A clear path to retirement

Jim, 61, and Linda, 58, came to us with concerns about their retirement. While they had significant assets, especially an investment portfolio in a holding company that Jim inherited from his father, they knew that the numbers they saw on their statement did not tell the whole story.

The taxation surrounding the Holdco confused them and led to disagreements about their retirement spending. They also wanted a solution for how to deal with the Holdco so that they did not pass it on to their only child like Jim's dad passed it on to him. They were grateful for what they had, but the complexity of the Holdco sometimes felt like more trouble than it was worth. They felt strongly about simplifying their estate so their child would not inherit a confusing mess. They also wanted to include philanthropy in their retirement plan by making donations to local charities that served the community.

Another factor in their plan was the psychology around their money. Linda was downsized from her work several years ago and received a modest payout, which they used for family spending. Her money funded renovations on the house and travel while his money stayed invested. Now that Jim was ready to retire, they needed to change from a savings mindset to a spending one.

They were not entirely on the same page about their spending: Linda was ready to enjoy retirement together, but Jim wanted to be more conservative. This disconnect was made worse by the fact that Linda felt her money had already been spent, so it was unfair that Jim was reluctant to spend his money.

At Valence, we believe our job as financial planners is twofold: provide clients with the best possible financial advice, and help them understand how to apply the advice to reach their goals.

Simply telling Jim and Linda about tax-efficient investing in the Holdco, charitable donation strategies, and estate planning was not enough. They needed to understand how those strategies translated to a sustainable retirement income for life and how they could simplify their legacy for their child.

Our initial thoughts were fairly standard: use the Holdco and their RRSPs as the main sources of retirement income. We were still projecting a significant balance in the Holdco at Jim's death, so the plan would be to wind it up after his death using the post-mortem pipeline strategy.

Since Jim inherited the Holdco shares from his father, they had some cost base, which meant the layer of personal capital gains upon deemed disposition was not too high. The tax layer of dividends to the estate would be much higher, so the pipeline strategy was the better choice. At this point, however, it did not sit comfortably with Jim and Linda; they wanted to avoid that complexity if possible.

We explored completely winding up the Holdco during Jim's lifetime. They liked the idea of removing this source of stress, so it became a matter of managing the timeframe. Winding it up in the next five years resulted in too much taxable income being concentrated into those years. The resulting tax was so high it could have jeopardized their retirement income sustainability. Winding it up over at least ten years made the taxes more manageable, but still not ideal.

Throughout the discussion, we explained the mechanics of the Holdco and how it could be used as a source of retirement income. We simulated their retirement spending against stress-test events, such as a stock market crash or living longer than average, to reassure them that their desired level of spending was sustainable. As their understanding grew, their anxiety about the Holdco started to fade. They became more willing to revisit the initial strategy of winding it up after Jim's death.

We provided Jim and Linda with their personalized report and a practical sequence of actions for implementing the plan.

• Donate shares directly from the Holdco portfolio instead of cash. This avoids the capital gain while generating the donation tax credit and a balance in the Capital Dividend Account. Use the CDA balance for additional retirement income without pushing Jim into higher marginal rates; under a pipeline strategy, unused CDA is essentially wasted.
• Flow eligible dividends from the Holdco to Jim. This triggers refundable tax and provides retirement income.
• Start an RRSP meltdown for Linda now. This reduces her mandatory RRIF minimums at age 72 and allows Jim to split pension income with her while keeping her taxable income spread over time.
• Delay CPP and OAS benefits strategically. Jim should delay both to age 70, as his OAS would otherwise be fully clawed back due to his taxable income and the dividend gross-up. Linda should delay CPP to 70 for a larger expected lifetime benefit but start OAS at 65, allowing several years of at least a partial benefit before Jim starts splitting RRIF income with her.
• Use Linda's age for Jim's RRIF minimum withdrawal factor. When Jim converts his RRSPs to a RRIF, this election slightly reduces his taxable income.

A retirement income that is sustainable in approximately 93% of all simulated stress-tested scenarios.

Estimated tax savings of $687,000 in Jim's year of death, assuming he lives to age 85 and earns a 6% return on his Canadian equity portfolio.

Linda keeps her OAS benefits for at least four years.

A clean, cash inheritance for their child and other beneficiaries after the pipeline strategy is executed, without complex structures such as holding companies or family trusts.