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Personal Investment Project

Winter 2004

 

Contents

Case Study

Background

 

Debra

Louisa

Personal Status

         Age 42 years old
         Divorced Female
         Has two children from her prior marriage living with her
         Working as a lawyer
         Living with another divorced female with two of her own children
 
         Age 41 years old
         Divorced Female
         Has two children from her prior marriage living with her
         Used to be a freelance secretary and housepainter, but she has worked in the home for several years
         Living with another divorced female with two of her own children
 

Financial Status

         Earnings from job $120,000 per annum
         Lump Sum Settlement in lieu of child support  -  $60,000
         Savings  -  $140,000 in term deposits
         Joint Account with her roommate  for  $2000
         Yearly Income of not known
         Lump Sum Settlement in lieu of child support  -  $150,000
         Savings  -  $130,000 in certificates earning about 6% on her interest
         Joint Account with her roommate  for $2000
 

Expenses

         Largest single expense is sharing the rent of  -  $2000
         Largest single expense is sharing the rent of  -  $2000
 

 

Tax Planning

Due to her high annual income Debra would be looking at paying taxes at the highest federal and provincial rates which would be at 29% and 11.16% respectively.  My first source of action would be to investigate some tax planning strategies.

Since Debraís income is over a $100,000 and she also has substantial amount of money in savings, I would suggest that she invests the max amount she can into RRSPís.  Now that said, she might also have some carry forwardís from prior years which she did not max.  If she does have carry forwards from prior years she should look at investing the maximum amount possible into RRSPís, this will further reduce her income and potentially bring her into the next lowest federal tax bracket.  For example, if she was able to invest about $60,000 into RRSPís then her taxable income would be reduced to $60,000 which brings her to a federal and provincial tax bracket of 22% and 9.15%.  Since she has such a large sum of money in her savings account investing the maximum amount into an RRSPís would be an excellent tax planning strategy.

Louise on the other hand does not have a stated income and hence, we can make the assumption that she should be in the lowest federal and provincial tax bracket.  For the income she might make from working at house, she can claim a portion of that as a tax deduction depending on how much space of the house she uses for the income she generates from her house.  Looking at the time value of money there is no real advantage in Louise investing in RRSPs.

Another option they both have open to them is to claim one of the children as depends or equivalent to spouses.  This will mostly benefit Debra because she is in a high tax bracket and could use the tax savings.  Or they could claim common-law, but without knowing there relationship/friendship this would be a hard area to investigate.  There are tax advantages with common law but with that comes the issue of what happens if they decide to separate.

For the children, they should both be investing the maximum amount into family RESPís, which has a Canada Educational and Savings Grant (CESG) equal to 20% of their annual contributions to the RESP.  The maximum CESG per year is $400 per child.  Now the advantage of family RESPís is at the time of withdrawal if one of the children does not attend school it can be transferred to the other child.  Secondly when the money is removed tax is paid on the CESG which if you have more than one child in university then there is some tax strategies to minimize the taxes.

Lastly the lump Sum Settlement in lieu of child support they both received does not have to be included in their income and hence it is considered tax free.

 

Financial Planning

Even though Debra is 42 she still has to 55 before retirement if she chooses to work till then.  Therefore, I would recommend for her to diversify her risk by investing in mutual funds and bonds but I would also strongly recommend for Debra to also look at investing in the markets.  She is well off in terms of her annual income so I would suggest for her in increase her higher risk investments.  To counter argue depending on what she has invested, she might not want to take the chance of loosing her savings.  Hence, it really depends on how risk adverse the client is willing to be.

Louise on the other hand should look to invest in low risk investments but mainly diversify her risk.  Hence, depending on the market situations she can look at bonds which would be good for her because of the monthly income needed for rent.  Another area of investment for her would be mutual funds and T-bills.  Since she does not have a job, she would have to be very careful with the investments she chooses.

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