John and Julie are both 45 years old and have 3 children, ages 15, 10, and 8. John is a senior manager at a telecommunications company and was recently promoted to vice-president. Julie works part-time in addition to running the household. With his increase in salary, John thinks it’s a good time to review his overall investment plan. John and Julie have been saving on a regular basis for the past 10 years or so, but most of the assets are held in John’s hands through employer-sponsored plans. John is a member of a defined benefit pension plan so his available RRSP contribution room each year is only about $5,000. Julie has contribution room of $3,600 available for this year. Now that their assets are starting to accumulate, they are wondering if they are structuring their investments in the most tax-efficient way.

Solution

The first step in preparing their financial plan was for John and Julie to complete the Cash Flow Worksheet. This was a useful exercise because they were able to quickly identify areas where their discretionary expenses had gotten out of control. They were still pleasantly surprised to see that they have just over $12,000 of surplus cash flow with which to invest.

John and Julie also prepared their Net Worth Statement; after doing this, it was clear they weren’t investing very tax-efficiently with all assets in John’s name.

John and Julie need to implement some income splitting strategies today in order to equalize the ownership of assets between them; these strategies will save them tax dollars down the road. Splitting income between spouses is an easy and effective way of reducing a family’s overall tax liability, but it is important to implement these strategies early. John should invest his annual RRSP contribution of $5,000 in a spousal RRSP; he will still benefit from the tax deduction in his own hands but the assets themselves will be in Julie’s name and eventually taxed in her hands. Julie should also start maximizing her annual RRSP contributions; again, any income from the RRSP will be taxed in her hands. By making these RRSP contributions, John & Julie will realize tax savings today of approximately $2,500. They could then direct these tax savings, along with their cash flow surplus, to either paying down their mortgage or else investing in a non-registered account in Julie’s name to further achieve income-splitting.

John and Julie are well on their way to building a solid financial plan and realizing their personal financial goals.