D. FINANCIAL AND TAX PLANNING (24 Marks)

Required: Using the information provided in the case on Pages 5-9, discuss in detail 5 financial and tax planning opportunities for the Smith's.

Your answer here should address the Smith's questions regarding their finances.

Specifically, divide your answer for this section into the following categories:

Financial/Tax Planning Strategies Available For this Year

Education funding for their future grandchild.

Financial assistance for Jack.

RRSP Contribution Room - What is the maximum contribution that Stan & Shelley can make for 2019.

TFSA Contribution Room-What is the maximum contribution that Stan & Shelley can make for 2019.

Locked-in RRSP - Shelley would like to know if there is any contribution room for this account.

Financial/Tax Planning Strategies Available Until Retirement

Use of a Spousal RRSP to save taxes in retirement. Should the Smith's consider this type of account?List pros and cons.

Financial/Tax Planning Strategies Available in Retirement

Summarize specific, potential tax strategies for minimizing income taxes in retirement (e.g. income splitting).

E. RETIREMENT PLANNING (8 Marks)

Provide four (4) likely sources of retirement income for the Smith's at age 65.

If the amount of potential income from these sources is unknown state so in your response.

F. ESTATE PLANNING- Strategies to Achieve the Smith's Goals (9 Marks)

The Smith's have not yet taken any steps to financial prepare for the eventual passing of their assets to their children.

List and explain three (3) steps that the Smiths' should take in order to ensure that their estate planning wishes are successfully executed, and in a tax efficient manner.

CASE INFORMATION-STAN & SHELLEY

It is now June 2019 and last Friday you received an e-mail from a client of yours that you prepared a financial plan for 3 years ago.

The e-mail is from Stan & Shelley Smith and it provides the following updates:

Background

Stan & Shelley Smith are your clients. Stan is now 67 years old and Shelley is 54 years old.

Stan & Shelley have been married for almost 4 years now. They had only been married for one year the last time they came to seek your advice.

Client Goals

Short-term Goals (0-5 years):

Both clients want to retire in 2 years. They plan to live off $130,000 per year, after tax.

Maintain the house for Jack long-term.

Find a long-term solution for Jack's financial issue (monthly deficit)

Sell their personal residence in 2021(current worth is $1,000,000 and buy a condominium for $400,000 and invest the remainder into a diversified portfolio.

Travel.

Mid-Term Goals (5 to 10 years):

Live an active retirement.

Live in the same lifestyle in initial retirement years.

Long-term Goals (Greater than 10 years):

Fund future tuition fees for future grandchild.

Not run out of money (to age 90).

Be able to afford nursing care in their elderly years.

Assumptions:

1.Inflation is 2.5%.

2.Annual rate of return on investments : 4.5% before taxes.

3.Clients will live until age 95.

4.Clients will make maximum contributions to their RRSPs and TFSAs until retirement.

5.The clients have one leased car.

Financial Management

Shelley is still earning approximately $235,000 per year (2019) and she still is contributing to her Employer Pension Plan, as required by her employment agreement.

Stan still works in the education field and he expects to earn approximately $95,000 in 2019. Stan also contributes the maximum permitted amount to his employer's Defined Benefit Plan.

Stan still owns the rental house to accommodate his son Jack. Last year Jack was in a serious car accident and was permanently disabled. Jack can no longer work and he receives $3,500 per month from the insurance company as a result of the accident, which is increased by inflation each year. Since Jack's injuries were permanent, he will receive this payment from the insurance company for the rest of his life. The amount Jack receives from the insurance company covers most of his expenses, however Stan has to provide Jack with an additional $600 per month to cover his uninsured expenses. Stan had to cut back on his "Sports/Hobbies" expenditures by $600 to keep him on budget and on schedule for retirement in 2 years.Stan is concerned about Jack's financial welfare when he (Stan) passes away. Stan asks you if there is a government sponsored disability program available to assist Jack in his senior years. Stan would like you to provide him with the details.

When Stan & Shelley retire they plan on selling their home they share now, buy a two-bedroom condo and net $400,000 after expenses. Then "they will invest the net proceeds of their home sales into a diversified portfolio of exchange-traded funds."

Stan's daughter (Jane) is now married and is expecting her first child. For now, Stan's daughter and new son-in-law will remain in Jane's apartment. Until further notice, Stan will continue to subsidize Jane's apartment for $1,400 per month. Stan would like to surprise Jane with a special gift for her baby: 4 years of free college tuition when his granddaughter reaches the age of 18. Stan would like to the details (advantages) of any financial planning strategies for saving for post-secondary school for his grandchild.

Personal Financial Statement information for the Smiths' is included below:

Stan & Shelley Smith

Assets & Liabilities-May 30, 2019

ASSETS

$

Bank Accounts

4,000

Shelley's Non-Registered Investments-100% Stocks

28,570

Registered-Shelley's RRSP

365,362

Registered-Stan's RRSP

185,548

Registered-Shelley's TFSA

46,400

Registered-Stan's TFSA

23,005

Shelley's Registered Locked-in RRSP

78,542

Shelley's Registered Pension Plan

337,802

Stan's Registered Pension Plan

372,500

Rented House

550,000

Stan's Inherited Bond

$28,500

Personal House

1,000,000

LIABILITIES

Mortgage

220,000

Line of Credit

60,000

Stan & Shelley Smith

Income & Expenses - For the Month of May 2019 ($)

Employment Income (Net of Deductions other than pension)

16,465

Rent/Mortgage/Residential Care

970

Property Taxes

750

Water/Sewage

300

Property Insurance

215

Other House Expenses (Hydro, Heat, Maintenance, Gardening)

810

Groceries

1,400

Car Expenses (Lease, Gas, insurance, maintenance, etc.)

795

Pension Plan Contributions

1,678

Medical/Dental Expenses

25

Telephone/Cable/Internet

215

Professional Association Dues

15

Pets

800

Other Non-Discretionary Expenses (Clothing, Bank Fees, Drug Store)

795

Entertainment/Restaurants

1,875

Gifts & Donations

470

Vacations/Travel

1,250

Sports/Hobbies

600

Cash for Jack's Expenses

600

Club Memberships

60

-Daughter's/Son-in-Law's Apartment

-Grooming

-Subscriptions

-RRSP Contributions

-TFSA Contributions

-Other

1,400

125

50

150

917

200

Investment Planning

Last month Stan's great uncle passed away. Stan uncle left him a Royal Bank (corporate) 3% bond. Interest is paid semi-annually. After doing some research, Stan determined that his uncle bought the bond at its face value of $25,000. Today, the bond is valued $28,500. The current interest rate in the economy is 2.25%. The Smith's are considering selling the bond and using the money to pay off some of their debt.

The Smith's would like you to tell them the current yield on the bond to see if it is worth keeping.

Tax Planning

The Smiths' plan on making the maximum contributions for 2019 to their registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). In 2018 Stan contributed $5,500 to his employer pension plan. In 2018 Shelley contributed $8,500 to her employer pension plan. Both Stan and Shelley expect to contribute the same amount to their employer pension plans in 2019 as they did in 2018. For 2019, neither Stan nor Shelley have any carry-forward room in their RRSP or their TFSAs.

Stan would like to know what his maximum contribution amount is in his RRSP and TFSA for 2019. They have not contributed to either account so far this year.

Shelley heard from a friend that Spousal RRSPs are a good tool for splitting income (reducing the overall family tax burden).

Shelley asks you to explain if her and Stan could benefit from setting up and contributing to a Spousal RRSP.

Jane used up the remaining balance in her RESP in her last year of school (2017).

Retirement Planning

Shelley re-affirmed in her e-mail to you that she wants to retire in 2 years, in 2021, at age of 56. Stan will be 69 years old in 2021.

When they retire, they sell the home they share now, buy a two-bedroom condo and net $400,000 after expenses. Then "they invest the net proceeds of these home sales in a diversified portfolio of exchange-traded funds."

The Smiths' retirement spending goal is $130,000 a year after tax.

They both plan to keep working until Stan turns 70 in 2021, "which will significantly increase the value of his pension," the planner says. He would be entitled to a pension of $35,076 a year. His Canada Pension Plan and Old Age Security benefits will also be higher. Shelley will be be 57 when she retires.

Estate Planning

The Smith's estate planning wishes are that their assets are divided between the children. Jack is not capable of managing his own finances and so other arrangements will have to be made after Jack's parents are deceased.

However, neither Stan nor Shelley have taken the recommended steps required for proper estate planning:

Hire a lawyer to write up a Power-of-Attorney for both Stan & Shelley;

Hire the same lawyer to write up wills for both Stan and Shelley; and

Complete the "Named Beneficiaries" section of the RRSP and TFSA accounts have not been used.