Integrated Personal Financial Planning - Wealth accumulation, retirement and estate planning.

Integrated Personal Planning­Wealth Accumulation, Retirement and Estate Planning
By George Athanassakos

The process of financial planning involves an organized approach to the financial concerns of individuals throughout their lives. It is a results-oriented process whereby a person identifies their financial goals, looks at their current pattern of financial behavior and implements steps of an action plan in order to accomplish the goals that have been set. Throughout an individual's life, the emphasis on one or another financial goal may change. The action plan developed must be re-examined, refined or changed altogether.

Not everyone takes an organized and integrated approach to their goals. Knowledge of the tools and techniques that can be used to maximize return, minimize risk, reduce tax exposure and preserve value for the next generation is key. A highly qualified financial planner is one who possesses in depth knowledge of these tools and techniques and who is able to apply them in an integrated way through out the individual's changing life cycle. Such a planner is able to decipher the information necessary to make relevant recommendations and is up to date on legislative and other changes impacting a person's financial situation.

The following sections will discuss three primary aspects of financial planning: wealth accumulation, retirement planning and estate planning. Each of these areas is a discipline in itself. Therefore, each of the following sections will deal with only a specific topic within these areas of financial planning. n

Wealth accumulation: Returns and risks of various asset classes between 1978 and 1997
By Ben Amoako-Adu and George Athanassakos

One of the most important objectives of personal financial planning is how best to accumulate wealth over time by investing in higher yielding assets. Wealth accumulation will be achieved through a careful selection of assets that appreciate in value over the investment period. Successful investment is often determined by balancing the higher expected rate of return with the level of risk that can be tolerated by the investor.

Building a robust portfolio to withstand recessions and financial shocks should be a major consideration in the wealth accumulation process.

The historical monthly rates of returns of six asset classes were examined together with the rate of inflation over a twenty year period between 1978 and 1997.1

These assets are then compared with the Consumer Price Index (CPI) which is used to calculate the rate of inflation.2 Figure 1 shows the accumulated value of an investment of $1000 in each of the assets from January 1978 to December 31, 1997. It is clear that investment in equities over the period gave the highest return.

Since investors are concerned not only with the rate of return, but also with the risk associated with investing in assets, we also need the possiblility that an investment may significantly drop in value. Table 1 reports both the monthly holding period returns and various measures of risk for each asset class examined in this article. Table 1 shows that an investment in equities (TSE300) yielded the highest monthly return of 0.0117, but it also had the highest standard deviation of 0.0121 and the highest lowest quartile loss of -0.2253. Long-term bonds were the assets which gave the second highest rate of return of 0.0101 over the twenty year period. Although the risk of equity investment may be the largest among all assets examined, if an investor stayed invested for a long time, equity investment would give the highest wealth accumulation. An investment in gold and in commodities gave the lowest monthly returns while their risks were significantly higher than those of the other assets, except equities.

Asset allocation principles suggest that investors hold different classes of assets in their portfolio to minimize the portfolio risk. This calls for an analysis of the cross correlation among assets in the different classes examined.

Table 2 reports the pair-wise correlation matrix for all the assets. While most of the correlation coefficients over the twenty year period were not statistically different from zero, four of them were. The correlation between the stocks (TSE300) and bonds was 0.317. That is, to some extent stocks and bonds moved in the same direction over the study's twenty year period. The other positive correlations were observed between gold and the TSE300 (0.236) and between gold and the CRB index (0.291). The CRB index and gold, on the other hand, were negatively correlated with bonds, but only the CRB index's correlation coefficient with bonds was statistically significant. Thus, for portfolio risk reduction (diversification) purposes, the best assets to have been included in a portfolio over the 1978 to 1997 period would have been commodities and bonds.

Different assets perform differently during periods of high and low inflation. Table 3, Panel A reports asset mean returns and risk measures over periods of relatively high inflation, namely between January 1970 to December 1984. During this period, the average rate of inflation was 0.0062 with a standard deviation of 0.0041. Gold and bonds provided the highest rates of return. Strangely enough, the worst performing assets during the period of high inflation were real estate and commodities, which have traditionally been considered as a good hedge against inflation.

Panel B, Table 3 reports the returns and risk characteristics of the various investment alternatives for periods of low inflation, namely 1985 to 1997. During this period, the average rate of inflation was 0.0025 while its standard deviation was 0.0032. Bonds and stocks provided the highest rates of return. During this period, the worst performing assets were again gold and commodities.

In periods of economic downturn, assets which normally yield a high rate of return may perform poorly while other assets which do not normally perform well may become high fliers. Table 4, Panel A, which reports the performance of the assets for the non-recession periods, shows that bonds and stocks provided the best performance. The average monthly
rate of return on bonds was 0.0094, while the return on stocks was 0.0115. Again, commodities provided the worst rate of return (0.0016).

The returns and risk analysis of the asset classes during the recession years are reported in Panel B of Table 4. During this period, the best performing asset was bonds with an average monthly rate of return of 0.0161. Gold was the second best performing asset with an average monthly rate of return of 0.0074. This may provide some evidence to support the belief that bonds and gold may provide a hedge against recessions and economic downturns. Though the average return on stocks was positive, it was significantly lower that the return on either treasury bills or gold.

The analysis of the Canadian data over the 1978-1997 period indicates that despite the higher risk associated with equity investments, if an investor stays invested continuously over a long period, stocks provide the highest rate of return. Investment in bonds was the second best performer over the period. These two assets and treasury bills provided significantly higher returns than the rate of inflation. Consistently, the worst performers were gold and commodities. Their returns were lower than the rate of inflation over the period. However, both gold and commodities are negatively correlated with bonds, implying that holding bonds and gold or commodities in a portfolio will help reduce portfolio risk.

Further analysis of the data indicates that during periods of high inflation, gold and bonds provide the highest real rate of return. However, in periods of low inflation, bonds and stocks tend to provide the highest rate of return and gold and commodities the lowest rates of return. During recession periods, the best assets to hold are treasury bills and bonds. They provide the highest rates of return. On the other hand, the worst assets to invest in during such periods are real estate and commodities.


The excellent research assistance of Nauby Jacob is gratefully acknowledged.

1. The gold and commodity price indices were converted into Canadian dollars by using end of month Canadian/US exchange rates.

2. Data Sources: TSE300, Bonds, T-Bills and CPI are from ScotiaMcLeod's Handbook of Canadian Debt Market Indice (1970-1997); the residential real estate prices represent the index of single bungalows in Markham, Ontario and are from Royal LePage Survey of Canadian House Prices (1974-1997); the commodities and gold prices are from Bloomberg (1976-1997). All returns are total rates of returns, and are calculated on a monthly basis from January 1978 to December 1997. *

Retirement Planning
By Glenn Feltham

Most concerns expressed about spousal RRSPs relate to ownership--a contribution to a spousal RRSP, and any amount earned on that contribution, are the spouse's property. Although control of the spousal plan may raise concerns, legitimate or otherwise, contributors' primary fear appears to relate to the consequences on marital breakdown. The popular press has tended to indicate that your spouse will be in a better position. For example, Steven Keman notes, "Some financial advisors refer to spousal plans as prepaid alimony." 1 However, this contention tends to ignore family law rules that define how property is to be divided between the spouses on marital breakdown.

In the absence of a prenuptial contract (which are infrequently used in Canada), the value of all property acquired after marriage will be equalized--that is, the spouse who has the lesser value, is entitled to receive one-half of the difference in the value of their properties.2 This has caused some authors to assert that the possibility of marital breakdown should have little affect on the decision, as equalization will leave the parties in the same position. For example, Joseph Frankovic,, states, "... it would appear that the contribution to a spousal RRSP would normally make little difference, since contributing to one's own RRSP would simply increase the amount of net family property subject to equalization in the event of marriage breakdown."3 However, in determining whether an individual will be in the same position if he or she invests in his or her own RRSP or a spousal RRSP,
it is important to understand how RRSPs are valued for equalization purposes.

If, in determining the value of RRSPs for equalization purposes, they are not discounted (or are inadequately discounted) to reflect the future tax liability, an individual's after-divorce wealth will be maximized by contributing to a spousal RRSP rather than one's own RRSP. In examining fourteen cases reported in the Reports or Family Law in 1996 and 1997 in which RRSPs were subject to equalization, RRSPs were not discounted in eight.4 Of the six cases in which the value was discounted, three were cases in which the RRSP was liquidated (and the tax implication was therefore certain). Of the remaining three, the average discount rate was 21%. Although the Ontario Court of Appeal, in a 1994 decision in Sengmueller v. Sengmueller,5 stated that there should be a reduction that would take into account future tax liability, this does not appear to reflect current practice. The implication is that if you feel that your marriage will not last, you may have a greater incentive to invest in a spousal RRSP, contrary to conventional wisdom.

It is my belief that most Canadians do not understand the benefits of spousal RRSPs, and certainly do not understand the decision rule that the spouse with the higher current marginal tax rate should make all RRSP contributions (up to his or her limit), to the plan of the spouse who is expected to have the lowest marginal tax rate on retirement.6 The belief (myth) that the contributor's spouse gains from holding a spousal RRSP on marital breakdown also appears to be prevalent. As demonstrated in this paper, the converse is
likely true. Are Canadians uninformed about spousal RRSPs? The anwer, sadly, is yes. *


1. Steven Keman,,"RRSP 1997", Penguin Books Canada, Toronto, 1996. at 15.

2. For example, see Sections 4 and 5 of the Family Law Act, R.S.O. 1990.

3 . Joseph Frankovic,, "Canadian Financial Planning Manual", CCH Canadian Limited, North York, 1998. at 289.

4. An electronic "full-text" search of all cases reported in the Reports of Family Law was conducted for 1996 and 1997. Of twenty-one cases in which RRSPs were included in equalization, six did not provide enough information to determine whether
the court ordered that there be a transfer of RRSP assets such that each spouse had an RRSP of the same value (in which case discounting would not matter). This left fourteen cases that were analysed.

5. Sengmueller v. Sengmueller (1994), 2 R.F.L. (4th) 232.

6. The gathering of "hard data" lending evidence to contribution behaviour between spouses, and the use of spousal RRSPs, would contribute greatly to our understanding of these issues. Unfortunately, it is beyond the scope of this short paper.

Esate Planning: Spousal Rollovers
By Florence Marino and Christine Black

Once one has accumulated and continues to accumulate wealth, the individual's thoughts will eventually turn to his or her immortality. Estate planning is a process that is aimed at preserving and enhancing what will be left to the next generation.

One of the main issues involved in estate planning is addressing the tax liability that will arise on the death of an individual. In particular, the tax rules relating to a deemed disposition of capital property on death must be dealt with.

The tax rules relating to spousal rollovers and the various alternatives for funding the ultimate capital gains tax liability upon the death of the spouse must also be considered.


There are two different types of capital property--non-depreciable and depreciable. The most common types of non-depreciable capital property are shares of a corporation, partnership units and land. Units in a mutual fund or segregated fund would also fall under this category. The most common forms of depreciable property are buildings owned for rental purposes and equipment used in an unincorporated business.

Upon death, a taxpayer is deemed to have disposed of all capital property for proceeds equal to their fair market value immediately before death.1 Any resulting capital gain must be reported in the taxpayer's income tax return (terminal return) for the year of death. Three-quarters of such gains will be added to the taxable income of the deceased individual.2 In respect of depreciable capital property, this deemed disposition may also result in the inclusion of recaptured depreciation in the deceased taxpayer's income.3


An exception to the deemed disposition at fair market value applies where the capital property in question passes to the deceased's spouse or a qualifying testamentary spouse trust. Both the deceased and the spouse must have been residents of Canada immediately before death and the trust must be resident in Canada immediately after the property vests in the trustee. In this situation the transfer takes place at the adjusted cost base (and capital cost or cost amount where the property is depreciable capital property).4 This results in the deferral of any capital gains (and recaptured depreciation) until the spouse dies or the property is disposed of by the spouse or spouse trust.

In addition to married persons of the opposite sex, a spouse is defined to include persons of the opposite sex in "common law" relationships. That is, persons who co-habit in a conjugal relationship and have so co-habited for a 12-month period prior to the relevant time or who are parents (natural or adoptive) of the same child would be considered "spouses."5

The transfer or distribution to the spouse or qualifying spouse trust must be made as a consequence of death. This phrase would cover transfers pursuant to the laws of intestacy or as a result of a disclaimer, release or surrender by a beneficiary under a will or on intestacy.6 As well, transfers which occur after death pursuant to a spouse's interest in property as a result of marriage are deemed to occur as a consequence of death.7

Frequently, testamentary trusts in favour of a spouse are used in estate planning, as opposed to making specific bequests of assets directly to the spouse. One of the main non-tax reasons for doing so is to continue to exercise control over one's assets even after death. For example, use of a trust can ensure that the assets will pass to the children of the deceased spouse after the death of the surviving spouse. To qualify for a tax-free rollover of property upon death, only the surviving spouse can be entitled to the income and can have access to capital of the spouse's trust.

In order for the rollover to take place either to a spouse directly or to a qualifying testamentary spouse trust, the property must "vest indefeasibly" in the spouse or spouse trust within 36 months of death.8 This term is not completely defined in the Act 9 but has been the subject of case law and commentary by Revenue Canada.10 A discussion of some of the commentary and case law is helpful.

Revenue Canada takes the view that the term "vested indefeasibly" refers to an unassailable right to ownership of a particular property. It is its view that property vests in a person when they obtain a right to absolute ownership of that property in a manner that the right cannot be defeated by any future event. This may be so even though the person may not be entitled to the immediate enjoyment of all benefits arising from the right to absolute ownership.11

In the case of Dontigny Estate v. The Queen12 it was held that a clause in the taxpayer's will that defeated or terminated a gift upon the remarriage of the spouse, disqualified the spouse trust. In Parkes Estate v MNR13 shares that were subject to a mandatory buy-sell provision in a shareholders agreement were held not to have vested indefeasibly in the spouse. In the Estate of Van Son case14 the facts were similar to the Parkes Estate case except that the buy-sell agreement only provided an obligation on the other shareholder to purchase the shares with no corresponding obligation on the estate to sell the shares to the survivor. In this case, it was held that the shares had vested indefeasibly in the spouse. Shares subject to an optional buy-sell provision would vest in the spouse provided the shares are transferred to the spouse before the option is exercised.15


A transfer of property to a spouse or qualifying testamentary spouse trust on a rollover basis may not always be desirable. If the deceased has capital losses (or loss carryforwards) or has not fully utilized his or her capital gains exemption before death it would be appropriate for the deceased's personal representative to consider "electing out" of the rollover.16 Thus the personal representative may transfer sufficient property at fair market value to allow the deceased to realize the amount of capital gains necessary to offset capital losses or maximize any unused exemption.17 The spouse will also receive a corresponding increase in the adjusted cost base (ACB) of the property. Any remaining property can then be transferred using the spousal rollover provisions. With this in mind, it is important that individuals provide in their wills that their executors have the power to make elections under the Act.

Similar results may be achieved using a "tainted" spouse trust, i.e., a trust where someone other than the spouse (a child, for example) has the right to capital or income during the spouse's lifetime. Property will pass to such a trust at fair market value. Therefore, an individual may provide the executor with the power to transfer sufficient property to a tainted spouse trust so as to allow the utilization of any capital losses or remaining capital gains exemption. Any remaining property may then be transferred to the spouse or an "untainted" spouse trust, utilizing the spousal rollover rules.


Assuming a spousal rollover has taken place on the first death, the spouse or spouse trust is subject to a realization of capital gains on the death of the surviving spouse (or earlier if the property is actually disposed of during the spouse's lifetime). Planning ahead for the funding of this ultimate tax liability is an important aspect of estate planning.

The planner's goal should be to ensure that the spouse's estate does not become subject to long term liabilities to Revenue Canada18 and to avoid the forced sale of property (perhaps under unfavourable market conditions) simply as a means of acquiring cash to pay debts. For these reasons, it is generally recommended that life insurance be acquired as a means of funding income tax and other liabilities which are incurred upon death and in particular, individuals should consider the acquisition of insurance on the lives of both spouses, with proceeds payable on the second death. This is not only a means of adapting life insurance precisely to the estate plan, but may also be considerably less expensive than purchasing insurance on one life only. This is the most effective means of guaranteeing that the required amount of cash will be available exactly when needed.

The impact of capital gains taxes at death can be substantial. Planning ahead to fund the ultimate capital gains tax liability upon the second death of two spouses preserves the value of the estate for heirs and may be done in a highly cost effective and efficient manner.


1. Paragraph 70(5)(a) of the Income Tax Act, (R.S.C. 1985), c.1 (5th Supplement), as amended, hereinafter referred to as the "Act". Unless otherwise stated, statutory references are to the Act.

2. Note, if the deemed disposition results in a capital loss rather than a capital gain, three-quarters of the loss must first be used to offset the deceased's capital gains in the year of death. Then the losses must be reduced by the amount of any capital gains exemption claimed by the deceased in all previous years. If there is excess capital losses, then a deduction will be permitted against other income in the year of death or in the previous year (subsection 111(2) of the Act). This represents some relief for deceased taxpayers since capital losses are generally only permitted to be deducted against capital gains and not against other types of income.

3. Consider the example of a rental property which has an ACB of $100,000 (excluding the value of the land which is capital property), an undepreciated capital cost (UCC) of $80,000 and a fair market value at the time of death of $200,000. The deemed proceeds on death will equal the fair market value ($200,000). The amount by which the deemed proceeds exceed the ACB ($100,000) would be treated as a capital gain and taxed as described previously. The difference between the property's ACB and its UCC ($20,000) would be treated as recaptured depreciation and would be fully taxed in the year of death. If the deemed proceeds exceed the UCC but are less than the ACB, the deceased would incur recaptured depreciation but no capital gain or loss. Where deemed proceeds are less than UCC, a terminal loss would be incurred which could be used to offset other income in the year of death.

4. Subsection 70(6) of the Act.

5. Subsection 252(4) of the Act.

6. Subsections 248(8) and (9) of the Act.

7. Subsection 248(23.1) of the Act.

8. The legal representative of the taxpayer can apply to the Minister to extend this period so long as this application is made within the 36 month period. However, the property still must vest indefeasibly in the spouse or spouse trust during such longer period as the Minister considers reasonable in the circumstances.

9.Subsection 248(9.2) of the Act provides a rule applicable in respect of deaths occurring after December 20,1991. It states that property will be deemed not to have vested indefeasibly in a spouse or spouse trust created by the taxpayer's will unless it became so vested before the spouse's death.

10. Interpretation Bulletin IT-449R - "Meaning of 'Vested Indefeasibly'" dated September 25, 1987.

11. Ibid. paragraph 1.

12. [1974] C.T.C. 532 (FCA).

13. [1986] 1 C.T.C. 2262 (TCC).

14. [1990] 1 C.T.C. 182 (FCTD).

15. Supra note 13 at paragraph 8 example (d).

16. Subsection 70(6.2) of the Act

17. Individuals who incur significant amounts of exempt capital gains during their lifetimes may be subject to AMT. However, under section 127.55 of the Act, AMT will not apply in the year of a taxpayer's death.

18. Some relief is available under subsection 159(5) of the Act by filing Revenue Canada form T2075. Under this provision, income taxes owing for the year of death may be paid in annual instalments (not exceeding ten) with interest charged at the prescribed rate from the day taxes should have been paid. This interest would not be incurred for the purpose of earning income and would therefore not be tax deductible.

If taxes owing by a deceased individual are to be paid by instalment, security must be provided to the Minister. This may be in the form of a charge on property owned by the deceased or by another person, or a guarantee provided by another person. *

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