Solution

Case 1 : Lucie and Samuel Solution 3 7.2.3. Support payments can be planned, but the effect of this may be to extend rights and obligations beyond the split. On the other hand, since this is a contractual agreement between the spouses, it is possible to limit the scope and duration of the support payments, to limit the extent of this financial obligation. 7.3. A list of your respective assets on the date of contract signature can be appended to the document to facilitate an eventual partition of the assets. 8. The cohabitation agreement offers a lot of options, but since it creates not just rights but also responsibilities, it is important to clearly define its scope. Consequently, although there is no prescribed form, it is best to have it drawn up by a legal expert.

Case 1 : Lucie and Samuel Solution 6 1.6. Samuel, in addition to your RRSP, you belong to a defined contribution pension plan with your employer. Since it is a simplified pension plan (SPP), only the value of the employer ’ s contributions is locked in. This value corresponds to $37,130, or half of the total value of the plan ($74,260). 1.6.1. When you leave your job, you will have to transfer the value of your RPP to individual plans, that is, a locked-in retirement account (LIRA) for the locked-in portion and an RRSP for the value of your salary contributions. 1.6.2. The value of the plan is unseizable, but only the portion transferred to a LIRA will still be unseizable after the transfer to individual plans. 1.7. Lucie, in addition to your RRSP, you belong to a defined benefit pension plan. The value of your rights ($71,435) was determined by the plan administrator and corresponds to the current value of the annuity payable at age 65 that is currently vested. This value is locked in until retirement and cannot be used in the meantime. 1.8. Your balance sheets show an estimated value of the pension plan credits you have vested with the Québec Pension Plan (QPP). These values represent the value today of the payments you will have a right to receive from age 65 to death if you stopped contributing now. Although these amounts cannot be used any way you choose, they represent the value of your rights. Lucie, you will notice that the value of your rights ($75,666) is considerably higher than Samuel ’ s ($67,658). Although your vested annuity is slightly higher than Samuel ’ s, the difference is mainly because you are a woman, and women have a longer life expectancy than men. 1.9. The future income taxes are an estimate of the income taxes that will eventually have to be paid when the deferred taxation plans are used to generate retirement income. Since the assets that will trigger these income taxes will likely be cashed out gradually throughout retirement, the tax rates used to estimate the amount ($56,803 for Samuel and $52,580 for Lucie) are your current tax rates, that is 19.89% for Samuel and 19.19% for Lucie, since they seem representative of the effective tax rate that may apply, on average, in retirement. The only exception is the rate applied to the HBP balances ($12,000 each). The marginal tax rate of 37.12% seemed more appropriate for this, since this is the rate that would apply if a refund were not made during the year. 2. You do not have a detailed budget, but the costs for your house amount to $16,273 per year. Year Interest portion, next 12 months Mortgage $10,255 $4,007 Electricity $1,560 Mortgage balance $135,731 Mortgage balance in 12 months $129,483 1 Reimbursed capital: $135,731 – $129,483 = $6,248 Instalments: $394.42 × 26 = $10,255 $10,255 – $6,248 = $4,007 Municipal and school taxes $3,538 Snow removal $350 Home insurance $570 Total: $16,273 1 PV = 135,731; PMT = -394.42; N = 26; I/Y = 3,04 2nd [P/Y] \P/Y\ = 26 et \C/Y\ = 2; CPT FV = $129,483.

Case 1 : Lucie and Samuel Solution 9 16. Assuming it is your TFSAs that will be used to finance your plan, only your retirement savings are invested for the long term. The asset allocations are as follows: Samuel Tremblay Asset category Registered retirement savings $ % Profile % Difference % Liquid securities 2,975 2 5 – 3 Fixed-income securities 34,379 22 35 – 13 Growth securities 119,289 76 60 16 Total 156,643 100 100 Current marginal tax rate used: 19.89% (current effective tax rate) Lucie Simard Asset category Registered retirement savings $ % Profile % Difference % Liquid securities 0 0 5 – 5 Fixed-income securities 66,878 47 45 2 Growth securities 74,634 53 50 3 Total 141,512 100 100 Current marginal tax rate used: 19.19 % The money invested for the short-term to cover the two years abroad – that is, the TFSAs – is not included in the calculations. The values presented are net of future income taxes, to reflect purchasing power and portfolio risk more accurately. 17. Samuel, your portfolio is underweighted in fixed-income securities, so the level of risk is higher than necessary. 17.1. You could sell $25,000 worth of the ABC Canadian equity index fund and the ABC S&P500 index fund and invest in a Canadian bond fund, such as the ABC Canadian bond fund already in your RRSP, to reflect your investor profile. 17.2. If you decide to use $10,000 from your RRSP, you could invest $10,000 of your TFSA in a Canadian bond fund. The rest should be kept in liquid securities. The equivalent of $24,000 of equity funds from your RRSP could be sold and $10,000 invested in cash securities in preparation for the withdrawal and $14,000 invested in a Canadian bond fund. 17.3. Since you will have to transfer your registered pension plan when you leave your job, you could keep your current investments and use the amounts transferred to rebalance your portfolio. 18. Lucie, the allocation of your assets is slightly overweighted in fixed-income securities, particularly due to the value of your registered pension plan. 18.1. You could sell the ABC Canadian bond index fund and invest that amount between the other ABC funds you currently hold, or another equity fund, so the allocation of your retirement savings corresponds to your investor profile. 18.2. If you decide to use $10,000 from your RRSP, you could simply invest the $10,000 in liquid securities and keep $10,000 in your TFSA invested in your Vista fund.

Case 1 : Lucie and Samuel Solution 12 10. You are planning to rent your home to Samuel ’ s parents for $750 a month, including electricity and snow removal. The rental income net of expenses incurred to earn it is taxable. 10.1. The rent does not seem very high and is probably lower than the rental value of your home, and since Samuel ’ s parents are related to you, the expenses exceeding the rent paid cannot be used to reduce income from other sources. 10.2. Only the part related to the interest paid on the mortgage payments ($4,007 for the next 12 months) would be a deductible expense. 10.3. The rental will generate a loss of $1,025 per year, which cannot be deducted, because the asset will not be used to earn income, but to house a related person. 11. These last statements assume that you will remain residents of Canada for tax purposes for the entire duration of your stay abroad. But each situation is unique, since it is the taxpayer ’ s intention to leave Canada to settle in another country that ends their tax residence in Canada. The tax authorities rely on many measures to determine whether a de facto resident of Canada effectively has the intention to make another country the place where they will regularly reside. The three following criteria have enormous weight, since they demonstrate the maintenance of important ties with Canada: ▪ Maintaining a home in Canada ▪ Having a spouse who remains in Canada during the taxpayer ’ s absence ▪ Having dependants who remain in Canada during the taxpayer ’ s absence According to paragraph 1.12 of Income Tax Folio S5-F1-C1, Determining an Individual ’ s Residence Status, published by the CRA, the fact that the residence is not rented at a full market rate may allow you to meet the first criterion. Other “secondary” criteria are considered, but none of them is sufficient, on its own, to establish residence status. • Keeping personal assets in Canada (such as furniture, clothing or a car) • Maintaining social ties with Canada, such as membership in a recreational association • Maintaining economic ties with Canada (for example, a job with a Canadian employer or active participation in a Canadian company, an account with a Canadian bank, a pension plan, a credit card or security deposit account in Canada) • Keeping hospitalization and medical insurance coverage from a province or territory of Canada • Holding a driver ’ s licence from a province or territory of Canada • Keeping a vehicle registered in a province or territory of Canada • Keeping a Canadian passport • Maintaining an affiliation with a union or professional association in Canada 12. The number of residence ties that you intend to maintain in Canada and the temporary nature of your assignment in Ghana seem to indicate that you will remain tax residents of Canada during your absence, but only a detailed analysis of all the facts by an expert will allow a firm opinion to be issued on the matter.

Case 1 : Lucie and Samuel Solution 15 PROTECTION SITUATION Analysis 1. Samuel, you have disability insurance through your employer ’ s group insurance plan. The benefits, which are taxable to you, amount to $4,083 per month ($49,000 per year), which is equal to 70% of your salary. The premium is paid by your employer, the waiting period is one week, and the benefits are indexed to the cost of living and payable to age 65. After two years, however, the benefits may stop if you are able to earn your living as something other than an agronomist. 1.1. You will no longer be covered once you leave your job. 2. Samuel, the QPP will provide a disability annuity of $15,732 if you are considered to be seriously and permanently disabled, a definition of disability that is extremely difficult to meet, which means it is not very useful for financial planning. Like all QPP annuities, it is taxable. 3. Since it has already been planned that you will not earn any income for at least two years, the health risk that would cause the most serious financial consequences is long-term disability. 3.1. You could purchase individual income-loss disability insurance. Usually, the right to compensation is based on the fact that the insured is working at the time of the incident that leads to the disability, and it may be very difficult to find protection that would go back over two years to establish that right. 3.1.1. There are many products on the market, however, and a financial security advisor would be able to help you with a search. 4. Lucie, you are covered by the disability insurance offered by your employer, which provides benefits payable after 13 continuous weeks of total disability, or later if your accumulated sick days are not yet exhausted after that period. The benefits are taxable and are equal to 70% of your salary at the time of the disability ($3,996 per month or $47,952 per year). They are payable to age 65 and indexed to the cost of living, to a maximum of 3%. After two years of disability, however, the benefits may stop if you are able to take a comparable job. The total premium for the protection is $1,578 and you pay $230 of it. 4.1. The benefits are coordinated with the public plans, so they will be reduced by any disability benefit paid to you by a public plan such as the QPP or CNESST. 4.2. It may be possible to continue to belong to your registered pension plan during a short period of disability by continuing to make your contributions. 4.2.1. Your registered pension plan seems to allow for a member who retires due to disability to receive an immediate annuity. To be eligible, the member must have a disability that meets the following criterion: “Disability, under the public service pension plan, is a physical or mental impairment that prevents you from engaging in any employment for which you are reasonably suited by virtue of your education, training, or experience and that can reasonably be expected to last for the rest of your life.” 5 5 https://www.canada.ca/en/treasury-board-secretariat/services/pension-plan/active-members/disability- pension.html .

Case 1 : Lucie and Samuel Solution 18 Recommendations • Samuel, you should consult with a financial security advisor to look into an individual disability insurance policy that would offer long-term protection in the event of a disability during your unpaid leave. • Lucie, you should get written confirmation from your employer that you can continue to be protected by the disability insurance in your group insurance plan during your unpaid leave. This confirmation should also state the premiums you will have to pay, as well as the various payment options. • Lucie, you should get details from your employer about the complementary health insurance that you could have during your unpaid leave if you are outside of Canada, as well as the costs you would have to assume if you decided to maintain this protection. • You should ask the NGO to give you a document explaining the health care insurance coverage you will enjoy during your sojourn abroad. You will then be able to assess whether it is advisable to stay protected by Lucie ’ s complementary health insurance plan, given the associated costs. • Before your departure, you should consult with a notary to draw up a power of attorney giving Samuel ’ s parents the powers required to maintain your home and deal with a breakdown or disaster requiring work to be done during your absence. These powers should include access to financial resources, such as bank accounts, and the power to represent you with your insurers and authorize any required work on the house.

Case 1 : Lucie and Samuel Solution 21 10. Workers in Québec must contribute to the Québec Pension Plan to have the right to the public pension, the amount of which depends on work income starting at age 18. The MPE for one year ($55,900 in 2018) is equal to the earnings that allow the taxpayer to accumulate the maximum pension credit for that year. The calculation formula allows 15% of the months with the lowest employment income to be removed from the calculation, to reduce the repercussions of low-income years. The MPE increases annually based on the average industrial salary in Canada, and pensions in pay increase based on inflation. 10.1. A QPP reform will come into effect progressively beginning in 2019 and will result in an increase in contributions and credits that will accumulate in the future. This reform was not considered here, partly because in the long term, it may result in a reduction in employers ’ contributions to private savings and a reduction in your personal savings due to increased contributions to the QPP. 11. Samuel, according to your Québec Pension Plan Statement of Participation issued by Retraite Québec, you will have the right to an annual pension of $13,580 (today ’ s dollars) beginning at age 65 if you continue to contribute the maximum to the QPP until that age. 11.1. Your pension at age 65 should be about $13,371 in today ’ s dollars if you do not contribute to the plan for two years. 12. Lucie, according to your Québec Pension Plan Statement of Participation issued by Retraite Québec, you will have the right to an annual pension of $13,601 (today ’ s dollars) beginning at age 65 if you continue to contribute the maximum to the QPP until that age. 12.1. Your pension at age 65 should be about $13,397 (today ’ s dollars) if you do not contribute to the plan for two years. 13. The federal government pays the Old Age Security (OAS) to Canadians age 65 and over who meet the residency criteria, which you should meet if you return to the country as planned after two years. The benefit, indexed quarterly based on inflation, is $7,040 in 2018, but it is reduced by 15% of individual net income over the threshold for the year ($75,910 in 2018), which is also indexed to inflation. 14. Your household cost of living is $68,537, but each of you would have to spend more to maintain the same standard of living if you lived alone. Living as a couple allows for economies of scale, which is why your respective costs of living would be higher than 50% of your household cost of living if you separated. For this reason, it would be more reasonable to assume that each of you would have a cost of living in retirement equal to 70% of your household cost of living minus the mortgage payments, or $41,000 in today ’ s dollars (rounded to the nearest $1,000). 15. The calculations show that your planned volunteer trip would not endanger your plan to retire at age 65. 15.1. The return assumption for your investments is 3.80%, and the assumption for inflation, salary increase and MPE is 2%. 15.2. The age of capital depletion is 94 in your case, Samuel, because the probability that you will still be alive at that age is 25%. In your case, Lucie, the probability of survival is 97. 15.3. In your case, Lucie, we assumed that you will not belong to your RPP after the first three months of your unpaid leave, because the information about the contributions you would have to make is not available.

Case 1 : Lucie and Samuel Solution 22 15.4. In your case, Samuel, the calculations assume that you will contribute the maximum to your RRSP annually, based on a salary of $70,000 (today ’ s dollars) and will make up your unused contributions ($30,200 7 ) over a period of 15 years (the payments during the first five years will include an HBP repayment). Furthermore, an annual contribution of $1,100 to your TFSA, indexed based on your salary increases, has been included. The total for the first year is $15,735, less than your current savings of $17,433. 15.5. In your case, Lucie, the calculations also assume that you will contribute the maximum to your RRSP each year and that you will make up your unused contribution room ($30,569 8 ) over a period of 15 years. No TFSA contribution is planned in your case. 16. Samuel, based on the parameters presented, your capital will be depleted by age 95, and yours, Lucie, will not be depleted, which leaves some room for latitude concerning your age of retirement. 17. These calculations extend over a very long period and should be revised regularly during your life, so they reflect the changes in your assets and cost of living. The results suggest, however, that ongoing savings at the same scale as current savings, beginning on your return, will allow you to maintain a standard of living in retirement similar to the one you currently enjoy. 18. The time it takes for Samuel to find a job after you return, his new employment conditions and your real expenses during your absence mean that these assumptions will not necessarily reflect reality. The development of new retirement scenarios will allow you to determine the annual savings amounts based on funds available, Samuel ’ s real salary and his future employer ’ s possible contribution to his retirement savings. 7 $18,000 = [$12,000 – ($1,333.33 x 3)] = $4,200 (see point 1.1). 8 $20,000 = [$12,000 – ($1,333.33 x 3)] + $2,569 (see point 2.1)

Case 1 : Lucie and Samuel Solution 23 Recommendations • You can go ahead with your volunteer plan. • Lucie, the possibility of contributing to your pension fund is interesting because it would allow you to retire at age 63. When you settle the details of your unpaid leave, ask to receive in writing the amount of the contribution you would have to make on your return if you continued to contribute to your RPP during your absence. Also ask for information about the elections you have to make before you leave. • Lucie, if you have catch-up contributions to make to your RPP on your return, make an appointment with me to make the best financial and fiscal choices for the terms of payment. If not, start contributing the allowable maximum to your RRSP and contribute at least 1/15 of your unused contributions from prior years ($2,038) until the next assessment of the situation. • When Samuel returns to work, make an appointment with me to recalculate and set annual savings targets based on the real data.

Case 1 : Lucie and Samuel Solution 24 SITUATION AT DEATH Analysis 1. You are both able to hold a job to meet your respective needs, but the repayment of the mortgage would save the surviving spouse from having to consider moving to a smaller home. 2. You are both competent and able to manage your assets. 3. Samuel, you are the owner and insured of a 20-year term life insurance policy purchased August 2, 2009, with a death benefit of $100,000 that will be paid to your estate, because there is no designated beneficiary. The annual premium is $295. 4. Samuel, the group insurance plan offered by your employer includes term insurance on your life, with a death benefit, payable to your estate, in the amount of your salary, which is $70,000. The premium is $110 a year. 4.1. You will no longer be part of the group when you leave your job, which will terminate this protection unless you exercise your right of conversion to individual insurance within 31 days after leaving the group. You will not have to provide proof of health to be covered, and the rate will be based on the usual risks. It is possible to choose an annual term rate (no levelling of the premium), which may be appropriate when the desired period of coverage is short. 5. Lucie, you are the owner and insured of a 20-year term life insurance policy purchased on August 2, 2009, with a death benefit of $100,000 that will be paid to your estate, because there is no designated beneficiary. The annual premium is $245. 6. Lucie, your social benefit program pays a death benefit equal to twice your salary ($137,000). The premium you pay is $247 a year. 6.1. This protection should be maintained during an unpaid leave authorized by your employer, but you will have to pay the premiums on your return, either in a lump sum or through payroll deductions. 6.1.1. It is always important to get written confirmation of the protections in effect and their costs. Only your employer can give you such a document. 7. The death benefits in your life insurance contracts will be part of your respective estates, and therefore only accessible to your heirs once the estate is settled, which may take some time. If the life insurance proceeds are paid to a designated beneficiary, however, that person will have access to the money as soon as it is paid by the insurer. 7.1. It is possible to designate a life insurance beneficiary either by will or by informing the insurer of the designation. 8. You have purchased mortgage life insurance through the Royal Scotia Bank, your mortgage creditor. On the death of either of you, the mortgage will be entirely paid off, not just the deceased ’ s portion.

Case 1 : Lucie and Samuel Solution 25 9. You signed notarized wills in 2013 which provide for a universal bequest to the surviving spouse. If the spouse is predeceased, each will provides for the assets to be divided between the testator ’ s parents, with accretion (the share of a predeceased parent going to the surviving parent) and, if they are both predeceased, among the brothers and sisters, with representation (the portion of a predeceased brother or sister going to their children). 9.1. You have named each other liquidator of your respective estates and both named your old friend Marielle Dubois, CPA, as the replacement liquidator. 10. A deceased taxpayer is deemed to have disposed of all their assets at fair market value immediately before death and cashed in their full registered retirement savings. The related income is added to the other income earned by the deceased from the beginning of the year, and the resulting tax liability must be paid by the estate. 10.1. The death benefit paid by an RPP is the exception to this rule, since it is not taxable to the deceased but to the person who receives it, that is, the beneficiary or, if there is none, the estate. The estate is a tax trust and a taxpayer, separate from the deceased, that comes into existence at the time of the testator ’ s death. 10.2. The assets that are bequeathed to the spouse may be the subject of a tax rollover, which means it is the spouse who will be taxed on the income arising from the disposition of the assets received or the registered retirement savings cashed out. This rollover is also possible when the spouse receives a death benefit from the deceased ’ s RPP. 10.3. When the deceased has an unpaid HBP balance at the time of death, this balance must also be included in their final tax return. The spouse can, however, elect to take over the deceased ’ s annual payments and pay them into their own RRSP following the original schedule. 10.4. As such, no income tax will be payable on the first death. 11. Samuel, your estate assets amount to $471,073. In addition, Lucie will receive, directly, as a priority beneficiary, the value of your RPP and her share of your mortgage debt will be entirely repaid. This means she will receive a total value of $613,199. 11.1. This assumes, however, that the RRSP, HBP balance and RPP will be rolled over to Lucie, meaning she will eventually be taxed on a sum of $207,535. If Lucie were to die first, your estate would have to pay estimated income taxes of $83,014. 11.2. If there is no group life insurance, and planning for the transfer of $100,000 for your parents, Lucie would receive a total value of $443,199. 12. Lucie, your estate assets amount to $522,212. In addition, Samuel ’ s share of the shared mortgage debt will be entirely repaid. As such, he will receive a total value of $590,078. 12.1. This assumes, however, that the RRSP, HBP balance and RPP will be rolled over to Samuel, meaning he will eventually be taxed on a sum of $115,683. If Samuel were to die first, your estate would have to pay estimated income taxes of $59,259. 12.2. Planning for the transfer of $50,000 for your parents, Samuel would receive a total value of $540,078.

Case 1 : Lucie and Samuel Solution 26 13. Samuel, your estate can be settled with no cash flow problems, since the cash position of the estate is $203,798. 13.1. If there is no group life insurance, and planning for the transfer of $100,000 for your parents, the cash position of the estate is still positive, at $33,798. 14. Lucie, your estate can be settled with no cash flow problems, since the cash position of the estate is $274,528. 14.1. The transfer of $50,000 to your parents would reduce the cash position of the estate to $224,528. 15. Lucie, since Samuel is your de facto spouse, he will receive the death benefit payable by your RPP. This death benefit will be in the form of a life annuity, indexed to inflation, equal to 50% of the vested annuity at the time of your death, or $2,701 per year ($5,402 ÷ 2). This annuity will be taxable for Samuel. 16. Since neither of you is married or in a civil union with another person and you have lived together for more than three years, each of you is eligible for a QPP survivor ’ s pension in the event of the other ’ s death, which is indexed annually to inflation. 16.1. Samuel, in the event of your death, the pension Lucie will receive is $6,106 a year, based on your statement of participation. This annuity will be taxable for Lucie. 16.2. Lucie, in the event of your death, the pension Samuel will receive is $6,130 a year, based on your statement of participation. This annuity will be taxable for Samuel. 17. Your mutual bequests largely meet your objectives, except concerning the sums you wish to leave to your parents on your respective deaths, since they will not receive anything on the first death. 18. There are several ways to ensure that your parents receive the desired amount on your death, but the three following seem the most appropriate: 18.1. Draw up new notarized wills. 18.1.1. The benefit of this is that you can review all the provisions of your wills. 18.1.2. You will then be able to leave a legacy by particular title to your parents. 18.1.2.1. This would ensure that even in the absence of life insurance, your parents will have the right to the sum bequeathed. If your life insurance policies are not in effect at the time of death, some of your assets may have to be sold. 18.1.3. You could designate your parents as the beneficiaries of your 20-year term life insurance. 18.1.3.1. In your case, Samuel, you could designate your parents as co-beneficiaries of the entire benefit. 18.1.3.2. In your case, Lucie, you could designate your parents as co-beneficiaries of 50% of the benefit. 18.1.4. Your current wills are notarized and recent, and changing them entails a cost.

Case 1 : Lucie and Samuel Solution 27 18.2. Draw up notarized codicils. 18.2.1. The legacies by particular title and the beneficiary designations could also be the subject of a codicil. A codicil is an amendment to an existing will that does not revoke the will. 18.2.1.1. Although it does not take the same form as a will, a codicil written in the testator ’ s hand (holograph) or signed by two witnesses would have to be homologated by the court, even if the will is notarized. A poorly written codicil may also cause conflicts with the will. 18.3. Informing the insurer in writing of a change of beneficiary for your 20-year term life insurance policies, which would be done quickly and at no cost: 18.3.1. In your case, Samuel, you could designate your parents as co-beneficiaries of the entire benefit. 18.3.2. In your case, Lucie, you could designate your parents as co-beneficiaries of 50% of the benefit. 19. Since the accretion applies both between individual co-legatees and co-beneficiaries of a life insurance policy, a single co-beneficiary parent of a life insurance policy who survives you would have the right to the full benefit they would have received if both parents were living. 20. Since your life insurance policies are term policies, the non-renewal of the policies would mean your parents would receive nothing, because they would not be heirs under your wills. If you purchase a new policy, you could obviously designate your parents as beneficiaries, but that would require follow- up, and you may forget.

Case 1 : Lucie and Samuel Solution 28 Recommendations • Samuel, you could designate your parents as co-beneficiaries of your 20-year term life insurance with a death benefit of $100,000 by communicating with your insurer to ask them to explain the steps to take to submit your new designation in writing. • Lucie, you could designate your parents as co-beneficiaries of 50% of your 20-year term life insurance with a death benefit of $100,000 by communicating with your insurer to ask them to explain the steps to take to submit your new designation in writing. • In 2029, when these policies expire, you could re-evaluate your estate objectives to determine whether this life insurance protection should be maintained. • Lucie, before your departure, ask your employer to confirm in writing that your group life insurance will be maintained during your absence and to tell you the amount of the premiums you will have to pay on your return.

Case 1 : Lucie and Samuel Solution 29 Action plan Task Person responsible Deadline □ Make a decision about your volunteer plan. Samuel and Lucie As soon as possible. □ Ask the NGO to give you the following information in writing: • Canadian tax treatment to apply to allowances that will be paid to you abroad • Possible tax obligations to Ghana • Health care coverage during your stay abroad Samuel and Lucie Before officially accepting the assignment to Ghana. □ Get the following information in writing from Lucie’s employer about her unpaid leave: • Confirmation of coverage, premiums and payment options for disability insurance, complementary health insurance and group life insurance. • Cost of maintaining membership in RPP and payment options. • List of elections to make and documents to complete before departure. Lucie As soon as possible. □ Contact ABC Insurer in writing to change the beneficiary designations on your respective life insurance policies. Samuel and Lucie As soon as possible. □ Make an appointment with a notary to draw up a cohabitation agreement and, if you decide to go ahead with your volunteer plan, a power of attorney allowing Samuel’s parents to act in your name for the maintenance of your home. Samuel and Lucie As soon as possible, so the documents can be signed before you leave for Ghana. □ Draw up an inventory of your respective assets. Samuel and Lucie As soon as possible, before meeting with the notary. □ Make a decision about maintaining the group complementary health insurance and membership in the RPP during the unpaid leave. Lucie and financial planner Before your departure. □ Meet with your investment advisor to restructure your portfolios Samuel, Lucie and financial planner Before your departure. □ Make the rental of your home to Samuel’s parents official by signing a lease. Samuel and Lucie Before Samuel’s parents move. □

Case 1 : Lucie and Samuel Solution 30 Task Person responsible Deadline □ Inform your home insurance provider that your residence will be inhabited by Samuel’s parents. Samuel and Lucie Before Samuel’s parents move. □ Inform Lucie’s car insurance provider that Samuel’s parents will be driving your car. Lucie Before your departure. □ Reimburse Lucie’s car loan. Lucie Before your departure. □ Consult with a financial security advisor to check whether disability insurance could provide protection in the event of a long- term disability. Samuel Before your departure. □ Make an additional RRSP contribution of $2,666.67 as an HBP repayment. Samuel and Lucie Before your departure. □ Report an HBP repayment of $1,333.33. 2019 tax return □ Report an HBP repayment of $1,333.33. 2020 tax return □ Calculate rental expenses to determine whether rental income will have to be declared. Samuel and Lucie For all the years of rental. □ File your tax returns in Canada, even while you are abroad. Samuel and Lucie No later than April 30 of the next year. □ Share the travel costs equally. Samuel and Lucie During the entire stay in Ghana. □ If the RPP membership is maintained during the unpaid leave, consult with a financial planner. Lucie and financial planner On your return, start to make catch-up contributions. □ Begin retirement savings again. Lucie On your return. □ Determine the amount of savings required for retirement. Samuel, Lucie and financial planner On your return, as soon as Samuel finds a new job. □

Case 1 : Lucie and Samuel Solution 31 APPENDIX A P ERSONAL B ALANCE S HEET AS AT 30 J UNE 2018 Samuel $ Lucie $ Total $ ASSETS Cash and near-cash assets Bank accounts (note 3) 4,300 4,325 8,625 Life insurance cash surrender value (note 4) Non-registered investments (note 5) Tax-free savings account (note 6) 58,068 59,001 117,069 Advances receivable (note 7) Other: Total cash and near-cash assets 62,368 63,326 125,694 Personal assets Principal residence (note 8) 132,000 132,000 264,000 Secondary residence (note 9) Automobiles (note 10) 14,000 12,000 26,000 Antiques, works of art, jewellery, collections (note 11) Other: Total personal assets 146,000 144,000 290,000 Income-producing assets Equity ownership in a private corporation or partnership (note 12) Rental property (note 13) Other: Total income-producing assets Deferred tax plans RRSP, RPDB or RRIF (note 14) 121,275 103,683 224,958 Registered pension plan (note 15) 74,260 71,435 145,695 VRSP, LIRA or LIF (note 16)

Case 1 : Lucie and Samuel Solution 32 Samuel $ Lucie $ Total $ RESP or RDSP (note 17) Québec pension plan (QPP) (note 18) 67,658 75,666 143,324 Other assets: Total deferred tax plans 263,193 250,784 513,977 TOTAL ASSETS 471,561 458,110 929,671 LIABILITIES Accounts payable (note 19) Unpaid credit card balances Credit purchases Income taxes payable Other: Total accounts payable Personal loans (note 20) Bank overdraft Line of credit Car 8,570 5,798 14,368 RRSP Investments Advances received from a private corporation Other: Total personal loans 8,570 5,798 14,368 Mortgage loans (note 21) Principal residence 67,866 67,866 135,731 Secondary residence Rental property Other: Total mortgage loans 67,866 67,866 135,731 Future income taxes (note 22) 56,803 52,580 109,383

Case 1 : Lucie and Samuel Solution 33 Samuel $ Lucie $ Total $ TOTAL LIABILITIES 133,239 126,243 259,482 NET WORTH 338,322 331,867 670,189

Case 1 : Lucie and Samuel Solution 34 Notes to the personal balance sheet NOTE 1: Personal and family situation Samuel Tremblay and Lucie Simard are single, have no children and have been living in a de facto union for 12 years. They are both agronomists in the city of St-Hyacinthe, where they jointly own a semi-detached home. NOTE 2: Accounting policies Assets and liabilities are shown at their estimated current value. NOTE 3: Bank accounts Financial institution Account type Balance $ Samuel Tremblay Royal Scotia Bank Chequing 3,300 Lucie Simard Royal Scotia Bank Chequing 3,325 Samuel or Lucie Royal Scotia Bank Chequing 2,000 Total: 8,625 NOTE 4: Life insurance cash surrender value n/a NOTE 5: Non-registered investments n/a NOTE 6: Tax-free savings account (TFSA) Samuel Tremblay Balance mutual funds Description MER % Cash % Fixed income % Growth % TotaL $ ABC balanced 1.9 5 35 60 27,260 Funds with no redemption fee Total: 27,260

Case 1 : Lucie and Samuel Solution 35 LIQUID SECURITIES Guaranteed investment certificates maturing in less than 1 year or redeemable Samuel Tremblay Financial institution Date of deposit Maturity date Interest rate % Accrued value $ Banque Populaire 20-11-2016 20-11-2019 0.85 14,547 Banque Populaire 12-02-2018 12-02-2021 1.00 16,261 Total: 30,808 Other liquid securities Portion of ABC balanced fund invested in cash securities. Total : 1,363 Lucie Simard Financial institution Date of deposit Maturity date Interest rate % Accrued value $ Banque Populaire 20-10-2017 20-10-2020 1.00 24,831 Total: 24,831 FIXED-INCOME SECURITIES Other fixed income securities Samuel Tremblay Portion of ABC balance fund invested in fixed-income securities. Total : 9,541 Fixed income mutual funds Lucie Simard Description MER % Total $ Canadian Vista bonds 1.55 10,320 Funds with no redemption fee Total: 10,320 GROWTH SECURITIES Other growth securities

Case 1 : Lucie and Samuel Solution 36 Samuel Tremblay Portion of ABC balance fund invested in growth securities. Total : 16,356 Growth security mutual funds Lucie Simard Description MER % Total $ Canadian Vista shares 2.10 17,250 Vista all-world ex-Canada shares 2.65 6,600 Funds with no redemption fee Total: 23,850 TFSA total – Samuel: 58,068 TFSA total – Lucie: 59,001 NOTE 7: Advances receivable n/a NOTE 8: Principal residence Address Year of acquisition Price paid $ Municipal evaluation $ Market value $ 450 Tousignant, St-Hyacinthe, Québec 2010-05-23 210,000 270,000 264,000 Note: Semi-detached house with a market value estimated based on the recent sale of the attached house ($275,000), reduced to take into account the sale cost of 4%. NOTE 9: Secondary residence n/a

Case 1 : Lucie and Samuel Solution 37 NOTE 10: Cars Model Year Cost of acquisition $ Market value $ Samuel Tremblay Ford Focus 2016 24,000 14,000 Lucie Simard Toyota Yaris 2015 21,000 12,000 Total: 26,000 Market value estimated using www.canadianblackblook.com. NOTE 11: Antiques, works of art, jewellery, collections n/a NOTE 13: Rental property n/a NOTE 14: Registered Retirement Savings Plan (RRSP), Deferred Profit-Sharing Plan (DPSP) or Registered Retirement Income Fund (RRIF) FIXED-INCOME SECURITIES Fixed income mutual funds Samuel Tremblay Description MER % Total $ ABC Canadian bonds 1.65 24,350 Lucie Simard Description MER Total $ ABC Index Canadian bonds 0.85 11,325 These two funds have no redemption fee.

Case 1 : Lucie and Samuel Solution 38 GROWTH SECURITIES Growth security mutual funds Samuel Tremblay Description MER % Total $ ABC Canadian equity index 1.25 67,625 ABC S&P500 index 1.45 29,300 Total: 96,925 Lucie Simard Description MER % Total $ ABC Canadian equity index 1.25 53,250 ABC international equities 2.85 15,508 ABC S&P500 index 1.45 23,600 Total: 92,358 These five ABC funds have no redemption fee. RRSP total – Samuel 121,275 RRSP total – Lucie 103,683 NOTE 15: Registered pension plan Defined benefits Member Contribution rate Pension accumulation rate Earnings subject to contributions S Current value $ Other features Lucie Simard 8.39% ≤ MPE 1.375% $68,500 $71,435 Inflation 9.94% + MPE 2% Other relevant information: Federal public service pension plan. Value on June 30 established by the plan administrator. Vested annual pension of $5,402 in today’s dollars, payable at age 65. Annual pension payable from age 65 or age 60 if the member has 30 years of service. Bridge benefits payable until age 65 calculated at the rate of 0.625%. Value of member’s contributions with interest: $32,465

Case 1 : Lucie and Samuel Solution 39 Defined contribution Member Contribution rate % Employer contribution rate % Earnings subject to contributions $ Market value $ Locked-in value $ Samuel Tremblay 5 5 70,000 74,260 37,130 Other relevant information: Simplified Pension Plan (SPP) The account value is totally invested in an AMIVIE balance fund, with the investments allocated as follows: 5% liquid securities, 25% fixed-income securities, 40% Canadian equities and 30% foreign equities. The management and administration fees are equal to 1.75% of the value of the plan. NOTE 16: Voluntary Retirement Savings Plan (VRSP), Locked-In Retirement Account (LIRA) or Life Income Fund (LIF) n/a NOTE 17: Registered Education Savings Plan (RESP) or Registered Disability Savings Plan (RDSP) n/a Note: The RESP should only appear in the subscriber’s personal balance sheet and the value is equal to contributions made. The total value of the RDSP should appear in the beneficiary’s personal balance sheet. NOTE 18: Québec Pension Plan Client Accrued pension at age 65 Discount rate Life expectancy Current value $ Before 65 % 65 and + % Samuel Tremblay 5,488.10 1.76 1.76 89 67,658 Lucie Simard 5,589.85 1.76 1.76 92 75,666 Comments: The discount rates correspond to a rate of return of 3.8% corrected to account for the estimated growth rate of the pension, that is, the MPE growth assumption (2%) before retirement and the inflation assumption (2%) after retirement. Life expectancy is used as the age of the end of payments, because we are trying to establish the cost of a comparable annuity. NOTE 19: Accounts payable n/a

Case 1 : Lucie and Samuel Solution 40 NOTE 20: Personal loans Description Date of loan Maturity date Payments $ Interest rate % Original amount $ Balance $ Samuel – car loan 10-03-2016 10-03-2020 424.86/mont h 0.99 20,000 8,570 Lucie – car loan 01-10-2015 01-10-2019 390.18/mont h 1.99 18,000 5,798 Total: 14,368 NOTE 21: Mortgage loans Lender Date of loan Maturity date Payments $ Amorti- zation Frequency Interest rate % Original amount $ Balance $ Royal Scotia Bank 2010-05-23 2023-05-23 394.42 25 years 2 weeks 3.04 180,000 135,731 Mortgage on residence in St-Hyacinthe Total: 135,731 NOTE 22: Future income taxes Samuel Tremblay Description FMV $ Estimated tax rate % Future income tax $ RRSP 121,275 19.89 9 24,122 RPP 74,260 19.89 14,770 QPP 67,658 19.89 13,457 HBP 12,000 37.12 4,454 Lucie Simard Description FMV $ Estimated tax rate % Future income tax $ RRSP 103,683 19.19 19,897 RPP 71,435 19.19 13,708 QPP 75,666 19.19 14,520 HBP 12,000 37.12 4,454 NOTE 23: Distribution of assets for long-term investments 9 The current effective tax rate was used, because there is nothing to confirm that the average rates in retirement will be higher or lower. The current marginal tax rate was chosen to calculate the latent tax burden on the HBP, because non- payment would be taxed at that rate. In fact, the repayments that are made will be RRSP deposits that do not lead to a tax savings that would have been calculated at that rate.

Case 1 : Lucie and Samuel Solution 41 Samuel Tremblay Asset category Registered retirement savings $ % Non- registered investments $ % Combined % Profile % Difference % Liquid securities 2,975 2 5 – 3 Fixed- income securities 34,379 22 35 – 13 Growth securities 119,289 76 60 16 Total 156,643 100 100 Current marginal tax rate: 19.89% Lucie Simard Asset category Registered retirement savings $ % Non- registered investments $ % Combined % Profile % Difference % Liquid securities 0 0 5 – 5 Fixed- income securities 66,878 47 45 2 Growth securities 74,635 53 50 3 Total 141,512 100 100 Current marginal tax rate: 19.19% Note: The money invested for the short-term to cover the two years abroad is not included in the calculations. The values presented are net of future income taxes, to reflect purchasing power and portfolio risk more accurately.

NOTE 24: Life, disability and other insurance contracts Life insurance Issuing company Underwriting year Type of contract Owner Adherent Insured Beneficiary Annual premium $ Cash surrender value $ Adjusted cost base $ Capitalization fund Death benefit Payer ABC 2009-08-02 T-20 Samuel n/a Samuel Estates 295 n/a n.a. n/a 100,000 Samuel ABC 2009-08-02 T-20 Lucie n/a Lucie Estate 245 n/a n.a. n/a 100,000 Lucie Le Collectif n/a Collectif F. Laframboise Samuel Samuel Estate 190 n/a n/a n/a 70,000 Samuel n.d. n/a Collectif Lucie Lucie Estate 247 n/a n/a n/a 137,000 Lucie Comments: Samuel’s life insurance death benefit is equal to his annual salary, and Lucie’s is equal to twice her annual salary. Disability insurance Samuel Salary (group insurance) Issuer Premium $ Waiting period Monthly income $ Taxation of benefits Duration of benefits % indexation Profession protected for (years) F. Laframboise 210 1 week 4,083 Taxable 65 years Inflation 2 years Comments: The premium shown is the portion that Samuel pays, because the information concerning the total premium was not provided. Lucie Salary (group insurance) Issuer Premium $ Waiting period Monthly income $ Taxation of benefits Duration of benefits % indexation Profession protected for (years) ACIA 1,578 30 days 3,996 Taxable 65 years Infl., max. 3 % 2 years Comments: The premium shown is the total premium, but the amount Lucie pays is $230.16. 4 2 Case 01 : Lucie and Samuel Solution

Cas 01 : Lucie et Samuel Solution 43 NOTE 25: Legal documents Samuel Tremblay and Lucie Simard signed notarized wills in 2013 which plan for a universal bequest to the surviving spouse. In the event of the prior death of the spouse, both wills plan for the assets to be divided between the testator’s parents, with accretion, and, if they are deceased, between the testator’s brothers and sisters, with representation. No beneficiary designation is stipulated in their wills. Each one named the spouse as liquidator of the estate and appointed Marielle Dubois, CPA, a long-time friend of the couple’s, as the substitute. Samuel Tremblay and Lucie Simard signed notarized protection mandates in 2013 where they name each other mandatary to the property and to the person in the event of the incapacity of either of them. Samuel’s mandate names his mother as his sub stitute mandatary to the person and Marielle Dubois for the administration of his property. Lucie’s mandate names her sister Julie as her substitute mandatary to the property and the person. All the mandataries will have full power of administration. The mandate provides that the mandator’s property can be used to meet the spouse’s needs. NOTE 26: Tax information Samuel Lucie Capital gain in the last three years None None Balance of net capital losses $0 $0 Effective tax rate 19.89% 19.19% Marginal tax rate 37.12% 37.12% Unused RRSP deduction $18,000 $20,000 Undeducted RRSP contribution $0 $0 TFSA contribution rights $6,000 $6,000 HBP balance on January 1 $12,000 $12,000 Note: Samuel and Lucie each withdrew $20,000 from their respective RRSPs in 2010 to buy their house in St-Hyacinthe. They each reimburse $1,333.33 to their RRSPs every year.

Cas 01 : Lucie et Samuel Solution 44 APPENDIX B E STATE B ALANCE S HEET AS AT 30 J UNE 2018 Samuel $ Lucie $ Net worth according to personal balance sheet 338,322 331,867 Plus: Life insurance 10 - Group life insurance 70,000 137,000 - Individual life insurance 100,000 100,000 Insured liabilities 67,866 67,866 Future income taxes 56,803 52,580 Other: Subtotal: 294,669 357,446 Less: Life insurance cash surrender value Québec Pension Plan 67,658 75,666 Death-related expenses 20,000 20,000 Taxes payable on death (note 1) Specific bequests Charitable donations Registered pension plan 74,260 71,435 Subtotal: 161,918 167,101 ESTATE ASSETS 471,073 522,212 Plus: Amounts received by heirs as beneficiaries 11 142,126 67,866 Less: Income taxes paid by heirs Value transferred to universal heirs 613,199 590,078 10 The life insurance proceeds must be payable to the estate. 11 The spouse – here, the universal heir – is the priority beneficiary of the RPP death benefit. For Lucie’s RPP, however, it is an annuity payable to the spouse until his death. It is therefore not added here. Furthermore, since the mortgage is insured in the event of the death of either of the co- borrowers, the surviving spouse’s portion of the debt is extinguished. It is this enrichment of the surviving spouse (universal heir) that must be shown here, as if it were a life insurance payout received as the designated beneficiary.

Cas 01 : Lucie et Samuel Solution 45 NOTE 1: Taxes payable on death a) Death of Samuel Description Income (loss) $ Capital gain (loss) $ No income taxes, because the assets are rolled over to the surviving spouse, who can decide to continue the deceased spouse’s HBP payments. Total: × 50% = Taxable income Tax rate: Income taxes: Charitable donations: × rates applicable to the donation Tax credit for charitable donations: Taxes payable on death:

Cas 01 : Lucie et Samuel Solution 46 b) Death of Lucie Description Income (loss) $ Capital gain (loss) $ No income taxes, because the assets are rolled over to the surviving spouse, who can decide to continue the deceased spouse’s HBP payments. Total: × 50% = Taxable income Tax rate: Income taxes: Charitable donations: × rates applicable to the donation Tax credit for charitable donations: Taxes payable on death:

Cas 01 : Lucie et Samuel Solution 47 c) Simultaneous death – Samuel Description Income (loss) $ Capital gain (loss) $ RRSP 121,275 HBP 12,000 Registered pension plan 12 74,260 Total: 207,535 × 50% = Taxable income 207,535 Tax rate: 40% Income taxes: 83,014 Charitable donations: × rates applicable to the donation Tax credit for charitable donations: Taxes payable on death: 83,014 12 The registered pension plans are taxable to the beneficiary, and if there is none, to the estate. Since the estate is a tax trust taxed at progressive rate in the first three tax years, the actual taxes will probably be lower than those indicated here. For the sake of simplification, the death benefit of an RPP paid to the estate is taxed at the same rate as the assets included in the deceased’s final tax return.

Cas 01 : Lucie et Samuel Solution 48 d) Simultaneous death – Lucie Description Income (loss) $ Capital gain (loss) $ RRSP 103,683 HBP 12,000 Registered pension plan 32,465 Total: 148,148 × 50% = Taxable income 148,148 Tax rate: 40% Income taxes: 59,259 Charitable donations: × rates applicable to the donation Tax credit for charitable donations: Taxes payable on death: 59,259

Cas 01 : Lucie et Samuel Solution 49 APPENDIX C C ASH POSITION OF THE ESTATE AS AT 30 J UNE 2018 Samuel $ Lucie $ Cash and near-cash assets, according to personal balance sheet 62,368 63,326 Plus: Life insurance - Group life insurance 70,000 137,000 - Individual life insurance 100,000 100,000 - - Registered retirement savings 13 Other: Subtotal: 170,000 237,000 Less: Liability to be repaid 8,570 5,798 Cash surrender value – life insurance Death-related expenses 20,000 20,000 Taxes payable on death Specific bequests of cash or near-cash securities Charitable donations of cash or near-cash securities Other: Subtotal: 28,570 25,798 CASH SURPLUS (DEFICIT) 203,798 274,528 Plus: Amounts received by heirs as beneficiaries Less: Income taxes paid by heirs Cash assets available to the universal heirs 203,798 274,528 13 If the registered assets are not left to the spouse and are instead included in the calculation of taxes payable on death in the estate statement.

Cas 01 : Lucie et Samuel Solution 50 APPENDIX D D ETERMINATION OF INCOME AVAILABLE AND COST OF LIVING FOR 2018 Samuel Lucie Total $ $ $ S OURCES OF INCOME Employment income 70,000 68,500 138,500 Self-employment or business income (net) Rental income Investment income Support payments received (paid) Annuities and other pensions Other income T OTAL GROSS INCOME 70,000 68,500 138,500 I NCOME TAXES AND SOCIAL CHARGES QPP/CPP contributions 2,829 2,829 5,658 Employment insurance contributions 672 672 1,344 QPIP contributions 384 375 759 Pension plan contributions 3,500 5,942 9,442 Provincial taxes 7,523 7,077 14,600 Federal taxes 6,400 6,069 12,469 T OTAL INCOME TAXES AND SOCIAL CHARGES 21,308 22,964 44,272 I NCOME AVAILABLE 48,692 45,536 94,228 L ESS : N ON -RRSP SAVINGS 7,000 7,000 14,000 RRSP contributions (including HBP) 6,933 4,758 11,691 C HANGE IN CASH AND DEBT 14 0 0 0 C OST OF LIVING 34,759 33,778 68,537 14 The change in debt equals the difference in the balance of personal loans.