfall in the cost of her education in light of the anticipated value of her RESP savings. You will need to consult a lawyer to establish a formal in-trust account for Nisha. While you can also create an informal trust account relatively easily through your financial institution, the very fact that it is an informal arrangement, I would not recommend doing so. As per calculations detailed earlier, ideally, you will contribute $3,747.18 at the beginning of each year for the next 16 years (including this year) to the in-trust account. If it is better suited to your cash flow, you could instead set up a monthly contribution plan to the in-trust account in the amount of $313 to arrive at approximately the same annual investment. Bear in mind, opting for a monthly installment plan will yield a slightly lower savings total in 16 years. To maximize tax efficiency, the funds invested in the in-trust account should be allocated to equities and should mirror the same asset allocation of the equity component of Nisha's RESP.

Savita invests her after-tax income; Anil uses his after-tax income for household expenditures
Effective immediately, Savitas after-tax employment income should be allocated to saving and investing while Anil's income should first be used to fund household expenditures before being used for saving and investing. Savita's priority should be to allocate her income to maximize her RRSP and TFSA contribution room. Based on our discussions in previous meetings, we determined that Savita should have an asset allocation of 60% equities and 40% fixed income. However, since Savita currently has all of her funds in fixed income investments, for the foreseeable future, further savings should be invested in equities to increase her equity component based on the following allocation: 55% Canadian equities, 20% U.S. equities, 10% global equities, 7.5% emerging markets, 7.5% precious metals.

Canadian Institute of Financial Planning

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

Again, your investment advisor will help you with the selection of specific securities and with the timing and frequency of making buying and selling decisions.

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

Upon your request, I can recommend three lawyers from which to choose or you can use your existing lawyer to draft an agreement in which the two of you exchange assets of equal fair market value. A properly documented paper trail will ensure that attribution rules are not triggered in the event the CRA elects to review the transaction. The lawyer can also help with the withdrawal of financial assets from Anils non-RRSP account and the transfer of ownership of Savitas cottage to Anil.

Family loan at CRA prescribed rate

Your lawyer can also help you document an interest-only family loan from Anil to Savita at the current prescribed rate. We will need to meet again to identify what specific investments should be liquidated as part of this transaction. In large part, this decision will be tied to the adjusted cost base (ACB) of the investments in your non-RRSP portfolio in relation to their current fair market value as we want to minimize any immediate tax implications. We will then have to decide what investments to hold in Savitas non-RRSP portfolio being mindful not to trigger the superficial loss rules.

Diversifying your investment portfolios

As addressed earlier, an opportunity with respect to asset management is to diversify globally. To the extent that business cycles are not positively correlated across jurisdictions, diversification can reduce expected volatility (or risk) without a corresponding reduction in return. This strategy can be phased in over time by allocating new investments for both of you towards foreign bonds and equities. Again, your investment advisor should be able to select specific foreign investments that align with your financial objectives, your investment time horizon and your risk tolerance.

Canadian Institute of Financial Planning

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

Monitoring Your Financial Plan

As stated in my letter of engagement, we will arrange a face-to-face meeting at least once each year. During this time, we will do an extensive review of your circumstances, ensure the assumptions used in the plan remain relevant, identify what, if any, changes have taken place in your life and employment situation and confirm that your investment time horizon and your risk tolerance have not changed. We will also review the performance of your investment portfolios. Based on this review, we can determine if we should simply stay the course or if changes need to be made to your plan. This said, given that this document is only targeting specific elements of your financial situation as per your request, we will schedule a series of meetings to step back and take a more detailed look at your situation in relation to all the financial planning components: financial management, retirement planning, tax planning, asset management, risk management and estate planning. It is only following these meetings that I will be able to generate a comprehensive financial plan as contracted in our letter of engagement.

Canadian Institute of Financial Planning

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