Pension Income Splitting

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1 Newsletter Title Page 1 Office Address: Suite Rosemary Heights Cres. info@integral-financial.com Check our website: September/Fall Winter 2014 I N T HIS I SSUE Pension Income Splitting Mutual Fund Client Statements and Reporting Moving Forward Sources of Disability Benefits The Value of Adding Group Critical Illness to your Benefits Plan! Contact Us This income splitting opportunity affords a significant benefit to married and common law couples Pension Income Splitting By Nelson F. Deslippe Individuals in receipt of eligible pension income can allocate or split up to 50% of the income with their spouse or common law partner, and the allocated income is reported as the spouse's taxable income. This allows the shifting of income from a higher income spouse to a lower income spouse, enabling the couple to reduce their combined income tax liability and increase cash flow during retirement. This income splitting opportunity affords a significant benefit to married and common law couples which is not available to others in a joint living arrangement (such as two retired siblings or two long time friends). The choice to split pension income is made annually as an election when filing the couples' personal income tax returns. Qualifying married and common law couples have the opportunity to assess their overall income picture after the fact, offering maximum flexibility to optimize tax savings. "Eligible pension income" that qualifies for pension splitting is a specifically defined term and is dependent upon the age of the individual receiving the payment. If the individual is age 65 or over before the end of the year, eligible pension income is the total of: 1. a life annuity payment out of a pension plan; 2. an annuity payment from a registered retirement savings plan; 3. a payment out of a registered retirement income fund; 4. a periodic payment under a money purchase provision of a registered pension plan; 5. a payment from a pooled pension plan; 6. an annuity or periodic payment from a deferred profit sharing plan; & 7. the taxable portion of a non registered annuity payment. We help our clients achieve financial peace of mind under any circumstance.

2 Newsletter Title Page 2 If the individual has not attained the age of 65 before the end of the year, eligible pension income is the total of: As proposed in the 2012 federal budget, the definition of eligible pension income that can be split between spouses was expanded to include payments from a Retirement Compensation Arrangement (RCA). 1. a life annuity payment out of a pension plan (i.e., the same as (1) above for individuals 65 or over), and 2. any of points (2)to (7)above if they are being received as a consequence of the death of a spouse or common law partner. As proposed in the 2012 federal budget, the definition of eligible pension income that can be split between spouses was expanded to include payments from a Retirement Compensation Arrangement (RCA). Where the recipient individual has attained the age of 65 some time in the year, the RCA amount which may be split is the lesser of: 1. The total of all payments made in the year to the individual out of the RCA that provided benefits that supplement the benefits provided under a registered pension plan, and any payments in respect of a life annuity that is attributable to periods of employment for which benefits are also provided to the individual under the registered pension plan, and 2. The amount, if any, by which the defined benefit limit (greater of $1, and one ninth of the money purchase limit for the year) for the year multiplied by 35 exceeds the individual's eligible pension income determined without reference to the RCA payment received. It would appear from a careful reading of the RCA provision that pension splitting will be very restrictive and only allowed in cases where the RCA was set up to supplement a registered pension plan and meets the quantitative restrictions. As such, it would appear that there needs to be clear evidence of an existing registered pension plan in combination with the establishment of the RCA. This new provision has elements that are open to interpretation, which will take time to evolve. C ONTACT I NFO Rosemary Heights Crescent It is important to understand that when spouses opt to split eligible pension income, it does not change the legal ownership of the income but it does change the income tax onus. As such, the pension recipient remains the legal owner of the income flow while the spouse with whom the pension recipient splits the income becomes responsible for the income tax liability that arises on the income allocated. Within the couple as a family unit, this should generally not be a problem but the issue should be addressed to ensure each individual's cash flow is appropriate. info@integral-financial.com

3 Newsletter Title Page 3 Pension income splitting is a highly valuable element of retirement planning Pension income splitting is a highly valuable element of retirement planning because it offers retirees an opportunity to increase overall family after tax income through a reduction of the combined income tax liability. Qualified individuals should assess the value of this strategy annually to optimize their financial well being. 1/R , *Adapted from Edition of The Institute s Comment. Nelson F. Deslippe, B.COMM., CFP, CLU, CH.F.C. Insurance Advisor nelson@integral-financial.com Mutual Fund Client Statements and Reporting Moving Forward By Adam Graham C ONTACT I NFO Rosemary Heights Crescent For a number of years, the mutual fund industry in Canada has evaluated how their clients receive and perceive their mutual fund statements. They ve looked at models from around the world and concluded that we lacked the transparency in our statements. Therefore as of July 15th, 2014 there will be increased disclosure and transparency when it comes to what your mutual fund fees are, how an advisor gets paid, and whether there is any conflict of interest when a Mutual Fund Advisor sells a mutual fund. Below are a few key components of the new Client Relationship Model (CRM). info@integral-financial.com

4 Newsletter Title Page 4 At account opening, it is the responsibility of the advisor to disclose what products and services cost, including charges involved in operation of the account and making, holding and selling investments. Advisors will be required to prove that material conflicts have been reported to the dealer and appropriately addressed through avoidance or disclosure. Enhanced Client Reporting and Cost Disclosure At account opening, it is the responsibility of the advisor to disclose what products and services cost, including charges involved in operation of the account and making, holding and selling investments. Also, annually, there will be a summary in real dollars in terms of what investors were charged and any other fees paid to the dealer, including trailing commissions. Clients will also be able to see in these annual statements how much they ve contributed for the given period, what the investment is worth as of the report date, deposits and withdrawals, and percentage returns for their account over one, three, five and ten years since account opening. Conflict of Interest Identification, Control and Disclosure A conflict of interest occurs when the dealer or advisor s obligations to clients are perceived or determined to be compromised. Advisors will be required to prove that material conflicts have been reported to the dealer and appropriately addressed through avoidance or disclosure. The advisor disclosure must be shared with the client in a clear, meaningful, specific and relevant manner. Collection of Know Your Client Information what's new is a regulator focus on looking at suitability more holistically, including any point in time when an order is accepted, a new account is opened, a transfer or deposit is accepted C ONTACT I NFO Rosemary Heights Crescent info@integral-financial.com Although the collection of Know Your Client (KYC) information and suitability assessments have been around for a while, what's new is a regulator focus on looking at suitability more holistically, including any point in time when an order is accepted, a new account is opened, a transfer or deposit is accepted, there is a change in advisor or portfolio manager, there is a material change in KYC information and considering the client's current financial situation, investment knowledge, objectives, risk tolerance and new requirements of time horizon and the account's current investment portfolio composition at that time. Delivery of Relationship Disclosure Information Clients must be given a written communication describing the products and services offered by the dealer, the nature of the account, the manner in which the account will operate and the responsibilities of the dealer and advisor. Adam Graham, BA Investment Funds Advisor adam@integral-financial.com

5 Newsletter Title Page 5 Sources of Disability Benefits By Glennis J. Deslippe Many individuals wonder if they really need an individual disability insurance policy, believing there are other sources they can rely on to provide replacement income in the event of a disability. While there are other sources that may provide disability benefits, the reality is those sources may not provide sufficient amounts to maintain pre disability standard of living. They may also impose limitations on accessing the benefits. Many individuals realize this only when they submit their disability claim, when it's too late. The following information provides some understanding about the features and limitations of various sources of disability benefits. This material is for informational purposes only and should not be constructed as providing legal or tax advice. Reasonable efforts have been made to ensure its accuracy, but errors and omissions are possible. All comments related to taxation are general in nature and are based on current Canadian tax legislation and interpretations for Canadian residents, which is subject to change. For individual circumstances, consult with your legal or tax professional. This information is provided by The Canada Life Assurance Company and is current as of May, 2014.

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7 Newsletter Title Page 7 Advantages of Individual Disability Insurance Vs Group Disability Insurance 1. You own the policy. If you leave your job, the coverage goes with you. 2. The monthly benefit you receive is NON TAXABLE. 3. An enhanced definition of Disability. 4. You receive a benefit amount based on your earned income, not a group maximum. 5. The premium is guaranteed for the length of the policy. 6. The contract is non cancelable. The insurance company cannot change the contract in any way, regardless of changes to your lifestyle or job. 7. You can design a plan suited to your specific needs based on your job, age, salary, income requirements, and pricing options. 8. You can choose a start date and benefit period based on your needs.

8 Newsletter Title Page 8 Workers Compensation table 2014 How much of your client s earning would be covered by the Workers Compensation plan? British Columbia Percentage of earnings covered Maximum gross earnings covered Waiting period 90% of net $77,900 No Net income generally refers to income after deduction for income tax, CPP and EI. Association of Workers Compensation Boards of Canada ( Useful Websites: Glennis J. Deslippe, BSN, CHS, GBA Living Benefits Specialist glennis@integral-financial.com

9 Newsletter Title Page 9 The Value of Adding Group Critical Illness to your Benefits Plan! By Michael Kettner Every once in a while I come across an interesting tool that really grabs my attention. Just recently, a supplier told me about a free app for the ipad which calculates a person s likelihood of dying, becoming disabled, or suffering from a critical disease. I know, I know... not the most light-hearted app out there, but I already have Angry Birds. The app asks a few basic questions and then uses the information to calculate the odds of potential risks occurring. Here are the details I provided: Age: 35 Gender: Male Smoking Status: Non-Smoker My results were shocking to me My results were shocking to me; they are as follows: Probability of experiencing a disability before the age of 65: 36.9% Probability of contracting a critical illness before age 65: 28.3% Probability of dying before age 65: 7.7% Probability of dying, becoming critically ill, or becoming disabled before age 65: 62.0% Now, of course the app didn t have a lot of information to go on, so it was only calculating the results based on a very limited amount of data. But it still makes you think C ONTACT I NFO Rosemary Heights Crescent I consider myself fairly healthy. Yes, I may carry around 10 extra pounds of weight that I probably shouldn t, but I do walk to-andfrom work a couple times a week (40 minutes a day total, on the days I do it), and I will periodically visit the gym to relieve my guilt. So my chances may improve a bit compared to the statistics above. However, it is still eye-opening. This made me ask myself: Is my family properly protected if I become a statistic? Thankfully, since I am in the insurance industry and believe in what I promote, my family is well-covered. However, a lot of Canadians are not. info@integral-financial.com

10 Newsletter Title Page 10 How do we address this issue? Group Benefits provide a simple way for employers to offer financial protection for employees It is now easier than ever to help relieve this problem. Group Benefits provide a simple way for employers to offer financial protection for employees in case any of these items happen. Almost every group benefits plan in Canada offers Life Insurance. A lower percentage have Long Term Disability (in reviewing my personal client list, about 70% have disability coverage). However, not many companies offer standard group critical illness benefits, which is shocking since it is one of the least expensive benefits to add while providing tremendous potential value. This needs to improve in order to make the coverage more relevant to all employees. What Are the Key Considerations in a Group Critical Illness Policy? Key Considerations in a Group Critical Illness Policy There are a lot of great critical illness policies out there. Not only do the major group benefit insurers provide them, but there are also a variety of specialty risk carriers who have developed a number of unique benefits within group critical illness. There are, however, a few things you need to consider when reviewing which policy would best suit your needs. You should carefully contemplate the following: Benefit Amount - Choosing a benefit amount is as simple as deciding the dollar amount you hope to provide to your staff if they were to experience a critical illness or serious disease. Depending on the number of employees, your options might be vast or limited. Your budget might play a role in deciding the benefit amount. In my experience, the most common amounts range between a benefit of $10,000 and $25,000. C ONTACT I NFO Rosemary Heights Crescent Requirement of Medical Evidence - Depending on the number of staff on the benefits plan, as well as the benefit amount being offered, an insurer may set a maximum amount for how much insurance they will offer before the employees need to submit medical evidence. I typically don t like these limits, because it defies the reason that group benefits are offered in the first place (i.e. spreading risk among those who are healthy and those who are not), but it may be appropriate depending on the overall benefit amount you want to provide. info@integral-financial.com

11 Newsletter Title Page 11 Types of Illnesses/Diseases Covered - While some critical illness policies tout that they cover the most illnesses, sometimes it is not the number that is most important, but rather which illnesses are actually covered. I typically focus on four main illnesses: cancer, heart attack, stroke, and coronary artery bypass as they make up approximately 80% of the critical illness claims: Number of Illnesses Covered To partially contradict the previous section, I will say that it is also important to provide a lot of different opportunities for claims to be paid. By covering a wider range of illnesses, you give your employees the best chance of being covered during their time of need. Insurers typically cover between 15 and 30 illnesses in a standard policy. Multiple Event Clauses - There are policies out there that provide a full benefit amount if someone was to contract one or more of the critical illnesses that are covered within the benefits plan. The first-generation products within group critical illness would only pay out once. The second-generation products allowed for a second payout if a separate illness was experienced. However, there are now several policies that will allow as many payouts as necessary, as long as each contracted illness is unrelated in nature. This can be very important to staff, depending on how many health concerns they may face. Options for Conversion - When an employee considers leaving a company, they are in the awkward position of trying to continue providing their family with a similar benefit plan, so offering the option to convert their group critical illness benefit to an individual policy may be important. The employee may not be able to buy an individual policy in any other manner, as there is typically a requirement to supply medical evidence. Converting a group critical illness policy typically doesn t require proof of health within certain limits, and this makes conversion an attractive option. C ONTACT I NFO Rosemary Heights Crescent info@integral-financial.com Termination Age - You should look for an insurer who is flexible enough to provide the right amount of coverage for your needs. If your company values employees with a lot of experience, then it would be important to ensure the termination age of the policy is adjusted appropriately based on your requirements. Reduction of Benefit Clauses - In conjunction with Termination Age, some insurers will mandate a 50% reduction of benefit for anyone over the age of 65. While this may be a reasonable costsaving measure for insurers and some organizations, you should always search for a policy that fits your company culture.

12 Newsletter Title Page 12 While there are other items you may wish to review, this list should provide a good starting point for most discussions. Taking Action If you would like to add group critical illness benefits to your benefit plan, I would welcome the opportunity to chat with you further. I am passionate about promoting such programs and am able to offer my advice and expertise to any employers in Canada. You can reach me at michael@integral-financial.com or ext. 4. Michael H. Kettner, GBA Group Benefits Consultant michael@integral-financial.com Contact Us Please contact Nelson, Glennis, Adam or Michael to assist you with your life, investment, living benefits and group insurance needs Rosemary Heights Crescent Phone: (604) Fax: (604) info@integral financial.com Website: financial.com We help our clients achieve financial peace of mind under any circumstance. Eddy Choi Administrative Manager