Current Trends and Issues in Financial Planning 2007 Edition

1. This presentation will probably involve audience discussion, which will create action items. Use PowerPoint to keep track of these action items during your presentation • In Slide Show, click on the right mouse button • Select “Meeting Minder” • Select the “Action Items” tab • Type in action items as they come up • Click OK to dismiss this box • This will automatically create an Action Item slide at the end of your presentation with your points entered. Current Trends and Issues in Financial Planning2007 Edition Roxanne Eszes, CFP Cleartech Documentation & Training cleartech@sympatico.ca

2. 2007 Edition CE Course • Over 140 pages of new material • Consolidates new developments in one place • Covers a wide range of topics across the CFP syllabus • Qualifies for 12 CE hours with exam • 20 question M/C exam • circle responses on answer sheet (optional) • go online at www.cifps.ca to submit answers • obtain a score of 12 out of 20

3. Course Highlights • Professional Practice Update • FPSC Competency Profile • ISO Standards for Financial Planning

4. More Course Highlights • Economic Update • Review of Canada’s economic framework • Recent Canadian economic developments • External influences • Overseas economic developments • Risks to Canada’s economic outlook

5. More Course Highlights • Personal Finance Update • Recent statistics on consumer spending • Statistics on current trends in inflation, mortgage rates, bond yields, etc.

6. More Course Highlights • Personal Finance Update • Residential Mortgages • Interest-only mortgages • 30, 35 and 40-year mortgages • High-ratio mortgages

7. More Course Highlights • Income Tax Update • Federal personal income tax parameters for 2007 • Synopsis of proposals from Budget 2007 the Tax Fairness Plan (October 2006) of interest to CFPs

8. More Course Highlights • Some general tax changes include: • Working income tax benefit for low-income Canadians • Tax measures for persons with disabilities • Charitable donations to private foundations • Registered Education Savings Plans • Elementary and secondary school scholarships

9. More Course Highlights • More general tax changes • Child tax credit • Public transit tax credit • Lifetime Capital Gains Exemption • Children’s Fitness Tax Credit • Changing CCA rates • Reducing general corporate tax rate

10. More Course Highlights • Retirement Planning Update • Enhanced age credit • Pension splitting • Phased retirement • Age limits for maturing RRSPs and RPPs • RRSP qualified investments

11. More Course Highlights • Retirement Planning Update • Life Income Funds • Minimum and maximum withdrawals • Annuitization requirements • Unlocking Pension Funds • Ending Mandatory Retirement

12. More Course Highlights • Investment Planning Update • Income Trusts • Enhanced dividend tax credit • Taxation of income trusts and other flow-through entities (e.g., partnerships) • Systematic Withdrawal Plans • Regular SWPs • T-funds • Guaranteed Minimum Withdrawal Benefits (GMWBs)

13. Today’s Presentation • Residential mortgages • RESPs • RDSPs, CDSGs, CDSBs • Pension Splitting • Systematic Withdrawal Plans

14. Housing Prices

15. Mortgage Industry Response • Interest-only mortgages • Longer amortization periods • New mortgage insurance policies

16. Interest-only Mortgages: The Basics • Low monthly payments for a period of time (usually 5 to 10 years) • Homeowner must qualify at the higher principal plus interest payment level

17. Example • Linda has $200,000 mortgage: • at 5.5% amortized over 25 years payments would be $1,228 /month • Interest-only would be $917 /month • “Savings” of $311 /month • Her ability to qualify would be based on payments of $1,228 per month

18. Interest-only Mortgages: Risks • What if market declines? • Asset value could decline but amount owing doesn’t change, even after paying thousands in interest • With interest-only mortgage, Linda would pay interest of $55,000 over the five years, but would still owe $200,000 • With standard 25-year amortization and P&I payments, mortgage balance would be $178,000

19. After the Interest-only Period • Converts to a standard mortgage, with balance of amortization • 5 years interest only, then 20 year amortization • 10 years interest only, then 15 year amortization • This could result in 50% increase in payments (Example: $200,000 at 5.5% over 20 years  $1,376, compared to interest-only of $917)

20. Who Offers Them? • So far, not the big banks • Available through mortgage brokerage firms

21. Who Uses Them? • Most suited for high net-worth real estate investors • Interest expense on investment property is deductible, interest expense on personal property is not • Not really suitable for first-time homebuyers • Possible exception of young professional couples with one person on temporary leave for school or children, and in rising house market

22. 30, 35 and 40-year Mortgages • Allow people to • Enter housing market earlier • Reduce their monthly payments to free up cash flow • Make the same level of payments, but buy a more expensive home

23. Downsides of Longer Amortization • Expensive! • Delays that point in time where mortgage is paid off and the client can divert surplus income to other financial objectives • Payments could continue on into retirement

24. Ex: Linda with $200,000 at 5.5%

25. Who Offers Them? • Some of the big banks through mortgage brokers • Other financial institutions like Wells Fargo and ING Direct

26. Who Uses Them? • Young new homeowners are attracted because they seem affordable…but they need to be made aware of the costs! • More suitable for real estate investors who can deduct the interest expense

27. High-ratio Mortgages • Homeowners without the required down payment (used to be 25%) are required to buy mortgage insurance • Approximately 40% of all new home purchasers fell into this category in September 2006 • Banking legislation in November 2006 reduced the required down payment to avoid insurance to 20%

28. Mortgage Insurance Providers • CMHC used to be the sole provider • Now at least 4 others, and this has led to competition, innovative structures and reduced premiums • Introduction of risk-based pricing • premiums used to be based on size of loan • now credit history is being factored in

29. Mortgage Insurance Surcharges • Longer Amortization Periods • 0.20% on 30-year amortizations • 0.40% on 35-year amortizations • Interest-only Mortgages • 0.25% for a 5-year interest-only period • 0.50% for a 10-year interest-only period

30. Mortgage Strategies to Stress • Don’t necessarily max out on the pre-approved amount • Try to avoid mortgage insurance by having the minimum 20% down payment • Choose the shortest amortization period affordable • Try to make extra lump-sum payments of 10% to 20% as terms permit • Choose twice a month or bi-weekly payments over monthly payments

31. RESP Proposals • $4,000 annual RESP contribution limit will be eliminated • Lifetime limit of $42,000 will be increased to $50,000

32. What this Means… • Parents who have neglected RESPs can still contribute the maximum even if child is only a few years away from school • not ideal, because less time for compounding • at least the income will be tax sheltered, and taxed in the hands of the student

33. CESG Proposals • New CESG room each year will increase from $2,000 to $2,500 • Lifetime CESG limit of $7,200 is unchanged • Maximum annual grant is $500 (20% of $2,500), or up to $1,000 if the beneficiary has sufficient carry forward room

34. What this Means… • Parents who haven’t taken advantage of CESGs can catch-up more quickly • Lifetime CESG limit of $7,200 requires contributions of $36,000 • CESG only payable on the first $5,000 each year (assuming contribution room) • To take maximum advantage of CESG, start no later than the year child turns 10, spread the $36,000 over 8 years, with max contribution in any one year of $5,000

35. RESPs for Adults • Adults who plan to return to school can make annual contributions or a lump-sum deposit totaling $50,000 • Investment income will be sheltered • EAPs taxable during school, when marginal rate is lower • EAPs payable are limited to $5,000 before the individual has completed 13-weeks of full-time consecutive study (or $2,500 for each part-time semester)

36. Registered Disability Savings Plan (RDSP) • Tax-sheltered savings plan for persons eligible for the DTC • Designed like RESPs • Can be established by DTC-eligible person, or their parent or guardian • DTC-eligible individual is the beneficiary • Available in 2008

37. RDSP Contribution Limits • No annual limit • Lifetime limit of $200,000 for the beneficiary • No restrictions on who can contribute • Contributions permitted until beneficiary turns 59 (end of year)

38. Canada Disability Savings Grant (CDSGs) • Government matches contributions to RDSPs

39. CDSGs, continued • Lifetime limit of $70,000 per beneficiary • Can receive CDSGs until the end of the year that the beneficiary turns 49 years of age • There is no carry forward of CDSG room, so contributions should be spread over time

40. Canada Disability Savings Bond (CDSB) • CDSB of up to $1,000 will be paid annually to RDSP of a low or modest-income beneficiary • CDSBs are not contingent on contributions • Maximum CDSB paid when family net income does not exceed $20,883 • Phased out for incomes between $20,883 & $37,178 • Lifetime limit of $20,000 of CDSBs per beneficiary • Payable until age 49

41. Tax Treatment • Contributions are not tax deductible • Investment income accrues tax free while in plan • When beneficiary makes RDSP withdrawal, the taxable portion includes: • investment income • CDSGs and CDSBs • NOT contributions

42. Payments from an RDSP • Must start by age 60 (end of year) • Maximum withdrawals (details yet to be specified) • Contributors cannot receive a refund of contributions, only beneficiary may benefit • Repayments of CDSGs and CDSBs (and associated income) may be required upon death or cessation of disability

43. Pension Splitting/Eligible Pension Income • Tax Fairness Plan of October 31, 2006 proposed sharing of up to 50% of eligible pension income • Decision to share must be done annually, it is not automatic • Both spouses must consent • May have to plan to create eligible pension income • Eligible pension income does not include CPP or OAS benefits

44. Eligible Pension Income Before 65 • Life annuity payments from an RPP • Full amount of annuity payments from an RRSP, RRIF or DPSP, but only if the payments are a result of death of taxpayer’s previous spouse, and taxpayer has remarried • Income component of unregistered annuity payments, under same conditions as above • Only planning opportunity is perhaps to take early retirement under RPP

45. Eligible Pension Income After 65 • Term or life annuity payments from a registered pension plan (RPP) • Creation Opportunities • Payments from a term or life annuity purchased with funds from an RRSP or DPSP • Withdrawals from a RRIF, LIF or LRIF • Income element of an unregistered annuity payment

46. Systematic Withdrawal Plans (SWPs) • Regular SWPs involve a systematic redemption of mutual fund units • Investor can change withdrawals as needed • Redemption can result in capital gains • 50% taxable outside of registered plan • 100% taxable if coming out of RRSP

47. T-Funds • T-version of mutual fund or T-SWPs • Distributes a pre-determined % of assets each year • Distribution % is set by company, not investor • Distribution % does not equal return • Some companies allow customization of cash flow by switching between T-Fund and non-T-fund

48. Taxation of T-Funds • A large portion of each distribution is a return of capital (tax efficient) • Reduces ACB • Increases capital gain upon disposition (deferral until then) • Distribution in excess of return of capital retains character as interest, dividends, capital gains

49. More Taxation of T-Funds • Advantages are lost within RRSP because 100% of distributions are taxable • Return of capital is not income for purpose of calculating OAS clawback • Great choice for charitable giving because capital gains inclusion rate is 0%

50. Guaranteed Minimum Withdrawal Benefits (GMWBs) • Insurance version of T-funds • A segregated fund with a guaranteed income stream, instead of maturity guarantee • Guaranteed 5% a year for 20 years • Deferral bonus of 5% a year for up to 10 years • Could increase distributions by 50%