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Flexible Planning Possibilities

A July 21, 2021 Money Sense article (My three kids chose different educational paths. How do I withdraw RESP funds in a way that’s fair to them and avoids unnecessary taxes?, Allan Norman) considered some possibilities and strategies to discuss when withdrawing funds from a single RESP when children have different financial needs for their education. Some of the key points included the following:

  • There is likely a minimum educational assistance payment (EAP) withdrawal that should be taken, even by the child that needs it least.
  • The EAP includes government grants (up to $7,200) and accumulated investment earnings on both the grants and taxpayer contributions.
  • The grants can be shared, but only up to $7,200 can be received per child, with unused amounts required to be returned to the government.
  • Only $5,000 in EAPs can be withdrawn in the first 13 weeks of consecutive enrollment.
  • The withdrawal amount is not restricted by school costs.
  • The children are taxed on EAP withdrawals.
  • It is generally best to start withdrawing the EAP amounts as early in the child’s enrollment as possible, when the child’s taxable income is lowest. If the child is expected to experience lower income in later years, there is flexibility to withdraw EAP amounts in those later years instead.
  • The level of EAP withdrawn for each child can be adjusted. As individuals are taxed on the EAP withdrawals, planning should consider the children’s other expected income (e.g. targeting less EAPs for years in which they will be working, perhaps due to co-op programs or graduation). Consider having the EAP completely withdrawn before the year of the last spring semester as the child will likely have a higher income as they start to work later in the year.
  • To the extent that investment earnings remain after all EAP withdrawals for the children are complete, the excess can be received by the subscriber. However, these amounts are not only taxable, but are subject to an additional 20% tax. Alternatively, up to $50,000 in withdrawals can also be transferred to the RESP subscriber’s RRSP (if sufficient RRSP contribution room is available), thus eliminating the additional 20% tax. An immediate decision is not necessary as the funds can be retained in the RESP until the 36th year after it was opened.

ACTION ITEM: The type, timing, and amount of RESP withdrawals can significantly impact overall levels of taxation. Where an RESP is held for multiple children, greater flexibility exists.

Retirement Planning – Did I practice what I preached?

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As accounting and tax professionals helping clients with their challenges, we don’t often think about our own situation all that much.  It’s the old “the cobbler’s children go shoeless” situation.  And I find myself in that position now as I go into retirement.

If you don’t have a clear idea of what retirement actually means for you, then how could you possibly plan for it?  And furthermore, if you are supposed to start “planning early” – like when you are a younger person starting to make money, how could you possibly plan for a stage of life that you can’t really even put your head around.  I would admit to suffering from this difficulty right up to and including the present.

We need new terminology…

At the risk of being a little bit contrarian, I am going to suggest that we need new language around all of what professional advisors call “retirement planning”.  The term is just not helpful and most of us can’t really get started on the planning. It seems there are two main components as I see it – financial aspects and life stage aspects. Unfortunately, the two aspects are intertwined, and this makes it messy. 

On the financial side, I believe the objective is financial security and independence/freedom and the lingo should reflect that. And once the lingo reflects that, then perhaps we can be more settled in how to go about it.  How about “Post Work Financial Model”?  It’s a mouthful, but a financial model can be tweaked as the future real life events unfold, generally not according to plan. What you need is flexibility to re-set and re-forecast.

On the life stages side of things, you alone have to figure this out with relevant family members etc. How about calling this the “Post Work Lifestyles Plan”?  If you are not clear on what this looks like (THAT WOULD BE ME!), you will not be in a position to bring data to the table that is a necessary part in completing the financial side.  Most of us are a little fuzzy on what exactly our post working lifestyle will be and the related spending and costs through to “the end” (of your life!).

Where to start?

  • You have to at least try to start with the Post Work Lifestyles Plan.  I’m personally finding that a little tricky, but if you can articulate this with some degree of certainty, then you are off to the races.  But let’s assume you only have a vague notion of what this looks like – you would be in good company!
  • If you cannot bring any detail to the Post Work Lifestyles Plan, then in my view, you have to make an assumption that nothing will change on the spending side of things. Spending will therefore be the same in the post work years as they were in the year(s) before retirement.  Many will object to this approach.  If you say, “my spending will be less, but I’m not sure how much less”, you are introducing conjecture into the next part of the exercise, namely the Post Work Financial Model. There should be minimal conjecture permitted into that model.  So if you are not comfortable assuming that the post work spending will remain the same, the you must loop back and do a better job of fully flushing out the Post Work Lifestyle Plan and the related costs. To be frank, most of us cannot do this with any degree of precision – not even close.  So let’s assume we take the easy route.

Now it looks like this….

  • You don’t have a well defined Post Work Lifestyles Plan,
  • You now must assume post work spending and financial requirements are identical to the most recent years of normal spending, and
  • You are ready to start the Post Work Financial Model.

What is the first step to completing the Post Work Financial Model

You have to figure out how much you are spending on an annual basis, and then plug in any major “out of the ordinary” expenditures like possible family weddings, and other major capital purchases you know are coming up or might come up.

The good news about that first step…

  1. I have rarely seen a client who knows what the family spending is, much less what they spend it on.  I have seen all manner of spreadsheets and tracking documents.  All estimates and calculations brought to me are suspect in my view.
  2. Even though I have been tracking my own family spending on Quickbooks for 20+ years, I personally still don’t know the numbers off the top of my head – I need to look at the data.  So don’t feel bad that this whole spending thing is a mystery.  And I don’t recommend tracking things in as much detail as I do on Quickbooks, unless you are obsessed about it or an accountant…
  3. But here’s the good news:  There is a simple and inescapable way to figure out the family spending – in less than a few hours. You may not like to see the $ results, but it’s pretty much fool-proof.
    1. Calculate your gross earnings.
    2. Figure out your total final income taxes that you had to pay.
    3. Both a. and b. can be taken off your recent tax returns – hard cold facts!
    4. Calculate how much money you saved:  Start with what you sent to your investment advisor, or the funds you bottled up in bank accounts during the year in question.  Perhaps you opened a new savings account and the balance increased over the year by $28,000.  Or you sent a total of $57,000 to your investment accounts for RRSP and non-registered account investing.  Mortgage principal paydown is also a savings item to be added into this total, and so is any other type of debt reduction.
    5. Now make this simple calculation:  a-b-d = How much $ you spent.
    6. Sorry folks it’s just that simple:  What you earned, less the taxes you pay, less what you saved equals what you spent.  Most people are not happy with the resulting figures (it’s impossible!!), but there is no way around this simple calculus.

Then it’s simple

From this point onward it’s easy sailing.  Your advisor can make a calculation of the income you could expect in retirement based on pension income, investment income etc., and by making assumptions about rates of return, life expectancy and all sorts of other VERY SIGNIFICANT variables that can skew the financial model wildly back and forth.  That’s the “dark art” component of the Post Work Financial Model.  But at least the spending part of the model will be based in reality and can be tracked back to hard facts.

Then these income streams and rates of return are merged with the spending and bingo – you find out if and when you will be running out of money.  How comforting is that?  Hmmm, maybe that’s why few people have the stomach for this Post Work Financial Model/Post Work Lifestyles Plan exercise!

But those that are brave enough to give a good try are rewarded with a little bit of guidance and a really useful tool.  It can easily be updated from time to time as better information comes in about that not-so-well-done Post Work Lifestyle Plan.  If you can do some of the heavy lifting on this, you will no longer be running blind in an area of your life that really does require a little clarity!


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RRSP designations

A May 10, 2021 CBC article demonstrated the importance of reviewing RRSP beneficiary designations. The article discussed the unfortunate cascade of events where, in 2018, a 50-year-old individual went to the hospital for stomach pain and was diagnosed with cancer. He passed away three weeks later, leaving a spouse and a child. It appeared as if the deceased had not reviewed the designated beneficiary on his $685,000 RRSP, which remained his mother from the time when he had originally set it up while single. Not only did this mean that the surviving spouse and child would not receive these savings, but also that they were effectively liable for the tax on the RRSP funds. Although the will included a clause making the spouse the 100% beneficiary of the estate, this did not override the RRSP beneficiary designation. While the spouse and mother were able to settle and cover the tax bill with the proceeds of a life insurance policy, the case serves as a good reminder to review whether insurance and registered account beneficiary designations match the current intent of the parties.


In a March 16, 2021 Ontario Court of Appeal case, a dispute arose over the interpretation of a will regarding how proceeds from the sale of a cottage were to be distributed. As the deceased’s daughters held a life interest in the cottage, the cottage was not sold until more than 40 years after the original owner’s death. The proceeds from the sale of the cottage were to go to the grandchildren. However, within the 40-year period, one of the grandchildren passed away. At issue was whether the proceeds should be split among the four surviving grandchildren, or in five parts, with the deceased grandchild’s estate and beneficiaries receiving a fifth. The court used the “armchair rule,” which seeks to interpret the will using the same knowledge that the testator had when making the will, and determined that it should be divided into four.

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