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tax & estate Tax and estate concerns at different life stages by Wilmot George, CFP, TEP, CLU, CHS, vice-president, tax, retirement and estate planning at CI Investments, with L i a m Bushell, who was a summer student at CI Investments Tips for serving clients of all ages Afinancial advisor’s responsibilities often extend beyond rates of return to include tax, retirement and estate plan- ning. To understand these aspects of a financial plan, advisors should take the opportunity to learn more about a client’s family, values and priorities in order to effectively manage the client’s assets in life and at death. New advisors, in particular, might benefit from reviewing common planning issues for clients at different life stages. Young professionals: debt costs and registered accounts Young professionals often spend their time and resources paying off post-secondary debt or planning for significant purchases such as a car or house, rather than planning for retirement. This creates an opportunity to talk about debt and savings. The tax implications of debt — specifically, the deductibility of interest costs — can be a significant factor in prioritizing which debt to pay off first. The general rule, under Section 20(1)(c) of the federal Income Tax Act, is that interest on a loan is tax-deductible if the loan is used to earn income. Where two loans are identical in all respects other than the deductibility of related interest, the loan with non-deductible interest is more expensive and should be paid off first. Consider a fictional client, Jessica, who has two outstanding loans of $15,000 each: one to purchase a car for personal use, the other to purchase dividend-paying stocks in a non- registered investment account. Annual interest on each loan is 8%. Interest on the car loan, however, is non-deductible, while interest on the stock loan is tax-deductible as the stocks have the potential to pay dividend income. Jes- sica wants to know the cost of each loan for the current year. Her marginal tax rate (MTR) is 35%. Table 1 shows the results. Another important decision for young pro- fessionals is whether to invest available cash in an RRSP or TFSA. For a client who expects to withdraw money in the future when subject to a higher marginal tax rate, the TFSA is normally a better vehicle. Consider Thomas, a fictional 22-year-old business graduate in a junior role at a market- ing firm. His marginal tax rate is 20%, and he expects his employment income to increase. His bucket list includes a round-the-world trip 20 years from now, and he expects to with- draw his money at a 45% tax bracket to pay for the trip. With $6,000 from employment income to contribute to either an RRSP or TFSA, Table 2 shows the latter makes the most sense. 123RF STOCK PHOTO Table 1: Cost comparison of loans (non-deductible versus tax-deductible interest) $15,000 car loan $1,200 $0 $15,000 stock loan Interest cost (8% annually) Tax savings from deductible interest (35% MTR) Pre-tax investible income from employment Tax (20%) Net contribution Total amount after 20 years (6% annual growth) Tax on withdrawal (45%) $1,200 $420 RRSP $6,000 $0 $6,000 $19,243 $8,659 TFSA $6,000 $1,200 $4,800 $15,394 $0 Cost of loan (current year) $1,200 $780 Table 2: RRSP versus TFSA when withdrawals are made at a higher tax bracket relative to contributions Net cash at withdrawal $10,584 $15,394 16 OCTOBER 2019 1 Assumes available RRSP deduction room 2 No tax due to tax-free withdrawal