Skip to main content
financial facelift

Steve and Beth freely admit their finances are "convoluted and confusing" and they need help sorting things out.

There's the registered retirement savings plans, Steve's professional corporation – he's a physician – and the tax-free savings accounts.

They want to pay off their debts, put their four children through university, pay for four weddings and semi-retire in four years. They are both age 51. Their children range in age from 20 to 25.

Steve also teaches. Beth works in administration. Together, they bring in about $244,125, plus some rental income from their share of an income property.

"What should our focus be?" Beth writes in an e-mail, "Debt repayment? Investing? How should we be investing considering our different accounts?"

We asked Ross McShane, director of financial planning at McLarty & Co. Wealth Management Corp. in Ottawa, to look at Steve and Beth's situation. Mr. McShane is co-author of The Golden Telescope.

What the expert says

Steve would like to give up his teaching position and continue to practise medicine in some capacity, Mr. McShane says.

"If [after he quits teaching] he earns the same amount of income from his practice as he does now until age 65, then their goal is attainable."

In fact, they would have a surplus, which would give them room to retire earlier, Mr. McShane says.

Steve will receive a pension of $42,900 a year starting at 60. At 65, they will also have income from the Canada Pension Plan and their rental property, and at age 67, Old Age Security payments kick in. They will need to draw on either their corporate investments or RRSPs to cover the balance of their lifestyle needs of $115,000 after-tax.

Beth and Steve could improve their situation considerably by using the professional corporation to reduce income tax.

First, they could make Beth a shareholder so that dividends could be paid to her in her lower tax bracket, rather than to Steve, who is in a much higher tax bracket. Shifting about $60,000 of the $72,000 annual dividend from Steve to Beth would save more than $3,000 a year in income taxes.

Then they could add the four children as shareholders using a structure that takes into account family law and the risks associated with potential marriage breakdowns.

Shifting a portion of dividends from Beth to the children will lower the family's tax bill even further.

Each child could receive dividends to pay for their schooling with a minimum amount of income tax, assuming they have no other significant source of income.

Shifting $10,000 from Beth to one of the children would save another $2,500 a year in tax. Dividends could be also paid to the children to cover their wedding costs.

"I recommend establishing a payout strategy now, with the proceeds deposited into the children's TFSAs until needed down the road," Mr. McShane says. The funds will grow tax-free within the TFSAs, whereas investment income would be taxed inside the corporation if it was retained.

The first order of business should be to eliminate the credit card debt and the personal line of credit. They could cash in their TFSAs and stop making monthly TFSA contributions until the debt is wiped out "within the year," he says. Once that is done, they can replenish their TFSAs.

Rather than catching up on their unused RRSP room, the couple could either direct surplus funds to their TFSAs or leave the money in the corporation to defer taxes.

Doing so gives them more flexibility in terms of timing and payout than would their RRSPs.

As for their investment portfolio, they are holding equity investments inside their RRSPs and interest-bearing ones in the corporation. Instead, interest-bearing securities should be in the RRSP and equities outside of it to take advantage of preferential tax treatment for dividends.

In their TFSAs they have U.S. stocks. "This presents a problem in that the 15-per-cent withholding tax on U.S. dividends is not recoverable inside a TFSA," the planner says. U.S. stocks should be held either in the RRSP or the corporation.

As well, they have an assortment of mutual funds that carry high management expense ratios – 2.42 per cent on average. A portfolio of individual securities and exchange-traded funds would be much less costly, he notes, "and the investment counselling fee is tax deductible on corporate and non-registered investments." A fee saving of 0.75 to one percentage point could save them more than $3,000 a year.


Client situation

The people

Steve and Beth, both 51, and their four children.

The problem

Make sense of a complicated financial situation and figure out if they can semi-retire while still relatively young.

The plan

Start by taking full tax advantage of Steve's professional corporation.

The payoff

A clearer view of what they can afford.

Monthly net income

$15,347 (Excludes retained earnings in corporation of $7,372 a month)


Cash, TFSAs $56,065; her RRSP $112,260; his RRSP $84,545; RESP $12,890; home $650,000; share of rental property $175,000, business investments $269,060; est. value of his pension plan $491,660. Total: $1.85-million

Monthly disbursements

Property tax $405; home insurance, maint. $340; utilities $470; food $800; clothing, personal care $400; medical and insurance $340; cleaning $500; telecom $475; entertainment $450; clubs $50; gifts $200; discretionary $200; travel $1,000; transportation $955; debt service $6,345. Total: $12,930. Surplus: $2,417


Rental mortgage $109,750; personal debt $74,345. Total: $184,095

Read more from Financial Facelift.

Want a free financial facelift? E-mail

Some details may be changed to protect the privacy of the persons profiled.