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Devon, 56, and his retired wife Gail, 60, analyze their savings, portfolio and design a postwork spending goal.glenn lowson/Globe and Mail

At 56, Devon is ready to fold up the company he heads and spend more time with his wife, Gail, who has retired from work and is collecting a pension. She is 60.

Initially, Devon had hoped to sell his business for $900,000 and take advantage of the $800,000 (indexed) lifetime capital-gains tax exemption for small business corporations.

“My attempts to sell indicate the company is considered ‘me,’” Devon writes in an e-mail. So unless a buyer comes along, he will wind it down and withdraw the assets – about $300,000 in cash.

They have substantial savings, a mortgage-free home in the Greater Toronto Area and a second property – a condo apartment, where his mother lives. Short term, they plan to buy a new car for $85,000 and renovate the kitchen for $30,000. Longer term, they want to “ensure we don’t run out of money if Devon retires early.” Their postwork spending goal is $84,000 a year.

We asked Aaron Hector, a vice-president and registered financial planner at Doherty & Bryant Financial Strategists in Calgary, to look at Devon and Gail’s situation.

What the expert says

Gail is getting $30,000 a year, adjusted for inflation, from her defined-benefit pension plan. They will get another $30,000 to $40,000 in combined Canada Pension Plan (CPP) and Old Age Security (OAS) benefits, depending on when they choose to take them, Mr. Hector says.

If they earn 4 per cent a year on their $2.3-million portfolio, that would add another $90,000 plus, “more than enough to fill in the gaps."

In addition, Devon has $300,000 in cash in his corporation, which he will take in dividends over the next several years. “Their financial ability to retire is not in question so long as they wisely manage their finances from here on out,” Mr. Hector says.

Step 1 is to reposition their portfolio, all of which is invested in stocks. Apple Inc. and Inc. account for 60 per cent of the total, with the remainder being high-dividend-yielding Canadian and U.S. stocks. “The portfolio is very focused and has considerable risk.”

Managing capital gains will be an issue, the planner says. In their non-registered accounts, they have $516,000 and $112,000 of unrealized capital gains, respectively. When investments are sold, one half of these gains are taxed as income, so Devon is sitting on future taxable income of $258,000 and Gail $56,000.

They could start with selling some stock in their registered retirement savings plans (RRSPs), his locked-in retirement account (LIRA) and tax-free savings accounts (TFSAs), the planner says. “Crystallizing capital gains inside those accounts does not trigger a tax event.” If 100 per cent of the securities in the RRSP and LIRA accounts were sold and replaced with fixed income, their overall equity exposure would be 68 per cent, which is more reasonable heading into retirement, he says.

“The Amazon and Apple shares could also be sold from the TFSA account to continue to reduce the overweight exposure there.” These changes would reduce the weighting of Amazon and Apple to 34 per cent of their combined portfolio, “still much too high, but a move in the right direction that has no tax consequence.”

They could continue to sell off the Amazon and Apple stock in their non-registered accounts even if it means triggering capital gains and paying tax. Gail could sell half her position in 2018, triggering a gain of $28,000, and the remaining half in January, 2019, triggering another $28,000.

“This would allow her to diversify, while pushing half the tax liability out to April of 2020,” the planner says. She could also make an RRSP contribution this year of $15,000 to offset a large portion of her 2018 tax liability.

Devon may choose to unwind his Apple and Amazon positions over a few years to lower the average tax hit, the planner says, “but it is important to not let the tax tail wag the dog.” Stop-loss orders could be put into place to limit his downside exposure to a steep price drop in the meantime.

If Devon postpones taking dividends from his company until after he has dealt with the capital gains on his stocks, he would be able to more aggressively sell off his overweight positions without stacking the capital gains income on top of the dividend income, Mr. Hector says. This will allow him to keep his average tax rate much lower.

If he were to only have capital gains income over the next three years (one third each year of $258,000), he would report $86,000 a year of income and pay 23 per cent tax on average (only 11.5 per cent of the total capital gain). Then if he were to draw $300,000 from his company as dividends over the following four years at $75,000 a year, he would pay an average rate of about 13 per cent on the dividends.

If he were to have $86,000 of taxable gains plus $75,000 of dividends on a single tax return, then his average tax rate would be 26 per cent.

As Devon sells his non-registered positions, he should consider loaning the cash to Gail under a “spousal loan” at the prescribed rate, currently 2 per cent, because her taxable income will be lower than his while he is triggering his capital gains and winding down his company. Under the loan, Gail can reinvest the cash inside her investment account with the ongoing income taxed at her lower rate.

To illustrate the value of the loan, if Devon earned a dollar of eligible dividend income on top of his $86,000 of capital gains, he would pay 12.2-per-cent tax on that dividend income. However, if Gail earned a dollar of income on top of her $30,000 of pension income, she would have a tax reduction of 6.9 per cent due to the mechanism of the dividend tax credit. That’s a difference of 19.1 percentage points (6.9 plus 12.2). However, Gail must make interest payments to Devon each year to satisfy the Canada Revenue Agency.

Client situation

The people: Devon, 56, and Gail, 60

The problem: Can Devon retire immediately? Is their portfolio appropriate? What are the tax implications of winding down Devon’s corporate assets?

The plan: Diversify their portfolio to lower exposure to big tech stocks and add fixed income. Balance the timing of capital gains with corporate dividends.

The payoff: A retirement without unnecessary stress and unnecessary tax

Monthly net income: $10,978 (falls dramatically if Devon retires)

Assets: Cash, $30,000; house $600,000; rental property $300,000; his non-registered $843,430; her non-registered $530,770; his RRSP $535,475; his LIRA $57,045; her RRSP $154,675; his TFSA $117,825; her TFSA $81,645; estimated present value of her DB pension plan $350,000; cash inside Devon’s company $300,000. Total: $3.9-million

Monthly distributions: Property taxes $310; net loss on condo $500; property insurance $145; utilities $260; maintenance $625; garden $100; transportation $865; groceries $600; clothing $420; gifts and charitable $1,000; vacation & travel $1,000; phones, internet, TV $550; personal care $80; dining, entertainment $650; pets $75; sports, hobbies $100; subscriptions $50; healthcare $285; health, life, disability insurance $750; RRSPs $1,500; TFSAs $915. Total: $10,780

Liabilities: Mortgage on rental property $130,000 at 2.8 per cent

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