Home Month and Year February 2020 The Art of Financial Planning

The Art of Financial Planning

Different uses for TFSAs, RRSPs and trusts


When it comes to politics, health, the weather, money and other contentious facts of life, the cliché is undisputable: you’re entitled to your own opinions, but not to your own facts.

And it’s a documented and statistical fact: Canadians have become lousy savers, and it’s getting worse. Despite appealing and uniquely Canadian options like RRSPs, TFSAs and trusts, Canadians are saving much less than they used to.

Some blame is on skyrocketing real estate prices, increasing debt, a higher cost of living and incentives that favour borrowers over savers, prompting Canadian households to pile on billions of dollars in mortgage debt as a risky way to build wealth.

Financial analysts emphasize that, despite clichés and traditional trends, the amount Canadians are able to put away has decreased for a number of reasons: stagnating wages and the rising price of necessities like gas, groceries, daycare and housing.

Housing used to account for around 30 to 35 per cent of people’s take-home pay. Today, because wages are not keeping pace with housing costs, the figures have spiked to 45 or 50 per cent for some households. And there is financial industry concern that while the population is aging, many Canadians are working past retirement age – drawing down their savings rather than building them up.

According to Statistics Canada, the household savings rate – the percentage of disposable income left after spending – was 1.7 per cent, near its lowest point in six decades. In dollar terms, the plunge is substantial.

Money management professionals focus on the long term while dealing with inevitable short-term speed bumps and mood-impacting factors.

Calgary-based Ken Power, senior financial planner at K.P. Power Financial Planners and a member of Advocis (the Financial Advisors Association of Canada, representing more than 13,000 members), points out that, when used the right way for the right reasons and goals, Canadian options like TFSAs, RRSPs and trusts can be effective financial-planning and personal money-management tools.

“In my practice, we tend to specialize in comprehensive financial plans and consider all three [TFSAs, RRSPs and trusts] as important tools with different uses,” says Power.

“It’s taken a while but TFSAs are getting more understood and popular although RRSPs are still the most popular option. Not only the basic and primary purpose of saving for retirement but the RRSP Home Buyers’ Plan is an excellent way to save money on the purchase of a first home or the Lifelong Learning Plan when it comes to education.

“TFSAs, tax-free savings plans, are simple and good for a lot of situations,” he notes. “It’s excellent for a lot of people and the most efficient way to transfer wealth, since the money goes to a beneficiary without tax.”

As an example of the power of compounding interest, he enjoys quoting history’s most famous scientist, Albert Einstein, “Compound interest is the eighth wonder of the world” and “He who understands it, earns it. He who doesn’t, pays it.”

Ken Power keeps it simple …. and catchier. “The beauty of compound interest is that it allows you to earn interest on your interest, so that while you have to sweat to earn the money you initially invest, from then on your money works on your behalf.

“Ultimately, it’s important to understand the reasons why trusts fit for some situations, and some find other types of financial planning more suitable for the goals and needs,” he says.

Henry Villanueva, legal counsel and estate planner with MacMillan Estate Planning, has over 14 years of professional work experience as a lawyer and accountant. He defines his specialty as “safeguarding a family’s significance and collaborating with families to design and implement a customized estate plan that promotes family harmony.”

He acknowledges the unique features and values of RRSPs, TFSAs and trusts for specific situations. “Generally, a trust is a ‘relationship’ – not a company or partnership – established where a trustee or manager of the trust is instructed to hold certain property in trust for the exclusive benefit of others. Trusts are created for various purposes and they apply to various income levels,” he explains.

“From my experience though, trusts are more suited and worth the work for families with a net worth in excess of $1 million. But if the main concern is to protect certain assets, regardless of value, a trust may be worth setting up.”

Villanueva admits that trusts may be misunderstood by some and often have a misleading stereotype. “Families often dread trusts as being complicated and they are apprehensive that maintaining a trust may be difficult and costly. The reality is that trusts may be as complex or as simple as they are set out to be. Maintenance costs usually entail banking fees for the trust’s account and yearly T3 tax return preparation fees. The trustee may also charge a fee for acting as such but usually this is a family member anyway. Bookkeeping is usually not too much of a concern since the trust is not an active business and there are only a few transactions to record.”

As trusts are usually personalized, he avoids generalizations and “how-to” templates but notes it’s common to take into consideration factors such as the parties involved – who will be the settlor, trustee and beneficiary – the purpose of the trust, governance clauses and restrictions, powers of trustees and whether the trusts can be amended in the future and how.

Comprehensive estate planning should include a tax review to check whether all tax efficiencies and minimization strategies have been considered. There are various tax opportunities and recently the more common opportunities include, but are not limited to: planning around tax-efficient timing of withdrawals from non-registered accounts and registered accounts such as RRSPs or RRIFs; planning around future cash flow requirements especially during retirement; possible corporate restructuring such as estate freezes; and possible use of investment strategies that bypass probate and provide for principal protection.

Villanueva notes that, unlike RRSPs and TFSAs, trusts are not considered for tax deferring or tax-savings value. “Historically, trustees would pass on any income earned by trust property to beneficiaries, so they can pay the taxes at their own, presumably lower, rates. At present, to limit using trusts for tax avoidance, CRA’s attribution rules attribute the trust’s income to the person who transferred the property to the trust, if the beneficiaries are minor children or close relatives.

“Currently, trusts are taxed at the highest rates. Despite limited tax advantages, trusts continue to be on the spotlight for their legal and risk-protection characteristics and ability to respond to specific family dynamics.

“Planning one’s estate entails a deep dive into one’s goals and objectives – long term and short term. And it is wise to be mindful of the expectations of the children and to make sure you have had a discussion with them on this matter. It is easy to assume that as parents you know what is best for your children, but the reality is, they may have something different in mind. Planning and executing legacy and charitable-giving opportunities usually provide for heart-warming experiences for the family as well.”