Retirement and Tax Planning

In Episode 12 of the Financial Checkup, Aaron Schechter, CPA, CA, TEP (Partner, Tax) at Crowe Soberman LLP, discusses the tax and financial planning considerations physicians should look at during the various stages of their career and life - from residency to post-retirement. Aaron also chats about how the Advantages Retirement Plan™ can help you and your spouse/common-law partner plan and prepare for a successful retirement.

Transcript

Speaker 1: Welcome to The Financial Checkup, a podcast series devoted to improving the financial health and retirement readiness of physicians and their spouses or common-law partners. This series is brought to you by the award-winning Advantages Retirement Plan from OMA Insurance. 

Aaron Schechter: Tax and financial issues and considerations is not like a one size fits all program. You really need to take into consideration a whole host of factors that relate to that individual, him or herself, before you can make recommendations when it comes to certainly tax planning and financial considerations at a particular point in a person's life. 

Speaker 1: The views or opinions expressed by the presenters are solely their own and do not necessarily represent the views or opinions of the OMA, OMA Insurance, or the Advantages Retirement Plan. 

Preya Singh-Cushnie: I'm Preya Singh-Cushnie Senior Director at OMA Insurance. Today, we're going to spend quite a bit of time speaking about all things tax and retirement planning. We'll touch on tax and financial planning considerations during the career and life cycle as a physician, whether you're a medical student or resident, practicing physician, one ready to plan, already entering into retirement, we'll be sure to educate you on how the award-winning Advantages Retirement Plan can help you plan and prepare for the kind of retirement you envisioned for yourself and your family. I'm extremely pleased to introduce our guest speaker today, Aaron Schechter. Aaron is a partner at Crowe Soberman LLP an accounting firm here in Toronto. He has over 20 years of experience in providing tax advice to privately owned and owner-managed clients. 

Aaron helps to ensure his client's taxes are minimized and their capital's maximized. He's also developed a significant and specialized expertise with respect to tax, accounting, and financial needs as it relates to health professionals, primarily those who are doctors or dentists, I will now pass the mic over to Aaron. 

Aaron Schechter: Thank you very much, Preya. It's a pleasure to be here today. I didn't know that disclaimer was coming up, but it actually brings an important point to mind and that is that, tax and financial issues and considerations is not like a one size fits all program. You really need to take into consideration a whole host of factors that relate to that individual, him or herself, before you can make recommendations when it comes to certainly tax planning and financial considerations at a particular point in a person's life. With that being said, what I'd like to do is just show you a quick video as an introduction to today's program. 

Video:                          Sure. What's this looks expensive? 

                                         This is some new bedding. 

                                         David, didn't I just tell you to save your money? 

                                         Yeah. I am testing this out for the store. So work is paying for it. 

                                         Work is paying for your bedding. 

                                         I was going to leave, but now I don't want to. 

                                         What is that? Is that a new lamp? 

                                         Yeah. I'm thinking of bringing homeware into the store. That's a write-off. 

                                         That's a write-off?

                                         Yeah. 

                                         Do you even know what a write-off is? 

                                         Yeah. It's when you buy something for your business and the government pays you back for it. 

                                         Oh. Who pays for it? 

                                         Nobody. You write it off. 

                                         Who writes it off? 

                                         I don't know. The write-off people. Why are we having this conversation? 

                                         So if I need booze to get through my day, I can just write that off? 

                                         That's a stretch. 

                                         But the skincare products you got this morning, those are write-off? 

                                         What skincare products? You purchased skincare products? 

                                         Okay. I am the face of the company. If I have acne, what does that say about the legitimacy of the store? 

                                         That's not a write-off. That's not a write-off. This not a write-off. 

                                         Well, the bedding's non-refundable. 

                                         David, a write-off is a business expense used to reduce your taxable income. 

                                         Okay. Well, then why isn't it called a tax write-off? 

                                         It is. It is. You can't just buy things for yourself and write them off. 

                                         Well, then I'll return some things. There's not enough space in here for the massage chair anyway. 

                                         I should get back to work just in case anymore of your packages arrive. 

Aaron Schechter: Well, that as many people know is from Schitt's Creek. It's intended to provide at least for purposes of this presentation an exaggerated example of an individual that certainly has not paid any attention to tax literacy and financial considerations so far during their lifetime. I feel that as a tax practitioner, it is my responsibility to make my clients aware of tax and financial matters and provide them with a basic background when it comes to these issues. Because ultimately, they're the ones who are making the decisions. I'm simply the advisor, giving them the pros and cons of the issues. But ultimately, it's their responsibility to make the decision. They can only make an informed decision once they have a basic background in tax. 

With that being said, as I mentioned before, tax and financial planning is not a one size fits all shop, certainly things that are a priority to someone in their 20s and 30s, and you can advance the slides all along the time horizon. Every individual has at different stages in their life and certainly throughout their career different priorities. Those priorities shift as an individual moves from one phase of his or her career to the next. For example, someone who is in their 20s, they're still probably going to school, maybe they're completing their fellowship or their postdoc, and they're accumulating debt. Certainly, their financial and tax priorities are different than someone who's in their 40s to 60s. That individual's probably in their prime income earning years. They might be looking at buying a second home. 

They're probably looking at more strategic tax planning and financial planning considerations. That again differs from someone who is in their 60s, approaching their 70s and 80s, when they're thinking more along the lines of slowing down their practice, retiring, and maybe planning for the next generation. Next slide. What I plan on doing here in this presentation is looking at some of the key phases during a physician's life cycle and identifying some of the financial and tax considerations in that particular phase of the life cycle. And then going into a little bit more detail on what some of those key financial and tax considerations would entail. 

For someone in their 20s and possibly even in their early 30s they're finishing up school, from a tax perspective, it might be their first time that they filed a Canadian tax return. They're learning about what is a tax deduction, what is not a tax deduction. From a financial perspective, it's probably their first introduction to insurance when they start their career one of the most important things that they should look at is getting disability insurance because, of course, if something critical happens to them, they've potentially lost their source of income. So disability is probably the most important type of insurance for a physician starting out their career. If they buy a home, they might need to get or they might want to think about getting a term life insurance policy, it's fairly inexpensive, but these are the things that they should be considering early on. 

They might also want to make sure that they've got just a basic will, basic powers of attorney just in case something, God forbid, happens to them, especially as they start a family. Finally, although it's important probably at every phase in a physician's career life cycle, this is probably the phase where an individual first starts to develop relationships with professional advisors like accountants, maybe even lawyers, investment advisors, and insurance providers. Next slide. 

Moving on, in the 20s to early 40s, probably an individual has now finished their school, they realize that perhaps they've got a lot of debt and they want to start to systematically pay that off. Based on their earnings, they would take a certain percentage of that every month and put it towards their debt, come up with a debt retirement plan so that debt can be extinguished, maybe not as quickly as possible, given the fact that interest rates are still fairly low, but as interest rates increase, there's probably an increasing need and recommendation to pay off that debt sooner rather than later, of course, the interest on student debt is not deductible. There's better forms of debt that an individual could actually have. 

At the same time, it's probably a good opportunity for someone to start systematically investing. They do that primarily through their RRSP, maybe making a monthly contribution periodically, and maybe also through their tax-free savings account, their TFSA. Now the OMA's Advantage Retirement Plan, which is a group retirement savings plan, which I'll talk a little bit more in detail about later. It is also probably a good start here because that is a systematic or it's a plan that allows for a systematic contribution to that plan that helps grow an individual's retirement income. If the individual is starting a family, maybe has a child or two, then they might also want to consider a registered education savings plan. 

There's two main benefits of that type of plan. The first one is that the money put into that plan grows tax-free until the child attends post-secondary education. Second, the government will give a grant of up to $500 per child per year. It's free money that can be used towards a child's education. The insurance needs change a little bit in this phase of a physician's life cycle. The first one is that there might be a shift from term insurance, which is relatively cheap to a more permanent type of life insurance, the premiums are a little bit higher under a permanent life insurance policy, but it is a policy that will be in place for the entire life of the physician. 

It can be a very important financial asset to a physician. Also, the individual might want to consider getting critical illness insurance, and critical illness insurance. I feel the critical illness insurance is more of like a premium type of insurance. You probably want to ensure that you've got life insurance and disability insurance before you start looking at critical illness, but critical illness will provide a lump sum benefit to the individual if there is a significant illness, such as a heart attack, stroke, Alzheimer's, a cancer diagnosis, and a myriad of other types of illnesses. One of the advantages of critical illness is that most of these types of policies actually offer a refund or premium. 

If you haven't made a claim on that policy by a certain age, then the insurance company will give you back all of your premiums. Also, during this phase of the career life cycle of the physician, the individual will start wanting to look at perhaps increasing the amount of life insurance that he or she has, increasing the amount of disability because not only will their income increase, so they've got to replace their income if they do have a disability, but also their personal life expenses might increase. Certainly, as they have a family, they might now look at if something should, God forbid, happen to them, they have to ensure that their family is taken care of from a financial perspective. From a tax perspective, during this phase, oftentimes, the physician is starting to deduct their RRSP contributions just because you make a contribution to an RRSP doesn't mean that you necessarily have deducted in the year that you make the contribution. You want to look at trying to maximize the value of your RRSP deductions. 

So oftentimes an individual will wait until he or she is in the highest income bracket before starting to deduct their RRSP contributions. I certainly get a lot of questions on incorporating from physicians in their early 30s. I will tell you that again, it's not a one size fits all situation for incorporation. Anybody that tells you that there's a tax savings from incorporation is not giving you the full picture. There generally is not a tax savings from incorporation. It is mostly an income tax deferral. If you do incorporate, then you need to make decisions on how you're going to take money out of your professional corporation. Is it going to be salary or dividends, and both of those have different implications? 

One of the questions I get quite frequently is should they invest for their retirement through their medical professional corporation or through their RRSP. If you do incorporate, then you should definitely have a secondary will. I'll talk about that in a few minutes. Next slide. As I mentioned, one of the questions that I get fairly frequently is, "If I do incorporate, do I then start to build my retirement nest egg through my corporation? Do I invest through my medical professional corporation and only take out from that corporation, the amount that I need for personal living expenses? Or do I take out some extra so that I can invest in my RRSP?" There was a quantitative analysis done by a senior advisor at one of the banks, probably about, I want to say at least 10 years ago. When they ran the numbers, what they determined was that it was best if an individual went their RRSP and simply used their corporation to invest and build up their retirement nest egg. 

Now since that study was done, personal income tax rates have done nothing but increase. A few years back, they decided to rerun that quantitative analysis. It was interesting because the analysis actually flipped. It's now better to take salary out of your professional corporation, invested in your RRSP, and use your RRSP to build your retirement nest egg, as opposed to simply using your professional corporation to harbor your investments and build for retirement. What I recommend is that we have no idea where tax rates are going to be in 10, 15, 20, 25 years. The best approach is probably a hybrid approach that you use a combination of both contributing to your RRSP, taking out salary, to contribute to your RRSP, as well as any income that is not needed for personal living purposes. You leave that behind in the corporation, you make benefit of the income tax deferral that is available in a professional corporation, and then invest that money within your professional corporation. So a hybrid approach to me makes the most sense. 

I also worry that for individuals that use strictly their professional corporation for investing, those funds are always just the mouse click away from ending up in a personal bank account, and then being used for things like a family vacation or a new car, or a renovation to a house now. Those items are all fine. New house, a vacation for the family, or even a new car, I'm not saying that those are bad things, but the temptation lies there to take those funds out of your corporation and use them for personal living purposes when instead they should be reserved for retirement. Speak to your financial advisor, make sure that you've got enough money for retirement before you decide to take a lump sum out of your professional corporation. 

Next slide. I did mention that when you do incorporate that it is imperative that an individual has two wills, both a primary will and a secondary will. The reason for that is, in Ontario, we have a concept called probate. Probate is when an executor of an estate needs to take the will to the courts and the courts stamp it that it's a bonafide copy of a true will. In order for the courts to stamp that will as being probated, they will charge you a fee of 1.5% of the fair market value of the estate in excess of $50,000. Once one asset in a will needs to be probated all the assets under a will need to be probated. There's a concept of having two wills. One is that primary will and the second is the secondary will, which carves out assets that don't need to be probated. Those assets include shares of a private company, like a medical professional corporation or holding company, investment company, things like personal artifacts, art, cars. 

By carving those assets out of your primary will and keeping them in a secondary will or having them addressed in a secondary will, the estate does not end up paying that 1.5% probate fee on those assets. So an individual can accumulate quite a significant wealth within their medical professional corporation or an investment company or holding company. As long as those shares are carved out of their primary assets and put into a secondary or carved out of their primary will and carved out into a secondary will, then those assets will not be subject to probate. So you'll save yourself 1.5% on the value of any company, personal, private company that you own at the time of your passing. 

Next slide. Okay. Moving on to individuals that are in their 40s, 50s, and 60s, and this is really, as I mentioned before, the prime income earning period for a physician. With that comes probably some more sophisticated high-level types of tax and financial planning. I think I've got a slide on pretty much all of these. Let's go and take a look at some of these items in a little bit more detail. Next slide. One of the things that a physician in this stage of their career might want to think about is an individual pension plan, and an individual pension plan is a corporate pension plan for a physician, which is funded with pre-corporate tax dollars. So a corporation will now fund an individual's retirements and create this pension plan for him or her. It is not unlike an RRSP except for a few differences. 

Obviously, the corporation gets a tax deduction for those contributions to the IPP, whereas in an RRSP situation, the individual gets a tax deduction for those RRSP contributions. Also, with an IPP, those contributions that are allowed into the plan are usually, significantly higher than what an individual can put into his or her RRSP. So some people will often refer to an IPP as a supercharged RRSP, and it should be noted that you can't have both an IPP and an RRSP. You can only have one or the other. If you convert or you set up an IPP, you have to take some of your RRSP and convert it into the IPP, which is not a big deal. 

Another benefit of the individual pension plan is that when it is set up, oftentimes, there is a significant lump sum payment that the corporation can contribute to the IPP. So they can get a very large tax deduction often on the initial setup of the IPP. Of course, it depends on how old the physician is, how much salary they've taken out of their professional corporation, how long they've been working, and how long they've had the professional corporation for. All of these factors play a role in how much can ultimately be contributed to the IPP, but for somebody who is in their 40s and 50s, it generally makes a lot of sense to set up this type of corporate pension plan, as opposed to contribute strictly through your RRSP. 

One other benefit of note here with a individual pension plan, if there is a significant amount of investment income in a professional corporation, oftentimes what you'll find based on some new rules that the government introduced probably about five years ago, maybe a little bit longer than that is that there's a grind down of the low corporate income tax rate when investment income gets too high in a corporation. With an IPP that investment income could be shifted into the pension plan, as opposed to being earned in the professional corporation. Therefore, it doesn't impact and won't grind down the low corporate income tax rate that the professional corporation earns on its business income. 

Next slide. So many of you may have heard of type of planning that's really been the flavor of the month for, I'd say the last five years or so, and that's called capital gains stripping. It generally doesn't make sense for someone who's not at least 40 years old, and it only really makes sense when an individual needs a lump sum of money to be taken out of their corporation, maybe for a down payment on a vacation home, or possibly a renovation, or maybe a new matrimonial home. They need half a million, a million, $2 million. This is not the type of planning that you want to use just to provide yourself with a stream of annual income. There's professional fees involved. And it doesn't make sense to this on an annual basis. 

There are many different types of ways to do capital gains stripping. It should be noted that even though it's been the flavor of the month for the last five years or so, it is a significantly aggressive type of tax planning. It's not right for everybody. You have to have a little bit of a stomach for some tax exposure. My understanding is that there are at least two situations that the CRA is challenging taxpayers that have done this type of planning. They are going to be heard in the tax courts in the next one to two years. Certainly, we'll get an idea of how the CRA or how the tax courts feel about this type of planning. 

There's also been the threat that the CRA who doesn't like this tax planning, they know it exists, but they don't like this type of tax planning, they may simply implement a legislative fix that will curtail this type of planning. If you are thinking about doing it, definitely speak to your professional advisor about those risks that can be associated with it. Next slide. If an individual has a lot of investment income that they're earning personally, there may be opportunities to split or shift some of that investment income to lower-income family members, usually a spouse or children, even minor children by using what's called a prescribed rate loan. A prescribed rate loan is a situation where a high-net-worth individual will transfer or will loan money at a prescribed rate to a spouse or a child. 

Now the prescribed rate is a rate that is set by the CRA quarterly. It's been 1% for the last year or so. As interest rates increase, we expect that prescribed rate to increase as well. So it might not be 1% for the rest of this year, but it's certainly 1% now. Once you make that loan, you've locked in that prescribed rate for the life of the loan. If you make a loan now, it will be at 1% till that loan is repaid and which can be indefinitely. The idea here is that instead of the high-net-worth individual investing, let's say a million dollars, he or she loans that million dollars to a spouse or a child, including minor children that might be in lower income tax brackets, you'll have the spouse or the children invest that money and pay tax on that investment income. And because they are theoretically in lower income tax brackets than the high-net-worth individual, there's some tax arbitrage there, there's some tax savings. 

That's a plan that can be implemented. Remember, you have to have the money outside of your professional corporation. The corporation cannot make a loan to your minor children or your spouse to implement this type of plan, it doesn't work. Next slide. The Advantages Retirement Plan and certainly Preya can provide more information on this, but this is a plan for OMA members as well as their married spouses, and also common-law partners, where it is a pretty simple, systematic periodic contribution to this group retirement savings plan using an individual's RRSP and TFSA. It helps build a nest egg for retirement. You can convert the group retirement savings plan to an annuity, which will provide the individual with a guaranteed steady income for the rest of his or her lifetime, and starting as early as age 50. 

But it's a great plan because it is very simple and the fees are much lower than they would be if you invested directly with an investment advisor. I suggest that if you have more questions or you're interested in this program a little bit more, certainly Preya can handle those queries. Next slide. Also, during this that the 40, 50, and 60-year-old stage of a physician, other things to consider are things like US estate tax. Oftentimes, we'll have a situation where an individual comes to us and says, "By the way, I'm a US citizen. I had a green card when I was younger, or I was born in the United States." Without getting into too much detail, this causes a situation where the individual, when they pass away could be subject to USA estate tax. 

In addition, things like vacation homes in Florida, or Palm Desert, anywhere in the United States, having real estate in the United States, even if it's used for personal use and also shares of private companies, sorry, public companies, not private companies, public companies. So if you own shares personally of Netflix and Apple, and those have grown significantly over time, depending on how much you own, you could be subject to US estate tax, and there are ways to mitigate against US estate tax, both on assets like vacation homes and property owned in estates. You can use certain types of trusts. If you've bought certain types of investments, which I talked about like Netflix shares or Apple shares sticking them into a corporation may also help mitigate US estate tax. 

When the professional turns 65 years of age, they can start income splitting with a spouse through their professional corporation via dividends. If you have a professional corporation and you haven't introduced your spouse as a significant shareholder of your professional corporation, you may want to undergo what's called an estate freeze, which is basically taking a snapshot of the value of a professional corporation at a moment in time converting the professional's common shares to preferred shares and introducing a spouse, having the spouse subscribed for common shares at that time. So that once the individual turns age 65, you can then start income splitting by paying spouse dividends through your professional corporation. 

Also because things are not static, things are dynamic, they're changing all the time. It's also a good opportunity, an idea to review Will's powers of attorney and beneficiary designations on registered accounts. I recommend doing this at least once every five years. Again, things change certainly a will that was created when the individual's 30 will not be applicable, a will need to be updated if the individual is 30 years old, sorry, by 60 years old. If the individual is 60, they might have grandchildren that they want to introduce into their wills. Perhaps, they have a child that is now estranged. They might be on their second marriage. There's a whole variety of different issues and considerations as an individual gets older, that needs to be reflected in his or her will. 

You might also want to look at life insurance as an asset. I often tell my clients that are looking at life insurance as an asset that keep in mind that if you are going to buy this type of product, really, you should be thinking about it as providing a bequeath to the next generation. If you're interested in giving your children, let's say, a significant lump sum on your passing, and you've got additional disposable income that you don't need for personal living purposes, or that you don't want to use during your lifetime, then certainly using a permanent type of life insurance policy would be a great way to provide them with a lump sum of money. Now, a lot of people are selling this type of product as something that can be used by the professional during his or her lifetime. 

I'm not sure I necessarily subscribe to that theory. Although, it could happen, but again, we don't know what the tax rules are going to be like 5, 10, 15, 20 years from now. So to think that the rules, when it comes to leveraging life insurance policies now will be the same as they will be in 25 years. I'm not convinced that they will be, especially if this type of planning becomes more and more popular. Next slide. Okay. Moving on to someone who is now in their 60s, 70, and 80s. One of the questions I get, certainly in and around the age of 60 for a physician is do they take CPP? Now if they've been taking salary from their professional corporation, then they've paid into the CPP program. CPP is not a significant amount of money when it comes to the individual's retirement income flow. 

So my thought on when to take CPP is that if you don't need it, don't take it. The longer you defer taking CPP for, the more money that will be given to you on a monthly and annual basis. Now that decision might depend on the health of the professional, but for someone who is fairly healthy, I would say defer taking CPP for as long as possible. As I mentioned before, there's a plan if you've got a medical professional corporation to introduce a spouse into the shareholdings of the medical professional corporation and start paying him or her dividends, assuming that they're in a lower income tax bracket, once the professional is older than 64 years of age. Well, when an individual turns 71, they've got to take their RRSP and convert it. They either collapse the RRSP, or they convert it into a registered retirement income fund on a tax-deferred basis. There are mandated minimums that the individual has to take as taxable income every year out of their RRIF. 

You want to balance those mandatory income distributions with taking money out of your professional corporations. If you were taking out $150,000, $200,000 out of your professional corporation every year, but now all of a sudden after age 71, you now have to take $20,000 out of your RRIF that becomes taxable to you. You want to balance that off and probably take a little bit less out of your professional corporation because when you take money out of your professional corporation, you're losing out on that income tax deferral. So balancing the two, 'In retirement, where do I take my money from? Do I take it from my professional corporation? Do I take it from my RRIF?" What's that mix again is an important decision that you need to discuss with your investment advisor or accountant. 

Now I mentioned a registered education savings plan for children early on in the presentation, but certainly, it also works for grandparents. Grandparents can set up an RESP for grandchildren, and maybe the immediate children are just starting out their careers and they don't have the disposable cash to make contributions to an RRSP for their children. But certainly, the grandparents might have more disposable income and they can set up an RESP for their grandchildren and start to get the free government grants and have that tax-free compounding start to work for them and build up some income and funds that are available for the grandchild's post-secondary education. 

I will talk about... Well, let's go to the next slide. I did mention the concept of probate before, but when someone is now 60, 70, 80 years old, it's probably also a good time to now think about and possibly even have your accountant to do a calculation of what the estimated estate tax is going to be on your passing, as well as what the probate fees may be. And there are ways to mitigate and minimize both estate planning, sorry, estate taxes, as well as probate fees as well. We already talked about having a dual will as one way of minimizing probate fees. You can also take non-registered marketable securities that an individual may have and transfer those marketable securities to the medical professional corporation, or it might even be a regular corporation if the individual has retired already a holding company, an investment company. 

And as long as the individual has a secondary will, which carves out shares of private companies by transferring the non-registered marketable securities into a private corporation. Now all of a sudden, those marketable securities are no longer subject to probate fees. Should you pass away without those investments being liquidated? There is also plans where you can take the title to an investment account and title of real estate, like the matrimonial home, and put it into a bare trustee corporation. We have clients that have done that. I've also seen situations where even though a client has done that when the executors go to transfer the investment portfolio to the beneficiaries, or when the executors go and try to sell the matrimonial home if titled to those assets are in a bare trustee, the financial institution or the purchaser's lawyer in the event of a real estate transaction, may still require the executors to go out and to probate those specific assets, even though they should be free and clear of having to go to get probate on them. 

But I have seen situations where the financial institution and/or a lawyer in a real estate transaction says, "Forget it, we're not going to transfer the assets, or we're not going to buy the assets or the real-estate unless the executor go and get probate on that because we just want to make sure that you have the legal right to transfer those properties." Also, another way to avoid probate is to take a look at some of the registered accounts, potentially RRSP or RRIFs, and making sure that they are designated beneficiaries within those policies, designated beneficiaries will allow for those assets, those registered accounts to pass to the name to beneficiaries without going through the estate. Therefore, do not attract probate fees. Couple of things to caution you about when a parent, because oftentimes, we'll see where a parent wants to put their child's name as joint owner of a non-registered bank account or a portfolio of stock. 

There can, one, be tax implications to doing that if it's not done carefully. Also, based on a court case from, again, it's probably about 10 years ago called [inaudible 00:46:34] When a parent puts assets in joint name with a child, there is a presumption of resulting trust. What that means is that there really hasn't been a change in ownership just because you've put your child's name on the account doesn't mean that you've passed ownership to them. In fact, what it means through the courts is that you've only transferred or that the child actually holds those assets now in trust for the estate, there hasn't been an outright gift to that child, but rather that child simply holds those assets in trust for the estate. Therefore, it doesn't escape probate. 

Now if there is going to be or the intention is that it's a legitimate gift from the parent to the child, that should be explicit. There should be indeed a gift put in place because the onus will be on the child to demonstrate that indeed the parents intended for it to be a gift, especially if there's other siblings involved can you imagine situation, which happens all the time, where parents put their one child's name on the account to jointly hold that account. And then the child that received the joint ownership of the account, when the parents pass away, say, "Mom and dad intended that to come to me directly." Meanwhile, there's other children who are part of the estate, who haven't been equalized and obviously would possibly object to that. 

Next slide. Okay, I'm going to skip over this in the interest of time, but I'll briefly say that if you do an estate freeze and I had mentioned what an estate freeze was early on in the presentation where you convert common shares to preferred shares, and you take a snapshot picture of the value of the corporation. If you start to systematically redeem those shares, it can provide the individual not only with a stream of income during their lifetime, but it can also minimize the ultimate tax that they pay when they pass away. 

Next slide. This one's interesting. I think it's an important consideration for someone who is closer to retirement, or even in retirement because it forces you to reexamine the will. There's a few things in this slide that are important to note. The first one is, will the estate have a sufficient amount of liquid assets to pay off those estate taxes and probate fees? That's why I mentioned that during this phase of the career of a physician, it might be important for the accountant to prepare an estimate of the taxes that are going to be owed on the death of the professional. Because once that number is known, there are ways to mitigate it, there's ways to reduce it. Certainly, if there aren't, then at least the professional knows how much the estate will need in terms of liquid assets, in order to cover that funding requirement. 

Now they might have life insurance that will cover that, they might have other assets, they might have cash in the bank account to fund that liability. But what if they don't, what if a significant portion of the estate is comprised of the medical professional corporation or an investment company or holding company that holds a significant amount of liquid assets, whether those be marketable securities or even real estate? How is the estate now going to pay the tax on the value of that corporation when the underlying properties cannot be easily liquidated? That's for a situation where the deceased owned a corporation. What if simply the professional owns a family cottage or a vacation home? It's not as if the executors can go out and sell that property rather quickly. Maybe it's also something that the family wants to keep. How do you fund that liability? 

Do the executives have to go out and get a mortgage on the family cottage in order to pay the taxes on it? These are questions that should be thought of and addressed when you're doing estate planning. Next slide. Just in terms of the situation where a family owns a cottage and let's say, there's two children, one lives in Ontario where the cottage is and goes up every weekend, and then there's another sibling and his or her family is out in BC and doesn't use the cottage at all. How do you plan on equalizing your children if one child wants to keep the cottage? Are there sufficient assets to equalize the child who lives in BC who doesn't necessarily want the cottage? Again, things that need to be considered and addressed in a will. What I find, although it doesn't happen all that frequently is that ideally there should be a family meeting while everybody is still alive and still has the mental faculties to make decisions. 

It is important that the parents describe and make their wishes and intentions known to all the children. Maybe they reveal a little bit of what is in their will because it will eliminate surprises down the road and certainly surprises lead to possible ill will not only against the parents, but also between siblings and create for fights, and then the only people that win are the lawyers. I think there's one more slide left. 

Preya Singh-Cushnie: Maybe if we can just wrap up quickly because we only have about six minutes for questions and I know questions are coming in. 

Aaron Schechter: Okay, perfect. Let's just jump to the last slide then. I'm just going to leave you with some of the takeaways, I think the communication is important, speak to your trusted advisor, speak to your family, there's no one size fits all situation, tax planning, and financial issues should be considered at all times, and things change. So you've got to look at your wills, update them, reevaluate your financial and estate planning considerations. 

Preya Singh-Cushnie: Excellent. Thank you so much, Aaron, that was very informative and very detailed. I'm pretty sure that everyone listening can agree that was very valuable information for them to consider. I do encourage everyone that's listening that the Q&A button is available. Please submit any questions you have there. I do see one that's come in. The question here is, "If your children have an RRSP already set up for their child, can the grandparents set up an additional RESP for that grandchild?" 

Aaron Schechter: Okay. There are limits on how much can be contributed to each child. Generally, you should have one RESP per child, or you can have what's called a family RESP, which includes all the children, but it depends on the child, him or herself. Anybody can be a subscriber, which is a contributor to an RESP but only you can either have a single RESP for each individual child or a family RESP plan. 

Preya Singh-Cushnie: Thank you. What are the common mistakes that people make in retirement planning? 

Aaron Schechter: There are a lot of common mistakes that people made. I talked about putting assets in joint names, that could trigger tax consequences. Otherwise, it could lead to a presumption of resulting trust, not taking into account possible US estate tax issues. Under previous governments in the United States, the exemption for US estate tax was really high. Right now, I think it's about $11 million. So your state needs to be greater than $11 million, but under the Biden administration, he is proposing to bring that down considerably down to, I believe, it's either $3 million or $5 million. You're going from having an exemption of an estate that used to be, and I'm talking about a worldwide estate, I'm not talking just about your US assets, from $11 million, which probably exempted a lot of people, now bringing it back down to $3 million or $5 million. 

If you look at just the value of real estate here in Toronto, the matrimonial home could put you easily over that threshold of your worldwide estate. So if you have shares in US companies, all of a sudden, you can find yourself with US estate tax liability. 

Preya Singh-Cushnie: Thank you for that. I'm not seeing... Oh, one more live question coming in. This will be our final question because we are getting down to just a couple of minutes left. This one's coming in. "I'm just retiring, age 67. I want to add my partner as a shareholder in my corporation to pay her dividends to lower our taxes. She is a physician. How do I do this?" 

Aaron Schechter: First of all, I'm not sure it makes sense if she's still a practicing physician. So that's important to note. If she has retired and it does make sense, of course, I don't know their individual circumstances, but let's say it does make sense. You undertake what's called an estate freeze where you freeze the value of your corporation and all of that would ascribe to the original shareholder, the professional. That value would be fixed. Once that value is fixed, then anybody else who is a... Depending on the type of corporation, if it's still a medical professional corporation, then only a spouse or a child who is older than the age of 18 can subscribe for non-voting common shares. But let's say it's just the spouse at this time or a partner, he or she would then subscribe for new common shares for a nominal amount. 

Preya Singh-Cushnie: Great. Thank you so much again, Aaron, that is all that we have time for in terms of questions. For those folks who are still submitting questions, please send them to info@omainsurance.com, we will definitely be able to answer you that way. Just before we wrap up, I encourage you to take a look at the Advantages Retirement Plan on the OMA Insurance/Retire page. Please, do reach out to us by hitting the Contact Us button. If you have any questions, again, keep them coming in info@omainsurance.com. We'll definitely help you out with some of your questions that you've asked us today. Wishing everyone a great rest of the day and thanks for joining us today. Take care. 

Speaker 1: The Financial Checkup series is produced in collaboration with OMA Insurance and Commonwealth, the administration and technology partner for the Advantages Retirement Plan.