Stephen Covey, in his classic book, The 7 Habits of Highly Effective People, highlighted as the second habit the need to begin with the end in mind. This habit is instrumental to building a solid financial plan. Only by knowing where you intend to go, and by taking an honest look at where you are today, can you determine the steps required to arrive at your destination. Of course, as life progresses, the destination may shift, but the concept remains: to build a plan today, you need to know what you are working towards.
Not all income is taxed equally. The tax treatment varies based on different forms of income and tax brackets; hence the importance of having a tax minimization strategy in place. It is hardly fair that you should work your whole life and retire only to have the government withhold the pension you were promised, or require you to pay as high, or higher taxes while retired than while you were working full- time. So, look to see where you can deduct, divide, or defer.
Ultimately, there are many variables to consider in tax planning, and there is no one-size-fits-all solution. The factors to consider include which source of income is best deferred, pension sharing, income splitting, taking tax-efficient income on non-registered investments through Corporate Class funds or a Tax Smart Withdrawal program, looking to use the least tax-efficient sources of income first, avoiding OAS claw backs, and taking advantage of tax credits.
An estate plan means preparing for both the management and disposal of a person’s estate during the person’s life and the bequest of assets to heirs and the settlement of a person’s estate. As such, very few people find estate planning to be a fascinating topic and unfortunately most associate it with dying. However, having an estate plan is much more than that.
First, an estate plan gives you control over your money and your assets. It allows you to have all your documents (will, power of attorney, and possibly a health directive) in one place, providing you with certainty should your health change temporarily or permanently.
Second, estate planning helps you transfer your assets in the most tax-efficient manner. This typically includes considering what to do with assets like rental property and corporations. These are assets that, if sold, would trigger significant capital gains tax; probate fees can also be substantial.
Third, many retirees associate ownership with control, and believe that if they give up ownership, they give up control. With a good estate plan, there are often ways to give up ownership, and yet maintain control. Through the use of trusts or other techniques, you maintain privacy and protect your assets from creditors, all while having your assets pass to the beneficiaries of your choice.
If you want your assets and your beneficiaries to be protected when you are no longer able to do so, you should have an estate plan in place. Otherwise, the courts and the Canada Revenue Agency may be making the decisions for you.