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FINANCIAL PLANNING I
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ISBN: 978-1-77176-384-4
First printing: 2021
Copyright © 2021 by Canadian Securities Institute

Content Overview
1 Managing the Financial Planning Process
2 Budgeting and Consumer Lending
3 Mortgages
4 Taxation
5 Investments
6 Retirement
7 Wills and Powers of Attorney
8 Risk Management and Life Insurance

FINANCIAL PLANNING I iii
Table of Contents
1 Managing the Financial Planning Process

1•3 THE ROLE OF THE ADVISOR
1•3 MEETING YOUR CLIENTS’ NEEDS

1•3 Providing Financial Advice
1•4 The Changing Role of The Advisor
1•4 THE FULL SERVICE OFFER
1•4 Full Service Offer
1•5 The Process of Providing Full Service Advice
1•6 WHAT YOU HAVE LEARNED!
1•6 The role of the Advisor
1•7 Working with your Client
1•7 THE FINANCIAL PLANNING PROCESS
1•8 Establish the Client/Advisor Relationship
1•8 The Initial Interview
1•9 Responsibilities towards the Client
1•9 Establish the Client/Advisor relationship
1 • 10 Working with your Client
1 • 10 Collect Data and Information
1 • 11 Qualitative and Quantitative Information
1 • 11 Part A: Defining and prioritizing the Client's Goals
1 • 12 Part B: Assessing the Client's Present Financial Situation
1 • 13 WHAT YOU HAVE LEARNED!
1 • 13 Collecting Data
1 • 15 Analyze Data and Information
1 • 15 Information needed to Conduct The Analysis
1 • 16 Duties as an Advisor when Analyzing Clients’ Data

iv FINANCIAL PLANNING I

1 • 17 Analyzing Information
1 • 18 Recommend Strategies to Meet Goals
1 • 18 Steps in the recommendation stage
1 • 19 Guidelines for making recommendations
1 • 19 Recommend Strategies to Meet Goals
1 • 20 Implement the Recommendations
1 • 21 Referring Clients to a Business Partner
1 • 21 Implementing Recommendations
1 • 22 Conduct a Periodic Review or Follow Up
1 • 22 Conduct a Periodic Review
2 Budgeting and Consumer Lending

2•3 INTRODUCTION
2•3 CASH FLOW AND BUDGETING
2•3 PREPARING CLIENT STATEMENTS

2•4 The Difference between a Current and a Projected Cash Flow Statement
2•4 Income Data
2•5 Collecting Income Data
2•5 Other Sources of Funds
2•6 Expenditure Data
2•6 Collecting Expenditure Data
2•7 Expenditure Clusters
2•7 Using The Expenses Form
2 • 10 Basic and Discretionary Expenses

TABLE OF CONTENTS v
2 • 11 BUDGETING AND SAVINGS FUNDAMENTALS

2 • 11 Creating a Budget
2 • 11 Creating a Cash Surplus
2 • 11 Using a Budget
2 • 12 Steps in Creating a Budget
2 • 13 Budget Tips and Tricks
2 • 15 Creating Client Cash Flow Statements
2 • 17 THE ROLE OF FINANCIAL INSTITUTIONS
2 • 17 The Changing Role of Financial Institutions
2 • 17 The Use Financial Services Industry
2 • 17 The Changing Role of The Advisor
2 • 18 Consumer Credit
2 • 18 CREDIT FUNDAMENTALS
2 • 18 The 5 Cs of Credit
2 • 20 The Importance of Credit History
2 • 21 DEBT SERVICE RATIOS
2 • 21 The Debt Service Ratio
2 • 21 The Gross Debt Service Ratio
2 • 21 Interpreting The Gross Debt Service Ratio Used
2 • 21 The Total Debt Service Ratio
2 • 21 Interpreting The Total Debt Service Ratio Used
2 • 23 Credit Fundamentals
2 • 24 PERSONAL BORROWING OPTIONS
2 • 24 Credit Cards
2 • 26 Charge Accounts
2 • 27 Personal Lines of Credit
2 • 28 Personal Loans

vi FINANCIAL PLANNING I

2 • 29 Personal Borrowing Options
3 Mortgages
3•3 INTRODUCTION
3•3 MORTGAGE OPTIONS

3•3 The Mortgage Marketplace
3•6 TYPES AND FEATURES OF MORTGAGES
3•6 Conventional and High-Ratio Mortgages
3•6 The Mortgage Stress Test
3•7 Fixed-Rate and Variable-Rate Mortgages
3•7 Mortgage Options
3•8 Term and Amortization
3 • 10 Prepayment Options
3 • 10 Payment Schedules
3 • 11 INCREASING FREQUENCY OF PAYMENTS ON A MORTGAGE LOAN

3 • 13 Mortgages
3 • 14 ASSESSING HOME AFFORDABILITY
3 • 14 Determining the Down Payment
3 • 16 The CMHC First-Time Home Buyers Incentive (FTHBI)
3 • 16 Determining the Mortgage Payment
3 • 20 Mortgage Insurance Fees
3 • 21 Appraisal Fee
3 • 22 Mortgage Brokers
3 • 22 Land Transfer Tax
3 • 22 Closing Costs
3 • 23 Assessing Home Affordability

TABLE OF CONTENTS vii
3 • 23 CREDITOR INSURANCE
3 • 23 Introduction
3 • 25 Creditor Life Insurance
3 • 28 Creditor Loss-of-Job Insurance
3 • 28 Creditor Disability Insurance
3 • 29 Creditor Critical Illness Insurance
3 • 29 REGULATORY CONSIDERATIONS WHEN SELLING CREDITOR INSURANCE

3 • 31 Creditor Insurance
4 Taxation
4•3 THE CANADIAN TAX SYSTEM
4•3 Introduction to Taxation
4•3 The Canadian Approach to Taxation
4•4 Financial Planning and Taxation
4•8 The Canadian Tax System
4 • 10 PERSONAL INCOME TAX RETURNS
4 • 10 How Taxes are Calculated
4 • 12 Federal and Provincial Taxes
4 • 13 Tax Deductions and Tax Credits
4 • 15 Average and Marginal Tax Rates
4 • 17 Personal Income Tax Returns
4 • 18 TYPES OF INCOME
4 • 18 Employment Income
4 • 22 Business Income
4 • 27 Investment Income
4 • 31 Taxable Capital Gains
4 • 34 Other Income

viii FINANCIAL PLANNING I

4 • 35 The Different Types of Income
4 • 36 TAX DEDUCTIONS
4 • 36 Contributions to a Registered Pension Plan
4 • 36 Contributions to a Registered Retirement Savings Plan
4 • 38 Deduction for Elected Split-Pension Amount
4 • 38 Annual Union and Professional Dues
4 • 38 Childcare Expenses
4 • 39 Disability Supports Deduction
4 • 39 Business Investment Losses
4 • 39 Moving Expenses
4 • 40 Eligible Child and Spousal Payments
4 • 41 Carrying Charges and Interest Expenses
4 • 42 Employment Expenses
4 • 45 Tax Deductions
4 • 46 TAX CREDITS
4 • 47 Personal: Basic, Spousal
4 • 47 Age and Pension Income
4 • 47 Tuition Amount
4 • 47 Canada Training Credit
4 • 48 Employment Amount and Contribution to CPP/QPP
4 • 48 Health: Medical, Disability, Canada Caregiver
4 • 49 Other Tax Credits
4 • 52 Tax Credits

TABLE OF CONTENTS ix
5 Investments
5•3 INVESTMENT THEORY – RISK AND RETURN
5•7 Interest Rate Risk
5•9 Risk and Return
5 • 10 TYPES OF INVESTMENTS
5 • 10 Government Investment Products
5 • 11 Guaranteed Investment Certificates (GICs)
5 • 12 Mutual Funds
5 • 13 Stocks
5 • 15 Non-Registered Investments
5 • 16 REGISTERED EDUCATION SAVINGS PLANS (RESPs)
5 • 16 Types of RESPs
5 • 17 General Features of Registered Education Savings Plans
5 • 19 Canada Education Savings Grant (CESG)
5 • 21 Canada Learning Bond (CLB)
5 • 21 Registered Educational Savings Plans (RESPs)
5 • 22 TAX-FREE SAVINGS ACCOUNTS (TFSAs)
5 • 23 Tax-Free Savings Accounts Rules
5 • 25 TFSAs and RRSPs
5 • 28 Tax Free Savings Accounts (TFSAs)

x FINANCIAL PLANNING I
6 Retirement
6•3 REGISTERED RETIREMENT SAVINGS PLANS (RRSPs)
6•3 The Advantages and Disadvantages of RRSPs
6•4 Tax Benefits
6•4 Contribution Limits
6•6 Carry-Forward Provisions and Over-Contribution Rules
6•7 Spousal Plans
6•9 Self-Directed RRSPs
6 • 10 Qualified Investments for RRSPs
6 • 11 Withdrawals from an RRSP
6 • 13 Deregistration
6 • 13 Home Buyers’ Plan
6 • 15 Lifelong Learning Plan
6 • 16 Registered Retirement Savings Plans (RRSPs)
6 • 17 REGISTERED RETIREMENT INCOME FUNDS (RRIFs)
6 • 17 Using a RRIF Effectively
6 • 18 Qualified and Unqualified Investments in a RRIF
6 • 19 Withdrawals from a RRIF
6 • 20 Registered Retirement Income Funds (RRIFs)
6 • 20 REGISTERED PENSION PLANS (RPPs)
6 • 21 The Advantages and Disadvantages of RPPs
6 • 21 Defined Contribution Plans (Money Purchase Pension Plans)
6 • 22 Defined Benefit Plans
6 • 23 Contribution Limits
6 • 24 Defined Contribution Plans vs. Defined Benefit Plans
6 • 25 Pension Adjustment Calculations (PA)
6 • 26 Pension Adjustment Reversals (PAR)
6 • 26 Vesting and Locking-in Provisions

TABLE OF CONTENTS xi

6 • 28 Registered Pension Plans (RPPs)
6 • 29 GOVERNMENT PENSION PROGRAMS
6 • 29 Canada Pension Plan (CPP) and Quebec Pension Plan (QPP)
6 • 33 Old Age Security (OAS)
6 • 34 Guaranteed Income Supplement (GIS)
6 • 34 Government Pension Programs
6 • 35 CALCULATING RETIREMENT NEEDS
6 • 35 Budgeting for Retirement
6 • 37 Estimating Income and Taxes
6 • 39 Calculating a Client’s Retirement Needs
7 Wills and Powers of Attorney

7•3 WRITING A WILL
7•3 Types of Wills
7•6 Domicile
7•7 Limitations of Wills
7 • 13 REVOKING AND AMENDING WILLS
7 • 13 Revoking a Will
7 • 15 Reviewing and Amending a Will
7 • 17 APPOINTMENT OF EXECUTORS, GUARDIANS AND TRUSTEES
7 • 17 Selecting an Executor/Liquidator
7 • 17 Designating Executors/Liquidators
7 • 19 Compensation for Executors/Liquidators
7 • 19 Accepting the Appointment
7 • 20 Designating Guardians and Custodians
7 • 20 Designating Trustees

xii FINANCIAL PLANNING I
7 • 21 INTESTACY
7 • 21 Failure to Make a Will
7 • 21 Impact on the Estate by Dying Intestate
7 • 22 Distribution of Assets without a Valid Will
7 • 22 Provincial Statutory Requirements with an Intestacy
7 • 23 PROBATE
7 • 24 Letters Probate
7 • 25 The Process of Probating a Will
7 • 28 Wills
7 • 28 PURPOSE OF POWERS OF ATTORNEY
7 • 29 Objectives of a Power of Attorney
7 • 29 Incapacity
7 • 29 POWERS OF ATTORNEY FOR PROPERTY AND MANDATES
7 • 30 Enduring or Continuing Powers of Attorney
7 • 30 Mandates and Protection Mandates
7 • 30 Scope of the Powers of a Power of Attorney
7 • 33 POWERS OF ATTORNEY FOR PERSONAL CARE AND LIVING WILLS
7 • 34 Living Wills and Advance Care Directives
7 • 34 Difference Between Powers of Attorney for Personal Care and Powers
of Attorney for Property
7 • 34 Decision Making Powers
7 • 35 Powers of Attorney
8 Risk Management and Life Insurance

8•3 INTRODUCTION
8•3 THE NATURE OF RISK

8•3 Defining Risk
8•4 Evaluating What Risk Means to a Client

TABLE OF CONTENTS xiii
8•5 MANAGING RISK

8•5 Methods used for Managing Risk
8•7 Risk and Risk Management
8•8 TYPES OF RISK
8•9 Personal Risk
8 • 11 Property Risk
8 • 13 Legal Liability Risk
8 • 14 Other Potential Sources of Risk
8 • 17 Types of Risks an Individual Could Experience
8 • 18 THE LIFE INSURANCE INDUSTRY
8 • 18 Life Insurance Industry Regulation
8 • 19 Assuris
8 • 21 Life Insurance Industry Regulation
8 • 22 TYPES OF LIFE INSURANCE
8 • 22 Term Insurance
8 • 23 Permanent or Whole Life Insurance
8 • 29 UNDERSTANDING A CLIENT’S LIFE INSURANCE NEEDS
8 • 29 Importance of Reviewing a Client’s Risks and Insurance Needs
8 • 30 Financial Obligations at Death
8 • 31 Determining the Amount of Life Insurance Coverage a Client Needs
8 • 32 Life Insurance Principles and the Different Types of Life Insurance Plans

Managing the Financial
Planning Process 1
LEARNING OBJECTIVES CONTENT AREAS
1 | Explain the role of the advisor. The Role of the Advisor
2 | Describe the method of proactive financial Meeting Your Clients' Needs

advising.
3 | Describe the components and process of the The Full Service Offer
full service offer.
4 | Explain the steps in the financial planning The Financial Planning Process
process.

1•2 FINANCIAL PLANNING I
KEY TERMS
The Key Terms list targets some significant concepts covered in the textbook. Key terms appear
in bold text in each chapter to help you focus your study efforts on these important topics.
client driven letter of engagement
conflicts of interest lifestyle goals
financial advising net worth statement
financial goals periodic review
financial planning process preliminary budget
financial profile product driven
full service offer qualitative data
implicit data quantitative data
income and expense statement relationship building
initial interview

CHAPTER 1 | MANAGING THE FINANCIAL PLANNING PROCESS 1•3
THE ROLE OF THE ADVISOR
1 | Explain the role of the advisor.
The role of the advisor in the financial services industry has changed in recent years from one that is product driven
to one that is client driven.
In the product driven role, the advisor engages with the client to sell products. Each encounter is focused on a single
transaction. The product driven advisor provides what the client requests or else focuses on selling specific products
that the client may or may not need.
The client driven role, on the other hand, is the basis of relationship building, where the advisor’s focus is not
on selling products but on building relationships with clients, matching products and services to their needs and
referring them to business partners where necessary.
As you learn about advising in the financial services industry, you will see that the role of the advisor is to take the
client-driven, relationship-building approach. By focusing on your clients’ goals, identifying barriers and providing
products and services that meet their needs, you will lay the foundation for a long-term relationship that is built
on trust.
MEETING YOUR CLIENTS’ NEEDS
2 | Describe the method of proactive financial advising.
The old model of financial services was a reactive model, where the advisor responded to client needs by doing only
what was asked, or by selling as many products as possible, regardless of need.
The advisor today who takes a proactive approach is better able to assist clients in defining their needs and
assessing which financial products and services would be most appropriate for their personal financial situation.
PROVIDING FINANCIAL ADVICE

Financial advising is the method you as an advisor will use to assess your clients’ situation, to assist your clients in
clearly defining and prioritizing their goals and to develop strategies to meet those goals.
You must work within the financial capacity of your clients to help them to accommodate their lifestyle goals.
By lifestyle, we mean the way we live. Lifestyle is reflected in the type of car we drive, the house we buy,
the types of activities we engage in and the way we spend our money.
Your clients may identify some lifestyle goals as priorities; however, it is not always possible to meet all their
goals or to live the lifestyle they want. Your clients must make choices, and you must work with them to prioritize
their goals.
Some clients who live beyond their means through a lifestyle they cannot afford may be in financial difficulty. In
that case, your role is to help your clients to set the elimination of excessive personal debt as their first goal and to
develop strategies to help them reach it.

Most of your clients have dreams of planning for retirement, establishing an educational fund for their
children, buying a new house, building a cottage, or taking a vacation, among others. Your role as an
advisor is to assess, “Which of those dreams are realistic? Which are the most important? And what
steps can you take to realize them?”
THE CHANGING ROLE OF THE ADVISOR

The role of the advisor in the financial services industry has evolved in recent years because of changes in two areas:
Regulations Changes in regulations governing financial institutions have moved the industry
towards an integrated financial services market. This means that you have a more
complete package of products and services to offer a client. One of your roles as an
advisor is to give your clients complete information to help them choose the products
and services they need from the many options available. This means knowing your
clients’ goals and having the knowledge to suggest viable alternatives.
Technology Because of technological innovations such as automatic banking machines and online
banking, many clients will no longer come to you for simple transactions that they can
perform themselves. Rather, they will come to you with complex questions and needs.
Technology has also made it possible for financial institutions to develop and offer a
much broader range of products and services. Where financial institutions once had
only two kinds of accounts, chequing and savings, they now have over 100 products
available. This product proliferation can be confusing for clients and increases the
importance of having a professional who knows the institution’s products and services
and can provide valuable advice.
These changes mean that your role as an advisor is more complex and you have access to a greater range of products
and services. Remember to take an approach that focuses on building a relationship with your clients and providing
the advice they need, rather than selling products to them without consideration of their individual situation.
Your role is not to sell specific products but to provide the financial information that allows your clients
to make informed decisions.
THE FULL SERVICE OFFER
3 | Describe the components and process of the full service offer.
FULL SERVICE OFFER

The full service offer refers to a level of service that takes into consideration all your client’s needs as you develop
an integrated strategy to help them achieve their goals.
Clients need help from their advisor on a range of topics, such as purchasing a car, sending a child to university or
planning for retirement. They may wish to buy a house and need help in developing a savings strategy. Or perhaps
they have finished paying down debts and their interest is shifting from borrowing to investing. They have choices to
make and they need professional information and advice.

Clients with many needs may choose to go to a banker, an insurance agent and a broker to get something different
from each one. Under decreased regulation, they also have the option to go to one source with the knowledge and
skills to provide all of the services required.
Clients who are overwhelmed with choices will appreciate a knowledgeable and trustworthy advisor who will work
with them to help them define their objectives and to provide the products and services they need to meet those
objectives. On the other hand, clients who are dissatisfied with the service they receive will find it easier than ever to
find another provider.
Remember that your clients must be satisfied with the choices they make. While your knowledge of products and
services is of value in helping your clients to make decisions, your most important role is to help them identify their
needs and goals and develop strategies to meet them.
THE PROCESS OF PROVIDING FULL SERVICE ADVICE

As an advisor, you will follow a process to provide full service to your clients that is based on sound knowledge of
the products and services available and is driven by your clients’ needs and goals.
Below is an overview of that process:
ASSESS YOUR CLIENTS’ FINANCIAL SITUATION

Assess your clients’ situation to determine financial flexibility:
• Determine your clients’ relevant financial partners and/or dependents (such as spouse, children or parents).
• Collect financial information relevant to all (such as their income sources, expenditures, assets and liabilities).
• Collect personal information relevant to all (such as their work situations, legal or health care considerations
and any concerns that might have an impact on the client’s financial situation).
DEFINE AND PRIORITIZE GOALS

Define and prioritize your clients’ goals by doing the following:
• Encourage your clients to talk about their goals, such as buying a house or planning for retirement.
• Ask questions and probe to identify which goals are most important.
• Develop timelines to achieve the goals.
ADJUST THE STRATEGY BASED ON FINANCIAL CAPACITY

To develop strategies to meet goals, first determine the financial implications of the goals and your clients’ capacity
to achieve them:
• Determine strategies to meet goals. For example, if a goal is to buy a house in three years, determine the
necessary savings to reach that goal.
• Determine any financial impacts by comparing the proposed strategy to your clients’ financial capacity.
• Assess your clients’ ability to withstand the financial impact or make sacrifices to meet commitments.
• Adjust strategies if necessary, to the financial and personal capacity of each client.
EXAMPLE
Max and Sonia Breton plan to have a child soon and their goal is to buy a bigger house. What other needs are
they likely to have related to this decision? They will need money for clothes and baby equipment, and they may
need to pay for child care. Based on this information, how would you help them to adjust their financial situation
to reach their goal?

IDENTIFY FINANCIAL PRODUCT AND SERVICE OPTIONS

• Based on your knowledge of financial products and services, identify options that correspond to your clients’
needs (rather than being based on sales quotas).
• Allow your client to make informed decisions.
CONDUCT A PERIODIC REVIEW

Review your clients’ financial situations to measure progress at least every year:
• Identify discrepancies between the initial strategy and its results.
• Identify reasons for discrepancies.
• Identify products and/or services that may be more suitable.
• Recommend changes based on results.
EXAMPLE
If Max and Sonia’s goal was to save 10% of their income and they only managed to save 5%, examine the reasons
why:
• Was their goal unrealistic?
• Did they have unexpected expenses?
• Was their income lower than expected?
• Did they fail to provide enough information to make a proper assessment and recommendations?
Depending on the diagnosis, adjust the strategy and propose a new course of action.
From Max and Sonia’s perspective, the periodic review will help to monitor progress and provide encouragement.
This will help you to develop a strong relationship with them.
WHAT YOU HAVE LEARNED!
THE ROLE OF THE ADVISOR:

Your role as an advisor is to be client driven and proactive. Take the client’s individual situation and lifestyle into
consideration to find solutions that fit.
Changes in regulations and technology mean that you have access to a broader range of products and services
than in the past. Clients need you to help them choose from a multitude of options while staying focused on their
individual needs and goals.
Follow the process to assist your clients:
• Assess your client’s financial situation
• Define and prioritize goals
• Adjust strategies based on financial capacity
• Identify financial product and service options
• Conduct a periodic review

WORKING WITH YOUR CLIENT

Max and Sonia Breton have come to Bryan Lee for advice. They currently live in a condo downtown and Sonia is
pregnant with their first child.
Bryan assesses their financial situation. He determines that they bought their condo two years ago in a stagnant
housing market and have little more than the original down payment invested in it.
“WE WOULD LIKE TO BUY A HOUSE IN A NEIGHBOURHOOD THAT IS MORE FAMILY-FRIENDLY

THAN OUR CONDO BUILDING,” SAYS SONIA.
“WE’D ALSO LIKE TO TAKE A TRIP TO ITALY WHILE WE CAN,” SAYS MAX. “WE’VE ALWAYS
TRAVELLED, BUT ONCE THE BABY IS BORN, IT’LL PROBABLY BE A WHILE BEFORE WE CAN GO
ANYWHERE AGAIN.”
“WHAT IS MORE IMPORTANT TO YOU,” ASKS BRYAN, “GOING TO ITALY OR BUYING A HOUSE?”
“IF WE HAVE TO CHOOSE,” SAYS MAX, “I SUPPOSE THE HOUSE IS MORE IMPORTANT.”
“LET’S SUPPOSE YOU TAKE THAT TRIP TO ITALY. TAKING FROM YOUR SAVINGS WOULD REDUCE
THE AMOUNT YOU HAVE FOR A DOWN PAYMENT. YOU’RE ALREADY SHORT OF WHAT YOU WILL
NEED. AND REMEMBER, YOU’LL NEED TO BUY A LOT OF NEW CLOTHING AND FURNITURE FOR
THE BABY AS WELL.”
“WHAT IF WE PUT OFF THE TRIP TO ITALY?” ASKS SONIA. “DOES THAT MAKE THE IDEA OF BUYING
A HOUSE MORE REASONABLE?”
“IT’S PERFECTLY REASONABLE,” SAYS BRYAN. “LET ME EXPLAIN SOME SAVINGS OPTIONS FOR
YOU AND WE’LL CALCULATE HOW LONG IT WILL TAKE.”
Bryan describes some savings vehicles that will protect their savings and offer a small
return. Sonia and Max calculate that if they manage to put 10% of their income in savings
every month, they should have added enough to their savings to purchase a house in their
desired neighbourhood in 18 months.
Bryan suggests that they meet again at the half-way point to make sure they are staying
on track.
THE FINANCIAL PLANNING PROCESS
4 | Explain the steps in the financial planning process.
Some clients who look for help with financial planning may do so as a conscious decision to take control of their
financial affairs before a problem arises. Others may come to financial planning only after problems have occurred.
In either case, good financial planning will help your clients to set and meet financial goals that will enhance their
financial security.
As an advisor, you will help your clients by assessing their current financial situation to uncover real or potential
problems, and by identifying their objectives. Then, you will use information gained from that process to formulate
and implement financial recommendations.
In some cases, you may need to direct your clients to specialists and professionals who can provide specific products
or services that you may not be qualified to provide.

Typically, the financial planning process can be divided into the following steps:
1. Establish the client/advisor relationship
2. Collect data and information
3. Analyze data and information
4. Recommend strategies to meet goals
5. Implement recommendations
6. Conduct a periodic review or follow-up
Although financial planning involves the same set of steps for each client, an effective plan is a unique and specific
plan that addresses the distinct needs of each client.
Clients expect financial plans to be both efficient and effective. An efficient plan produces the best
results for the least money, while an effective plan delivers desired results.
As you learn the steps in the financial planning process, you will discover how to respond to your clients’ needs by
building a careful plan to address their unique circumstances and goals. Through this process, your clients will be
able to assess their current financial situation, set realistic goals for the future and follow your recommendations to
achieve these goals.
ESTABLISH THE CLIENT/ADVISOR RELATIONSHIP

The first step in the planning process is to interview your clients to determine any issues or problems they have
identified and establish how the development of a financial plan might help. The initial interview also helps both
you and your clients to decide if you will be comfortable working with each other now and in the future.
THE INITIAL INTERVIEW

Some areas of discussion in the initial interview include:
• The financial planning process and how it will help your clients meet their objectives
• Alternative strategies to choose from
• Specialist expertise required for specific choices
• Disclosure of possible conflicts of interest
If the initial interview is successful, formalize the relationship with either a letter of engagement or a professional
service contract. The letter or contract should clearly and unambiguously outline the following:
• What information the advisor will require
• What services the advisor will provide
• How and by whom the advisor will be compensated
• How and by whom other professionals will be compensated
• How long the professional relationship is expected to last
DIVE DEEPER
Find the Sample Letter of Engagement Job Aid in your online learning material.

RESPONSIBILITIES TOWARDS THE CLIENT

Your clients expect clarity and transparency in all aspects of the planning process.
Whether or not your clients ask questions, you should be prepared to provide details regarding:
• Your level of experience
• Your qualifications
• Any disciplinary actions or decisions against you
• The services offered by your financial institution
• Your planning process
• Will you be directly involved during the entire process?
• Who else will be involved?
• What are your fees?
• Will the financial plan be in writing?
Your clients also expect and deserve a high level of professionalism and ethics from you as their advisor. By
following a code of conduct to meet their expectations, you will develop lasting relationships that are built on trust
and mutual respect.
Your responsibilities to your clients are as follows:
Integrity Be honest and upright with your clients.
Professionalism Be competent, knowledgeable and up to date regarding all aspects of the financial
services industry.
Confidentiality Respect your clients’ privacy and treat their information with confidentiality.
Objectivity Do not make recommendations that benefit you or your institution when there are
other products and services that might better suit your clients.
Diligence Investigate products or services before you recommend them and closely supervise
others who are involved in the planning process.
ESTABLISH THE CLIENT/ADVISOR RELATIONSHIP:

The first step in the financial planning process is to establish a relationship with your clients.
• Start by conducting an initial interview to discuss the planning process
• If you determine that your services can benefit the client, draw up a contract or letter of engagement that
outlines the terms of the agreement
• Be prepared to answer any questions your client may have regarding your experience, knowledge and
trustworthiness, as well as your methods of conducting business
• Conduct yourself throughout the planning process with integrity, professionalism, confidentiality, objectivity
and diligence at all time

1 • 10 FINANCIAL PLANNING I

Albert Roscoe calls Bryan to discuss his finances. Albert is 41 years old and is a senior project manager at a software
development company
“I KNOW I SHOULD HAVE SAVED MORE FOR MY RETIREMENT,” SAYS ALBERT.

“I’D LIKE SOME ADVICE ON HOW TO DO THAT.”
Bryan explains the planning process and describes some possible savings strategies.
“IT’S POSSIBLE THAT YOU WILL WANT TO TALK TO A RETIREMENT SPECIALIST AS WELL. IF SO, I CAN
GIVE YOU A REFERRAL,” SAYS BRYAN.
“HOW DO YOU GET PAID?” ASKS ALBERT.
“I GET PAID A SALARY BY THE INSTITUTION I WORK FOR,” SAYS BRYAN. “A RETIREMENT SPECIALIST
WILL CHARGE A FEE FOR SERVICE AND A SMALL PERCENTAGE OF INCOME EARNED FROM YOUR
ASSETS.”
“THAT SOUNDS FAIR. I WOULD LIKE TO WORK WITH YOU,” SAYS ALBERT.
“WHAT IS THE NEXT STEP?”
“WE’LL SET UP AN APPOINTMENT TO DISCUSS A PLAN OF ACTION. IN THE MEANTIME, I’LL DRAW
UP A LETTER OF ENGAGEMENT AND GET IT TO YOU BEFORE OUR MEETING SO YOU CAN REVIEW
IT AHEAD OF TIME. I’LL ALSO MAKE A LIST OF INFORMATION I WOULD LIKE YOU TO BRING TO
OUR MEETING.”
COLLECT DATA AND INFORMATION

Once the client/advisor relationship is established and formalized, the next step is to gather the information
required for the preparation of a financial plan.
Your clients should understand the importance of providing as much information as possible to create a complete
and accurate profile. If they cannot provide all the required information at the first meeting, ask them to bring what
they need to complete the process at the next meeting.
To win the trust and confidence of your clients, you must communicate empathy and professionalism.
Before you ask your clients any questions, be sure to acknowledge the sensitive nature of the
information they will be providing, explain why it is necessary that they provide it and reassure them
that you will treat it with the utmost confidentiality.
You will use client information to do two things:

A. Identify and prioritize your clients’ goals and objectives
B. Assess your clients’ present financial situation to recommend solutions
The type of data you will gather to do this is both qualitative data and quantitative data.

CHAPTER 1 | MANAGING THE FINANCIAL PLANNING PROCESS 1 • 11
QUALITATIVE AND QUANTITATIVE INFORMATION
Qualitative Qualitative data is any information that helps you to assess your clients’ understanding
of economic concepts and to determine their tolerance for risk. Qualitative questions
will also help you to identify areas where goals and attitudes may conflict so you can
help your clients to establish reasonable objectives and priorities.
Quantitative Quantitative data is any record related to:

• Personal finances, such as income, expenditure, assets, liabilities, insurance policies
and legal agreements such as nuptial or separation agreements
• Business finances, such as financial statements, shareholder agreements, stock
option plans, profit sharing plans and employee benefit plans
PART A: DEFINING AND PRIORITIZING THE CLIENT'S GOALS

The first part of data collection will be used to answer the questions, “What are my client’s needs and goals?” and
“Which goals are most important?” The information you use to define and prioritize your clients’ goals is mostly
qualitative data gathered through client interviews.
Financial goals may include buying a house, setting up an education fund for children, supporting elderly parents,
travelling after retirement or any other goals. Because each client has a different set of objectives, each plan will be
unique.
Define and prioritize your clients’ goals by doing the following:
• Encourage your clients to talk about their goals
• Ask questions and probe to identify which goals are most important
• Develop timelines to achieve the goals
DESIRABLE CHARACTERISTICS OF FINANCIAL GOALS

Realistic and achievable financial goals have four characteristics:
• Specific and measurable
• Ordered in level of importance
• Defined by time frame
• Acceptable in level of risk

Look at the table below to see an explanation and example of each characteristic:
Characteristic Explanation Example
Specific and Encouraging clients to set specific, A client who wishes to be “comfortable after
measurable measurable targets instead of vague and retirement” should state the dollar amount it
general goals serves two functions: would take to achieve the desired level of comfort.
• It helps to clearly and explicitly
define financial objectives.
• It helps to measure and monitor the
performance of the financial plan.
Ordered Because resources are typically limited, A client expects to have $10,000 to spare next
in level of your clients should prioritize their year. To decide whether she should use the money
importance goals and focus on achieving the most to pay down her mortgage or boost her RRSP, your
important first. client must decide which she values more: being
debt free or building her retirement fund.
Defined by Setting a time frame in which to achieve A client wishes to establish a fund to pay for his
time frame goals helps to define the objectives three-year-old daughter’s future college education.
more specifically and provides periodic To achieve his goal, he needs to put aside $2,000
milestones that allow progress to be each year for the next 15 years.
monitored.
Clients should be encouraged to start financial planning as soon as possible. By saving and investing
early in life, they will be better prepared to meet financial emergencies that may arise.
Acceptable in Assessing the level of risk that your If a client is averse to risk, her investment portfolio
level of risk clients are willing to accept will help to may be concentrated in money market or fixed
determine which investment strategies income instruments.
can be pursued to achieve a specific
Remember to consider the effect a particular
financial goal.
financial decision might have on other objectives.
For example, investing in bonds instead of equities
might decrease the risk but increase the tax
consequences.
Keep in mind that the goals and objectives that are defined at the outset of the planning process may
change over time. For example, if there is a new addition to the family, the client may need to set up
another education fund. Or if a family member falls ill, adding to an emergency fund may take priority
over funding education.
PART B: ASSESSING THE CLIENT'S PRESENT FINANCIAL SITUATION

Once your clients’ financial objectives have been clearly identified and prioritized, the next step is to assess their
current financial situation in order to construct a financial profile. The financial profile contains both qualitative and
quantitative data.
Collect data for the financial profile through interviews and questionnaires and by examining your clients’ financial
records and documents.

DIVE DEEPER
Find the Financial Planning Questionnaire Job Aid in your online learning material.
INFORMATION NEEDED FOR THE ASSESSMENT

Information that you need to create a financial profile includes:
• Current sources and uses of funds
• List of assets and liabilities
• Tax returns
• Investment records
• Insurance policies
• Wills
• Risk management needs and tolerances
• Unique needs (such as adult dependants, special medical needs)
OTHER ASPECTS TO CONSIDER

During the information acquisition stage, the advisor must be aware of the following aspects of data collection:
Implicit data While some data is explicit and can be readily perceived by examining the financial
documents, the advisor must determine some implicit information.
For example, one of the critical qualitative pieces of information that the advisor needs
to gather is a client’s attitude towards risk. Risk tolerance has a direct bearing on asset
allocation within the investment portfolio which, in turn, affects the portfolio return. A
client’s risk tolerance is evaluated by means of interviews and a detailed questionnaire.
Two-way process Information exchange is a two-way process. While the advisor collects qualitative and
quantitative data from the client, some important information is passed along to the
client as well.
For example, the advisor’s fee structure must be specified and the client must be made
aware of the costs associated with implementing the plan.
Confidentiality In creating the client’s financial profile, the advisor will be privy to sensitive personal
and financial information. This information must be kept in strict confidence and used
solely for the purpose of structuring and implementing the financial plan.
COLLECTING DATA:
• When collecting data, ask your client to provide as much information as possible to create a complete and
accurate financial profile
• Reassure your client of your respect for confidentiality
• Interview your client to collect qualitative data such as goals, financial priorities, their level of financial
knowledge and risk tolerance

• Collect quantitative data by asking your client to provide records of income, expenses, assets, liabilities, legal
agreements, insurance policies and other documents related to their financial situation
• Obtain additional data at a second meeting
• Use the information you have collected to
A. Define and prioritize your clients’ goals, making sure the goals are:
Specific and measurable
Ordered in level of importance
Defined by time frame
Acceptable in level of risk
B. Create a financial profile by gathering data related to income and expenses, assets and liabilities, special
needs and all other aspects of your client’s finances and living situation.
• Remember that data collection is a confidential, two-way process and that while some data is explicit and
available by examining documents, other information is implicit and must be inferred by asking the right
questions and listening to your clients.

Albert Roscoe brings documentation of his finances to his second meeting with Bryan, as Bryan has requested.
“THANK YOU,” SAYS BRYAN. “I REALIZE I’M ASKING FOR SOME VERY SENSITIVE AND PRIVATE
INFORMATION, BUT IT’S NECESSARY TO CREATE AN ACCURATE FINANCIAL PROFILE. I ASSURE
YOU I’LL TREAT THIS INFORMATION WITH COMPLETE CONFIDENTIALITY.”
“I FEEL BETTER KNOWING THAT,” SAYS ALBERT.
“I HAVE A QUESTIONNAIRE I’D LIKE YOU TO COMPLETE,” SAYS BRYAN, “BUT FIRST I’D LIKE TO ASK
YOU A FEW QUESTIONS. FIRST, WHAT ARE YOUR FINANCIAL OBJECTIVES?”
“I WOULD LIKE TO RETIRE IN 15 YEARS,” SAYS ALBERT.
“YOU’LL BE 56 IN 15 YEARS,” SAYS BRYAN. “YOU SHOULD PLAN TO BE AROUND FOR AT LEAST
ANOTHER 30 YEARS FROM THAT POINT. HOW MUCH MONEY DO YOU THINK YOU WILL NEED TO
LIVE ON?” ASKS BRYAN.
“ENOUGH TO BE COMFORTABLE,” SAYS ALBERT.
“LET’S PUT A SPECIFIC DOLLAR AMOUNT ON YOUR COMFORT,” SAYS BRYAN.
Bryan determines from his interview with Albert that Albert is not very familiar with financial
concepts and that, while he states that one of his goals is to invest in an equity mutual fund, his
risk tolerance is actually quite low.
“WHEN WE MEET NEXT TIME,” BRYAN SAYS, “WE CAN TALK ABOUT SOME POSSIBLE SAVINGS
STRATEGIES FOR YOU. IN THE MEANTIME, I WOULD LIKE TO HAVE A LOOK AT YOUR TAX RETURN
FROM LAST YEAR. WOULD YOU MIND BRINGING IT NEXT TIME WE MEET?”
By asking questions and gathering documents, Bryan has collected the data he needs to create
a financial profile for Albert.

ANALYZE DATA AND INFORMATION

Once you have acquired data through interviews and questionnaires, it is your responsibility as an advisor to analyze
the collected data, clarify the financial situation and identify any problem areas and opportunities. The purpose of
this analysis is to identify strengths and weaknesses in your clients’ financial profile and to answer the question,
“Are my clients’ goals feasible?”
Compare your clients’ current position with projections for the future and assess the feasibility of each financial
goal. You may need to focus on any of the following areas, depending on your clients’ goals:
• Need for an emergency fund • Risk analysis

• Insurance planning • Retirement planning
• Tax planning • Estate planning
• Debt management • Trust management
• Investment management • Charitable giving
• Cash management • Long-term care provisions
• Education planning
Remember that your clients’ financial profiles should always be examined relative to their stated
objectives.
INFORMATION NEEDED TO CONDUCT THE ANALYSIS

Your analysis should identify your clients’ current financial position, highlighting areas where further information is
needed and identifying inconsistencies or gaps in information.
Depending on the specific needs of your clients, you will need to prepare:
• Net worth statement
• Income and expense statement
• Preliminary budget
• Life insurance needs analysis
• Retirement needs analysis
• Tax projections
• Investment portfolio analysis
• Disability needs analysis
• Review of employee benefits
You may also need to consider:

• Plan for the succession of a business
• Charitable giving

• Risk management needs

• Special needs such as:
Adult dependant needs
Education needs
Needs of disabled children
Divorce/re-marriage issues
• Coverage for:
Terminal illness
Long-term illness
Critical care illness
A second meeting may be required to obtain additional data or to discuss modifying goals which may be
unachievable.
This will require not only skill in preparing and presenting the data, but also skill in counseling the client to make
decisions and accept more realistic goals.
Some types of unrealistic goals which might arise and possible solutions are shown below:
Unachievable Goal Alternative Suggestions
Retire at a specific age • Increase the time frame

• Reduce desired retirement income
• Increase investment return by assuming more risk
• Reduce expenditures
Save a specified sum • Cut flexible expenses

• Cut fixed expenses
• Increase income
• Employ forced saving techniques
Finance a child’s post-secondary • Apply for a student loan

education to a specified amount • Child finds employment
• Set up an RESP
DUTIES AS AN ADVISOR WHEN ANALYZING CLIENTS’ DATA

The duties of the advisor at the data analysis stage are as follows:
• Identify existing gaps between the current financial situation and the stated objectives. Some common problem
areas are:
Too much or too little insurance
A high debt burden
Lack of portfolio diversification

• Identify potential problems that would adversely affect your clients’ financial plan in the future. Some examples
may be:
A lack of retirement planning
The absence of an emergency fund
• If necessary, modify the stated objectives or the priority of these objectives.
• Evaluate current and forecasted economic conditions and incorporate them into the analysis.
• Carry out the analysis in strict accordance with legal and ethical requirements.
Remember to identify problem areas and opportunities before recommending a financial plan and
provide your clients with realistic expectations.
Also, be sure to alert your clients to the fact that inflation and changes in the economic environment will
affect their financial plan.
ANALYZING INFORMATION:
• Compare your clients’ current position with projections for the future
• Assess the feasibility of each financial goal
• Highlight areas where further information is needed and identify where there are inconsistencies or gaps in
information
• Identify gaps, opportunities and potential problems
• Modify goals which may be unachievable
• Incorporate current and forecasted economic conditions
• Act in strict accordance with legal and ethical requirements
“ALBERT,” SAYS BRYAN, “YOUR GOAL IS TO RETIRE IN 15 YEARS. THE FACT THAT YOU’RE CARRYING
NO DEBT PUTS YOU IN A STRONG POSITION. YOU HAVE $75,000 IN AN RRSP RIGHT NOW AS
WELL AS A PENSION PLAN, BUT IT WILL STILL BE A CHALLENGE TO SAVE ENOUGH TO RETIRE THAT
SOON. WOULD YOU SAY THAT RETIRING AT 56 IS A REASONABLE GOAL?”
“I MAKE A GOOD INCOME,” SAYS ALBERT, “AND WITH A GOOD RETURN ON MY SAVINGS, I THINK
I CAN DO IT.”
“HOW DO YOU FEEL ABOUT RISKING YOUR SAVINGS IN A HIGH-RETURN INVESTMENT?”

ASKS BRYAN.
“I DON’T WANT TO RISK LOSING MY SAVINGS,” SAYS BRYAN. “I’D LIKE A HIGH-RETURN
INVESTMENT THAT’S SAFE.”
“SAFE INVESTMENTS DON’T TYPICALLY EARN A SPECTACULAR AMOUNT,” SAYS BRYAN,
“ESPECIALLY GIVEN THE CURRENT ECONOMIC CONDITIONS.”

“ALSO, AS THINGS STAND, YOU HAVE ONLY MINOR INSURANCE COVERAGE AND VERY LITTLE
SAVINGS OTHER THAN YOUR RRSP SAVINGS IF YOU SHOULD FIND YOURSELF UNEMPLOYED. IT’S
GOOD TO HAVE A CUSHION IN CASE OF AN EMERGENCY.”
“AND YOU DO HAVE A GOOD INCOME, BUT YOUR EXPENSES ARE HIGH.”
Bryan calculates what Albert would need to save to retire in 15 years with his desired
income. He points out that inflation will take a bite out of Albert’s savings, and he stresses
that Albert should also be directing some savings into an emergency fund that is easily
accessible.
Albert is somewhat dismayed to see how much money he will need to save to achieve his
goal. Bryan modifies the calculation to increase Albert’s age of retirement by five years
and to reduce the amount of his post-retirement income.
“I CAN DO THAT,” SAYS ALBERT, “BUT I WISH I’D GOT AN EARLIER START AT IT.”
By comparing Albert’s financial situation to his goals, Bryan is able to suggest

modifications to make the goals achievable.
RECOMMEND STRATEGIES TO MEET GOALS

After you have analyzed your clients’ data and defined their goals, you are in a position to help your clients answer
the question, “How can I achieve my goals?”
Work with your clients to develop and present a financial plan that is tailored to meet their goals, values,
temperament and risk tolerance. Analyze the data to determine the effect of alternative strategies to reach
their goals.
EXAMPLE
If one of your clients’ goals is to improve cash flow, you must determine with them which alternative will work
best—increasing income or cutting expenses.
To make projections and recommendations, you will need to make certain assumptions, including rates of return
expectations, inflation rate, life expectancy, changes in income and future tax rates.
It is critical to note that while you as the advisor recommend strategies and suggest alternatives to meet
your clients’ goals, the final decisions regarding your recommendations must be made by your clients. The
recommendation process is a process of two-way communication with your clients.
STEPS IN THE RECOMMENDATION STAGE

The following is the sequence of events that should take place at this stage:
1. Discuss strategies and recommendations with your clients.
2. Allow your clients to ask questions and express concerns.
3. Modify and revise your recommendations accordingly.
4. Discuss the new recommendations with your clients.

GUIDELINES FOR MAKING RECOMMENDATIONS

The following guidelines will help you make professional and ethical recommendations:
• Evaluate alternative strategies and develop an integrated set of recommendations while keeping in mind your
clients’ goals, values and risk tolerance
• Communicate your recommendations in a clear, concise, complete and easy-to-understand manner
• Solicit feedback to verify your clients’ understanding of the recommendations.
• Provide your clients with full, true and plain disclosure of all relevant information about your recommendations,
in accordance with ethical and legal requirements
• Recommend specific, rather than general, strategies
• Clearly explain all fees and provide your clients with a fee schedule
• Outline the level of service you will provide by specifying the frequency of your reports and reviews as well as
your availability
“Start saving periodically” is a general recommendation that is open to interpretation.

“Save $150 every month” is a specific recommendation that will help your clients achieve a defined goal.
• Provide your clients with written recommendations to formalize the action plan and to serve as a reference
• If necessary, refer your clients to other specialists, such as lawyers, accountants or tax consultants, to address
specific financial concerns that your clients may have
Remember to tailor your recommendations to meet your clients’ financial objectives without compelling
them to buy any particular investment product.
RECOMMEND STRATEGIES TO MEET GOALS:

The recommendation process is a process of two-way communication with your clients. Your role is to make
recommendations. Your clients make the final decision.
Follow the sequence below to make recommendations:
1. Discuss strategies and recommendations with your clients.
2. Allow your clients to ask questions and express concerns.
3. Modify and revise your recommendations accordingly.
4. Discuss the new recommendations with your clients.
Use the guidelines below:

• Evaluate alternative strategies
• Communicate clearly
• Solicit feedback
• Disclose all relevant information

• Recommend specific, not general, strategies

• Provide written recommendations
• If necessary, refer your clients to specialists
• State your fees and provide a schedule
• Outline your level of service
“ALBERT,” SAYS BRYAN, “BASED ON OUR CONVERSATION AND ON YOUR FINANCIAL PROFILE, I
SUGGEST THAT YOU CONCENTRATE ON CREATING A POOL OF FUNDS TO FALL BACK ON IN AN
EMERGENCY BEFORE YOU DO ANYTHING ELSE. IDEALLY, YOU SHOULD HAVE AT LEAST THREE TO
SIX MONTHS’ LIVING EXPENSES SET ASIDE TO TIDE YOU OVER IN CASE OF EMERGENCY. AFTER
THAT, I SUGGEST THAT WE SET UP AN RRSP TO WHICH YOU CAN MAKE REGULAR MONTHLY
CONTRIBUTIONS OF $500. I THINK YOU CAN MANAGE THOSE CONTRIBUTIONS WITHOUT TOO
MUCH STRESS.”
“ANOTHER OPTION IS TO REDUCE YOUR EXPENSES BY, SAY, EATING OUT LESS FREQUENTLY AND
MOVING TO A LESS EXPENSIVE APARTMENT. THAT WAY, YOU CAN SAVE MORE EVERY MONTH AND
RETIRE WITH MORE INCOME, OR RETIRE EARLIER. WHAT ARE YOUR THOUGHTS ON THE MATTER?”
“I SEE WHAT YOU’RE SAYING ABOUT THE EMERGENCY FUND,” SAYS ALBERT. “I’M NOT WORRIED
ABOUT THAT, THOUGH. MY JOB IS VERY STABLE AND I DO HAVE SOME WORKPLACE INSURANCE
IN CASE I GET SICK. I WOULD LIKE TO START SAVING AS MUCH AS POSSIBLE RIGHT NOW FOR MY
RETIREMENT. AND I’LL TRY TO REDUCE MY EXPENSES SO I CAN SAVE MORE.”
“I’LL DIRECT YOU TO A RETIREMENT SPECIALIST WHO CAN HELP YOU DECIDE HOW TO INVEST
YOUR RRSP SAVINGS TO GET THE AN APPROPRIATE RETURN GIVEN YOUR TOLERANCE FOR RISK
AND STATED INVESTMENT OBJECTIVES,” SAYS BRYAN.
Bryan recommends alternative savings strategies with specific targets. He allows Albert to
make the final decision.
IMPLEMENT THE RECOMMENDATIONS

At this stage, you may help your clients to implement your recommendations based on the financial plan.
Some measures that you recommend may be immediate, such as:
• Applying for insurance
• Paying down debt
Others will be implemented over a longer term, such as:

• Making periodic investments
• Contributing funds to an RRSP
The time frames you outlined in Step 2 will serve as a guideline in implementation.
If necessary, you may refer clients to a business partner such as a lawyer, tax advisor, investment advisor, real estate
broker, retirement specialist or insurance representative.

REFERRING CLIENTS TO A BUSINESS PARTNER

If you are referring your clients to other professionals, you must identify the responsibilities of these professionals
and the costs of using them.
Use the following procedure to complete the referral:
1. Identify client needs that are beyond your abilities to address.
2. Identify your business partner.
3. Obtain agreement to proceed.
4. Make sure the person you are referring your client to is available.
5. Arrange the meeting between your client and business partner, or if necessary, set up a joint meeting.
6. Follow up with both client and partner.
IMPLEMENTING RECOMMENDATIONS:
• Help your client to implement the recommended strategies using the time frames determined in Step 2 as
guidelines
• Some strategies may be immediate while others are long term
• Refer your client to a business partner where necessary
“ALBERT,” SAYS BRYAN, “I CAN SET UP AN RRSP WITH OUR INSTITUTION FOR YOU TODAY AND
YOU CAN GET STARTED IMMEDIATELY ON YOUR PLAN. IF YOU LIKE, WE CAN ALSO SET UP AN
AUTOMATIC DEDUCTION FROM YOUR BANK ACCOUNT THAT WILL GO DIRECTLY INTO YOUR
SAVINGS ACCOUNT.
“HOWEVER, I THINK YOU COULD BENEFIT FROM THE ADVICE OF A RETIREMENT SPECIALIST.
GLORIA VELASQUEZ IS A COLLEAGUE WHO CAN HELP YOU MANAGE YOUR RRSP PORTFOLIO.
WOULD YOU LIKE ME TO ARRANGE A MEETING WITH HER?”
“I HOPED THAT YOU COULD MANAGE MY RRSP,” SAYS ALBERT.
“GLORIA HAS ACCESS TO A GREATER RANGE OF PRODUCTS THAN I DO,” SAYS BRYAN, “AND SHE
KNOWS THIS PART OF THE BUSINESS MUCH BETTER.”
“ALL RIGHT, I’LL TALK TO HER,” SAYS ALBERT.
“I’LL CALL HER RIGHT NOW TO SEE IF SHE’S AVAILABLE,” SAYS BRYAN.
Bryan sets up an appointment between Albert and Gloria. The next week, he calls both
Albert and Gloria to see how the meeting went. Albert benefits from the expertise of
a specialist.

CONDUCT A PERIODIC REVIEW OR FOLLOW UP

For various reasons, your clients’ circumstances may change over time. Changes may be related to personal reasons
or to general economic conditions. In either case, because of this tendency toward shifting circumstances, it is
essential to conduct a periodic review of your clients’ financial condition and to adapt your recommendations if
necessary.
In general, an annual review is recommended.
If a major personal change occurs, such as a birth or death in the family, illness, divorce or retirement, you should
review the plan at that time. These types of changes may trigger a change in a client’s priorities.
A change in economic conditions might trigger a review as well.
EXAMPLE
If interest rates have fallen, you may want to recommend refinancing a mortgage.
During the reviews, your role is as follows:

• Monitor progress towards your clients’ stated goals and objectives
• Adjust the financial plan to changes in the client’s financial objectives, lifestyle, and temperament
• Adapt the recommendations to changes in the economic environment
• Update the client on changes in tax legislation and evaluate its impact on the financial plan
• Introduce new investment products to the client, explaining the characteristics of these products to help the
client decide whether to incorporate them into the financial program
• Inform your clients of emerging opportunities and discuss their potential role in the client’s financial program
Some new products or opportunities may not be offered by your institution. Nevertheless, you must
remember to act in your clients’ best interests by making objective recommendations.
CONDUCT A PERIODIC REVIEW:

• Review your clients’ situations annually or when their circumstances change
• Monitor your clients’ progress
• Adjust to personal, economic and legislative changes
• Inform your clients of new products and opportunities


Last year, Bryan recommended that Albert make periodic deposits into a retirement fund. During follow-up, Bryan
checks with Albert to see how the strategy is working out.
“ALBERT,” ASKS BRYAN, “ARE YOU COMFORTABLE MAKING REGULAR DEPOSITS AS WE

DISCUSSED, OR ARE YOU FINDING IT A STRETCH FINANCIALLY?”
“I WAS ON TRACK UNTIL RECENTLY,” SAYS ALBERT, “BUT I’VE SLIPPED IN THE PAST TWO MONTHS
BECAUSE OF OTHER EXPENSES.”
“ARE YOU HAPPY WITH THE PLAN AS IT IS?” ASKS BRYAN. “DO YOU STILL CONSIDER THAT
CONTRIBUTING TO A RETIREMENT FUND IS A PRIORITY?”
“ACTUALLY,” SAYS ALBERT, “I MIGHT HAVE TO PUT IT ON HOLD FOR NOW. A NUMBER OF PEOPLE
HAVE BEEN LAID OFF AT WORK AND THERE MAY BE ANOTHER WAVE OF LAY-OFFS IN A FEW
MONTHS. I DON’T KNOW IF I CAN AFFORD TO TIE UP FUNDS THAT I MIGHT NEED TO MAKE ENDS
MEET.”
“PERHAPS WE SHOULD REDIRECT YOUR RRSP CONTRIBUTIONS TO YOUR EMERGENCY FUND FOR
NOW,” SAYS BRYAN. “WE CAN CONSIDER SOME SHORT-TERM SAVINGS STRATEGIES THAT MIGHT
BE MORE APPROPRIATE FOR YOU AT THIS TIME.” “I WILL LET GLORIA KNOW THAT FOR THE TIME
BEING THE PLANNING PROCESS IS ON HOLD.”
By adapting the financial plan to changes in Albert’s financial situation, Bryan is able to
help his client meet his new goals while keeping the Retirement specialist in the loop.

Budgeting and
Consumer Lending 2
1 | Collect financial data to create client Cash Flow and Budgeting

statements.
2 | Collect financial data to create and analyze Preparing Client Statements

client statements.
3 | Explain the process of creating a budget. Budgeting and Savings Fundamentals
4 | Explain the role of financial institutions in The Role of Financial Institutions

consumer credit.
5 | Explain how the 5 Cs of Credit are used to Credit Fundamentals

evaluate a client’s ability to borrow.
6 | Calculate and interpret debt service ratios. Debt Service Ratios
7 | Differentiate between the various types of Personal Borrowing Options

credit available.

KEY TERMS
5 Cs of Credit debt service ratios
budget discretionary expenses
beacon score expenditure cluster
basic expenditure expenditure data
capacity expenses or expenditures
capital fixed rate loan
character gross debt service ratio (GDSR)
charge account income data
collateral net income
cash flow statement non-discretionary expenses
consumer credit personal line of credit
consumer statement personal loan
credit projected cash flow statement
Credit bureau total debt service ratio (TDSR)
credit card variable rate loan
credit score

CHAPTER 2 | BUDGETING AND CONSUMER LENDING 2•3
INTRODUCTION
Helping your clients prepare a budget is an important step in the financial planning process. With a budget in place,
your clients will have a better understanding of how much of their income they can use to service loan payments
and save for their future.
Consumer credit needs in Canada are served by a broad variety of domestic and foreign financial institutions
using increasingly sophisticated technology. New regulations promote the efficiency and growth of the sector,
foster domestic competition, empower and protect consumers and improve the regulatory environment. To meet
the increasingly complex needs of clients, advisors in today’s financial services industry must remain abreast of
rapid changes.
CASH FLOW AND BUDGETING
1 | Collect financial data to create client statements.
A cash flow statement is the foundation of a budget. It is used to assess the financial health and habits of clients
and to measure and track the flow of income.
A cash flow statement answers three questions essential to creating a budget:
• How much money is there?
• Where does it come from?
• Where does it go? Reduced to its elements, a cash flow statement looks like this:
Net income – Expenses = Cash flow surplus/shortfall
As an advisor, you can use a client’s cash flow statement to evaluate the client’s ability to save, invest, or carry debt.
By knowing how to collect relevant information from the client to develop a cash flow statement, you will be able
to create a budget for your clients based on their objectives.
PREPARING CLIENT STATEMENTS
2 | Collect financial data to create and analyze client statements.
A personal cash flow statement is a record of a client’s cash flow over a specific period, usually one year.
The cash flow statement consists of two main parts:
• Net income received (gross income less employee deductions and income taxes)
• Expenses paid
The difference between net income received and expenses paid represents the client’s cash flow surplus or shortfall,
depending on whether it is a positive or a negative amount.
A major goal of financial planning is to generate a cash flow surplus. If this cash flow surplus is invested in assets or
used to reduce liabilities, or both, the client’s net worth will increase over time.

THE DIFFERENCE BETWEEN A CURRENT AND A PROJECTED

CASH FLOW STATEMENT
A current cash flow statement is a record of income and expenses over the past year.
A projected cash flow statement is a forecast of expected income and an allocation of expenses and savings for the
following year, based on the client’s financial objectives.
The purpose of a current cash flow statement, which is the first priority of a budget, is to assess clients’ ability to
increase their net worth by decreasing expenses.
A detailed month-by-month cash flow statement over a one-year period will highlight the following:
Information Extrapolation
Income • Amount Predictability

• Source (How reliable is the income?)
Expenditure • Basic Reducible amount

• Discretionary (What expenses can be reduced, and by
how much?)
The cash flow statement may be for a single client, or it may be a joint statement that includes information for a
spouse, partner or another household member.
Each financial institution will have its own forms and methods to collect the complex and detailed client data
needed to create a statement, but data collection is always separated into two areas:
• Income
• Expenditures
DIVE DEEPER
You will find a sample Summary of Annual Income Sources and a Summary of Annual Living Expenses by
clicking on the Job Aids link.
INCOME DATA
Income data represents positive cash flow, which shows where funds came from.
The income sources form is used to assess the clients’ sources of funds for the year, including income for both
partners, whether individually or jointly received. Not all income flows from employment, and some types of
income are more or less constant and predictable than others. The table below identifies possible sources of income
and their levels of volatility:
Income Volatility
Salary or wages Income from a good job at a stable organization is more reliable than income from a
short-term contract position.
Investments Investment income is less reliable than earned income because of fluctuations in the
market. Do not consider investment income from registered accounts.

Income Volatility
Government payouts A government payout such as a child tax benefit may be a reliable source of income,
while a rebate on a home renovation is a one-time payout that cannot be relied
upon year to year.
Business income Personal business income is generally less reliable than a wage or salary.
Other Other income is usually the most volatile of all sources.
EXAMPLE
Peter and Suzanne Pirelli are married with no children. They both work full time and Suzanne makes quilts in
her spare time. Last year, she sold a number of quilts at a craft fair. This was the first time she sold any of her
quilts, and she is not certain if she will take part in the fair again in the coming year because she feels it was more
trouble than it was worth. The income from the sale of the quilts represents other income, the most volatile
category of income.
COLLECTING INCOME DATA

Income data is collected from the following sources:
• Pay stubs, T4s or T4As, notice of assessment
• Bank accounts and investment statement transaction history
• Invoices
• Leases for any investment properties that are being rented out
• Records of payment
Begin the process of data collection by asking the client in advance to bring along basic information when meeting
with you to complete the personal financial statements.
Remember that financial information is private information, and your clients may be sensitive about
revealing it. Make sure you acknowledge the sensitive nature of your questions and explain clearly why
it’s necessary to ask them.
OTHER SOURCES OF FUNDS

Total household income may also be affected by the use of other resources, such as the sale of an asset. Other
sources of funds such as these are also part of the positive cash flow but are not considered income.
As an advisor, you should pay particular attention to other sources of funds, as they may distort the picture of your
clients’ ability to sustain, over the long term, a particular level of income and expenses to balance their budget.

EXAMPLE
The following example shows Peter and Suzanne’s combined income distribution and other sources of funds:
Income Source Amount
Employment After-tax employment income $51,036.60
Investments Interest on savings account and Canada Savings Bonds $378.50
Government payouts N/A N/A
Business N/A N/A
Other income • Rent from Suzanne’s brother $7,860

• Sale of Suzanne’s quilts
• Tax refund
Other sources of funds • Savings used on vacation $12,536.90

• Sale of boat
• Sale of 2 Canada Savings Bonds
EXPENDITURE DATA
Expenditure data represents negative cash flow, which shows where funds went.
As with income, there are many types of expenditures, each with a different impact on your clients’ financial
situation.
COLLECTING EXPENDITURE DATA

Expenditure data is collected from the following sources:
• Chequing account records
• Credit card statements
• Tax returns
• Mortgage statements
• Other receipts or records
As with income data, begin the process of expenditure data collection by asking your clients in advance to bring
along basic information when meeting with you to complete their personal financial statements.
Remember to be sympathetic to your clients’ concerns about revealing this sensitive information.

EXPENDITURE CLUSTERS
The expenses form divides expenditure data into the following 12 categories, or clusters, to assess client use of
funds for a year:
• Housing • Personal grooming

• Groceries • Leisure
• Clothing • Education
• Transportation • Savings and investments
• Health care • Debt reduction
• Child or parental care • Miscellaneous
Each expenditure cluster is further broken down so that data can be analyzed in detail.
The table below illustrates how the expenditure cluster for transportation is broken into smaller categories within
that cluster:
Transportation Expenses Client 1 Client 2 % of Total

A. Personal Vehicle Loan payment
Licensing
Insurance
Maintenance/repair
Fuel
B. Leased Vehicle Leasing cost
C. Other Taxis
Public transit
Parking
Total Transportation Expenses: Total %:
As you can see, each cluster is summarized by total cost and by percentage of total expenditures for comparison
against standard parameters. This comparison can help your clients to identify areas where spending patterns can
be adjusted to reach other goals. It is important to remember, though, that each client is different and standards
cannot be applied rigidly.
USING THE EXPENSES FORM

You should work with your clients to fill in as much initial data as possible in each of the twelve clusters. Once
you have entered the initial data, you can go back and clarify specific points to present a true picture of your
clients’ situation.

If your clients do not know how much they spend in each of the 12 clusters, you may have to help them estimate
these figures.
Expenditures will vary according to your clients’ lifestyle, family size and financial responsibilities. Keep in mind your
clients’ goals, preferences and constraints as you work to reach a customized solution.
Remember — your role is not to judge how your clients have spent their money, but rather to help them
achieve their financial goals.
Note that each expense must be accounted for only once. This fact is more important than where an expense is
accounted for.
EXAMPLE
If you include dining out in the leisure cluster; make sure you don’t include it in the grocery cluster as well.
Likewise, you may account for the cost of a child’s university residence in either the education or the housing
cluster, but not both.
Some things to consider in each expenditure cluster include:
HOUSING
The housing cluster represents the largest percentage of spending for most households and is usually the spending
area with the least flexibility. It includes mortgage or rent payments, property taxes, condo fees, insurance,
maintenance costs, utilities and all household expenses, including furniture and cleaning costs.
The expenses form allows for the fact that some clients may own or rent a secondary property such as a cottage or a
separate apartment for a dependent.
GROCERIES
The second cluster, groceries, includes only expenditures for groceries and household items.
CLOTHING
The clothing cluster includes all clothing, including work, casual and special occasion clothing, as well as cleaning
and repair costs. These expenditures may vary considerably, depending on lifestyle and family size.
TRANSPORTATION
The transportation cluster includes personal or leased vehicle expenses as well as taxis, public transit and parking. If
a client uses a bicycle for commuting, it may be considered a transportation expense rather than a leisure expense.
HEALTH CARE
This cluster includes all costs of health insurance (both private and provincial), disability insurance, dental and
optical care and all pharmaceutical expenses.
When the cost of health insurance is deducted from employment earnings and appears on the income sources form
as a payroll deduction, do not include it here as well.
When costs are refunded by health insurance coverage, include only the net amount paid.
CHILD AND PARENTAL CARE

This cluster includes all daycare or babysitting costs as well as the costs of caring for an aging parent. Expenditures
for this category will vary considerably from one household to another.

PERSONAL GROOMING
Personal grooming expenses include hair care products, cosmetics and other personal care items. Make sure not
to include personal grooming items such as shampoo and toothpaste in the groceries cluster if they appear here
as well.
EDUCATION
The education cluster includes tuition, books, supplies and living expenses (unless you have included those expenses
in the housing cluster).
You should pay particular attention to households with children who are approaching university or college age, as
they will likely want to plan for education expenses in the next few years.
Education expenses are likely to be tax deductible or eligible for tax credits, so you should note this deduction on
the income sources form.
LEISURE
The leisure category includes expenditures for all activities and purchases in the categories of entertainment,
hobbies, sports and fitness, travel and vacations, magazine subscriptions and newspapers.
This category, perhaps more than any other, will vary considerably, based on the lifestyle of your clients, and
because this spending is highly discretionary, it generally offers the most flexibility.
EXAMPLE
Sometimes a leisure activity may bring income to a household.
For example, Suzanne spent $800 on quilting supplies in the past year. Because quilting is a hobby for her, this
expense would normally belong in the leisure cluster. However, because she sold some quilts last year, as we saw
on her income sources form, you may choose to deduct the cost of supplies from her gross income instead of
recording it on her leisure expense form.
SAVINGS AND INVESTMENTS

The savings and investments cluster includes expenses for regular contributions to pension plans, investment plans,
or savings. Contributions to Registered Education Savings Plans (RESPs), annuities and permanent life insurance
policies are also included here.
Some of these expenses, if they are deducted by the employer, will appear in the deductions section of the income
sources form, rather than in the savings and investments cluster. This is important to remember when you are
calculating your clients’ savings.
EXAMPLE
Because Peter’s contribution to his employer-sponsored pension plan ($3,000) is deducted from his employment
income, it appears as a deduction on the income sources form rather than as an expense on the expenditure
form. This distorts the actual figure for the savings and investments category.
Peter and Suzanne contributed $5,500 (or 7.7%) of their living expenses to other savings and are concerned that
they should be saving more. But if Peter’s contribution to his pension plan is added to the above $5,500, it brings
their total savings to $8,500 (or 11.8%) of their total expenditures.

DEBT REDUCTION
The debt reduction cluster includes any decrease over the year on any debt, such as payments made on a credit card
or a personal loan. Interest payments are also included, whether or not there has been a change in the outstanding
balance of the debt.
This category also includes any payment towards a life insurance loan or for unpaid income tax.
MISCELLANEOUS
This cluster is for miscellaneous expenses such as allowances for children, pocket money, gifts, donations or
other unusual expenditures. This cluster may be the most difficult for clients to determine if expenses are not
tracked closely.
Remember that donations to registered charities are tax deductible, so if you record a donation as a
miscellaneous expense, be sure to record it as a deduction as well.
BASIC AND DISCRETIONARY EXPENSES

Expenses are of two types:
• Basic
• Discretionary
Basic, or non-discretionary, expenses consist of necessary expenses that you cannot cut without significantly
lowering your standard of living. They include most housing expenses (other than cable TV and furniture), groceries,
clothing, transportation, health care, daycare, parental care, personal grooming expenses and loan payments.
Discretionary expenses are flexible expenses that include leisure, private education, non-essential home
renovation, savings and investments, some debt reduction and some miscellaneous items.
Clients looking for ways to decrease expenses should focus on discretionary expenses, which are easier to reduce.
Remember that it can be difficult to categorize some expenses as basic or discretionary. For example, clothing and
personal grooming products represent basic expenses, but the amount a client spends in these categories can be
highly discretionary. One client may average $20 a month on haircuts, while another will spend $200 in the same
period at the hair salon.
You must also take into account the fact that a client who spends 90% of his or her income in the basic category
does not have as much ability to reduce expenses as a client whose basic expenditure represents only 50% of
total income.
EXAMPLE
Your client may deem some expenses that typically fall in the discretionary category essential.
For example, Suzanne belongs to a health club, which is typically considered a leisure expense. Suzanne,
however, feels it is a necessity to keep stress under control so she can remain productive at work. She claims that
eliminating this expense would lower her standard of living considerably.
As an advisor, it’s important to use your judgment and tact when working with your clients to determine
which expenses are necessary and which are discretionary.

CHAPTER 2 | BUDGETING AND CONSUMER LENDING 2 • 11
BUDGETING AND SAVINGS FUNDAMENTALS
3 | Explain the process of creating a budget.
CREATING A BUDGET
A budget is a projected cash flow statement or a savings plan that is built from a current cash flow statement.
The current cash flow statement shows how much money there is, where the money comes from and where it goes.
When more money comes in than goes out, there is a cash surplus. When more money goes out than comes in,
there is a cash shortfall.
The process of creating a budget is one of analyzing the cash flow statement to see how you can create or increase a
cash surplus and direct it to areas that will increase your net worth.
CREATING A CASH SURPLUS

There are two ways to create (or increase) a cash surplus:
• Increase income
• Reduce expenses
Increasing income may be a limited option for some. Methods include:
• Working extra hours
• Negotiating an increase in salary
• Taking a higher paying job
• Expanding a business
• Restructuring investments
Reducing expenses is often a more realistic goal than increasing income, and a household budget is usually focused
on this method to increase cash flow.
USING A BUDGET
Clients often struggle when using a budget for the first time.
“WE’VE TRIED TO REDUCE OUR SPENDING,” SAID PETER. “IT GOES WELL FOR A WEEK
OR TWO, AND THEN WE FALL INTO OLD HABITS. IT’S HARD TO LIVE ON A BUDGET.”
“WE’RE CONCERNED THAT WE’RE NOT SAVING ENOUGH MONEY,” SAID SUZANNE, “BUT WE
DON’T WANT TO CHANGE OUR HABITS DRASTICALLY EITHER. WE ENJOY OUR LIVES AND WE
WANT TO CONTINUE TO DO SO.”
“LIVING ON A BUDGET ISN’T ALL ABOUT PENNY PINCHING,” SAID BRYAN. “IT’S ABOUT LAYING
THE FOUNDATION FOR A SECURE FINANCIAL FUTURE. EVEN MODERATE CHANGES CAN MAKE A
HUGE DIFFERENCE.”
“WHERE DO WE BEGIN?” ASKED PETER.

“KEEPING TRACK OF YOUR INCOME AND EXPENSES IS THE FIRST AND MOST IMPORTANT PART OF
A BUDGET,” SAID BRYAN.
“IF YOU KEEP A DAILY OR WEEKLY RECORD OF EXPENSES AND REVIEW YOUR SPENDING
MONTHLY, YOU SHOULD KNOW EXACTLY HOW MUCH YOU’RE SPENDING AND WHAT YOU’RE
SPENDING IT ON.”
“HERE’S HOW TO DO IT:”
“BEFORE YOU CREATE A MONTHLY BUDGET, GATHER ALL YOUR FINANCIAL STATEMENTS RELATED
TO INCOME AND EXPENSES. THIS INCLUDES PAY STUBS, INVOICES, BANK STATEMENTS, DEBIT
STATEMENTS, CREDIT CARD STATEMENTS AND RECEIPTS.”
“YOU WILL USE THIS INFORMATION TO CREATE A PICTURE OF YOUR AVERAGE MONTHLY INCOME
AND SPENDING, SO THE MORE INFORMATION YOU CAN PROVIDE, THE MORE ACCURATE YOUR
FINANCIAL PICTURE WILL BE.”
“NEXT, FOLLOW THE STEPS BELOW TO CREATE A BUDGET.”
STEPS IN CREATING A BUDGET

Step 1: Set Your Savings Goal
1. Record income Record your total monthly net income (after deductions) from all
sources, including employment and investment income as well as
government payouts and any other sources of income.
2. Record expenses Record the total of all expenses for the month, including mortgage or rent
payments, utilities, car payments, insurance, groceries, entertainment
and so on. If you are not in the habit of keeping receipts for small cash
purchases, record the amounts on your debit slips as cash expenditures
and estimate as well as you can where it was spent. Track debit and credit
purchases from your financial and credit card statements.
3. Determine cash flow Subtract your expense total from your income total to determine your
cash flow. A positive number means a cash surplus. A negative number
means a cash shortfall.
4. Set savings goals Based on your cash flow, set realistic savings goals, and then set a target
amount to cut from your expenditure and add to your savings.
Short term goals may include paying down debt, taking a vacation or
purchasing a television. Long term goals may include buying a house
or saving for retirement. If you are living month to month with a cash
shortfall, your immediate goal may simply be to balance your budget.

Step 2: Adjust Your Expenses
1. I dentify basic and discretionary Look at your record of expenses and divide it into two columns: basic,
expenses required expenses that are more or less the same every month, and
discretionary expenses that are flexible in amount and necessity.
2. Identify expenses to cut Focus on your list of discretionary expenses and identify items that can be
reduced in cost or cut altogether. For example, if you are spending money
on two take-out coffees a day, reduce your spending in that area to one a
day; or better yet, cut the habit altogether.
3. Adjust expenses Make a projected budget for the following month with new target
amounts in each expense category.
Ideally, by reducing expenses in some areas, you will have a cash surplus.
Use your budget to direct the surplus to other areas that will increase
your net worth, whether it is debt payment or savings.
If you have accurately accounted for all your expenses, your income and
your expenditure should now be equal.
Step 3: Review Your Budget Monthly
At the end of the month, compare your actual expenses with your projected expenses. You may find that you did
well in some areas, while in others you need to improve.
There may be some areas where you were unrealistic in your projected spending. You may need to adjust your
budget accordingly. Otherwise, continue to do your best to reduce your spending to meet your goals.
BUDGET TIPS AND TRICKS

The advisor can provide advice on how to create and use a budget.
“THAT SOUNDS SIMPLE!” SAID SUZANNE. “I THOUGHT IT WOULD BE MORE COMPLICATED

THAN THAT. I’M ACTUALLY EXCITED TO GET STARTED.”
“WELL, IT IS QUITE SIMPLE IN THEORY,” SAID BRYAN, “ALTHOUGH YOU MAY FIND IT’S
MORE DIFFICULT TO PUT INTO PRACTICE THAN IT SOUNDS. HOWEVER, THERE ARE LOTS
OF TIPS AND TRICKS TO MAKE IT EASIER TO STAY ON TRACK.”
“WHAT KINDS OF TIPS AND TRICKS?” ASKED PETER. “CAN YOU TELL US WHAT THEY ARE?”
“SURE! I’LL MAKE A LIST FOR YOU,” SAID BRYAN.

1. Set goals Set short- and long-term savings goals for specific needs and
specific amounts.
2. Overestimate expenses, Get in the habit of assuming you have less money than you do and
underestimate income that things will cost more than they will. Over-spenders tend to do
the reverse.
3. Know your money Avoid overdraft and bounced cheque fees by knowing exactly how much
money is in your account at all times.
4. Make debt payment a priority Follow the three rules of debt management:
• Pay off the debt with the highest interest rate first
• Convert non-tax-deductible debt to tax-deductible debt
where possible
• Increase the frequency or amounts of debt payments
5. Pay yourself first Deposit savings into an account as soon as you get paid.
• Set up an automatic transfer from your chequing account to your
savings account
• Set up an automatic savings deduction from your paycheque
• Take advantage of employee RRSP programs with automatic
payroll deductions
6. Trim your expenses Ask yourself what you can do to trim costs. Consider the following;
• Move to a less expensive house or apartment
• Live without a car, cable TV, a land line or a cell phone
• Consolidate debts
• Cut down on the use of gas or electricity
• Eat out less frequently
7. Share what you can Ask yourself what you can share to reduce costs. Consider the following:
• Join an auto-share group
• Share appliances and gardening equipment with neighbors
• Share your living space (roommate)
8. Keep separate accounts Keep a spending account that is separate from an interest-bearing saving
account. Be aware of bank fees associated with multiple accounts,
however.
9. Implement savings and For example, set up pre-authorized automatic monthly payments
investments plans for short to a mutual fund that has investment objectives and a risk profile
and long term goals that are consistent with your tolerance for risk and in line with your
investment objectives.

10. Reduce insurance coverage If you are over-insured, consider reducing your insurance coverage, to
reduce premiums. Also, ask your insurance provider about multi-line
discounts.
11. Pay with cash Pay for purchases up front to keep track of exactly how much money you
have and to avoid credit card debt.
12. Match funds For every dollar you spend on a leisure activity, put the same amount
in savings.
13. Save unexpected cash Add all or most of windfall cash in savings on top of regular savings.
14. Do not skimp on health care Basic care of yourself and your family will prevent costly care and grief
down the road.
CREATING CLIENT CASH FLOW STATEMENTS

• Prepare a current cash flow statement by collecting and recording all information related to income and
expenses.
• Subtract expenses from net income to find a client’s cash flow. A positive number means a surplus; a negative
number means a shortfall.
• When collecting income data, keep in mind the following:
Some sources of income are more stable and predictable than others
Some funds that contribute to the cash flow, such as a savings withdrawal or the sale of an asset, are not
considered income
• When collecting expenditure data, keep in mind the following:
Expenses are clustered into 12 categories
Some expenses are basic while others are discretionary
Some clusters represent more discretionary spending than others
• Create a projected cash flow statement from the current statement to develop a budget
• The purpose of a budget is to create or increase a cash surplus and direct it to areas that will increase net worth.
• The focus of budget cutting measures is discretionary spending
• The three steps to creating a budget are:
Set savings goals
Determine expenses to cut
Review budget monthly
• Clients will find it easier to stay on track if they follow good budgeting habits.


To prepare Peter and Suzanne’s income sources form, Bryan determined the following:
• Peter and Suzanne’s total household income used for last year were $71,812.
1. Total after-tax household income for the last year was $59,275.10. This includes net salary, investment
income and other income, including an income tax refund, the sale of quilts and rent from Suzanne’s brother.
2.Total funds used from other sources for last year were $12,536.90. This includes cashed-in savings as well as
proceeds from the sales of a boat and Canada Savings Bonds.
To prepare their expenditure form, Bryan determined the following:

• Peter and Suzanne spent 37.4% ($26,824) of their total expenditure for the year on housing, including repairs
and furniture.
• They spent 12.0% ($8,200) of their total expenditure on groceries. This figure is high because they often
entertain at home.
• They spent 7.2% ($5,145) on clothing, including new work clothes, a special occasion dress and laundry and dry
cleaning.
• They spent 5.5% ($3,960) on transportation, including minor repairs on Suzanne’s Chevy Lumina and a small
amount on taxis. Peter drives a company car and pays for fuel only.
• Both Peter and Suzanne are covered by provincial health insurance, and both carry workplace health insurance
as well. They spent 2.4% ($1,725) of their total expenditure on health care, including dental work, contact
lenses and fluid, and the replacement cost of eyeglasses that Peter broke in a ball game.
• Peter and Suzanne paid for no child or elder care last year.
• They spent 2.5% ($1,784) on personal grooming.
• Leisure spending accounts for 14.1% ($10,135) of their income. This spending includes entertaining at home,
eating out once a week, gifts, hobbies, health club membership, yoga clothing and two trips, one to Florida and
one to Jamaica.
• Suzanne and Peter had no education expenses last year.
• Savings and investments account for 7.7% ($5,500) of their expenses, excluding Peter’s contribution to his
company pension plan.
• They spent 3.7% ($2,674) on debt reduction, including student loan payments and interest payments on credit
cards.
• Miscellaneous spending accounts for 7.6% ($5,445) of their spending for the year.
To prepare a budget, Bryan recommended the following:

• Peter and Suzanne spent considerably more than their net income last year because of substantial use of funds
from other sources.
• To balance their budget next year, they will need to cut their spending by almost 18%, or $13,000, which
represents the total funds used from other sources.
• To meet a savings goal of 5% of the total after-tax household income, or $3,000, they will need to cut current
expenses by 23%, or $16,000.
• The areas of discretionary spending where Peter and Suzanne can cut their spending most easily are groceries,
leisure, clothing and miscellaneous. They can trim some from their housing budget as well if they make do
without buying new furniture next year.

• Because Suzanne is not planning to sell quilts next year, she and Peter should look for ways to replace that
income. They may want to consider raising her brother’s rent or asking for a contribution to the grocery bill.
• Peter and Suzanne should pay special attention to budgeting tips that relate to debt payment (paying the
balance of their credit cards to avoid interest payments) and cost reduction (eating out less, economizing on
meals, foregoing a vacation, making wardrobe items last longer, and reducing club membership status).
THE ROLE OF FINANCIAL INSTITUTIONS
4 | Explain the role of financial institutions in consumer credit.
THE CHANGING ROLE OF FINANCIAL INSTITUTIONS

Historically, roles in the Canadian financial sector were divided among banking, trust, insurance and securities
activities. Separate institutions related to each activity were required to stay within their own field. A series of
reforms in the 1980s led to changes in regulations and the relaxation of boundaries.
Today, there is a great deal of overlap in services offered from one type of institution to another. Some offer a full range
of products and services, while others specialize in specific areas. This has led to increased competition for consumer
business, and more than ever before, the advisor’s relationships with clients depend on knowledge and trust.
THE USE FINANCIAL SERVICES INDUSTRY

The increasing use of technology makes it easier than ever to collect and share information, but it has also raised
concerns among the public about privacy. The government has responded by introducing laws to protect personal
information, help businesses and consumers develop confidence in electronic commerce and protect the public
against the threat of illegal transactions. Industry self-regulated codes that promote consumer protection are more
prominent than ever.
THE CHANGING ROLE OF THE ADVISOR

On one hand, since consumers in today’s financial services environment can have all their needs met through a
relationship with one primary financial institution, advisors have the potential to provide a broad range of products
and services to a single client.
On the other hand, in an environment of fierce competition among financial services providers, client loyalty can no
longer be taken for granted. In the field of consumer credit, the advisor who is knowledgeable and informed will gain
client trust and develop long-term relationships.
EXAMPLE
When Bryan Lee’s clients Kareem and Aziza Ali needed to renew their mortgage, Aziza said to Kareem, “Bryan’s
institution is offering us a great rate. I think we should give him a call.” “Sure,” Kareem answered. “But there are lots
of other places we could go. Before we call Bryan, I think we should shop around to make sure we’re getting the best
value for our money.”
Bryan knows that to keep their loyalty, he has to gain Kareem and Aziza’s trust by providing
knowledgeable service.

CONSUMER CREDIT:
The consumer credit industry has gone through changes for two reasons:
• Changes in technology: Changes in technology have made it easier to collect and share information while at the
same time increasing consumer concerns about privacy and security.
• Changes to regulations: Changes to regulations have relaxed the boundaries between different types of financial
institutions, enabling overlapping services and increasing competition among the sectors.
These changes mean advisors can now provide a broader range of services using increasingly sophisticated
technology. However, they are working in a field of greater competition and ever-increasing threats to consumer
security. More than ever, clients are looking for services from an advisor who is knowledgeable and trustworthy.

When Kareem and Aziza Ali meet with Bryan to discuss their mortgage renewal, Bryan takes the time to review their
financial goals and to verify that their personal information is up to date.
Since their last meeting, Kareem and Aziza’s discretionary income has increased. Bryan suggests an accelerated
payment schedule and shows them how it will help them shorten the amortization period and reduce interest paid
on their mortgage loan.
Kareem and Aziza are pleased that Bryan is careful about the accuracy of their private information, and they feel
that he is looking out for their best interests by showing them how they can save money.
CREDIT FUNDAMENTALS
5 | Explain how the 5 Cs of Credit are used to evaluate a client’s ability to borrow.
Consumer credit plays a key role in the economy and in the day-to-day lives of almost all consumers. It is almost
impossible to live in today’s society without needing to borrow on credit to pay for products and services that are
basic necessities in our lives.
Approving clients for credit is a fundamental aspect of the advisor’s role, and determining your clients’
creditworthiness and calculating their credit limits are skills you will need to put into practice on a regular basis.
By learning the considerations for granting credit, you will be able to collect relevant information from the client to
make accurate credit decisions.
THE 5 Cs OF CREDIT
Before a financial institution advances credit to clients, the clients’ creditworthiness is assessed based on
information they provide and on their credit history. The tests used to determine if it is in the lender’s best interest
to advance credit may also help clients to plan their finances. For example, if the tests indicate a high risk, clients
should view this as a warning sign and reassess their credit habits.

THE 5 CS OF CREDIT?
The lender’s criteria in assessing a client’s credit risk are described as the 5 Cs of Credit, as follows below:
Character Character refers to the client’s honesty, reliability and intention to repay credit.
Character assessment relies on full disclosure by the client and is determined by the
client’s existing level of debt, assets, employment record, residence stability and
purpose of the loan.
Capacity Capacity refers to the client’s ability to repay the loan.

Capacity assessment is determined by the client’s current income, job stability, assets
and future considerations.
Credit Credit refers to the client’s past credit history, which the lender considers an indicator
of how debt may be handled in the future.
Credit assessment is determined by the client’s current use and availability of existing
credit, payment history, delinquencies and any records of outstanding judgments.
Collateral Collateral refers to property that can be used to secure a loan.

Lenders may require collateral as security if the loan is substantial relative to the
client’s net worth. If the loan is in default, the assets pledged as collateral are
liquidated to provide for repayment of the loan.
Capital Capital, also known as equity or financial capital, refers to the client’s net worth and is
based on total assets and general financial situation.
Capital is viewed as an extension of the client’s character, an indicator of financial
management skills and a source of collateral. A high score in this category can
indicate that the client has a secondary source of repayment funds in the event that
regular income is disrupted.
EXAMPLE
When Vikram Patel approaches Bryan Lee’s financial institution to apply for a line of credit to use as an
emergency fund, Bryan assesses Vikram’s creditworthiness using the 5 Cs approach. Because Vikram works as
a cameraman in the film industry and sometimes faces employment gaps between jobs, his capacity to repay
funds is not perfect. However, his line of employment pays well, he carries no debt and he has a spotless credit
report. Also, he has equity in his house that can be used as collateral in the event of default. Based on his 5 Cs
assessment, Bryan decides that Vikram presents a low risk and he approves the line of credit.
Did you notice that Bryan uses his judgement and is not rigidly bound by the 5 Cs of Credit? A good
advisor considers all factors and weighs one against the other to arrive at a decision.

THE IMPORTANCE OF CREDIT HISTORY

Credit history is determined by a credit bureau, an organization that supplies credit information for a fee to credit
bureau members. Members, including banks, trust companies, credit unions/caisses populaires and other lenders and
issuers of credit, routinely conduct credit checks on anyone who applies for a credit card, loan, mortgage or any form
of credit. Anyone who has applied for, or previously used, any form of credit will have a credit file at a credit bureau.
THE CREDIT SCORE

Credit-reporting agencies provide a credit score, also known as a beacon score, that is a numerical value based
on a statistical analysis of the borrower’s information. The details on a borrower’s credit file can be further used to
influence a lender’s decision whether to advance credit. An unfavorable credit report can jeopardize a borrower’s
ability to obtain credit.
VIEWING CREDIT BUREAU FILES

By law, anyone can request a copy of his or her credit bureau to verify and amend the information if it is incorrect.
Further, borrowers have the right to request that missing data be added to their files. Borrowers also have the right
to know why they have been refused credit by a lender.
INFORMATION FOUND ON A CREDIT REPORT

The report generally contains four types of information:
• Personal information: Name, current address, previous address, current employer, employment history, and
other personal information
• Account history: A list of all current and previous creditors, and a score related to payment history.
• Inquiries: A record of anyone who has requested the credit report in the past few years, either for credit or
employment purposes
• Public record information: Information regarding legal judgements, civil actions, liens or bankruptcies
A credit report may also contain a consumer statement, which is personal comment submitted by the consumer
to clarify information in the report.
Did you know that if a company provides inaccurate information to a credit bureau, both the credit
bureau and the company that provided the information have a legal responsibility to correct it?
EXAMPLE
When Angela Gerhart applied for a loan, she was surprised to learn that Bryan Lee turned down her application
because of a poor credit report. When she asked the credit bureau for a copy of her report, she discovered that
according to the report, she was delinquent in paying for purchases made on a credit card that she does not
own. Angela suspected that she was a victim of identity fraud. She contacted the credit card company to cancel
the card and is currently working with a representative of the company to have the charges removed and her
name cleared.

DEBT SERVICE RATIOS
6 | Calculate and interpret debt service ratios.
THE DEBT SERVICE RATIO

A debt service ratio is a ratio of two numerical values selected from a borrower’s financial statements that are
used as a guideline to help lenders and financial planners evaluate a client’s financial situation. A commonly used
method for measuring clients’ debt capacity is to calculate whether or not their debt service ratios fall within
standard guidelines.
The gross debt service ratio (GDSR) and the total debt service ratio (TDSR) are the two most common debt
servicing ratios used by financial institutions to determine a borrower’s capacity to repay a loan.
THE GROSS DEBT SERVICE RATIO

The GDSR is the calculation of all annual housing costs, whether rent or mortgage, as a percentage of annual gross
income. Mortgage costs include principal and interest payments, property taxes, heating and 50% of condominium
fees (if any).
INTERPRETING THE GROSS DEBT SERVICE RATIO USED

The GDSR is used to determine if a client has a manageable level of annual housing costs relative to income.
• A ratio of 32% or less of annual gross income is considered acceptable by most lenders.
• The GDSR may not be more than 32% even if a client has no other debt.
THE TOTAL DEBT SERVICE RATIO

The TDSR is calculated as annual rent or mortgage payments, property tax, heat and 50% of annual condominium
fees plus other annual debt payments as a percentage of annual gross income.
INTERPRETING THE TOTAL DEBT SERVICE RATIO USED

The TDSR is used to determine if a client has a manageable level of annual housing and debt costs relative
to income.
• A ratio of 40% or less of annual gross income is considered acceptable by most lenders.
When you calculate the TDSR with annual debt payments, remember to include
• automobile lease payments;
• line of credit (LOC) payments based on 3% of the LOC limit;
• credit card payments based on 3% of the limits.
Financial institutions may allow monthly alimony payments as income to the receiving spouse or debt obligation
to the spouse paying the alimony. Confirmation of income or payment is done through the review of the separation
agreement or tax return.

We do not use spousal support or child support in our TDS ratio calculations; this information will not be referenced
and is beyond the scope of the content.
Financial ratios do not reflect a client’s entire financial situation. Non-financial factors, such as a client’s marketable
skills and abilities, personal situation and stage in the life cycle, should also be considered.
NOTE
If there is no specific information in the exercise or exam question related to the payment option for the credit
card and LOC, please use rules above.
In general, debt service ratios have the following pitfalls:
Pitfall Example
The GDSR and TDSRs highlight a client’s current A doctor and a commission-based salesperson may have
financial situation and do not consider the the same expected annual gross income, but the doctor’s
variability of future income and asset values. income is typically more stable and can likely support a
higher level of debt.
The GDSRs and TDSRs do not provide A high-income earner may have high discretionary
information on a client’s short-term liquidity or expenses and be unable to meet debt service payments in
long-term solvency. the short term or principal repayments over the long term.
The GDSRs and TDSRs are based on annual gross A family with two income-earners, each earning $30,000
income, but because debt payments are made in annually before tax, will have significantly higher income
after-tax dollars, it is more appropriate to assess on an after-tax basis than a family with one income-earner
annual debt payments relative to annual who has a higher marginal tax rate (MTR) earning $60,000
after-tax income. annually before tax.
The GDSRs and TDSRs are only applicable for A four-member family with an annual income of $35,000
average family incomes. is likely unable to afford to spend 40% of annual income
on debt servicing.
A four-member family with an annual income of $150,000
can likely afford to spend more than 40 % of their annual
income on debt servicing.
Remember that debt service ratios cannot be assessed without taking into account a client’s entire
financial situation.
EXAMPLE
Ramona has a mortgage costing $2,200 per month with property taxes that are $300 per month, for a total of
$30,000 per year. She has no other debt payments and a gross income of $100,000 per year. Because she has
no debt payments, her GDSR and TDSR are the same at 30%. Her GDSR is below the recommended limit, and
Ramona has the capacity to assume credit.

Now suppose that Ramona has applied for a personal line of credit with a limit of $25,000. Calculate her
TDSR assuming a monthly payment of 3% of the authorized limit.
Remember, even though the line of credit is for future needs, the financial institution has to qualify the
client using a prescribed payment for debt servicing calculations. We assume payments as though it
was entirely drawn down, since Ramona has the ability to assume that debt at any time. In this case,
payments are approximately $9,000 (3% x $25,000 x 12 months) a year. Her TDSR would equal 39% of
her annual gross income—just under the recommended 40% limit.
CREDIT FUNDAMENTALS:
Before a financial institution advances credit to clients, the lender assesses the clients’ credit worthiness based on
the following information:
• The Five Cs of credit:
Character
Capacity
Credit (credit history based on the credit bureau report)
Collateral
Capital
• The client’s debt service ratio:

GDSR at 32% or less
TDSR at 40% or less

Vikram Patel is applying for a line of credit at Bryan’s financial institution. To assess Vikram on the basis of the 5 Cs,
Bryan does the following:
1. He asks Vikram to provide information.
2. He reviews Vikram’s current financial situation.
3. He reviews Vikram’s credit history for red flags.
4. He assesses Vikram’s assets that may be used as collateral.
5. He reviews Vikram’s capital to assess his net worth and financial skills.
Vikram passes the 5 Cs assessment, so Bryan moves on to assess his debt service ratio. Since Vikram is currently
paying off a car loan, Bryan uses the TDSR that factors in Vikram’s annual debt payment.
Based on his assessment, Bryan decides that Vikram is creditworthy and goes ahead to process a line-of-credit
application on his behalf.

PERSONAL BORROWING OPTIONS
7 | Differentiate between the various types of credit available.
Financial institutions offer a number of personal borrowing options, including:

• Credit cards
• Charge accounts
• Personal lines of credit
• Personal loans
Different borrowing options suit different purposes, depending on the client’s credit rating, repayment plan and
what the credit will be used for.
When you demonstrate knowledge of the range of borrowing options available and the features of each, your clients
will feel comfortable that you understand their needs and are making suitable recommendations that work in their
best interests.
CREDIT CARDS
A credit card offers credit up to a specified limit where the cardholder must pay a minimum monthly payment,
specified in the card holder agreement. It could be anywhere from 1 to 3% of the outstanding balance depending on
the issuer and the credit rating of the borrower.
Credit card interest is high relative to other borrowing options.
A financial institution has no legal claim on the item purchased. Its only security is the cardholder’s guarantee to
repay the debt.
CREDIT CARD ISSUERS

While there are a wide variety of credit cards on the market, there are only three categories of credit card issuers.
Look at the table below to compare the three.
Issuer Example Typical Interest Rate Description
Financial VISA, 11.9% to 19.99% • No annual fee for no-frill card

Institutions MasterCard • Annual fee will sometimes apply for extra
features
• Some issuers offer travel or rewards points, or
even cash back on purchases
• Minimum monthly payment based on the
outstanding balance
• Interest free as long as full payment is made by
the due date
• Otherwise, interest is calculated on the daily
balance from the date of transaction
• Cash advance is available at full interest from
the date of access

Issuer Example Typical Interest Rate Description
Retail Stores Hudson’s Bay, 28.8% • Typically no annual or transaction fee

Simons • Interest free as long as full payment is made by
the due date
• Otherwise, interest is calculated monthly on
the statement balance minus payments made
Gasoline Petro-Canada, 24% • Typically no transaction fees

Retailers Esso • Interest free as long as full payment is made by
the due date
• Otherwise, interest is calculated either on the
posting date or the statement date
FEATURES OF CREDIT CARDS

Clients should assess the following credit card features before selecting a card:
Feature Description
Annual Card Fee The annual card fee is a fixed flat fee payable each year. All else being equal, clients
should select the card that charges the lowest annual fee.
Grace Period The grace period is considered an interest-free loan period, typically 20 to 30 days.
Clients must pay off the total amount owed by the statement due date to avoid paying
interest on the total amount for that billing period.
Interest Rate The interest rate is only relevant if clients carry an outstanding balance past the
Charged on statement due date.
Overdue Balance
Clients who carry a balance past the statement due date should select a card based on a
lower interest rate rather than a lower annual fee.
Clients who miss two consecutive payments in a 12 month period can expect an interest
rate increase. The financial institution may also decide to reduce the credit limit.
Additional There is a wide variety of additional credit card features, including free life insurance up
Features to a specified limit, travel and retail rewards, cash machine linkage and greater credit
availability.
Did you know that owning a credit card can be like having a free line of credit? Let your clients know that
they can make the most effective use of their credit cards by taking full advantage of the grace period
while paying off the outstanding balance by the statement due date. It’s the same as having a
short-term interest-free loan every month!

EXAMPLE
Here is an example of how an advisor can help a client choose a credit card with the right features for them.
Bryan Lee’s client, Judith Munro, is applying for a credit card. She would like to take advantage of its convenience
to make most of her daily purchases, paying the entire balance at the end of each billing period. Bryan suggests
that she apply for the ABC Financial Travel Rewards card. Because she plans to charge a high amount to her card
each month, the travel points she earns will outweigh the annual fee, and because she plans to pay the balance
by the due date, she will pay no interest.
CHARGE ACCOUNTS
A charge account is an account that allows a customer to purchase goods and services on credit up to a specified
limit, with payment made at a later date. Payments are made according to specified terms, with the entire amount
due on a specified date or according to a fixed payment schedule. Charge accounts are typically characterized by
high fees and interest rates.
TYPES OF CHARGE ACCOUNTS

A charge account can be a charge card, an open account credit or a conditional sales contract.
Each type of charge account is described below:
Account Type Description
Charge Card • Borrowers charge purchases up to a specified limit. In many cases, there is no limit
on these cards
• Cards require payment in full each month
• Late payments are subject to a penalty at a high interest rate
• Charge cards will be cancelled if the balances remain unpaid
• Annual fees are typically high
• Usually rewards associated with these types of cards, including travel points and
access to airport lounges
Open Account Credit • A financial institution, retail outlet or utility company allows the consumer to buy
up to a specified amount on credit
• Clients make payments according to specified terms
• No interest is charged if clients pay full amount before the statement due date
Conditional Sales • Clients pay for high priced items such as appliances in installments
Contract • The creditor retains title to the item until it is paid for, with the option of
repossession if the client defaults
• The retailer may sell the contract, along with the client’s promissory note to pay,
to a third party financial institution
• The buyer purchases the item with a down payment paid to the retailer and makes
monthly payments to the financial institution
• Conditional sales contracts are an expensive type of financing, with interest rates
as high as 25% to 30%

EXAMPLE
Lorenzo Dalbello is a freelance writer who travels extensively, writing restaurant and hotel reviews for magazines
and newspapers. He is cautious about acquiring debt and always pays his credit cards in full on the due date.
Bryan Lee recommends that Lorenzo apply for a Diners Club charge card because Lorenzo will be able to take
advantage of its generous travel rewards without being penalized by its high interest rates.
PERSONAL LINES OF CREDIT

A personal line of credit from a financial institution allows the borrower to draw on an amount of credit at any
time and for any purpose. Once you’ve repaid it, you can use the line of credit again without re-applying. This is
called revolving credit.
Interest is charged only on the amount borrowed for the period. Repayment is typically a minimum monthly
payment or a percentage of the limit of the line of credit, which may vary by issuer.
A personal line of credit provides a higher credit limit at a lower interest rate than credit card financing, and it
provides quick access to credit in case of an emergency.
TYPES OF PERSONAL LINES OF CREDIT

A personal line of credit may be any one of the following types:
Personal Line Typical Interest Rate Description

of Credit
Secured Line Prime to prime + 3%, • Borrower pledges assets as collateral

of Credit depending on borrower’s • If the borrower defaults on the loan, the lender can sell the
credit rating and value of collateral to recoup the funds
pledged assets
Unsecured Line Prime + 3% to • Borrower does not pledge assets as collateral

of Credit 7% depending on • Interest rate is higher than a secured line of credit to
borrower’s credit rating compensate for the higher risk that the financial institution
and net value is assuming
Home-equity Line Prime + 0% to • A portion of a borrower’s equity in a home is used as

of Credit (HELOC) 3%, depending on collateral to secure a line of credit
borrower’s credit • Clients can borrow a larger amount at a lower interest rate
rating and market than with unsecured personal loans
value of home
• Maximum is usually set at 80% of the home’s market
value, less any outstanding mortgage loans. (Government
restriction has capped the maximum amount for the line
of credit portion of the HELOC to a maximum of 65% of
the market value. The remaining 15% can be borrowed as a
mortgage segment under the HELOC plan)
• Application, legal and appraisal fees must be paid up front

Personal Line Typical Interest Rate Description

of Credit
Overdraft Up to 21% + overdraft • This type of unsecured line of credit allows the borrower to
Protection fee overdraw a chequing account up to a predetermined limit
• Funds advanced carry a high interest rate
• Intended to protect against temporary account overdraft
• Should be used for emergency only and repaid as quickly
as possible
Although overdraft protection is essentially a line of credit, it should only be used to protect against
temporary account overdraft. Remind clients who may be inclined to use overdraft funds for short or
long-term financing that there are much less costly alternatives available.
EXAMPLE
When Anthony Novak applies for a personal line of credit to do some renovations on his home, Bryan Lee suggests
that he take out a home equity line of credit. Anthony’s house is valued at $220,000 and he owes $115,000 on his
mortgage loan. Anthony qualifies for $61,000, or 80% of the house’s value less the outstanding debt.
PERSONAL LOANS
A personal loan is an installment loan (also called a term loan) that is typically used to finance major purchases,
such as an automobile or a home renovation.
The amount borrowed under an installment loan must be repaid over a specified term according to a fixed schedule
of monthly payments.
An installment loan has an open prepayment clause that allows the borrower to pay off all or part of the loan,
without penalty, at any time prior to maturity.
THE DIFFERENCE BETWEEN A FIXED AND A VARIABLE RATE

The interest rate charged on an installment loan may be fixed or variable:
Fixed Rate Loan • The conditions and interest rate of a fixed rate loan are set for the term of the loan
and payments.
• Monthly payments are usually blended; that is, each payment consists of principal
and interest.
• The borrower bears no cost if interest rates increase but realizes no savings if interest
rates decrease.
Variable Rate Loan • The interest rate for a variable rate loan floats with the prime rate.
• Monthly payments are blended and are typically a fixed amount (with a cushion for
rising rates) determined by the lender.
• The last loan payment is adjusted or the loan is extended for a period to reflect changes
in interest rates over the term.
• The borrower bears the cost if interest rates increase but realizes the savings if interest
rates decrease.

TYPES OF PERSONAL LOANS

Some types of personal loans that may be offered by financial institutions include:
Loan Type Description Features
Vehicle Loan The financial institution provides 100% of • Generally secured by the vehicle itself
the cost of a new or used vehicle such as a • Flexible payment schedule
car, boat or recreational vehicle.
Debt Multiple debts such as credit card debts • Secured or unsecured

Consolidation can be consolidated into one loan with one • Low interest rate
Loan monthly payment at a lower interest rate.
• Extended payment schedule
Investment Loan The borrower uses the loan to invest, if she • Secured or unsecured
believes that the after-tax return on the • Flexible payment schedule
investment will outweigh the cost of the loan.
Paycheque Also called a payday loan, this is a small, • Secured by the borrower’s paycheque
Advance short-term loan that is advanced on a • Short term
paycheque to cover expenses and that is
owed in full on payday. • Very high interest rate
• Other fees apply
EXAMPLE
Here is an example of how an RRSP loan might work. Daniela Vanderveer has $8,000 worth of unused
contribution room in her RRSP account. Bryan suggests that she borrow $8,000 to top up her RRSP, which
results in a $2,880 tax refund. Daniela applies this to her loan and pays off the remaining amount with monthly
payments over the course of a year. The interest she earns on her RRSP savings over the years will outbalance the
interest she pays on the loan. Bryan specifies that interest on RRSP loans is not tax deductible.
PERSONAL BORROWING OPTIONS:

Financial institutions offer a number of personal borrowing options.
• Credit cards
• Charge accounts
• Personal lines of credit
• Personal loans
Different borrowing options have different interest rates and repayment plans. Some options are suitable for small
purchases and short-term financing, while others are more suitable for large purchases and long-term financing. The
advisor should consider the features of each option to determine the best credit plan for the client’s purpose.


Bryan’s client, Elena Brancusi, has been routinely using overdraft protection on her chequing account to fund
purchases. Bryan meets with Elena to review her financial picture. Elena says she carries debt on three credit cards
and has trouble making ends meet. Elena also owes money on a television that she bought on an installment plan.
Bryan advises Elena to take out a debt consolidation loan to pay her credit card and conditional contract debt and
to keep only the card with the lowest interest rate for future use. Bryan suggests a fixed-rate loan with an extended
payment schedule so Elena will have predictable payments of a manageable size.
Bryan suggests a second meeting with Elena to help her put a plan in place so that in the future she is not choosing
costly borrowing options that have the potential to spiral out of control.

Mortgages 3
1 | Describe the sources of funds for mortgages. Mortgage Options
2 | Explain the types of mortgages and their features. Types and Features of Mortgages
3 | Determine the down payment, mortgage Assessing Home Affordability

payment and costs of purchasing a home.
4 | Explain the characteristics and use of the Creditor Insurance

various types of creditor insurance.
5 | Explain the regulatory considerations an Regulatory Considerations When Selling

advisor must be aware of when selling Creditor Insurance
creditor insurance.

KEY TERMS
amortization high-ratio mortgage
balloon payment interest-only loan
blended payments land transfer tax
Canada Mortgage and Housing Corporation mortgage broker

(CMHC)
mortgage insurance
closed mortgage
mortgage loan
conventional mortgage
mortgage stress test
creditor critical illness insurance
open mortgage
creditor disability insurance
pre-existing condition
creditor insurance
prepayment
creditor life insurance
RRSP Home Buyers’ Plan (HBP)
creditor loss-of-job insurance
straight-line mortgage
declining payment plan
term
First-Time Home Buyer Incentive (FTHBI)
variable-rate mortgage
fixed-rate mortgage

CHAPTER 3 | MORTGAGES 3•3
INTRODUCTION
Housing expenditures represent the largest portion of monthly expenses for most people, and the purchase of a
house is almost always a major financial decision. Because few can afford to purchase a home outright, most people
finance the purchase with a mortgage loan.
MORTGAGE OPTIONS
1 | Describe the sources of funds for mortgages.
A mortgage loan is a loan used primarily to pay for the purchase of property. The property itself becomes the
security for the loan and the mortgage loan is a registered charge against the property. The charge is released when
the debt is paid in full.
A second mortgage may be granted if there is an existing first mortgage registered against a property and there is
enough equity in the property to borrow more against. If the property is sold or the mortgage is in default, the first
mortgage is paid first and the second mortgage is paid from any remaining proceeds. The interest rate on a second
mortgage is usually higher than the first, to compensate the lender for the higher risk.
By learning about mortgage options and the attributes of the different mortgage types, you will be able to advise
your clients about the choices available to them. Your clients will be able to take advantage of your expertise to
make decisions that will help them achieve their goals.
THE MORTGAGE MARKETPLACE

Mortgages on residential properties are available through the major retail sources of capital such as banks, trusts
and credit unions/caisses populaires. The mortgage market place also includes brokers, real estate agents and
government agencies like the Canada Mortgage and Housing Corporation (CMHC).
The mortgage marketplace is divided into two parts: the primary market for mortgage funds and the secondary
market, where debt instruments are bought and sold.
Institutions that have played a significant role in regulating the market in recent years include:
• The Office of the Superintendent of Financial Institutions (OSFI)
• The Canada Deposit Insurance Corporation (CDIC)
THE PRIMARY MORTGAGE MARKETPLACE

The primary mortgage marketplace refers to the primary source of mortgage funds for clients. In the Canadian
marketplace, the main originators of mortgage money are:
• Chartered banks
• Trust companies
• Credit unions/Caisses populaires
• Life insurance companies
• Pension Fund mortgages
• Canadian Mortgage Investment Companies
• The Canadian Mortgage and Housing Corporation (CMHC)
Different issuers of mortgages are described below.

CHARTERED BANKS
A chartered bank is a bank that is authorized to operate by the Government of Canada and is regulated under the
Bank Act. Compliance is monitored by the Office of the Superintendent of Financial Institutions (OSFI). The Canada
Deposit Insurance Corporation (CDIC) offers protection to consumers for their deposits in member institutions.
The Bank Act restricts mortgage loans issued by chartered banks to an 80% loan-to-value ratio, unless the loan
is insured.
Many of the chartered banks have created subsidiaries known as mortgage corporations. Funds are raised by these
corporations through the issuance of Guaranteed Investment Certificates (GICs) which are guaranteed by the parent
bank and used for mortgage lending, with terms and rates matched to those of the GIC.
Chartered bank mortgage investments have concentrated on single family loans where, by means of their vast pool
of lendable funds and extensive branch system, they have taken a large portion of market share from both the life
insurance and trust companies.
TRUST COMPANIES
Trust companies, unlike banks, have the power to conduct fiduciary business as executors, trustees and
administrators of wills and estates. As professional trustees, trust companies also administer portfolios for other
entities, notably pension funds.
Trust company mortgage investment, like that of the chartered banks, is restricted to a maximum loan-to-value
ratio of 80%, unless the loan is insured.
Trust companies are regulated under the Loan and Trust Corporations Act of each province, and OSFI and CDIC are
the compliance watchdogs. As with chartered banks, because the liabilities of trust companies are relatively short
term, considerable attention must be paid to liquidity.
CREDIT UNIONS
Credit unions, caisses populaires and other co-operatives share the second place spot to the chartered banks in the
mortgage market. As the consumer becomes more educated about financial services, credit unions offer a viable
alternative to banks and other mortgage providers.
LIFE INSURANCE COMPANIES

Life insurance companies are regulated under the Insurance Companies Act and monitored by OSFI. The act
regulates many aspects of operations, including mortgage investments. As with chartered banks and trust
companies, individual loans are limited to a maximum of 80% of the appraised value of the property, unless the
loan is insured.
Mainly due to their size and liability structure and the long term nature of mortgages, life insurance companies were
the major force in the postwar Canadian mortgage market, but they have been losing their share of the residential
mortgage market because of increased competition from banks and other financial institutions.
Recently, life insurance companies have again become involved in the residential mortgage market with the
introduction of mortgage-backed securities. Life insurance companies, particularly the larger ones, have also
been active in other areas of real estate-related investments, such as forming equity partnerships in real estate
developments, purchasing commercial real estate and granting commercial loans.
PENSION FUND MORTGAGES

Canadian pension funds represent a low percentage of the mortgage market. The regulatory act for pension funds is
the Canadian and British Insurance Companies Act.

Mortgages offer not only the security essential to a pension fund, but also comparatively high returns relative
to risk. Pension funds are also major players in the commercial real estate market. With their large pools of
capital, pension funds such as the Ontario Teachers’ Pension fund have turned to ownership of large real estate
developments to secure their money for the long term.
CANADIAN MORTGAGE INVESTMENT COMPANIES

Mortgage Investment Companies (MICs) are a special form of loan company administered under the Trust and Loan
Companies Act. They may be incorporated either provincially or federally. Federally incorporated MICs have enjoyed
a lower cost of funds because they are able to attract depositors from the retail market due to their access to CDIC
deposit insurance.
THE CANADA MORTGAGE AND HOUSING CORPORATION

The Canada Mortgage and Housing Corporation (CMHC) is a crown corporation wholly owned by the Canadian
government. Under the National Housing Act (NHA), CMHC is authorized to provide insurance to lenders against
principal and interest losses arising from mortgage defaults on various types of loans.
CMHC’s primary program is Mortgage Loan Insurance for homeowners. Loans on newly constructed single- and
multi-family residential properties can also be insured. New homes must also be registered under a provincial new
home warranty program to protect homeowners against faulty workmanship during the initial years.
CMHC continually develops programs to address specific economic conditions. These programs can insure up to
95% of the lesser of the value of the property or the purchase price. There is a maximum loan amount insurable and
this varies by region across Canada recognizing different economic conditions. This program responds to the growing
group of consumers who experience difficulty in saving enough for a home to acquire this asset when they want it.
CMHC has developed various initiatives to provide insured loans to individuals and groups under the Residential
Rehabilitation Assistance Programs, designed to improve health and safety or provide access for persons with
disabilities.
CMHC operates with a mandate to improve housing for Canadians. Qualifying loans extend from
single to semi-detached homes, townhouse, row or condominium housing and also include mobile and
modular homes.
THE SECONDARY MORTGAGE MARKET

The secondary mortgage market refers to the buying and selling of existing mortgages or blocks of mortgages held
by lenders. The original holders of the mortgages (banks, trusts, etc.) sell these investments to other institutions
(pension funds, private investors) as part of the process of managing their capital investments and cash flows and
maintaining profitability and corporate liquidity. Mortgage loans allow institutions to earn a profit on the spread
between deposit rates and mortgage rates.
The purchasers of blocks of mortgages are seeking secure income streams and profitable long term investments.
NHA-insured mortgages trade near the level of government bond interest rates, as the market considers them
obligations of the federal government. In many cases, those who sell the mortgages continue to manage the loans
for a fee, and the mortgagors are unaware that the ownership of the mortgage has passed into other hands.
Mortgages, unlike bonds or stocks, are not a homogeneous product. The underlying security is real property with an
inherent lack of liquidity and an unpredictable repayment stream. This has limited the secondary market.

TYPES AND FEATURES OF MORTGAGES
2 | Explain the types of mortgages and their features.
CONVENTIONAL AND HIGH-RATIO MORTGAGES

The two types of mortgages in Canada are referred to as a conventional mortgage and a high-ratio mortgage.
• For a conventional mortgage, financial institutions in Canada will not lend more than 80% of a home’s purchase
price or a home’s appraised value, whichever is less. Clients must provide the remaining 20% as a down payment.
• For a high-ratio mortgage, clients can borrow up to 95% of a home’s purchase price up to a maximum of
$500,000, but the mortgage must by law be insured against default. The first $500,000 is eligible for a 5%
minimum cash down.
As of February 2016, the federal government implemented new rules related to minimum mortgage down payment
requirements on new home purchases. The changes primarily impact those borrowers who are seeking insured
mortgages (less than a 20% down payment) of between $500,000 and $999,999.
Government-required mortgage down payment rules
Mortgage Amount $1 – $500,000 $500,001 – $999,999 $1M and over
Minimum Down
5% 10% 20%
Payment Requirements
EXAMPLE
The property’s purchase price is $650,000. The minimum down payment is $40,000, which is calculated
as follows:
1. The minimum required down payment on the first $500,000 is 5% = $25,000 ($500,000 x 0.05)
2. The minimum required down payment on $150,000, the remaining amount over $500,000,
is 10% = $15,000 ($150,000 x 0.10)
With a high-ratio residential mortgage, the borrower must pay between 2.8% and 4.0% of the amount borrowed as
a one-time insurance premium that is added to the mortgage loan. Premiums in Ontario, Manitoba and Quebec are
subject to provincial sales tax. The provincial sales tax cannot be added to the loan amount.
Mortgage insurance is available through the Canada Mortgage and Housing Corporation (CMHC), a government
insurer, or through Genworth Financial, a private mortgage insurer. Other mortgage insurers are currently entering
the market as well.
THE MORTGAGE STRESS TEST

Effective October 17, 2016, all high-ratio mortgage must be qualified using the Bank of Canada posted five year
mortgage rate even if your financial institution will be granting a lower rate.

Effective January 01, 2018 all conventional mortgages must be stress tested using the Bank of Canada five year rate
or the contract rate of the financial institution plus 2%, the higher of the two rates must be used.
The mortgage stress test is not applicable to renewals unless the borrower is changing financial institutions. The
stress test may subject existing borrowers to unfavorable rates with their current lender if they are unable to qualify
with the new rules.
FIXED-RATE AND VARIABLE-RATE MORTGAGES

• A fixed-rate mortgage provides the borrower with a fixed interest rate over the mortgage term. With this
choice, a client has the security of knowing what the mortgage payments will be in advance, which is important
when assessing future cash flow.
• A variable-rate mortgage provides the borrower with a rate that fluctuates with the prime rate. With this
choice, a client should consider borrowing less than the maximum monthly limit to provide a cushion against
unexpected increases in interest rates.
So which is better, a fixed rate or a variable rate? Under normal circumstances—that is, unless the prime
rate is unusually low—a client who is more risk tolerant may prefer a variable rate, while the risk-averse
client will probably be happier with a fixed rate.
MORTGAGE OPTIONS
The table below summarizes common mortgage options and features offered by financial institutions.
Features and Options Description
Prepayment
Open Mortgage • Terms normally range from six months to 12 months

• Allows for the prepayment of all or a portion of the mortgage loan at any time,
without penalty
• Interest rates are usually higher than for closed mortgages of a comparable term
Closed Mortgage • Terms normally range for six months to 10 years

• Does not allow for the prepayment of the mortgage beyond prescribed limits
without penalty
• Interest rates are lower than for open mortgages of a comparable term
Interest Rate
Level Payment • Payments are a blend of interest and principal

• Payments remain level over the term of the loan
Convertible Fixed Rate The borrower can convert from a short-term (up to one year) fixed-rate mortgage to
a long-term (over one year) fixed-rate mortgage

Features and Options Description
Capped Variable Rate • Interest rate will fluctuate with a benchmark rate but will not increase beyond a
prescribed interest limit
• Provides the borrower with a level of protection against interest rate spikes
Convertible Borrowers can convert from a variable-rate to a fixed-rate mortgage at any time
Variable Rate (usually only after the first year)
Other Features
Split-Term Mortgage • Lender allows the mortgage terms to be split into three to five parts to minimize
the borrower’s interest rate risk at renewal
• Combination of all possible terms is available
Varying Payments The borrower may double a payment or skip a payment
EXAMPLE
Henk and Sonja Wiese have $50,000 saved toward a down payment and are looking for a house to purchase.
They compare a three-bedroom house and a four-bedroom house in the same neighborhood. The three-bedroom
house is $250,000 while the four-bedroom house, which has a nicer yard as well as the extra bedroom, is
$275,000. Bryan Lee points out to them that if they buy the three-bedroom house, they won’t have to purchase
mortgage insurance because their down payment is 20% of the house’s price. Bryan also advises them that
locking in at a fixed interest rate is a good idea, because the prime rate is currently the lowest it’s been in a long
time and is likely to rise over the next few years.
TERM AND AMORTIZATION

CALCULATING INTEREST ON A MORTGAGE
In Canada, virtually all residential mortgage loans are written for blended payments of principal and interest, where
the interest and principal portions of payments are not immediately discernible to the borrower.
The Interest Act, a federal statute, requires that the interest portions on blended payments must not be
compounded more frequently than semi-annually and that the effective semi-annual rate cannot exceed more than
one-half the annual nominal rate.
The second characteristic of most residential mortgages is that interest is calculated on a not-in-advance basis. This
means that interest is calculated on a declining principal basis, where principal payments are deducted when they
are made and before interest is calculated.
SETTING THE INTEREST RATE

Interest rates are based on the current prime rate and the goal of the financial institution is to match its assets with
its liabilities so that the difference between the interest rates on the two brings profit after expenses.
Lenders will usually provide rate quotes with a 60- to 120-day holding period during which the client gets the
advantage of rate declines but is protected from rate hikes.

Did you know that the rate posted by a financial institution is often higher than the achievable rate? The
wise borrower will always shop around for a low rate.
Lower-than-market interest rates are often available for mortgages directly from builders on new home purchases.
Builders act as middlemen between borrowers and banks by booking blocks of funds with their bank for financing
a block of homes. Frequently, there are limitations on time frames or purchase prices to meet the prearranged
financing. These builder loans can be an attractive incentive to purchase a new home when rates are rising.
TERM AND AMORTIZATION

The amortization is the period of time over which the borrower pays off a mortgage loan. The amortization period
is broken into shorter periods called terms during which the borrower pays a set interest rate. At the end of the
selected term, the loan is generally renewed for another term at prevailing interest rates, and so on until the loan is
fully repaid.
A term can range from six months to 10 years and sometimes up to the length of the amortization. The standard
repayment term in Canada tends to be five years, and the standard amortization period is 25 years, although it can
be as long as 30 years (25 years maximum for CMHC insured mortgage). The lender for older homes and riskier
situations may shorten the amortization period, when they want to see the capital repaid faster.
PAYMENT PLANS
While blended payments of principal and interest are the standard repayment arrangement, there are other
potential methods of payments on a mortgage loan, as described below:
• An interest-only loan has no amortization period. Also known as a straight-line mortgage (the principal
portion is unchanged), it is primarily used in bridge financing, not permanent mortgages.
• A mortgage with a constant principal portion and a declining interest component is a declining payment plan,
and not a popular option.
• The payment due at the end of the term of a mortgage is called the balloon payment. It is then that the
outstanding principal balance can be renewed or paid off. A loan for longer terms, such as 10 years, can have a
contractual requirement for a principal repayment at an earlier date during the term.
PREPAYING A MORTGAGE
Prepayment is defined as early payment of a mortgage loan.
• An open mortgage is one that has no restriction on prepayment of principal—that is, money borrowed today
can be paid back at any time during the term of the loan without penalty.
• A closed mortgage is one where prepayment of the entire principal is not allowed during the term of the loan
without penalty.
Some prepayment rights are guaranteed by law and cannot be waived by the client. These rights are contained in
the Canada Interest Act and govern in all jurisdictions of the country. The Canada Interest Act permits prepayment
of a conventional mortgage (where the borrower is an individual) after the fifth anniversary of the mortgage, with
a statutory maximum prepayment penalty equivalent to three months’ interest. The fifth-anniversary rule does
not apply to mortgages with corporate borrowers where the terms of prepayment are wholly determined by the
contract between the two parties.
Along with a favourable interest rate, the ability to prepay under certain conditions and without penalty
is one of the most desirable features that clients look for in a mortgage loan.

PREPAYMENT OPTIONS
Most institutions today offer a wide range of prepayment options to suit customer needs. Some are
described below:
• Lump-sum prepayments permitted annually on the anniversary of the mortgage (limits range between
different banks)
• Annual double-up payments where two mortgage payments are made at once
• Regular increased monthly, bi-monthly, bi-weekly or weekly payments (up to double)
EXAMPLE
Bryan Lee advises Imre and Katrina Docek to take advantage of the not-in-advance calculation of interest by
making an annual lump-sum payment on the loan. When they make two mortgage payments at once on an
annual basis, the extra payment is applied directly toward the principal. This shifts the interest-to-principal ratio
and eliminates the debt sooner.
PAYMENT SCHEDULES
SELECTING AN APPROPRIATE PAYMENT SCHEDULE
Mortgagors can save money on a mortgage loan in two ways:
• By shortening the amortization period
• By increasing the frequency of payment
In Canada, mortgage rates are quoted as an annual rate with semi-annual compounding. The loan is usually repaid
in monthly payments, with the effective annual rate (EAR) always disclosed in the mortgage document.
While many clients will often initially assume a 25-year amortization period on a mortgage loan, it is generally
advisable to select the shortest amortization period possible. A mortgage loan with a 20 or 15 year amortization
period is paid off faster than a mortgage loan with a 25 year amortization period. A shorter amortization period will
save substantial interest costs and improve a client’s net worth.
Institutions usually offer a choice of weekly (52 payments), bi-weekly (26 payments), semi-monthly (24 payments)
or monthly (12 payments). By selecting a more frequent mortgage payment, the amortization period is effectively
shortened and interest costs are reduced.
Lenders also offer accelerated on the same periods, mostly on bi-weekly or accelerated weekly payments:
Accelerated Bi-Weekly Instead of multiplying the regular monthly payment by 12 and divide it by 26, this
Payment payment is normally calculated by dividing the monthly payment amount by two
and making 26 payments of that amount during the year. The accelerated bi-weekly
payment has the same number of payment periods as a biweekly payment, but the
payment amount is higher.
Accelerated Weekly Instead of multiplying the regular monthly payment by 12 and divide it by 52, this
Payment payment is normally calculated by dividing the monthly payment amount by four and
making 52 payments during the year. The accelerated weekly payment has the same
number of payment periods as a weekly payment, but the payment amount is higher.
An accelerated payment schedule can have the same effect as making one extra monthly payment
each year!

CHAPTER 3 | MORTGAGES 3 • 11
EXAMPLE
Here’s an example of how a shorter amortization period can save money. Janet Benjamin plans to purchase a
house for $140,000. She intends to use $40,000 of her savings as a down payment and finance the remaining
$100,000 with a 5-year term mortgage at a 7% annual percentage rate.
If Janet amortizes the mortgage loan over 15 years instead of 25 years, she will make monthly payments of $893
compared to $700. She will reduce her total interest costs from $110,123 to $60,785, saving $49,338 over the
15 year amortization period.
Amortization Monthly Total Interest Total Principal ($100,000)

in Years Payment Costs and Interest Repaid
25 $700 $110,123 $210,123
20 $769 $84,632 $184,632
15 $893 $60,785 $160,785
10 $1,156 $38,713 $138,713
5 $1,975 $18,524 $118,524
All calculations have been completed using the RBC mortgage calculator and rounded to the nearest dollar.
Remember that the total interest costs do not take into account the opportunity cost of savings
alternatives. For example, Janet could also choose to invest surplus funds or pay down other debt
instead of making larger mortgage payments.
INCREASING FREQUENCY OF PAYMENTS ON A MORTGAGE LOAN

A financial institution has offered Janet a rate of 7% p.a. (APR) on her $100,000 mortgage for a 5-year term, with
a 25-year amortization period. The different payment amounts and total interest costs for monthly, semi-monthly,
bi-weekly, weekly, accelerated bi-weekly, and accelerated weekly payments are calculated as follows (assuming a
constant interest rate throughout the period)*:
New Total
Calculating Payment Payments Amount of
Payment Amortization Interest
Payment Period per Year Payment
in Years Costs
12 monthly
Monthly 1 month 12 $700 25.0 $110,123
payments
Semi-
Monthly/2 ½ month 24 $350 24.9 $109,322
monthly
Monthly ×
Bi-weekly 2 weeks 26 $323 24.8 $108,086
12/26
Monthly ×
Weekly 1 week 52 $162 24.7 $107,715
12/52
Accelerated
Monthly/2 2 weeks 26 $350 20.5 $86,252
Bi-weekly
Accelerated
Monthly/4 1 week 52 $175 20.4** $85,978
Weekly
* Mortgage Calculations: All calculations have been completed using the Royal Bank’s mortgage calculator (see www.royalbank.com).
** New Amortization in Years: The difference between 20.4 years in the table above and the time value of money calculations 20.54 years is
due to rounding.

Increasing Frequency of Payments versus Accelerating Payments: If Janet increases the frequency of her payments
from 12 monthly payments ($700 monthly) to 52 weekly payments ($162 weekly), the total interest costs will
decrease by $2,408 ($110,123 – $107,715). However, real savings occur if Janet accelerates the weekly payments.
For example, if she pays $175 weekly on an accelerated basis compared to $162 weekly, total interest costs will
decrease by $21,737 ($107,715 – $85,978).
In order to calculate the amount of the accelerated weekly payment, we must first express the semi-annual rate as
an effective period rate (52 weeks).The effective weekly rate is calculated as shown below in steps 1 to 3.
Step 1: 2 (x,y) 7.00 2ndF →EFF 7.1225;
Step 2: 52 (x,y) 7.1225 2ndF →APR 6.8848;
Step 3: 6.8848 ÷ 52 = 0.1324% (weekly rate based on EAR of 7.1225%).
Key In Display
100000 PV 100,000.00
700 ÷ 4 = +/− PMT –175.00
0.1324 i 0.1324
COMP n −1,068 (rounded)
1,068 weeks = 20.54 years**
PAYMENT SCHEDULES
The example below shows a partial payment schedule for a $150,000, 25-year mortgage at a fixed rate of 4%
interest. We suppose monthly blended payments of $789.04 over the 25 years.
It illustrates how the balance between principal and interest payments shifts and eventually reverses over time, so
that early payments consist mostly of interest and later payments consist mostly of principal.
Monthly Payment Principal Interest Balance

($789.04)
First Payment $293.16 $495.88 $149,706.84
End of Year 1 $304.00 $485.05 $146,417.45
End of Year 2 $316.28 $472.76 $142,690.16
End of Year 3 $329.05 $459.99 $138,812.29
End of Year 4 $342.35 $446.69 $134,777.76
End of Year 5... $356.18 $432.86 $130,580.23
End of Year 23 $726.56 $62.48 $18,171.76
End of Year 24 $755.92 $33.12 $9,263.35
End of Year 25 $781.50 $2.58 $0.00
The calculations above were made using the RBC Mortgage Calculator

DIVE DEEPER
Click on the Job Aids Link to see examples of the following calculations:
Calculating the Equivalent Monthly Rate Job Aid.
Calculating Mortgage Payments and Outstanding Mortgage Balance Job Aid.
MORTGAGES:
Clients can take out a mortgage loan through one of the following providers:
• Chartered banks
• Trust companies
• Credit unions/Caisses populaires
• Life insurance companies
Clients have the option of choosing a conventional or a high-ratio (insured) mortgage at a fixed or variable rate.
Clients also have the choice of an open mortgage, with prepayment options, or a closed mortgage, with no
prepayment options.
Making lump-sum prepayments or increasing the frequency of payment will shorten the amortization period of a
loan and save interest costs.

Isaac has been mortgage free for several years and has recently decided to renovate his kitchen and bathroom. He
has been pre-approved for a mortgage refinance of $100,000 that he will use to pay for the project.
Bryan explains prepayment options and asks if Isaac would like to take out an open mortgage with a prepayment
option or a closed mortgage with no prepayment option, at a slightly lower interest rate. Isaac chooses a closed
mortgage that allows him to pay 10% of the principal annually.
Bryan explains the various payment schedules and asks Isaac how often he would like to make his payments. Isaac
chooses the accelerated bi-weekly payment schedule.
Bryan explains to Isaac that by making this choice, he is shortening the amortization period by four and a half years
and saving $23,871 in interest costs. Having chosen regular bi-weekly payments instead, his client would only have
saved $2,037.

ASSESSING HOME AFFORDABILITY
3 | Determine the down payment, mortgage payments and costs of purchasing a home.
Clients who have been approved for a mortgage loan to purchase a home must take the following factors into
consideration to determine what they can afford:
• Down payment
• Mortgage insurance (if mortgage is high ratio)
• Land transfer tax and other fees
• Mortgage payment
• Monthly installment debts
• Gross Income
As well as the month-to-month costs of owning a home, clients need to know how much money they will need up
front, including not only the down payment but all fees and start-up costs. Your job as an advisor is to help your
clients determine a financial target and put a plan in place to achieve it.
After learning to assess home affordability, you will be able to make accurate calculations for your clients so that
they can confidently set realistic home-buying goals and work effectively to achieve them.
DETERMINING THE DOWN PAYMENT

The financial objective of clients wishing to purchase a home is to follow a savings program to build up the down
payment required. Clients will generally invest these savings in term deposits such as GICs or T-bill/money market
funds to preserve the capital, and maybe in mortgage/bond funds based on the investment horizon.
The amount needed for a down payment is calculated using the following variables:
Variable Symbol Description
Down Payment Future Value (FV) 20% of the home’s value plus start-up costs and fees (for
Required a conventional mortgage)
Current Savings Present Value (PV) The client’s current savings toward down payment
determined by net worth statement
Accumulation Period Term (n) Specified period over which the client must accumulate
for Savings capital to meet savings objective
Regular Savings Payment (PMT) The amount the client can save on a regular basis
determined by the current cash flow statement and included
as a savings objective in the projected cash flow statement
Rate of Return Interest (i) Expected return over the accumulation period from
conservatively invested funds (to preserve capital)
• Non-registered investment calculated as
after-tax return
• Registered investment calculated as before-tax return

EXAMPLE
George and Nathalie Desjardins want to purchase a house in 4 years. They currently have $25,000 in non-
registered investments to use toward their down payment. Over the next 4 years, they expect to save
an additional $6,000 p.a. (at the end of each year) and earn an after-tax return of 3% p.a. on all of their
investments. At the end of 4 years, the Desjardins will have accumulated $53,240 to use toward a down payment
on their house:
Key In Display Description

25000 +/– PV –25000.00 Current savings
4n 4.00 Accumulation period
3i 3.00 Expected after-tax return
6000 +/– PMT –6000.00 Additional annual savings
COMP FV 53240 (rounded) Estimated accumulated capital
THE RRSP HOME BUYERS’ PLAN

Through the RRSP Home Buyers’ Plan (HBP), qualified home buyers can withdraw up to $35,000 from their RRSPs
to buy or build a home for withdrawals made after March 19, 2019. For a couple, each partner can use up to $35,000
of RRSP assets, for a total maximum limit of $70,000. This withdrawal is not considered income, but rather an
interest-free loan from the RRSP.
The loan must be completely repaid to the RRSP within 15 years, beginning in the second calendar year following
the year of the withdrawal. The annual minimum payment is $2,333 for a $35,000 withdrawal. There is no annual
maximum repayment and ideally the loan should be repaid to the RRSP as quickly as possible.
If a repayment is missed, the annual payment is considered an RRSP withdrawal and taxed as part of a client’s income
for that year. These funds cannot then go back into the RRSP. Contributions made to an RRSP less than 90 days before
a withdrawal are not eligible to be used under the RRSP HBP.
As of 1999, if clients have repaid all amounts previously received under the RRSP HBP, eligibility to subsequently
participate in the plan is not affected by previous participation, provided they meet the definition of a qualified home
buyer. Also, disabled individuals who previously owned a home can participate in the RRSP HBP if their new dwelling is
more accessible or better suited to their needs.
The 2019 Federal Budget also proposed that individuals that experience the breakdown of a marriage or common-law
partnership be permitted to participate in the Home Buyers’ Plan, even if they do not meet the first-time home buyer
requirement. This applies to withdrawals made after March 19, 2019.
A person supporting a disabled individual can also use the RRSP HBP for these same purposes.
Home Buyers’ Plan (HBP): Clients often question the advantages and disadvantages of using RRSP funds for a down
payment on a home. In summary, clients must carefully assess all of the factors that can potentially affect their
decision whether to use the RRSP assets as part of the down payment on a home. These factors include current
marginal tax rate (MTR), age, the amount of savings for the down payment, and the amount of RRSP assets and
nonregistered assets. Clients must also assess their current financial situation and the priority of their objective to
purchase a home in the short term, relative to their long-term retirement objective. Further, clients must assess both
their current and future expectations regarding real estate prices.
It may be advantageous for clients who do not have enough capital to qualify for a conventional mortgage to use their
RRSP assets to increase their down payment rather than pay default insurance on a high-ratio mortgage.
Note that the RRSP HBP loan has associated opportunity costs. By removing funds from an RRSP, clients forgo the
tax-sheltered compounding that would have accumulated in the plan. However, some financial planners argue
that clients are investing in a principal residence, which also allows tax-sheltered compounding, since the principal
residence is tax-exempt.

Remember that clients who do not have enough capital to qualify for a conventional mortgage will have
to take out a high-ratio mortgage. In that case, they will incur additional costs for mortgage default
insurance. Make sure these clients have explored other options (such as using RRSP funds) to meet the
20% requirement if possible.
THE CMHC FIRST-TIME HOME BUYERS INCENTIVE (FTHBI)

The 2019 federal budget announced support for first-time home buyers in the form of a shared equity mortgage
with the CMHC. The First-Time Home Buyer Incentive (FTHBI) is a program that allows eligible first-time home
buyers to apply to finance a portion of their home purchase though a shared equity mortgage with the CMHC. The
program is expected to be in effect as of September 2019. The key points of the FTHBI are:
• 5 percent minimum down payment required
• Maximum 5 percent shared equity on existing properties
• Maximum 10 percent shared equity on newly constructed homes
• No ongoing payments are required on the shared equity portion
• Household income must be under $120,000 per year
• The insured mortgage and the incentive cannot be greater than four times the participants’ annual
household incomes.
An eligible first time home buyer with a down payment of 5% who purchases a newly constructed
home valued at $400,000 can apply for a 10% shared equity with the CMHC. This would reduce the
borrower’s mortgage from $380,000 to $340,000. This can reduce the borrower’s monthly mortgage
costs by as much as $228 per month.
DETERMINING THE MORTGAGE PAYMENT

Because very few clients can afford to pay cash for a home, the amount they spend generally depends not only
on the amount of mortgage financing they can obtain from a financial institution but also on how much they can
afford. Factors to consider in determining affordability are:
• Amount of down payment
• Gross Income
DETERMINING HOW MUCH THE BORROWER CAN AFFORD

The GDSRs and TDSRs that financial institutions use to assess borrower risk are reasonable guidelines to determine
how much a client can afford, but they may not apply to all situations.
Although clients may be constrained by limits imposed by the lender, true ability to pay a mortgage loan is
determined by the client’s income, expenses and prioritized financial objectives.
Clients with high discretionary expenses may find their budget will not support a 32% GDSR. On the
other hand, clients who are thrifty may be able to carry a higher GDSR. The decision on how much
clients can afford for a mortgage loan is partly based on their priorities. If owning a home is a major
priority, then other objectives may need to be postponed.

A projected cash flow statement can be constructed to determine the funds available for a mortgage payment after
considering all of the additional home ownership expenses and ongoing costs.
To determine whether a client can afford to purchase a home, the following key factors must be assessed:
• Price of the home
• Client’s down payment
• Size of the mortgage loan
• Gross Income
STEPS TO DETERMINE HOME AFFORDABILITY

A home affordability analysis is based on the following steps:
Step 1 Determine the client’s existing capital and projected monthly and annual savings for down payment and
start-up costs.
Step 2 Calculate the associated costs of home ownership:
• Calculate initial start-up costs.
• Deduct this amount from the accumulated capital to determine the down payment.
• Determine ongoing annual home expenses, excluding mortgage payments.
Step 3 Determine the maximum monthly mortgage payment using the affordability tests:
• Test 1: GDSR
• Test 2: TDSR
Step 4 • Determine the maximum affordable mortgage loan given the maximum monthly mortgage payment
and the available down payment (Step 1) excluding start-up costs (Step 2).
• Then determine the maximum affordable home purchase price based on the maximum affordable
mortgage loan together with the down payment.
Step 1 Determine the client’s existing capital and projected monthly and annual savings for down payment
and start-up costs.
The MacDonalds have $36,000 in non-registered assets to use toward a down payment. Over the next 4 years,
they expect to invest $5,500 p.a. at the beginning of each year and earn a real, after-tax return of 4% p.a. on all of
their non-registered assets. The MacDonalds will accumulate $66,400 (A) at the end of 4 years to use as a down
payment and to meet start-up costs on their home.
Key In Display
2ndF BGN
36000 +/– PV –36,000.00
4n 4.00
4i 4.00
5500 +/– PMT –5,500.00
COMP FV 66,405 (rounded) (A)

Step 2 Calculate the associated costs of home ownership:

• Calculate initial start-up costs.
• Deduct this amount from the accumulated capital to determine the down payment.
• Determine ongoing annual home expenses, excluding mortgage payments.
The MacDonalds estimate their home start-up costs will be $8,500 (B). Their ongoing annual expenses for home
ownership, excluding the mortgage, will be $7,500 (C).
Estimated Start-Up Costs for Home Estimated Ongoing Annual Home Expenses
Total of fees and closing costs 3,000 Property taxes (GDS)* 2,800
Moving expenses 1,000 Home insurance 800
Repairs, renovations, hook-ups, etc. 2,000 Life insurance for mortgage 300
Furniture, appliances 2,500 Heat (GDS)* 2,400
Repairs, renovations, decorating 1,200
Total (B) Total (C)
$8,500 $7,500
* Note that these are the numbers used in the Gross Debt Service Calculation (GDS) in Step 3.
Therefore, the MacDonalds will have a down payment of approximately $57,900. This is calculated from the
projected capital of $66,405 from Step 1 minus the estimated start-up costs of $8,500 (B) ($66,405 − $8,500 =
$57,905 [rounded to $57,900]).
Step 3 Determine the maximum monthly mortgage payment using the affordability tests:
• Test 1: GDSR
• Test 2: TDSR
CONVENTIONAL MORTGAGE
THE MACDONALDS
The MacDonalds’ would like to purchase a small home in the suburbs. Their combined gross income is $66,900 p.a.
and they have no existing debt. They have saved $66,400 and expect closing and moving fees to be $8,500, leaving
them with a down payment of $57,900 ($66,400 – $8,500 = $57,900) The expected property taxes are $2,800
p.a. ($233 per month) and heating will cost $2,400 p.a. ($200 per month). There are no condo fees expected as it
is a detached home. The current rate for a 5-year term mortgage is 7% p.a. (it is assumed that this rate will remain
unchanged over the next 4 years). They have a visa card with a $5,000 limit and zero balance (3% of the limit used
in TDS). They would also like to purchase or lease a small car, if they can find one that fits their budget ($296 taxes
included per month).
To determine the maximum monthly mortgage payment, the MacDonalds’ assess their GDS ratio (“Test 1”) and
TDS ratio (“Test 2”). The GDS and TDS are used by the banks to determine the size of the maximum affordable
mortgage loan.
Based on the GDS and TDS ratios, the maximum monthly mortgage payment the MacDonalds’ qualify for is $1,350.
This amount is determined as follows:
TEST 1 – BASED ON GDS RATIO OF 32%:

Calculate what a client can afford to spend each month on housing costs using the GDS ratio:
Gross annual income Annual property tax Heating 50% of condo fee
32% × − − −
12 12 12 12

From the GDS ratio, the amount of the total monthly housing-related costs (mortgage principal + interest +
property taxes = PIT) the MacDonalds’ can afford is $1,784 per month (32% × annual gross income of $66,900/12).
Since property taxes are $233 per month and heating $200 per month, the maximum mortgage payment lenders
will allow is $1,351 per month ($1,784 – ($233 + $200)). We will use $1,350 for the purposes of this illustration.
TEST 2 – BASED ON TDS RATIO OF 40%:

Calculate what a client can afford to spend each month on housing costs using the TDS ratio:
Gross annual Annual 50% of Monthly debt

income property tax Heating condo fee payment
40% × − − − −
12 12 12 12 12
Since the MacDonalds’ have no other debt but they have a visa card with a zero balance and a limit of $5,000 and
are planning on leasing or purchasing a small car as the house is in the suburbs. The TDS ratio will not affect the
maximum mortgage payment as the minimum payment on the credit card would be $150 if used to the limit and
the lease monthly payment will not exceed $296 taxes included. The MacDonalds’ can afford to have expenditures
that do not exceed $2,230 per month (40% × annual gross income of $66,900/12). Since the gross debt payment is
$1,784, the maximum monthly debt payment lenders will allow is $446 per month ($2,230 – $1,784). Considering a
credit card payment of $150 and a potential lease of $296, there is no room for any additional installment payments.
Step 4 • Determine the maximum affordable mortgage loan given the maximum monthly mortgage
payment and the available down payment (Step 1) excluding start-up costs (Step 2).
• Then determine the maximum affordable home purchase price based on the maximum
affordable mortgage loan together with the down payment.
MAXIMUM AFFORDABLE HOME PRICE

Based on the MacDonalds’ GDS and TDS ratios, the affordable mortgage is calculated as follows:
Step 1: Calculate EAR Step 2: Calculate Equivalent Monthly Rate

Key In Display Key In Display
2 (x,y) 7 12 (x,y) 7.1225
7 2ndF EFF 7.1225 7.1225 2ndF APR 6.90
÷ 12 = 0.5750
Then
Key In Display
1350 +/– PMT –1,350.00
0.5750 I/Y 0.5750
300 n
0 FV
COMP PV 192,744 (rounded)
To determine the maximum affordable home, the MacDonalds’ approximate down payment of $57,900 is added
to the mortgage loan amount of $192,744, for a total of $250,644. This is the approximate house price the
MacDonalds’ can afford to purchase if they have a down payment of $57,900 and they finance the balance with a
mortgage of approximately $192,744.
Please note that based on the down payment of $57,900 a client could consider a house in the price range of
$289,500 [$57,900/0.20], assuming the client has sufficient income to qualify for the mortgage. As explained
above, this price is not a feasible option for the MacDonalds’.

EXAMPLE
When Bryan Lee’s clients Jason and Tamara MacDonald want to buy a house, this is how they will determine
what they can afford:
• They determine a savings goal based on what they currently have in savings and what they believe they can
save over the next four years to include all the associated costs of home ownership.
• They calculate the start-up costs associated with buying a home and subtract that amount from their savings
target to determine the down payment amount.
• They calculate ongoing expenses, not including mortgage payments.
• They determine how much they will be able to pay each month on their mortgage loan based on their GDSR
(as they have no other debt payments, the GDSR becomes the TDSR).
• They determine how much mortgage they can carry based on the monthly payments they can afford.
• They determine the maximum amount they can afford to pay for a house based on their mortgage limit and
their down payment.
The amount the MacDonalds save for a down payment will determine the size of the mortgage loan and
the price of the home.
MORTGAGE INSURANCE FEES

The taxes, charges and transaction costs for the typical house vary considerably by location. Transaction-related
costs are typically 2% to 5% of the purchase price of an average home in most municipalities. Other local charges
affect the total fees quite considerably.
Fees and taxes can add a significant amount to the cost of buying a home. Many clients are unaware of
the hidden costs involved in the decision to become a home owner.
MORTGAGE INSURANCE
For the benefit of having a mortgage insured by any qualified mortgage insurance company, the borrower must pay
an insurance premium. Qualified mortgage insurance companies include:
• CMHC
• Genworth Financial Canada
• Canada Guaranty Mortgage Insurance Company
The benefit to the borrower of an insured mortgage could be more competitive interest rate pricing, as the lender
effectively has a Government of Canada guarantee that the loan will be repaid as agreed.
The insurance premium, a one-time fee, can either be paid in full when the loan is disbursed or amortized over the
life of the loan and repaid over time with each mortgage payment.
Amortizing the insurance premium over the life of the loan reduces the need for cash up front but
significantly increases the cost. Using a short-term debt such as a line of credit to pay the premium up
front may be prudent.

Loans that qualify as conventional mortgages, which do not require insurance under the law, can also apply for and
receive insurance.
If the loan-to-value ratios have increased when a mortgage is renewed, a new fee is payable on the entire loan
amount, not just the incremental loan amount. This may occur where a mortgagor, at first mortgage renewal,
wishes to refinance a second mortgage to take advantage of lower, first mortgage rates.
APPRAISAL FEE
A financial institution usually requires an appraisal of a property before it will advance a mortgage loan to be sure it
will sell on the market for at least the amount of the loan.
While the market values of investments such as stocks and bonds are readily available in the financial press, a
home’s market value is not observable and must be estimated. A formal estimate of a home’s value is called
an appraisal.
A home’s market value is defined as the highest price a buyer will pay if the house is for sale in the open market,
under normal circumstances (without financial pressure or distress), with reasonable time to find a willing buyer.
Remember that a property may be undervalued if the owner is forced to sell through power of sale, loss
of employment or a marriage break-up.
The two common methods used to value a home are the direct market comparison approach and the cost approach.
Approach Description Method
Direct Market Properties are valued by comparing the • Locate recently sold properties in the
Comparison prices at which similar properties in the local market that are similar to the
same area have been sold. home being appraised.
Adjustments must be made for differences • Make adjustments to account for
among properties. varying characteristics between homes.
To do a direct market comparison, detailed

information for each sale can be acquired
from the local registry, land title offices or
local real estate board.
Cost When there are no sales of comparable • Estimate the land value.
homes in the same area in the recent past, • Add the cost of rebuilding the
or if data is unavailable, the cost approach existing home.
can be used.
• Subtract the home’s accrued
The concept behind the cost approach is that depreciation, such as wear and tear
at any time, home values should not rise and obsolescence.
above the cost of rebuilding the home as if it
were new, plus the cost of the land value.
Some of the factors an appraiser may consider when doing a direct market comparison appraisal include:
• Lot and building size
• Type of construction
• Parking

• Presence or absence of desired features

• Proximity of schools, parks and public transit
A newly built home is an example of a situation where a cost appraisal is more appropriate.
MORTGAGE BROKERS
Your client may choose to use the services of a mortgage broker. These brokers are licensed provincially to provide
assistance to the public in finding mortgage funds.
As with real estate agents, the best way to select a broker is through a reference from a satisfied customer.
Generally, for residential mortgages, the broker is compensated by the lending institution with a finder’s fee for
bringing in the business.
LAND TRANSFER TAX

The purchase of a property and the registration of the mortgage usually happen at the same time and there is
usually a provincial tax on the transfer of the deed to the new owners, called a land transfer tax.
In Ontario, as an example, the tax is based on a multi-tiered system according to the value of the property.
The fees are:
• .5% on the first $55,000 of property value
• 1% from $55,000 to $250,000
• 1.5% from $250,000 to $400,000
• 2% from $400,000 up
CLOSING COSTS
Miscellaneous closing fees include:
• Condominium Estoppel Certificate fees (a common law certificate that outlines a condominium corporation’s
financial and legal state)
• Moving costs
• Home inspection fees
• Water quality and quantity certificate fees
• Survey fees (for older homes)
• Real estate fees (covered in the fees for the seller, important to know when calculating the equity available for
the purchase of a new property)
• Legal fees and disbursements
• Development charges, taxes, new home warranty fees
• GST on new homes
EXAMPLE
You may be able to help your client prepare for additional expenses by using other assets or lines of credit. For
example, when Bryan Lee’s client Mai Nguyen realized that her down payment would be significantly reduced by
fees and taxes, to the point that she was unable to afford to purchase a home in the price range she had hoped
for, Bryan pointed out to her that she could have access to extra funds by selling some of her other assets.

ASSESSING HOME AFFORDABILITY:

• Clients who do not have enough money for a down payment to purchase a house will have to develop a savings
plan, or they may consider borrowing from their RRSP savings.
• The down payment amount is determined by the savings amount less associated costs of fees and taxes.
• The maximum affordable mortgage payment is determined by:
Amount of down payment
GDS or TDSR
• Maximum mortgage amount and maximum house price are determined by the maximum mortgage payment.
• Fees and taxes add a significant amount to the cost of buying a home and must be factored into the client’s
calculations.

Jason and Tamara MacDonald currently have no RRSP savings and $36,000 in non-registered investments to use
toward a down payment.
Bryan helps the MacDonalds to determine what they can afford in the following way:
1. He helps them develop a savings plan with a target amount of $5,500 each year for four years. All of the funds
will earn a real, after-tax rate of 4% per annum. Including their current savings, they expect to accumulate
approximately $66,400 in four years.
2. They estimate that home start-up costs will be $8,500. They subtract this from $66,400 to leave a down
payment sum of $57,900.
They estimate that ongoing home expenses (excluding mortgage) will be $7,500 per year including property
taxes and heating.
3. They have a combined total gross income of $66,900 and that they can afford monthly mortgage payments
of $1,350.
4. Based on their calculations, they can afford a $192,744 conventional mortgage at 7% interest for a five-year
term with a 25-year amortization.
The top of the price range for an affordable house is $250,644.
CREDITOR INSURANCE
4 | Explain the characteristics and use of the various types of creditor insurance.
INTRODUCTION
Creditor insurance is an arrangement between a money-lending institution and an insurance company to
provide insurance on the institution’s borrowing clients. The insurance may be life, disability, critical illness or job
loss insurance.

Creditor insurance is an optional product that borrowers can purchase when and where they obtain a mortgage
or other type of personal loan. It is available through a number of Canada’s largest financial institutions as well as
some specialized distributers.
For example, vehicle dealerships often sell creditor insurance to cover vehicle loan or lease payments if the
purchaser dies or becomes ill.
By learning about the different types of creditor insurance, the regulations related to them and your obligations to
your clients, you will be able to make knowledgeable recommendations and gain your clients’ trust.
PURCHASING CREDITOR INSURANCE

The person insured by creditor insurance is the individual borrower (or borrowers, if the policy is joint) who pays the
entire premium for the coverage. The beneficiary is the money-lending institution.
In case of insured conditions such as death, critical illness or unemployment, benefit payments are made directly to
the lender. They may consist of a lump sum benefit to pay off a loan or else a series of required payments on a loan
or lease to meet the payment schedule.
The certificate of insurance is delivered to the borrower. It contains full details of the coverage, including the
limitations and exclusions that may apply.
CALCULATION OF INSURANCE PREMIUMS

Insurance rates are typically determined based on the age of the borrower on the date of the insurance application.
The borrower’s age is typically fixed for the term of the loan or until there is a change to the repayment schedule,
although the lending institution may change rates with due notice. The way premiums are calculated varies from
one financial institution to another.
DIVE DEEPER
Click on the Job Aids link to read the Creditor Insurance Premium Calculations Job Aid which shows rate
tables and examples.
LIMITATIONS AND EXCLUSIONS

Different types of policies may contain different exclusions. A disability policy, for example, may exclude pregnancy
as a condition of coverage, while a loss of job policy may exclude loss of seasonal employment.
Most policies contain a pre-existing condition provision that limits coverage under certain conditions.
THE PRE-EXISTING CONDITION PROVISION AND MEDICAL EXAMS

A pre-existing condition provision is a form of exclusion from coverage. This provision may differ among products.
The pre-existing condition exclusion typically provides that for a certain time after the insurance takes effect, no benefits
will be payable for claims resulting from medical or other conditions that existed before the insurance was taken out.
If the particular product contains a pre-existing condition exclusion, the advisor should clearly explain the exclusion
to the borrower. Borrowers can then determine if they have any medical conditions that may be excluded from a
claim before they decide to purchase the insurance.
Typically, creditor insurance is priced on a group basis with limited medical underwriting, so most borrowers will
qualify for coverage. A basic health questionnaire may be required to determine whether there is a pre-existing
condition. Advisors should notify clients that failure to answer health questions completely and truthfully may
result in coverage being void.

Tests that are part of a routine health check that result in no indication of a health problem will have no bearing
on a claim.
Tests that are undertaken because of a known health issue must be disclosed by the borrower in the application.
Failure to do so could lead to coverage being void.
CANCELLATION POLICY
Borrowers may usually cancel a creditor policy at any time.
Also, creditor insurance typically allows a grace period after enrolment, during which the borrower may cancel with
a full refund.
TYPES OF CREDITOR INSURANCE

Creditor insurance can be purchased on the following types of loans:
• Mortgage loan
• Line of credit
• Personal loan
Furthermore, creditor insurance typically falls into one of four categories:

• Life insurance
• Disability insurance
• Critical illness insurance
• Loss of job insurance
Life and critical illness insurance on a mortgage, for example, typically ensure that a mortgage loan will be paid in
full in the event that the borrower dies or becomes critically ill. If the borrower becomes disabled or suffers a job
loss, disability or job loss insurance will typically cover monthly mortgage payments until the borrower recovers
and/or returns to work.
Each type of insurance will be treated in more detail in the following topic sections.
CREDITOR LIFE INSURANCE

Creditor life insurance is an arrangement between a lending institution and an insurance company to provide the
full amount of a borrower’s outstanding debt to the lending institution in the event of his or her death.
Creditor life insurance is available for mortgages and other types of personal loans and is offered to the borrower by
the lending institution as an option when the loan is taken out.
GENERAL PROVISIONS OF CREDITOR LIFE INSURANCE

The general provisions of creditor life insurance typically consist of:
• Certificate of Insurance
The certificate and any riders
The application
Evidence of insurability
Medical history
Applications to change insurance
Endorsements to new versions

• Non-Waiver
• Applicable Jurisdiction
• Incontestability
• Suicide Exclusion
• Age of Insured
• Currency and Place of Payment
• Assignment Rights
• Beneficiary
• Limitation of Actions
FEATURES OF CREDITOR LIFE INSURANCE

In the event of the death of the borrower, creditor life insurance pays the loan balance or the qualifying balance of
lines of credit, typically up to a limit stated in the policy.
Creditor life insurance typically has the following features:
• Single or joint coverage
• Group rate
• Grace period covering late payment
• Non-taxable benefits
ADVANTAGES OF CREDITOR LIFE INSURANCE

Creditor life insurance has the following advantages:
• Payments are conveniently blended with loan payments.
• It is easy to qualify.
• Group rates are relatively low.
• It helps safeguard savings for their intended purpose.
• It allows existing employee coverage to take care of needs other than paying off debt.
• It remains intact when employee insurance may be lost through self employment or job loss.
DISADVANTAGES OF CREDITOR LIFE INSURANCE

Creditor life insurance has the following disadvantages:
• While the premium remains the same, the coverage declines along with the balance of the mortgage.
• Because the financial institution owns the policy, it may make changes to the coverage or cancel it without
your consent.
• Coverage will terminate as soon as the mortgage is paid off.
• In the event of a successful claim, the financial institution, rather than the borrower’s beneficiaries, receives the
insurance proceeds.
• If the borrower changes financial institutions, he or she will have to reapply for insurance coverage. Rates based
on age will increase and if health has changed, the application may be declined.
• You may not be able to opt out of features you do not need.
• Because group rates are blended, healthy non-smokers pay the same amount as overweight smokers, so their
premiums may be high.

COMPARING CREDITOR LIFE INSURANCE TO TERM LIFE INSURANCE
Creditor Life Insurance Term Life Insurance
Coverage Coverage decreases as the mortgage Coverage remains the same as the
balance declines mortgage balance declines
Qualifying Terms Group underwriting Individual underwriting
Premiums Premiums remain the same as the Amount of insurance and premiums
mortgage balance and the amount of remain the same as the mortgage
insurance declines balance declines
Portability Not transferable to a new lender Transferable to a new lender
Control of beneficiary The lender is the beneficiary Borrower designates the beneficiary
Control of payment Funds are directed to pay off the lender Funds can be used as desired
PAYOUT PROVISIONS AND LIMITS OF CREDITOR LIFE INSURANCE

Creditor life insurance typically pays the outstanding loan principal amount, less outstanding arrears, up to a stated limit.
Insurance on a line of credit typically pays the balance up to a stated limit in the event of death. Rates are based
on an average monthly balance, and if the current balance is significantly greater than its average for the past
12 months, payable benefits may be limited and exclusions may apply.
EXCLUSIONS AND LIMITATIONS APPLY TO CREDITOR LIFE INSURANCE

Typically, creditor life insurance is subject to exclusions and limitations similar to the following:
• The death of the borrower must not be related to a pre-existing condition.
• Payout is set at a maximum limit.
TERMINATION OF CREDITOR LIFE INSURANCE

Creditor life insurance typically terminates under the following circumstances:
• When a premium due has not been paid following the grace period.
• When the policy is cancelled.
• When the borrower turns a specified age.
• When the older borrower with joint coverage turns a specified age (at which time only the coverage on that
borrower will terminate).
• The date the borrower (or under joint coverage, one of the borrowers) dies.
EXAMPLE
For example, Bryan Lee’s clients Louis Bernard and Susan Frankel carried creditor life insurance on their mortgage
loan for 10 years. When Louis died suddenly of a heart attack, the insurance company paid the entire balance of
the loan to the lender. While Susan was not the direct beneficiary of the insurance, she was relieved of monthly
payments and was able to meet her financial obligations on a reduced income.

CREDITOR LOSS-OF-JOB INSURANCE

Creditor loss-of-job insurance is similar to creditor life insurance, but rather than paying benefits in a lump sum, it
typically covers monthly payments on a loan or line of credit if the borrower becomes unemployed during the term
of coverage.
EXCLUSIONS AND LIMITATIONS APPLY TO CREDITOR LOSS-OF-JOB INSURANCE

Typically, creditor loss-of-job insurance is subject to exclusions and limitations similar to the following:
• The borrower must be employed full time (not self employed).
• Job loss must be involuntary and without cause.
• Employment may not be of a seasonal nature.
• Unemployment may not be due to pregnancy.
• Monthly payment amounts are set at a maximum limit.
• The number of consecutive monthly payments is set at a maximum limit.
• A minimum period of months must elapse between each period of job loss to re-qualify for benefits.
• A waiting period typically applies before benefits are paid.
TERMINATION OF CREDITOR LOSS-OF-JOB INSURANCE

Given no irregularity in payment or cancellation of policy, creditor loss-of-job insurance typically terminates on the
earliest of the following dates:
• The date the borrower returns to work.
• The date of the final allowable payment.
• The date of the borrower’s death.
EXAMPLE
For example, when Bryan Lee’s client Angelique Ong Seng was laid off from her job as a sales representative, loss-
of-job insurance provided monthly benefits to cover the loan payments on her car. When she found a new job
after four months, the payments ceased. Angelique worked steadily in that position for three and a half years, so
when that job ended, she had passed the re-qualification period of 24 months and was again eligible for benefits.
CREDITOR DISABILITY INSURANCE

As with loss-of-job insurance, creditor disability insurance typically covers monthly payments on a loan or line of
credit rather than paying a lump sum. In the event of a disabling accident or illness, disability insurance covers the
monthly payments on a loan or line of credit. Once the borrower recovers, responsibility for repayment resumes.
EXCLUSIONS AND LIMITATIONS OF CREDITOR DISABILITY INSURANCE

Typically, creditor disability insurance is subject to exclusions and limitations similar to the following:
• The disability must be of a nature that prevents the borrower from earning income.
• There must be documented medical evidence of restrictions or limitations due to the disability.
• The disability must not be related to a pre-existing condition.
• Monthly payment amounts are set at a maximum limit.
• The number of consecutive monthly payments is set at a maximum limit.
• A waiting period typically applies before benefits are paid.

TERMINATION OF CREDITOR DISABILITY INSURANCE

Given no irregularity in payment or cancellation of policy, creditor disability insurance typically terminates on the
earliest of the following dates:
• The date the disability ends.
• The date the borrower returns to work.
• The date of the final allowable payment.
• The date of the borrower’s death.
EXAMPLE
For example, when Bryan Lee’s client Allan Fisher broke his leg in a motorcycle accident, creditor disability
insurance on Allan’s mortgage loan provided monthly coverage of his payments until he was able to return
to work.
CREDITOR CRITICAL ILLNESS INSURANCE

Creditor critical illness insurance provides a lump sum payment in the event that the borrower is diagnosed with
one of several specific critical illnesses. Illnesses covered under critical illness insurance are typically cancer, heart
attack and stroke.
EXCLUSIONS AND LIMITATIONS ON TO CREDITOR CRITICAL ILLNESS INSURANCE

Typically, critical illness insurance is subject to exclusions and limitations similar to the following:
• The critical illness must not be related to a pre-existing condition.
• Payout is set at a maximum limit.
TERMINATION OF CREDITOR CRITICAL ILLNESS INSURANCE

Creditor critical illness insurance typically terminates under the same circumstances as creditor life insurance.
EXAMPLE
For example, when Bryan Lee’s client Larissa Hyrchuk was diagnosed with life-threatening breast cancer, her
critical illness insurance paid the balance of her mortgage loan. The fact that she recovered and returned to work
after a year and a half had no effect on her claim.
REGULATORY CONSIDERATIONS WHEN SELLING CREDITOR INSURANCE
5 | Explain the regulatory considerations an advisor must be aware of when selling creditor insurance.
Distributors of individual insurance products in Canada are regulated not only under the federal Bank Act but also
by a framework of provincial licensing bodies that oversee financial product distribution, licensing requirements,
consumer protection and market conduct.
Creditor group insurance distributors are not subject to the same requirements, and the field of creditor insurance is
largely self-regulated.

The Canadian Life and Health Insurance Association, in conjunction with provincial regulators and its member
insurance companies, has developed guidelines for the administration of creditor group insurance. These guidelines
are intended to protect the interests of borrowers.
In the same vein, the Canadian Bankers Association has prepared the Code of Conduct for Authorized Insurance
Activities, which sets out the minimum standards that apply to bank representatives who promote authorized
insurance products in Canada.
IMPACT OF THE GUIDELINES ON THE ROLE OF THE ADVISOR

Although exempt from licensing requirements, you as an advisor have a duty to inform your clients about creditor
insurance policies and the risks associated with these products.
EXAMPLE
For example, because creditor insurance is designed and priced on a group basis, there is very limited
underwriting, so most borrowers will qualify for coverage. Nevertheless, if the policy holder dies or becomes ill
due to a pre-existing medical condition, he or she may be disqualified from benefits.
Because selling creditor insurance is largely a self-regulated industry, it is open to abuse, and sellers of this type
of insurance may not inform the buyer about the pre-existing condition provision.
As an advisor, you are obliged to know and abide by the codes of conduct of the industry in providing creditor
insurance products and services to your clients.
GUIDELINES FOR SELLING CREDITOR INSURANCE

Under the Canadian Life and Health Insurance Association guidelines, the borrower is entitled to comprehensive
written information about creditor insurance coverage, including (but not limited to) the following:
• A statement that the insurance is voluntary and is not required as part of the loan approval process
• All terms and conditions that might limit or exclude coverage
• The insurer’s obligation to notify the borrower if the coverage is declined
• The terms upon which the coverage is to commence if the application is accepted
When coverage is approved, the insurer must issue an insurance certificate that includes a full description of the
coverage and terms as well as detailed information necessary to make a claim.
Find the Code of Conduct for Authorized Insurance Activities for the CBA’s guidelines in your online learning material.
THE ADVISOR’S ROLE IN PROVIDING CREDITOR INSURANCE

As an advisor, your role in providing loan, mortgage or line of credit insurance is to:
• Know the features and benefits of creditor insurance
• Know the limitations of the insurance coverage
• Disclose all relevant clauses to your client
• Explain the conditions under which insurance will be provided
• Explain the conditions under which insurance will not be provided
• Use updated applications
• Calculate correct monthly premiums according to the type and amount of insurance required
• Correctly complete all appropriate paperwork

• Obtain required signatures, initials and document witnessing

• Provide your client with full copies and supplemental material where necessary
• Check to ensure the proper coverage has been captured by the system(s) and insurance is in place
• Know the process for clients to make a claim
• Know where to direct clients to a qualified insurance specialist to answer all insurance-related questions
• Act as an intermediary where appropriate between the insurance company and your client
• Provide your client with phone number for client information support centres
EXAMPLE
When Bryan Lee’s client Paul Joss applies for a line of credit, Bryan explains the features and benefits of creditor
insurance to Paul, but he also makes sure to disclose the limitations. Paul is interested in loss-of-job insurance
because as a landscape worker for the city, he is laid off annually at the end of November. Bryan discourages
Paul from paying for loss-of-job insurance because, due to the seasonal nature of his job, he does not qualify
for benefits.
CREDITOR INSURANCE:
Creditor insurance is a form of insurance that pays the lender in the event that the borrower is unable to make loan
payments due to death, critical illness or loss of employment. Creditor insurance may take the form of a lump sum
payment or a series of payments over the life of the loan or lease. Insurance of this type may be taken out on the
following credit products:
• Personal Loan
• Line of credit
• Mortgage
Creditor insurance typically falls into four categories:

• Life insurance
• Loss of job insurance
Creditor insurance is a form of group insurance with limited medical underwriting, so most borrowers qualify for
coverage. However, a creditor insurance policy may contain exclusions or limitations. In particular, a pre-existing
condition provision may exclude the borrower from coverage for claims resulting from conditions that existed
before the insurance was taken out.
The borrower may typically cancel creditor insurance at any time, and there is usually a grace period after
enrolment, during which the borrower may cancel with a full refund.
The credit insurance industry is largely self-regulated. The advisor is obliged by industry codes of conduct to inform
clients of the disadvantages as well as the advantages of this type of insurance. It is especially important to disclose
any limitations or exclusions that may prevent a client from collecting benefits.


When Jason and Tamara MacDonald take out a mortgage with Bryan’s institution, Bryan offers the option to take
out creditor insurance as well.
JASON SAYS TO BRYAN, “WE’RE PAYING DOWN 20% OF THE PURCHASE

PRICE. I THOUGHT MORTGAGE INSURANCE WAS ONLY NECESSARY IF OUR
DOWN PAYMENT WAS LESS THEN 20% OF THE PURCHASE PRICE.”
“THAT’S CORRECT,” SAYS BRYAN. “IN THAT CASE, MORTGAGE LOAN

INSURANCE WOULD BE MANDATORY. THAT TYPE OF INSURANCE
PROTECTS THE LENDER IF YOU DEFAULT ON THE LOAN. HOWEVER, WHAT
I’M OFFERING IS AN OPTIONAL MORTGAGE LIFE INSURANCE POLICY. THIS
TYPE OF INSURANCE PROVIDES A GUARANTEE THAT YOUR REMAINING
MORTGAGE AT THE TIME OF YOUR DEATH WILL BE PAID IN FULL SO THAT
YOUR SURVIVORS WON’T BE BURDENED. ALSO, IF YOU’RE SICK OR YOU
LOSE YOUR JOB, YOUR MONTHLY PAYMENTS CAN BE COVERED UNTIL YOU
RETURN TO WORK.”
“BUT WE BOTH HAVE INSURANCE PLANS IN PLACE AT WORK,” SAYS JASON.

“DO WE NEED EXTRA INSURANCE?”
BRYAN SAYS, “MORTGAGE LIFE INSURANCE REMAINS IN PLACE

EVEN IF A JOB ENDS.”
“HOWEVER,” SAYS BRYAN, “REMEMBER THAT UNLIKE TERM INSURANCE,
YOU CAN’T CHOOSE WHAT TO DO WITH THE BENEFITS OF CREDITOR
INSURANCE. IT GOES DIRECTLY TO THE LENDER TO PAY THE BALANCE OF
YOUR LOAN. ALSO, AS YOU PAY OFF YOUR MORTGAGE, YOU’RE PAYING THE
SAME AMOUNT EVERY MONTH FOR LESS AND LESS RETURN. YOU MIGHT
WANT TO CONSIDER THAT FACT BEFORE YOU MAKE A DECISION.”
“HOW MUCH DOES THE INSURANCE COST?” ASKS TAMARA.
Bryan calculates the cost of creditor life insurance on its own. Then he calculates the cost of insurance including
loss-of-job, disability and creditor insurance, in various combinations.
Jason and Tamara decide to take out creditor life insurance only. Bryan begins the application process,
starting with the health questionnaire.
“IF YOU HAVE ANY CURRENT HEALTH PROBLEMS,” HE TELLS THEM, “IT’S VERY
IMPORTANT THAT YOU DISCLOSE THEM. ANY INFORMATION YOU OMIT
COULD MEAN THE LOSS OF BENEFITS.”

Taxation 4
1 | Describe the features of the Canadian The Canadian Tax System

tax system.
2 | Explain the components and calculations of Personal Income Tax Returns

personal income tax returns.
3 | Explain the taxation of various types of income. Types of Income
4 | Describe allowable tax deductions. Tax Deductions
5 | Describe the allowable refundable and Tax Credits

non-refundable tax credits.

KEY TERMS
accrual method fiscal year-end reasonable expectation

of profit
accrued interest home office expenses
recapture
after-tax cash flows income deferral
reduced standby charge
allowable deductions income splitting
refundable tax credits
attribution rules independent contractors
Registered Pension
automobile benefit inter-jurisdictional splitting Plan (RPP)
average (or effective) investment income Registered Retirement

tax rate Savings Plan (RRSP)
lifetime capital gains
business investment loss exemption selection of
organizational form
Canada Training Benefit marginal tax rates
special election
capital cost median rule
allowance (CCA) standby charge
medical expense tax
capital gain credit (METC) stock options
carrying charges moving expenses tax credit
cash method net capital loss tax deduction
charitable donation net income tax liability

tax credit
non-capital loss tax shelters
death benefit
non-deductible expenses taxable capital gain
deductible expenses
non-refundable tax credits taxable fringe benefit
dividend
non-taxable fringe benefit terminal loss
dividend tax credit
pension adjustment total income
eligible pension income
personal income tax return un-depreciated capital
employee stock option cost (UCC)
political contributions
employment income tax credits Valuation Day (V-Day)

CHAPTER 4 | TAXATION 4•3
THE CANADIAN TAX SYSTEM
1 | Describe the features of the Canadian tax system.
Because taxes have an impact on most of the products offered by financial institutions, taxation should be viewed
as an integral part of investment and financial decision-making. As an advisor, you should keep in mind that tax
planning is not a separate function that you can exclude yourself from. Although investment and financial decisions
are not made for tax reasons only, ignoring taxes can lead to poor choices that fail to maximize after-tax wealth.
When you learn how the Canadian tax system works, you will understand how it relates to your clients’ financial
situation so you can take advantage of opportunities and avoid pitfalls. Your clients will benefit as you help them to
understand the impact taxes have on their investment decisions.
INTRODUCTION TO TAXATION
Viewing tax as a factor in making financial decisions is critical to sound financial counselling. Because spending,
saving, insurance, investments and borrowing involve after-tax cash flows, tax constitutes a very important indirect
variable in the accumulation and preservation of wealth.
As an advisor, you are not in the business of providing specialized tax advice, but you are in a position to educate
your clients about the impact of taxes on their financial decisions. Keeping abreast of detailed tax laws and changes
imposed by federal and provincial budgets may be the role of a professional tax advisor, but it is important for you
to acquire enough tax sophistication to understand the tax features pertaining to individual products, as well as the
tax consequences of cross-selling more than one product.
To focus on your clients’ satisfaction, you should know their tax profiles, as well as any other financial products
they hold. Much the same way that a pharmacist needs to know which drugs a patient is currently taking so that
dangerous interactions with a new drug can be avoided, you can help your clients to avoid the consequences of
purchasing incompatible products that will adversely affect their taxes.
Keep in mind that, while tax accountants and lawyers have a strong technical knowledge of tax, they may
not be as familiar as you are with your clients’ needs and the investment products available to them.
THE CANADIAN APPROACH TO TAXATION

Like most countries, Canada relies on the following three basic sources of tax revenues:
• Income
• Consumption
• Wealth
The federal and almost all provincial governments rely primarily on income and consumption (sales) tax to finance
their expenditures, while municipalities primarily depend on wealth taxes in the form of property taxes.

OBJECTIVES OF THE CANADIAN TAX SYSTEM

The main objectives of the Canadian tax system are:
• To raise revenue to finance public projects and social programs
• To redistribute income using features such as progressive rate schedules and tax credits
• To provide incentives for some economic activities such as saving for retirement, while providing disincentives
for other activities such as tobacco and gasoline consumption
EXAMPLE
Taxpayers who contribute to a Registered Retirement Savings Plan (RRSP) benefit from deferred income tax
payments, while the price of cigarettes includes a tax on top of the regular sales tax.
Every Canadian resident must pay federal and provincial income tax annually, based on their income for the year.
PERSONAL INCOME TAX RETURNS

Annually, Canadian residents must complete a personal income tax return that details the type of income and
the amount earned for the year. The return form also lists allowable deductions to determine what portion of
income is taxable.
Taxes on taxable income are assessed according to a schedule of progressive tax rates associated with different
tax brackets, with higher income levels subject to higher tax rates. After taxes are assessed and the tax liability is
determined, any credits available to the taxpayer are applied to determine the net federal tax amount.
PAYMENT OF TAXES
Employees generally have taxes automatically withheld from their pay cheques, while those with business income
pay their taxes by instalments. Any taxes withheld by an employer or paid by instalment are applied against
the liability. If the taxpayer paid too much, the excess is refunded. If too little was paid, the taxpayer has a legal
obligation to file a tax return and submit the balance owing by a deadline.
FINANCIAL PLANNING AND TAXATION

The best approach to taxation is to view it as an integral part of investment and financial decision making that
has an impact on most of the products offered by financial institutions. Because spending, saving, insurance,
investments and borrowing involve after-tax cash flows, tax may constitute a very important indirect variable in
the accumulation and preservation of wealth.
Because different products face different tax treatments, and different clients are subject to different marginal tax
rates, you must carefully assess tax implications when choosing financial products, in much the same way that you
consider maturity, liquidity and expected yield of investments.
The multiple objectives of the Canadian tax system necessitate varying tax rates that are designed to discriminate
among different economic activities, assets and individuals. Tax planning involves taking advantage of the different
rates of taxation imposed on various returns by shifting income from highly taxed economic activities, assets and
taxpayers to lower taxed economic activities, assets and taxpayers.
Such tax planning entails taking full and legal advantage of the provisions of the Income Tax Act to reduce one’s
tax liability.
Remember that an appropriate comparison of investment products can only be made on an

after-tax basis.

THE FOCUS OF FINANCIAL PLANNING AND TAXATION

Rather than focusing on tax minimization, sound financial planning should focus on household net worth with the
goal of after-tax income maximization.
Tax minimization as an objective may lead to poor investment decisions with adverse non-tax consequences. For
example, an advisor who focuses on the goal of tax minimization may recommend an investment that has an
increased tax incentive but carries a higher risk, reduced liquidity or poor marketability.
Effective tax planning instead focuses on keeping after-tax income and cumulative net worth within the
client’s household.
FUNDAMENTALS OF EFFECTIVE TAX PLANNING

As the Canadian tax system attempts to provide incentives for certain ventures and to redistribute income, it
creates a system of differential tax rates that may vary significantly depending on when the tax is paid, who is
paying it, what the taxable activity is, what form of business the taxpayer is involved in and where the business or
activity takes place.
In this context, the fundamentals of effective tax planning can be viewed as trading across both tax rates and the
time value of money through one or more of the following processes:
• Income deferral (trading over time), where the taxpayer defers paying taxes to take advantage of lower tax
rates and cumulative interest on the deferred amount
• Income splitting (trading across taxpayers), where the taxpayer splits income with a spouse or partner in a
lower tax bracket to take advantage of lower tax rates
• Tax shelters (trading across investment vehicles), where the taxpayer takes advantage of economic activities,
types of income and time periods that are taxed at a lower rate
• Selection of organizational form (trading across organizational forms), where the taxpayer chooses a business
structure with the least relative tax burden and takes advantage of delayed payment of tax
• Inter-jurisdictional splitting (trading across jurisdictions), where the taxpayer takes advantage of differences in
inter-provincial and international tax rates
Tax shelters, Selection of organizational form and Inter-jurisdictional splitting are advanced tax planning
techniques. If your client is inquiring about these, refer them to a tax specialist.
INCOME DEFERRAL
Income deferral takes advantage of timing so that income is claimed when tax rates are low and income is earned
on pre-tax amounts. The stability or instability of tax rates will have the following impact:
• If marginal tax rates are constant over time, taxpayers will prefer to delay recognition of income due to the
time value of money. Examples include:
Unrealized gains on stocks (where the gross or pre-tax amount is generating income)
Deferred compensation arrangements

• If marginal tax rates are declining over time, taxpayers have an incentive to delay income recognition by
sheltering income from taxes until it can be taxed at as low a rate as possible. Examples of plans where income
recognition can be delayed include:
Canada/Québec Pension Plan (CPP/QPP)
Registered Employer Pension Plan (RPP)
Registered Retirement Savings Plan (RRSP)
Registered Retirement Income Funds (RRIFs)
Life Income Funds (LIFs)
Locked-in Retirement Accounts (LIRAs)
Prescribed Retirement Income Funds (PRIFs)
Deferred Profit Sharing Plans (DPSPs)
Registered Education Savings Plans (RESPs)
• If marginal tax rates are increasing over time (due to massive budgetary deficits or changes in governing political
parties), taxpayers have an incentive to accelerate the recognition of income.
USING RRSPs TO MAXIMIZE AFTER-TAX INCOME

Although withdrawals from an RRSP are fully taxable, the following two factors result in a reduction of total
tax liability:
• Immediate tax savings due to an RRSP contribution’s deductibility from taxable income
• Compounding at the pre-tax rather than the after-tax rate of returns
Let your clients know that the compounding effect can be magnified if they contribute at the beginning
of the tax year rather than at the end.
INCOME SPLITTING
Because taxpayers in Canada are subject to progressive tax rates, taxpayers subject to high tax brackets may prefer
to have some of their income earned by their low tax-bracket spouses or their children.
People most likely to benefit from income splitting are:
• Couples with one spouse working or with great disparity of income
• Mature households with accumulated assets
The easiest and most common strategy is for the higher-income spouse to pay for all household living expenses,
thus allowing the lower-income spouse to accumulate investment assets and earn investment income at a lower
tax bracket.
In the event of a marriage breakdown, the equalization provisions of the Family Law Act generally require assets
accumulated during the marriage to be equally divided between the spouses.

Some examples of income splitting strategies include the following:
Spousal RRSP An individual may contribute to an RRSP registered in the name of his or her spouse or
common law partner and claim a tax deduction.
Any withdrawals from a spousal plan, claimed as a tax deduction by a contributing
spouse, made:
• in the year funds are contributed; or
• in the two calendar years following the year of contribution;
will be taxable to the contributing spouse in the year of withdrawal, rather than to the
recipient spouse
In the event of a marriage breakdown, however, the plan remains the property of
annuitant spouse but funds can be divided and transferred tax-free to the contributor
as part of the division of assets between spouses as per the separation agreement.
Transfer of Assets When assets are transferred between spouses, income on the assets, such as capital
gains, interest and dividends, is generally attributed back to the author of the transfer
according to the rules in the Income Tax Act. However, the recipient spouse, without
attribution, can reinvest this income.
Attribution rules do not apply if the inter-spousal transfers are documented as loans
bearing the prescribed interest rate. The interest paid by the borrowing spouse is then
deductible under the normal rules for interest expense and included in the taxable
income of the lender.
EXAMPLE
Adam contributes $10,000 to a spousal RRSP in the name of Roger, his spouse. If his marginal tax rate is 35%,
Adam can claim a tax deduction of $10,000 on his income tax return (which will reduce Adam’s immediate
tax burden by $3,500). The funds in the RRSP will grow tax-sheltered until withdrawal, ideally in retirement.
Upon withdrawal by Roger, the amount will be brought into his income and fully taxed. If Roger is in a lower tax
bracket than Adam, Roger will pay tax on the withdrawn amount at a lower rate.
EXAMPLE
Jerome transferred a mutual fund worth $40,000 to his wife Ruth last year. The mutual fund generated a return
of 7% ($2,800) on which Jerome paid his marginal tax rate of 40% ($1,120). Ruth purchased a mutual fund with
Jerome’s gain of $2,800 which then generated a return of 6% ($168). Because Ruth has no other income, she
pays no tax, whereas if Jerome had re-invested the gain in his own name, the additional $168 would be taxed at
his marginal rate.
SPLITTING INCOME WITH CHILDREN

Income splitting activities with children are subject to a different set of provisions in the Income Tax Act.
Outright gifts (with no strings attached) to children under 18 years of age require the interest and dividend income
earned on such gifts to be attributed back to the parent, while allowing capital gains to be taxed in the child’s hand.
For children who have reached the age of 18, attribution rules do not apply except for loans bearing an interest rate
lower than the prescribed rate.

In all cases, second-generation income is considered to have been earned by the child.
Some income splitting strategies with children include:
Strategy Method
Canada Child • Canada Child Benefit cheques are deposited in a separate chequing or savings
Benefit (CCB) account for each child.
• Parents are required to be trustees until age 18.
• The interest accumulates in the child’s name and is not taxed in the
parents’ hands.
• For children with income below the basic personal amount, this income will
attract no tax and will not diminish next year’s Canada Child Benefit.
• Since such funds become the property of the child, many parents use this
method to earmark long-term savings for post-secondary education.
RESP • Deposits to an RESP are not tax deductible, but the interest accumulates tax
free until the child enters a post-secondary institution and starts to receive
payments from the fund.
• Then, the interest portion is taxable, but since most post-secondary students
have little or no taxable income, the tax burden will be negligible.
• An RESP also allows another child to become a beneficiary, provided the
proceeds are used for educational purposes.
• Contributions to an RESP will generate a grant from the federal government
under certain conditions.
Stocks • Parents buy stocks with strong growth potential in the name of a child.
• When the child eventually disposes of the shares, capital gains that are
generated are not attributed back to the parent.
• Unlike RESPs, funds can be used for any purpose.
• This strategy entails a higher level of risk and loss of control over the
investment when the child turns 18.
Income splitting is a strategy that focuses on maximizing after-tax household net worth rather than
individual net worth.
THE CANADIAN TAX SYSTEM:

• Because taxes have an impact on most of the products offered by financial institutions, advisors should
be familiar with their clients’ tax profiles, including their marginal tax rates, as well as any other financial
products they hold.

• Canada relies on the following three basic sources of tax revenues:

Income
Consumption
Wealth
• The objectives of taxation are to:

Raise revenue
Redistribute income
Provide incentives
• Taxes are levied annually and are assessed on a progressive scale, with higher incomes subject to
higher tax rates.
• The fundamentals of effective tax planning are:
Income deferral
Income splitting
Tax shelters
Selection of organizational form
Inter-jurisdictional splitting
• Deferring income allows taxpayers to claim income when tax rates are low and to earn income on
pre-tax amounts.
• When income is split between high tax-bracket taxpayers and their low tax-bracket spouses or their children,
the household’s tax liability is reduced.

Grace Moloka comes to Bryan Lee to request a $5,000 personal loan for home renovations.
“YOU HAVE $10,000 IN A GIC,” SAYS BRYAN. “WHY NOT DRAW FROM THAT?”
“I WOULD RATHER NOT CASH THAT IN,” SAYS GRACE.
“THE GIC IS EARNING ONLY 5% ANNUALLY, WHILE THE PERSONAL LOAN WILL COST YOU 7%,” SAYS
BRYAN, “AND THAT’S BEFORE YOU CONSIDER THE IMPACT OF TAXES.”
“INTEREST INCOME ON THE GIC IS FULLY TAXED AT YOUR MARGINAL TAX RATE OF 50%, WHICH MEANS
YOU’RE ACTUALLY EARNING ONLY 2.5% AFTER TAXES ON THE GIC. AND THE INTEREST ON A PERSONAL
LOAN ISN’T TAX DEDUCTIBLE, SO IT WILL COST THE FULL 7%.”
“I’D BE BETTER OFF USING MY GIC, THEN, WOULDN’T I?” SAYS GRACE.
“YES,” SAYS BRYAN, “AND IF YOU LIKE, YOU CAN TAKE OUT AN INVESTMENT LOAN TO REPLACE THE
FUNDS YOU USE. THE INTEREST ON THE INVESTMENT LOAN WOULD BE TAX DEDUCTIBLE, ASSUMING YOU
PURCHASE A QUALIFYING INVESTMENT.”
Even if Grace chooses not to take out an investment loan, Bryan’s knowledge of the tax implications of her
request has helped Grace to avoid making a costly error. Although he may not make a sale, he has contributed
to Grace’s financial well-being and has bolstered his long-term relationship with her.

PERSONAL INCOME TAX RETURNS
2 | Explain the components and calculations of personal income tax returns.
The Canadian personal income tax is levied by federal and provincial governments on each individual income for the
12-month period ending on December 31 of every year.
All residents of Canada must report their earnings for tax purposes from the province or territory where they live on
December 31 of the tax year.
Generally, a personal income tax return for a year has to be filed on or before April 30 of the following year. Self-
employed persons may file up to June 15, but must pay any balance owing by April 30.
A thorough knowledge of the federal and provincial rules regarding income tax returns and an understanding of
how taxes are calculated will help you understand your clients’ financial situation so you can help them make wise
investment decisions.
HOW TAXES ARE CALCULATED

TOTAL INCOME
Total income for tax purposes includes the following:
• Employment income (wages, salary and/or benefits)
• Business income (after-production costs)
• Investment income (except for sheltered income under RRSPs and RPPs) including:
Interest income
Dividends
Rent and royalties
• Taxable capital gains
• Other income
TAXABLE INCOME
Total income less allowable deductions determines net income. Additional deductions are subtracted from net
income to determine taxable income.
Total income
– Allowable deductions
= Net income
– Additional deductions
= Taxable income

CHAPTER 4 | TAXATION 4 • 11
THE NET FEDERAL TAX AMOUNT

The tax liability (that is, taxes owed) on taxable income is determined based on a schedule of tax rates. The total
non-refundable tax credits are then applied to determine the net federal tax amount.
Taxable income
× Tax rate (%)
= Tax liability
– Total non-refundable tax credits
= Net federal tax amount
ALLOWABLE DEDUCTIONS
Net income is calculated from total income by subtracting allowable deductions, including the
following examples:
• Contributions to RRSPs and RPPs
• Professional and union dues
• Business losses
• Child care expenses
• Tax shelter deductions
Net income is used to calculate some non-refundable tax credits and can also be used to qualify individuals for
government programs like the Canada Child Benefit.
ADDITIONAL DEDUCTIONS
Taxable income is calculated from net income by subtracting additional deductions, including the
following examples:
• Stock option and share deduction for employees
• Loss carryovers (net capital and non-capital losses of other years)
• Capital gains deduction
NON-REFUNDABLE TAX CREDITS

The net federal tax amount is calculated from the tax liability by applying non-refundable tax credits, including
the following examples:
• Basic personal amount
• Canada/Quebec Pension Plan contributions
• Tuition amount
DIVE DEEPER
Click on the Job Aids link to find the T1 General Job Aid.

FEDERAL AND PROVINCIAL TAXES

CALCULATING FEDERAL TAXES
Federal taxes are assessed on taxable income (that is, after deductions) according to a schedule of progressive tax
rates associated with different tax brackets. The personal income tax is progressive in the sense that higher income
levels are subject to higher tax rates.
Below is a sample breakdown of nominal tax rates based on the year 2020:
Taxable Income Tax Rate
On the first $48,535 of taxable income 15%
On the next $48,534 of taxable income 20.5%

(on the portion of taxable income over $48,535 up to $97,069)
On the next $53,404 of taxable income 26%

On the next $63,895 of taxable income 29%

On taxable income over $214,368 33%
EXAMPLE
Ralph’s employment income during 2020 was $60,000. He has no other sources of income and is a Canadian
resident. He contributed $5,000 to his RRSP during that same year. He has no other allowable deductions. His
taxable income for last year is therefore $55,000 (60,000 – 5,000 = 55,000). His federal tax (before credits are
applied and based on the rates in the sample table) is:
On the first $48,535 (at 15%) = $7,280.25
On the next $6,465 (at 20.5%) = $1,325.33
$55,000 = $8,605.58
CALCULATING PROVINCIAL TAXES

The provinces impose their own tax rates on the basic federal taxable income and apply their own systems of credits
and surtaxes. Quebec administers its own provincial income tax and has its own rules regarding the calculation of
taxable income and tax payable.
The provinces offer their own versions of the following credits, which are refundable if no other tax liability
is incurred:
• Property tax credits
• Sales tax credits
• Political contribution tax credits
• Home Ownership Savings Plan tax credit
Federal taxes are levied annually and are assessed on a progressive scale, with higher incomes subject to
higher tax rates.

EXAMPLE
In Ralph’s case, because he lives in Ontario, he paid the following provincial taxes on his taxable income in 2020:
On the first $44,740 at 5.05% $2,259.37
On the next $10,260 at 9.15% + $938.79
Provincial taxes $3,198.16 (not withstanding credits or surtaxes)
TAX DEDUCTIONS AND TAX CREDITS

TAX DEDUCTIONS AND A TAX CREDITS
A tax deduction reduces the taxable income on which federal tax is calculated, and therefore reduces tax paid at the
individual’s combined federal and provincial marginal tax bracket rate for a particular year.
In contrast to a deduction, a tax credit is a specific reduction of taxes payable and has a value equal to its stated
amount, regardless of the taxpayer’s tax bracket.
A tax credit may be refundable or non-fundable, as described below:
Refundable Tax Credit Refundable tax credits are treated as having been actually paid, similar to source
withholdings and tax instalments. If these tax credits reduce federal taxes to a
negative sum, the negative balance is refunded to the taxpayer. Refundable tax
credits include:
• Refundable medical expense supplement
• Investment tax credit
• Employee and partner GST/HST rebate
• Working income tax benefit for low-income families who have earned income
from employment or business
Non-refundable Non-refundable tax credits, although they reduce federal taxes in the same way as
Tax Credit refundable tax credits, become worthless once federal taxes reach zero.
THE MAIN TAX DEDUCTIONS

The main deductions available are:
• Contributions to a Registered Pension Plan (RPP)
• Contributions to a Registered Retirement Savings Plan (RRSP)
• Deduction for elected split-pension amount
• Annual union and professional dues
• Childcare expenses
• Disability supports deduction
• Business investment losses
• Moving expenses (when related to work)
• Eligible support payments made
• Carrying charges and interest expenses
• Other employment expenses

EXAMPLE
Simon has a combined federal and provincial marginal tax rate of 44%. For him, a tax deduction of $2,000
results in an $880 ($2,000 × 44%) tax savings.
It’s important to remember that total income, net income and taxable income must be greater than or
equal to zero. Most deductions in excess of income will be lost. If possible, deductions and losses that
would otherwise expire can be used up by accelerating income recognition or by realizing some locked-
in capital gains.
NON-REFUNDABLE TAX CREDITS

The total non-refundable tax credits consist of a specified percentage (based on the lowest tax bracket) of the
following amounts:
• Basic personal amount
• Age amount
• Amount for spouse/common-law partner
• Canada caregiver amount
• Amount for infirm dependants age 18 or older
• Disability amount
• Canada/Quebec Pension Plan contributions
• Employment Insurance contributions
• Tuition amount for oneself and transferred from a child
• Medical expenses over a specified percentage of net income
• Political contribution
• Pension income amount
• Charitable donations
• Amounts transferred from your spouse or common-law partner
• Interest paid on your student loans
• Home buyers’ amount
The total non-refundable tax credits are subtracted from the federal tax liability to get the net federal tax amount.
Unlike the deductions subtracted in arriving at net income and taxable income, the non-refundable tax credits are
worth the same to all taxpayers who have a tax liability of at least the total of such credits.
As the name suggests, these credits are not refundable, and therefore credits in excess of tax liability cannot be
used. However, except for those with a very low income, most taxpayers do not find themselves with tax credits
exceeding federal tax liability.

EXAMPLE
As calculated earlier, Ralph owes $8,605.58 in federal taxes. Assume that the total amount on which the
total non-refundable tax credits are based is worth $16,000. Using the sample tax rate of 15%, he is therefore
entitled to $2,400 ($16,000 × 15%) of non-refundable tax credits. His net federal tax is reduced to $6,205.58
($8,605.58 – $2,400).
He also receives a provincial tax credit of 5.05% of the non-refundable tax credits worth $808, so his provincial
tax is reduced to $2,390.16 ($3,198.16 – $808).
His combined federal and provincial tax for the year is $8,595.74.
AVERAGE AND MARGINAL TAX RATES

THE AVERAGE TAX RATE
The average (or effective) tax rate is the average tax rate paid on income. It measures the average rate of tax
applicable to each dollar of income earned. (Looks at an absolute)
The average tax rate is measured by dividing the total amount of tax paid by taxable income. This measure is
useful in situations where income and tax rates remain fairly stable over time and where the figure sought is the
individual’s total after-tax income.
EXAMPLE
For example, Ralph’s federal and provincial tax for the year is $8,595.74 and his taxable income is $55,000.
Therefore, his average tax rate is 15.63% ($8,595.74/$55,000).
THE MARGINAL TAX RATE

The marginal tax rate is the tax you pay on the last dollar of income. However, and more importantly for tax
planning, it represents the tax rate applicable to each additional dollar of income a taxpayer earns.
The marginal tax rate is calculated by dividing the change in tax payable by the change in income.
The marginal rate of tax is relevant in cases where clients want to compare various investment alternatives.
Marginal tax rates measure the amount of tax payable on each dollar if income increases or decreases by
that amount.
Marginal tax rates help to measure the increase in tax or tax savings associated with, for example:
• Making RRSP contributions
• Receiving a bonus
• Receiving investment income

EXAMPLE
Ralph’s income increases by $1,000 to $61,000. His marginal tax rate for 2020 is calculated as follows:
Employment income $61,000
Less: RRSP contribution – $5,000
Taxable income = $56,000
Federal tax payable before credit:
On the first $48,535 (at 15%) $7,280.25
On the next $7,465 (at 20.5%) + $1,530.33
$8,810.58
Non-refundable tax credit – $2,400.00
Federal tax $6,410.58
Provincial tax payable before credit:
On the first $44,740 at 5.05% $2,259.37
On the next $11,260at 9.15% + $1,030.29
= $3,289.66
Non-refundable tax credit (5.05%) – $808.00
$2,481.66
+ $6,410.58
Total tax payable $8,892.24
Marginal tax = ($8,892.24 – $8,595.74) ÷ ($61,000 – $60,000)

= $296.50 ÷ $1,000 = 29.65%
Simply put, you can add the two highest tax rates to determine the marginal tax rate. Based on Ralph’s taxable
income of $61,000, his marginal tax rate is 29.65% (20.5% federal and 9.15% provincial).
Ralph’s marginal tax rate is much higher than his average tax rate. If Ralph’s increased income brings him
to the highest tax bracket his marginal tax rate will be even higher.

PERSONAL INCOME TAX RETURNS:

• All residents of Canada must report their earnings for tax purposes from the province or territory where they live
on December 31 of the tax year.
• Taxes are assessed according to a progressive tax schedule in which higher income levels are subject to
higher tax rates.
• Total income includes earnings from all sources, including:
Employment
Business
Investments
Taxable capital gains
Other sources
• The net federal tax amount is calculated using the following formula:
Total income
– Allowable deductions
= Net income
– Additional deductions
= Taxable income
× Tax rate (%)
= Federal tax liability
– Total non-refundable tax credits
= Net federal tax amount
– Total refundable tax credits
= Refund or Balance owning
• A tax deduction reduces taxable income on which federal tax is calculated, and therefore reduces tax paid at the
individual’s combined federal and provincial marginal tax bracket for a particular year.
• A tax credit is a specific reduction of taxes payable and has a value equal to its stated amount, regardless of the
taxpayer’s tax bracket.
A refundable tax credit is treated as having been paid and a negative tax balance is refunded to the taxpayer.
A non-refundable tax credit becomes worthless once it reduces federal taxes to zero.
• The average tax rate is the average tax rate paid on taxable income. It measures the average rate of tax
applicable on each dollar of taxable income.
• The marginal tax rate represents the tax rate applicable on each additional dollar of income a taxpayer earns.


Isaac Sinclair comes to see Bryan after he learned he will receive unexpected bonus of $5,000 prior to taxes (Gross).
“I WOULD LIKE TO SAVE IT RATHER THAN SPEND IT,” SAYS ISAAC. “I WAS THINKING
ABOUT PUTTING IT IN A GIC.”
“YOU COULD DO THAT,” SAYS BRYAN, “BUT IT MIGHT BE A BETTER IDEA TO PUT IT IN AN RRSP.”
“WHY IS THAT?” ASKS ISAAC.
“IF YOU PUT IT IN A GIC,” SAYS BRYAN, “THE AMOUNT THAT YOU WILL DEPOSIT WIILL BE LESS
THAN $5000.00 DUE TO DEDUCTIONS AT SOURCE. WHEN IT COMES TIME TO PAY YOUR
TAXES, YOU’LL HAVE TO DECLARE IT AS INCOME. IT WILL SUBSTANTIALLY INCREASE YOUR NET
FEDERAL TAX, AND YOUR MARGINAL TAX RATE WILL GO UP TOO.”
“ON THE OTHER HAND, IF YOU DEPOSIT THE GROSS AMOUNT IN AN RRSP, YOU CAN DEDUCT
IT FROM YOUR TOTAL INCOME.”
“WHAT DOES THAT MEAN?” ASKS ISAAC.
“WELL, YOUR GROSS INCOME WILL BE OFFSET BY THE RRSP CONTRIBUTION, SO IT MEANS
YOU’LL PAY LESS TAX.”
“WELL, THAT’S A GOOD THING,” SAYS ISAAC. “I THINK I’LL TAKE YOUR ADVICE.”
TYPES OF INCOME
3 | Explain the taxation of various types of income.
Different types of income are subject to different rules of taxation. Income may fall under any of the
following categories:
• Employment income
• Business income
• Investment income
• Taxable capital gains
• Other income
Each type of income and the rules of taxation that govern it are explained below.
EMPLOYMENT INCOME
Employment income represents the largest single source of Canadian income tax revenue. This type of income
derives from salary, wages, commissions and any form of remuneration for work performed.
REPORTING EMPLOYMENT INCOME

Canadian residents must report all employment income received during the year.
For example, if an employee receives a bonus on January 1, 20x8 for services rendered in 20x7, the bonus is included
as income in the year it was received (20x8).

If your clients anticipate that their marginal tax rate will decrease in the year following the earning of the
bonus (for example through maternity leave or returning to school), they may want to defer receipt of
the bonus to take advantage of the reduced taxes.
An income report summarizes gross income, including all taxable benefits, Canada/Quebec Pension Plan,
Employment Insurance premiums and tax withholdings.
The report also includes information regarding contributions made by an employee to a registered pension plan and
the employee’s pension adjustment for the year.
TYPES OF EMPLOYMENT INCOME

Employment income includes:
• Wages
• Salary
• Directors’ fees
• Bonuses
• Commissions
• Gratuities
• Taxable fringe benefits and allowances
TAXABLE FRINGE BENEFITS

A taxable fringe benefit is any personal living cost paid for or provided by an employer that is subject to taxation.
Review the table below for some examples of fringe benefits that are taxable to the employee.
Benefit Description
Rent-free or Housing or board and lodging provided to employees free or at a reduced price
low-rent housing (except at a remote location)
Gifts Employee gifts or non-monetary awards exceeding a maximum value of $500, with
specific limitations
Prizes Holiday trips and other prizes and incentive awards, including benefits for trips not
associated with business and the use of vacation properties
Education Tuition fees paid by the employer, unless the particular course was undertaken at the
initiative of the employer for the employer’s benefit
Reimbursement Reimbursement such as for the cost of tools required to perform duties of employment
Automobile benefit Personal use of an employer-owned vehicle
Stock options Purchase of shares in the employer’s corporation at a price

that is lower than the fair market value of the shares at the
See below for details
time of purchase
Employee loan A low-cost or non-interest-bearing loan provided by an

employer to an employee

Other taxable fringe benefits include:

• Frequent-flyer programs for personal travel from credits accumulated during business-related travel
• Travelling expenses of an employee’s spouse
• Life insurance premiums for employees
• Financial counseling, except as it relates to the employee’s re-employment or retirement
• Income tax return preparation
• Reimbursement for daycare costs of children, except when the employer provides on-site facilities
• Club dues when membership in the club provides little or no advantage to the employer’s business
AUTOMOBILE BENEFIT
If an employee has personal use of an employer-owned vehicle, an automobile benefit must be included in
employment income. This benefit comprises the standby charge and the operating cost.
• The standby charge represents a taxable benefit to employees when an employer’s automobile is available for
their personal use.
A reduced standby charge applies if the employee uses the automobile more than 50% of the time for work,
or if the total kilometers for use are less than a specified amount.
• When an employer provides an automobile to an employee and pays the operating cost related to personal
use, this payment represents a taxable benefit to the employee. Operating costs include gasoline and oil,
maintenance charges and repair expenses and licenses and insurance.
There are two methods of calculating the operating cost:
Basic calculation The operating cost benefit is equal to a specific cost per kilometre of personal use.
Optional calculation If the car is used more than 50% of the time for employment purposes, the operating
cost can be calculated as 50% of the standby charge.
The optional calculation is used only if requested, in writing, by the employee. The employee must determine which
of the two methods is the most advantageous before making such a request.
Note that if an employee does not use a company-owned vehicle for personal driving, there is no taxable benefit,
even if the vehicle was available to the employee for the entire year.
Keep these tips in mind if your client has an automobile benefit:

• Make sure your clients keep an accurate log of their kilometers
• Because the standby charge and operating cost benefit is dependent on the level of personal and
employment kilometers, your clients should try to decrease personal kilometers.
• If your clients use a vehicle for personal use more than half the time, it may be to their advantage
to own it.
• As the standby charge is based each year on the original cost of the car, it may be worthwhile for the
employee to purchase the car from the employer at a depreciated value.

STOCK OPTIONS
An employee stock option permits the employee to buy specified number of the employer company’s shares at
a stated price for a stated time period, usually up to ten years. The exercise price of the option is normally priced
at or above the stock’s market value when the option is granted. The employee can exercise the option at any time
(unless restricted by vesting provisions) until the option expires.
• If the stock to which the option applies goes up higher than the exercise price, the employee has the benefit of
buying the stock at the original exercise price and benefiting from the spread of the two values.
• If the market price of the company’s stock decreases, the employee allows the option to expire and is not forced
to buy the stock.
The principal advantage of an employee stock option plan is that the employee incurs no financial outlay or taxable
benefit, unless the option is exercised. Employees are in turn motivated by the potential benefit to perform in a
manner that increases share price.
For example, ABC Corp. offers its executives a stock option plan that allows them to acquire 1,000 shares at $10
each. Because the cost to the executives is fixed at $10 per share, they are motivated to increase the stock price
above $10.
The value of the taxable benefit is the difference between the fair market value (FMV) of the shares at the time of
exercise and the exercise price, plus any fees paid for the option.
When an employee of a corporation exercises or disposes of an employer stock option, a deduction equal to one-
half of the amount of the taxable benefit can be claimed, provided the employee deals at arm’s length with the
company and the option’s exercise price was not less than fair market value when the option was granted.
For employees of a Canadian Controlled Private Corporation (CCPC), the tax treatment arising from shares acquired
under a stock option plan are more favourable. The shares are taxable only when the shares are sold, not at the time
of exercise. It is important to note that the deduction in preceding paragraph may also be applicable to CCPC’s if
the employee has held the shares for two years.
Make sure you review the tax implications of the amount and timing of stock options with your clients.
EMPLOYEE LOANS
Another common benefit that employees may receive from employers is low-cost or non-interest-bearing loans.
Such loans result in a taxable benefit, which is included in the employee’s employment income. The benefit is
calculated as shown below:
Outstanding loan × (prescribed interest rate* – interest rate on loan)
* The prescribed interest rate is determined by the Canada Revenue Agency (CRA) and is adjusted every three months. The benefit is
therefore calculated quarterly if the prescribed rate changes during the year.
USING AN EMPLOYEE LOAN TO BUY A HOUSE

If the loan was used by the employee to purchase a home, then the interest rate used in calculating the annual
benefit is the lesser of:
• the prescribed rate when the loan was received
• the current prescribed rate
If the repayment period exceeds five years, however, it is assumed that a new loan is agreed to every five years with
a new rate corresponding to the prescribed rate in effect at that time. This ensures that the employee is protected
against any increase in the prescribed rate for a period of five years.

NON-TAXABLE FRINGE BENEFITS

A non-taxable fringe benefit is any personal living cost paid for or provided by an employer that is exempt
from taxation.
These specific benefits are excluded from employment income on a deferred or permanent basis:
• Employer contributions for an employee to a registered pension plan (RPP); however, the employer’s
contribution to a group RRSP on behalf of an employee is a taxable benefit
• Employer contributions on behalf of an employee to a deferred profit sharing plan (DPSP)
• Payment of insurance premiums for group sickness or accident plans that protect the income of employees who
are unable to work due to illness or injury
• Payment of premiums for private group health or prescription drug insurance plans that provide extended
medical coverage beyond public plans (this applies only to private health plans and not to premiums for public
health insurance plans)
• Payment by an employer, on an employee’s behalf, of premiums for supplementary unemployment insurance
plans, including both private and public plans that protect employees in the event of a job loss
• Discounts on the purchase of goods insofar as the price paid is not less than the cost price to the employer
• Counseling services relating to the employee’s mental or physical health or re-employment or retirement
• Reimbursement of certain costs incurred during a work-related move (which the employee can deduct as
moving costs)
• A lump sum compensatory amount paid to cover ancillary resettlement expenses related to an eligible move of
up to $650
• Reimbursement of part of a loss incurred by the employee as a result of the disposal of a principal residence due
to a work-related move (for which the employee can deduct moving costs). In effect, only 50% of the excess of
such a payment above $15,000 constitutes a taxable benefit for the employee
• Education or training fees, if required by employer
• Automobile costs reimbursement if based on kilometers driven for employment purposes (if the allowance is a
fixed and regular amount, it is a taxable benefit)
• Spousal travelling expenses when the spouse’s presence is required by the employer and the spouse contributes
to the achievement of the business objectives of the trip
• If the employer makes fitness or recreational facilities available to the employees as a whole, at no charge or for
a nominal fee, the value of the benefit to the employee is normally not taxable
• Golf club membership fees if the golf club is used for the employer’s advantage, such as for entertaining clients
To reduce income taxes, your clients may wish to reduce salaries and wages in exchange for non-taxable benefits.
DIFFERENCE BETWEEN AN EMPLOYEE AND AN INDEPENDENT CONTRACTOR

A person employed full or part time for a salary or wage is typically eligible for benefits that are unavailable to an
independent contractor who is self-employed.
On the other hand, since independent contractors earn a business income, they are eligible for deductible
expenses that are not available to employees.
BUSINESS INCOME
For income tax purposes, the business category includes any activity carried out with the intention of generating
profits. It could include profits earned from babysitting, shovelling snow or cutting grass for neighbours, operating
a paper route, selling products from home or being a proprietor/partner of a professional business such as a doctor,
dentist, accountant or lawyer.

TYPES OF BUSINESS ORGANIZATIONS

The calculation of business income for tax purposes is the same for all types of businesses.
An unincorporated business, whether it is a sole proprietorship or a partnership, calculates business income in the
same manner as an incorporated business. The Income Tax Act does not differentiate between a small business run
part time by an entrepreneur and the largest Canadian public corporation.
Business types include:
• Sole proprietorship
• Partnership
• Trust
• Corporation
REASONABLE EXPECTATION OF PROFIT STANDARD

Because business losses reduce an individual’s income for tax purposes, such losses reduce income taxes. However,
business losses are disallowed unless the business is legitimate and the individual can demonstrate a reasonable
expectation of profit.
EXAMPLE
Jill Cambria makes jewellery as a hobby and often sells what she makes at craft fairs. She conducts her hobby
as a business, which allows her to claim material, travel, studio and other expenses as a business cost. Because
she earns more than she spends on her business, these deductions are legitimate. However, when an individual
cannot show that a hobby business has a reasonable expectation of profit, such expenses may be non-deductible.
DETERMINING IF THERE IS A REASONABLE EXPECTATION OF PROFIT

In assessing whether a particular business has a reasonable expectation of profit, the Canada Revenue Agency
considers these factors:
• Time and money invested
• Formal business plan to earn profit
• Reported profits which offset losses
If reasonable effort, time and money have been expended and an occasional business loss occurs, the Canada
Revenue Agency will not likely disallow the loss, as there is a reasonable expectation of profit.
It’s a good idea to review a client’s tax return for the current year and a few years preceding to assess
whether business losses have been incurred and to evaluate the reasonable expectation of profit for the
business. Other professional advice may be required.
DEDUCTIBLE HOME OFFICE EXPENSES

Taxpayers who conduct business at home may deduct a portion of their home office expenses. However, in order
for expenses to be deductible, the home office must be:
• The taxpayer’s primary place of business, or
• Used exclusively for the purpose of earning business income, and used on a regular and continuous basis for
meeting clients and customers

AN ADVENTURE OR CONCERN IN THE NATURE OF TRADE

An adventure or concern in the nature of trade occurs when a person who performs a single profitable transaction is
considered to be in that business or trade.
For example, the gain realized on the sale of a building could be considered a business profit instead of a capital gain
if the seller is considered to be acting as a land developer. The transaction would then be considered an adventure in
that trade, and the income from the sale treated for tax purposes as business income.
Likewise, the profit earned on the sale of shares, even as a one-time-only occurrence, could be considered a business
profit, and not a capital gain, if the Canada Revenue Agency can demonstrate that the intent of the share purchase
was to make a profit.
It is important to review transactions involving large profits to ascertain whether the gains realized will be deemed
business income or capital gains.
ADVANTAGES OF CLAIMING A CAPITAL GAIN RATHER THAN BUSINESS INCOME

The advantage of treating a transaction as a capital gain is that the capital gain is taxable at only 50% while
business income is fully taxable.
Compare the two types of income below:
Capital Gains Transaction Business Activity
Gains or losses are only 50% taxable or deductible Gains (income) are fully taxable
Losses can only be used to offset capital gains Losses are fully deductible against any income
EXAMPLE
Clarence O’Brien sold three acres of land and realized a gain of $10,000. If he declares this as a business profit, he
will have to add the entire amount to his business income for tax purposes. As a capital gain, he adds only $5,000
to his income.
It is important that your clients document their course of conduct in acquiring, holding and disposing of
a property. Written evidence illustrating the purposes is crucial to substantiate a taxpayer’s position.
The Canada Revenue Agency and the courts look to the factors below to determine the primary purpose of an activity:
Factor Capital Gains Transaction Business Activity
Purpose of acquiring the property Provides the owner with a long term Resold at a profit
or enduring benefit
Period of ownership Held for a long time Held for short time
Nature of transaction Used to earn investment income Used only to profit from the sale
(rent, interest or dividends) of property
Relationship of transaction to the Transaction is unrelated to the Transaction is similar in nature to the
taxpayer’s business taxpayer’s business taxpayer’s business
Number and frequency of Transactions are very infrequent* Buying and selling transactions are
transactions frequent
* Depending on other factors, the courts sometimes deem infrequent (or even solitary) transactions to be an adventure or concern in the
nature of trade and thus business income.

NET PROFIT
An entity’s net profit or loss from a business venture represents business income for tax purposes. Net profit is not
specifically defined in the Income Tax Act, but the courts generally recognize that it represents profit (revenue less
all expenses necessary to generate that revenue).
REVENUE OR SALES
Revenue or sales represents the value of all products or services sold or performed during the fiscal year, normally
from January 1 to December 31.
Revenue must be recorded using the accrual basis, and not the cash basis, as defined below:
Cash Revenue is reported once the product/service has been received.
Accrual Revenue is reported once the product/service has been delivered, or invoiced.
Make sure your clients are reporting their revenues on the accrual basis, when invoiced, not when cash is
collected. Otherwise, interest charges may be assessed by the CRA.
RECORDING EXPENSES
Similarly, expenses are recorded on the accrual basis, that is, claimed when the invoice is received and not when it is
actually paid.
At year-end, clients should record all expenses relating to the current year, even though they will not be
paid until after year’s end.
RECORDING INVENTORY
Products purchased for resale are called inventory. For tax and accounting purposes, inventory is expensed only
when sold or when it becomes valueless. This expense is called cost of goods sold. The practice of expensing
inventory only when sold is called the matching principle.
CAPITAL COST ALLOWANCE

The Capital Cost Allowance (CCA) represents the annual expense for tax depreciation of certain assets known
as depreciable capital property (such as equipment, computers and automobiles) used in the process of earning
business and/or investment income.
It constitutes an allowance for the wear and tear on an asset and the likely depreciation of value from the time it
is purchased until it is finally disposed of. As assets contribute to the revenue-earning process for several years, the
cost is allocated or deducted against revenue gradually.
CCA is deducted from the original capital cost of the property at rates defined in the Income Tax Act, leaving, at the
end of each fiscal year, an un-depreciated capital cost (UCC) that forms the basis for determining the CCA for the
next fiscal year.
UCC therefore represents the difference between the original cost of an asset minus the CCA claimed on the asset.
CALCULATING THE CAPITAL COST ALLOWANCE

When an asset is acquired, the cost is added to the particular CCA asset pool to which it belongs. It is important to
note that the asset must be available for use (set up, installed, and ready to operate) before being added to a class.

In calculating CCA for a particular year, only 50% of the prescribed CCA rate on assets purchased within that year
may be used. This rule is applied when there are net acquisitions (acquisitions minus dispositions in the same
category) over the course of the year.
The 2019 federal budget introduced an enhanced CCA for eligible zero-emission vehicles purchased on or after
March 19, 2019 and available for use before January 1, 2027.
Refer to the Income Tax Act to see the different classes of assets and the rates defined for each class.
EXAMPLE
Automobiles under $30,000 belong to Class 10. The prescribed CCA rate for this asset class is 30% declining
balance. Only 15% (50% of 30%) of the cost of the asset may be depreciated in the year of purchase.
Therefore, a car purchased last year for $20,000 results in a CCA of $3,000 (15% × $20 000 = $3,000) for last
year. This year, the CCA will be $5,100 (30% × $17,000).
DISPOSITION OF ASSETS
When an asset is disposed of, the UCC of that asset class is reduced by the amount of proceeds received (unless the
proceeds exceed the asset’s original costs, in which case the pool is reduced by the original cost only).
The amount of proceeds that exceeds the cost represents a capital gain subject to tax.
EXAMPLE
A car originally purchased for $3,000 several years ago is sold for $5,000. The UCC of the class is reduced by
$3,000 (the lesser of proceeds of $5,000 and cost of $3,000) and a $2,000 capital gain is realized.
RECAPTURE OF CCA
A negative UCC balance is created when the CCA claimed on a particular class exceeds the actual economic
depreciation of the asset.
Recapture represents the amount of CCA over-claimed in the past. Because CCA was deducted as an expense, this
excess CCA must now be included in income.
EXAMPLE
A building with an original cost of $100,000 has a UCC balance of $40,000, meaning that CCA of $60,000 has
been claimed in the past.
If the building is sold for its fair market value of $80,000, the UCC balance at the end of the year will be negative
(–$40,000).
The actual economic depreciation of the building is $20,000 ($100,000 – $80,000) but the taxpayer claimed
CCA of $60,000 ($100,000 – $40,000). The taxpayer therefore over-claimed $40,000 CCA in the past and must
now include that amount in income.
TERMINAL LOSS
A terminal loss occurs when a taxpayer claims less CCA than the actual economic depreciation of a particular asset.
A terminal loss is deductible for tax purposes.
A building with an original cost of $100,000 has a UCC balance of $40,000, meaning that CCA of $60,000 has been
claimed in the past.

If a taxpayer sells the building for its fair market value of $30,000, the UCC balance at the end of the year
will be $10,000.
Since there is no asset left in the class at year-end, the $10,000 is a terminal loss and can be deducted from income
this year. The terminal loss represents unclaimed CCA.
The actual economic depreciation of the building is $70,000 ($100,000 – $30,000), but the taxpayer claimed CCA
of $60,000 ($100,000 – $40,000). The taxpayer therefore under-claimed CCA of $10,000 in the past and can now
deduct that amount from income. A terminal loss is the opposite scenario of a recapture.
Keep the following tips in mind regarding your clients’ CCA:

• Recommend that your clients accelerate the purchase of new assets when a particular class
of depreciable property is about to generate a recapture of CCA. This will offset some or all
the negative CCA. (This plan doesn’t apply to rental properties over $50,000, which belong to
distinct categories.)
• If a particular asset class has a positive UCC with no asset left in its class at year-end, advise your
clients to delay the purchase of assets in this class until the next year to take advantage of the
terminal loss deduction.
• Recommend that your clients purchase and install an asset before the year-end to claim CCA early.
Remember that one half of the CCA is deductible in the year of acquisition, no matter when in the
year it was acquired.
FISCAL YEAR END FOR BUSINESSES

Since 1995, businesses carried on as sole proprietorship or partnership are generally required to have a December 31
fiscal year-end. Before 1995, such businesses were able to select any fiscal year-end, thus opening the way to a tax
deferral. An incorporated business may have any year-end.
However, in certain cases there are valid non-fiscal reasons for having a year-end other than December 31. In such
cases, businesses carried on by individuals may opt for a financial year that does not coincide with the calendar year
using the proxy method. A tax deferral is no longer permitted.
INVESTMENT INCOME
Investment income, also known as property income, is generally regarded as a return earned on invested capital. It
includes items such as interest, dividends, rents and royalties.
DIFFERENCE BETWEEN INVESTMENT INCOME AND BUSINESS INCOME

Business income is active in nature, requiring physical or mechanical effort, or both. Investment (or property)
income is passive in nature, not requiring the commitment of significant time, labour and attention.
TYPES OF INVESTMENT INCOME

There are three major types of investment income:
• Interest income
• Dividends
• Rent and royalties
Although the general principles are the same, different types of investment income are governed by unique tax rules.

CALCULATING INVESTMENT INCOME

For various reasons, Canadian tax law treats different forms of investment income differently, and such differences
usually influence the after-tax rates of return on assets. The timing of tax liability affects after-tax cash flows and
therefore the yield on particular investments.
Most common stocks can justify an interest-expense deduction for tax purposes because of the potential for
dividend income.
INTEREST INCOME
Interest income is defined as the compensation received for the use of borrowed funds.
Interest income is 100% taxable when received or receivable. Unpaid or accrued interest is included in taxable
income every year or deferred for not more than one year.
The after-tax return on each additional dollar of interest income is calculated as:
(1 − tax rate) × interest rate
For example, the after-tax return on a GIC providing a 5% yearly return (before tax) for a client who is subject to a
40% marginal tax rate is 3%, calculated as:
(1 – 0.4) × 5% = 3%
Two accounting methods for reporting interest for tax purposes are offered to taxpayers (not including
corporations). They are as follows:
• The cash method, where interest is reported in the year it is received, is used to report regular interest. This
method has some restrictions.
• The accrual method, where interest is recognized as being earned on a daily basis regardless of the date
actually received or receivable, is used by businesses to report interest earned on investments.
Taxpayers must use the chosen method in subsequent years for interest derived from the same source.
EXAMPLE
Last year, Vincent bought a one-year $10,000 GIC at 1.5%, the interest on which is paid annually and which falls
due on June 7 of this year.
On June 7, he receives $150. With the accrual method, he must declare interest income of $85.07, or $150 ×
207/365, for last year. This year, he must declare the remaining interest income of $64.93.
DEFERRING INTEREST PAYMENTS

Having led to abuses with the cash method, legislation has been passed to impose an accountancy rule that is tied
to the investment’s date of acquisition when interest is paid at time intervals exceeding one year.
All accrued interest must be declared annually on the anniversary of the acquisition date, regardless of when
interest is paid. Issuers of investments on which interest is paid only at maturity must issue annual statements of
the amount of accrued interest. Taxes are paid based on anniversary dates or maturity dates for maturities of less
than one year.
This is the case for nearly all kinds of investments, such as strip bonds, GICs and loans and mortgages.

EXAMPLE
Last year, Jane lent $10,000 at 10% interest to a friend’s business. The loan interest will not be paid for five years,
at which time Jane will receive $15,000 ($10,000 principal plus five years’ interest).
Jane is required to report and pay tax on $1,000 of accrued interest income each year beginning on the first
anniversary of the loan. That is, if the loan is given on January 1 of last year, a full year of interest must be
included as income on January 1 of this year and therefore reported in Jane’s tax return for this year.
Recommend to your clients that it’s preferable to hold these types of investments in an RRSP, where
accrued interest is not taxable until withdrawal.
DIFFERENCE BETWEEN VARIABLE AND CONTINGENT INTEREST DEBT INSTRUMENTS

Certain debt instruments offer either variable or contingent interest rates.
Variable interest rate debt instruments include, among others, variable-rate GICs.
Debt instruments for which the interest rate is contingent on a future event include GICs tied to a stock market index.
DISPOSITION OF INTEREST WHEN BOND IS SOLD

When a bond is acquired between interest payment dates, the purchaser pays the accrued interest to the seller. For
tax purposes, the seller includes the interest income and the purchaser deducts the accrued interest paid against the
interest received.
IMPACT OF THE DISCOUNT OR PREMIUM ON THE SALE OF A BOND

Because the value of bonds fluctuates inversely with interest rates, transactions on such securities are frequently
effected at a value different from the nominal value of the securities.
• A bond that is purchased at a discount (a price lower than its nominal value) produces a capital gain at
disposition (sale or maturity) of the investment.
• A bond that is purchased at a premium (a price higher than its nominal value) produces a capital loss
at disposition.
The preferential impact on income of capital gains should motivate investors in a high tax bracket
towards the purchase of discounted securities.
REPORTING INTEREST INCOME ON STRIP BONDS

No interest is paid during the term of strip bonds. The nominal value is paid upon maturity. However, the individual
must declare annually an income of theoretical interest, which is considered to have accumulated each year. The
return at maturity establishes the total income.

REPORTING INTEREST INCOME ON SHORT-TERM INSTRUMENTS ISSUED AT DISCOUNT

Treasury bills, bankers’ acceptances and commercial paper constitute short-term assets that are issued at a
discount and mature at face value. The discount is treated as interest income for tax purposes if the short-term
instrument is kept until maturity. It is possible that sales of these securities before their maturity may involve a
capital gain or loss.
REPORTING INTEREST INCOME ON COUPON BONDS

Interest income on coupon bonds (compounding) is taxable on an annual basis (even though interest may not
have been paid). If possible your clients should hold such debt instruments in a tax-sheltered vehicle, such as an
RRSP or TFSA.
DIVIDENDS
A dividend is a distribution of profits to the shareholders of a corporation. It is important to note that a firm
distributes dividends only after it has paid off the interest on its outstanding bonds and honoured its tax obligations.
Dividends received by individuals from Canadian corporations are taxed in a unique and complex manner that was
designed by public authorities to encourage Canadians to invest in Canadian equities. It was also designed as part of
a plan to integrate corporate and shareholder income, thus eliminating the double taxation of dividends.
There are two types of dividends: the eligible and the non-eligible dividends.
Eligible dividends are received by individuals from public corporations and Canadian-controlled private corporations
(CCPCs) that have been paid out of business income taxed at the high corporate tax rate. Non-eligible dividends are
received from CCPCs that pay tax at the small business rate. Only the eligible dividends are discussed below.
TAXATION OF DIVIDENDS
Eligible dividends are calculated for taxation in the following way:
1. The dividends actually received are grossed up and included in taxable income as taxable dividends.
(The gross-up amount reflects the corporate taxes presumably already paid on corporate income.)
2. The grossed-up taxable dividend is subject to tax at the individual’s tax rate.
3. A dividend tax credit is then deducted from the tax liability to arrive at the net federal tax.
The percentage of gross-up and tax credit per year for eligible dividend:
2020
Dividend grossed-up 38%
Tax credit on grossed dividend 15.02%
Note that the dividend tax credit is lost if it cannot be used in the year the dividend was received.
The dividend tax credit is calculated independently of the tax rate, and is available only for dividends received from
Canadian public or private corporations.

EXAMPLE
Karen owns shares of a large Canadian bank. Last year, she received $1,000 in dividends from those shares. Karen
is taxed at a 40.16% marginal tax rate (that is, 29% federal and 11.16% provincial). Excluding surtaxes and using
a 38% dividend grossed up and a dividend tax credit of 15.02%, the amount of tax payable on this source of
income is:
Dividends received $1,000
+ Gross-up (38%) $380
= Taxable dividend $1,380
Federal taxes on dividend (at 29%) $400.20
– Dividend tax credit (15.02%) of taxable dividend) $207.28
= Net federal tax $192.92
Provincial tax (at 11.16%) $154.01
– Provincial dividend tax credit (10.00%) of taxable dividend $138.00
= Provincial tax owing $16.01
+ Federal taxes owing $192.92
= Total taxes paid $208.93
TAXABLE CAPITAL GAINS

CAPITAL GAINS AND LOSSES
Capital gains (or capital losses) are gains (or losses) realized on the sale of capital property. Capital property
is property that was acquired for the intended purpose of obtaining long-term or enduring benefits. Capital
property includes:
• Personal-use property (such as houses, land, cars or furniture)
• Listed personal property (such as jewelry, stamps or coins)
• All other investment property (such as stocks, bonds, franchises or equipment)
Note that at the time of sale the property does not have to have been be held for a long time, as long as the
taxpayer intended to achieve benefits from the capital property over a long period of time.
TAXABLE CAPITAL GAINS

As of the year 2000, the federal government has approved that only 50% of capital gains are considered taxable
capital gains and only 50% of capital losses are considered allowable capital losses.
Capital losses can only be offset against capital gains and cannot be used to offset other (non-capital) sources
of income.
The amount by which taxable capital gains exceed allowable capital losses is included in taxable income and subject
to the regular marginal tax rates.

Excess allowable capital losses can be carried back three years and forward indefinitely to offset taxable capital gains
realized in such periods.
A capital gains exemption for shares of a small business corporation and certain farm property is
available for Canadian residents. Be sure to investigate whether this applies to your clients’ situation.
DIFFERENCE BETWEEN BUSINESS INCOME AND CAPITAL GAINS

There is a significant difference between the taxation of business income and capital gains. Business income is fully
taxable, as the profit is included in income. For example, a profit of $1,000 adds $1,000 to total income.
On the other hand, only 50% of a capital gain is added to total income. For example, a capital gain of $1,000 adds
$500 to total income.
A capital gain results in lower income taxes than business income and increases an individual’s after-tax cash flow.
Keep in mind that allowable capital losses can only be deducted from taxable capital gains, whereas
losses from business and property can be deducted from any source of income.
DIFFERENCE BETWEEN INVESTMENT INCOME AND CAPITAL GAINS

A capital gain is the gain realized through the difference between the selling price and the cost on the sale of an
investment or other property.
Investment income is calculated as revenue from invested capital minus all reasonable expenses incurred to earn
that revenue.
In order for interest expense to be tax deductible, it must be incurred to earn income.
Since capital gain is not considered investment income by the Income Tax Act, any asset that offers only capital gain
without any potential dividend or interest payments cannot justify a tax deduction for interest expense.
CALCULATING CAPITAL GAINS AND LOSSES

Capital gains or losses are calculated as follows:
P – (ACB + E) = Capital gain or loss
Where:
P = Proceeds of disposition The actual or deemed selling price received when a property is sold
ACB = Adjusted cost base The original purchase price plus other costs incurred to acquire the
property, including brokerage fees, installation costs and legal fees
E = Expenses of disposition All costs incurred to complete the sale, such as legal fees, brokerage
fees and commissions to agents, to name a few
CAPITAL PROPERTY ACQUIRED BEFORE 1972

Before 1972, capital gains were not taxable, nor were capital losses deductible. Consequently, any capital property
acquired before that year is subject to special rules for the purpose of calculating the capital gain or loss.

The gains or losses are calculated based on a starting point known as a Valuation Day (V-Day). There are
two V-Days:
• December 22, 1971 for publicly traded (common or preferred) shares or securities
• December 31, 1971 for all other capital property
The V-Day value of the property is its fair market value on that date.
The taxation authorities’ adopted method for eliminating the accumulated gain or loss as of V-Day will differ
depending on whether the property is non-depreciable or depreciable:
Depreciable Property If taxpayers declare a capital gain for depreciable property that was acquired before
1972, they may be required to adjust the proceeds of disposition before calculating the
capital gain. This calculation will be used to eliminate any capital gain that might have
been accumulated before the Valuation Day.
Non-Depreciable For any capital gain or loss that is declared on non-depreciable property that was
Property acquired before 1972, a deemed cost of the property must be determined and will be
used in calculating the capital gain or loss. This deemed cost can be established using
either the V-Day value of the property or the median rule method, described below.
Note that if the taxpayer has elected to use the V-Day value for another item
of property in a previous year, they must continue to use this method for all
non-depreciable property that they owned on December 31, 1971.
THE MEDIAN RULE METHOD

The median rule method uses the median amount as the deemed cost of the property.
The median amount is the value that is neither the highest nor the lowest of the following three amounts:
• The capital cost of the property
• The property’s V-Day value
• The proceeds of disposition
When two or more of these amounts are the same, that amount will be the median amount.
EXAMPLE
Last year, Victor disposed of 1,000 shares in a public corporation that he had acquired on July 6, 1967 for a per-
share price of $2. The proceeds of disposition were $16 per share. Fair market value as of December 22, 1971 was
$6 per share.
If Victor uses the median rule method, the deemed cost per share will be $6 (the median amount of $2, $6 and
$16). In this case, the same result would have been obtained using the V-Day value.
His capital gain per share will be $10 ($16 – $6), which only represents the portion of the gain that was
accumulated after 1971.
SPECIAL ELECTION
A special election is available to permit individuals to treat Canadian securities as capital property, therefore
making all gains or losses capital gains or losses. This may help taxpayers who are concerned that their high
level of share transactions will cause the Canada Revenue Agency to consider the gains on the sale of shares as
business income.

THE IMPORTANCE OF TIMING

Capital gains and losses are only recognized for tax purposes when a disposition (sale) of property occurs.
For example, if a taxpayer purchases shares in a public corporation at a cost of $10,000 that are currently worth
$30,000, this unrealized gain of $20,000 is not taxable until the taxpayer sells the shares and realizes the gain.
Consider delaying the sale of all or part of an asset until after year-end to defer the capital gains tax.
Remind your clients to keep records of net capital losses. They can be carried back three years or carried
forward to offset taxable capital gains.
In certain cases, a disposition is deemed to have occurred for tax purposes when a property has been converted from
a personal use property to an income-earning property or vice versa. When this occurs, the taxpayer is deemed to
have disposed of the property at its current fair value, thus realizing a capital gain or loss.
EXAMPLE
Suzanne owns a house that she has rented out for the past three years. Suzanne paid $150,000 for the house and
it is currently worth $200,000. She will now begin to live in the house.
Suzanne must report a capital gain of $50,000 ($200,000 – $150,000) this year, as there has been a change in
the use of the property.
In such a case, you can advise your client that a special election is available to defer the tax on the
capital gain until the property is actually sold.
OTHER INCOME
To complete the calculation of total income for tax purposes, it is necessary to review the treatment of transactions
that do not fall into the above primary income sources. Transactions that are not categorized as primary income
sources are called other sources of income.
Other sources of income that may fall into a catch-all category that includes the following main items:
• Lumps sum or periodic benefits received from an RRSP, RRIF, RPP, DPSP, RCA or IPP
• Benefits received from government sponsored plans:
Old Age Security
Canada and Quebec Pension Plans
Employment Insurance Benefits
• Benefits from foreign pensions

• Elected split pension amount
• Retiring allowances
• Income from Registered Education Savings Plans
• Research grants
• Support payments received from a former spouse (but not for the support of a child), that are periodic, not
lump sum, and that are pursuant to a court or written agreement

NON-TAXABLE INCOME
These types of income can be received with no tax consequences:
• A gift or inheritance
• Life insurance proceeds on the death of an individual
• Profits from betting or gambling or lottery winnings when conducted for pleasure (not as a gambling business)
• Capital dividends
• Amounts received as scholarships, fellowships, bursaries or prizes received by a student registered in a program
giving entitlement to education tax credit
• Proceeds from accident, disability, sickness or income maintenance insurance policies (certain exceptions apply)
• Child assistance payments, such as the Canada Child Benefit for low and moderate income families
• Payments received from a former spouse or partner for the support of a child
DEATH BENEFITS
A death benefit is a payment made by an employer and received by a taxpayer on or after the death of a spouse
or family member in recognition of their service. It does not refer to life insurance proceeds, which are fully exempt
from taxation.
When death benefits are received by a taxpayer from the deceased’s employer, the first $10,000 is not included in
income. If several persons are the beneficiaries of such a payment (the surviving spouse and the deceased’s children,
for example), the $10,000 exemption is granted first to the spouse. If the spouse receives less than $10,000, any
remaining exemption is granted to the other beneficiaries.
THE DIFFERENT TYPES OF INCOME:

Employment income represents the largest source of tax revenue.
Employment income includes both taxable and non-taxable fringe benefits.
Business income can be generated by any of the following types of business:
• Sole proprietorship
• Partnership
• Trust
• Corporation
Business gains are fully taxable, while business losses are fully deductible against any income.
Capital gains transactions differ in intent from business transactions and capital gains are taxed at a lower rate than
business gains.
Investment income is of three types:
• Interest income
• Dividends
• Rents and royalties

Interest income is defined as the compensation received for the use of borrowed funds.
Dividends are the distribution of after-tax profits to the shareholders of a corporation.
Capital gains (or capital losses) are gains (or losses) realized on the sale of capital property.
Only 50% of capital gains are considered taxable capital gains and only 50% of capital losses are considered
allowable capital losses.
Other sources of income are a catch-all category that includes transactions not categorized as primary income
sources. Some other sources of income are taxable, while others are non-taxable.

Grace Moloka comes to see Bryan in November. She works as an account manager at a car dealership and she plans
to take a six-month leave of absence at the beginning of April.
When Bryan reviews her finances, he sees that she received a bonus in December of the previous year.
“WILL YOU BE RECEIVING A BONUS AGAIN THIS DECEMBER?” ASKS BRYAN.
“YES,” SAYS GRACE, “WE ALWAYS RECEIVE OUR ANNUAL BONUSES

RIGHT BEFORE CHRISTMAS.”
“I THINK YOU SHOULD ASK YOUR EMPLOYER TO DEFER PAYMENT OF THE BONUS UNTIL JANUARY,”
SAYS BRYAN. “IF YOU RECEIVE IT IN DECEMBER, YOU WILL NEED TO INCLUDE IT AS INCOME ON THIS
YEAR’S TAX FORM. YOUR INCOME WILL BE SUBSTANTIALLY REDUCED NEXT YEAR, SO IF YOU CLAIM
THE BONUS AS INCOME NEXT YEAR INSTEAD OF THIS YEAR, IT’LL BE TAXED AT A LOWER RATE.”
Bryan’s knowledge of different types of income and how they are taxed has made it
possible for him to help Grace hold onto a bigger share of her bonus.
TAX DEDUCTIONS
4 | Describe allowable tax deductions.
A tax deduction reduces taxable income on which federal tax is calculated, and therefore reduces tax paid at the
taxpayer’s combined federal and provincial marginal tax bracket for a particular year.
The more you know about specific deductions, the better you will be able to advise your clients and make
recommendations that fit their tax profile.
CONTRIBUTIONS TO A REGISTERED PENSION PLAN

In some workplaces, employees are required to make annual contributions to a Registered Pension Plan (RPP) in
addition to the employer’s contribution. The contribution made by the employee is a deductible expense for the
employee in the year paid.
CONTRIBUTIONS TO A REGISTERED RETIREMENT SAVINGS PLAN

Unlike an RRP, which is controlled by the taxpayer’s employer, a Registered Retirement Savings Plan (RRSP) is a
private, tax-sheltered retirement program controlled by the individual.

TAX ADVANTAGES OF RRSPs

Investments made to an RRSP have the following tax advantages:
• Contributions to an RRSP are deductible from income, which means a contribution reduces the amount of tax
that would otherwise be payable.
• Funds accumulated within the plan, from contributions and investment returns, are subject to tax only when
removed from the plan.
The RRSP must be collapsed by the end of the calendar year in which the individual turns 71.
CALCULATION OF RRSP CONTRIBUTION LIMITS

The amount of the contribution to an RRSP that can be deducted for tax purposes is calculated as:
• The lesser of:
A maximum percentage of earned income (as defined by CRA) of the previous year, or
A maximum prescribed dollar limit for the year (the maximum annual contribution that can be made to an
RRSP for a given year)
• Minus:
The pension adjustment of the previous year (PA) and the current year’s past service pension
adjustment (PSPA)
• Plus:
Accumulated unused RRSP contribution at the end of the previous tax year
EXAMPLE
Sam’s earned income was $83,000 last year and $55,000 the year before. He did not make an RRSP contribution
in either year. His Notice of Assessment for last year indicated a pension adjustment of $3,500. His contribution
room is not affected by past service pension adjustments (PSPA) in this case.
A. If the maximum prescribed contribution limit is $27,230 (2020),
B. And the maximum percentage of earned income is 18%
(18% × $83,000=$14,940), Then:
The lesser of (A) and (B) is: $14,940

Add accumulated unused RRSP contribution: ($55,000 × 18%) + $9,900
$24,840
Subtract pension adjustment: – $3,500
Maximum deduction for the current year: $21,340

Some things to remember:

• RRSP contributions made during the first 60 days of the year can be included in the preceding year’s
contribution amount.
• A taxpayer may also have unused RRSP contribution room from previous years.
• Taxpayers should contribute as much and as early as possible to an RRSP for two reasons:
To take advantage of the tax deferral, and
To earn tax-sheltered capital appreciation and interest accumulation for a longer period of time.
• Tax returns for children with earned income should be filed to increase RRSP contribution room.
DEDUCTION FOR ELECTED SPLIT-PENSION AMOUNT

Up to 50% of eligible pension income can be transferred from one spouse or common-law partner to the other as
an income splitting measure. If both spouses or partners elect to transfer eligible pension income, the transferor can
deduct the amount transferred.
Both taxpayers must be Canadian residents and living together. For those 65 years of age and older, eligible pension
income includes lifetime annuity payments received from a registered pension plan (RPP), deferred profit sharing
plan (DPSP) or RRSP, or payments received from a RRIF. For taxpayers who are not yet 65 years of age, eligible
pension income is restricted to RPP lifetime annuity payments and other payments resulting from the death of a
spouse or common-law partner.
ANNUAL UNION AND PROFESSIONAL DUES

If an individual is a member of a union (such as the Canadian Auto Workers) or professional association (such as the
Canadian Medical Association), annual fees paid in the year are deductible expenses.
CHILDCARE EXPENSES
Childcare expenses, such as babysitting, daycare or camp, may be deducted provided that the expenses were
incurred to allow the taxpayer to attend school or earn income from employment, a profession, a business or grant-
funded research.
The expenses can relate to a child of the taxpayer (or spouse), or for any child dependent on the taxpayer (or
spouse), and whose net income was less than a specific amount.
If more than one person in the same household supports the child, the deduction must be claimed by the person
with the least amount of net income for tax purposes subject to some exceptions.
Non-minor children can be hired for the care of eligible siblings. The amounts paid to these children are deductible
from income as childcare expenses and included in the income of the non-minor children, who are usually subject to
little or no tax.
In some cases, a portion of payments to private schools may qualify as childcare expenses and/or
charitable donations. Review this possibility with your clients.

DISABILITY SUPPORTS DEDUCTION

Deductible expenses for disabled people include attendant care expenses and other costs of disability supports to
secure employment or pursue an education, unless these costs are reimbursed through a tax-free payment such as
an insurance benefit.
Any expenses deducted under this provision are not eligible for a medical expense tax credit (METC). However,
individuals who pay for disability supports that will be used by a disabled person for purposes other than employment
or education will be allowed to deduct the cost of these supports as a Medical Expense Tax Credit (METC).
BUSINESS INVESTMENT LOSSES

A business investment loss for a small business corporation in Canada includes:
• A loss on the sale of shares
• Debt owed
50% of such a loss can be deducted against all sources of income.
EXAMPLE
Bob purchased shares costing $50,000 in a small business corporation in Canada. If the business becomes
insolvent or bankrupt, Bob will incur a loss equal to the difference between $50,000 and the proceeds received
from the bankrupt corporation, if any.
Assuming that the small business corporation is worth nothing, Bob has realized a loss of $50,000 ($50,000
minus nil). He may claim a deduction of $25,000 (50% × $50,000), which may be used to reduce his
employment, business, investment, taxable capital gains or other income this year.
If Bob does not have sufficient income this year to use the loss, it can be carried back to offset income in any of
the past three years or carried forward to offset income for the next ten years.
Review all capital losses to assess whether they qualify as business investment losses.
MOVING EXPENSES
Deductible moving expenses include expenses incurred by a taxpayer for relocation to start a business or
employment in another part of Canada or to attend a university or other post-secondary school. These expenses are
deductible to the extent of income earned in the new location.
To be deductible, the moving costs must be associated with a move to a new residence that is at least 40 kilometres
closer to the new work location than the previous residence.
If all or a portion of the expenses cannot be deducted in the year of the move because insufficient income was
earned at the new location, the unclaimed portion may be carried forward until your client has enough income to
claim and deduct them in the following years.

EXAMPLE
Cheryl incurred $3,000 in moving costs last year but earned only $1,000 at her new job during that fiscal year.
She can only deduct $1,000 of moving expenses for that year, but she may deduct the excess moving expenses of
$2,000 ($3,000 – $1,000) in the following year if she has sufficient income at the new work location.
Deductible moving expenses include:
• Travel costs (moving, transportation and storage of property)
• Meals and lodging (up to 15 days)
• Costs of cancelling lease for old residence
• Selling cost of old residence (commissions, legal fees, and mortgage prepayment fees)
• Legal fees and land transfer taxes for the purchase of a new residence (if the old residence is sold)
• Costs connected to maintaining an unoccupied residence, such as mortgage interest, property taxes and
insurance premiums as well as heating and electricity costs, insofar as these expenses do not exceed $5,000
and provided that the taxpayer makes every reasonable effort to close the sale
Taxpayers may choose a simplified method of calculating certain travel expenses for moving. Instead of
substantiating actual expenses by receipts, the taxpayer may use various pre-established flat rates.
Identify clients who have moved residence and make sure they have claimed moving expenses
if they are eligible.
ELIGIBLE CHILD AND SPOUSAL PAYMENTS

Spousal support amounts are amounts paid or received after a marriage breakdown for the support of a former
spouse or, except in Quebec, common-law partner. Such payments are deductible to the payer and taxable to the
recipient if they meet the following criteria:
• Payment is an allowance pursuant to a written agreement
• Payment is made on a periodic basis for the maintenance of the former spouse
• The parties are living apart
Since April 30, 1997, a distinction has been made between child support payments and spousal support payments
for income tax purposes.
• Child support payments paid under arrangements reached after April 30, 1997, are no longer taxed as income to
the recipient nor are they deducted from income by the paying parent.
• Child support paid under agreements made up to April 30, 1997 is taxed as income to the receiving parent and
deducted by the support-paying parent.
It is important to note that the rules only deal with child support payments. Spousal support payments remain
deductible to the payer and taxable to the recipient spouse.
If a client receives or pays child support payments, examine the May 1997 tax rules before modifying a
separation agreement concluded before that date.

CARRYING CHARGES AND INTEREST EXPENSES

Carrying charges are expenses incurred to earn investment income. They can be deducted for tax purposes,
provided that they are:
• Incurred for the purpose of earning income
• Not an expenditure of a capital nature
• Not a reserve
• Not a personal or living expense
• Reasonable
Examples of deductible expenses are:

• Investment counselling fees paid for non-RRSP investments
• Bookkeeping and record-keeping charges
• Interest expense for non-RRSP investment loans
• Legal fees relating to support payments for the receiving spouse
Examples of non-deductible expenses are:

• Personal and living expenses
• Expenses incurred to invest in sheltered plans (TFSAs, RRSPs, RESPs) or personal assets
INTEREST EXPENSES
Under certain circumstances, interest paid is deductible against interest, dividends, and business and rental income
earned but not capital gains. It’s not necessary to currently earn income from the investment, but it must be
reasonable to expect that it will.
Examples of deductible paid interest include the interest on loans used to acquire:
• Shares (from which there is a reasonable expectation of receiving dividends)
• Bonds
• Real estate rented or used in a business
• Equipment used in a business
In order for the interest to be deductible for tax purposes, it is critical that an individual establish, through
documentation, that a specific loan was used for the purpose of acquiring an income-producing investment and not
for personal purposes.
To maximize your clients’ after-tax cash flow, follow these principles:

• Your clients should use excess cash to acquire personal assets, which can then be used as collateral
to obtain an investment loan.
• Excess cash should be applied to reduce personal loans, which incur non-deductible interest.
• For the taxation year in which a client dies and for the year preceding the client’s death, investment
expenses that were not deducted will become deductible when calculating their income.
Because interest may be deductible, the after-tax cost of investment loans is much lower than the cost of funds
used to acquire personal property. Therefore, excess funds should first be used to pay down personal loans.

In certain circumstances, even after a loss investment has been sold, interest on the debt unpaid (due to the loss)
continues to be deductible.
Let your clients know that carrying charges for purchasing investments through payroll deduction are
eligible for the interest expense deduction.
EMPLOYMENT EXPENSES
Some employment expenses (such as automobile expenses and travelling expenses) may be deducted by an
employee, other than a salesperson, if all the conditions below apply:
• They are under contract to pay for their own expenses.
• They are required to travel away from the employer’s place of business on a regular basis.
• No non-taxable travelling allowances are received.
AUTOMOBILE EXPENSES
Although it may be difficult to determine the exact cost associated with using an automobile for employment
purposes, it has been accepted that the full cost of operating an automobile should be prorated between personal
and employment use.
A percentage of the operating costs of an automobile, such as gas, oil, repairs, insurance, financing (interest),
lease and capital cost allowance, is deductible. The percentage is calculated as the number of kilometers driven for
employment purposes divided by the total kilometers driven during the year.
EXAMPLE
Julia is required to use her own automobile for employment purposes. Last year, Julia drove the car a total of
20,000 km of which 14,000 km was for employment purposes.
This year, she acquired the automobile for $20,000 and incurred the following automobile expenses:
Gas $2,200
Repairs $500
Insurance/registration $1,000
Parking (for employment duties) $400
Interest on loan to purchase car $2,800
Total $6,900
The deductible automobile expense is calculated as follows:
Expenses ($6,900 – $400) $6,500

Plus tax depreciation (CCA) ($20,000 × 15%)*
* CCA of 30% and 50% of the prescribed CCA rate on class 10 assets purchased in the first year and 30% for the
following years $3,000
$9,500
Multiplied by:
Employment km = 14,000 = 0.7
Total km 20,000
(0.7 × $9,500) $6,650
Plus parking × 100% $400
$7,050
Therefore, Julia may deduct $7,050 in automobile expenses.

TRAVELLING EXPENSES
If the above-mentioned conditions are met, the employee may also deduct other kinds of travel costs that are not
reimbursed by the employer. These may include, for example, hotel and meal costs incurred in the course of travel.
Make sure your clients keep an accurate log of kilometers driven for employment purposes.
SALESPERSON EXPENSES
Employees who act in a selling capacity (or who negotiate contracts) and who receive some form of commission
may deduct other expenses in addition to automobile costs.
Effectively, salespeople may deduct all amounts expended in a year for the purpose of earning employment income.
However, total expenses cannot exceed commission income for the year. (This restriction does not apply to capital
cost allowance and interest charges associated with purchasing an automobile.)
The following conditions must be fulfilled before the salesperson can claim employment deductions:
• Employees are required to pay their own expenses (under contract of employment).
• The employee is ordinarily required to travel away from employer’s place of business.
• Remuneration is particularly dependent on volume of sales.
• Employees do not receive non-taxable traveling expenses allowances.
• Expenses do not exceed commission income.
Examples of commissioned salesperson expenses include:

• Advertising
• Promotion
• Telephone
• Parking
• Automobile supplies
• Accounting fees
• Cost of assistants
• Limited home office expenses
• Up to 50 % of meals and entertainment
Salespeople may not deduct the following:

• Payments for golf club or fitness club membership
• Cost of assets such as computers, desks or filing cabinets
Commissioned salespeople can deduct employment expenses as regular employees or as commissioned

salespeople. In some cases, it may be advantageous to claim as a regular employee since there is no limit on the
amount deductible.
Because salespeople can’t deduct capital expenditures except for capital cost allowance on automobiles,
capital equipment used for work, such as cellular phones and computers, should be leased. The lease
cost is deductible.

HOME OFFICE EXPENSES

A home office deduction is allowed if the office is the place where the individual principally performs the duties of
employment or if the individual only uses it to earn business income and regularly meet clients at the home office.
The Canada Revenue Agency interprets principally to mean more than 50% of the time.
The home office deduction is a percentage based on the square footage of the home office compared to the
total home.
Depending on whether the employee is a regular employee or a commissioned salesperson, a percentage of the
following expenses may be deductible:
• Maintenance
• Utilities
• Rent
• Property taxes (commissioned salesperson only)
• Insurance (commissioned salesperson only)
Mortgage interest costs are not deductible to either type of employee. However, an individual earning business income
may claim a portion of the mortgage interest and property taxes in addition to all other home office expenses.
TRADESPERSON’S TOOLS
The total cost of eligible new tools acquired by an employed tradesperson in excess of a specified amount is
deductible up to a specified maximum, on condition that an employer certifies that the employee is required to
acquire those tools as a condition of, and for use in, the employment.
STOCK OPTIONS
Employees who receive stock options are required to include a stock option benefit in their employment income.
The benefit claimed equals the fair market value of the shares at the time they were acquired minus the price
actually paid.
If the option price is greater than or equal to the full market value of the stock on grant date, the employee is
eligible to claim a stock option deduction equal to one-half (1/2) the value of the taxable benefit.
The employee is eligible for the same deduction if the corporation is a Canadian Controlled Private Corporation
(CCPC) and the employee holds the stock for two years or more between exercise and sale.
In the case of a company other than a CCPC, the fact that the employee holds the shares for two or more years does
not give right to the deduction.
LOSS CARRYOVER
Losses that cannot be applied in the year they occur can be carried back three years by amending returns or they
can be applied to future years (or both). Restrictions apply, with specific rules for specific types of loss, including
the following:
• Non-capital loss
Business losses other than from farming activities, investment losses and deductible business investment losses
• Net capital loss

Excess of allowable capital losses over taxable capital gains for a particular year
• Farm loss
• Restricted farm loss

CAPITAL GAINS DEDUCTION

An individual may shelter certain capital gains with his or her lifetime capital gains exemption. The exemption
applies to the disposition of qualified farm property (also applies to dispositions of qualified property used in a
fishing business) or of shares of small business corporations designated as Canadian-controlled private corporations.
LIFETIME CAPITAL GAINS EXEMPTION (LCGE)

Effective January 1, 2019 $866,912
Effective January 1, 2020 $883,384
After December 31, 2020 Indexed to Inflation
For tax years after 2015, the lifetime capital gains exemption for a qualified farm or fishing property will be
$1 million until the indexing on the disposition of qualified small business corporation shares exceeds $1 million.
Then all three properties will have the same exemption.
The deduction is discretionary; that is, no one is required to claim it against capital gains realized.
The capital gains deduction is available only to individuals and is subject to limitations.
Remember that allowable business investment losses and cumulative net investment losses reduce a
taxpayer’s capital gains deduction. These should be calculated before your client claims a deduction.
TAX DEDUCTIONS:
A tax deduction reduces taxable income on which federal tax is calculated, and therefore reduces tax paid at the
taxpayer’s combined federal and provincial marginal tax bracket rate.
Some facts about deductions:
• RRSP contributions are deductible from income and are not taxed until they are withdrawn. They offer the
advantage of a tax deferral as well as capital appreciation and interest accumulation.
• Taxpayers who operate a business can deduct business losses from all types of income.
• Capital losses can only be deducted from capital gains.
• Expenses incurred to earn investment income are deductible for tax purposes if they meet the required criteria.
• Moving expenses can be deducted if the new location is at least 40 kilometers closer to the new work location.
• Spousal support payments are a deductible expense to the payer and taxable to the recipient.
• Child support payments are no longer deductible to the payer or taxed as income to the recipient if paid under a
court order or written agreement after April 1997.
• Interest paid is deductible against interest, dividends and business and rental income as long as it was paid on a
loan used for the purpose of acquiring an income-producing investment.
• Employees under contract to pay their own expenses may deduct automobile expenses related to employment.
• Salespeople who work on commission are eligible to deduct additional employment expenses.
• Home office expenses may be deducted by taxpayers who are self-employed or who use a home office
principally for employment duties.
• Tradespeople may deduct the cost of tools that are required for use in employment.


Grace Moloka plans to make two investments, placing $10,000 in an RRSP to maximize this year contribution room
and purchasing $10,000 worth of shares in XYZ Corporation.
Grace has $11,000 in cash and therefore wants to obtain a loan for $9,000 at 5% to finance the purchase. Her plan
is to use the loan proceeds to contribute to the RRSP plus $1,000 of her own cash and use the remaining cash to
purchase the shares.
“INTEREST PAYMENTS ON A LOAN ARE DEDUCTIBLE FROM INTEREST INCOME,” SAYS

BRYAN. “BUT IF YOU TAKE OUT A LOAN AND USE THE FUNDS TO CONTRIBUTE TO
YOUR RRSP, YOU WON’T BE ABLE TO DEDUCT THE INTEREST WHEN YOU COMPLETE
YOUR TAXES THIS YEAR.”
“WHAT DO YOU RECOMMEND?” ASKS GRACE.
“YOU WANT TO MAXIMIZE THE DEDUCTIBILITY OF INTEREST ON THE LOAN,”

SAYS BRYAN. “TO DO THAT, YOU SHOULD USE $10,000 OF YOUR CASH TO
ACQUIRE AN RRSP. THEN, YOU SHOULD BORROW $9,000 AND COMBINE IT
WITH YOUR REMAINING CASH TO INVEST IN THE SHARES IN XYZ CORPORATION.
THAT WAY, YOU CAN EASILY DEMONSTRATE THAT YOU BORROWED THE $9,000
FOR INVESTMENT PURPOSES. AS WELL, YOU WILL GET THE BENEFIT OF AN
RRSP CONTRIBUTION.”
Because Bryan is knowledgeable about tax deductions, he is able to help Grace structure her
investments to minimize costs and maximize the return.
TAX CREDITS
5 | Describe the allowable refundable and non-refundable tax credits.
After the taxes owing on taxable income are calculated, the total non-refundable tax credits are applied to
determine the net federal tax amount.
There are several tax credits available to taxpayers in Canada, each with unique rules and requirements.
Other than the charitable donations tax credit and dividend tax credit, non-refundable tax credits are based on a
specified base amount of income and are calculated by multiplying the base amount by a specified tax rate.
DIVE DEEPER
Click on the Job Aids Link to review the Non-refundable Federal Tax Credits Job Aid.
Remember that non-refundable tax credits reduce federal income taxes at the specified rate, not at the
individual’s marginal tax rate.

PERSONAL: BASIC, SPOUSAL

Each taxpayer in Canada is eligible for a non-refundable tax credit on the following:
Tax credit Eligibility
Basic personal Each taxpayer in Canada is eligible for a base annual personal amount of income
which is multiplied by the applicable tax rate to arrive at the personal tax credit.
Spouse/common-law The spouse or common-law partner tax credit can be claimed if the taxpayer
partner or eligible supported a spouse or common-law partner whose net income was less than a
dependant specified amount.
The amount for an eligible dependent can be claimed if the taxpayer had no spouse
or common-law partner and was supporting a child under 18 or was supporting a
related individual 18 or over who was mentally or physically impaired. The taxpayer
cannot claim both a spousal/partner amount and an eligible dependant amount.
AGE AND PENSION INCOME

Some non-refundable tax credits are limited in amount or reduced as income levels increase.
The pension income tax credit, for example, is available on a base amount of qualifying pension income to a
specified limit.
The age tax credit is available to taxpayers who reach the age of 65 before the end of the year. It is reduced by a
specified percentage when net income is greater than a specified amount, and it is fully eliminated when income
reaches a specified higher amount.
The age credit is transferrable to a spouse or common-law partner.
TUITION AMOUNT
A tax credit is available for tuition fees paid as follows:
Tax Credit Description
Tuition amount The tuition tax credit is calculated as a specified percentage of the amount paid for
a student in post-secondary education. Certain occupational, trade or professional
examination fees are included.
After the student has used his own credit to reduce his income tax to zero, the
unused portion can be transferred to a spouse, parent or grandparent (up to a limit).
CANADA TRAINING CREDIT

The 2019 federal budget introduced the Canada Training Benefit in order to address barriers to professional
development for working Canadians. The Canada Training Benefit will include as one of its key components the
new Canada Training Credit, a refundable tax credit aimed at providing financial support to help cover up to half of
eligible tuition and fees associated with training. Eligible individuals will accumulate $250 each year in a notional
account that can be accessed for this purpose.
An individual must be between the ages of 25 and 65 (year at which the balance is reduced to $0) and be resident in
Canada throughout a year to claim the credit for the year. The individual’s earned income must be between $10,000
and $150,473 (third tax bracket limit 2020).

Individuals will be able to accumulate up to a maximum amount of $5,000 over a lifetime. Any unused balance will
expire at the end of the year in which an individual turns 65.
The amount claimed will offset, dollar for dollar, tax otherwise payable or will be refunded to the individual to the
extent that the amount exceeds tax otherwise payable.
This measure will apply to the 2019 and subsequent taxation years. Consequently, the annual accumulation to the
notional account will be effective as of the 2019 taxation year and the credit will be available to be claimed for
expenses as of the 2020 taxation year.
EXAMPLE
Eric is eligible to accumulate $250 per year starting in 2019. In 2023, the value of his notional account will be
$1,000. In 2023, Eric enrolls in training and pays $1,200 in eligible tuition fees. Eric will be able to claim a tax
credit of $600 for the 2023 taxation year. The notional account balance will be $400 and Eric will accumulate an
additional $250 for 2023. The notional account balance in 2024 will be $650. Eric will be able to accumulate an
additional $3,750 in his notional account over his lifetime.
EMPLOYMENT AMOUNT AND CONTRIBUTION TO CPP/QPP

Employees can claim a tax credit to help cover their work-related expenses. The Canada employment amount is
based on the lesser of a specified base amount and total employment income, calculated as a specified percentage.
Employees can also receive a credit based on employee contributions to the Canada Pension Plan (CPP), Quebec
Pension Plan (QPP) or Employment Insurance. These credits are calculated at a specified percentage of the
amount contributed.
The self-employed, who are required to pay both the employer and employee components of the CPP/QPP, can
deduct 50% of the CPP/QPP paid in calculating net income. The tax credit calculation is based on the remaining
50% of amounts paid.
HEALTH: MEDICAL, DISABILITY, CANADA CAREGIVER

Non-refundable tax credits in the health category include the following:
Tax Credit Description
Disability The disability credit is available to a taxpayer who is certified by a doctor as disabled.
Medical expense The medical expense credit is applicable on expenses in excess of the lesser amount
of 3% of net income or a specified limit.
Medical expenses claimable by a taxpayer include those incurred by the taxpayer, the
taxpayer’s spouse and any dependants
Canada caregiver The Canada caregiver tax credit is available to a caregiver of a dependent person who
has a mental or physical infirmity.
MEDICAL EXPENSE TAX CREDITS

Within limits, taxpayers can claim medical expenses, paid and not reimbursed, as tax credits. Taxpayers can claim a
15% tax credit for their medical expenses exceeding the lesser of the annual threshold or 3% of their net income.

In addition to amounts paid to doctors, dentists and full-time home attendants, medical expenses include
amounts paid:
• For full-time nursing home care
• To institutions for the disabled
• For ambulance transportation
• For travel expenses for medical care if services were not available within 40 kilometers of client’s home
• For prescription drugs, eyeglasses, and contact lenses
• For certain medical devices prescribed by a medical practitioner
• By the employee as a premium for private health services plans
Since 2010, expenses incurred for purely cosmetic procedures do not qualify anymore for the medical tax credit but
those necessary for medical or reconstructive purposes would still qualify.
Medical expenses can be claimed for any 12-month period ending in the year and must be documented by receipts.
This allows individuals to select a 12-month period that results in the largest medical expense claim.
At the federal level, all medical expenses incurred by a family can be grouped and claimed by any
spouse or partner.
EXAMPLE
Casey may only claim medical expenses in excess of the lesser of 3% of his income or the annual threshold.
His dental expenses were $1,000 in November of last year and $500 in February of this year. If he selects a period
from November 1 to October 31 for medical expense claims, his total medical expenses are $1,500. He can claim
a tax credit because this amount is higher than 3% of his income.
Without this flexibility, he would not be eligible to claim any medical expenses, because the expenses incurred in
either calendar year do not exceed the lesser of 3% of his net income or the annual threshold.
OTHER TAX CREDITS

Some other tax credits described below are:
• Political contributions tax credit
• Charitable donation tax credit
• Unused credits
POLITICAL CONTRIBUTIONS TAX CREDIT

Federal political contributions tax credits are offered in exchange for contributions to federal registered political
parties. The maximum credit is set at a specified limit and is calculated using a three-tiered system of percentages.
The political contributions tax credit may not be carried forward and all unused credits are lost.
CHARITABLE DONATION TAX CREDIT

The government offers a charitable donation tax credit to encourage Canadians to donate to registered charities.
Qualified donees can issue official donation receipts for gifts they receive from individuals and corporations.

To qualify, the donation must be made to:

• A registered charity (including a registered national arts service organization);
• A registered Canadian amateur athletic association;
• A listed housing corporation resident in Canada constituted exclusively to provide low-cost housing
for the aged;
• A listed Canadian municipality;
• A listed municipal or public body performing a function of government in Canada;
• A listed university outside Canada that is prescribed to be a university, the student body of which ordinarily
includes students from Canada;
• A listed charitable organization outside Canada to which Her Majesty in right of Canada has made a gift;
• Her Majesty in right of Canada, a province, or a territory; and
• The United Nations and its agencies
Some private schools may issue a charitable donation receipt for a portion of the payments paid to the school.
LIMITATIONS OF A CHARITABLE TAX CREDIT

A taxpayer’s charitable donations of up to 75% of net income qualify for a federal tax credit of 15% for the first
$200 of the donation, 29% on income below $214,368 and 33% on income of $214,438 or more. It is a good
strategy to combine charitable donations for the entire family unit on one tax return, thereby limiting the 15%
threshold to a single $200 portion of the whole amount. This limit is increased to 100% of net income in the
year of death.
Taxpayers who cannot, or choose not to, claim credit for the full amount in the current year can carry it forward
in any of the next five years. After five years, the credit is lost. In the year of a taxpayer’s death, it may be carried
back one year.
In addition, in the year of the taxpayer’s death and in the preceding year, the limit on donations is 100% of a
person’s net income. The federal limit for claiming donations to CRA is 75% of net income.
EXAMPLE
Rajesh has taxable income of $230,000 in 2020. If he makes a charitable donation of $35,200 in 2020, his
charitable donations tax credit will be $10,805.28 (calculated as $30.00 + $5,158.56 + $5,616.72). The three
different amounts that add up to Rajesh’s total tax credit are calculated as follows:
$30 = 15% of $200
$5,156.58 = 33% of $15,632 (i.e., the amount of his $230,000 income that is above 214,368)
$5,616.72 = 29% of $19,368
The $5,616.92 figure is the amount of Rajesh’s total donations for the year over $200 that is not eligible for the
33% rate above ($35,000 – $15,632).
Note that the $15,632 figure is the lesser of two amounts:
• The amount by which Rajesh’s total donation exceeds $200 ($35,000)
• The amount by which his taxable income exceeds $214,368 ($15,632)

DONATIONS TRIGGERING A CAPITAL GAIN

Capital property (cottages, securities, land, buildings and equipment you use in a business) donated to a charity
is deemed to have been disposed of just prior to the gift, thereby triggering a potential capital gain. This occurs
whether the gift is made during one’s lifetime or at death through a will.
The capital gain (equal to the fair market value of the property donated at the time of gift less the property’s
cost base) would be taxable at 50% under normal circumstances.
For capital property gifted to a registered charity, however, the taxpayer may elect the disposition amount
to be anywhere between cost and fair value. The receipt issued by the charity would equal the amount the
taxpayer elected.
Donations of certain types of capital property to a registered charity may be entitled to an inclusion rate of zero on
any capital gains realized on such gifts. The inclusion rate of zero applies if you donate the following property:
• a share of the capital stock of a mutual fund corporation;
• a unit of a mutual fund trust;
• an interest in a related segregated fund trust;
• a prescribed debt obligation;
• a share, debt obligation, or right listed on a designated stock exchange
UNUSED CREDITS
Although some tax credits will be lost if the taxpayer is unable to use them, others can be transferred to another
taxpayer under specific conditions. Some transferrable tax credits include:
Tax Credit Eligible Recipient
Disability Supporting spouse or parent
Tuition amount Spouse, parent or grandparent
Child Spouse
Age Spouse
Pension Spouse
PERSONAL INCOME TAX CREDIT FOR DIGITAL SUBSCRIPTIONS

The 2019 federal budget proposes a temporary, non-refundable 15% tax credit on amounts paid by individuals
for eligible digital news subscriptions. This will allow individuals to claim up to $500 in costs paid towards eligible
digital subscriptions in a taxation year for a maximum tax credit of $75 annually.
This credit will be available in respect of eligible amounts paid after 2019 and before 2025.

TAX CREDITS:
A tax credit is a specific reduction of taxes payable and has a value equal to its stated amount. Tax credits can be
refundable or non-refundable.
Every Canadian taxpayer is eligible for a non-refundable basic personal tax credit.
Although most non-refundable tax credits have unique rules and requirements, they are for the most part
calculated on a specified base amount of income. The base amount is multiplied by a specified tax rate. Some
non-refundable tax credits are subject to limitations.
Two tax credits with distinct rules and requirements are the charitable donation tax credit and the dividend
tax credit.
Taxpayers who are unable to use tax credits can transfer specific credits to a spouse or family member. Other credits
are lost if they cannot be used.

Grace Moloka donated a painting to a registered charity. The painting has a cost of $10,000 and a fair market
value of $30,000.
BRYAN TELLS GRACE, “YOU CAN ELECT THE DISPOSITION AMOUNT TO BE

COST OR FAIR MARKET VALUE.”
“IF YOU ELECT FAIR MARKET VALUE, YOU WILL REALIZE A CAPITAL GAIN OF $20,000 WHICH IS
TAXABLE AT 50%. SO YOU WILL PAY TAX ON $10,000 BUT YOU WILL RECEIVE A CHARITABLE
DONATION RECEIPT FOR $30,000 AND RECEIVE A TAX CREDIT ON THAT AMOUNT.”
“IF YOU ELECT COST, YOU’LL REALIZE NO CAPITAL GAIN, SO YOU’LL PAY NO TAXES.
HOWEVER, YOUR DONATION RECEIPT WILL BE ONLY $10,000, SO THE TAX CREDIT WILL
BE MUCH SMALLER.”
Bryan calculates that Grace would be better off to elect the higher value, pay the
capital gains tax and receive the higher tax credit. His knowledge of tax credits has
helped Grace to get the maximum advantage out of her charitable donation.

Investments 5
1 | Explain the various types of risk.

Investment Theory – Risk and Return
2 | Calculate the return of an investment.
3 | Explain the features of various investments. Types of Investments
4 | Explain the features of Registered Education Registered Education Savings Plans (RESPs)
Savings Plans (RESPs).
5 | Explain the features of Tax-Free Savings Tax-Free Savings Accounts (TFSAs)

Accounts (TFSAs)

KEY TERMS
accounting rate of return investment rate of return
accumulated income payments (AIPs) issuer
beneficiary liquidity risk
business risk market risk
Canada Education Savings Grant (CESG) marketability risk
Canada Learning Bond (CLB) mutual fund
capital appreciation net asset value per share (NAVPS)
country risk nominal rate
economic benefit opportunity cost
Educational assistance payments (EAPs) real rate
exchange rate risk real return bonds (RRB)
expected inflation rate Registered Education Savings Plan (RESP)
family RESP plan return
financial cost risk
financial risk risk premium
Fisher equation segregated funds
group RESP plan share
Guaranteed Investment Certificate (GIC) stock
holder survivor
individual RESP plan systemic risk
inflation risk Tax-Free Savings Account (TFSA)
interest rate risk treasury bill

CHAPTER 5 | INVESTMENTS 5•3
INVESTMENT THEORY – RISK AND RETURN
1 | Explain the various types of risk.

2 | Calculate the return of an investment.
One of the most important functions you will have as an advisor is to know the different types of investments
available to your clients and to be able to evaluate them in order to recommend appropriate choices.
To evaluate an investment’s performance in terms of the return it earns, you first need to know the types of
investment risks that affect it, to measure the degree of risk it carries and to determine whether your clients will be
adequately compensated for bearing that risk.
Learning investment theory will equip you with a sound knowledge of investment risk and return so you can help
your clients make informed investment decisions.
All financial assets are expected to produce cash flows, and the riskiness of an asset is judged in terms of the
variability of (or risk to) the cash flow.
When we invest in common stock, for example, we are unsure of its future value because the future cash flows from
the stock are uncertain and are not guaranteed by the issuer. Our investment in the stock means we are taking a
risk in the hope of making a return.
THE RISK PREMIUM

Because investors are generally averse to risk, they require higher rates of return on investments that have higher-
than-average levels of risk.
The nominal risk-free rate is based on a benchmark such as a treasury bill, and the increase in the required rate of
return over the nominal risk-free rate is the risk premium.
Risk premium is expressed as follows:
Nominal risk-free rate + risk premium = required rate of return
EXAMPLE
For example, if the risk-free rate of return on a treasury bill is 1%, and the expected return on an investment in a
mutual fund is 9%, then the risk premium is 8% (9% – 1% = 8%).
THE FUNDAMENTAL SOURCES OF RISK

The fundamental sources of risk generally fall into one of the following categories:
Risk Definition
Business risk The uncertainty associated with return on business investments
Financial risk The uncertainty introduced by the method the firm uses to finance its investments
Liquidity risk The uncertainty of a secondary market for an asset
Exchange rate risk The uncertainty of returns to an investor who acquires securities in a foreign currency
Country risk The uncertainty of returns caused by unexpected changes in the political or economic
environment of a country

Risk Definition
Inflation risk The risk that the rising value of the cost of living will weaken purchasing power and
decrease the real return on investments
Interest rate risk The risk that unexpected increases in interest rates will decrease the value of return on
investments
Market risk The risk that is derived from the economy as a whole
Each risk category is described in more detail below.
BUSINESS RISK
Business risk is the uncertainty associated with return on business investments. Cash inflow may be
unpredictable due to the nature of the business activity, and the more uncertain the income of the business, the
more uncertain is the cash flow to the investor. The more uncertain the cash flow, the greater the risk premium an
investor will demand.
EXAMPLE
A retail food company typically experiences very stable sales and growth over time and has low business risk.
In the automobile industry, sales and earnings fluctuate over the business cycle, and so the risk premium for a
company in this industry will be greater than that of the food company.
FINANCIAL RISK
Financial risk, also called default risk, is the uncertainty introduced by the method the firm uses to finance its
investments. The higher the level of debt, the higher the debt servicing costs; and the lower the cash flow available
for dividend payments to shareholders, the higher the financial risk to the shareholders.
EXAMPLE
ABC Company uses only common stock to finance investments, so it incurs only business risk.
XYZ Company is identical to ABC, except that it uses debt financing as well as equity financing. Thus, it borrows
money to finance investments by issuing both bonds and stocks. It must pay interest to its creditors before
providing income to its shareholders, so the risk to the shareholders of XYZ is greater than the risk to the
shareholders of ABC.
LIQUIDITY RISK
Liquidity risk, also known as marketability risk, is the uncertainty of a secondary market for an asset.
Liquidity refers to the investor’s ability to sell an asset quickly at its fair market value. The more difficult it is to
convert an asset into cash, the greater its liquidity risk.
When assessing the liquidity risk of an investment, an investor must consider two questions about liquidity:
• How long will it take to convert the investment into cash?
• How certain is the price to be received?

The less liquid an asset, the greater the risk premium the investor will demand.
Below is a comparison of the relative liquidity of various assets:
Asset Liquidity
Cash Cash is the most liquid of all assets.
Stocks and other bonds Because stocks and other bonds take several days from the time of sale to the receipt
of payment, they are less liquid than cash.
Non-redeemable GICs Non-redeemable GICs are not liquid in that the investor cannot redeem them prior to
maturity without penalty.
Real estate assets Real estate assets are less liquid because the time between the sale date and payment
date can be several weeks.
Foreign securities Liquidity risk can be a significant consideration when investing in foreign securities,
depending on the country and the liquidity of its stock and bond markets.
EXAMPLE
Maxwell puts all his extra income toward his mortgage loan and has no emergency fund. In the event of a
disruption to his income, all his savings are tied up in a fairly illiquid asset and he will have to use his home equity
line of credit to meet his expenses.
EXCHANGE RATE RISK

Exchange rate risk is the uncertainty of returns to an investor who acquires securities in a foreign currency. The risk
with such an investment is that its value will be affected by fluctuations in the conversion rate so that the investor
suffers a loss upon conversion.
EXAMPLE
George purchases a Government of Great Britain bond denominated in pounds sterling. George will receive
interest payments in pounds every six months. If the pound depreciates against the Canadian dollar at the time
of payment, then George will receive fewer Canadian dollars.
COUNTRY RISK?
Country risk, also called political risk, is the uncertainty of returns caused by unexpected changes in the political or
economic environment of a country. Country risk may be associated with emerging economies that unexpectedly
introduce currency and capital controls, new tax regimes or new governments.
EXAMPLE
Arturo invests in a mining stock in a country that appears to be going through a period of stability after years
of political turmoil. However, the elected government is unexpectedly overthrown by a foreign power and the
country’s economy is thrown into chaos. The value of Arturo’s mining stock plunges along with value of the
country’s currency.

INFLATION RISK
Inflation risk, also called purchasing power risk, is the risk that the rising cost of living will weaken purchasing
power and decrease the value of return on investments.
EXAMPLE
To understand the role of inflation risk, consider the following simplified example:
Suppose Jenny earns $100 per week. This value, as expressed in today’s dollar terms, is called the nominal value
of money.
Suppose that Jenny consumes only apples, and assume that apples are currently priced at $1 each.
Thus, the nominal value of $100 can buy 100 apples.
Now suppose that the price of apples increases to $2 each. $100 can now buy only 50 apples. Jenny has suffered
from a loss of purchasing power due to the increase in the price of apples.
The value of the money in terms of purchasing power is called the real value of money.
The real value of money adjusts for inflation and declines as prices rise.
An investment with a fixed nominal rate, such as a GIC, is at risk of losing value due to inflation, as a
higher-than expected inflation rate reduces the real rate of return to the investor.
Inflation risk can be measured using the Fisher Equation or the approximation formula.
THE FISHER EQUATION

The Fisher equation depicts the relationship between the nominal rate, inflation, and the real rate:
(1 + real rate) = (1 + nominal rate) / (1 + expected inflation rate)
Sam invests in a mutual fund that he expects will earn an annual rate of 5%.
Inflation is expected to be 2% for the first year.
The (expected) real rate of return, using the Fisher equation is given as follows:
(1+ real rate) = (1 + nominal rate) / (1 + inflation rate)
(1 + real rate) = (1 + 0.05) / (1 + 0.02) = 1.0294
Real rate = 0.0294 = 2.94%
Although the investment grew by 5% in nominal dollar terms, prices increased by 2% over the same period, so the
real rate of return on the investment was 2.94%.
Note that the real rate of return accounts for the loss of purchasing power due to inflation.
THE APPROXIMATION FORMULA

The real rate can be approximated by subtracting the expected inflation rate from the nominal rate. Thus, using
the figures from the example above:
Real rate = nominal rate – expected inflation rate
Real rate ≈ 5% – 2% = 3%
While the approximation works for small values, it’s best to use the Fisher equation to obtain a more
accurate result.

INTEREST RATE RISK

Interest rate risk affects the price of bonds and arises from unexpected changes in interest rates.
EXAMPLE
Gregory has purchased a five-year $1,000 CanCorp bond that pays a coupon rate of 5%, payable semi-annually.
This implies that Gregory has locked in the interest payments at 5% and expects to receive $25 every six months.
Now suppose that interest rates increase to 8%. Gregory loses the opportunity to earn this higher interest rate
because the coupon payments are locked in. Because it offers a lower coupon payment (compared to other
similar bonds), the 5% bond will not be as attractive as the 8% bond, and so the price will fall.
Advise your clients that when interest rates are expected to rise, bond prices are expected to fall, and
when interest rates are expected to fall, bond prices are expected to rise.
MARKET RISK
Market risk, also called systemic risk, is the risk that is derived from the economy as a whole. Uncertainty about
general economic conditions such as future inflation rates or interest rates creates market risk. These economic
factors affect a large number of assets in the market.
EXAMPLE
During the expansion phase of the economic cycle, individuals have more discretionary income and purchase
more goods and services. Thus, companies that supply consumer goods will experience higher profits and their
stock prices will rise.
However, in periods of economic decline, the stocks of these same companies may fall as their sales decrease.
DETERMINING THE RATE OF RETURN

When an investor purchases a security for a given market value, that investor hopes to earn a positive return
corresponding to the level of risk.
In calculating the investment rate of return, we take into account three components, as defined below:
Economic Benefit Cash flows from an investment represent the economic benefit to the investor and are
used to estimate an asset’s value.
Financial Cost The financial cost is the dollar amount that represents the investor’s initial investment
into the asset.
Opportunity Cost The opportunity cost is the value of a missed opportunity to invest in an
alternative choice.
ECONOMIC BENEFIT
Examples of an economic benefit include:
• Interest payments from a bond
• Dividend payments from a preferred share
• Capital appreciation from a common share

FINANCIAL COST
Some examples of financial cost are:
• The purchase price of common stock
• The purchase price of a bond
Note that this initial investment is an explicit cost, because it represents money that the investor
spent. The opportunity cost is an implicit cost as it does not represent money spent but merely a
missed opportunity.
OPPORTUNITY COST
Assume that Virginia has only $1,000 to invest. She has two choices:
1. Invest in a Government of Canada bond
2. Invest in a preferred share of ABC Inc
Assume both investments have the same risk. The Government of Canada bond is expected to earn a return of 3%.
If Virginia invests in the preferred share of ABC, she is giving up the opportunity to invest her money in the
Government of Canada bond and to earn 3%. The 3% represents the opportunity cost.
Thus, the correct way for Virginia to price the preferred share is to use the 3% opportunity cost as her discount rate.
To gauge whether the rate is high or low, we need to compare it to a benchmark return. This benchmark
return is the opportunity cost: that is, the rate of return on alternative investments with similar risk.
The value of an asset is inversely related to opportunity cost. If the opportunity cost increases, then the
value of the asset declines, and vice versa.
ACCOUNTING RATE OF RETURN

The accounting rate of return is the net benefit per dollar of investment in the asset. It is expressed as follows:
Net Gain or Loss

× 100
Initial Investment
EXAMPLE
Valery invested in the zero-coupon bond issued by Ontario Hydro and paid $970.87.
He received $1,000 at the end of one year for a net gain of $29.13.
Then the rate of on his investment is:
Net Gain or Loss $29.13

Rate of return = × 100 × 100 = 3%
Initial Investment $970.87

RISK AND RETURN:

• The riskiness of an asset is judged in terms of the variability of the cash flows.
• Investors require higher rates of return on investments that have higher-than-average levels of risk.
• The fundamental sources of risk are:
Business risk
Financial risk
Liquidity risk
Exchange rate risk
Country risk
Inflation risk
Interest rate risk
Market risk
• The components of the investment rate of return are:

Economic Benefit
Financial Cost
Opportunity Cost
• The accounting rate of return is the net benefit per dollar of investment in the asset.

Isaac Sinclair comes to see Bryan about making an investment.
“I WOULD LIKE TO INVEST IN THE XYZ MUTUAL FUND,” SAYS ISAAC. “LAST YEAR,
THEY REPORTED A THREE-YEAR AVERAGE RETURN OF 15%. DON’T YOU THINK
THAT’S GOOD?”
BRYAN SAYS, “I DO. BUT YOU MUST ALSO REALIZE THAT THIS RETURN IS NOT CERTAIN AND
THERE’S NO GUARANTEE THAT THIS FUND WILL DO AS WELL NEXT YEAR. IT COULD DO MUCH
BETTER OR MUCH WORSE.”
“WELL, THAT’S ITS AVERAGE RATE,” SAYS ISAAC. “DOESN’T AN INVESTMENT

RETURN USUALLY HOVER AROUND THE AVERAGE?”
“ALTHOUGH THE THREE-YEAR AVERAGE WAS 15%,” SAYS BRYAN, “I KNOW THAT
THE ACTUAL ANNUAL RETURNS WERE 30%, –20% AND 35%. AS YOU CAN SEE,
THERE WAS A GREAT DEAL OF VARIABILITY.”
ISAAC SAYS, “OH, I SEE THAT THE AVERAGE RATE DOESN’T TELL THE FULL STORY.
YOU NEVER REALLY EARN THE AVERAGE!”

“THAT’S RIGHT,” SAYS BRYAN, “THE DEGREE OF THE VARIABILITY IN THE PAST THREE YEARS
GIVES AN INDICATION OF THE RISK IN THE FUND, AND OF HOW DIFFICULT IT IS TO PREDICT
THE ACTUAL RETURN YOU WILL EARN.”
“I GUESS YOU COULD SAY THAT INVESTING IN A GIC PRESENTS VIRTUALLY NO RISK
SINCE I WILL KNOW FOR SURE WHAT MY RETURN WILL BE,” SAYS ISAAC.
“IT’S TRUE THERE’S NO MARKET RISK,” SAYS BRYAN, “BUT THERE IS INFLATION RISK. THE
COST OF LIVING MAY WEAKEN THE PURCHASING POWER OF YOUR ORIGINAL INVESTMENT
AND DECREASE THE VALUE OF THE RETURN. IF YOU INVEST IN THE MUTUAL FUND YOU RUN
A GREATER RISK OF LOSING MONEY, BUT YOU ALSO HAVE THE OPPORTUNITY TO REALIZE A
HIGHER RETURN. IT’S UP TO YOU TO DECIDE WHAT YOUR TOLERANCE FOR RISK IS.”
Because Bryan understands the risks related to different types of investments, he is

able to give Isaac the information he needs to make an informed decision.
TYPES OF INVESTMENTS
3 | Explain the features of various investments.
When you have learned about the various types of investments, you will be able to compare and contrast the risk-
return profile of various investment options and assess the tax implications of each type of investment. This will
help you offer clients a number of investment products that match their risk tolerance, meet their return objectives
and maximize their after-tax returns.
GOVERNMENT INVESTMENT PRODUCTS

Government investment products include the following:
• Treasury bills
• Canada Premium Bonds
• Real Return Bonds
TREASURY BILLS
A treasury bill, also known as a T-bill, is a short-term debt obligation issued by the government.
Treasury bills pay no interest. Instead, they are sold at a discount below face value, and the difference between the
issue price and the price at maturity represents the return on the investment. Under the Income Tax Act, this return
is taxable as interest income, not as a capital gain.
Treasury bills are offered in denominations from $1,000 to $1 million with original terms to maturity of
approximately three months, six months and one year.
Every two weeks, Treasury bills are sold at auction by the Minister of Finance through the Bank of Canada.
REAL RETURN BOND

The Government of Canada also issues real return bonds (RRB). A real return bond resembles a conventional bond
in that it pays interest throughout the life of the bond and repays the original principal amount on maturity.
Unlike conventional bonds, however, the coupon payments and principal repayment are adjusted for inflation.

CHAPTER 5 | INVESTMENTS 5 • 11
EXAMPLE
Edgar holds an RRB with a face value of $1,000 that provides a real yield of 4.25% at maturity. Inflation (as
measured by the CPI) was 1.5% over the first six-month period after issue, so the value of the $1,000 RRB at the
end of the six months is $1,015 (1000 x 1.015). The interest payment for the half-year is based on this amount
($1,015 x .0425/2 = $21.57) rather than the original bond value of $1,000. At maturity, the maturity amount is
calculated by multiplying the original face value of the bond by the total amount of inflation since the issue date.
For tax purposes, coupon payments and any increase in inflation compensation must be included annually as
income, it is important to note that inflation compensation will not be paid until maturity. During periods of very
high inflation, there is a possibility that tax owing in a given year may be greater than the coupon interest received.
GUARANTEED INVESTMENT CERTIFICATES (GICs)

A Guaranteed Investment Certificate (GIC) is a fixed-term investment that guarantees the principal. The interest
rate may be fixed or variable. GICs can be purchased from banks and trust companies with terms typically ranging
from one to five years, although they may be shorter or longer. Interest rates are typically fixed at a higher rate for
longer terms.
A GIC may be redeemable or non-redeemable:
Redeemable GIC A redeemable GIC can be cashed in before the maturity date, although early
withdrawal may be penalized with a lower interest rate.
Non-redeemable GIC A non-redeemable GIC is locked in for the entire term and cannot be cashed out
before the maturity date. A non-redeemable GIC typically offers a higher interest rate.
ADVANTAGES OF GICs
GICs offer the following advantages:
Low risk The principal is guaranteed.
Guaranteed growth A fixed-rate GIC guarantees the amount of interest that will be earned.
Flexibility GICs offer various options such as short or long terms, fixed or variable rates and
interest that is collected monthly, annually or at maturity.
DISADVANTAGES OF GICs
Some disadvantages of GICs are:
Low growth GICs offer low risk on investment in exchange for a low return.
Low liquidity Non-redeemable GIC funds are inaccessible for the term of the GIC.
Opportunity cost The GIC holder misses out on the opportunity to make an investment with higher
potential for return.

MUTUAL FUNDS
A mutual fund is an investment vehicle that consists of pooled contributions from a group of investors. Professional
money managers invest the pooled funds into a variety of securities, including stocks, bonds and money
market instruments.
Investors (share or unit holders in the fund) share in the income, gains, losses and expenses the fund incurs in
proportion to the number of units or shares that they own.
Mutual fund shares or units are redeemable on demand at the fund’s current price or net asset value per share
(NAVPS), which depends on the market value of the fund’s portfolio of securities at that time.
Funds are invested according to specific policies and objectives that are stated in the fund’s prospectus. The
prospectus generally covers the following:
• Whether income or capital gain is the prime objective
• The degree of safety or risk that is acceptable
• The main types of securities in the fund’s investment portfolio
Mutual funds recommended to clients must be assessed carefully and reviewed regularly to be sure they
reflect the client’s current and ongoing risk tolerance and investment goals.
ADVANTAGES OF MUTUAL FUNDS

The chief advantages of mutual funds are:
Low-cost Diversification Mutual fund ownership provides a low-cost way for investors to acquire a
diversified portfolio.
A typical large fund might consist of 60 to 100 or more different securities in 15 to 20
industries. Small investors therefore have access to a wider range of securities, and
because individual accounts are pooled, managed funds can trade more economically
than individually held funds.
Professional Mutual funds offer an inexpensive way for the small or inexpert investor to access
management professional management of their investments.
Mutual funds are managed by an investment specialist who continually analyzes the
financial markets and monitors fund performance to fine-tune the fund’s asset mix to
meet investment objectives.
Variety The availability of a wide range of mutual funds enables investors to meet a wide
range of objectives, from fixed-income funds through to aggressive equity funds.
Transferability Many fund families permit investors to transfer between two or more different funds
being managed by the same sponsor, usually for little or no added fee. Transfers are
also usually permitted between different purchase plans under the same fund.
Variety of purchase and Purchasers, for example, can make a one-time, lump-sum purchase or they can
redemption plans accumulate units in a fund periodically through a pre-authorized contribution
plan (PAC).

Liquidity Mutual fund shareholders have a continuing right to redeem shares for cash at net
asset value within three business days.
Ease of estate planning Shares or units in a mutual fund continue to be professionally managed during probate
period until estate assets are distributed. In contrast, other types of securities may not
be readily traded during the probate period, even though market conditions may be
changing drastically.
Loan collateral Fund shares or units held in non-registered accounts are usually accepted as security
for a bank loan.
DISADVANTAGES OF MUTUAL FUNDS

There are several disadvantages to mutual funds, as described below:
Cost Sales charges and management fees can be high, although competition in the market
has reduced these recently.
Short-term value With the exception of money market funds, which are designed with liquidity in mind,
mutual funds are not recommended for short-term performance or as an emergency
cash reserve. High sales charges can lead to loss of capital if they are sold too soon.
Risk Mutual funds are susceptible to market volatility, which is difficult to predict or time
and is not controllable by the fund manager.
Tax complications Buying and selling by the fund manager for the good of the fund may create
unfavorable tax circumstances for the individual if the fund shares or units are held in
non-registered accounts.
SEGREGATED FUNDS
Segregated funds are an insurance product that combines a mutual fund-like investment with the protection of an
insurance policy. As with mutual funds, an investor’s money is pooled with the contributions of other investors to
purchase a portfolio of securities.
The value of the units purchased is based on the value of the underlying securities and changes in response to
market conditions.
Segregated funds also have unique features that enable them to meet special client needs, such as maturity
protection and death benefits. In both cases, the contract holder or the beneficiary receives, under certain
conditions, a partial guarantee of the money invested.
Segregated funds are especially attractive to business owners or professionals seeking creditor protection.
Because of the insurance benefits they offer, segregated funds have higher management fees than mutual funds.
It is important to remember that you must be Insurance Licensed in order to discuss segregated funds with your
clients and that the risk profile of the fund must match the risk profile of the client.
STOCKS
Stock certificates represent ownership in a company or companies. The smallest unit of ownership in a particular
company is called a share.

Stock (or shares) can be preferred or common:

• Preferred shareholders typically have no voting rights but a higher claim on earnings and assets.
• Common shareholders have voting rights at shareholder meetings. They may or may not receive dividends,
depending on the discretion of the Board of Directors.
ISSUING SHARES
Shares are issued as readily transferable street certificates that are registered in the name of a securities firm.
Electronic shares have replaced certificates as evidence of ownership.
BENEFITS OF STOCK OWNERSHIP

Some of the benefits of stock ownership are as follows:
Capital appreciation Capital appreciation in the form of retained earnings adds to the value of the
shareholders’ equity.
Dividends In many companies, dividend payments are a routine matter and can be regularly
anticipated by common shareholders (as well as preferred shareholders, who have a
higher claim to earnings in the form of dividends).
Marketability The right to buy or sell common shares in the open market at any time is a relatively
simple matter with few legal formalities.
Tax benefits The Income Tax Act offers favourable tax treatment of dividend income and
capital gains.
Voting privileges Common shareholders have the right to elect directors, to approve financial
statements and auditor’s reports and to have access to information pertaining to the
company’s affairs.
Limited liability Personal assets are not vulnerable to creditors if a company goes bankrupt.
RISKS OF STOCK OWNERSHIP

The major risk of stock ownership is the risk of uncertain return or outright loss—that is, the investor may not
receive a return to compensate for the level of risk assumed. This risk can take the following forms:
Lower (or no) dividends Unlike debt interest, dividends are payable to common shareholders at the discretion
of the Board of Directors. Some companies reinvest all earnings in the business, while
others lack sufficient earnings to pay dividends.
Lower (or zero) price Stock value may decrease, and if a business fails, shareholders may lose their entire
when shares are sold investment. Preferred shareholders have a higher claim on assets and take priority over
common shareholders in the event of liquidation. The possibility of total loss explains
why common share capital is sometimes referred to as venture or risk capital.
CAPITAL GROWTH
As companies earn profits year after year, whatever money is not paid out to shareholders in the form of dividends will
remain in the company as retained earnings. Since retained earnings form part of common equity, a growth in retained
earnings will add to the value of shareholders’ equity. Assuming a fairly constant number of shares outstanding, the
amount of equity that belongs to each share will increase, and therefore, the price of stock will increase.

Also, annual growth in the size of a company’s profits increases the ratio of earnings per share, and investors, in
anticipation that growth will continue, are willing to pay a higher price.
Corresponding dividend growth that arises from increased earnings also leads to stock price increases.
There are many other factors, both within the company and externally, that can affect a company’s stock price, and
careful analysis and selection are required to ensure a profitable investment.
NON-REGISTERED INVESTMENTS:
• Income from non-registered investments is not deferred but taxed as it is earned.
• Non-registered government investment products such as Treasury bills and Real Return Bonds.
• A guaranteed investment certificate (GIC) is a fixed-term investment that guarantees the principal.
• Returns on GICs come from interest income.
• A mutual fund consists of pooled contributions from a group of investors.
• Mutual fund investors share in the income, gains, losses and expenses the fund incurs in proportion to the
number of units or shares that they own.
• Stock certificates represent ownership in a company or companies.
• Returns (or losses) on stocks come from capital appreciation (or depreciation) and dividends.
• Segregated funds are an insurance product that combines a mutual fund-like investment with the protection of
an insurance policy.

Vikram Patel received a graduation gift of $2,000 from his grandparents.
“I WOULD LIKE TO INVEST IT IN A MUTUAL FUND,” SAYS VIKRAM. “CAN YOU HELP ME
CHOOSE THE RIGHT ONE?”
“BEFORE YOU MAKE THAT DECISION,” SAYS BRYAN, “IT’S A GOOD IDEA TO ASK YOURSELF WHAT
YOUR REQUIREMENTS ARE. ARE YOU LOOKING FOR A SHORT-TERM INVESTMENT OR ONE FOR
THE LONG TERM? ALSO, WHAT IS YOUR RISK TOLERANCE? HOW WOULD YOU FEEL IF YOUR
INVESTMENT TOOK A PLUNGE INITIALLY?”
“I WOULDN’T BE HAPPY,” SAYS VIKRAM. “I CAN’T AFFORD TO LOSE ANY OF IT. IN FACT,
IF I PURCHASE MUTUAL FUNDS, I MAY NEED TO SELL THEM FAIRLY SOON BECAUSE I’M
PLANNING TO GO BACK TO SCHOOL NEXT YEAR AND WILL PROBABLY NEED THE MONEY.”
“MUTUAL FUNDS ARE NOT THE BEST CHOICE FOR THE SHORT TERM,” SAYS BRYAN. “THEY TEND
TO DO WELL OVER THE LONG TERM, BUT I WOULDN’T RECOMMEND THEM IF YOU MAY NEED
THE FUNDS IN AN EMERGENCY. WHY DON’T YOU PURCHASE A REDEEMABLE GIC INSTEAD? THAT
WAY, THE PRINCIPAL WILL BE SAFE, YOU WILL BE ABLE TO ACCESS THE MONEY IF YOU NEED IT
AND YOU WILL RECEIVE A MODEST AMOUNT OF INTEREST ON YOUR INVESTMENT AS WELL.”
Because Bryan understands the differences among different non-registered

investment products, he is able to help his client make a wise investment choice.

REGISTERED EDUCATION SAVINGS PLANS (RESPs)
4 | Explain the features of Registered Education Savings Plans (RESPs).
A Registered Education Savings Plan (RESP) is a tax-deferred education savings vehicle where the contributor,
or subscriber, enters into a contract with a sponsor, such as a bank or a mutual fund company, to invest funds for a
beneficiary or beneficiaries’ post-secondary education.
Legally married or common-law spouses can be joint subscribers to an RESP. The beneficiary, usually a child, will
receive income from the RESP when attending a post-secondary educational institution. All RESPs are subject to
Canada Revenue Agency (CRA) regulations.
By understanding how to make the most of an RESP, you will be able to explain to clients the different ways of
setting up a savings vehicle to help pay for post-secondary studies of a beneficiary. You will also be able to illustrate
how RESPs help in tax planning since the taxes payable on the income earned from the capital contributed to the
plan are deferred.
TYPES OF RESPs
There are three common types of RESPs:
• Individual
• Family
• Group
INDIVIDUAL PLANS
An individual RESP plan is ideal for a single named beneficiary, the beneficiary doesn’t have to be related to you.
This type of RESP can be opened for a child, yourself or another adult; that being said the Canada Education
Savings Grant (CESG) and the Canada Learning Bond (CLB) will only be applicable to eligible beneficiaries.
Beneficiaries are discussed in the table below.
FAMILY PLANS
A family plan is ideal if you have more than one child.
A family plan is normally created when you have one or more children (beneficiaries) who will need savings to pay
for their post-secondary studies. The beneficiary must be related to the account holder, either by blood or adoption.
They may be children, stepchildren, grandchildren (including adopted grandchildren), brothers or sisters of the
account holder.
The Income Tax Act, describes a “blood relationship” as that of a parent and child (or grandchild or great-grandchild),
or that of a brother and sister. Nieces, nephews, aunts, uncles and cousins are not considered blood relatives.
A family plan benefits the beneficiaries of the plan by allowing the earnings and CESG to be shared among the
beneficiaries named in the RESP, to a maximum of $7,200. The Additional Canada Education Savings Grant and the
Canada Learning Bond can be paid only if all the beneficiaries in the plan are siblings.
GROUP PLANS
A group plan is for a single beneficiary (child), the child does not have to be of blood relationship. These types of
plans are normally provided by group plan dealers.

A group plan provides benefits to contributors who are able to make continuous payments throughout the full term
of the RESP plan. Group plans are professionally managed and ideal for individuals who don’t want or have the
ability to manage the investments.
How it works is that all contributions are combined with those of other contributors. Each child will receive funds
from the plan based on how much is in the group plan account, and by the number of students attending post-
secondary school within the same age group.
Each plan is different and fees may be charged if contributions to the plan are stopped.
When comparing the different types of RESPs, your clients should assess RESP fees, conditions of the
specific plans, refund policies, investment control, investment options and expected returns.
GENERAL FEATURES OF REGISTERED EDUCATION SAVINGS PLANS

General features to know about RESPs include:
• RESP beneficiary or beneficiaries
• RESP contributions
• RESP maturity and transfer of funds to beneficiary
• Use of RESP proceeds by beneficiary for educational assistance payment (EAPs)
• General tax aspect of RESPs
• Withdrawal of accumulated income if beneficiary fails to attend post-secondary education
RULES REGARDING RESP BENEFICIARIES

An RESP can be set up as a single-beneficiary (individual) plan or as a multi-beneficiary (family) plan. For both of
these plans, a subscriber can change the beneficiary at any time, although certain restrictions may apply.
Individual plan The beneficiary may be anyone, including the subscriber or the subscriber’s spouse,
nieces, nephews or any unrelated individual of any age.
With many individual plans, an alternate beneficiary can be named if the original
beneficiary does not attend a post-secondary educational institution.
If all beneficiaries are under the age of 21, RESP assets from individual plans can be
transferred to a family plan at a later date.
Starting in 2011, transfers between individual RESPs for siblings are allowed, without
tax penalties or loss of Canada Education Savings Grants, provided the receiving plan
is opened when the beneficiary is under 21 years of age.
RESP’s for a disabled beneficiary may stay open for 40 years.
Family plan The beneficiary or beneficiaries may only include the subscriber’s children, brothers,
sisters, grandchildren or great-grandchildren, connected by blood or adoption. The
subscriber, the subscriber’s spouse, nieces, nephews or any unrelated person cannot
be beneficiaries.
Contributions cannot be made to a family plan for a beneficiary older than 31.

If one child under a family plan does not pursue a post-secondary education, the RESP
earnings can be used by the other child or children in the plan, provided maximum
RESP contribution limits for each beneficiary are adhered to.
Individual and family plans now have the same flexibility regarding the allocation of
RESP assets among siblings.
Group plan The plan only allows for a single beneficiary (child), the child does not have to be of
blood relationship. Benefits are based on the accumulated amount of funds within the
plan and divided by the number of beneficiaries within the same age group who are
attending post-secondary education.
RULES REGARDING RESP CONTRIBUTIONS

Contributions to RESPs are not tax-deductible for the subscriber. However, the RESP contributions and earnings
benefit from tax-free growth.
Currently, there is a lifetime limit of $50,000 to all RESPs for any one beneficiary. There are no annual limits on
contributions to RESPs.
RESP contributions can be made over a 31-year period and the RESP must be matured and fully paid out or
collapsed by the end of the 35th year following the year the plan was established.
Note that if the subscriber borrows funds to contribute to an RESP, the interest paid on the loan is not
tax-deductible.
TRANSFERRING FUNDS TO THE BENEFICIARY

When an RESP beneficiary attends a qualified post-secondary educational institution, the RESP proceeds are
transferred to the beneficiary as required in the form of educational assistance payments (EAPs) and used to meet
education expenses. The RESP continues to provide tax-sheltered growth until the end of 35 years.
The subscriber may choose to withdraw the non-taxable capital from the plan (refund of contributions), or if
necessary, leave it to the beneficiary who may use the non-taxable capital along with RESP earnings and the Canada
Education Savings Grant (CESG) payments to fund post-secondary education costs. You will learn about CESG’s in
the following section.
The subscriber also decides how much is paid out of the RESP and when the EAPs are made, subject to conditions.
EAPs can be spread over the duration of the student’s education program. Spreading the EAP over the duration of
the program is not always the ideal case as the beneficiary’s current income and future income should be considered
to minimize taxes payable.
EXAMPLE
Jonas and Beatrice are friends at university. Jonas’s parents, who are of modest means, withdrew the principal
of his RESP to deposit in their RRSP and Jonas receives regular EAPs from the earnings. The EAPs are spread out
over the duration of his program to reduce the cost evenly and to minimize his taxable income. Jonas works every
summer and contributes to his expenses.
Beatrice’s parents, on the other hand, contributed more to her RESP and left the principal in the fund. Beatrice’s
EAPs, based on both principal and earnings, are also spread over the duration of her program to minimize her
annual taxable income.

EDUCATIONAL ASSISTANCE PAYMENTS (EAPs)

Documentary evidence of the beneficiary’s full-time enrolment in a qualified post-secondary educational institution
is required before Educational assistance payments (EAPs) from an RESP are released. This is usually documented
on an invoice from the institution of courses chosen along with a timetable.
Qualified post-secondary educational institutions include Canadian universities, community colleges, and junior
and technical colleges. Universities outside Canada that provide approved post-secondary courses, including some
correspondence courses, generally qualify as well. Colleges outside Canada do not qualify.
Educational assistance payments can be used for tuition, books, laboratory fees, transportation, accommodation
and other school-related expenses.
TAXATION OF RESPs
RESP contributions are not tax-deductible for the subscriber, and so withdrawal of the capital contributions is non-
taxable. This applies whether the subscriber withdraws the capital or the beneficiary uses it to fund education costs.
The main tax advantage of RESPs is that the earnings are tax sheltered in the plan until the funds are withdrawn by
the beneficiary.
Also, because the beneficiary is usually in a low tax bracket while attending university or college, minimal tax will be
payable by the beneficiary on RESP withdrawals.
OPTIONS IF THE BENEFICIARY FAILS TO ATTEND A POST-SECONDARY

EDUCATIONAL INSTITUTION
If the RESP beneficiary fails to attend a post-secondary educational institution and there are no alternate
beneficiaries, the RESP earnings can be withdrawn by the subscriber, with the following conditions:
• If the RESP beneficiary does not pursue post-secondary education by age 21, the RESP has been in existence
for at least 10 years and the subscriber is a Canadian resident, the subscriber can withdraw the RESP earnings,
which are then referred to as accumulated income payments (AIPs).
• If the subscriber or subscriber’s spouse has sufficient RRSP contribution room, the AIPs may be transferred
(up to $50,000) to claim the RRSP tax deduction, which will fully offset taxes payable on the AIPs.
Note that the RESP must terminate before March 1 of the year following the year in which the AIPs are
first withdrawn.
• If the subscriber does not have sufficient RRSP contribution room to shelter all of the RESP’s accumulated
income, the excess accumulated AIPs will treated as taxable income for the year. The AIPs will also be subject to
a penalty tax. This is to ensure that RESPs are not used for tax-deferral purposes that are unrelated to education
funding or retirement savings.
Clients should set up an RESP before their child’s 11th birthday to ensure that the plan will have been in
existence for at least 10 years by the time the child reaches age 21. Otherwise, the subscriber will need
to wait until the 10-year requirement is met before RESP earnings can be withdrawn.
CANADA EDUCATION SAVINGS GRANT (CESG)

The Canada Education Savings Grant (CESG) is a federal program that, as of 2009, provides up to 20% on the first
$500 of annual RESP contributions (up to 40% for low- income families) and an additional 20% grant on the next
$2,000 of annual RESP contributions to a lifetime limit of $7,200, not including CESG earnings.

ELIGIBILLITY FOR THE CANADA EDUCATION SAVINGS GRANT

The beneficiary must be under the age of 18 to be eligible for CESG payments, and beneficiaries who are age 16 or
17 are not eligible unless in the years prior to age 16, the RESP subscriber met specific contribution requirements.
Additional RESP funds may be available if the primary caregiver’s net family income meets low-income
requirements.
Contributions to RESPs qualify for the CESG, provided they are new contributions. Any amounts withdrawn from an
RESP and then re-contributed, where there is no net increase in RESP contributions, are not eligible for the CESG.
To qualify for the grant, a family RESP cannot add any beneficiaries who are age 21 or older to the plan.
THE CANADA EDUCATION SAVINGS GRANT CARRY FORWARD

If the RESP subscriber does not start making CESG-eligible RESP contributions in the child’s first year, they can carry
forward payments to be eligible for the grant in later years, subject to limitations.
CESG contribution room accumulates at the rate of $2,500 per year for 2007 and later. The rate of accumulation
between 1998 and 2006 was $2,000.
If the contributor does not start making CESG-eligible RESP contributions in the child’s first year, catch-up
payments eligible for the grant can be made in later years (subject to the lifetime limit of $7,200 per beneficiary
and the annual limit per beneficiary of $1,000 or 20% of the unused CESG room).
EXAMPLE
Jack contributed $1,000 last year to an RESP for his daughter. This contribution will earn a CESG of $200
(20% of $1,000), leaving $1,500 in CESG contribution room available for carry forward in future years.
This year, Jack contributed $5,000 to the RESP. The CESG is limited to $2,500 of this year’s contribution, plus
the $1,500 carried forward from last year. As such, the CESG will be 20% of $4,000, or $800.
Be sure your clients understand that only unused CESG contribution room can be carried forward. In
this example, the extra $2,500 contributed this year cannot be carried forward and claimed for CESG
purposes in later years.
TRANSFERRING CANADA EDUCATION SAVINGS GRANT PAYMENTS TO

THE BENEFICIARY
Once the RESP beneficiary is enrolled in a qualified post-secondary educational program, the funds withdrawn from
the RESP are referred to as educational assistance payments (EAPs) and are taxable as income in the beneficiary’s
hands. EAPs include RESP earnings from capital contributions, CESGs and earnings from CESGs.
A specific portion of each payment is attributable to the grant portion, which is based on the ratio of CESGs paid
into the RESP relative to the total investment earnings in the RESP. The balance remaining in the plan’s CESG
account is reduced accordingly.
EXAMPLE
Maryam’s daughter Hannah is in her first year of university. The total investment earnings in her RESP, including
investment earnings on the CESGs, amount to $45,000. The CESGs paid into the plan amount to $7,200, or 16%
of the total. If $10,000 is paid out as EAPs in Hannah’s first year of university, $1,600, or 16%, is considered to be
the CESG. The balance of the CESG account after the first year will be $5,600 ($7,200 – $1,600).

OPTIONS IF THE CANADA EDUCATION SAVINGS GRANT IS NOT USED

Funds from an RESP principal payment that are not used for educational purposes must be repaid by the plan’s
trustee to the government equal to 20% of the amount withdrawn.
If the RESP includes contributions that did not qualify for the CESG (unassisted contributions), the assisted, or
qualified, contributions will be considered to be withdrawn first and must be repaid accordingly.
The RESP trustee must repay the CESG to the government in any of the following situations:
• The RESP is terminated or revoked
• RESP contributions are withdrawn for non-educational purposes
• RESP accumulated income payments (AIPs) are withdrawn for non-educational purposes
• An RESP beneficiary is replaced (unless the new beneficiary is under age 21 and both the old and new
beneficiary are related by blood or adoption)
• A transfer is made from one RESP to another RESP due to a change of beneficiary or a partial transfer of funds
• A balance remains after a beneficiary in a family plan does not attend post-secondary education and the
remaining beneficiary or beneficiaries have received their lifetime CESG limit
CANADA LEARNING BOND (CLB)

A $500 Canada Learning Bond is available to families that qualify for the National Child Benefit Supplement for
children born after December 31, 2003. This usually applies to families whose net family income is $48,635 (2020)
or less (first tax bracket adjusted yearly).
Additional $100 CLB instalments are deposited each year for eligible low-income families, up to the year the child
turns 15. The initial $500 CLB, plus the $100/year instalments, will provide a child with up to $2,000. The CLB will
be deposited into an RESP established by the family.
Be sure to tell your clients who reside in the jurisdictions below, that they can also receive provincial
incentives to open an RESP through the following programs:
• Quebec education savings incentive (QESI)
• BC Training and Education Savings Grant Program (BCTESG)
REGISTERED EDUCATIONAL SAVINGS PLANS (RESPs):

• An RESP is a tax-deferred education savings vehicle used to invest funds for a beneficiary or beneficiaries’ post-
secondary education.
• An RESP may be for an individual or for more than one related individuals.
• Contributions are not tax deductible from their income, but earnings grow at a tax-free rate.
• Earnings are taxable upon withdrawal at the beneficiary’s tax rate.
• If a beneficiary does not use the RESP, earnings may be transferred tax free to the subscriber’s RRSP.

• If there is no contribution room in the subscriber’s RRSP, the earnings are treated as taxable income for the
subscriber with an additional penalty tax.
• The Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) are federal programs that provide
additional grant money to RESPs.
• CESG and CLB funds and their earnings are taxed in the beneficiary’s hands upon withdrawal.

Jason and Tamara MacDonald have two children aged one and four. Jason’s parents gave each of the children $1,000
to start an education fund.
RESP IS THE EASIEST AND SAFEST OPTION, BUT IT HAS STRICTER RULES REGARDING
CONTRIBUTIONS. A SELF-DIRECTED PLAN OFFERS MORE INVESTMENT CHOICES. A SELF-
DIRECTED MUTUAL FUND RESP, FOR EXAMPLE, HAS GREATER GROWTH POTENTIAL,
WHILE A GIC PLAN IS SAFER.”
“DO WE NEED TWO SEPARATE PLANS?” ASKS TAMARA.
“NO,” SAYS BRYAN, “YOU CAN CHOOSE A FAMILY PLAN RATHER THAN TWO INDIVIDUAL PLANS.
AND IF YOU HAVE A THIRD CHILD AT ANY POINT, THE FUNDS CAN BE ALLOCATED AMONG THEM.”
“AND REMEMBER, WHATEVER TYPE OF PLAN YOU CHOOSE, YOUR CHILDREN WILL BE ELIGIBLE
FOR THE CANADA EDUCATION SAVINGS GRANT AS WELL. THAT AMOUNTS TO 20% OF YOUR
ANNUAL CONTRIBUTIONS, UP TO A LIMIT.”
“WE’RE CONCERNED THAT WE WON’T BE ABLE TO CONTRIBUTE MUCH IN THE BEGINNING,”

SAYS JASON. “DOES THAT MEAN WE WON’T BE ELIGIBLE FOR THE FULL GRANT AMOUNT?”
“NO,” SAYS BRYAN, “THE CESG HAS A CARRY-FORWARD FEATURE, SO YOU WON’T LOSE YOUR
ELIGIBILITY FOR THE YEARS WHEN YOU CAN’T CONTRIBUTE AS MUCH.”
“WHAT IF ONE OF OUR CHILDREN DECIDES NOT TO GO TO A POST-SECONDARY

INSTITUTION?” SAYS TAMARA.
“IN THAT CASE, THE FUNDS CAN BE DIRECTED TO YOUR OTHER CHILD,” SAYS BRYAN. “AND IF
NEITHER CHILD CARRIES ON WITH THEIR EDUCATION, YOU CAN TRANSFER THE RESP EARNINGS
TAX FREE TO YOUR RRSP, PROVIDED YOU HAVE ROOM. OF COURSE, YOU WILL BE REQUIRED TO
PAY CESG FUNDS BACK TO THE GOVERNMENT; AND IF YOU HAVE NO ROOM IN YOUR RRSP, THE
EARNINGS ON YOUR ORIGINAL CONTRIBUTION WILL BE QUITE HEAVILY TAXED.”
Because Bryan knows how RESPs work, he is able to explain them clearly to his
clients so they can make an informed decision about their children’s education fund.
TAX-FREE SAVINGS ACCOUNTS (TFSAs)
5 | Explain the features of Tax-Free Savings Accounts (TFSAs)
A Tax-Free Savings Account (TFSA) is an account that accrues tax-free earnings; in other words, although
contributions to a TFSA are not tax deductible, there is no tax payable on the income earned, whether it is interest,
dividends or capital gains.

A TFSA can be an alternative to other registered savings plans, such as an RRSP. When you learn the rules,
restrictions and limitations of TFSAs, you will be able to help your clients decide if it is an appropriate
investment tool for their needs.
TAX-FREE SAVINGS ACCOUNTS RULES

The basic rules of a TFSA are as follows:
• Any resident of Canada who is at least 18 years of age can open a TFSA.
• Contributions are limited to
$5,000 a year (for 2009 to 2012)
$5,500 a year (for 2013 and 2014)
$10,000 a year (for 2015)
$5,500 a year (for 2016 to 2018)
$6,000 a year (for 2019)
$6,000 a year (for 2020) and indexed to inflation (rounded to the nearest $500)
• Contributions are not tax-deductible.

• Earnings in any form are not taxed.
• Various investment types are permitted, including:
GICs
Savings accounts
Stocks
Bonds
Mutual funds
EXAMPLE
Stephanie is a 17-year-old high school student who would like to start saving for the future. She has just inherited
$11,000 from her grandmother and would like to know what to do with it.
Stephanie can’t set up a TFSA until she turns 18 in three months, but at that time, she should set up a TFSA and
contribute $6,000. At the beginning of next year, she should add the remaining $5,000. In the meantime, she
could consider putting that sum in a redeemable GIC.
CONTRIBUTION RULES
As stated, contributions are not tax-deductible and are limited to a specified amount.
Other rules governing contributions to a TFSA are as follows:
• Contributions to a TFSA can come from employment or from any other source, including a tax refund, a
bequest, savings or a gift.
• Unused contribution room can be carried forward and used any time in the future.
• Over-contribution will be taxed at the rate of 1% of the excess contribution amount every month.
• Contribution room every year consists of the TFSA dollar limit for that year plus any withdrawals made in the
preceding year, along with any unused contribution room from the previous year.

EXAMPLE
Jim is a 40-year-old systems analyst who has been saving diligently for his retirement by making annual
contributions to an RRSP. After he files his income tax return and obtains a $12,000 refund for the tax-deductible
RRSP contribution, Jim wants to save the refund.
In 2020, Jim sets up a TFSA right away and deposited his tax refund. He is authorized to invest a maximum of
$5,000 per year from 2009 to 2012, $5,500 per year for 2013 and 2014, $10,000 for 2015, $5,500 per year from
2016 to 2018 plus $6,000 for 2019 and 2020 bringing his limit to $69,500 in 2020. However, contributions to a
TFSA are not tax-deductible and Jim won’t get a further tax refund by investing in a TFSA.
WITHDRAWAL RULES
Rules governing withdrawal from a TFSA are as follows:
• Withdrawals may be made at any time.
• Money withdrawn may be used for any purpose.
• There is no limit to how much may be withdrawn.
• There is no penalty or tax on withdrawals.
• Money that is withdrawn may be re-contributed at any time in the next calendar year or later.
• Re-contribution of withdrawn funds is not mandatory.
EXAMPLE
Mike, who is 23, has a fairly well paying job as an apprentice electrician and keeps his expenses down by sharing
an apartment with two friends. His ambition is to set up his own contracting business in a few years. To do that,
he believes he needs to go to a community college and learn more about running a business.
A TFSA would be a good place to start saving. If he contributes $6,000 a year to a high-interest savings TFSA, in
three years he’ll have $18,000 (plus interest), which he can withdraw, tax free, to put toward the cost of going
back to school.
THE PARTIES TO A TAX-FREE SAVINGS ACCOUNT

The three parties to a TFSA are the issuer, the holder, and the survivor, described as follows:
Issuer The issuer, in most cases, is the financial institution—such as a bank, life insurance
company, trust company or credit union—where the TFSA is held.
At present, many financial institutions are not charging any fees for setting up and
administering a TFSA. However, it is quite possible that at some point they may
begin charging a fee, especially for self-directed accounts that require more service
and attention.
Holder The person who has a TFSA is the holder and remains so until his or her death.
Only one person can be the holder of a TFSA. After this person’s death, his or her
successor holder, named in the TFSA contract or in a will, is considered the holder.
Survivor Only a spouse or common-law partner may be named as a successor holder. If the
holder of a TFSA wishes, he or she may arrange for his or her survivor to become the
holder of the TFSA after the original holder’s death.
If the survivor does not become the successor holder of the TFSA when the holder dies,
the arrangement ceases to be a TFSA.

TFSA REGISTRATION RULES

To qualify as a TFSA, an account must at all times meet the following conditions:
• It must be an arrangement between a holder and an issuer.
• The holder must be an individual who is a resident of Canada and is at least 18 years old.
• It must be registered through the issuer with the Canada Revenue Agency (CRA) after it is set up.
The deadline for registration is the last day of February in the year following the year in which it was set up.
• It must be one of the following types:

A deposit
An annuity contract
An arrangement in trust
• The holder must be able to make contributions, to be invested according to his or her instructions.
• The holder must be able to make withdrawals.
• Only the holder may make contributions, except in the case of an employer’s group plan.
In that case, the employer is allowed to make contributions on behalf of the holder.
Those contributions are considered income for tax purposes.
• Only the holder may receive payments from a TFSA.

• The arrangement must be maintained for the exclusive benefit of the holder.
• No one other than the holder and the issuer has any rights about how the money in a TFSA is invested, how
much is withdrawn or when money is withdrawn.
• If the holder wishes to transfer all or part of a TFSA to another TFSA, the issuer must comply.
If your client would like to transfer funds to a TFSA at another financial institution, there is no penalty or
tax payable on the transfer. Your client should be informed, however, if your financial institution charges
a fee for this service.
TFSAs AND RRSPs

Because the TFSA is a relatively new investment product, Canadians are much more familiar with the Registered
Retirement Savings Plan (RRSP). Knowing the characteristics of both RRSPs and TFSAs for comparison, including
the rules for contributions, withdrawals, taxation and maturity, will be useful in helping your clients decide which is
most appropriate for their needs.
COMPARING TFSAs TO RRSPs

The age requirement for a TFSA and an RRSP compare as follows:
Age of plan holder
TFSA RRSP
Minimum age of holder 18 No minimum age; even a child with

earned income may contribute
Maximum age of holder No maximum, so TFSA can last a 71

person’s lifetime (after age 18)

The contribution rules for a TFSA and an RRSP compare as follows:
Contributions
TFSA RRSP
Tax treatment Not tax-deductible Tax-deductible
Amount Maximum of $6,000 per year 18% of previous year’s earned

from 2019 from any source for income (as defined by Canada
individuals age 18 and older and Revenue Agency) to a maximum
resident in Canada contribution limit amount for the
applicable year, minus a previous
year’s pension adjustment
Unused contribution room Carried forward Carried forward
Over-contributions A penalty tax of 1% per month Up to $2,000 can be over-contributed

is levied until the excess without penalty. Above that, a
is withdrawn; there is no penalty tax of 1% per month is levied
over-contribution cushion until the excess is withdrawn
The withdrawal rules for a TFSA and an RRSP compare as follows:
Withdrawals
TFSA RRSP
Tax treatment Not taxed Taxed at marginal tax rate except if

made under Home Buyers’ Plan or
Lifelong Learning Plan
Amounts permitted Any amount at any time; also, $35,000 from Home Buyers’
no restrictions on how the funds Plan and $20,000 from Lifelong
withdrawn can be used Learning Plan
Minimum lifetime withdrawal No stipulated minimum When the plan holder reaches
withdrawals need to be made age 71, the plan must be wound
during a person’s lifetime up or converted and minimum
withdrawals must be made
every year
Repayment Withdrawal amount is added Within 15 years to Home Buyers’

back to contribution room Plan and 10 years to Lifelong
and withdrawals may or may Learning Plan; otherwise, no
not be paid back, at the plan repayment allowed
holder’s choice
Impact on government pension Withdrawals from TFSAs do not Withdrawal of RRIF/RRSP funds
and retirement benefits affect government pension benefits (mandatory or otherwise) may
adversely and cannot result in adversely impact eligibility for
clawback of benefits already paid, certain government pension
because TFSA withdrawals are not benefits or result in clawback of
included in income for tax purposes benefits already paid

Other rules for a TFSA and an RRSP compare as follows:
Other rules
TFSA RRSP
Kinds of investments Cash, stocks, bonds, mutual Cash, stocks, bonds, mutual
funds, GIC’s and other qualified funds, GIC’s and other qualified
investments investments
Use as collateral for loans Permitted Not permitted
Spousal attribution No attribution takes place; also, Amounts withdrawn from a spousal
a spouse’s own TFSA contribution RRSP by the spouse in the year in
room is not affected by giving which a contribution is made or
funds to his or her spouse to in the next two calendar years are
contribute to his or her TFSA taxable to the contributing spouse;
contributions to spousal plan come
out of contributor’s own RRSP
contribution room
Disposition at death Deemed disposition at death; no Deemed disposition at death;

tax on deemed disposition; tax-free fair market value is subject to
transfer may be made to surviving tax unless there is a tax-deferred
spouse (subject to CRA regulations (although not tax-free) rollover
being met) to surviving spouse, financially
dependent child, or grandchild
CHOOSING RRSPs OR TFSAs FOR RETIREMENT SAVINGS

Some people have enough savings to max out their RRSP contribution room and still contribute their limit to a TFSA
as well. Many people, on the other hand, cannot afford to do both. In that case, it is useful to compare the relative
advantages and disadvantages of TFSAs and RRSPs as a means to save for retirement.
Whether a TFSA or an RRSP is more suitable for your clients’ needs depends on two things:
• Income tax rate during contribution years
• Income tax rate after retirement
Clients who are in their peak earning years with well paying jobs would be better off with an RRSP.
On the other hand, clients with a modest earned income may find themselves in a higher tax bracket after they
retire. When they start withdrawing from their RRSP after age 71, they may have to pay more tax on the withdrawal
amounts than they would have had to pay on the contribution amounts. Their RRSP savings may also adversely
affect their eligibility for government retirement and pension benefits, or may result in a clawback of benefits
received. With a TFSA, government pension benefits are protected from clawback.
In other words:
• An RRSP is the better choice when the income tax rate is expected to be higher during contribution years and
lower after retirement.
• A TFSA is the better choice when the income tax rate is expected to be lower during contribution years and
higher after retirement.

EXAMPLE
Gillian is a 28-year-old singer who is beginning to build a career in the opera world. Her earnings are inconsistent.
She wants to save for her retirement and is trying to decide between an RRSP and a TFSA.
Because her income is at a modest level right now, Gillian is probably in a lower tax bracket than she will be in
when she eventually retires and has to start taking money out of her RRSP. That means that she’s saving less in
taxes than she will have to pay at that time. Until her income is higher, she would be further ahead by putting
as much as she can every year into a TFSA. If she still has some spare cash, it can go into her RRSP. If her career
flourishes and she begins earning more money, she can start making larger contributions to her RRSP at that time.
For people who must choose, due to financial limitations, between an RRSP and a TFSA, the choice should be
determined primarily by comparing their tax rate at the time of contribution versus their expected tax rate at the
time of withdrawal (ideally upon retirement).
Sometimes, an RRSP is not an allowable choice, as in the following situations:
• A client has no earned income
• A client has reached the age of 71
In those situations, a TFSA is the only choice.

But for those who are permitted and can afford it, the ideal solution is to have both an RRSP and a TFSA.
Clients can put deposits into the plan that is most advantageous from a tax point of view at any particular time, and
they can maximize their contributions to both plans when they can afford it.
A good savings strategy is to put the tax refund resulting from the RRSP contribution into a TFSA where
your client will be less likely to spend it.
TAX FREE SAVINGS ACCOUNTS (TFSAs):

• Canadian residents 18 or over may contribute up to $5,000 a year (2009 – 2012), $5,500 a year (2013 – 2014),
$10,000 (2015), $5,500 (2016 – 2018) plus $6,000 for 2019 and 2020 (indexed to inflation rounded to the
nearest $500) and the following years to a TFSA.
• Contributions to a TFSA are not tax deductible.
• Earnings from a TFSA are tax free.
• Contribution room may be carried forward.
• Withdrawals can be made at any time and used for any purpose.
• Withdrawals can be paid back or not, at the holder’s discretion.
• TFSA contributions can be invested in a variety of products.
• A TFSA can be in one name only.
• A TFSA can be transferred tax free only to a spouse.
• A TFSA may be preferred to an RRSP as a retirement savings vehicle if the income rate during contribution years
is lower than the expected income rate during retirement years.
• In some circumstances, it is advisable to have both a TFSA and an RRSP.


Jason and Tamara MacDonald have recently gotten married. For the time being, they’re happy to stay in their rental
apartment, but eventually they hope to buy a house. Meanwhile, they want to start saving for a down payment.
Both of them have just over $35,000 in their RRSPs.
“ARE YOU IN A HURRY TO BUY A HOUSE?” ASKS BRYAN.
“WE WOULD LIKE TO DO IT SOON IF WE CAN, BUT WE’RE WILLING TO WAIT FOUR OR FIVE
YEARS,” SAYS JASON.
“YOU CAN EACH BORROW YOUR MAXIMUM LIMIT FROM YOUR RRSP UNDER THE HOME BUYER’S
PLAN. YOU HAVE QUITE A BIT SAVED TOWARD A DOWN PAYMENT ALREADY,” SAYS BRYAN. “BUT
REMEMBER THAT IF YOU DON’T PAY YOUR WITHDRAWAL BACK WITHIN 15 YEARS, YOU’LL HAVE TO
PAY TAX ON THE SHORTFALL. IF YOU’RE CONCERNED ABOUT YOUR ABILITY TO PAY IT BACK, YOU
MIGHT WANT TO LEAVE YOUR RRSP ALONE.”
“IF YOU CHOOSE TO SAVE THROUGH A TFSA INSTEAD, YOU CAN EACH CONTRIBUTE $5,000
ANNUALLY AND WITHIN FIVE YEARS, YOU MAY HAVE ENOUGH FOR A DOWN PAYMENT. YOU’RE NOT
OBLIGED TO PAY BACK YOUR WITHDRAWAL ON THAT, BUT YOU CAN IF YOU CHOOSE TO.”
“WHAT ARE THE OTHER ADVANTAGES OF DOING IT THAT WAY?” ASKS TAMARA.
“WELL, YOU’LL HAVE THE ADVANTAGE OF TAX-FREE EARNINGS ON YOUR INVESTMENT, WHEREAS
RRSP EARNINGS ARE ULTIMATELY TAXED.”
“THEN THE TFSA IS THE WAY TO GO, DON’T YOU THINK?” ASKS TAMARA.
“BUT REMEMBER THAT YOUR CONTRIBUTIONS TO A TFSA AREN’T TAX DEDUCTIBLE. YOUR TAX
RATE IS 29%, SO TO PUT $5,000 IN A TFSA, YOU WILL NEED AN ACTUAL DOLLAR AMOUNT OF
$7,042 BEFORE TAX (CALCULATED AS 5,000 / (1-0.29)). WITH AN RRSP, YOU ONLY NEED $5,000 TO
CONTRIBUTE $5,000. SO EVEN THOUGH ANY EARNINGS FROM THE RRSP WILL BE TAXED IN THE END,
YOU MAY BE ABLE TO SAVE FOR A DOWN PAYMENT MORE QUICKLY USING AN RRSP.”
“CAN WE HAVE BOTH?” ASKS JASON.
“YES,” SAYS BRYAN. “ONE COMMON STRATEGY IS TO CONTRIBUTE WHAT YOU CAN TO YOUR RRSP
AND DEPOSIT THE TAX REFUND FROM THE RRSP IN YOUR TFSA ACCOUNT.”
“AND WE CAN USE SAVINGS FROM BOTH ACCOUNTS TO MAKE A MORE SUBSTANTIAL DOWN
PAYMENT,” SAYS TAMARA.
“THEN WE CAN DIRECT WHAT WE SAVE ON A LOWER MORTGAGE BACK INTO OUR RRSP,”
SAYS JASON.
Because Bryan understands how TFSAs work and how they compare to RRSPs, he is
able to help his clients find the best way to save to purchase a house.

Retirement 6
1 | Explain the features and uses of registered Registered Retirement Savings Plans (RRSPs)
retirement savings plans (RRSPs).
2 | Describe the rules regarding registered Registered Retirement Income Funds

retirement income funds (RRIFs).
3 | Describe the types, features and rules of Registered Pension Plans

registered pension plans (RPPs).
4 | Explain the rules regarding the three Government Pension Plans

government pension programs – Canada Pension
Plan (CPP), Quebec Pension Plan (QPP) and the
Old Age Security Program (OAS).
5 | Calculate the retirement needs of your client. Calculating Retirement Needs

KEY TERMS
allowance non-contributory plan
Canada Pension Plan (CPP) OAS Pension Recovery Tax
carry forward Old Age Security (OAS)
clawback over-contribution
contribution limits past service pension adjustment (PSPA)
contribution period pension adjustment (PA)
contribution room pension adjustment reversal (PAR)
contributory plan pension benefits
Defined Benefit Plans (DBPs) Post-Retirement Benefit (PRB)
Defined Contribution Plans (DCP) qualified investments
deregistration registered pension plan (RPP)
earned income registered retirement income fund (RRIF)
Guaranteed Income Supplement (GIS) registered retirement savings plans (RRSPs)
Home Buyers’ Plan retirement pension supplement
in-kind contribution self-directed RRSP
Lifelong Learning Plan spousal plan
locked in retirement accounts (LIRAs) Quebec Pension Plan (QPP)
locked-in RRSPs unqualified investments
locking in unused RRSP contribution room
money purchase pension plans vesting
minimum withdrawal

CHAPTER 6 | RETIREMENT 6•3
REGISTERED RETIREMENT SAVINGS PLANS (RRSPs)
1 | Explain the features and uses of registered retirement savings plans (RRSPs).
Registered Retirement Savings Plans (RRSPs) are the preferred retirement savings vehicle for many clients.
Individuals make tax-deductible contributions to the plan and accumulate tax-deferred income (interest, dividends
or capital gains) while saving to supplement their retirement income.
Contributions are discretionary and can be made up until December 31 of the calendar year in which the annuitant
of the plan attains the age of 71. Earnings on the contributions are currently not taxable. Amounts (capital and
investment income) become taxable when they are withdrawn from the plan.
As an advisor, it is important to have a solid understanding of RRSPs. This will enable you to provide sound advice
when assisting clients with their retirement planning. Clients will want to know how best to maximize their
retirement savings and minimize their tax payments. A long-term retirement strategy should be established with
your clients and be reviewed periodically.
THE ADVANTAGES AND DISADVANTAGES OF RRSPs

ADVANTAGES OF RRSPs
There are many advantages to having an RRSP, including:
Advantage Description
Reducing net income Contributions (up to a prescribed amount) are deductible from taxable income.
subject to tax
Earnings (interest, dividends and capital gains) generated inside the plan are not
currently taxed.
Allowing non-taxable Non-taxable transfers are allowed to other registered vehicles.

transfers
Providing a An RRSP can be used to generate retirement income in addition to income received
supplementary from government pension programs and company pension plans.
retirement income
DISADVANTAGES OF RRSPs
Disadvantage Description
Contribution Limit A client may want to contribute more to an RRSP than allowed by government
Restrictions regulations. Excess contributions exceeding a total of $2,000 at any one point are
subject to a 1% per month penalty tax.
Pre-retirement If a withdrawal is made from the RRSP before retirement, it will:

Withdrawals
• Increase the client’s taxable income
• Reduce the projected retirement value of the RRSP by:
The amount of the withdrawal
The income that would have accrued had the withdrawn funds been left
in the plan

TAX BENEFITS
Tax benefits include:
• Reducing taxable income in higher-earning years
• Increasing income in retirement, while decreasing taxable income at the time of contribution
• Using spousal plans as a form of income splitting
• Earnings inside the RRSP not being taxable as long as the funds are not withdrawn
EXAMPLE
John Kraft, who is in his 30’s, has a good paying job and wants to know if he should start saving for retirement.
He would like to maintain his current lifestyle into retirement but is concerned that the government pension
plans will not provide him with sufficient retirement income. John has no company pension plan. He drops by the
financial institution he has been banking with for several years and consults with Bryan Lee to obtain advice.
Bryan talks to John about the advantages and tax benefits of contributing to an RRSP plan. Bryan advises John
that he should take advantage of his high-income earning years to make contributions, while at the same time
reducing his taxable income. After John’s conversation with Bryan, he is convinced that he should set up an RRSP
and start contributing on a regular basis.
CONTRIBUTION LIMITS
The RRSP contribution limits are based on an individual’s previous year’s earned income, their Pension
Adjustment (PA), Past Service Pension Adjustment (PSPA), and accumulated unused RRSP contribution room
from the previous year. The amount contributed to the individual pension plan is not known until the end of the
calendar year and all registered pension plan (RPP) contributions are made.
RRSP CONTRIBUTION LIMITS

The maximum contribution limit amounts for the years 2019 to 2021 are:
Year Contribution Limit
2019 $26,500
2020 $27,230
2021 $28,830
CALCULATING THE MAXIMUM RRSP CONTRIBUTION AMOUNT

The annual contribution amount is calculated as follows:
The lesser of:
18% of previous year’s earned income, or
A maximum contribution limit amount for the applicable year
Minus:
Previous year’s pension adjustment (PA) and the current year’s past service pension adjustment (PSPA)
Plus:
Accumulated unused RRSP contribution at the end of the previous tax year

CALCULATING EARNED INCOME

Earned Income is calculated as:
Employment income (salary, wages, bonuses, tips, taxable benefits)
+ Income from authors’ and inventors’ rights (royalties)
+ Net business income from self-employment
+ Net rental income from real estate
+ Taxable alimony or maintenance payments received
+ Taxable wage-loss replacement income
+ Taxable long-term disability income
+ CPP or QPP disability benefits
+ Net research grants
Annual union fees

Professional fees
Net business losses from a sole proprietorship or partnership
Net rental losses from real estate
Deductible employment expenses
Deductible alimony or maintenance allowance paid
Important: Earned income must exclude:

• Interest or dividend income
• Scholarships
• Capital gains
• Unemployment benefits
• Non-taxable pension plan income
• Insurance income
• Death benefits
• Money received from a RPP, RRSP, RRIF or DPSP
EXAMPLE
The following is an example of how to calculate a client’s contribution limit amount for 2020.
Jamil is a member of a defined contribution pension plan. The earned income amounts are based on figures from 2019.
1. First, calculate the earned income amount.
Description Amount
Employment Income $79,000
Net Income from Self Employment $3,000
Rental Losses ($1,000)
Earned Income Amount $81,000
Pension Adjustment Amount from 2019 $5,000

EXAMPLE
(cont'd)
2. Second, calculate the allowable limit amount for 2020.
Contribution Limit Amount = The lesser of:
18% of 2019 earned income = 18% x $81,000 = $14,580, or
A 2020 maximum contribution limit amount = $27,230
3. Third, determine the maximum RRSP contribution amount for 2020.

Contribution Limit Amount – 2019 pension adjustment (PA) = $14,580 – $5,000 = $9,580
Jamil’s RRSP contribution limit amount for 2020 will be $9,580.
A client may have carried forward unused RRSP contribution room from previous tax years. In this case,
the unused RRSP contribution amount would be added to the calculated contribution amount for the
current year.
CARRY-FORWARD PROVISIONS AND OVER-CONTRIBUTION RULES

CARRY FORWARD RULES
Clients are allowed to carry forward unused RRSP contribution room from previous tax years and use it in
future years. The carry-forward provision prevents the loss of potential tax deductions. The carry-forward period
is indefinite.
In addition to being allowed to carry forward unused contribution room, RRSP holders may make RRSP
contributions but not deduct them for the year in which they were made. The client could choose to carry the
unclaimed contribution forward, to be claimed in a future year.
By choosing to contribute now but deduct later the client can:
• build up the tax-deferred investments within the RRSP as soon as possible
• claim the tax deduction in a higher marginal tax bracket year, when the tax savings from claiming the deduction
would be more beneficial
OVER-CONTRIBUTION RULES
Limited over-contributions into an RRSP are allowed without penalty. The maximum allowed over a lifetime cannot
exceed $2,000. The amount that is over-contributed is not tax deductible in the year of over-contribution. Any
over-contribution amount over $2,000 is subject to a penalty tax of 1% per month.
Although there is no tax deduction for the amount of the over- contribution, the excess amount is permitted to
accumulate tax-free investment income while it remains within the plan.

EXAMPLE
The following example helps explain how the carry-forward provision works:
Mary and Don Sundridge are a young couple with two small children. They bought a new house two years ago
and are on a tight budget. Since they bought the house, Don has been unable to contribute the maximum
amount allowed into his RRSPs.
Last year, Don had a maximum contribution limit of $16,650. He was only able to make a $3,500 contribution.
As a result, the difference of $13,150 was added to his total contribution limit for future tax years.
Once the children are older and Mary returns to work, Don plans to increase the amount he contributes to his
RRSPs, utilizing the contribution amounts built up through the carry-forward provision. By then he will likely be
in a higher-earning income bracket and will potentially benefit even more from the resulting tax deductions.
As an advisor, you will want to make clients aware of the carry-forward provision on RRSP contributions.
At the same time, emphasize the benefits of making:
• RRSP contributions as early in life as possible, and
• Regular contributions to a RRSP.
SPOUSAL PLANS
USES OF SPOUSAL PLANS
A spousal RRSP plan:
• Provides retirement income for the spouse or common-law partner of the contributor, while the contributions
are deducted from the taxable income of the contributor. Contributing to a spousal plan uses the contributor’s
RRSP contribution room.
• Allows the higher-income spouse or partner to reduce taxes while building up retirement income. Any amounts
withdrawn during retirement will potentially be taxed at the marginal tax rate of the lower-income spouse
or partner.
• Is of most benefit to families with a large difference in retirement income, providing a benefit by income
splitting and potentially reducing family taxes at retirement.
EXAMPLE 1
Julie earns a higher salary than her common-law partner, Maria. She has been making regular annual
contributions to a spousal RRSP which is registered in Maria’s name.
Julie has been receiving the tax receipt for the contributions made to the spousal plan and is able to deduct the
contribution amounts to reduce her taxable income.
When Julie and Maria retire, any amounts withdrawn will potentially be taxed at the lower rate of Maria, the
lower-income partner.

EXAMPLE 2
If Rekha has a maximum RRSP contribution limit of $15,500 but only contributes $10,000 to a plan in
her name, she may contribute $5,500 to a spousal RRSP. Her own total tax deduction would be $15,500.
In addition, Rekha’s spouse could also contribute to his own plan up to his allowable limit and claim a
corresponding tax deduction.
RESTRICTIONS ON WITHDRAWALS FROM A SPOUSAL PLAN

The government wanted to close the loophole where a high-income earner contributed to a spousal RRSP and then
the spouse withdrew the funds as soon as the official receipt was issued. The following restriction now applies on
withdrawals made from a spousal plan:
Conditions Consequence
• Contribution is made in current or two The contributor is responsible for reporting the
preceding tax years lesser of the amount withdrawn and the amount
• Spouse makes a withdrawal contributed during the three years.
EXAMPLE
In each of four consecutive years, Patrick contributes $1,000 to his wife’s spousal RRSP and claims each
contribution as a tax deduction in each of the years that contributions were made. Then, in the fifth year, his
wife Colleen decides to withdraw all funds from her plan. Thus, for the fifth taxation year:
a. Patrick includes as taxable income on his tax return the sum of $2,000 (made up of the following
contributions: fifth year – the year of withdrawal – nil; fourth year – $1,000; third year – $1,000).
b. Colleen includes as taxable income in her tax return the sum of $2,000 (i.e., the contributions to the
plan made for her in years 1 and 2), plus all earnings accumulated on the total contributions of $4,000
in the plan.
DEFINITION OF A SPOUSE FOR TAX PURPOSES

For income tax purposes, the ‘spouse’ of a taxpayer is a person, of either sex, to whom the taxpayer is legally
married. This does not include a former spouse. The tax concept of a ‘spouse’ has also been extended to include a
common-law partner of the taxpayer, who is defined as a person of either sex with whom the taxpayer lives in a
conjugal relationship (including same-sex couples) and the taxpayer:
a. has lived with the person for a period of at least one year; or
b. is the natural or adoptive parent of a child of the taxpayer.
Merely having or adopting a child together does not make a couple common-law spouse, they must also be living
together in a conjugal relationship.
IMPACT IF THERE IS A MARRIAGE OR COMMON-LAW RELATIONSHIP BREAKDOWN

The spouse or partner in whose name the spousal plan is registered (the annuitant) owns the RRSP, not
the contributor.
RRSP funds can be transferred tax-free as part of the division if:
• The court orders a division of assets after a relationship breakdown, or
• The spouses or partners have signed a written agreement.

SELF-DIRECTED RRSPs
SELF-DIRECTED RRSPs
A self-directed RRSP is one for which the client selects and directs the plan investments from a variety of eligible
instruments (including individual stocks, bonds and mortgages).
Annual management and periodic brokerage fees are typically charged on self-directed RRSPs.
Self-directed RRSPs are sometimes referred to as self-administered RRSPs.
SUITABLE CLIENTS FOR SELF-DIRECTED RRSPs

Self-directed RRSPs are best for clients with a sufficiently large amount to invest to justify the fixed management
fees. As a guideline, a client should have a minimum of $10,000 – $20,000 to invest.
If the client has at least a basic knowledge of investing and feels comfortable making investment
decisions, they may want to place the funds in a self-directed RRSP.
‘IN-KIND’ CONTRIBUTIONS
An in-kind contribution is a non-monetary contribution to a RRSP.
It enables a client to contribute an existing investment owned outside of the RRSP to generate a tax deductible
contribution. The amount of the deduction is based on the fair market value of the investment at time of contribution.
The client retains the investment, rather than selling it in the open market, and at the same time benefits from the
tax deduction created by a RRSP contribution.
An in-kind contribution is sometimes referred to as a species contribution.
Clients making in-kind contributions to their self-directed RRSPs should be made aware that there could be possible
tax implications on any assets transferred. Transactions could generate taxable income or capital gains.
EXAMPLE
The following table illustrates possible in-kind contribution scenarios and the resulting tax implications:
Transaction Type Example
Assets transferred to an RRSP are deemed to have Maureen contributed 1,000 shares of Acme Dot Com
been contributed at an amount equal to their fair Company to her self-directed RRSP on December 11
market value. of this year.
For example, stock is valued on the stock exchange Acme Dot Com shares closed at $12.50 that day.
at the close of the business day.
Therefore, Maureen was deemed to have made an
Assume the adjusted cost base (ACB) was $12.50. RRSP contribution of $12,500 = 1,000 × 12.50.
If an asset is transferred to an RRSP as an in-kind If Louis contributed $11,000 worth of mutual fund
contribution for an amount that is greater than units to his RRSP that have an adjusted cost base
its adjusted cost base, the taxpayer will realize a of $8,000, he would be deemed to have realized a
capital gain. $3,000 capital gain.
If an asset is transferred to an RRSP as an in-kind If Louis contributed $8,000 worth of mutual fund
contribution for an amount that is less than its units to his RRSP that have an adjusted cost base of
adjusted cost base, the taxpayer will realize no $11,000, he would be deemed to have realized no
capital loss. capital loss.

QUALIFIED INVESTMENTS FOR RRSPs

QUALIFIED TYPES OF INVESTMENTS CAN BE HELD IN AN RRSP PLAN
The following investments are qualified investments and can be held in registered retirement savings plans:
• Guaranteed investment certificates (GICs) and term deposits
• Money and deposits of money, in any currency held in a Canadian bank, trust company or credit union
• Bonds, debentures, notes, mortgages, or similar obligations, guaranteed by the Government of Canada or of a
province, municipality or crown corporation, for example Treasury bills
• Debt obligations issued by corporations, where the shares are listed on a prescribed stock exchange in Canada
• Debt obligations issued by the government of a country other than Canada
• Mutual funds and segregated funds
• Shares listed on a prescribed stock exchange inside and outside Canada
• Limited partnership units listed on a Canadian stock exchange
• Shares of small business corporations
• Mortgages or interest in mortgages secured by real estate located in Canada
• Gold and silver bullion, coins and certificates
• Debt obligations that have an investment grade rating and are part of a minimum $25,000,000 issuance
• Securities (other than a futures contract) listed on a designated stock exchange
UNQUALIFIED TYPES OF INVESTMENTS CANNOT BE HELD IN A RRSP PLAN

The following investments are unqualified investments and cannot be held in a registered retirement savings plan:
• Shares and debt obligations of private corporations, unless certain prescribed conditions are met
• Real estate (although Real Estate Investment Trust – REIT- units are qualified investments)
• Personal property such as jewellery, antiques, coins, stamp collections and works of art
• Commodity and financial future contracts
PENALTIES FOR HOLDING A NON-QUALIFIED INVESTMENT IN AN RRSP

The acquisition or retention of non-qualified investments in an RRSP results in tax being levied on the plan holder.
An RRSP annuitant will be subject to a one-time special tax of 50% of the fair market value of a non-qualified
investment. The tax liability will apply either at the time an investment is acquired by an RRSP or at the time an
investment becomes non-qualified.
Unless the annuitant knew or should have known that the investment was non-qualified, this tax will be refundable
to the annuitant if the investment is disposed of from the RRSP by the end of the year following the year in which
the tax applied. Investment income earned on a non-qualified investment will remain taxable to the RRSP.
RULES REGARDING FOREIGN CONTENT

There are no longer any limit restrictions on the amount of foreign content allowed to be held in a plan.

CHAPTER 6 | RETIREMENT 6 • 11
EXAMPLE
Kate Deroach is the sole heir to her grandmother’s estate. When her grandmother dies, she inherits a large
sum of money.
Kate makes an appointment with her advisor, Bryan Lee to discuss the best way to invest her inheritance. She
would like to maximize her contributions to her RRSP and take advantage of the $27,230 she has carried forward
in contribution amounts.
Kate is interested in using part of her inheritance to buy a condominium. She would also like to invest in the
stock market and take advantage of the current lower share prices.
Bryan advises Kate that:
• Real estate cannot be held in a RRSP plan
• Shares in a company where the shares are listed on a prescribed stock exchange inside and outside Canada
can be held in a RRSP plan
WITHDRAWALS FROM AN RRSP

RULES REGARDING WITHDRAWALS FROM AN RRSP
The owner of an RRSP is permitted, under the Income Tax Act, to fully or partially withdraw funds from the plan
at any time.
The owner of the plan needs to provide a signed letter of instruction requesting the withdrawal of funds. In many
cases, the issuer of the plan will have a standard form for the owner to complete and sign.
DISADVANTAGES OF WITHDRAWING FUNDS FROM AN RRSP

There are several disadvantages to making a withdrawal from an RRSP, including:
Disadvantage Description
Reporting the withdrawal as income The withdrawn funds are added to the owner’s income for the year
withdrawn. A higher income could result in a higher tax payable.
Being subject to withholding tax Up to 30% (31% in Quebec) tax could be withheld from the
withdrawn funds.
A potential tax payable Tax payable on the withdrawn funds reduces the net value of the
funds received.
Reducing the value of RRSPs The current and future values of the RRSP funds will be less. The
result could be a lower net worth for clients as they enter their
retirement years.
The funds outside of a RRSP being Funds invested outside of a RRSP could be subject to tax annually on
subject to tax investment earnings.
Potential penalties and Withdrawals from some RRSP plans may be subject to a penalty or
withdrawal fees withdrawal fee. This usually applies to funds withdrawn early or before
a stated maturity date.

WITHHOLDING TAXES ON RRSP WITHDRAWALS

An RRSP plan holder may make partial withdrawals of funds at any time.
The following chart outlines the percentage of tax withheld on RRSP withdrawals:
Withholding Tax Amounts and Rates
Amount All Provinces (Except Quebec) Quebec

Withdrawn Provincial Federal Tax Combined
Up to $5,000 N/A 10% 21%
$5,001 to $15,000 N/A 20% 26%
More than $15,000 N/A 30% 31%
Withdrawing funds from an RRSP has many tax implications. As an advisor, you should make sure your
clients are made aware of these implications before making a withdrawal from their RRSP.
PLAN-TO-PLAN TRANSFERS
A client may want to transfer funds from one RRSP (or RRIF) to another RRSP plan, a registered retirement income
fund (RRIF), a registered pension plan (RPP), or a Registered Disability Savings Plan (RDSP).
To transfer funds, the RRSP owner must complete a Canada Revenue Agency (CRA) form T2033 (Direct Transfer
form). The transferring institution and the institution receiving the funds must complete applicable sections
of the form.
With plan-to-plan transfers, there are no income tax implications. Income within the plan remains tax-deferred.
Withdrawals may be subject to potential penalties or penalty fees. There is no RRSP contribution slip issued.
Parents and grandparents are allowed to rollover their RRSP’s or RRIF’s into a RDSP on a tax-deferred basis. The
beneficiary must qualify for a disability tax credit and be a dependent. They also have included the ability to carry
forward entitlements for the Canada Disability Savings Grant and Bond for the previous 10 years.
There are two advantages to doing a plan-to-plan transfer:
• The transfer does not have to be reported as taxable income. No T4-RRSP tax slip is issued.
• Withholding taxes do not apply on the transferred funds.
EXAMPLE
Ted Thickson wishes to move $25,000 of the funds held in his RRSP with the Great Canadian Bank to a new plan
with the All Canadian Trust Company.
Ted could simply withdraw $25,000 from the Great Canadian plan and then re-contribute $25,000 to the All
Canadian plan (assuming Ted has sufficient RRSP contribution room for the year). However, $7,500 (30%) of
withholding tax would be deducted at source (by Great Canadian). Ted would have to come up with $7,500 of his
own to complete the $25,000 contribution.
Ted decides to contact his adviser, Bryan, for direction. Bryan advises Ted that if he were to do a plan-to-plan
transfer, there would be no tax withheld on the withdrawal.

PARTIAL WITHDRAWALS FROM AN RRSP

Partial withdrawals are allowed on most plans. The same tax implications apply to partial withdrawals that apply to
full withdrawals.
The only difference between a full withdrawal and a partial withdrawal is:
• With a full withdrawal, the RRSP is collapsed and closed.
• With a partial withdrawal, the RRSP would remain active.
The owner of the plan will need to provide a signed letter of instruction requesting the partial withdrawal of funds.
In many cases, the issuer of the plan will have a standard form for the owner to complete and sign.
DEREGISTRATION
CIRCUMSTANCES WHEN AN RRSP CAN BE DEREGISTERED
Deregistration could occur as a consequence of:
• An amendment to the terms of the plan that puts it in contravention of the requirements for registration as set
out in section 146 of the Income Tax Act.
• Pledging the assets of the plan as security for a loan.
• Failing to mature the plan into an annuity or RRIF by December 31 of the year in which the annuitant (owner) of
the plan attains the age of 71.
TAX IMPLICATIONS OF DEREGISTERING A RRSP

The owner will have to report the fair market value of the assets of the plan at the date of deregistration as taxable
income. Taxes are withheld on the amount.
Taxation applies on a RRSP deregistration regardless of whether the plan owner actually receives the proceeds
of the plan.
EXAMPLE
Donna Eckard wants to take out a large loan to start a new business. The lender will only provide Donna with a
loan if she can provide them with collateral. The only major asset Donna has is her RRSP.
In order to be able to use her RRSP as collateral, Donna will have to deregister the plan and report the assets
of the plan as taxable income. Donna is not too concerned, as she will likely be generating little or no taxable
income the first few years she is open for business.
HOME BUYERS’ PLAN

ELIGIBILITY REQUIREMENTS FOR THE HOME BUYERS’ PLAN
The Home Buyers’ Plan allows home buyers to withdraw funds from their RRSPs to help finance the purchase
of a home.
In order to be eligible, clients must:
• Be considered as first-time home buyers. The client is considered to be a first-time home buyer if, in the
four-year period, he did not occupy a home that he or his current spouse or common-law partner owned.
Even if the client or his spouse or common-law partner has previously owned a home, he may still be
considered a first-time home buyer.
If he has a spouse or common-law partner, it is possible that only one of them is a first-time home buyer.

• Have a written agreement to buy or build a qualifying home for themselves.
Or
• Have a written agreement to buy or build a qualifying home for a related person with a disability, or to help a
related person with a disability buy or build a qualifying home.
The four-year qualification period is waived for a disabled person and relatives who want to purchase a home that is
better suited for the disabled person who will live there.
• The Federal 2019 Budget announced an extension of access to the HBP after the breakdown of a marriage or
common-law partnership.
RULES AND GUIDELINES GOVERNING WITHDRAWALS

• The maximum RRSP withdrawal for a home purchase is $35,000 for each eligible person, from their own RRSP.
• A home buyer and spouse may each withdraw up to $35,000 from their respective RRSPs.
• The home can be new or used and must be:
Located in Canada
Occupied as a principal place of residence within one year following its purchase
Purchased before October 1 of the year following the year of the RRSP withdrawal
RULES AND GUIDELINES GOVERNING REPAYMENTS

Payments must be repaid to the RRSP within 15 years, beginning in the second calendar year following the year of
the withdrawal, or by March 1st of the third year.
A decision to participate in the Home Buyers’ Plan should be based on a careful cost-benefit analysis.
Discussing the pros and cons of making a withdrawal under the Home Buyers’ Plan should be part of
your discussion with the client.
The advantages and disadvantages of making a withdrawal are listed below:
Advantages Disadvantages
Funds borrowed are interest free. Funds borrowed stop growing on a tax-sheltered basis
until they are repaid.
By reducing the principal of a mortgage, money is RRSP contributions may be postponed for nearly a
saved on mortgage interest payments. year. If no contributions are made, the total amount
accumulated at retirement will be lower.
EXAMPLE
Barry and Nina Trechowski want to take advantage of current lower real estate prices and mortgage rates and
would like to purchase a home. They have always lived in a rental apartment and have little cash flow, as most of
their funds are tied up in a family business.
When they finally purchase a home, Barry and Nina would like to be able to make a larger down payment.
Consequently, the mortgage principal and the monthly mortgage payment would both be lower.

EXAMPLE
(cont'd)
A neighbour suggests they meet with a financial advisor to discuss the options. Barry and Nina set up an
appointment with Bryan Lee.
Bryan points out the following to Barry and Nina:
• Both hold funds in a RRSP
• The funds are being used to purchase their first home
• They would qualify for a tax-free withdrawal from their RRSPs under the Home Buyers’ Plan
• Both Barry and Nina could withdraw up to $35,000 each from their respective RRSPs for a total amount
of $70,000
• Repayments must be made over a 15-year period, maximum
Barry and Nina are happy with the information and advice they received from Bryan and will start house-hunting
this weekend.
LIFELONG LEARNING PLAN

THE PURPOSE OF THE LIFELONG LEARNING PLAN
The purpose of the Lifelong Learning Plan is to help finance education for the annuitant or the spouse or partner.
The annuitant or the spouse or partner must be in enrolled in full-time training or postsecondary education.
RULES AND GUIDELINES GOVERN WITHDRAWALS

• Up to $10,000 a year can be withdrawn over a four-year period.
• The total amount withdrawn cannot exceed $20,000.
TAX IMPLICATIONS ON WITHDRAWING FUNDS

• RRSP funds withdrawn are not taxable.
• The participant’s RRSP contribution room may be carried forward to future years.
• The funds borrowed stop growing on a tax-sheltered basis until they are repaid.
RULES AND GUIDELINES GOVERNING REPAYMENTS

• The first repayment is due within 60 days of the end of the fifth year following the first withdrawal.
• Repayments could be required earlier in some situations. An example would be failing to complete a course.
• Amounts withdrawn must be repaid to the RRSP in instalments over 10 years, maximum. Unpaid amounts will
be included in the income of the person who made the withdrawal.

EXAMPLE
Walter Gould has decided he would like to make a career change. In order to make the change, he would have
to go back to school on a full-time basis for two years. Walter has saved enough money to cover all costs,
except for the cost of his books and laboratory fees. Through a discussion with a friend, Walter has discovered
that he can make a non-taxable withdrawal from his RRSP to cover the educational costs. Walter makes LLP
withdrawals from 2020 to 2023. He continues his education from 2020 to 2025, and is entitled to claim the
education amount as a full-time student for at least three consecutive months on his income tax and benefit
return every year. Walters’s repayment period begins in 2025 since 2025 is the fifth year after the year of his
first LLP withdrawal. The due date for his first repayment is March 1, 2026, which is 60 days after the end of
2025, his first repayment year.
Walter is confident that he will be earning a higher salary as a result of his education and will have no difficulty in
repaying the amount withdrawn.
REGISTERED RETIREMENT SAVINGS PLANS (RRSPs):

RRSPs allow individuals to accumulate tax-deferred retirement capital and at the same time supplement their
retirement income.
There are rules and guidelines that govern:
• Contribution limits
• Qualified investments
• Carry-forward provisions
• Over-contribution limits
• Withdrawals
• Deregistration
Clients have the option of contributing to a spousal plan or having a self-directed RRSP.
Withdrawals can be made tax-free under the Home Buyers’ Plan and the Lifelong Learning Plan.

Now that Marc and Sandi Booth are in their forties, they are concerned that they will not have enough money set
aside for their retirement. Marc and Sandi set up an appointment with Bryan to discuss their retirement strategy.
Bryan does a review of Marc and Sandi’s current situation and finds out that:
Marc Sandi Bryan’s Advice
Is the high-income Is the low-income Set up a spousal plan with Marc being the contributor and Sandi
earner earner the annuitant.
Marc will get the tax deduction now in his high-earning years.
Sandi will potentially have a lower income in retirement and
Marc and Sandi will benefit from the lower taxes payable on the
RRSP withdrawals.

Marc Sandi Bryan’s Advice
Has $33,000 in Has $12,000 in Use up as much of the contribution room as they can.
carried-forward carried-forward
If more is invested now, rather than later, the retirement fund
contribution room contribution room
will grow faster.
Has no company Has a company Marc should contribute more to compensate for the lack of a
pension plan pension plan pension plan.
Has a good Has little Marc may be interested in a self-directed RRSP and direct his
knowledge of knowledge of own investments.
investments investments
Sandi would likely be more comfortable with a standard GIC or a
low-risk investment.
Bryan does a calculation to see what Marc and Sandi’s RRSP contribution limits are for the current tax year.
He reviews the different types of investments that can be held in an RRSP with Marc and Sandi.
REGISTERED RETIREMENT INCOME FUNDS (RRIFs)
2 | Describe the rules regarding registered retirement income funds (RRIFs).
A registered retirement income fund (RRIF) is essentially a registered investment vehicle out of which a
prescribed minimum amount must be withdrawn each year. Allowable investments include stocks, bonds, GICs, and
mutual funds. It is one of the options that can be used to receive funds from a maturing RRSP.
The typical client for a RRIF is a person who:
• currently has a RRSP and
• is retired or retiring and is close to reaching the age of 71.
Often a client will set up a RRIF at age 71 when they must collapse their RRSPs. However, a RRIF can be taken out
at any age.
Income earned in a RRIF is tax deferred. Tax is payable only on the amount withdrawn each year from the plan.
Amounts not withdrawn continue to compound tax free, as in an RRSP. The amount paid out is based on the market
value of the balance in the fund and the age of the annuitant at the beginning of the current calendar year.
As an advisor, you should be able to advise your clients on how they can effectively use a RRIF to maximize their
retirement savings and minimize their tax payments.
USING A RRIF EFFECTIVELY

In order to make use of a RRIF with maximum efficiency, a client’s needs should be assessed by asking the
following questions:
• At what age will the client need to start withdrawing funds?
• What is the minimum amount the client will require each year?
• Will it be advantageous to use the age of a younger spouse in order to keep the funds in the plan tax
deferred longer?

• Are there any other sources of income?

• How much market expertise does the client have?
• By withdrawing only the minimum required, the remaining capital in the plan can continue to grow
tax free. The consequences of inflation may be avoided by allowing the possibility of accumulating
more income for the future and offsetting future increases in the cost of living.
• The minimum amount of withdrawals can be based on the spouse’s age, if younger. Choosing the
younger age reduces the required minimum annual withdrawal amount, while maximizing tax-deferred
income growth within the plan. While this strategy does allow for reduced annual minimum
withdrawals, the starting date when minimum withdrawals are required is still based on the age of the
older spouse that is the annuitant of the registered account. A registered account must be converted to
a retirement option, such as a RRIF, by December 31 of the year in which the annuitant turns age 71.
As an advisor, it is important for you to keep up to date on the tax treatment of RRIFs, particularly with
regards to the mandatory minimum withdrawal amounts.
QUALIFIED AND UNQUALIFIED INVESTMENTS IN A RRIF

TYPES OF INVESTMENTS THAT CAN BE HELD IN A RRIF PLAN
The same investments that can be held in a RRSP apply to RRIFs.
The 2019 federal budget proposed to amend the tax rules in order for an Advanced Life Deferred Annuity (ALDA)
to be considered as a qualifying annuity purchase or a qualified investment under certain registered plans. An
ALDA will be a life annuity where payments may be deferred until the end of the year in which the annuitant
attains 85 years of age.
PENALTIES FOR HOLDING A NON-QUALIFIED INVESTMENT IN A RRIF

If non-qualified investments are held within a RRIF or LIF, a penalty is imposed. The RRIF annuitant will be subject to
a special tax of 50% of the fair market value of the non-qualified investment.
RULES REGARDING FOREIGN CONTENT

There are no longer any limit restrictions on the amount of foreign content allowed to be held in a plan.
EXAMPLE
John, a widower, is turning 71 in January. He has accumulated a substantial amount in an RRSP. John enjoys his
job and plans to work as long as he can. He does not require extra income at this point in his life. John contacts
his advisor, Bryan, for advice.
Bryan advises John that he can continue making contributions into his RRSP until December 31 of the year he
turns 71. At that point, the RRSPs must be collapsed. One option available to John is to transfer some or all of the
RRSP funds into a RRIF.
With a RRIF, a mandatory amount must be withdrawn annually. However, the balance of the funds in the RRIF
will continue compound tax free.
John is interested in diversifying his investments globally and Bryan advises him that there are no limits on the
percentage of foreign content held in the plan.

WITHDRAWALS FROM A RRIF

MINIMUM WITHDRAWAL REQUIREMENTS
The minimum amount must be paid to the annuitant in the year following the year the RRIF is established. For
example, if the RRIF was set up in July 20x1, the first withdrawal must occur on or before December 31, 20x2.
CALCULATING THE MINIMUM WITHDRAWAL AMOUNT
Age on January 1st How Calculated

(at the beginning
of the calendar year)
Up to Age 70 RRIF value on December 31 of the previous year / (90 – Age at the beginning
of the year).
Minimum may be based on younger spouse age.
Age 71 – 94 Starting at age 71, the minimum withdrawal is based on 5.28% of the market
value of the account on December 31 of the previous year. The percentage
increases each year.
Age 95 and Older At age 95 the percentage levels out at 20% of the remaining assets per year.
There is no minimum withdrawal requirement for the calendar year in which the RRIF is established.
Although there is a minimum withdrawal schedule for RRIFs, there is no maximum withdrawal amount. After
allowing for the RRIF minimum, the annuitant may withdraw additional funds from the RRIF with no restrictions
on amounts.
Withholding tax is applied to any portion of a RRIF payment that is in excess of the minimum amount.
Earnings in a RRIF are tax-free, and amounts paid out of a RRIF are taxable when the annuitant receives them.
DIVE DEEPER
Click on the Job Aid link to review the Typical RRIF Payout Job Aid.
EXAMPLE
Marty Lee turned 71 in September this year. He has an RRSP which will have an estimated closing market value of
$250,000 by December 31 of this year.
After a discussion with his advisor, Bryan, Marty has learned that he will have to collapse his RRSP by
December 31. Marty has decided he will move his RRSP funds into a RRIF.
Withdrawals must commence no later than December 31 of the year he is 72. Illustrated below is how the annual
minimum withdrawal amount for a RRIF is calculated next year:
Value of RRIF % Used for Annual Minimum

on December 31 Calculation Withdrawal Amount
$250,000 5.28 $13,200

REGISTERED RETIREMENT INCOME FUNDS (RRIFs):

A RRIF is an investment vehicle out of which a prescribed minimum amount must be withdrawn each year.
Tax is payable in the applicable tax year only on the amount withdrawn. Amounts not withdrawn continue to
compound tax free.
RRIFs allow a client to:
• Continue to earn income tax-free
• Keep control of their assets
• Choose from a wide variety of investment options
You should now have an understanding of how to calculate the minimum annual withdrawal amount.

Sam Giraldi holds a large RRSP at the institution where his advisor, Bryan, works. He has income funds that provide
him with yearly payouts, and owns several rental properties that provide him with additional income. Sam will be
turning 71 in March of this year and is aware that he will have to collapse his RRSP by December 31. Sam’s wife,
Enid, is much younger; she is only 63.
Sam contacts Bryan for advice to see what his options are.
Bryan advises Sam that he could transfer the RRSP funds into a RRIF tax free. The calculation for the minimum
amount he is required to withdraw annually can be based on Enid’s age. By using Enid’s younger age to calculate the
minimum annual withdrawal amount, Sam would reduce the minimum amount he would be required to withdraw
each year.
Sam is happy with the advice Bryan has given him. Sam would like to save as much of the money accumulated in his
RRSP for his later retirement years, when Enid is retired and their combined incomes potentially will be lower.
REGISTERED PENSION PLANS (RPPs)
3 | Describe the types, features and rules of registered pension plans (RPPs).
A registered pension plan (RPP) is a formal arrangement in which an employer provides a retirement pension
income for life to employees in consideration of past service. Participation in an RPP is not always mandatory.
A company with a pension plan may offer an RPP as a benefit to attract new employees or encourage current
employees to stay.
There are two basic types of RPPs:
1. Defined Contribution Plans (Money Purchase Plans)
2. Defined Benefit Plans
The plan can be either contributory or non-contributory. With a Contributory Plan, both the employer and the
employee contribute to the plan. With a Non-contributory Plan, the employee is not required to contribute
to the plan.
Having an understanding of RPPs and what they offer will enable you to better understand your client’s needs when
assisting them with their retirement planning.

THE ADVANTAGES AND DISADVANTAGES OF RPPs

ADVANTAGES OF HAVING AN RPP
There are many advantages to a participating in an RPP:
• It is a form of forced savings
• Contributions are tax deductible
• It reduces net income subject to tax
• It allows non-taxable transfers
• It provides a supplementary retirement income
• Participants benefit from:
Professional management and
Volume discounts on the large size of investments
DISADVANTAGES OF HAVING AN RPP

The main disadvantage to participating in an RPP is:
• Benefit payment restrictions
EXAMPLE
Marcus recently upgraded his education and obtained a Bachelor of Science degree. With two job offers to
choose between, Marcus decided to work for Iron Metal Research Ltd.
Marcus is in his forties and has started to think about retirement planning. His decision to work for Iron Metal
Research Ltd was partially based on the company’s attractive benefits package, which includes a contributory
RPP plan.
With an RPP plan, Marcus will be forced to save money towards his retirement. The funds will grow faster with his
employer contributing to the RPP plan as well. Another advantage is that the contributions Marcus makes to the
RPP are tax deductible and will reduce his taxable income.
DEFINED CONTRIBUTION PLANS (MONEY PURCHASE PENSION PLANS)

DEFINED CONTRIBUTION PLANS
A defined contribution plan (DCPs) provides a retirement pension based on the amount of funds accumulated in
the plan at retirement and prevailing annuity rates. They are also known as money purchase pension plans. The
total amount in the plan is based on the total of all contributions (employer and employee) plus investment income
accumulated for the employee until retirement.
Contributions may or may not be required by the employee.
A fully vested employee receives benefit payments at retirement. The employee receives all the funds in the plan in
the form of:
• A cash lump sum, or
• The purchase of a retirement income product (annuity or Life Income Funds – LIF).
The 2019 federal budget proposed amending the tax rules to permit Pooled Registered Pension Plans (PRPPs) and
defined contribution RPPs to provide a Variable Payment Life Annuity (VPLA) to members directly from the plan. A
VPLA will provide payments that vary based on the investment performance of the underlying annuities fund and on
the mortality experience of VPLA annuitants.

INVESTMENT RISKS ASSOCIATED WITH DEFINED CONTRIBUTION PLANS

Risks associated with DCPs include:
• Possible poor investment performance resulting in a smaller fund at retirement
• Investment risk that lies with the employee; the employer is not expected to fund any shortfall in the
anticipated value of the fund at retirement
Did you know that Deferred Profit Sharing Plans (DPSPs) are a form of deferred compensation plan set
up by employers for the benefit of their employees? They are similar to a defined contribution registered
pension plan. The employer makes contributions on behalf of its employees, according to the terms
of the plan, in years in which the company makes a profit. DPSPs provide a means of deferring tax on
retirement savings until the funds are withdrawn.
EXAMPLE
Billy plans to work for Bilco Corporation until he retires at age 65. Billy has been contributing monthly to a
defined contribution plan. Along with the amount the company has been contributing, he will have accumulated
more than $230,000 by the time he retires. Billy wants to know what his options are when he retires and leaves
the company.
Billy talks to his contact at Bilco Corporation, as well as his advisor, Bryan Lee.
Based on the number of his years of service, the funds are vested and Billy will receive benefit payments at
retirement. He has the option of taking a lump sum amount or purchasing a retirement income product.
Bryan informs Billy that if he takes out a lump sum amount, tax will be withheld and lump sum will have to
be reported as income. He suggests that Billy annuitize the funds in the plan into a life annuity at retirement.
Alternately, Billy could transfer the funds to a Locked-in Retirement Account (LIRA), thereby avoiding any current
tax implications. The money will continue to grow tax free until he needs the income or turns 71.
DEFINED BENEFIT PLANS

DEFINED BENEFIT PLANS
A defined benefit plan provides a pension benefit that is calculated according to a set formula. The calculation
is based on a number of factors such as salary history and years of service. The amount of the pension can be
determined prior to retirement based on a formula.
There are four common formulas used to determine the benefit. They are:
Formula Type Description
Flat Benefit Benefits are expressed as a fixed dollar amount for each year of service.
Career Average Benefits are based on the employee’s average earnings over the entire period of
service under the plan.
Final or Best Average Benefits are based on the employee’s average earnings over a short period.
This could be the final few years of service, or three or five of the employee’s
highest-earning years.
Combination of Benefit Benefits are determined by reference to two or more benefit formulas.
In addition to the regular benefit formula, plans could contain a limitation that
prevents benefits from exceeding a certain amount.

The formula used most often by employers is the final or best average formula.
EXAMPLE
Following is an example of how to calculate a defined benefit pension amount using the final or best
average formula:
Anthony has worked for the Bravo Manufacturing Company for 29 years and is planning to retire at the end of
20x5. For 27 years, Anthony was a member of the company’s defined benefit pension plan.
The plan offers a retirement pension based on:
• Years of service in the plan, at a rate of 2% per year
• The average of the three best years of income (including overtime) during the last five years of employment
Anthony’s total salary for the last five years was as follows:
20x1 $42,000
20x2 $46,000
20x3 $51,000
20x4 $48,000
20x5 $38,000
Anthony’s pension would be based on an average annual salary of $48,333 (($46,000 + $51,000 +
$48,000)/3 = $48,333).
To calculate the defined pension benefit amount, you would multiply the average salary amount by the
applicable percentage rate and number of years of RPP membership. Anthony’s pension amount would be
calculated as follows:
Average Salary Amount Rate % Per Year RPP Member For
$48,333 2% 27 years
= $48,333 × 2% × 27
= $26,100
The applicable defined benefit pension amount is $26,100.
CONTRIBUTION LIMITS
RPP CONTRIBUTION LIMITS
The RPP contribution limits are based on an individual’s current year’s earnings. The amount contributed to the
individual pension plan is not known until the end of the calendar year when all registered pension plan (RPP)
contributions have been made.
Employer contributions must be made within the taxation year, or up to 120 days after the end of the taxation year.
Employee contributions must be made by December 31 in the year a deduction is to be claimed.

CURRENT CONTRIBUTION LIMITS

The maximum contribution limit amounts for defined contribution plan for the years 2019 to 2021 are:
Year Contribution Limit
2019 $27,230
2020 $27,830
2021 indexed
The combined employer/employee contributions of a defined contribution plan cannot exceed the lesser of the
following amounts:
• 18% of the employee’s current year compensation; or
• the money purchase plan contribution limit set by the government for the year.
DEFINED CONTRIBUTION PLANS VS. DEFINED BENEFIT PLANS

DEFINED CONTRIBUTION PLAN COMPARED TO DEFINED BENEFIT PLANS
The following chart compares the features of each plan:
Feature Defined Contribution Defined Benefit
What does the plan Specifies a percentage of salary that both Specifies what pension the employee
specify? employee and employer must contribute receives at retirement
to the fund
Pension Amounts Benefits cannot be pre-determined as Benefit amount is known in advance

the value of the plan at retirement is
not known
Risks Risk of fund shortfall lies with employee Risk of fund shortfall lies with employer
Potential higher cost for employee Potential higher cost for employer
Advantages If returns are good, employee can Less risky for employee
earn more
Guaranteed amounts provide a safety
Easier to withdraw or transfer fund net against short-term negative market
fluctuations that may occur
EXAMPLE
Jill and Maxie have been good friends for several years. They realize the importance of saving for retirement and
are happy that the companies they work for offer RPPs as part of the benefit package. Jill participates in a defined
contribution plan. Maxie participates in a defined benefit plan. They discuss what feature they like best about
their respective plans.
The feature that Jill likes best with the defined contribution plan is that she has the flexibility to choose
investment options. Jill could benefit, by way of a higher retirement pension, if her investments perform well.
Maxie likes the fact that with the defined benefit plan, she knows in advance what her retirement benefit will be.
The information will be of great assistance when she puts together her retirement plan.

PENSION ADJUSTMENT CALCULATIONS (PA)

PENSION ADJUSTMENTS (PAs)
PAs are calculated for individuals participating in an RPP or a Deferred Profit Sharing Plan (DPSP).
The pension adjustment figure is the total of the employee’s pension and DPSP credits for the year.
The government requires a PA figure to be reported by each employer on all T4 slips for all of its
employees each year.
FORMULA FOR CALCULATING THE PA

The PA amounts are calculated differently for defined contribution plans and defined benefit plans. The PAs are
Defined Contribution Plan Defined Benefit plan
PA = Total employer and employee PA = (benefit accrual × 9) – $600

contributions to plan
The benefit accrual provides for the value of the employer’s
contribution based on the retirement benefits accrued by the
employee during the year. A limit is placed on the benefit accrual.
Did you know that in addition to a PA, a past service pension adjustment (PSPA) may also apply? A PSPA
allows an employee to make ‘catch-up’ contributions to their defined benefit pension plan. This may
impact the employee’s current RRSP contribution room.
A couple of situations where a PSPA could arise include:
• To compensate for an employee’s qualification period, when they were employed by an employer,
but not permitted to participate in a pension plan.
• When an employer implements a new pension plan and up to that point, existing employees have
not had the opportunity to contribute to an RPP.
EXAMPLE 1
PA Calculation for Defined Contribution Plan:
Greg Olner is employed by ABC Electrical Inc. and is a member of the company’s defined contribution plan.
His current salary is $50,000 annually. Greg contributes 5% of his salary to the plan. ABC Electrical Inc. also
contributes 5%.
In this case, the applicable PA amount would be the total employee and employer contribution amounts
to the plan.
PA = 10% of $50,000
= $5,000

EXAMPLE 2
PA Calculation for Defined Benefit Plan:
Jim Lee is employed by Real Time Consulting and is a member of the company’s defined benefit pension plan.
The benefit accrual amount applicable in this situation is $500.
The PA amount would be calculated as follows:
PA = (benefit accrual × 9) – $600
= ($500 × 9) – $600
= $4,500 – $600
= $3,900
PENSION ADJUSTMENT REVERSALS (PAR)

PENSION ADJUSTMENT REVERSALS
The pension adjustment reversal (PAR) restores an individual’s RRSP contribution room when a member terminates
their membership in a benefit provision of an RPP or DPSP. Under a defined benefit provision, a PAR calculation
applies when the individual receives a termination benefit that is less than the individual’s total PAs and PSPAs.
A PAR applies under the defined contribution provision or under the DPSP, only if the individual is not vested
at termination.
An individual’s PAR is the amount included in their pension credits but to which the individual ceases to have any
rights at termination.
ADVANTAGES OF PARs
The advantages of PARs are that they:
• Increase RRSP contribution room by allowing for the recovery of previously forfeited pension adjustments.
• Can be carried forward along with other unused contribution room.
• Make tax-assisted savings fairer and more effective for people who move in and out of the workforce.
EXAMPLE
Victor worked for Alignment Productions for 13 months before he was terminated. During his employment, he
was a member of the company’s defined contribution plan.
Victor left Alignment Productions before the vesting period of two years was up. Therefore, he has no rights to his
pension credits at termination.
In this situation, a PAR will apply. Victor’s RRSP contribution room will be increased by the forfeited pension
adjustment amount.
VESTING AND LOCKING-IN PROVISIONS

VESTING
Vesting means an employee has to belong to a pension plan for a specified number of years before the employer’s
contributions are irrevocably vested.
An employee who leaves before the vesting period is up is only able to withdraw the contributions they made, with
accrued earnings.
In some provinces, it is as low as two years, while in others it is as high as five years.

LOCKING IN
Locking in is a requirement of retirement legislation.
The legislation stipulates that accumulated employee and employer contributions cannot be paid as a cash
withdrawal if the employee, when leaving the job, has not:
• Reached a certain age, or
• Completed a certain period of service or plan membership.
OPTIONS WHEN THE EMPLOYEE LEAVES OR TAKES EARLY RETIREMENT

If the employee terminates employment or retires before the age of 55, they have the following choices:
• Leaving the amounts owed to them in the plan
• Transferring pension rights and funds to another RPP
• Withdrawing amounts due under the plan and transferring them to a locked-in retirement account (LIRA) or a
locked-in RRSP
• Withdrawing amounts due under the plan and transferring them to a life income fund (LIF)
LIRAS AND LOCKED-IN RRSPs

Locked in retirement accounts (LIRAs) and locked-in RRSPs are special retirement savings plans to which
amounts from supplemental retirement plans (RPPs or DPSPs) or life income funds (LIFs) can be transferred. LIRAs
and locked-in RRSPs are subject to locking-in restrictions.
RESTRICTIONS AND GUIDELINES THAT APPLY TO LIRAS AND LOCKED-IN RRSPs

There are many restrictions and guidelines:
• Contributions cannot be made to LIRAs and locked-in RRSPs.
• Only funds from a pension plan can be invested in them.
• No withdrawals are permitted except in the case of reduced life expectancy due to a medically certified physical
or mental infirmity, financial hardship, age 55 or older and funds value is less than $21,000, or annuitant is a
non-resident of Canada and 24 months have passed since departure from Canada. A one-time 50% unlocking
may be completed whereby the funds are transferred from a LIRA to a LIF and then 50% of the value is unlocked
to an RRSP while the other 50% remains in the LIF (annuitant must be 55 years old).
• The plan cannot mature more than 10 years before the normal retirement age under the retirement plan, that
is, the plan cannot usually mature before age 55.
• The law states that a LIRA or locked-in RRSP can be maintained until the end of the calendar year in which the
contributor turns 71. It must be converted into a retirement income plan (life income plan, locked-in retirement
income fund or life annuity) no later than this date.
EXAMPLE
Molly worked for Jet Propulsion Motors for 20 years and just recently voluntarily accepted a severance package.
While she was employed, she contributed to an RPP plan and accumulated more than $25,000 in the plan. Molly
is 45 years old and cannot withdraw the funds from the RPP until age 55.
She contacts Bryan to review her options. After a meeting with Bryan, Molly decides that the best option for her
is to transfer the funds into a locked-in RRSP. All of the same investment choices are available and the funds will
continue to grow within the plan tax free.

REGISTERED PENSION PLANS (RPPs):

An RPP is a formal arrangement under which an employer provides a retirement pension income for life to
employees in consideration of past service. An RPP has vesting and locking-in provisions.
There are two types of RPPs:
1. In Defined Contribution Plans, the total amount in the plan is based on the total amount of employee and
employer contributions, plus accumulated investment income.
2. Defined Benefit Plans provide a pension benefit that is calculated according to a set formula. The calculation is
based on a number of factors such as salary history and years of service.
The plan can be either contributory or non-contributory.

A pension adjustment calculation (PA) must be calculated for individuals participating in an RPP or deferred profit
sharing plan (DPSP).

George has worked at Haley’s Metalworks for over 30 years and is a member of the company’s defined contribution
plan. George is thinking of retiring in five years, when he is age 60. He has set up a meeting with Bryan to have some
of his questions answered.
GEORGE ASKS BRYAN, “WILL I HAVE TO WITHDRAW THE FUNDS FROM MY RPP WHEN I RETIRE?
I AM WORRIED ABOUT HAVING A HIGH TAXABLE INCOME IN THE YEAR OF MY RETIREMENT.”
“NO, THERE ARE A COUPLE OF DIFFERENT OPTIONS AVAILABLE,” RESPONDS BRYAN.

“ONE OPTION IS TO LEAVE THE FUNDS IN THE EXISTING PLAN. THE OTHER OPTION IS TO
TRANSFER THE FUNDS FROM THE RPP INTO LOCKED-IN RRSP OR LIRA.”
GEORGE REPLIES, “WILL THERE BE ANY TAXABLE IMPLICATIONS IF THE FUNDS WERE
TRANSFERRED?”
“NO,” BRYAN REPLIES. “AS LONG AS THE FUNDS ARE HELD IN A LOCKED-IN RRSP OR A
LIRA, THERE ARE NO TAXES WITHHELD OR AMOUNTS REPORTABLE AS TAXABLE INCOME.”
GEORGE ASKS, “I HAVE HEARD THAT FUNDS HELD IN AN RPP PLAN ARE LOCKED IN. CAN YOU
TELL ME MORE ABOUT THAT?”
BRYAN ADVISES GEORGE, “THE FUNDS HELD IN AN RPP CAN NOT BE TAKEN OUT OF THE
PENSION PLAN AS A LUMP SUM CASH PAYMENT. IT CAN ONLY BE USED TO PROVIDE
RETIREMENT INCOME.”
George leaves the meeting with Bryan satisfied that all of his questions
and concerns regarding RPPs have been answered.

GOVERNMENT PENSION PROGRAMS
4 | Explain the rules regarding the three government pension programs – Canada Pension Plan (CPP),
Quebec Pension Plan (QPP) and the Old Age Security Program (OAS).
Government pension programs include:

1. The Canada Pension Plan (CPP)
2. The Quebec Pension Plan (QPP)
3. Old Age Security (OAS)
The CPP and QPP are plans that all workers 18 years of age and older (employed and self-employed) and employers
pay into. At retirement, the contributors receive a monthly income. Monthly income payments usually begin the
month after a contributor’s 65th birthday. Payments can begin as soon as age 60.
The CPP and QPP have provisions for disability benefits, separation and divorce, survivor and death benefits.
OAS are benefits paid to all individuals when they turn 65 years of age if they have been Canadian residents for at
least 10 years after reaching the age of 18 at a rate of 1/40 of a credit per year of residency.
Allowances provide a benefit to low-income 60- to 64-year-olds who are spouses or common-law partners of
Guaranteed Income Supplement (GIS) recipients and meet the residency requirements.
As an advisor, you should be familiar with the various government pension programs and how they work. You
should be able to provide advice to your clients about how these programs affect their retirement planning strategy.
CANADA PENSION PLAN (CPP) AND QUEBEC PENSION PLAN (QPP)

CPP AND QPP
The CPP and QPP are sources of pension income that virtually every worker and employer pay into. At retirement,
contributors receive a monthly income amount.
The QPP is for Quebec residents. The rules for the CPP and QPP are similar. There are a few differences which will be
pointed out in the information covered.
Contributions are mandatory for all employed and self-employed Canadians (CPP) and Quebec residents (QPP) who:
• Are 18 or older, and
• Have an annual employment income over $3,500.
CONTRIBUTION PERIOD THAT APPLY TO THE CPP OR QPP

The contribution period (contributory period) is the period during which the worker may contribute to the plan.
Contributions begin normally at age 18 and end at the earlier of the following dates:
• The month before the month that the first pension benefits are paid
• The month when the worker turns 70—this applies even if an individual has not stopped working
• The month of death
The contributory period is one of the factors used to calculate the amount of the payments a pensioner is
eligible to receive.
As of 2012, if you are receiving your CPP/QPP retirement pension and you are working and contributing to the
CPP/QPP, your contributions will not be included in your contributory period. Instead, they will count toward your
post-retirement benefit.

FORMULA FOR CALCULATING CPP/QPP CONTRIBUTIONS

Contributions payable to both the CPP and QPP are calculated in the same way.
The amount of the contribution is based on:
Salaried Workers Self-Employed Workers
salary earned net income of business, after expenses
Investment income and other types of income do not enter into the calculation of the contribution amount.
The contributions payable are based on annual income between set minimum, known as the year’s basic exemption
(YBE), and maximum thresholds called year’s maximum pensionable earnings (YMPE):
• The YBE is set at $3,500.
• The YMPE which is adjusted every year in January, is based on the average increase in salaries.
For salaried workers, the employees pay half the contribution amount and the employers pay the other half. Self-
employed workers pay the entire contribution amount themselves.
Contribution limits for CPP/QPP

Self Employed Employed
(Responsible for full contribution) (Split Employer & Employee contributions)
All Provinces CPP

10.50% 5.25% each
(except Quebec)
Quebec QPP 11.40% 5.70% each
EXAMPLE
Janice is employed by a financial services company in Winnipeg. She earned $38,000 this year. Janice’s CPP
contribution was calculated as follows:
CPP Contribution Amount = (Salary minus $3,500) × %
= ($38,000 – $3,500) × 0.0525
= $1,811.25
Janice’s employer will also have had to contribute $1,811.25.
If Janice had been self-employed, she would have had to pay the full contribution amount herself. The amount is
CPP Contribution Amount = (Salary minus $3,500) × %
= ($38,000 – $3,500) × 0.105
= $3,622.50
These changes are scheduled to be phased in starting in 2019 over a seven-year time frame.
• From 2019 to 2023, the contribution rate for employees will gradually increase by one percentage point
(from 4.95% to 5.95%) on earnings between $3,500 and the original earnings limit.
Along with increased income limits, the enacted legislation also increases the contribution rate for both
employees and employers, starting in 2024.
• In 2024, employees will begin contributing 4% on an additional range of earnings. This range will start at the
original earnings limit (estimated to be $69,700 in 2025) and go to the additional earnings limit, which will
be 14% higher by 2025 (estimated to be $79,400).

ELIGIBILITY FOR RETIREMENT BENEFITS

Any individual who has made at least one contribution to the CPP or contributed for at least one year to the QPP
has the right to receive pension benefits from one plan or the other.
An individual can begin receiving CPP and QPP benefits the month following their 60th birthday (or the month
following the month the CPP or QPP receives their pension request).
Under both CPP and QPP rules, an individual who is receiving disability benefits is not eligible for pension benefits.
IMPACT OF AGE ON RECEIVING BENEFITS

Under both plans, the amount of the benefit is based on whether the payments begin before or after the
participant’s 65th birthday.
Age 65 is deemed to be the normal retirement age. Retirement before or after the age of 65 will affect the benefits
received based on the contribution rate.
Any reduction in benefit amounts is permanent. The benefit will remain unchanged after the pensioner reaches
age 65, except for indexing.
CPP and QPP contributors can apply to receive their pensions between the ages of 60 and 65 without any work
interruption or reduction in hours worked or earnings.
The early pension reduction is 0.6% per month for each month that the pension is taken before age 65. This
reduction affects the pension throughout the remainder of the pensioner’s life. For those who start the pension at
age 60, the monthly payment will be 36.0% lower than if they had waited until they turned 65.
If a retirement pension starts being paid before age 65, the QPP reduction will vary proportionally to the amount of
the pension. It will remain at 0.5% for a person who receives a very low pension. It will then gradually increase to
0.6% for a person who receives a maximum pension.
A CPP or QPP contributor between 65 and 70 may choose to apply for the pension at 65, or may wait until age 70 in
order to keep contributing to the plan. After age 65, the amount of pension is increased by 0.7% for each month by
which the recipient is over 65, to a maximum of 42.0%. This increase is payable throughout the life of the pensioner.
EXAMPLE
Ahab is trying to decide if he should apply for benefits from CPP at age 60, age 65 or age 70. He finds out that
the monthly pension amount he would receive at each age would be:
Age Monthly Pension Amount
60 $384 (64% of $600)
65 $600
70 $852 (142% of $600)
Ahab is planning to work for as long as he can past age 65. His parents are in good health and in their eighties.
Ahab decides that he will wait until age 70 to realize the maximum pension amount available to him.
POST-RETIREMENT BENEFIT AND THE RETIREMENT PENSION SUPPLEMENT

Since 2012, individuals who receive a CPP retirement pension and who decide to continue to work, or QPP retirement
pension and works outside the province of Quebec, may have to continue making CPP contributions, which will
increase their payments through the new Post-Retirement Benefit (PRB). The contribution depends on the level of
earnings and contributions individuals make to the CPP after they begin receiving the retirement pension.

Before the age of 65, contributions are mandatory for individuals and their employers. From age 65 up to age 70,
contributions are optional. If employees make contributions then employers also have to contribute.
Self-employed individuals have to pay both the employee and employer portions.
EXAMPLE
Last year, when Andrew is 65 years old, he takes his CPP pension and continues working part time. He and his
employer make CPP contributions. Because of these contributions, his annual pension amount will increase by a
certain estimated annual Post-Retirement Benefit beginning of this year. This increased annual pension amount
will then grow with the cost of living.
In Quebec, a person who receives a QPP retirement pension and continued working already receives a retirement
pension supplement (which is the Quebec equivalent of the post-retirement benefit)–as soon his earnings exceed
the $3,500 basic income. The total supplement for the year is 0.5% of the earnings on which he contributed during
the previous year.
EXAMPLE
Last year, Patricia’s retirement pension under the QPP is $750 per month. That year, she also has $22,700 in
employment earnings. Patricia’s retirement pension supplement will be $96 and is calculated as follows: $19,200
($22,700 less the basic $3,500 exemption) × 0.5%. Her yearly pension therefore will increase by $96 (or $8 per
month) this year.
Did you know that once the participant has started receiving CPP/QPP benefits, they can work and
increase the amount of their pension? They can continue to make extra CPP/QPP contributions based on
their later earnings.
FACTORS DETERMINING WHEN TO START RECEIVING BENEFITS

Three factors should be considered when deciding. The factors are:
1. Whether or not the individual needs the retirement pension prior to age 70
2. The assumed real interest rate applied over the period of time during which the pension would be received
3. The individual’s projected life expectancy
DETERMINING THE AMOUNT OF THE BENEFIT

CPP and QPP benefits were introduced in 1966. For individuals who entered the workforce after that date, CPP/QPP
benefits are calculated based on:
• The number of years of contribution (with maximum benefits payable approximately after 36 years
of contribution)
• The age benefit payments start
• The amount of contributions paid
Individuals who are forced to retire early because of a recognized severe mental or physical incapacity may be
eligible for disability benefits under the CPP and the QPP.
The children of a disabled person may also receive benefits. The children must be under the age of 18 or, if full-time
students, under the age of 25.

CPP BENEFITS WHEN A RECIPIENT DIES

If the contributor dies and has contributed enough to a pension plan, the surviving spouse is entitled to the
survivor’s pension (CPP) which is a portion of the deceased contributor’s benefits, up to a maximum of 60%. The
QPP version is called the surviving spouse’s pension.
The amount of the benefit is based on:
• whether the spouse is also receiving a disability or retirement pension;
• how much, and for how long, the contributor has paid into the plan;
• the spouse’s age when the contributor dies;
• whether or not the surviving spouse is responsible for the deceased’s dependent children.
Dependent children of a deceased contributor may be entitled to the children’s benefit (CPP) or the orphan’s
pension (QPP). To qualify for the CPP children’s benefit, dependent children must be under the age of 18 or, if full-
time students, under the age of 25. The QPP orphan’s pension ends when the child turns 18.
The CPP death benefit is a one-time universal payment of up to $2,500, paid to the estate of the deceased under
certain conditions. The QPP death benefit is a lump sum payment of $2,500.
ELIGIBILITY OF COMMON LAW PARTNERS

Common law partners are entitled to CPP/QPP benefits. As long as they have lived together, in a conjugal relationship,
for CPP at least one year, or for QPP at least three years (reduced to one year if there is a dependent child).
However, they must sign a declaration and provide proof that they live together in such a relationship.
OLD AGE SECURITY (OAS)

ELIGIBILITY CRITERIA
Benefits under the Old Age Security (OAS) program are paid to all individuals when they turn 65 years of age if
they have been Canadian residents for at least 10 years after reaching the age of 18, at a rate of 1/40 of a credit per
year of residency.
You may defer receiving your OAS for up to 60 months from eligibility date for 0.6% per month to a maximum
of 36% at age 70.
The full benefit is payable to individuals who were residents for at least 40 years after reaching the age of 18.
Unlike the Canada Pension Plan (and QPP), OAS is a non-contributory plan. Canadian residents do not have to pay
premiums into OAS; it is funded out of the general revenues of the federal government.
OAS benefit rates are reviewed on a quarterly basis to reflect increases in the cost of living (inflation) as measured
by the Consumer Price Index.
OAS PENSION RECOVERY TAX, AKA “THE CLAWBACK”

Individuals with an income above the yearly determined limit amount must repay some or all of the benefits. This is
referred to as a ‘clawback’, called the ‘OAS Pension Recovery Tax’ by CRA.
The clawback reduces the pension by 15 cents for every dollar of net income in excess of the yearly determined limit
amount. The clawed back portion is deductible when computing the taxpayer’s net income.

EXAMPLE
Cecilia has not worked since she immigrated to Canada in 1975. She stayed at home raising her five children
while her husband Jose went to work. Cecilia became a Canadian citizen 25 years ago. She is turning 65 this year.
Cecilia is wondering if she will be entitled to OAS benefits.
After contacting the government, Cecilia is advised that she qualifies for OAS benefits once she turns 65. She is
entitled to the full benefit amount payable, as Cecilia meets the criteria of having been a Canadian resident for
more than 40 years after reaching the age of 18.
GUARANTEED INCOME SUPPLEMENT (GIS)

The Guaranteed Income Supplement (GIS) is a monthly benefit paid to low-income residents of Canada who are
receiving full or partial OAS benefits.
The supplement must be specifically applied for every year and, unlike OAS, is received tax free by qualifying taxpayers.
The payment to which an individual is entitled to is based upon marital status and income.
THE ALLOWANCE
The Allowance provides a benefit to low-income 60- to 64-year-olds, who:
• Are spouses or common-law partners of GIS recipients
• Meet certain criteria in terms of length of residency in Canada
At age 65, most people who have been receiving the Allowance (or the survivor’s Allowance) will automatically
receive OAS instead. At that time, depending on their income, they may also be eligible for the Guaranteed
Income Supplement.
The Allowance provides a modest income for the survivor spouses or common-law partners of OAS pensioners, who
are between 60 and 64 years old.
GOVERNMENT PENSION PROGRAMS:

Government pension programs include:
1. Canada Pension Plans (CPP)
2. Quebec Pension Plans (QPP)
3. Old Age Security (OAS)
We have learned that:

• The CPP and QPP are plans that:
All workers 18 years of age and above and employers pay into
Pay the contributor a monthly income at retirement
Have provisions for disability benefits, separation and divorce, survivor and death benefits
May defer up to age 70 or start receiving at age 60

• OAS benefits are paid to individuals who are:

Age 65
Canadian residents for at least 10 years after reaching the age of 18
May defer up to age 70 or start receiving at age 65
Allowances provide benefit supplements for low-income 60- to 64-year olds who are spouses or common-law
partners of GIS recipients and meet the residency requirements.

Marian and Bruce are both currently working and are planning to retire next year. At the date of their planned
retirement, Bruce will be age 65 and Marian will be age 60. Currently, their main source of income is from money
received on several rental properties they own.
Marian and Bruce have just purchased a small motor home and want to travel across Canada and the United
States when they retire. They are thinking of supplementing their travels with the money they would receive from
government pension plans.
Bryan provides the following useful information to Bruce and Marian:
• As Bruce is age 65, he would receive full pension benefits from the CPP/QPP and OAS plans.
• Marian cannot receive OAS benefits until she is 65. She could start receiving benefits in 2020 from the CPP/QPP
plan in the month following her 60th birthday. However, Marian would then receive only 64% of the full CPP/
QPP benefit amount for the rest of her life.
CALCULATING RETIREMENT NEEDS
5 | Calculate the retirement needs of your client.
Planning for retirement requires establishing goals and addressing issues and concerns. Some questions that will
need to be answered are:
1. When does the client want to retire?
2. What kind of lifestyle, relative to the present one, do they want to enjoy?
3. Where does a client want to live?
4. What is the client’s life expectancy?
It is important to have a long-term budgeting plan in place. An estimate of the before-tax income amounts required
at retirement will need to be determined.
A client should determine what sources of revenue will be included in the plan. Sources can include the CPP or QPP,
OAS, RPPs, DPSPs and RRSPs.
As an advisor, you will need to find out what your client’s retirement goals are and what their financial needs will be.
The client will require assistance in estimating and budgeting in order to achieve these goals.
BUDGETING FOR RETIREMENT

IMPORTANCE OF BUDGETING IN RETIREMENT PLANNING
Today, clients are planning for retirement at a much younger age than in the past. Advance planning and careful
budgeting are required to ensure that the resources are available to fund their retirement.

FACTORS AFFECTING THE BUDGET PLAN

THE RETIREMENT DATE
The earlier a client wants to retire, the shorter the time frame will be to accumulate assets and have the funds grow.
The amount of funds required for retirement will be greater if a client wants to retire at age 55 rather than the
typical age 65.
LIFE EXPECTANCY
If a client’s life expectancy is to age 90 and the client wants to retire at age 55, sufficient assets need to be set aside
to generate the required income for a 35-year period.
If the client plans to retire at age 65, the retirement period will be reduced by 10 years. Fewer assets would need to
be accumulated to meet the desired retirement income amount.
RETIREMENT LOCATION
The retirement location and the type of lifestyle a client will want to lead can affect the amount of retirement
income required.
EXAMPLE
The following example helps to illustrate how a client’s choices could affect the amount of retirement
income required:
Client #1 – Tom and Ina Bell Client #2 – Pierre and Frances Beliveaus
Tom and Ina are 45 and 48. Pierre and Frances are 50 and 55.
They live in a big house in Vancouver. They live in a big house in Laval, Quebec.
They have two children, who are married and They have three children, all out on their own and
living in the area. very independent. One of their children is living in
Paris permanently.
Pierre and Frances enjoy the busy city life and
enjoy travelling.
When Tom and Ina retire, they plan to buy a small When they retire, Pierre and Frances plan to sell
property in the Fraser Valley. They want to lead a their house in Laval and buy a large condominium
quiet lifestyle, spending time with their children in downtown Montreal. They want to travel
and grandchildren. extensively, including annual trips to Paris.
Tom and Ina plan to retire at age 65. Pierre and Frances plan to retire at 70.
Tom and Ina both have parents who are still alive Pierre has a father who is 75. Frances has a mother
and in their eighties. who is 72.
The Bells will require less income to cover their costs in retirement. The factors contributing to a lower cost would be:
• Downsizing to a rural, smaller property
• Growing their own food, which will decrease grocery costs
• Limited travel expenditures, compared to the Beliveaus
The Bells will likely generate more additional capital from their move than the Beliveaus, adding to their total
retirement income amount.
The Bells can expect to live a long, healthy life and will have to budget sufficient assets to last their lifetime.

ESTIMATING INCOME AND TAXES

STEPS FOR ESTIMATING INCOME AND TAXES
In order to estimate income and tax amounts, the retirement planning process can be divided into the
following steps:
1. Estimating the client or the couple’s expected expenses at retirement, in today’s dollars
2. Projecting these expected expenses to the client’s expected retirement year, using the assumed inflation rate
3. Calculating the required before-tax income to meet those expenses, using the client’s average tax rate
ESTIMATING EXPENSES AT RETIREMENT

A client’s answers regarding their retirement objectives will affect the amount needed to reach his or her goals.
To estimate the client’s expected expenses, you will need to take the client’s current expenses and modify them to
reflect the expected expenses at retirement.
The client can get a reasonable estimate of expected expenses in today’s dollars by considering how their current
lifestyle might change at retirement.
The following chart outlines some possible changes that should be considered:
Expense Reductions Expense Increases
• Sell second car • Health care

• Fewer meals away from home • Absence of employer-paid benefits, i.e. car allowance
• Less business clothing required • Increase in travel and recreation
• Reduction in dry cleaning costs
• Housecleaning costs
• Move to a smaller home
ACCOUNTING FOR INFLATION

Even a modest average inflation rate of 3% per year means that to retire 20 years from now, it can be expected that
prices will be about 1.8 times their present levels. Based on a 3% inflation rate, something that costs $1,000 today
would cost about $1,806 in 20 years.
ESTIMATING THE BEFORE-TAX INCOME REQUIRED

You will need to estimate the amount of before-tax income required at retirement. The client will have to have
sufficient after-tax income to meet expected expenses.
For calculation purposes, we will use the average tax rate, not the marginal tax rate. For example, if $15,000 in taxes
is paid on an income of $50,000, the tax rate for the calculation would be 30%.
Even though average tax rates on income should be lower at retirement, it is better to be conservative and use the
client’s current average tax rate for the calculation.
If income splitting is used at retirement, there is potential for a lower average tax rate. It is important to identify
who will receive the retirement income.
For example, if only one member of the couple is earning an income currently, but the retirement income is to be
split equally, then the average tax rate at retirement could be substantially lower.

DETERMINING CAPITAL NEEDS

The retirement period is critical in determining the amount that needs to be accumulated in order to generate a
certain level of income.
The annual amount of income needs to increase yearly for its purchasing power to keep up with inflation.
The answer lies in the difference between the real and the nominal interest rate.
Nominal interest rates are those we refer to on a daily basis.
To obtain the real interest rate, use the following formula:
1 + Nominal Interest Rate

Real Interest Rate = –1
1 + Anticipated Inflation Rate
An example of how to calculate the real interest rate is:

If the nominal interest rate is 5% and the expected inflation rate is 2%, then the real interest rate is:
1 + .05
Real Interest Rate = – 1 = 2.94%
1 + .02
The real rate of return is also referred to as the inflation adjusted rate of return.
To simplify the calculation, approximate the real interest rate by simply subtracting the inflation rate from the given
nominal rate. Using the above example, the approximate real interest rate would be 3% (5% – 2%).
Research into real interest rates has shown that interest rates generally lie in the range of 2% to 4% per annum.
This rate is fairly stable over time.
CALCULATION PROCESS
• For each category of income source, estimate the amount of benefit to be received.
• Calculate the present value of the retirement benefits at the date they will be collected.
• If pension benefits start later than the time of retirement, calculate the present value of the benefits
at retirement.
ADJUSTING FINANCES TO MEET RETIREMENT GOALS

For most clients, some adjustments to their lifestyle and budgets must be made in order to achieve their
retirement goals.
Adjustments can be made in various ways:
• Reducing expenses
• Increasing income
• Abandoning some goals
• Postponing the date of retirement
Increasing revenues by a significant amount is not easy for most people. Reducing expenses or abandoning goals are
the type of adjustments most households can rapidly implement.
As an advisor, you can make suggestions to the client about how to make adjustments to their
retirement goals. Ultimately, the client has to make the final decision as to what will work for them.

TOOLS AVAILABLE TO ASSIST IN RETIREMENT PLANNING

As an advisor, you could present different scenarios with the client and describe what their various effects would be
on your client’s projected retirement income. Different assumptions could be used for retirement age, interest rates,
and retirement income amounts.
EXAMPLE
Considering that Suzanne is expected to live until 90 years old, sufficient assets need to be accumulated by
retirement to provide income for a period of 23 years.
Peter is concerned that they will outlive their retirement income.
They meet with Bryan, who assists Peter and Susan in calculating their estimated required income amount and
expected expenses at retirement.
Both Peter and Suzanne have an RRSP and Peter has a company pension plan. Suzanne’s RRSP is a spousal plan to
which Peter contributes an annual amount.
After some discussion, the following was determined:
Peter’s estimated income at retirement: $63,000
Suzanne’s estimated income at retirement: $47,000
Subtotal of estimated income at retirement: $110,000
Less estimated taxes (30% of income): $33,000
Total estimated income at retirement: $77,000
Estimated expenses at retirement: $52,500
Discretionary income remaining: $24,500
Amounts were adjusted to account for a 3% annual inflation rate.

The extra income will allow Peter and Susan to set aside some funds for emergencies and to travel occasionally.
CALCULATING A CLIENT’S RETIREMENT NEEDS:

As an advisor, you will need to meet with the client to:
• Establish retirement goals
• Address concerns and issues
• Review possible sources of income
• Estimate before- and after-tax income amounts
• Estimate expected expenses at retirement
• Estimate the amount required to generate expected income, accounting for inflation


Josée is in her forties and has never married. Although she has contributed to a RRSP since the age of 25, she does
not have a retirement plan in place.
Josée meets with Bryan to discuss her retirement goals and needs. Bryan asks Josée several questions and finds
out that Josée:
• Plans to retire at age 55
• Wants to continue living in her downtown condominium
• Can expect to live into her eighties
• Has not saved any money except for her RRSP
Bryan advises Josée that she will have less time to save for retirement if she retires at age 55. Josée will have to set
aside sufficient assets to generate the income required for a 35-year period.
Bryan helps Josée calculate her estimated income and tax amounts, as well as her expected expenses at retirement.
Her annual income amount will have to increase yearly to keep up with inflation. Bryan and Josée agree that the
calculated amount of accumulated assets at retirement is too high and is not achievable. Some adjustments to the
retirement plan will have to be made.
After some discussion, a retirement plan is put into place which Josée is happy with and feels she can realistically
work with. To reach her goals, Josée will have to:
• Retire at age 60 instead of age 55 to allow more time to save for retirement.
• Make the maximum contribution amount to her RRSPs from now until age 60. Josée should use up any unused
contribution room that has been carried forward.
• Lead a less lavish lifestyle and save more money. Josée could achieve this by decreasing the amount she spends
on clothes and meals eaten out.

Wills and Powers of Attorney 7
CHAPTER OUTLINE
The content in this chapter covers both common law and civil code legislations. In Canada, except in Quebec, the
rules of general application are derived from common law, which are laws developed by judges through decisions
by the courts. Common law is in contrast to Quebec’s codified system or Civil Code. Consequently, rules of general
application may differ in Quebec relative to the rest of Canada in many cases.
For study purposes, all content in this chapter is examinable regardless of where you reside.
1 | Explain the components and rules Writing a Will

regarding wills.
2 | Explain when a will needs to be revoked Revoking and Amending a Will

or amended.
3 | Explain the factors to be considered when Appointment of Executors, Guardians

appointing executors, guardians and trustees. and Trustees
4 | Explain the process and impact on the estate Intestacy

when a person dies intestate.
5 | Describe the rules and process of Probate

probating a will.
6 | Describe the purpose of a power of attorney. Objectives of a Powers of Attorney
7 | Describe the rules and uses for powers of Powers of Attorney for Property and Mandates
attorney for property and mandates.
8 | Describe the rules and uses for powers of Powers of Attorney for Personal Care and
attorney for personal care. Living Wills

KEY TERMS
administrator incapacity
advance care directive interlineations
affidavit of execution international will
Affidavit of Execution of Will intestate
Affidavit of Value letter of indemnity
alterations Letters Probate
Application for the Probate of a Will liquidator
beneficiary living wills
Certificate of Appointment of Estate Trustee mandate
claimants mandatary
codicil mandator
compensatory allowance memorandum
conventional will notarial will
custodian obliterations
dependants power of attorney
domicile powers of attorney for personal care
donee probate
donor probate bond
enduring or continuing power of attorney probate fees
equalization protection mandate
executor substitute attorney
formal will testamentary freedom
grantor testator
guardian trustee
holograph will will

CHAPTER 7 | WILLS AND POWERS OF ATTORNEY 7•3
WRITING A WILL
1 | Explain the components and rules regarding wills.
A will carries out individuals’ wishes regarding their estates upon their deaths. Having a professional draft a will can
be a relatively inexpensive way of ensuring that an estate is well protected from unnecessary taxation, unnecessary
probate fees and expensive lawsuits by disenchanted heirs who feel that they should have received a portion, or a
greater portion, of the estate.
The advisor can point out the tax implications of the various methods of transferring assets so that clients’ wishes
regarding their estates can be carried out with as little tax erosion as possible.
A will can be enforced only upon death and can be revoked at any time before death. The wishes of the deceased
(the testator) normally include provisions relating to the transfer of cash and specific property (bequests/legacies)
to specified individuals (the legatees). In addition, it includes the transfer of the balance (residue) of the net estate
to the testator’s heirs after the settlement of all outstanding creditors’ claims, taxes and obligations incurred during
life, including family law obligations.
A will should be drafted by a competent lawyer or in Quebec, a notary. If a will is drafted deliberately and
thoughtfully, using clear and careful language, much anxiety and bitterness and many disputes and delays in
the administration of the estate can be avoided. The heirs are more likely to accept the wishes of the deceased
harmoniously if those wishes are clearly stated and well thought out.
EXAMPLE
Ted wants to leaves 40% of his estate to each of his two daughters and only 20% to his son.
Bryan suggests that that Ted express his wishes clearly and coherently in his will, with reasons for his choice of
distribution of his assets, so Ted’s daughters will be less likely to have to justify their windfall to their brother.
TYPES OF WILLS
HOLOGRAPH WILLS
A holograph will is entirely handwritten by the testator (the person making the will), without assistance from
any mechanical device such as a typewriter or a computer, and is signed by the person making it, with or without
witnesses present.
A letter declaring testamentary intent and containing related matters may constitute a holographic will.
DISADVANTAGES OF A HOLOGRAPH WILL

The primary weakness of a holograph will is that it is usually drafted and executed entirely without professional
assistance or advice.
Unless the testator is fully versed in the legal and tax implications of estate planning and wills, he or she is likely to
make errors and omissions in the drafting of the will that could have disastrous consequences for the heirs.
Holograph wills are often copied from lawyer-prepared wills, without an understanding of why certain phrases are
used. Frequently, the holograph author simplifies the copied will and leaves out crucial words or phrases.
In addition, once clients get into the habit of doing their own will, it can be hard to discourage them. The ease with
which they can sit down and dash off a new will can lead to too many wills or changes being produced.
Holograph wills do not have witnesses, which makes proving the will harder at the time of death. The Court will
be looking for evidence from a reliable source, such as a bank manager, to ensure that the handwriting and the
signature is identifiably that of the deceased. Finding such an official may be difficult.

As such, this type of will is more easily contested.
EXAMPLE
Herbert was a strong-willed elderly bachelor, with strong opinions about a lot of things, who was used to having
his way.
Among his pet peeves was spending money on anything, especially lawyers and accountants.
Herbert was delighted to learn from the newspaper that he could write his own valid holograph will and he
exercised that right vigorously.
Herbert had made a lot of money in his younger days and seemed to think that his will would form a kind of final
financial statement about which of his relatives had pleased or displeased him.
Irascible to the end, he took pleasure in changing his holograph will every few weeks, as assorted nieces and
nephews pleased or irritated him, and in telling them they had been cut out or put back in the million-dollar will.
All of this was perfectly legal.
Though Bryan had tried to deter Herbert from doing this, when Herbert died, he left behind a substantial
collection of 11 holograph documents, all signed, all expressing testamentary intent. Many conflicted with others
but some could be read together.
Unfortunately for Herbert’s family, he had saved a few thousand dollars in will preparation fees but had neglected
to date any of the documents. At last count, the ongoing litigation battle to determine which documents
governed had triggered legal fees of several thousand dollars and climbing! Had Herbert listened to Bryan, this
could have been avoided.
It is more cost effective and less time consuming in the long run to have a professional help prepare your
will for you.
APPROPRIATE TIMES TO USE A HOLOGRAPH WILL

It is recommended that a holograph will be used only if it is absolutely necessary, such as in an emergency.
EXAMPLE
Zoltan finds himself stranded in the north woods, severely injured after the crash of his single-engine plane and
hundreds of miles from the nearest settlement.
Fearing that he will die from his injuries long before he can be rescued and realizing that he has no will to protect
his common-law wife, Zoltan drafts a holograph will in her favour in his plane’s log book and signs it.
Bryan and Zoltan had discussed Zoltan making an appointment to prepare a will with his lawyer. Zoltan had
intended to but didn’t get around to it before his accident.
You shouldn’t put off having a will prepared by a professional since unforeseen circumstances may occur.
VALIDITY OF HOLOGRAPH WILLS

Holograph wills are valid in all provinces except Prince Edward Island.
Since holograph wills are not valid in some provinces or certain rules may apply, one must understand the rules in
one’s home province or where the assets are located.

CONVENTIONAL AND FORMAL WILLS

A conventional or formal will (or will made in the presence of witnesses in Quebec) needs to be:
• Entirely in writing (handwriting, typewriter or a computer) by the testator or by a third party; and
• Signed by the testator in the presence of at least two witnesses.
These witnesses must sign in the presence of the person drafting the will and the other witness after the testator
has signed.
APPROPRIATE WITNESS TO A CONVENTIONAL OR FORMAL WILL

A witness must be over the age of majority and should not be a beneficiary or the spouse of a beneficiary.
While a will remains valid if a witness is a beneficiary or spouse of a beneficiary, any gift (bequest) to him or her will
be invalid. In some provinces, the beneficiary can apply to the courts for validation of the bequest but would have to
prove to the courts that the testator had not been under the undue influence of the legatee/witness in drafting and
executing the will.
NOTARIAL WILLS
A notarial will is typed and executed in the presence of one notary, the testator and a witness. A notarial will
applies to the province of Quebec in accordance with the rules and formal procedures of the Civil Code of Quebec.
The notary retains possession of the original will, while the testator keeps a notarial copy.
The notary can issue certified copies of the document to the heirs upon proof of the testator’s death.
A notarial will comes into effect immediately upon the death of the testator. Therefore, certified copies can be
delivered without any proceedings. Since such documents are considered notarial deeds, they are not subject to
probate upon the testator’s death.
It should be noted, however, that just because notarial wills are not subject to probate does not mean they cannot
be contested.
A witness to a notarial will must not be the notary’s spouse nor related to him in either the direct or the collateral
line up to and including the third degree, or connected with him by marriage or a civil union.
The witness also cannot be under the age of majority, nor can they be an employee of the notary unless they are
also a notary.
AFFIDAVIT OF EXECUTIONS
Having the affidavit of execution filed means that, in the absence of other objections, the court can usually be
satisfied that the will was properly signed and that the formalities of execution were all observed.
An affidavit prepared while the witnesses are readily available averts later problems in proving the validity of the
will, especially in cases where the witnesses might be difficult to locate at a much later date when the testator dies.
DO-IT-YOURSELF WILL KITS

Some of the do-it-yourself will kits merely provide the prospective testator with a brief explanation of how to
execute a proper holograph will.
Others provide a fill-in-the-blanks pre-printed form to be executed and witnessed as a formal will.
Still others provide software to enable the testator to execute a professional-looking will.
All of these kits lack a common feature, which is the advice of a professional who is familiar with the laws and
personal circumstances relating to the particular testator, his or her assets and his or her family.
Pre-printed kits are part of the category of conventional wills if they respect the formal needs to insure its validity.

Like a holograph will, these kits should only be employed as a last resort, as a temporary solution or in
circumstances where a professionally drawn will cannot be obtained in time. Such a do-it-yourself will should be
replaced with a professionally drawn one at the earliest possible date.
INTERNATIONAL WILLS
An international will is made in compliance with a convention that provides a uniform law on the form of an
international will.
Such wills are valid in every jurisdiction in which the convention is in force, regardless of the place of domicile of the
testator, the place the will was executed or the location of the assets. Such a will can be useful for testators with
assets in more than one jurisdiction.
These wills are very rarely used since so few jurisdictions have signed the convention. At time of writing,
Alberta, Manitoba, Newfoundland & Labrador, New Brunswick, Nova Scotia, Ontario, Prince Edward Island and
Saskatchewan are the only parts of Canada that recognize the international form of wills.
DOMICILE
The legal requirements for the formal validity of a will are governed by either the place where the will is made or
where the testator is domiciled, if different.
Domicile refers to the jurisdiction to which an individual has the strongest link or connection and, usually, a present
intention to remain in or return to.
In other words, one may have several residences but only one domicile, which is an individual’s usual and main place
of residence, as established by facts as well as intentions.
The following factors can be used to establish domicile:
• Location of the individual’s home (regular place of residence)
• Where the individual’s family lives
• Location of bank accounts, principal residence, etc.
• Location of regular employment
• Location of friends and social connections
• Frequency of visits to a previous domicile
• Written evidence indicating intention
EXAMPLE
Sylvester spent the last four months of his life in the Vancouver Islands and died there. When his family consulted
Bryan, one of their questions was whether Sylvester’s summer house qualifies as domicile.
Bryan considered the following aspects:
• When Sylvester was working, he lived mostly in Ontario.
• His will was executed in Ontario.
• His family and most of his friends lived in Ontario.
• He kept his bank accounts there.
Based on these considerations, Bryan concluded that a court would likely consider the Ontario residence his
domicile.

Establishing your domicile will determine the legal requirements of your will.
THE IMPORTANCE OF ESTABLISHING DOMICILE

The domicile where the will was executed determines how the estate is administered. The domicile at the time of
death determines which intestate laws might apply.
Conversely, real property is governed by the laws where the property is located. Legal advice should always be
obtained if there is any uncertainty regarding the issue of domicile.
Many new Canadians may bring legal documents and concepts from other judicial systems, some of which may or
may not be valid in Canada. In advising clients about will planning, which may also bring up tax issues, you must be
at least aware of the separate but related topics of residency, citizenship, domicile, and mailing address, all of which
must be distinguished.
IMPACT OF DOMICILE ON AMERICAN ESTATE TAXES

Domicile is a very important factor in some kinds of taxation, especially that of estate taxes imposed by the United
States. The U.S. imposes estate tax on persons domiciled in the U.S., regardless of where they are temporarily
resident at the time of death.
For example, Canadians holding a U.S. “green card,” or Permanent Resident Card, would have a very difficult time
asserting that they were not domiciled in the U.S.
The U.S. also imposes transfer taxes based on U.S. citizenship, regardless of where the person is living.
LIMITATIONS OF WILLS
TESTAMENTARY FREEDOM
Testamentary freedom is the freedom to will property away.
Some assets in common law provinces, such as real estate held as a joint tenant with rights of survivorship, cannot
be willed away. It goes to the survivor, not under the will.
Other assets, such as shares of a corporation, may be subject to prior contractual obligations such as a shareholder’s
agreement, which restricts the right of the owner to bequeath the shares by will.
Not all jurisdictions in the world permit testamentary freedom.
In many countries, real estate, in particular, may be governed by mandatory local laws about who inherits and in
what proportion.
Many countries go one step further and decree by statute how much family members will inherit, and no will
can vary those rules. Countries with this type of legal arrangement are usually referred to as a “forced heirship”
jurisdiction.
These laws are very similar to our intestate distribution statutes, except that they are mandatory. In such
jurisdictions, most or perhaps all residents will not have a will because it serves no purpose.
Other restrictions and limitations may be imposed on will-makers through religious belief or simple cultural
tradition.
Although not embodied in Canadian law, these restrictions may be felt as keenly by the will-maker as any secular
law, or even more so. Professionals need to be alert to these issues and must address them in accordance with the
client’s instructions but also in accordance with Canadian law.

PRIORITY OF CLAIMANTS OVER THE BENEFICIARIES OF A WILL

Claimants, such as family law and support creditors, may take priority over the beneficiaries of a will.
When such creditors or contractors make a claim against assets in an estate, they are not challenging the will. They
are exerting other rights against the property of the deceased. Whatever is left after the creditors and tax authorities
are satisfied can be disposed of under the will.
The laws governing wills are strict. Technical errors in drafting or failure to observe the formalities of execution may
create unfair and unexpected results since the courts have very limited powers and jurisdiction to resolve technical
violations.
Problems can be compounded because wills are often made years before they need to be interpreted and applied, at
a time when the maker is no longer around to explain his or her intentions.
Some provinces have come up with a “substantial compliance” law that authorizes the courts to resolve minor
technical violations of a will, as long as the integrity of the document is not in question.
TESTAMENTARY CAPACITY AND UNDUE INFLUENCE

The testator must be competent to make a will, being of sound mind when executing the will, and acting under a
free will, without any undue influence or pressure.
These things may be declared or affirmed in the text of the will itself. However, this is not always effective, as a self-
assessment declaring competence is not always reliable.
Disenchanted beneficiaries may, in some cases, contest a will on the grounds that the testator was not of sound
mind or was unduly influenced or fraudulently deceived by a third party at the time the will was drafted.
Regardless of the outcome, any litigation costs could use up a significant portion of the testator’s estate.
MINIMUM AGE REQUIREMENT TO MAKE A VALID WILL

Each province has a minimum age requirement that a person must meet to be eligible to make a valid will.
In some provinces, the minimum age requirement is waived under certain circumstances, such as in the case of a
minor who is married.
MINIMIZING FUTURE LITIGATION

To minimize future litigation in respect to a will, the professional should be alert to any suspicious circumstances
when taking will instructions.
The professional should ascertain whether the testator is aware of and understands:
• The assets that comprise the estate
• The persons the testator wants to receive the benefits
• Potential claims by a spouse and/or dependants
• The terms and conditions of the will
The professional should also take note of any apparent duress (bodily harm or threat of bodily harm) or undue
influence (an unusual degree of control exercised over the testator by a third party, usually a beneficiary under the
proposed will) that would suggest that the testator’s will instructions are not voluntary.

EXAMPLE
Peter is dependent upon Bernard for personal care.
Bernard arranges an appointment for Peter to make a will and will be present during the appointment.
Bryan is concerned that Bernard will do most of the talking on behalf of Peter and will influence the contents of
the will.
Bryan suggests that Peter also bring along a family member or friend to this appointment.
When the professional encounters suspicious circumstances, notes should be made relating to the areas
of concern and about the conversations that took place with the testator. This information should then
be communicated to the lawyer who will be drafting the will.
A major unexplained change from a previous will that is inconsistent with the client’s historic approach to asset
distribution is another situation warranting concern.
CHALLENGING A WILL
A will can be challenged if it fails to make adequate provision for the testator’s spouse and dependants. In such
cases, the court may rule that the will be ignored.
It is not invalid nor illegal to make such a will, but it will be ineffective in depriving dependants of their due support.
It is reasonably common in marriage breakdown situations that spouses will take the other spouse out of a will.
This is probably reasonable, at least until the financial terms of the breakdown have been settled. However, dying
without making provisions for such obligations is a sure-fire way to deplete the estate through litigation and
expenses and is to be discouraged.
EXAMPLE
Gino is incensed that his wife, Gail, had betrayed him.
He wants to instruct his lawyer to make up a will, leaving Gail only a bus token so she could ride to the end of the
line and jump in the lake!
Gino was going to give everything else to his sister, Bella.
Though Bryan knows that Gino might feel better by making such a will, he convinces Gino that the only real
beneficiaries of the ensuing court battle would be the litigation lawyers and not Bella or Gail.
When drafting wills, consideration should be given to the family and the dependant relief laws of the relevant
province. These laws are meant to ensure that adequate support is provided for spouses and dependants in the
event of an individual’s death.
Generally speaking, family law statutes contain support provisions in the event of a marriage breakdown.
Dependant’s relief legislation is meant to ensure that adequate support is provided for spouses and many other
financial dependants in the event of an individual’s death, whether that individual dies with or without a will.
The interplay between dependant relief on death and spousal and child support on marriage breakdown is very
complex and varies from province to province.
Dependants, generally including spouses or common-law spouses, children, parents, brothers or sisters, may apply
to the court for relief. Courts have wide authority under those laws to modify the will and order the estate to make
provisions for dependants, thus addressing dependant and spousal claims before the will’s instructions are carried
out.

In Quebec, common law spouses, brothers and sisters are not considered dependants for alimony or support claims
purposes.
SUPPORT OBLIGATIONS
Many people die having gone through a marriage or other relationship, creating support obligations.
If a spouse dies with a support agreement or a court order against him or her, it generally binds his or her estate,
unless some term of the order or agreement releases the estate, usually upon payment of some life insurance in lieu
of ongoing support payments.
Some provinces create property interests for the surviving spouse. Others simply generate an entitlement to a
dollar amount, without any direct link to any particular property. Knowing how the law works in your particular
jurisdiction can better help you guide clients into making logical plans.
RIGHTS OF THE SURVIVING SPOUSE

In some provinces, a surviving spouse may either receive the benefits under the terms of the will or claim an
“equalization” payment from the estate.
If surviving spouses feel the will has not treated them fairly or that the testator has not left them enough income
or capital to live according to their usual standards, they are likely to initiate such a claim. Such claims can often be
avoided by ensuring that the surviving spouse is provided with sufficient benefits such that a claim would not better
their situation significantly.
In Quebec, the equalization payment is referred to as the “compensatory allowance”.
The surviving spouse can apply for this payment under the pretense that he or she has contributed to the
enrichment of the deceased spouse via goods, services or money. The compensatory allowance is only applicable in
the case of legally married couples.
EXAMPLE
Jack died with a very restrictive will, which gave Jill the right to receive only the income from his estate for her
lifetime and at her death, the children will receive the capital of the will. There did not seem to be any particular
reason for this plan, at least, no reason that had been communicated to Jill.
Jack and Jill had been married for forty years and Jill was very upset with this arrangement. Most of the assets
were in Jack’s name. Bryan suggested that Jill consult with a lawyer about exercising her right to an “equalization”
claim against Jack’s estate.
In the end, Jill received a lump-sum equalization payment as a creditor and the children received the balance of
Jack’s estate right away instead of after Jill’s death. As it turned out, they were upset with their father’s will too,
so each of them gave most of their inheritance to their mother.
If surviving spouses feel they are being treated unfairly, they can challenge a will if they feel they have
the right to. Ensuring they are taken care of in the will avoids this.
If the surviving spouse is successful in pursuing such a claim, all benefits under the will in favour of the surviving
spouse are generally forfeited in favour of the equalization payment.
It may be difficult to predict whether the result will be beneficial or detrimental to the remaining beneficiaries.
In some unusual cases, however, estates with poorly planned wills may benefit from the “friendly” use of said
partition, transferring capital property or a lump-sum RRSP on a rollover basis to improve the estate distribution
plan from a tax perspective.

CHAPTER 7 | WILLS AND POWERS OF ATTORNEY 7 • 11
In some jurisdictions, couples may enter into marriage contracts under which each spouse agrees to forego certain
rights given by provincial statutes. This may include the agreement to forgo any equalization claim. However, if
a surviving spouse has not been provided with adequate resources to live, he or she often may make a claim for
support, despite the existence of a contract.
In Quebec, death does not cancel the deceased’s support obligation toward family members. The surviving spouse
may, within six months after the death, claim a financial contribution from the estate as support.
Also, in some common law provinces, if the surviving spouse feels that he or she has not been treated fairly by
the will, he or she may make a claim on the Net Family Property (NFP). The value of any kind of property that was
acquired by a spouse during the marriage and still exists at death must be divided equally between the spouses.
In Quebec, the estate would have to go through family patrimony and matrimonial regime rules before distributing
the assets as per the will and before paying compensatory allowance.
According to family patrimony rules, a surviving spouse is also entitled to claim half of the family patrimony when
the marriage is dissolved upon death (unless the spouses renounced their rights in this regard).
According to the matrimonial regime, the surviving spouse can also claim his portion. In his marriage contract, a
spouse can legally specify gifts be made at the time of the spouse’s death. Thus, one may die without leaving a will
but via his marriage contract disposed of all assets to a designated beneficiary at death.
It is only once this division is made that the estate can be distributed and pay, if required by the court, a
compensatory allowance.
EXAMPLE
Alan wishes to ensure that his wife, Alicia, does not make a claim against his assets under provincial matrimonial
property legislation. Alicia is his second wife and Alan wants to leave his estate to his children from his first
marriage.
His estate is worth $800,000.
His lawyer advises that through his will, funded by a life insurance policy, Alan should leave Alicia $500,000, with
the notation that the legacy is to be in lieu of her rights under provincial legislation.
It can be complicated to ensure that all beneficiaries are taken care of in the manner you want them to
be. That is why it is important to ensure your wishes are spelled out completely in your will.
The professional should be aware of the kinds of properties that are included or excluded from net family property
(NFP) or family patrimony in Quebec. The treatment of some assets, most notably the matrimonial home, varies
greatly from province to province and could have a great impact on the value of an equalization claim. Further, not
all provinces allow such claims.
As a bare minimum, the professional should be familiar with his or her own province’s general provisions under
family law and should work in consultation with a lawyer.
The key is that even when there is a will, surviving dependants often have certain rights. Ignoring such rights may
leave the courts room to override the will, negatively impacting the efficiency and effectiveness of an estate plan
based on that will.
RIGHTS OF THE DEPENDANTS OTHER THAN THE SPOUSE

Other dependants, including children, grandchildren, parents, grandparents and siblings of the deceased who were
financially supported or entitled to be supported by the testator, can file a claim against the estate if the will does

not provide adequately for them. A child includes an unborn child at the date of death or marriage breakdown and
children born outside of wedlock.
Other than the ex-married-spouse, only the parents, the married spouse and the children of the deceased can make
a support claim in Quebec.
Decisions related to the level of contribution for support can be handled with the liquidator of the estate or, at last
resort, by a Court order.
THREE TESTS TO DETERMINE WHETHER A COURT WILL CONSIDER AWARDING SUPPORT

In common law provinces, a court’s decision about whether to award support often hinges on the status of any
dependants making such claims.
The court must decide whether an individual is a dependant rather than a dissatisfied beneficiary. A spouse can be
dependant but is not necessarily considered to be a dependant. Minor children are obviously dependants but other
family members may or may not qualify.
Three tests usually determine whether a court will consider awarding support, thus ignoring certain wishes
expressed in the will or, in some cases, modifying the will, in favour of a dependant:
1. Was the deceased providing or obligated to provide support to the dependant?
2. Did the deceased fail to provide adequately for the dependant (by will or otherwise)?
3. Is the dependant in need of support?
Some provinces also consider the ability of the estate to pay support.
MEANS AND NEEDS OF THE DEPENDANT

While the relief provided varies according to specific circumstances and by jurisdiction, most courts consider the
means and needs of the dependant, as well as any gifts or provisions made to the dependant while the deceased
was alive.
The court may also consider the testator’s written reasons for depriving certain dependants of any benefits in the
will.
In deciding the extent of such support, the court will usually consider the lifestyle to which the dependants have
previously been accustomed.
RIGHTS OF DISABLED DEPENDANTS

Depending on the jurisdiction, disabled dependants also have a right to adequate provisions in a will. However,
“adequate” is not objectively defined and, therefore, depends on the circumstances of each case.
The professional should discuss with the client the possibility of a spouse or other dependant making a claim on the
estate. It is generally better to plan to address creditor issues rather than seek to avoid payment, as most provincial
laws contain wide powers to ensure spouses and other dependants are suitably looked after.
For example, in British Columbia, a statute called the Wills Variation Act gives the Court the power to rewrite a
will to take account of unfilled obligations. The will itself is varied, rather than simply making creditors out of the
claimants.
In other provinces, notably Ontario, even some property passing outside of the will, such as life insurance owned by
the deceased and payable directly to a named beneficiary, can be “clawed back” into the estate for the purposes of
assessing support.

CONDITIONS ON GIFTS THAT ARE CONTRARY TO PUBLIC POLICY, PROMOTE AN

ILLEGAL ACT, OR ARE DISCRIMINATORY
A will cannot set conditions on gifts that are contrary to public policy, promote an illegal act, or are discriminatory.
EXAMPLE
Louis is a devout Catholic. He wants to have a clause in his will specifying that a gift to his son, Pierre, would be
forfeited if Pierre joins a particular religious order. Bryan persuaded Louis not to do this as such a discriminatory
provision would be against public policy.
Any such provisions could be challenged in court; therefore, the testator should be counselled accordingly.
The effect of an invalid or illegal condition on a gift might actually backfire.
Due to the rules and interpretation issues surrounding wills, in some cases the gift might still be made, free of the
attempted conditions.
In other cases, the gift might be cancelled because the purpose was for the promotion of illegality.
What is certain is that the challenge to the gift, and the interpretation of it, will be a very expensive procedure,
with costs almost certainly coming out of the estate. Even the use of “terror” clauses is probably ineffective in most
cases, such as declaring that beneficiaries who challenge a will are to be disinherited. These provisions are likely to
be avoided by a court determined to do so.
REVOKING AND AMENDING WILLS
2 | Explain when a will needs to be revoked or amended.
REVOKING A WILL
A will takes effect only upon the death of the testator. It can be revoked at any time up until death, unless the
person becomes mentally incompetent.
The most common way of revoking a will is by making a subsequent will.
The “new” will normally starts with a revocation clause such as “I hereby revoke all my former wills and codicils.”
If the newly drawn will does not revoke an earlier one, both may be valid.
Where there are areas of conflict between the two wills, such as the devolution of the residue of the estate, the
latter will prevail.
In areas where no conflict exists, such as the payment of cash legacies, both wills may be valid and the legacies set
out under both wills could be payable.
In Quebec, the latest will is usually considered to be the only valid will.
Another way of revoking a will is by deliberately destroying it. Such destruction can be done either by the testator or
in the presence and under written instructions of the testator.

EXAMPLE
Elmer left the bulk of his estate, under a formal will, to his wife, Frieda, along with a $25,000 legacy to his church (A).
A few years later, Elmer had a falling out with the church over an issue of church dogma and changed his alliance
to a new church (B).
In an angry moment, Elmer executed a holograph will in favour of Frieda but changing the $25,000 legacy to be
payable to (B).
If Elmer were to die without rectifying the error, it is possible that both wills would be held to be valid. Frieda
would still get the residue of the estate but a $25,000 legacy would be payable to each of churches A and B.
As a consequence of Elmer’s negligence in not consulting a professional for the drafting of his new will, church
A would receive a legacy that Elmer no longer wished to leave and Frieda would receive $25,000 less than he
intended.
If Elmer resided in Quebec, all else being equal, the holograph will would be valid, as it is the most recent (even if
the previous will was a notarial will).
It is important to ensure you keep your will up to date so that the beneficiaries you now favor will receive
your bequests.
IMPACT OF MARRIAGE ON A WILL

With the exception of Quebec, all provincial statutes provide that a marriage subsequent to the preparation of a
will results in a revocation of the will. This policy attempts to make provision for the new spouse. The statutes of
Ontario, Nova Scotia and New Brunswick permit a spouse to elect to have the pre-existing will of the other spouse
not revoked.
As mentioned above, in Quebec, a valid will drafted before marriage remains valid. This of course does not
change the fact that the estate would have to go through family patrimony and matrimonial regime rules before
distributing the assets as per the will.
If a will is being made in contemplation of a specific marriage to a specific individual, the will should state that it is
being made in contemplation of marriage. But the will should also provide specifics for a distribution of assets if the
marriage does not take place.
Thus, if a will is made without providing for an anticipated marriage, a new will should be made upon marriage to
avoid dying intestate.
IMPACT OF DIVORCE ON A WILL

While a divorce does not generally revoke a will, some provinces, such as Ontario, British Columbia, Saskatchewan,
Manitoba and Prince Edward Island, have laws that revoke certain provisions of the will. Bequests, legacies and
executorships in favour of the former spouse are formally revoked. The law presumes that the former spouse
predeceased the testator. In Quebec, the legacies in favour of the former spouse prior to the divorce are revoked as
per the Civil Code.

By contrast, legal separation does not affect the will in most provinces. Thus, if a new will is not made and the
testator dies, the estranged spouse would inherit under the will. British Columbia is the only province where a legal
separation is viewed in the same way as a divorce for the purpose of revoking a will.
When there is a change in marital status, your client should always consider updating his or her will by revisions
through codicils or the preparation of a new will, regardless of the relevant provincial legislation. A significant
change in a person’s situation, such as a new marriage, always merits at least a review of his or her will.
REVIEWING AND AMENDING A WILL

A will should be reviewed whenever material changes take place in an individual’s life.
Wills should probably be reviewed periodically, every three to five years, in any case since a number of small
changes may add up to consequences much larger than the testator realizes.
In some cases, an outdated will may be worse than having no will.
Material changes that may require updating the will could include any of the following:
• Change in the value of the estate
• Potential liquidity problems faced by the estate
• Acquisition or disposition of a substantial asset or business venture
• Changes in tax laws (for example, elimination of the capital gains exemption)
• Change of residency
• Change in family size due to birth, death or adoption
• Changes in health and life expectancy
• Change in the marital status of the testator or one of the beneficiaries
• Change in the relationship between the testator and one or more of the beneficiaries
• Change in family law such as spousal equalization claim
Changes in the testator’s life, such as the marriage or divorce, may result in provincial laws effecting deemed
alterations or even revoking the will.
A periodic review is important so that a will reflects current, rather than past, circumstances and wishes.
CODICILS
A codicil is a legal document that can revoke, modify or add provisions to a will without having to redraft the entire
will. Codicils are attached to the will and executed and validated like a will, including being signed and dated in the
presence of at least two witnesses.
In Quebec, the codicil must respect the same conditions of validity and probate proceedings as a will.
If a will is amended many times through codicils, a new will may be best, helping to avoid potential confusion or
conflicts. Likewise, codicils are not recommended for major changes, such as the handling of the residue of the
estate. Especially in provinces in which the beneficiary receives a copy of the old will and the codicil, certain changes
are best achieved through a new will.

EXAMPLE
Ms. Thompson, an Ontario resident, had a will prepared naming her twin nieces equal beneficiaries of her sizeable
estate. Though she and Bryan had discussed it, she had never shared that information with her nieces.
Ten years later, realizing her nieces had prosperous careers and, therefore, don’t need her entire estate, she
decides to leave 50% of her assets to a medical charity, 20% to a social agency/charity and the remaining 30%
to her nieces in equal shares.
Ms. Thompson discussed this change with Bryan to determine how it should be done. Bryan described two
options and the ramifications of each:
• If she uses a codicil to make these changes, at her death her nieces will receive a copy of the original will and
the codicil and may be hurt to see that the original will was changed.
• If Ms. Thompson makes a new will instead of a codicil, the nieces will never know that there had been a
change.
To avoid hurt feelings, it may be worth the time and cost to make a new will rather than adding a codicil.
MEMORANDUMS
A testator often has a number of specific items, such as jewellery, furniture, etc., that he or she wants left to specific
family members. The makeup of this group of items, or the persons to whom they are to be left, usually changes
on a fairly regular basis over the lifetime of the testator. To try to incorporate such a large and changeable series of
bequests under a will would be costly, requiring frequent revisions or codicils.
Sometimes it is more practical for the testator to prepare a list of such objects and their beneficiaries and keep
the list filed with the will. This list is called a memorandum and it can be referenced in the will. Thus, every time
a change becomes necessary because, for example, items are added to or removed from the testator’s assets, it
becomes necessary only to revise the list and not the will itself.
In order for a memorandum to be legally binding, it must be in existence before the will is signed and then
incorporated by reference into the will.
If the memorandum happens to be handwritten, all of the issues surrounding holograph instruments may be called
into play.
However, many families will honour the wishes of the deceased regardless of the legalities since these items often
belong to the beneficiaries of the residue by law. If the testator would like to make his or her wishes legally binding,
this may be done via a codicil.
ALTERATIONS, INTERLINEATIONS AND OBLITERATIONS

Alterations refer to any changes made in the will, while interlineations refer to the insertion of words between the
existing lines of a will. Neither is permitted after a will has been formally signed and executed.
In some cases, the changes may be enforceable if they are made before the signing and they are initialled by the
testator and the witnesses in a nearby margin or blank space. However, if challenged, the onus will likely fall on the
witnesses to prove that the changes were made before the will was formally executed.
Obliterations refer to the deletion or erasure of certain words in a will such that they are no longer readable. If the
original words cannot be read, the will with the obliterated words is still valid and whatever words are still readable
constitute the valid will.

With most wills now prepared on computer, there is usually little reason not to make the changes on the original file
and reprint the amended page or even the entire will.
APPOINTMENT OF EXECUTORS, GUARDIANS AND TRUSTEES
3 | Explain the factors to be considered when appointing executors, guardians and trustees.
SELECTING AN EXECUTOR/LIQUIDATOR
The selection of an executor/liquidator and/or trustee is not a decision that should be taken lightly. The executor
must be available and capable of handling the work involved.
Many testators unthinkingly appoint their spouse, their brother, their lawyer, etc., to act as executor/liquidator,
without giving serious consideration to the implications of the role.
The selection of an executor/liquidator is a decision your family may have to live with for years to come. The
testator can change his or her mind prior to death, but there are no opportunities for second thoughts after the
fact. Although there is a legal process by which beneficiaries can apply to replace an incompetent or untrustworthy
executor or trustee, the process is a long and expensive one.
Furthermore, an executor/liquidator may be invested with the management of hundreds of thousands of dollars’
worth of assets. Ideally, the executor/liquidator should have experience in finance, administration, investments and
taxation if he or she is to be expected to competently manage a large portfolio of assets over time.
Thus, the selection of an executor/liquidator should be made with care and consideration. After all, this may be the
person who will represent the testator and the testator’s family in financial affairs for years to come.
DESIGNATING EXECUTORS/LIQUIDATORS
CORPORATE EXECUTOR/LIQUIDATOR
A corporate executor, such as a trust company, is the best choice of trustee in many instances, particularly if the
trust assets are of significant value or if any resulting trust is expected to last for a number of years.
A corporate executor/liquidator offers all of the following advantages:
• Experience in Financial/Estate Planning—The corporate executor/liquidator is in the business of administering
estates and trusts. As an entity, it has done so thousands of times before and can bring a wealth of experience to
the process that would be impossible for any one individual to accumulate, even in a lifetime of experience.
• Continuity—The corporate executor/liquidator cannot be outlived by the beneficiaries of the estate. Trust
officers may come and go within the organization, but the trust company itself can be counted on to be there
and to provide continuity of administration. Individual executors/liquidators, on the other hand, may become
sick or die and have to be replaced by individuals who have no previous experience with the particular account
at hand.
• Attention/availability—The corporate executor/liquidator is in the business of administering estates and
trusts on a full-time basis and so is always available and able to act when it is called upon. Individual executors/
liquidators, whether lawyers, accountants or relatives, earn their living elsewhere and can only devote a small
amount of their time and attention to the tasks of estate administration.
• Impartiality—Corporate executors/liquidators and trustees are not part of the family and, for that reason, can
be called upon to administer the terms of the will the way they are intended to be carried out. They are not
beholden to anyone in family, will not be bullied by aggressive or greedy family members or in-laws, and will

not be induced to breach the terms of the trust by threats of disinheritance or loss of love. Because they are
impartial outsiders, they can be relied upon to protect the vulnerable and to do the unpopular, according to law
and as the will directs. This feature of impartiality is one of most intangible but most valuable features a trust
company can offer.
• Multi-faceted Expertise—No single person can be the ultimate expert in areas of taxation, law, investments
and estate administration, which are all skills needed by the ideal executor/liquidator. The corporate executor/
liquidator is not one individual, however. It is comprised of a network of employees, all of whom specialize in
separate areas of estate administration. In naming a corporate executor/liquidator and trustee, the testator
hires many experts for the price of one.
• Financial Security—Corporate trustees, as an entity, have “deep pockets.” If a trustee errs and costs the trust
money, he or she may be sued for the losses. However, this right of restitution may be of little value to the
beneficiaries if the trustee has no assets with which to reimburse the trust. A corporate trustee will generally
have millions of dollars in funds and be in a solid financial position to stand behind its own actions.
INDIVIDUAL EXECUTOR/LIQUIDATOR
If the estate in question is not large, its assets are not complex and any resulting trust is not expected to endure
for too many years, such as an education trust for minor children, it may be wholly appropriate for the testator to
select an individual to act as executor/liquidator and trustee.
In such a case, the prospective executor/liquidator should exhibit many of the following characteristics:
• Be of an age and state of health that he or she would be likely to outlive the duration of the estate
• Have general expertise in finance, taxation and investments
• Be reliable and available
• Have personal knowledge of the wishes of the testator and the personalities and needs of the beneficiaries
MULTIPLE EXECUTORS/LIQUIDATORS
It is sometimes appropriate to appoint more than one executor/liquidator. This could be done to take advantage of
the different skills that different individuals may bring to the task or to ensure that the executors/liquidator bring a
blend of the objective and the subjective to the task at hand.
In Quebec, when there is more than one liquidator, they must all agree unanimously unless it is stated otherwise in
the will.
DESIGNATING A CORPORATE EXECUTOR/LIQUIDATOR AS THE BENEFICIARY

Particularly in the case of spousal trusts, this arrangement allows the beneficiary to continue to exercise an element
of control over the family assets, while providing for expert guidance in the estate administration process. In
the event of a disagreement, the will should determine who casts the deciding vote, whether it be the corporate
executor/liquidator or someone else.
ALTERNATIVE EXECUTORS/LIQUIDATORS
Wills should designate an individual or a qualified company, such as a trust company, to be an executor/liquidator
for the estate. Substitute or alternate executors/liquidators are also generally specified.
If an alternate is not specified and the executor dies before the decedent’s estate has been fully administered, the
executor’s executor is automatically appointed. Also, without an alternate, if the executor named predeceases the
testator or does not wish to serve, the court will appoint an administrator for the testator’s estate.
In Quebec, if the liquidator dies and no alternate liquidator has been assigned, the heirs of the testator will appoint
a substitute or ultimately the appointment will be made by the court.

COMPENSATION FOR EXECUTORS/LIQUIDATORS

Executors are generally entitled to compensation for their services, usually based upon a schedule set by the
Surrogate Court in their jurisdiction. This is a well established practice.
The schedule of fees is the same regardless of whether the executor is a trust company, a lawyer, or a family
member, for example.
The fees are usually computed at about 2.5% of the value of the assets realized (brought into control or sold) and
another 2.5% of the assets distributed, plus 5% of all estate income earned. If the estate has to be administered for
a number of years, ongoing administration fees may also apply. The fees are paid by the estate.
To avoid uncertainty about what they are going to charge and having to go to court for approval or argue with
beneficiaries, many trust companies now include a compensation agreement which is incorporated by reference
into the will. This documents for the beneficiaries that the will maker was aware in advance of the proposed costs of
administration, and expressly approved of them.
All expenses incurred for the settlement of the succession are assumed by the succession.
In Quebec, if the liquidator is not one of the heirs of the deceased then he has the right to be compensated. If the
testator had not previously determined the terms of the compensation then the heirs must do so. If, on the other
hand, the liquidator (in contrast with a trustee) is also a heir then he cannot request remuneration. However, the
testator may provide for it in his will or the heirs, if they all agree, may compensate the liquidator.
ACCEPTING THE APPOINTMENT

Being named as executor for someone’s estate is an appointment, not a contractual obligation. The person so
appointed may decline the appointment before commencing to act if he or she wishes.
In Quebec, in contrast with a trustee, if the liquidator is the sole heir then he cannot decline the appointment.
Before accepting the responsibilities and liabilities associated with an appointment as executor, an individual should
first consider whether or not he or she has the time and ability to commit to the role.
Also before accepting such an engagement, an assessment must be made to determine if the estate has or will have
any potential liabilities that might become those of the executor.
EXAMPLE
Dimitri’s brother, who is terminally ill, wishes him to act as executor of his estate. Dimitri’s brother is the sole
owner of a factory that is involved in serious environmental disputes with the province because of the factory’s
disposal of caustic chemicals in a nearby river.
Dimitri discusses it with Bryan before accepting the appointment because he is concerned about the personal risk
that he might assume as executor. In addition, he also realizes how time consuming it might be.
Accepting the appointment as executor is an important decision and you should ensure that there are no
conflicts of interest and that you have the time needed to devote to this responsibility.
Most corporate executors refuse to become involved in an estate that has assets with any connection to certain
industries due to environmental liability concerns.
DIVE DEEPER
Click on the Job Aid link to review the Duties of an Executor Job Aid.

DESIGNATING GUARDIANS AND CUSTODIANS

In some provinces, wills normally specify the testator’s choice for a guardian or custodian if there are any minors or
disabled dependants involved.
In Quebec, the testator can designate a tutor for his minor children. It is not applicable for disabled dependants.
Prior to specifying an individual as a guardian, the testator should discuss it with the individual to ensure he or she is
willing to take on the responsibility.
In addition, the testator should consider whether the guardian is someone the children would want to live with
and whether there is adequate financial funding to support the children while in the guardian’s custody. This clause
merely indicates the testator’s wishes, and within a certain time period, usually within the first 90 days, the guardian
has to be approved by court order. This is a deliberate opportunity for other concerned parties to bring to the court’s
attention any reason why the proposed guardian or custodian might not be in the children’s best interest.
While it might be presumed that will makers would keep the appointment of guardians up to date, guardianship is
a matter that the court takes very seriously and it will overrule the expressed wishes of the deceased if there is good
reason to do so, in the best interests of the children.
DESIGNATING TRUSTEES
If a trust is set up based on the provisions of a will, trustees, as well as alternate trustees, should be designated.
In most cases, the trustee can be the same person as the executor, or the spouse or guardian, depending upon the
situation.
EXAMPLE
Johann, a widower, is leaving his estate in equal shares for the benefit of his three children, two daughters and a
son. He has named his lawyer as his executor.
Johann is concerned because his son is mentally challenged and unable to manage his own financial affairs.
He looks to Bryan for guidance. Bryan suggests that Johann provide in his will that his son’s one-third share of the
estate be transferred to a trust on his behalf and name his daughters, not his lawyer, as the trustees.
There will be times when a trust will need to be established for a beneficiary who is a minor or mentally
or physically challenged.
If assets are left to minor children and no trustee is named, the court will appoint a public trustee to administer the
funds until the children reach the age of majority.
The surviving parent has no automatic legal right to administer the child’s inheritance. This may be difficult for the
surviving parent or guardian, who then has to make a formal application to the court when money is needed for
raising the children. However, the surviving parent or any other responsible party may apply to be appointed as
guardian of the property of the minor or incapable, as the case may be.
In the province of Quebec, if no trustee is appointed, the tutor will be responsible for the administration of the
legacy until the minor reaches the age of majority. The surviving parent has an automatic right to act as tutor for his
children. Other rules in the Civil Code provide for the appointment of an alternate tutor.

INTESTACY
4 | Explain the process and implications when a person dies intestate.
There are many reasons why a person may be considered to have died intestate (died without a will):
• He or she may have never made out any sort of will.
• He or she may have a conventional or formal will which was improperly signed or witnessed.
• He or she may have had a will which has been revoked, deliberately or unknowingly.
• He or she may have a form of will which is not valid in the jurisdiction where he or she dies (and resides at
that time).
• He or she may have a will worded so that it does not effectively dispose of all property.
• He or she may have a will, but the beneficiary may have predeceased, and the will makes no provision for
that eventuality.
• In some rare circumstances, a will may be traced to a client’s possession but cannot be found and a presumption
of revocation may be applied.
• Assets which pass automatically to a designated beneficiary, such as life insurance proceeds or registered
plans, are not directly affected by intestacy. However, if the named beneficiary has predeceased, then in most
situations, unless an alternate or contingent beneficiary has been named, the property will revert to the estate
of the property owner and be governed by the intestacy.
In Quebec, an intestate succession is also referred to as a legal devolution.
FAILURE TO MAKE A WILL

There are many reasons why people die intestate.
It could be because they are superstitious and cannot bring themselves to confront even the thought of dying.
Perhaps they see no reason to spend time, money and effort on a document that can only benefit others.
For many young parents, it may be because they view a will mainly as a vehicle to appoint a guardian of minor
children and, since they cannot agree with their spouse upon a common candidate, they do nothing.
There may be some uncertainty or conflict in their minds about what to do with their estate, so they choose to do
nothing.
Most people would agree that being intestate is not as good as having a valid will, but that may be the only thing
they can agree on. Often, they may put off making the potentially difficult decisions today by claiming that they will
make a will later.
IMPACT ON THE ESTATE BY DYING INTESTATE

All assets that must go through the deceased’s estate are subject to division as per intestacy legislation. Assets in
one name alone, which do not have any beneficiary designation, are generally controlled by a will or by the absence
of one.
Some assets, such as RRSPs, insurance proceeds and, in common law provinces, jointly held property with rights of
survivorship, can be passed directly to a designated beneficiary without having to go through the estate.
It is true that for some people the act of dying intestate actually turns out not to be a disaster. In fact, many people
plan their estates so that the presence or absence of a will has little effect after their death. If all the property of a

deceased passes automatically to the desired beneficiary without a will, isn’t it hard to argue that dying intestate is
a tragedy?
However, for many other people, an intestacy does represent a disaster to those left behind:
• The desired beneficiaries may not inherit
• Messes are created that could easily be avoided
• Tax may become payable earlier than need be
DISTRIBUTION OF ASSETS WITHOUT A VALID WILL

Without a valid will, assets are distributed by the courts in accordance with provincial intestacy laws.
Aside from determining who will receive what share of the deceased’s assets under the provincial intestacy laws,
other federal and provincial statutes, as well as the courts, will also determine when assets must pass and how they
will be invested and managed during the estate administration process.
Under our constitution, laws relating to property and civil rights are under provincial jurisdiction. Therefore, the
question of who inherits what will have a different answer in different provinces.
Federal income tax legislation, on the other hand, will affect all intestate estates in the same way.
If an individual dies without a valid will or if a valid will cannot be located, an intestacy results and certain
procedural requirements (a court application) will be necessary before anything can be done with the assets of the
deceased.
PROVINCIAL STATUTORY REQUIREMENTS WITH AN INTESTACY

In the event of an intestacy, certain provincial statutory requirements are triggered, such as:
• Court Appointment—In common law provinces, if a person dies intestate, the provincial court selects an
administrator to administer the estate, as well as a guardian for any minor dependants.
In Quebec, if a person dies intestate, the law identifies the heirs. The heirs must act as liquidators or must select
a liquidator (by majority vote). Should the heirs find themselves unable to agree on a liquidator, the proceedings
are the same as discussed above for common law provinces.
No one is in charge of the intestate estate until he, she or it (in the case of a trust company) is appointed by a
court order.
Eventually, after someone suitable applies, the court appoints one or more parties as Estate Administrator to
administer the estate.
In a separate but related proceeding, one or more persons may apply for custody of minor children. While the
term “guardian” is commonly used, in some jurisdictions the correct term is “custodian,” since they are the
person acquiring custody.
In yet another aspect of court proceedings, a person may apply to the court to be appointed as guardian of the
property of minor beneficiaries, to manage their property until the minor(s) reach the age of majority.
• Entitlement—The court has broad discretion as to who is appointed as the administrator of the estate, but
practice in common law provinces demonstrates that the order of priority usually is as follows:
Surviving spouse (in Ontario, Saskatchewan, Nova Scotia and British Colombia this also includes a common-
law spouse; this is not the case in Quebec)
Child
Grandchild or other descendants

Father
Mother
Brother or sister
If there are no next of kin at all, a provincial government office may apply to administer the estate.
In some cases, even creditors may apply to be appointed, in order that steps are taken to get the estate wound up.
Another problem with intestate estates is that there may be several parties who each have an equal right to be
appointed. For example, if there are five children, all of them would rank equally to apply to the court. This means
that there is a possibility that they all be appointed together. Having all five-take office would probably result in a
difficult situation from a logistical perspective; for example, unanimity of action, including five signatures, would be
required on everything. Furthermore, the chances of conflict arising would be very substantial.
Once appointed, an administrator may employ an alternative such as a trust company to act in the capacity of an
agent. This is often done if there are substantial assets, or real estate, that require professional management.
PROBATE
5 | Describe the rules and process of probating a will.
Probate is the legal process by which the courts confirm a person’s will to be his or her valid last will and testament.
In the process, probating a will also validates the authority of the executor.
Wills that have been properly signed and witnessed, assuming they were prepared by mentally competent
individuals, are valid without Letters Probate if they have not been revoked by a later will.
However, financial institutions have no way of knowing if any particular document is the last will, even if the person
presenting it believes that to be the case. For this reason, financial institutions are usually very reluctant to turn
assets over to an executor named in a will unless there is some extra affirmation of the validity of the document
being presented.
Thus, while a proper will is valid without any further formality, many wills are subject to being probated so that third
parties will rely upon them and release assets to the named executor.
In Quebec:
In common language, the term “homologation” may be heard across the board but the precise one is also probate
in English.
One should note that the legal terminology of the Civil Code creates a difference between probate (“verification” in
French) and homologation. The term “homologation” (in English and in French) is used when referring to mandates
i.e. the process by which the mandator’s incapacity is recognized and mandates given in anticipation of the
mandator’s incapacity are validated).
The main purposes of probate in the province of Quebec is to:
• Determine that a will appears to be the last one and that its form is valid;
• Make the will public by filing it in the court archives;
• Obtain certified true copies of the original.

The probate process is required for:

• Holograph wills and/or wills made in the presence of witnesses.
• Wills prepared or drafted by a lawyer as they are classified as wills made before witnesses.
• Changes made to the initial will by means of a codicil and the latter is holograph or made before witnesses.
There is no need to probate a notarial will.

Probating a will does not prevent any judicial contestations related to its content.
LETTERS PROBATE
Once the fair market value of an estate has been reasonably ascertained, the executor or liquidator must apply
either personally or through a lawyer for Letters Probate from the appropriate court in the relevant jurisdiction.
Letters Probate are not required for a notarial will.
This is basically a court order declaring who the executor is and that the will is the effective one.
Letters Probate, sometimes referred to as a Certificate of Appointment of Estate Trustee, are perceived to
validate the will and, therefore, give the executor authority and control over an estate’s assets and liabilities, so that
he or she may administer the estate.
The Application for Probate takes the form of a sworn document reciting necessary details about the deceased and
the estate, justifying the court in granting Letters Probate to the applicant.
It contains assurances to the court that a diligent search has been made for a later will or codicil and that the
applicant is sure there are none. This search can be a time-consuming one, especially in jurisdictions where
holograph documents are permitted.
PROBATE PROCEEDINGS IN QUEBEC

A will can be probated by way of a motion to the court or by a notary.
If the process is handled by the court, the first step is to prepare an “Application for the Probate of a Will.” This
application can be prepared by a lawyer, a notary or the liquidator.
The Application for the Probate of a will is presented before a judge or the clerk of the Superior Court of the judicial
district in which the deceased was domiciled. If this domicile is not in Quebec, it will be presented before the court
of the municipality in which the testator died, or of the judicial district in which he left property.
Barring exemption from the court, the application for the Probate of a Will must be brought to the attention of all
known heirs or successors so that they may intervene if need be.
DOCUMENTS NEEDED FOR PROBATE

The following are submitted either as part of or as supporting documents to the Application for Probate:
• The Last Will and Testament
• An Affidavit of Value of the estate (or, in some jurisdictions, an inventory of estate assets)
• An Affidavit of Execution of Will (by one witness) confirming that the formalities of signing were observed
Debts of the estate other than mortgages on real estate are not deductible in computing probate fees.
Estates, like will makers, can be insolvent or bankrupt. Even insolvent estates might appear to be liable for
substantial probate fees. However, since there would be no funds to be recovered by the beneficiaries, it is unlikely
that any executors who are beneficiaries will take out Letters Probate in such cases.

Probate is an old legal word meaning “proof,” and Letters Probate are simply proof, from a court, that a will is the
last will.
APPLICATION FOR PROBATE IN QUEBEC

The person initiating the application for probate must include the following documents:
• The original will;
• A copy of the death certificate;
• A sworn statement (or affidavit) by the applicant;
• A proof that notice of the request for probate has been sent to the heirs and successors.
In the case of a holograph will, a sworn statement (or affidavit) by a legally competent person attesting to the
authenticity of the handwriting and signature of the deceased must also be provided.
The competent person called on to attest to the authenticity of the handwriting and signature of the deceased
cannot be an heir.
For a will made before witnesses, a sworn statement must be submitted by one of the two witnesses having
countersigned the will to the effect that the matter was made in accordance with the law.
Once the will has been probated, the court clerk of the Superior Court keeps the original and hands a certified copy
to the applicant. From this point on, the liquidator can begin managing the succession.
Similar requirements and statements will be needed where the probate process is handled by a notary rather than
by the court. A certified copy of the will and statements will also be kept by the clerk of the Superior Court.
DISADVANTAGES OF HAVING TO PROBATE A WILL

One of the disadvantages of having to probate a will is the fact that court filings are normally a matter of public
record. Thus, once a will has been probated, anyone can gain access to the terms and conditions of the will and an
inventory of the deceased’s assets passing through the estate.
In Quebec, the proceedings are usually registered with the court of Quebec. Once the will has been probated,
anyone can view the terms of the will.
In common law provinces, assets of substantial value may still pass outside the estate by designated beneficiary
or joint tenancy, for example. These assets are not included in the value of the estate passing under the will and,
therefore, are not included in these proceedings.
THE PROCESS OF PROBATING A WILL

In most jurisdictions, there is no actual legal obligation to obtain probate. However, the executor may have no
choice but to submit the will for probate. This will often depend on whether assets can be administered without it.
Certain assets will normally require probate before the issuer, custodian or transfer agent will permit the asset to be
liquidated or transferred. This is typically true of such assets as:
• Real estate
• Funds on deposit at a bank, trust company, or other financial institution
• Securities like shares or bonds issued by public corporations
In other words, even in situations where Letters Probate are not a legal requirement for transfer of an asset at the
instruction of the executor, probate may be a practical requirement on the part of the issuer of the asset.
For example, many banks will require probate, even in jurisdictions where it is not a legal requirement, before they
will release funds on deposit in an account or term deposit, RRSP, etc.

The reason that most issuers of assets require probate is that they want to ensure that any instructions they are
given with respect to a deceased client’s assets are being issued by the legally valid representative of the deceased.
If a bank were to pay out money to the presumed executor of an unprobated will, and it later turned out that the
will was held not to be valid, the bank could be held liable to the ultimate beneficiaries of the estate for the funds
that it had wrongly disbursed.
Unfortunately, even if only one estate asset requires probate, the inventory submitted to the probate court
must include all assets which pass through the estate, and it is this aggregate value upon which probate fees are
calculated.
As a consequence, in situations where the probate and legal fees incurred in probating the will exceed the value
of the asset requiring probate, it might be prudent to simply forgo an estate asset if it is the sole asset requiring
probate.
EXAMPLE
Miguel’s estate is worth $200,000, but most of it is personal property (jewellery, art, etc.) and shares in his
family’s private business. He also owns $2,000 in shares of a public company.
Miguel’s domicile at the time of his death will be Ontario.
If Miguel’s executor were to probate his will in order to be able to liquidate the public shares, the probate fees
charged on the full estate ($2,500) would be greater than the value of the shares ($2,000).
In such a case, the estate would lose $500 by probating the will versus simply not bothering to liquidate the
shares. This is assuming the will contained the authority permitting the executor to abandon certain assets not
worth collecting.
In some cases, where the estate assets are all in the form of cash or personal effects, or the assets are
all issued by other family members (for example, shares of a private business), it may not be strictly
necessary for the executor to probate the will.
LETTER OF INDEMNITY AND PROBATE BOND

If the amounts involved are relatively small, under $30,000 for example, a financial institution may be willing to
accept a letter of indemnity or a probate bond from the executor in lieu of Letters Probate.
A letter of indemnity is an enforceable promise to reimburse the financial institution from all costs, claims,
expenses, etc. that may be triggered if the will turns out not to be valid.
Executors who are not also beneficiaries would not be wise to sign such an indemnity.
A probate bond is a promise by a bonding company to do the same.
PAYMENT OF FUNERAL EXPENSES

Banks and trust companies will generally pay the funeral expenses out of the deceased’s account without first
requiring evidence of probate. This is because funeral expenses are a first charge on the estate, under any will.
THE APPEARANCE OF ANOTHER WILL AFTER PROBATE

The executor wants to ensure that the will is probated prior to disbursing funds, as a protection from potential
lawsuits if it turns out that the will in question is invalid or has been superceded by a later will. If that is the case,
disbursements made under the former invalid will would have been made in error, an error for which the executor
who made the payments may be personally liable.

Where a will has been probated, if a valid will later turns up and it turns out that Letters Probate have been granted
in error, they will be called back in by the court and new Letters Probate granted. In this case, financial institutions
and others who dealt with the erroneous Letters are protected from liability since they acted under the authority
and protection of a court order.
Probate allows the court to determine that it is truly the last will and testament of the deceased.
In Quebec, a holograph will or a will made in the presence of witnesses must be probated following the testator’s
death by the Superior Court or by a notary. Probate allows the court to determine that it is truly the last will and
testament of the deceased. This procedure is not required for a notarized will.
PROBATE OF CODICILS
When changes have been made to the initial will by means of a codicil and the latter is in the hand of the testator or
made before witnesses, the modifications must also be probated.
PROBATE FEES
In theory, probate fees are a tariff charged by the provincial courts to reimburse them for the administrative costs
incurred in probating a will. The fees are paid out of the assets of the estate.
CALCULATING PROBATE FEES

In common law provinces, the probate fees charged are based upon the fair market value of the estate’s assets as of
the date of death. The court’s probate fees in Quebec are charged at a “flat fee”.
Generally, with the exception of mortgages on personal real property (a house, for example), probate fees are based
on the gross value of the estate assets, with no allowance made for outstanding debts of the deceased at the time of
death.
EXAMPLE
Marguerite died owning a $200,000 house with a $50,000 mortgage and $20,000 in Canada Savings Bonds, and
owing $10,000 on her credit accounts.
The probate value of her assets would be $170,000 ($200,000, plus $20,000, less the $50,000 mortgage).
In many provinces, the probate fees charged on a large estate will be significantly greater than the fees
charged on a smaller estate, even though the amount of administrative expense incurred by the courts in
either case may be virtually identical.
Because in many cases the probate fees charged are well in excess of the actual cost of the administrative process
involved, they are often seen as a form of hidden death tax.
Additionally, since probate fees can vary so dramatically from province to province for the same value of estate,
probate fees are often seen to be inequitable, in addition to being excessive.
For example, a one-million-dollar estate would attract probate fees of $14,500 in Ontario and only $7,000 in
Manitoba.

WILLS
Here are four types of wills:
1. Holograph
2. Conventional or formal or made in the presence of witnesses
3. Notarial
4. International
Establishing domicile is a legal requirement for the formal validity of a will and is governed by either the place where
the will is made or where the testator is domiciled, if different.
Testamentary freedom is the freedom to will property away. Some things to consider include:
• Testamentary capacity and undue influence
• Family law and dependants relief claims
• Rights of dependants other than the spouse
• Public policy
A will can be revoked at any time up until death. There are many events which should prompt a testator to review
and revise their will. Rather than rewriting it, codicils and memoranda may be added.
The decision of who or what to appoint as executors/liquidators and guardians should not be taken lightly.
There are many reasons why a person would die intestate. Writing a will ensures that your property and assets are
distributed as you would have wanted.

When Mr. and Mrs. Carlton meet with Bryan to discuss the preparation of their wills, Bryan encourages them to
write down a list of their assets and decide how they would like them to be distributed.
Bryan then urges them to seek legal counsel in order to formally prepare their wills in the event that anything
should happen to them.
Mr. and Mrs. Carlton are pleased that Bryan took the time to explain the process to them. They feel that he is
looking out for their best interests in ensuring their assets will be distributed according to their wishes.
PURPOSE OF POWERS OF ATTORNEY
6 | Describe the purpose of a power of attorney.
As the average life span of Canadians increases, it follows that more Canadians are living to ages where, due to
physical and/or mental incapacities, they are unable to look after their financial or personal affairs. Therefore,
incapacity planning has become a more important part of estate planning.
The certainty of death is the motivating factor behind most, if not all, estate planning. Mental or physical incapacity,
while not a certainty, may nevertheless have serious and expensive consequences for an individual who has neither
anticipated nor planned for it. As a result, planning for a power of attorney or other methods of appointing
substitute decision makers may be as important to your clients as making a will.

When you learn about how a power of attorney works, you can provide your clients with the information they need
to ensure that their spouses and dependants are not left without control of assets during the period of incapacity.
EXAMPLE
In January, Morris, who is single, owned 10,000 shares of a high tech computer support company, which he had
bought a year earlier for $10 a share and were now worth about $250 a share.
During their discussions, Bryan had Morris execute an enduring power of attorney appointing his brother.
As a new millionaire, Morris contracted for a new home for $700,000 and fulfilled his dream of owning a vintage
Harley-Davidson motorcycle.
Unfortunately, Morris’s driving skills did not match his investment prowess and he was soon involved in an
accident that left him in a coma for six weeks.
If Morris didn’t have a power of attorney in place, his brother would have had to apply to the courts to get
permission to deal with his financial portfolio.
The value of Morris’s stock dropped from $250.00 a share to $60.00 a share. If there was no power of attorney,
Morris would have awoken from his coma to find that not only was he no longer a millionaire, but he didn’t even
have enough money left to pay for his new house.
OBJECTIVES OF A POWER OF ATTORNEY

Wills, powers of attorney, and living wills (also sometimes referred to as personal care powers of attorney)
all share the objective of ensuring that an individual’s financial and family interests are taken care of in case of a
contingency such as illness or death, without having to seek court approval after the fact for the appointment of a
substitute decision maker or property administrator.
They are distinguished by the fact that the legal effectiveness of powers of attorney and living wills commence
during the grantor’s lifetime and terminate upon his or her death, while the will has no legal effect until after the
testator’s death.
INCAPACITY
Although the technical definition of incapacity varies slightly from province to province, as a general rule a person
is considered mentally incapacitated if he or she is unable, by reason of mental infirmity, to solely manage his or her
affairs, including financial affairs.
While clients may suppose that mental incapacity is the only situation to be managed through power of attorney,
there are, in fact, a whole host of intervening physical situations, ranging from a broken leg to being absent from the
country on vacation, that can be facilitated with a power of attorney. These are very flexible documents that can be
tailored to aid in many diverse situations.
POWERS OF ATTORNEY FOR PROPERTY AND MANDATES
7 | Describe the rules and uses for powers of attorney for property and mandates.
A power of attorney (also called mandate in Qc) is a document in which a person (the grantor/donor/ mandator
in Qc) gives written authority to a named individual(s) or a corporation (the attorney/donee/mandatary in Qc)
to act on behalf of the donor. With a power of attorney, the attorney has the legal power to make decisions and
to perform all actions – or only a certain type of action – on behalf of the grantor. Property, in this connotation,

includes not just real estate but any assets that the individual might own, such as securities, bank accounts,
furniture or jewellery.
Powers of attorney for property vary from province to province and from state to state. Accordingly, clients with
assets in more than one jurisdiction should be counselled to consult with lawyers in those jurisdictions to ensure
that appropriate substitute decision mechanisms are in place.
ENDURING OR CONTINUING POWERS OF ATTORNEY

In the common law provinces, the most commonly used tool in planning for mental incapacity is the power of
attorney for property and financial matters, sometimes called an enduring or continuing power of attorney.
The fact that the power of attorney is to be enduring (that it specifically continues in force during the incapacity of
the grantor) must be spelled out in the document. Otherwise, the powers granted under the PA cease to be valid
when the grantor ceases to have mental capacity, which is when the PA is needed most.
MANDATES AND PROTECTION MANDATES

In Quebec, two powers of attorney, or “mandates,” may be required:
1. Mandate: one that is effective while the donor is capable and
2. Protection mandate (known as mandate given in anticipation of incapacity): one that becomes effective if the
donor becomes incapacitated.
The mandate allows a person in full capacity, the mandator, to entrust another, the mandatary, administer her
assets or to represent her in her absence, or for any other circumstances.
This mandate is effective upon signature and loses validity if and when the mandator loses capacity.
In a protection mandate, the mandator can appoint a mandatary to care for her and/or administer her assets should
the mandator become incapable of doing so. The protection mandate is made by a notarial act or in the presence of
two witnesses.
The protection mandate will take effect only upon the mandator’s incapacity and will be effective only after review
by the court in a procedure named homologation. The purpose of the homologation procedure is to ascertain the
incapacity of the mandator and the validity of the mandate.
For ease of reading, the term power of attorney will be used throughout this section and will normally include the
different types of powers of attorney and mandates.
SCOPE OF THE POWERS OF A POWER OF ATTORNEY

Although laws differ from province to province, it is generally the case that powers of attorney for property grant
the attorney incredibly wide powers and decision-making abilities, unless the document itself is expressly limited or
restricted to certain activities.
Essentially, with the exception of making or altering a will, a person who has power of attorney can make any
legal commitment that the grantor could make, including buying and selling assets, borrowing money and signing
contracts.
CONSIDERATIONS WHEN CHOOSING THE RIGHT PERSON AS A POWER OF ATTORNEY

The choice of attorney or, in Quebec, a mandatary, in terms of trustworthiness and competencies, is of the utmost
importance since the attorney will be making decisions that will have direct bearing on the individual’s financial
welfare and, if relevant, the welfare of the individual’s dependants.

In Ontario, for example, unless the relevant power of attorney is expressly restricted, an attorney is legally capable
of doing anything on behalf of the incapacitated individual, assuming it is for the benefit of the individual or the
individual’s dependants, other than making or changing the individual’s will.
In Quebec, the contents of the mandate depend on the wishes of the mandator. A mandatary can be appointed
to take care of the property or the person, or both in case of incapacity. The mandate may be general or specific.
Therefore, the mandatary may administer all the property or simply follow a list of what is to be administered or
done.
While this broad language is used in the law, there is actually still an open question about whether or not powers
of attorney can make or change beneficiary designations on registered plans and life insurance policies. Because of
some cases in other jurisdictions, which held that such designations were very close to making a will, the current
position of life insurance companies generally is that a power of attorney may not affect beneficiary designations.
While the documents themselves are quite simple, the effects that powers of attorney may have are quite
significant. Unfortunately, financial abuse by powers of attorney is increasingly common, and it should not be
assumed that everyone has suitable circumstances for the appointment of a substitute decision maker by using a
power of attorney.
Clients should be encouraged to seek legal advice before executing powers of attorney. In some provinces, the
execution of even a bank form of power of attorney can accidentally revoke earlier so-called general powers of
attorney.
In essence, most of the considerations that go into the selection of an attorney are the same as those for an
executor. In fact, acting as a substitute is probably harder. Since most attorneys are close family or friends, the
opportunity for painful and destructive conflict is immense.
Furthermore, it is often very unclear whether an injured or ill person will return home from hospital and, therefore,
the attorney is often placed the difficult position of making important decisions, such as whether or not to sell the
grantor’s home.
RESPONSIBILITIES OF THE ATTORNEY OR A MANDATARY

Responsibilities are limited to those listed in the power of attorney document. The power may be granted to more
than one attorney, in which case the agents would act jointly or independently or both, depending on what the
document specifies.
In some provinces, the power is nearly full and there is no specific form required, nor is there any requirement in
terms of listing the powers to be exercised. If there are limitations, conditions or restrictions, they must be listed.
The power of attorney and mandate usually take legal effect immediately. The power of attorney for property will
be used when the grantor becomes incapacitated due to an accident or illness if the enduring terms are mentioned.
As mentioned previously, a protection mandate will take effect only upon the mandator’s incapacity and will be
effective only after homologation. It is no longer valid when the incapacity ends or upon the death of the mandator.
As soon the protection mandate is homologated, any mandate which had been effective for that mandator will no
longer be valid.
It is often prudent to name more than one person as attorney. They can audit each other to ensure that the powers
are exercised in the best interests of the grantor. Additionally, if one attorney is away or becomes incapacitated, the
other can step in and take over without the delay of waiting for the courts (Public Curator in Quebec) to appoint a
new attorney.
The good news about having the attorneys operate jointly is that the need for all to concur provides a source of
checks and balances on the exercise of the powers granted. The bad news is that all must be available and willing to
concur before anyone can act. Granting the attorneys independent power to act is more flexible but comes at the
expense of the checks and balances.

OTHER REASONS FOR GRANTING POWER OF ATTORNEY

While the emphasis to this point has been on incapacity planning, it is important to note that your clients may want
to appoint someone as an attorney to act on their behalf if they are away or otherwise unable to be present for
financial transactions.
EXAMPLE
Sid is a Canadian “snowbird” and vacations every winter in Florida. Since he is out of the country, Bryan
recommends that he authorize his attorney at home to deal with the anticipated sale of his house in Toronto and
no other matters until May 1, Sid’s expected return date.
If you are out of town, it may be a good idea to have a local power of attorney appointed to take care of
specific matters for you.
RESTRICTING AND ENDING POWERS OF ATTORNEY AND MANDATES

A power of attorney can be tailored and restricted to permit the attorney to transact only specific aspects of the
grantor’s affairs or to have power over only specific assets or until a specified date.
EXAMPLE
Abdul is going on a Caribbean vacation for three months. Bryan suggests that Abdul draft a power of attorney for
January 1 to March 31, the time he will be away.
Abdul grants his brother, Hanif, power of attorney over his bank accounts only.
Discretion regarding trading in Abdul’s brokerage account is left to Bryan.
It is possible to appoint different powers of attorney to deal with various issues.
An attorney may resign by applying to a court or may be asked to resign by the court if a public trustee or someone
with an interest in the estate applies to the court for such a request.
In such a case, the attorney would be replaced by any alternate attorney named in the PA (if any) or by a committee
appointed by the courts.
The grantor of a PA, if competent, can revoke the document and cancel the authority of the attorney at any time, by
written notification.
In Quebec, a mandatary for a protection mandate cannot resign from his or her duties as per the mandate without
having found a replacement mandatary. Otherwise, before relinquishing his or her responsibilities, the mandatary
must first apply for the institution of protective supervision. For example, the mandatary could ask the Public
Curator to act as a substitute.
For a mandate, the mandatary need only advise the mandator of his resignation.
ACCOUNTABILITY OF THE POWER OF ATTORNEY OR MANDATARY

In the event of the grantor’s incapacity, the attorney becomes accountable to the court rather than the grantor
since the grantor would no longer be competent to assess the adequacy of the performance of the attorney. The
power of attorney ensures that the grantor’s financial interests are protected in case of a temporary or permanent
illness.

In Quebec, in the event of the mandator’s incapacity, the mandatary becomes accountable to the heirs at the end of
his or her administration. He or she is not subject to a periodic accounting to the Public Curator.
It is often a good idea to indicate in the mandate that the mandatary be held accountable to a third party.
JOINT AND SUBSTITUTE ATTORNEYS OR MANDATARIES

There are obvious risks in granting someone the power of attorney over property. Having more than one attorney
or mandatary reduces the risk of fraud or poor decisions. On the other hand, having more than one may result in
deadlocks if the attorneys can’t agree.
Without provisions in the power of attorney to resolve such disputes, there is a need to apply to a court to make a
decision. Also, timely decisions cannot be made in the event one attorney is away.
A person may have a long period of incapacity prior to death and the attorney or mandatary may not be able, or
willing, to act for any or all of the period. A substitute attorney should be named to avoid the costs and delays of
applying to a court to name a substitute.
DECLARATION OF INCAPACITY
A power of attorney or mandate usually takes effect immediately when it is executed. Normally, the attorney does
not exercise his or her authority except in the event of the incapacity of the grantor.
Some powers of attorney are drafted in such a way that the power of attorney comes into effect, granting the
authority of the attorney to act, only upon the declaration of incapacity. Such a declaration is to be made by an
independent person, such as a family doctor named in the power of attorney. Third parties are able to accept the
power of attorney upon receipt of this declaration.
In Quebec, two conditions must be fulfilled for a protection mandate to be executed:
• The mandator must be incapable of taking care of herself or of administering her property.
• The mandatary must have the mandate homologated in court.
A medical evaluation and a psycho-social evaluation are required to obtain homologation.
IMPORTANCE OF KEEPING RECORDS OF THE POWERS OF ATTORNEY

It is very important that a record be kept of when and to whom a power of attorney has been given.
If a power of attorney is revoked, it is important that all copies of the document be destroyed and the appropriate
third parties be notified.
It would not be in the best interest of all parties involved for the advisor to act as a client’s attorney under a power
of attorney. It is the role of the advisor to explain to the client the various advantages and risks associated with the
different types of authority and structures available under a power of attorney.
If a client seems to be becoming more and more confused in the management of his or her affairs, the advisor
should document evidence of these concerns and communicate it to the client’s family, lawyer or notary.
POWERS OF ATTORNEY FOR PERSONAL CARE AND LIVING WILLS
8 | Describe the rules and uses for powers of attorney for personal care.
Within the last few years, many provinces have passed legislation that enables individuals to appoint other persons
to make personal care decisions for them when they are no longer capable of making such decisions for themselves.
Such documents are a special form of power of attorney and are sometimes called powers of attorney for personal
care.

LIVING WILLS AND ADVANCE CARE DIRECTIVES

Powers of attorney for personal care are sometimes referred to as living wills. However, they are not always
synonymous, as the term “living will” is not recognized in most provinces as a legal document but rather as a simple
document that may express wishes about future medical care or treatment.
Another term which may be encountered under the discussion of living wills is an advance care directive or
advance healthcare directive. This is a form of legal document by which a person seeks to consent to, or refuse,
medical care or treatment in advance of need.
In Quebec, a protection mandate can include both provisions regarding the personal care as well as the property of
the mandator.
Contrary to the protection mandate, the living will does not designate a specific person to make these decisions in
her place.
DIFFERENCE BETWEEN POWERS OF ATTORNEY FOR PERSONAL CARE

AND POWERS OF ATTORNEY FOR PROPERTY
Unlike powers of attorney for property, these powers of attorney deal with personal care issues.
Similar to a protection mandate, the powers of attorney for personal care authorize the substitute decision-maker
to make decisions on behalf of the incompetent person regarding living arrangements as well as matters pertaining
to such things as food and clothing. They also enable the substitute decision-maker to sign the consent-to-
treatment form required by the hospital for surgical treatment.
A corporate attorney cannot be given and would not accept such an appointment. Typically, and unlike the powers
of attorney for property and financial matters, an attorney for personal care will not be capable of using the
authority provided by the power of attorney until such time as the individual has become mentally incapacitated.
The rationale here is that until a person is mentally incapacitated, only he or she can make decisions regarding living
arrangements, food and clothing, medical treatment and matters pertaining to the cessation of life support.
In Quebec, it is possible, within the same document (the protection mandate) to designate different people to
administer property than those to administer personal care decisions.
DECISION MAKING POWERS

Perhaps the most provocative aspect of this special form of power of attorney is that it will allow the substitute
decision-maker to decide whether or not life support is to be maintained after a serious affliction or injury.
This reflects the common law courts’ recognition that individuals have the right to specify, in advance, the extent of
the medical treatment that they wish to receive at some future time.
The purpose of specifying certain contingencies in advance is not to abrogate the powers of the attorney, but rather
to provide direction and clarity to the attorney in the exercise of such a serious and delicate authority, such as the
power to request the removal of life support systems. This is basically the approach used in Quebec for a protection
mandate.
Living wills and advance care directives may be endorsed by the Canadian Medical Association. A doctor should be
consulted in drafting one. Instructions should be very specific.
If instructions are clear enough, treating medical personnel are required to abide by the instructions.
However, instructions for steps such as euthanasia are not likely to be followed because under current Canadian
law, although physicians are allowed to write do not resuscitate (DNR) orders upon the direction of a competent
patient, to give such instructions while the patient is incapable still amounts to murder in Canada.

Such vague language as “no heroic measures should be taken to preserve life” should not be used because it raises
confusion as to the standard by which a heroic measure is judged.
Treating someone against their express wishes is the common law tort of battery, roughly equivalent to the criminal
charge of assault. Advance Directives attempt to record for future use the types of treatment that would, or would
not, be acceptable under various scenarios.
It would then be the job of the power of attorney for personal care to try to ensure those directives were carried out,
assuming the patient was no longer capable of making his or her own decisions.
EXAMPLE
Tim, a 90-year-old severely ill man in a coma after a massive stroke, contracts pneumonia. Bryan had suggested
that Tim grant his son, Leo, power of attorney over his personal care and health care decisions. Bryan had also
recommended he complete an advance care directive specifying that treatment other than for comfort should be
withheld should he lapse into such an irreversible coma.
As a result, with Leo’s concurrence, Tim will not be given antibiotics to fight the pneumonia but will be kept
comfortably sedated and allowed to die a peaceful death.
Establishing a power of attorney over personal care and health care decisions or a protection mandate
ensures that the person’s wishes will be carried out when they are no longer able to communicate due to
illness or an accident.
POWERS OF ATTORNEY:
Powers of attorney, including (in Quebec) mandates and protection mandates, may be granted over:
• the person’s property
• personal care
There are different levels of power that can be allocated as well as different time frames that can be specified.

Mr. and Mrs. Carlton now realize that they should have powers of attorney in case of emergencies to take care of
their assets and health.
They are pleased that Bryan explained powers of attorney to them and are confident they have enough knowledge
now to discuss this with their attorney or mandatary.

Risk Management and Life
Insurance 8
CHAPTER OUTLINE
Please note that advisors have to be careful when giving advice or direction in matters of insurance. Without
holding proper licenses and/or certifications from the relevant regulatory body, their ability to give advice in
matters of insurance is restricted.
1 | Discuss the nature and definition of risk. The Nature of Risk
2 | Explain the methods used to manage risk. Managing Risk
3 | Describe the types of risk. Types of Risk
4 | Describe how the life insurance industry is The Life Insurance Industry
regulated.
5 | Describe the various types of life insurance. Types of Life Insurance
6 | Assess a client’s life insurance needs. Understanding a Client’s Life Insurance Needs

KEY TERMS
active risk retention participating life insurance
Assuris passive risk retention
business interruption losses peril
convertible term permanent (whole) life insurance
decreasing term personal liability
depreciated value personal risk
direct losses policy dividends
endowment life insurance property risk
first-to-die pure risk
group life insurance renewable term
hazard replacement value
indirect losses risk (loss) financing
joint last-to-die life or survivorship risk frequency
legal liability risk management
level term risk severity
Life Licence Qualification Program (LLQP) risk transfer
loss avoidance speculative risk
loss control subjective risk
loss prevention term insurance
loss reduction universal life insurance
objective risk variable life insurance
Office of the Superintendent of Financial

Institutions (OSFI)

CHAPTER 8 | RISK MANAGEMENT AND LIFE INSURANCE 8•3
INTRODUCTION
Risk management is a fundamental element of financial planning. The goal of risk management is to minimize the
potential cost of risks that we all face by managing risk in the most efficient way possible.
If you are able to evaluate potential risks, you will be able to save your clients from the impact of these risks on their
current and future financial security.
You will want to have the necessary knowledge to be able to assist your clients in developing a risk
management plan.
Life insurance is a tool that can be used to manage the financial risk associated with an uncontrollable event
such as death.
Life insurance is a way of sharing the losses of a few people among many people through risk pooling. Many people
facing a similar risk each pay a small premium. The pooled funds are then used to compensate the few who have
contributed who actually suffer a financial loss.
In addition to the emotional anguish that accompanies the death of a family member, there is an immediate need
to pay the bills associated with death.
As an advisor you play an important role in providing guidance for your clients. You will have to be able to review a
client’s needs and to provide information on the various life insurance options and plans available to them.
THE NATURE OF RISK
1 | Discuss the nature and definition of risk.
DEFINING RISK
The definition of risk relating to financial planning is “uncertainty concerning losses.” Risk represents the
uncertainty, not the loss itself.
Risk can affect a person’s financial security and well-being.
DIFFERENT SUB-CATEGORIES OF RISK

The sub-categories of risk are as follows:
Sub-Category Description
Pure Risk Involves only the possibility of loss. Profit is not a possible outcome.
Speculative Risk Either a profit or loss is possible.
Subjective Risk Amount of pure risk that either an individual or company will assume.
Objective Risk The variance between anticipated losses and actual losses.
Insurance companies are in the business of insuring pure risks. Speculative risks are usually not insurable and other
risk management techniques must be used.

DETERMINING RISK
An expected loss can be estimated in advance, usually by employing historical statistical data. One example is
mortality tables, which estimate the number of deaths per thousand annually among a population.
With insurance policies, the cost of the premiums increase, in relation to subjective and objective risk.
PERILS AND HAZARDS

The following chart defines perils and hazards:
Description Examples
Peril is the cause of the loss. • Fire

• Automobile accident
• Theft
Hazard is the condition that creates or increases the chance • Driving a car with bald tires
of occurrence or the severity of loss when it does occur. • Storing combustibles in a home
EXAMPLE
An example of pure risk is:
Donna and Frank own a cottage on the banks of the Red River. Last year, their property suffered extensive
damage when flood waters broke the sand bag barriers built up around the property. Donna and Frank were
devastated and suffered a great personal loss.
An example of speculative risk is:
Tom purchased 100 shares of Tomahawk Industries. After Tomahawk Industries announced a loss of several
million dollars in profit, the shares plummeted several dollars per share in value. If Tom were to sell the shares
now, he would suffer a loss.
The following quarter, Tomahawk Industries makes a profit. As a result, the shares increase in value. If Tom were
to sell the shares now, he would make a profit.
EVALUATING WHAT RISK MEANS TO A CLIENT

The first step is for clients to identify the potential risks they face. They must then decide which risks they can
withstand and which risks require additional protection.
Each risk should be evaluated for:
• Severity of loss
• Frequency of occurrence
A loss is:
Supportable Unsupportable
If it does not affect an individual’s standard of living or If it does seriously affect an individual’s standard of
financial assets. living or financial assets.

Different risks may be of concern to different clients. For example, damage to household goods may be of
primary concern to new homeowner, while the loss of expensive art work may be more of a concern to a wealthy
homeowner.
EXAMPLE
Marjorie and Brent are newly married. They want to ensure that they are well protected from any risks that may
threaten their lifestyle and financial assets.
Brent has a family history of heart problems. If Brent were to get sick or die, Marjorie would not be able to
adequately support herself and could potentially lose the house.
After reviewing Marjorie and Brent’s insurance portfolio, Bryan suggests Brent take out a disability policy, if he is
insurable. Should Brent suffer heart problems, the policy would provide Marjorie and Brent with supplementary
income.
SEVERITY AND FREQUENCY OF RISK

Risk severity is the dollar cost of a loss. Risk frequency is the probability of a loss occurring.
Low-frequency, high-severity risks have a low likelihood of occurrence, but could cause severe losses should they
occur. For example, a young client never works again due to a total disability caused by a newly developed heart
condition.
Low-frequency, high-severity risks are best managed through insurance, because people are generally unable to
absorb the potential loss personally. Even though the loss is likely to occur infrequently, the severity of such a loss is
so significant that a single catastrophe could wipe out a client’s assets.
MANAGING RISK
2 | Explain the methods used to manage risk.
METHODS USED FOR MANAGING RISK

By managing risks, it is possible to minimize the cost of a loss.
Methods for managing risk include:
• Loss control
• Risk transfer
• Risk (loss) financing
THE LOSS CONTROL TECHNIQUE

Loss control is a planning technique that involves different strategies a client can employ to reduce or eliminate
their personal exposure to the risk of loss due to a wide variety of perils.

Loss control techniques fall into three basic categories:
Technique Description Example
Loss Avoidance Not exposing one’s self to a The loss of capital due to a stock market crash
particular risk can be avoided by investing in guaranteed term
deposits rather than in equities.
Loss Prevention Aims at reducing the frequency of The risk of loss due to a fire at a factory can be
loss while continuing to engage in prevented if flammable materials are stored away
the activity from an open flame.
Loss Reduction Aims at reducing the severity of a The risk of loss due to a fire can be reduced if a
loss once it has been incurred sprinkler system is installed. The sprinklers should
quickly put out the fire and significantly reduce
the amount of damage caused by the fire.
RISK TRANSFER
Risk transfer involves shifting the cost of the potential loss arising from the risk to a third party.
Risk transfer techniques that may be employed include:
Insurance Non-insurance
Insurance reduces risk through Unwanted risks can be transferred by contracts.
pooling.
One example is to transfer the risk of a defective refrigerator by purchasing
It is effected by means of a a service contract that makes the retailer responsible for all repairs after
policy contract that transfers the the warranty expires.
financial consequences of pure
Another example is to transfer risk by incorporation of a business. By
risk to the insurer, in return for the
incorporating, the liability of the owners is limited and the risk of having
premiums paid.
insufficient assets to pay business debts is shifted to the creditors.
RISK (LOSS) FINANCING

Risk (loss) financing relates to the cost of losses that may be incurred and cannot be avoided or prevented. The
cost of losses can be managed through a technique called risk retention, which can be either active or passive.
With risk retention, individuals or companies retain all or part of a risk by:
• accepting the cost of the risk if it should happen or
• planning to fund the costs in advance.
The following chart explains active and passive risk retention further:
Type of Risk Retention Description Example
Active The client is aware of the risk and A car owner with an older, low-value vehicle
deliberately plans to retain all or part retains the risk of loss by choosing not to
of it insure it against collision damage.
Passive Unknowingly retaining risks because Not realizing that his boat is not covered
of ignorance, indifference or under his homeowner’s policy, a man fails to
carelessness insure it against loss.

EXAMPLE
The following is an example of active risk retention:
Paul owns and drives a 13-year-old car with a market value of only $4,800. He insures the car for third party
liability. Paul does not take out collision coverage, as he feels that the value of the vehicle doesn’t justify the
additional premium cost. If Paul is in an accident, he will absorb the loss himself.
Most insurance policies have a minimum amount of loss called a deductible that must be borne by
the insured before the insurer becomes liable for payment under the terms of the contract. The insurer
subtracts the deductible amount from any loss claimed.
If the deductible is $500, and the insured is making a claim for $3,000 worth of loses, the insurance
company will only pay out $2,500. The insured is responsible for the first $500.
This provision can reduce the insurance premium quite a bit. It relieves the insurance company from the
administration and payout of many small claims.
RISK AND RISK MANAGEMENT:

The goal of risk management is to minimize the cost of risks we face by managing risk in the most efficient way
possible. As an advisor you will need to meet with clients to assess their exposure to possible risks and how they can
best effectively manage them.
A pure risk involves only the possibility of a loss. With a speculative risk, either a profit or loss is possible.
Each risk should be evaluated for potential severity of loss and frequency of loss. If a risk is unsupportable, the risk
will affect the standard of living or financial assets. Low-frequency, high-severity risks could cause severe losses
should they occur and are best managed through insurance.
Methods for managing risk include:
• Loss control
• Risk transfer
• Risk (loss) financing

Vince and Marcy are newly married and are expecting their first child in a few months. Vince works as an engineer
for a large car manufacturer. He has to travel frequently to Japan for business. Vince invests most of his money in
stocks.
Vince contacts Bryan to discuss what he can do better to manage any potential risks he may face in the future now
that he is a responsible family man with dependants.

VINCE ASKS BRYAN, “I WANT TO MAKE SURE THAT MY WIFE AND FUTURE CHILDREN ARE
PROTECTED IN THE EVENT THAT I DIE SUDDENLY WHILE TRAVELLING OR IF I BECOME DISABLED
AND UNABLE TO WORK.”
“THERE ARE SEVERAL THINGS THAT YOU COULD DO TO PROTECT YOURSELF AND YOUR FAMILY,”
RESPONDS BRYAN. “ONE WAY TO TRANSFER THE RISK OF LOSS TO SOMEONE ELSE IS TO
PURCHASE A LIFE INSURANCE POLICY WITH ADDITIONAL ACCIDENTAL INSURANCE COVERAGE.
ANOTHER SUGGESTION IS TO TAKE OUT A DISABILITY INSURANCE POLICY TO ENSURE THERE IS
ADDITIONAL INCOME IN THE EVENT YOU ARE UNABLE TO WORK.”
“THOSE ARE GOOD SUGGESTIONS,” VINCE ANSWERS. “I AM ALSO WORRIED ABOUT WHAT
WOULD HAPPEN IF I WERE TO LOSE MY JOB. WE WOULD HAVE A HARD TIME MAKING ENDS MEET.
I’M NOT SURE THAT WE WOULD BE ABLE TO PAY ALL OF OUR MONTHLY BILLS ON TIME, AND WE
MIGHT HAVE TO SELL THE HOUSE.”
BRYAN REPLIES, “I CAN SEE WHY YOU WOULD BE CONCERNED ABOUT THIS. WHAT I WOULD
SUGGEST IS TO START SAVING TOWARD AN EMERGENCY FUND EQUAL AT LEAST THREE TO
SIX MONTHS’ LIVING EXPENSES FOR UNEXPECTED OCCURRENCES SUCH AS A JOB LOSS. THIS
WOULD GIVE YOU TIME TO FIND A JOB WITHOUT DEFAULTING ON OBLIGATIONS WHILE YOU ARE
NOT WORKING.”
“THANKS,” VINCE RESPONDS. “I HAVE ANOTHER QUESTION. I CURRENTLY HAVE MOST OF

MY RETIREMENT SAVINGS INVESTED IN STOCKS. SHOULD I BE INVESTING IN MORE STABLE
INVESTMENTS SUCH AS GICS?”
“THIS DEPENDS ON YOUR TOLERANCE FOR RISK, AND YOUR INVESTMENT OBJECTIVES. IF YOU
ARE CONCERNED ABOUT THE RISKS ASSOCIATED WITH OWNING EQUITIES, THEN YES. LET’S
SET UP ANOTHER APPOINTMENT AND TAKE ANOTHER LOOK AT YOUR PORTFOLIO,” BRYAN
ANSWERS.
Vince is satisfied with Bryan’s suggestions and advice and makes another appointment to
see him next week.
TYPES OF RISK
3 | Describe the types of risk.
There are several types of risks that a client may face, including:
• Personal
• Property
• Legal liability
• Other risks
As an advisor, it is important for you to know the risks your clients could face and how these risks could affect them
financially. Being able to discuss with a client how they can protect themselves from risk in their financial plan will
help to increase their confidence in the advice you provide to them.

PERSONAL RISK
PERSONAL RISK
Personal risk directly affects a client. It includes possibilities such as losing or facing a reduction of earned income
or incurring extra expenses.
There are three major types of personal risks, which include:
Type of Risk Description
Premature Death Dying before reaching the average life expectancy.

Can result in great financial difficulty for surviving dependants.
Long terminal illnesses may cause a decline in the standard of living long before death.
Aging and Retirement Insufficient income during retirement.
Health Risk of illness or disability, resulting in high medical expenses and the loss of earned
income.
Without a sufficient income or benefits paid from health or disability insurance, it may
be impossible to meet expenses.
COSTS ASSOCIATED WITH PREMATURE DEATH

Costs associated with premature death include:
• Loss of earned income of the deceased person.
• Expenses incurred including:
Funeral expenses
Costs associated with the last illness
Estate settlement costs and taxes
• Emotional and social costs including:
Grief counseling for survivors
Guidance for children
INCOME NEEDS ARE ASSOCIATED WITH PREMATURE DEATH

The income level of a family may be insufficient after the death of a family member.
There are several phases a family goes through after a death. There are income needs associated with these phases,
which are explained below:
Phase Description
1. Readjustment A normal readjustment period to recover from emotional shock is one to two years.
The family may need additional financial support while adjusting to a change in lifestyle.
2. Dependency This phase is defined by the age of the youngest child.

The surviving spouse will need enough income to provide for the children until age 18 or
older, if attending school.

Phase Description
3. Survivor Life The period after the youngest child reaches age 18 is critical.
Income Needs
The survivor may have been out of the workforce for many years and may find re-
entering the work force difficult.
It may be necessary to plan for life-long income for the survivor, including support prior
to and during retirement.
OTHER NEEDS LINKED TO PREMATURE DEATH

Some of the other needs that should be taken into consideration when looking at the impact of a premature death are:
• Outstanding mortgage obligations and other debts
• Future education funding requirements for children
• Emergency fund for survivors
RISKS ASSOCIATED WITH AGING AND RETIREMENT

There are several risks associated with aging:
• Work typically slows down or ceases with age, resulting in an insufficient income to meet daily needs.
• Individuals may have an insufficient retirement income to provide for everyday needs. With inadequate
planning, people may not have accumulated sufficient assets or other sources of income to draw on.
• Some people may exhaust a retirement fund while still alive. Because people are retiring at an earlier age and
are living longer, they need to account for these factors in their retirement plans.
• Some may rely on government pension programs for income. Income from pensions may not be sufficient and
may need to be supplemented.
• Others may have insufficient resources to meet their obligations at death due to a lack of estate planning.
COPING WITH THE RISKS ASSOCIATED WITH AGING

The following should be taken into consideration when putting together a retirement plan:
• When estimating assets in a client’s financial plan, make an allowance for the reduced income and increased
expenses that come with aging.
• Build extra saving components into the pre-retirement portion of the client’s plan to compensate for any
shortfalls. Components could include RRSPs and mutual and segregated funds.
• Recommend additional disability and life insurance be purchased to protect the long-term interest of the client
and the family in the event of interrupted income due to premature death or disability.
FINANCIAL RISKS ASSOCIATED WITH DISABILITY

Financial risks associated with disability include:
• Decrease in cash inflows and increase in cash outflows
• Increase in medical expenses
• Loss of income and wealth erosion

CHAPTER 8 | RISK MANAGEMENT AND LIFE INSURANCE 8 • 11
IMPACT OF INCREASED HEALTH COSTS

The share of health costs paid by individuals has been increasing, due to increased pressure to reduce the cost of
publicly funded health care.
Increased hospitalization costs may mean your clients have inadequate medical coverage in place. Hospitals have
decreased the length of stay in hospitals, placing the financial burden of home recovery on households.
Medical procedures have become more complicated and costly. The cost of drugs or procedures not covered by
health care plans must be assumed by individuals.
EXAMPLE
Helga and Helmut Fischer wish they had planned for possible future risks while they were younger and healthy.
Helmut suddenly became ill at the age of 45.
Helmut has a long-term disability plan as a work benefit, but does not have additional disability or life insurance
coverage. Helga is a homemaker and is not currently working. Helga and Helmut own their own home. They have
a small amount of savings and some money in an RRSP.
If Helmut is sick for a long period of time or dies, some of the challenges the Fischers could face are:
• Exhausting their savings very quickly
• Having to re-mortgage or sell their home
• Cashing in their RRSP and reducing the funds available at retirement
• Helmut being unable to qualify for most life and disability insurance policies
• Helga having to return to work while the children are still in school
PROPERTY RISK
RISKS ARE ASSOCIATED WITH OWNING PROPERTY
People who own property are exposed to the risk of having their property lost, damaged or destroyed.
Two major types of financial losses associated with the destruction or theft of property are direct and indirect
losses. They are explained in the chart below:
Type of Loss Description Example
Direct Loss Loss resulting from the physical damage, Jane owns a rental condominium at a
destruction or theft of a property. ski resort. If the building is damaged by
a major fire, the physical damage to the
property is a direct loss.
Indirect (Consequential) Loss resulting from the consequence With Jane’s condominium fire, the loss
Loss of the physical damage, destruction or of her rental income, while the building
theft of a property. is being rebuilt, is an indirect loss.
With businesses, indirect losses are called business interruption losses.

The client should be made aware that risk of loss or damage to a property from a natural disaster may
not be covered in a standard property insurance plan.
Clients should be advised to read their insurance contracts carefully. The inclusions and exclusions are
often very numerous and can result in unexpected and unpleasant surprises at claim time.
MAIN LOSS EXPOSURES ASSOCIATED WITH HOME OWNERSHIP

The main loss exposures associated with home ownership are:
• Loss of residence or secondary residence
• Loss of contents
• Loss of associated structures
• Personal liability associated with injury to individuals on the premises
Home insurance provides protection for the losses listed above.

Tenant’s insurance is the same except for the exclusion of the building, since it is owned by another party.
DETERMINING THE VALUE OF LOST OR DESTROYED ITEMS

There are two ways these values can be calculated:
Depreciated Value Replacement Value
The indemnity is based on the value of the The indemnity is based on the lost or destroyed articles being
replacement or repair of the articles in the replaced with comparable new items. There is no deduction for
condition they were in when they were lost the depreciation in value caused by use of the originals.
or damaged.
Replacement value coverage requires a higher premium but can
This is the standard policy. save the policy owner thousands of dollars at time of claim.
INCREASED RISK DUE TO MORTGAGES

In the event of a loss, if there is an outstanding mortgage and the home is not insured, the outstanding debt must
be retired.
The homeowner is exposed to both the risk of the loss of the asset and the risk related to the outstanding debt
associated with the asset.
RISKS RELATED TO PERSONAL PROPERTY AND IMPORTANT DOCUMENTS

An individual’s personal property is exposed to risk at all times, including occasions when the property owner is
away from the principal residence.
Documents such as birth certificates, stock certificates and important receipts should be protected. In many cases,
the documents are needed to provide proof of ownership or to support other claims. The lack of safety of personal
documents increases the risk exposure.

OTHER RISK FACTORS TO BE CONSIDERED REGARDING PROPERTY OWNERSHIP

Other risk factors that should be taken into consideration are:
• Increase in the cost of living: If the property was made uninhabitable by the resulting damage, additional costs
may be incurred. Costs will have to cover the period until the property is returned to a habitable condition.
• Inflation: In periods of high inflation, there is a risk that the replacement cost of assets may exceed levels of the
current risk protection. If there is an inflation guard in place, the amount of insurance coverage automatically
increases to reflect the changes in price.
EXAMPLE
Jean lives in an apartment in downtown Montreal. A fire in the unit above Jean’s resulted in structural damage to
the ceiling of his apartment and water damage to its interior and furnishings. The physical damage suffered is a
direct loss.
While repairs were being completed, Jean had to live in a hotel and eat all of his meals at restaurants. The
additional expenses incurred as a result of the fire were over $4,000. These costs represent an indirect loss.
LEGAL LIABILITY RISK

DEFINITION OF LEGAL LIABILITY RISK
A legal liability is where individuals can be held legally liable for an act that results in bodily injury or property
damage to someone else. A court of law may order payment of substantial damages to an injured person.
Some examples where people and businesses have been sued include:
• Negligent use of a product or a piece of equipment
• Sale of defective products that results in harm or injury to a third party
• Alleged malpractice
PERSONAL LIABILITY
Personal liability refers to the liability associated with negligence causing bodily injury or property damage to
someone else.
Liability may also arise from business pursuits and professional services. A recent area of expanding personal liability
is in the provision of director’s and officer’s services to organizations.
The nature of personal liability may involve substantial litigation with high legal costs and large claims that can
erode a client’s wealth.
IMPORTANCE OF RISK AWARENESS

Liability risks represent a serious loss exposure for many people. It is important for the professional advisor
who interacts with self-employed people and other clients to create awareness about the potential adverse
consequences of being held liable for bodily injury or property damage. There are two reasons for this:
1. There is no maximum upper limit with respect to the amount of the loss. An individual can be sued for any
amount.
2. Your clients cannot afford to lose future income and assets to a liability claim.

EXAMPLE
Joe has a home office, where he prepares personal and corporate income tax returns for business clients.
Mary, an oral surgeon, slips on Joe’s icy front steps while on her way to an appointment with Joe. As a result of
the fall, Mary sustains serious, permanent back injuries and is forced to give up her practice.
Mary has disability insurance, but it only replaces 50% of her $200,000 annual net income. Mary is only 32 and
had a working life in front of her of at least 25 more years.
She sues Joe for negligence, in the amount of $6,000,000 for loss of income alone.
If Joe loses the lawsuit, he could lose his home, his car, his investments, and a significant portion of his annual
income.
OTHER POTENTIAL SOURCES OF RISK

OTHER POTENTIAL SOURCES OF RISK
There are several other sources of risk that may have an impact on a client’s financial plans, including:
• Owning or using an automobile
• Impact of injury or illness while a client is traveling
• Loss of employment
PROTECTION WHEN OWNING OR USING AN AUTOMOBILE

There is a need for protection due to increased exposure to personal losses associated with owning and operating an
automobile.
Automobile accidents can be a cause of great financial insecurity to individuals. The possibility of being held liable
because of the negligent operation of an automobile represents a severe financial risk to automobile owners.
Type of Risk Description

Physical Damage Damage can be caused by a collision with another vehicle or object. Other losses can
result from falling objects, fire, theft, larceny, explosions, weather and vandalism.
A portion of a client’s assets is exposed to loss due to the damage or loss of an
automobile. The exposure to the loss is related to the market value of the vehicle,
which decreases as the automobile ages.
Liability The personal risk is the potential cost related to any action or claim arising out of
alleged negligent ownership or operation of a vehicle.
Medical Costs Costs arising out of bodily injury due to an automobile accident can be substantial.
Costs may include surgical, dental, x-ray, home-care and funeral expenses.

As an advisor, you should be aware that some provinces have a no-fault insurance system for public
liability insurance on automobiles. In these provinces, the owner must choose an adequate coverage
plan for all possible losses suffered, since it is not possible to sue another driver, no matter how serious
the other party’s negligence may have been.
Some other provinces have a limited no-fault insurance that allows lawsuits against those who caused
accidents only when the personal injuries are severe or fatal. The mandatory accident benefits coverage,
payable without proving fault, provides immediate payment for the owner, passengers or any injured
pedestrians.
The minimum amount of automobile insurance required will vary from province to province, though
most clients will purchase more than the minimum amount.
Your client’s automobile coverage should be reviewed annually to ensure the coverage is adequate.
TYPES OF RISKS ARE ASSOCIATED WITH TRAVELLING

Risks associated with travelling are often greater than the risk exposures faced at home or at work. Here are some of
those risks:
• Travelers are likely to spend far more time than usual in cars, trains and planes and may be exposed to a higher
risk of death or injury due to accidents.
• Travelers to foreign destinations could find themselves in dangerous criminal or political environments, exposing
themselves to risks of injury or death not existing at home.
• Travelers to foreign destinations could be exposed to unusual health hazards including contaminated water,
indigenous diseases and poor medical care.
• Travelers often find themselves in unfamiliar environments, and unfamiliarity can lead to risk exposure. For
example, many North American tourists visiting England cause traffic accidents because they habitually look
left, instead of right, before crossing the street.
• The physical exertion of travel could aggravate a pre-existing condition such as a sore back or a heart condition.
TYPES OF PROTECTION WHILE TRAVELLING

One of the primary risks related to travelling is the possibility of accident or sickness while travelling in a foreign
country.
Travel within Canada does not pose significant financial risk because all of the provinces and territories have
reciprocal agreements with regard to provincial health care plans.
It is still wise to consider travel insurance as some services may have coverage limits or may not be covered at all.
With foreign travel, the client’s assets may be eroded through the need to meet large medical and health costs that
are not covered by Canadian provincial health plans.
Canadian provincial health plans provide restricted coverage based on medical and hospital expense scales as they
exist in Canada. The protection provided may only be a fraction of the amount required to pay for similar services in
a foreign country.

PROTECTION WHILE TRAVELLING OUTSIDE OF CANADA

The financial impact resulting from accident and sickness while out of the country can often be transferred to
insurers through the purchase of travel insurance.
Travel insurance is widely available from:
• Insurers
• Travel agents
• Banks
• Trust companies
• Credit unions
• Credit card companies
Travel insurance typically covers:

• Foreign medical expenses
• Related expenses including ambulance and travel home for an injured person
• Trip cancellation
• Lost luggage costs
Most travel policies exclude coverage for:
Exclusion Type Description
Pre-existing Conditions These are conditions that are known about prior to application for
coverage. An example would be an existing heart condition.
Ongoing or Elective Treatments This could include treatments such as dialysis or a magnetic
resonance imaging (MRI.)
Hazardous Activity Injuries Activities could include sports such as scuba diving or parasailing.
Many of the expenses covered by most travel insurance policies are covered on a reimbursement
basis only. The insured must pay for the expenses when and where they are incurred and then seek
reimbursement upon returning to Canada.
Therefore, clients should always carry a credit limit sufficient to deal with such contingencies.
PROVISION FOR POTENTIAL JOB LOSS IN A FINANCIAL PLAN

Involuntary job loss has increased the risk of unemployment because the trend of organizational downsizing and
restructuring has increased. This increases the pressure on clients to prepare to meet future financial and contractual
obligations.
Most private insurers are not interested in providing insurance against job loss because the nature of the risk is
subject to a wide variety of economic, social and political factors.
Public social programs provide some basic protection but this often falls short of the client’s needs.
It is recommended that the financial plan contain some provision for the retention of this risk. As a guideline, the
client should have an emergency fund of at least three to six months’ living expenses.

EXAMPLE
Abby is taking a one-year sabbatical from her job and wants to travel to Asia.
A good friend, Molly, was overseas recently and tells Abby about her experience travelling to Thailand. When
Molly arrived in Bangkok, her luggage did not arrive with her. After speaking to the airline, Molly found out she
would be reimbursed up to a maximum of $100 only if the luggage could not be located. The cost to replace the
contents would be considerably more.
Two weeks after Molly’s arrival in Thailand, she suffered food poisoning and needed to be hospitalized. Molly
figured her provincial health plan would cover any of her medical costs. Molly was told she would have to pay for
any medical costs upfront and would only be refunded for a portion of the cost incurred. Molly had her mother
wire over the necessary funds to pay the hospital.
While Molly was away her garage was broken into and her car stolen. Luckily she had adequate insurance on her
car to cover the cost of replacing her car and to repair the damaged garage door.
Molly advises Abby to speak to a representative at her financial institution about the various provisions offered
through travel insurance policies and to purchase a policy that would be the most suitable for her trip.
TYPES OF RISKS AN INDIVIDUAL COULD EXPERIENCE:

Types of risks that could affect a person’s lifestyle and financial assets include:
• Personal
• Property
• Legal liability
• Other
As an advisor, you will need to be able to discuss possible risk factors and determine which ones may have an
impact on a client’s life. A risk management plan should be put into place to help minimize any consequences
suffered from potential risks.
Consideration should be given to:
• Personal risks such as premature death, aging and retirement and health
• Property risks suffered including direct and indirect losses
• Legal liability risks where individuals can be held legally liable for an act that results in bodily injury or property
damage to someone else
• Other sources of risk including owning or using an automobile, injury or illness while one is traveling and loss of
employment

Livy is a single mother and has a 13-year-old son, Jason. She has diabetes and suffers from circulatory problems. Livy
owns her own home which has an in-ground pool.
Livy is in the process of reviewing her lifestyle and wants advice on how she can manage the many risks she could
potentially face. Livy makes an appointment to consult with Bryan and address her concerns. The following chart
outlines what was discussed:

Livy’s Concerns Potential Risks Bryan’s Advice

Loss of job Would she have sufficient income to Start a Tax Free Savings Account to use for
meet expenses? unexpected events such as a job loss. The
goal is to save an amount equal to at least six
months’ net salary.
Poor health What would happen if her health Purchase a disability insurance policy which
deteriorated and she was unable to will supplement Livy’s income. She may have
work? to pay a higher premium because of her
health condition, but it will be worth the cost.
Premature death What if she was to die unexpectedly? If Livy is insurable, purchase a life insurance
Would there be sufficient funds to policy to cover funeral costs and to provide
provide for her son until he graduates the necessary funds for her son if she were to
from university? die.
Safety of pool Could the neighbor’s children come in Ensure that the pool is adequately fenced in.
harm’s way? Check that Livy’s home insurance policy has
liability insurance.
Home ownership Would she be able to afford to rebuild or Ensure that Livy’s home insurance policy has a
buy another house if there was a fire? replacement provision.
After Livy’s discussion with Bryan, she feels she is doing everything she can to minimize future potential risks. Livy
feels it was worth her time to come up with a risk management plan.
THE LIFE INSURANCE INDUSTRY
4 | Describe how the life insurance industry is regulated.
The insurance industry is regulated on both the federal and the provincial levels.
At the federal level, the Office of Superintendent of Financial Institutions (OSFI) and the Insurance Companies Act
are responsible for insurance regulations and compliance.
At the provincial level, each province is headed by a Superintendent of Insurance who reports to the applicable
provincial ministry.
In every province except Quebec, policy contract provisions are governed by the Uniform Life Insurance Act.
Assuris protects Canadian life insurance policyholders against the loss of benefits due to the insolvency of a member
company.
As an advisor it is important for you to be aware of the regulatory bodies that govern the insurance industry. You
must demonstrate to your clients that you are acting in compliance with the various acts and regulations.
LIFE INSURANCE INDUSTRY REGULATION

FEDERAL REGULATION IN THE LIFE INSURANCE INDUSTRY
At the federal level, the Office of the Superintendent of Financial Institutions (OSFI) focuses on the solvency
and stability of federally registered insurance companies, banks and trust companies.

Key statutes governing the activities of the life insurance industry are the:
Statute Responsibilities
Office of Superintendent of • Constant supervision of federally chartered and foreign

Financial Institutions Act (OSFI) insurance companies
Insurance Companies Act • Requires companies to maintain assets based on various

formulae tied to the type of insurance carried
• Reserves must be maintained for unearned premiums and claims
PROVINCIAL REGULATION IN THE LIFE INSURANCE INDUSTRY

Each province has a department that is responsible for matters relating to insurance. This department is headed by a
Superintendent of Insurance, who is responsible to a provincial ministry, such as Financial Institutions or Consumer
and Corporate Affairs.
The main responsibility of the superintendents of insurance is to supervise:
• Insurance contract terms and conditions
• Licensing companies, agents and brokers
The financial supervision of the provincial superintendents of insurance is limited mainly to insurers operating under
provincial charters.
BECOMING A LIFE INSURANCE AGENT

To become licensed in a particular province, an agent must complete the Life Licence Qualification Program
(LLQP) of that province, pass a rigorous provincial exam and obtain a licence.
In some jurisdictions, agent-licensing matters are delegated to an insurance council made up of company insurance
agents and government representatives.
LEGISLATION GOVERNING LIFE INSURANCE POLICY CONTRACT PROVISIONS

Provisions required by law to be included in policy contracts are governed by provincial life insurance legislation
known collectively as the Uniform Life Insurance Act.
The Uniform Life Insurance Act is applicable in all provinces except Quebec, which has its own legislation and which
is similar in many points.
ASSURIS
ROLE OF ASSURIS
Assuris protects Canadian life insurance policyholders against the loss of benefits due to the financial failure of
a member company. The compensation fund is financed through contributions from the participating insurance
companies. All life insurance companies licensed to write life insurance in Canada are required to be members of
Assuris.
Assuris was formerly known as CompCorp.

PRODUCTS ARE COVERED BY ASSURIS

Eligible products issued by member companies include:
• Life insurance
• Health insurance
• Annuities
• Segregated funds
• Long-term care insurance
• RRSPs
• RRIFs
• TFSAs
FAILURE OF A MEMBER COMPANY

In the event of the failure of a member company:
• The liquidator will look for another member company of Assuris to take on the policies of the failed company.
• The liquidator may have to reduce policy benefit amounts. Assuris will ensure that the benefits are not reduced
below the Assuris-covered benefit amounts.
• After any reduction in benefit amounts, policies will continue according to their terms.
• It is likely that the liquidator will freeze benefit payments until a percentage of benefits payable can be
determined or the policies can be moved to another insurer.
Assuris will ensure that during the period of any freeze:
There are funds available to pay death claims and income benefits up to the Assuris-covered benefit amount.
Voluntary withdrawals will be permitted where it can be demonstrated that the funds are needed to prevent
hardship.
ASSURIS COVERAGE
The following benefits are fully covered by Assuris:
Type of Benefit Maximum Amount Covered Protection

Monthly Income $2,000 85% of benefit or $2,000, whichever is higher
Health Expense $60,000 85% of benefit or $60,000, whichever is higher
Death Benefit $200,000 85% of total benefit or $200,000, whichever

is higher
Cash Value $60,000 85% of total benefit or $60,000, whichever is higher
Accumulated Value $100,000 $100,000

(Annuities, RRIFs)

Assuris itself does not guarantee the full payment of the policyowner’s interest, only the difference between what
the policyowner receives from the insolvent insurer and the Assuris limit, if applicable.
EXAMPLE
ABC insurance company becomes insolvent and a liquidator arranges to pay 75% of its claims. The chart below
outlines amounts payable for two possible scenarios:
Claim Amount Liquidator Pays 75% Assuris Covers Assuris Pays Total Paid
$100,000 cash value $75,000 85% cash value amount $10,000 $85,000
$60,000 cash value $45,000 Maximum $60,000 cash $15,000 $60,000

value
LIFE INSURANCE INDUSTRY REGULATION:

The insurance industry is regulated on both the federal and the provincial levels.
On the federal level there are:
• The Office of the Superintendent of Financial Institutions (OSFI)
• The Insurance Companies Act
On the provincial level there are:

• The Superintendent of Insurance at the applicable provincial ministry
• The Uniform Life Insurance Act
Other protection available for Canadian life insurance policyholders is provided by Assuris.
A client will feel comfortable knowing that the insurance industry is monitored by several regulatory bodies.
Legislation is in place to protect the stability of the industry and to protect the public interest of the policy holder.

Bonnie and Bruce Stiles have heard that the life insurance company they have policies with is having financial
problems. They have a life insurance policy with a death benefit amount of $250,000 and a cash value of $25,000.
They meet with Bryan to talk about their concerns and find out if any legislation is in place to protect their interests
as a policyholder.
Bryan reassures Bonnie and Bruce that the insurance industry is monitored by several regulatory bodies. He tells
them that the following is in place to protect the public’s interest:
Regulatory Body or Act Purpose
The Office of the Superintendent of Monitors solvency and stability of federally regulated insurance
Financial Institutions (OSFI) companies, banks and trust companies
Insurance Companies Act Companies must maintain assets based on formulae and maintain
reserves for unearned premiums and claims

Regulatory Body or Act Purpose

Superintendent of Insurance Supervision of insurance contract terms and conditions and licensing
companies, agents and brokers
Uniform Life Insurance Act Sets out provisions required by law to be included in policy contracts
Assuris Protects policyholders against loss of benefits due to the financial

failure of a member company
Bryan adds that if the insurance company were to go out of business, Assuris is there to compensate against the loss
of benefits.
Assuris would ensure that up to $212,500 of the death benefit (85% of $250,000 = $212,500) would be paid and
that any cash values up to $60,000 would be paid.
TYPES OF LIFE INSURANCE
5 | Describe the various types of life insurance.
There are two basic types of life insurance:

• Term insurance
• Permanent (whole) life insurance
TERM INSURANCE
Term insurance is pure insurance coverage with no investment accumulation or cash surrender value. The concept
is similar to insurance coverage provided for by automobile or homeowner’s insurance.
Term insurance provides protection against the risk of death for a specified length of time. The protection will
terminate at the end of the specified period.
Term insurance is available with:
Level Term Decreasing Term
The coverage stays the same throughout the term The coverage decreases over the specified time frame.
of the policy.
Term insurance is usually used to cover a temporary need, such as a debt or mortgage.
The older an individual, the higher the annual premium amounts will be. Most term insurance policies expire after a
set duration or at a certain age (for example age 65 or age 75).
LENGTH OF TERM INSURANCE

“Term” insurance is so called because it is only issued for a specific term, typically one, five, 10 or 20 years, although
term policies could be issued to age 65 or age 100.
At the end of the term the policy expires, unless it is a renewable term plan. Almost all short-term term policies are
issued as renewable term.

TYPES OF TERM INSURANCE

The different types of term insurance are:
Type Description
Renewable Term A renewable term contract allows for the policy to be extended for another
term of equal length without the insured having to provide medical evidence of
insurability.
For example, a 10-year renewable term policy issued in 2015 could be renewed
for another 10-year term in 2025, regardless of the health of the insured at that
time, even if the insured was terminally ill.
Convertible Term A convertible term policy is one that can be converted into a permanent
(whole) life contract.
This is subject to certain conditions, but is not contingent on the health of the
person insured under the policy.
Decreasing Term Decreasing term is most often used to cover the outstanding balance of a
mortgage.
The coverage decreases as the outstanding mortgage balance decreases over
time.
Group Life Insurance Group life insurance is a type of term insurance, usually provided through an
employer as part of a benefits package.
The coverage is usually directly related to some multiple of the employee’s
salary.
Premiums are often lower with group insurance than with an individually
purchase insurance policy.
If your client has no dependants, group life insurance provided through an employer may be sufficient
coverage for their estate protection needs and no further life insurance may be required.
If an employer pays all or part of the premiums on a group term life insurance policy, the portion of the
premium paid by the employer relating to the coverage is considered a taxable benefit for the employee.
PERMANENT OR WHOLE LIFE INSURANCE

Permanent (whole) life insurance, also known as whole life insurance, is designed to be in force for the client’s
lifetime. The coverage and premiums usually stay the same throughout the time the policy is in force.
This type of insurance builds up a cash reserve known as the cash surrender value (CSV).

Permanent (whole) life insurance can be:
Straight Payment Limited Payment
Premium payments remain Premium payments are for a specified number of years, until the policy is paid
the same throughout the life in full.
of the policy.
In this case, no further premiums are paid, but the insurance coverage is still in
effect.
The annual premium payable during the premium-paying period will be greater
than that paid under a similar straight payment plan, but it is payable for a
shorter period of time.
A permanent or whole life insurance policy is said to mature or endow when its cash value equals its death benefit.
A policy does not usually mature until the insured reaches age 100.
UNIVERSAL LIFE INSURANCE

Universal life insurance is a type of permanent (whole) life insurance plan that offers more flexibility than a
traditional plan.
The features of a universal life insurance plan include:
Feature Description
Periodic reviews and The mortality costs, investment returns, expenses and other costs are subject
adjustments to periodic review and adjustment by the insurance company within certain
limits defined in the contract.
Flexibility of face amount A policyholder can choose:

and premium deposits
• The policy’s initial face amount of coverage and death benefit type (such as
level, increasing, or initial face amount plus cash surrender value)
• The size and frequency of the premium deposits, based on conditions
existing when the policy is issued
Increases in coverage are subject to medical qualification.
Investment accounts The investment account portion of a universal life insurance policy earns a rate
of return consistent with similar investment vehicles, either deposits or mutual
funds.
Mortality costs (deductions for the insurance protection) are reassessed based
upon the company’s experience and may be decreased or increased.
The company’s expenses and investment returns are examined and the
administrative portion of the cost may also be adjusted.
Flexibility to make changes The policyholder can alter these choices during the life of the policy, although
to coverage, premium the company must approve any changes that will increase the amount of risk
deposits and investments covered by the policy.

ENDOWMENT LIFE INSURANCE

Endowment life insurance is a combination of term life and whole life. It provides coverage for a specified period
of time (usually to age 65) and builds cash value.
If the insured should die during the period of coverage, the beneficiary receives the face amount of coverage.
If the insured does not die during the period of coverage, the policy owner receives the entire face value of the policy
as a cash payment and the insurance coverage ceases.
VARIABLE LIFE INSURANCE

Variable life insurance is a permanent (whole) life contract with a fixed premium.
The policyholder has the option of investing in:
• A daily interest savings account
• Guaranteed, mid- and long-term interest accounts
• Common stocks
• Bonds
• Balanced or other pooled funds
• Various portfolios linked to indexes, such as the TSX, S&P or NASDAQ
Variable life policies have a death benefit and a cash surrender value that varies depending on the performance of
the underlying fund investments.
JOINT LIFE LAST-TO-DIE OR SURVIVORSHIP LIFE INSURANCE

Joint last-to-die life or survivorship life is a form of life insurance that insures two or more lives and pays the
death benefit only on the death of the second (or last) insured life to die.
The following explains some of the features of joint last-to-die life insurance:
Feature Description
Lower Premium The premiums are lower than if two individual policies were issued.
The reasoning is that since the death benefit is paid only on the death of the
second insured, this will statistically likely occur farther in the future.
Insurance Type The insurance can be either permanent (whole) life or term insurance.
Unique Purpose This type of life insurance is commonly used in estate planning for spouses. It is
useful in providing cash to pay taxes on the death of the surviving spouse.
It is most typically used to protect against tax liabilities triggered by the last
death for disposition of RRSPs, RRIFs or capital properties. The property can be
transferred tax free to the surviving spouse at the first death.

FIRST-TO-DIE LIFE INSURANCE

First-to-die term life is a form of life insurance that insures two or more lives and pays the death benefit only once,
on the death of the first insured to die.
The following explains some of the features of joint first-to-die life insurance:
Feature Description
Lower Premium The premiums are lower than if two individual policies were issued, since only
one death benefit is paid. However, the premiums are higher than if only one life
was insured.
Insurance Type The insurance can be either permanent (whole) life or term insurance.
Unique Purpose This type of life insurance is commonly used in estate planning for spouses or
business planning. It is useful in providing cash to pay expenses that might arise
at the first death only.
In estate planning situations, it might be used to pay a charitable gift at death.
In business situations, it might be used to discharge the obligation to buy out a
deceased business partner.
Duration The policy typically terminates at the death of the first life insured to die.
Some contracts permit the surviving life insured to continue coverage on their
own life, on a single life basis, without having to prove medical insurability.
USING PERMANENT (WHOLE) LIFE INSURANCE FOR BUSINESS PURPOSES

When a partner or the owner of a business dies, the proceeds of a life insurance policy are a readily available source
of funds.
The funds can be used to buy out the deceased partner’s interest in the business or pay any liabilities or taxes due on
the death of one of the partners.
PARTICIPATING LIFE INSURANCE

A participating life insurance plan participates in a distribution of surplus or profits, called dividends.
This option is not available on term policies. Dividends vary with type of plan, entry age and length of policy.
Policy dividends are, in part, a form of refund of premiums. The policyholder pays excess premiums to the
company. The company, upon determining if there is a surplus or profit, refunds a portion of those premiums back
to the client as a dividend.
Factors that can affect the amount of surplus or profit are:
• Lower or higher operating and administrative expenses than planned
• Earning a greater or lesser return on investments than planned
• Having fewer or more death claims than forecast
In a non-participating policy, the policyholder does not participate in the surplus or profit generated and the
premiums tend to be lower. Lower premiums are due to less conservative assumptions being used to determine
interest rates, mortality losses, expenses and contingency conditions.

ADVANTAGES OF TERM LIFE INSURANCE PLANS

The advantages of term life insurance plans are that they are:
• Good for short term insurance needs
• Inexpensive for younger people in good health
DISADVANTAGES OF TERM INSURANCE PLANS

The disadvantages of term life insurance plans include:
• Premium cost goes up with age
• Client may become uninsurable with age and could outlive the coverage
• Coverage provided by group term life, will terminate when an employee leaves company unless policy has a
conversion clause
• At conversion, the former employee may have to pay a higher premium due to age and health
ADVANTAGES OF PERMANENT (WHOLE) LIFE INSURANCE PLANS

The advantages of permanent (whole) life insurance plans are:
• They are good for long term insurance needs
• They stay in force regardless of the insured’s age as long as premiums are paid
• They have premiums that remain level throughout the life of the policy
• They have cash values, which:
give the policyholder more flexibility
can be borrowed against
can prevent the policy from lapsing
DISADVANTAGES OF PERMANENT (WHOLE) LIFE INSURANCE PLANS

The disadvantages of permanent (whole) life insurance plans are that:
• The cost of premiums is higher than term
• There may be a better return on money than accumulation with cash values
COMPARISON OF LIFE INSURANCE PLANS

Type of policy Period Covered Cash Value Premium Coverage Comments
Term Level For a stated None Stays the same Stays the same Pure insurance
number until renewal coverage
of years,
such as 1, 5, 20
Term For a stated None Stays the same Death benefit Least expensive
Decreasing number decreases over type of
of years, the term insurance
such as 1, 5, 20
Whole Life Whole of life Low to Medium Stays the same Stays the same Part insurance,
Straight part savings

Type of policy Period Covered Cash Value Premium Coverage Comments
Whole Life Whole of life Low to Medium Stays the same Stays the same Paid up after a
Limited certain number
payment of years
Universal life Varies Low to high Varies Varies Combines

renewable term
insurance with a
savings account
paying market
interest rates
Endowment For a stated High Stays the same Stays the same Savings
period of time until paid up accumulation
No more
insurance
protection after
policy has been
paid up
While reviewing your client’s risks, you should also ensure that the client has sufficient coverage for
unexpected sickness or disability.
Disability due to illness or injury generally results in lost income and increased expenses.
Disability insurance will usually pay up to 60-70% of a person’s pre-tax earned salary. It is commonly
offered as part of a benefit package to employees. Generally, disability policies have a waiting period
between 30 days to six months (after the disability starts, but before the benefits start), which should be
taken into consideration.
A client who is self-employed or who works for a company that does not offer disability insurance should
consider purchasing coverage for this risk independently through an individually owned disability policy.
EXAMPLE
Ashley and Shane Valentine are in their early thirties and want to start a family. Shane’s father died of a heart
attack in his fifties and his mother has high blood pressure. Ashley and Shane want to ensure that they are
protected financially from any unexpected events, should either one of them die suddenly. Bryan suggests that
they meet with an Insurance Agent to discuss their concerns.
The Agent asks them several questions and finds out the following:
• They just recently bought a larger home and have a mortgage amortized over a 25-year period.
• Both Ashley and Shane have started accumulating funds in a RRSP.
• Shane has a small inheritance which he has invested in secure investments. This is their emergency fund.
• They want to provide sufficient income for their future children should anything happen to them.
• Shane is concerned that he will not be able to qualify for life insurance as he gets older, due to his family
health history.
• Ashley and Shane have disability insurance as part of their benefit packages at the companies they work for.

EXAMPLE
(cont'd)
The Agent thinks they are on the right track by contributing to RRSPs, having an emergency fund in place and
having disability coverage. He feels that Ashley and Shane can protect themselves better from an unexpected
event such as premature death by applying for a:
• Decreasing term policy for 25 years to cover the outstanding balance of their mortgage.
• Permanent (whole) life insurance policy on the life of Shane now while he is still young and premiums will be
relatively reasonable. Should Shane experience health problems later in life, he will continue to be insured as
long as he pays the premiums.
The Agent helps Ashley and Shane calculate the amount of life insurance they should apply for and assists them
in completing the applicable application forms.
As a precaution, the Agent warns Shane that he might have to pay a somewhat higher premium than expected
because of his family history of health problems. However, that additional risk factor is all the more reason to
acquire life insurance now.
UNDERSTANDING A CLIENT’S LIFE INSURANCE NEEDS
6 | Assess a client’s life insurance needs.
IMPORTANCE OF REVIEWING A CLIENT’S RISKS AND INSURANCE NEEDS

As part of the full financial planning picture, a periodic review of the client’s life insurance needs should be
completed.
A client’s life insurance needs will change as they go through different phases of life. For example, they will have
different needs when they are single, when they are married and when they have dependants.
Standard questions to ask a client include:
• What possible risks could the client face?
• Does the client face any unusual risks such as a hazardous occupation or hobby (skydiver, surfer)?
• What existing assets and insurance coverage does the client have?
• What assets would the family wish to retain at death?
• What debts and obligations does the client have?
• Are there any dependants? If so, how many and how old are they?
• If the spouse is working, would that spouse continue working after the client’s death?
• If the spouse is not working, should the policy account for support and for how long?
• When does the client plan on retiring?
• What is the health of the client?
• What is the family health history of the parents and siblings?
• What is the main purpose of this life insurance policy?
• Who needs to be insured? The client, spouse or children?

• How long is the life insurance required for?

• What life insurance coverage amounts are required?
• What type of life insurance is most suitable: a term or a permanent plan?
• What is the client’s ability to pay premiums?
• Has the client been rated or declined for life insurance in the past?
FINANCIAL OBLIGATIONS AT DEATH

Life insurance is the most common form of protection against the financial risks a client could face as the result of
the death of the client or of a family member. The client will require sufficient life insurance coverage to be able to
meet present and future financial obligations.
The following financial obligations need to be addressed when reviewing your client’s insurance needs:
Click on the Job Aid Link to read the Client Questionnaire – Life Insurance Needs Job Aid.
Financial Obligation Description
Immediate Expenses Expenses following death will need to be paid, including:

and Bills
• Final medical bills not covered by insurance
• Funeral and burial or cremation costs
• Current household and personal expense bills
• Outstanding loans, including mortgages
• Credit card balances
• Unpaid property taxes
• Probate costs
• Legal and executor fees
• Unpaid income taxes, including capital gain
Loss of Earning If the main income earner of the family dies, the earned income generated while they
Potential were alive will terminate at death.
An amount equal to these potential future earnings should be factored into the
financial plan.
Mortgage Ideally the dependants should be left with a mortgage-free residence.
Emergency Fund A certain sum of money should be set aside for unforeseen occurrences, such as the
breakdown of a car.
Education Fund If the family includes dependents under the age of 18 (or 25 if attending school
full time), then the financial plan should include a contingency plan to pay for the
education of the dependants.

DETERMINING THE AMOUNT OF LIFE INSURANCE COVERAGE A

CLIENT NEEDS
The main concern is not the type of life insurance, but that the amount of life insurance coverage is adequate and
is in force at the time of the insured’s death. The prime objective of life insurance is to restore lost income to the
dependants.
To determine the amount of life insurance required, the following information is required for each client:
• Value of the capital available today
• Monthly income the capital could possibly generate
• Current monthly expenses
• Which expenses will decrease and which expenses will increase
• Which expenses will continue and which will cease at death
• For the dependants, an estimate of the:
annual expense amount
number of years the expenses need to be covered
• What other sources of income there are at death, including the:

present value of the expected income
number of years the income will be received
There should be some consideration given to the effect of inflation when reviewing projected future amounts.
EXAMPLE
Brent recently graduated from law school with a lot of debt. He also recently purchased a condominium on the
lake and has a large mortgage. Brent also bought a sports car with his line of credit. He is planning to get married
this year. Brent is concerned that his new wife will suffer financially if he were to die suddenly.
Brent contacts his advisor, Bryan, on how he can protect himself and his fiancée from financial hardship if
something unexpected were to happen to him. Bryan gathers some information and suggests that Brent meet
with and Insurance Agent.
The Agent asks Brent several questions and finds out that his main concern is to cover the period of the next
20 years while Brent’s debt is high. His earning potential will be high for the next 30 years and Brent feels he will
be able to pay off his debts before he retires. Brent and his fiancée would also like to start a family after they
are married.
The Agent feels that Brent should take out a life insurance policy to protect his future dependants and not place
them in financial jeopardy. The Agent does a calculation to determine the amount of life insurance Brent would
require. The Agent takes into account:
• Brent’s current income and expenses
• Which expenses will decrease and increase with time
• An estimate of what the dependants’ expected expenses would be at death
Brent feels good about the Agent’s advice and is pleased that Bryan suggested they meet. He feels less stressed
now that he has a plan in place to protect his future dependants from financial uncertainty should he die
unexpectedly.

LIFE INSURANCE PRINCIPLES AND THE DIFFERENT TYPES OF LIFE

INSURANCE PLANS:
Death is an uncontrollable event which can jeopardize the financial success of an individual and family.
There are two basic types of life insurance available:
• Term life insurance plans, which include:
Renewable term
Convertible term
Group insurance
• Permanent (whole) life insurance plans, which include:

Universal life
Endowment life
Variable life
A term life insurance plan is available as a level term or a decreasing term.

A permanent (whole) life insurance plan can be a participating policy, receiving annual dividend payments.
Periodic reviews of your clients’ life insurance needs should be completed to ensure that they are fully covered from
any financial risks they may face.
As an advisor, you play an important role in providing guidance for your clients. You will have to be able to
understand the risks a client may face and be able to provide information and on the various insurance options and
plans available.

Pedro and Maria Santez, who are in good health and in their forties, do not currently have life insurance coverage.
They go to see Bryan and ask him to help them understand their risks and determine whether they should consider
taking out life insurance.
Bryan asks Pedro and Maria some questions to clarify his understanding of their insurance needs and they provide
him with the following answers:
Question Answer
Do they have any concerns or fears? Yes, Maria may have insufficient income if Pedro were to die.
Do they have any savings or RRSPs? Yes, they each have a RRSP, including a spousal RRSP for Maria.
Do they own their own home? If so, is there Yes, they own a small bungalow in the suburbs. They recently
a mortgage? took out a mortgage to buy a cottage up north. The current
outstanding mortgage amount is $50,000 and will be paid off in
10 years.

Question Answer
Is Maria employed? No, she is not and has no plans on working again. If necessary,
she could return to her pre-marriage job as a dental assistant,
earning $28,000 a year.
Do they have any children? No, there are no children or dependants.
When do they plan to retire? They plan to retire when Pedro reaches age 60.
Are there any major health problems? No, they are both in excellent health.
Based on the Santezes’ answers, Bryan suggests they speak to an Insurance Agent to inquire about:
• Pedro taking out a permanent (whole) life policy on his life to provide for Maria in the event he was to die. As he
is in good health and expects to live a long life, the coverage will be in force for life and both the coverage and
the premiums will remain level. With a term plan, the premiums would go up dramatically as Pedro gets older.
• Pedro and Maria taking out a 10-year renewable decreasing term policy for the amount of the mortgage on the
cottage. The amount of the coverage will decrease as the mortgage decreases and the policy will expire when
their mortgage is paid off.
The Santezes’ met with an agent and felt their meeting was very successful because of the information Bryan was
able to provide them.

200 Wellington Street West, 15th Floor • Toronto, Ontario M5V 3C7
625 René-Lévesque Blvd West, 4th Floor • Montréal, Québec H3B 1R2
Telephone 1+866•866•2601 Fax 1+866•866•2660 Website www.csi.ca

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FINANCIAL PLANNING I

Credentials that matter. ®

TELL US HOW WE’RE DOING

© CANADIAN SECURITIES INSTITUTE (2021)

Telephone 416 • 364 • 9130 Fax 416 • 359 • 0486

Toll-Free 1 + 866 • 866 • 2601 Toll-Free Fax 1 + 866 • 866 • 2660

Credentials that matter.®

First printing: 2021

Copyright © 2021 by Canadian Securities Institute

© CANADIAN SECURITIES INSTITUTE (2021)

1 Managing the Financial Planning Process

1•3 MEETING YOUR CLIENTS’ NEEDS

© CANADIAN SECURITIES INSTITUTE (2021)

1 • 17 WHAT YOU HAVE LEARNED!

2 Budgeting and Consumer Lending

2•3 CASH FLOW AND BUDGETING

2•3 PREPARING CLIENT STATEMENTS

© CANADIAN SECURITIES INSTITUTE (2021)

2 • 11 BUDGETING AND SAVINGS FUNDAMENTALS

© CANADIAN SECURITIES INSTITUTE (2021)

2 • 29 WHAT YOU HAVE LEARNED!

3•3 MORTGAGE OPTIONS

3 • 13 WHAT YOU HAVE LEARNED!

© CANADIAN SECURITIES INSTITUTE (2021)

3 • 31 WHAT YOU HAVE LEARNED!

© CANADIAN SECURITIES INSTITUTE (2021)

4 • 35 WHAT YOU HAVE LEARNED!

© CANADIAN SECURITIES INSTITUTE (2021)

© CANADIAN SECURITIES INSTITUTE (2021)

© CANADIAN SECURITIES INSTITUTE (2021)

6 • 28 WHAT YOU HAVE LEARNED!

7 Wills and Powers of Attorney

© CANADIAN SECURITIES INSTITUTE (2021)

8 Risk Management and Life Insurance

8•3 THE NATURE OF RISK

© CANADIAN SECURITIES INSTITUTE (2021)

8•5 MANAGING RISK

© CANADIAN SECURITIES INSTITUTE (2021)

LEARNING OBJECTIVES CONTENT AREAS

1 | Explain the role of the advisor. The Role of the Advisor

2 | Describe the method of proactive financial Meeting Your Clients' Needs

© CANADIAN SECURITIES INSTITUTE (2021)

client driven letter of engagement

conflicts of interest lifestyle goals

financial advising net worth statement

financial goals periodic review

financial planning process preliminary budget

financial profile product driven

full service offer qualitative data

implicit data quantitative data

income and expense statement relationship building

© CANADIAN SECURITIES INSTITUTE (2021)

THE ROLE OF THE ADVISOR

1 | Explain the role of the advisor.

MEETING YOUR CLIENTS’ NEEDS

2 | Describe the method of proactive financial advising.

PROVIDING FINANCIAL ADVICE

© CANADIAN SECURITIES INSTITUTE (2021)

THE CHANGING ROLE OF THE ADVISOR

THE FULL SERVICE OFFER

3 | Describe the components and process of the full service offer.

FULL SERVICE OFFER

© CANADIAN SECURITIES INSTITUTE (2021)