It is January 1, 2024 Background We re-visit Joe and Olivia Schmoe 12 years after we...

Transcribed Image Text:

It is January 1, 2024 Background We re-visit Joe and Olivia Schmoe 12 years after we first met with them. Joe is now 50 years old and Olivia is 48 years old, and their daughter Emma is now 16 years old Family Situation Joe and Olivia are in their peak earning years. They have been residents of Ontario for their entire lives. They have been married for Twenty-two years. Family Member Birth Date Age as of January 1st Joe Schmoe June 30th 50 Olivia Schmoe April 1st 48 EmmaSchmoe February 28th 16 Employment Oliviaowns and operates a successful Beauty Salon which is an Incorporated businessOSBeauty Incthat qualifies as a CCPC. She draws a salary of $100,000 annually and dividends of $50,000. Any remaining profit is used to finance further expansion. Joe is the head of the Department for Construction at the local College. He has been working there for 15 years. His current salary is $75,000 and it has been increasing annually at a rate of 1.5% above inflation. However, the college is downsizing, and it is offering a termination benefit of two weeks salary for each year of service for those who leave voluntarily. Personal Use Assets Joeand Olivia's Residence is a large property that is mortgage-free, and they also own a Cottage in the Kawarthas that is about a 90 minute drive from Joeand Olivia's residence in Markham, Ontario. They enjoy hiking and chose to buy a cottage that was more suited for that than waterfront cottages, so they originally bought the Cottage ten years ago for $160,000 and it is now worth about $290,000. There is an outstanding mortgage of $50,000 against the Cottage. Tax-paid Capital Olivia started OS Beauty Inc7 years ago with an initial investment of $20,000. It is now worth almost $350,000. OS Beauty Inc. is a qualified small business corporation. This was the only time Joehas ever used the capital gains exemption. Joeand Oliviahave built a modest investment portfolio outside of their RRSPs. The current value of the portfolio and the adjusted cost base of the investments are shown in the statement of net worth. Retirement Assets Olivianow has about $180,000 in her RRSPs and she named Joe as beneficiary and Emma as the Alternate beneficiary. Joejoined the university's defined benefit pension plan after completing exactly two years of service. The plan has a normal retirement age of 65 and a qualifying factor of 80. The plan will provide a non-indexed retirement pension of 2% of final earnings (average over the last three years) per year of service. His average salary over the last three years was $74,000. The plan is not integrated with the CPP and Joemust contribute 6% of his salary each year. If Joeaccepts the severance offer, he will also cease to be a member of her pension plan. The pension administrator has indicated that he could choose either to receive an unreduced retirement pension based on his current pensionable service beginning on January 1st of the year that follows the year he turns age 59 or he could receive a lump sum now. RRSP contributions for Joeare limited by her participation in the pension plan. She has about $60,000 in her RRSPs. Joeis deciding on whether to accept the severance package. He is wondering what the earliest age he could retire and still receive an unreduced retirement pension. Joeis also trying to decide on whether a lumpsum payout or receiving the monthly pension would be better if his life expectancy is 90. His unreduced pension would otherwise commence in January of the year when he was 60 years of age and would be payable at the beginning of each month. Estate Planning and Insurance Joe and Olivia do not have wills and have done little in the way of estate planning. Oliviais particularly worried about what will happen to her business when she dies and wonders how she could pass the business on to Emma while minimizing any tax liability. Oliviahas a $300,000 term life insurance policy on her own life with Joenamed as the beneficiary. Ten years ago, she purchased a long-termdisability insurance policy with a future income option, a provision for own occupation and a benefit for residual disability. When she purchased the policy, she bought coverage for $2,000 per month, which was 60% of her salary at the time. She has not exercised the future income option. Joehas group term convertible life insurance coverage of two (2) times his salary, group long-term disability coverage and group health insurance for the family that covers basic medical expenses. Objectives Olivia and Joe are thinking more about retirement. They expect to work for at least another twelve years and perhaps longer if they still enjoy what they are doing. Retiring may be a gradual and long-term process. Joeis considering the possibility of opening a construction company, however, this would require a capital investment of $300,000. Oliviahas offered to borrow the money from OS BeautyInc and lend it to him on the condition that the loan must be repaid within three years. Oliviadoes not really care if Joepays interest on this loan; she will leave that decision up to hm. Joewould like to know what the implications are if he accepts the loan from OS BeautyInc. Financial Statements A statement of net worth and statement of cash flow follow: Assets Liquid Assets Net Worth Statement: Oliviaand Joe Schmoe as at December 31st of last year Investible Assets and Business Assets - Non-registered Olivia Joe Total 1,500 1,500 3,000 3,620 3,620 7,240 5,120 5,120 10,240 ACB OSBeauty Ltd. 25,000 350,000 350.000 ABC Corp Shares 13,400 19,600 19,600 CanBond Fund 12,000 15,500 15,500 5-year $20,000 Strip Bond 14,000 14,000 14,000 All Growth Canadian Fund 18,000 24,600 24,600 385,10038,600 423,700 Investible Assets and Business Assets - Registered Olivia's RRSP Joe's RRSP Personal Use Assets 180,000 180,000 60,100 60,100 180,000 60,100 240,100 ACB House $140,000 Cottage in Kawarthas 160,000 Personal Vehicles 60,000 146,000 146,000 145,000 145,000 14,400 14,400 28,800 292,000 290,000 Furnishings Personal Belongings 100,000 Classic Corvette 40,000 70,000 37,500 37,500 75,000 70,000 342,900 412,900 755,800 Total Assets Liabilities and Net Worth 913,120516,7201,429,840 Olivia Joe Total Mortgage on Kawarthas Cottage 25,00025,000 50,000 Total Liabilities 25,000 25,000 50,000 Net Worth 888,120 491720 1,379,840 Statement of Cash Flow: Oliviaand JoeSchmoefor last year Cash Inflows Olivia's Salary 100,000 Joe's Salary 75,000 Dividend and Interest Income 53,240 Total Cash Inflows $228,240 Cash Outflows Income Taxes 80,814 Mortgage (interest only) Cottage 4,000 Property Taxes 4,200 Home Insurance 1,200 Utilities 4,460 Maintenance 4,000 Landscaping and Security 5,000 Food 9,600 Household Expenses 800 Telephone 800 Personal Care 1,900 Clothing Transportation 6,500 6,800 Entertainment 2,400 Eating Out 5,000 Gifts 4,000 Charitable Donations 4,000 Holidays 4,000 Private School 21,000 Medical Expenses 3,000 Life and Disability Insurance 1,600 Sundry Payroll deductions 800 Principal Repayment on Cottage 7,000 Additions to Money Market Fund 1,240 Foreign Equity Growth Fund 5,000 CanBond Fund 3,000 Strip Bond 14,000 Olivia's RRSP 13,500 Joe's RRSP 600 Joe's RRP 3,560 Total Cash Outflows 223,774 Unaccounted for Difference in Cash 4,466 It is January 1, 2024 Background We re-visit Joe and Olivia Schmoe 12 years after we first met with them. Joe is now 50 years old and Olivia is 48 years old, and their daughter Emma is now 16 years old Family Situation Joe and Olivia are in their peak earning years. They have been residents of Ontario for their entire lives. They have been married for Twenty-two years. Family Member Birth Date Age as of January 1st Joe Schmoe June 30th 50 Olivia Schmoe April 1st 48 EmmaSchmoe February 28th 16 Employment Oliviaowns and operates a successful Beauty Salon which is an Incorporated businessOSBeauty Incthat qualifies as a CCPC. She draws a salary of $100,000 annually and dividends of $50,000. Any remaining profit is used to finance further expansion. Joe is the head of the Department for Construction at the local College. He has been working there for 15 years. His current salary is $75,000 and it has been increasing annually at a rate of 1.5% above inflation. However, the college is downsizing, and it is offering a termination benefit of two weeks salary for each year of service for those who leave voluntarily. Personal Use Assets Joeand Olivia's Residence is a large property that is mortgage-free, and they also own a Cottage in the Kawarthas that is about a 90 minute drive from Joeand Olivia's residence in Markham, Ontario. They enjoy hiking and chose to buy a cottage that was more suited for that than waterfront cottages, so they originally bought the Cottage ten years ago for $160,000 and it is now worth about $290,000. There is an outstanding mortgage of $50,000 against the Cottage. Tax-paid Capital Olivia started OS Beauty Inc7 years ago with an initial investment of $20,000. It is now worth almost $350,000. OS Beauty Inc. is a qualified small business corporation. This was the only time Joehas ever used the capital gains exemption. Joeand Oliviahave built a modest investment portfolio outside of their RRSPs. The current value of the portfolio and the adjusted cost base of the investments are shown in the statement of net worth. Retirement Assets Olivianow has about $180,000 in her RRSPs and she named Joe as beneficiary and Emma as the Alternate beneficiary. Joejoined the university's defined benefit pension plan after completing exactly two years of service. The plan has a normal retirement age of 65 and a qualifying factor of 80. The plan will provide a non-indexed retirement pension of 2% of final earnings (average over the last three years) per year of service. His average salary over the last three years was $74,000. The plan is not integrated with the CPP and Joemust contribute 6% of his salary each year. If Joeaccepts the severance offer, he will also cease to be a member of her pension plan. The pension administrator has indicated that he could choose either to receive an unreduced retirement pension based on his current pensionable service beginning on January 1st of the year that follows the year he turns age 59 or he could receive a lump sum now. RRSP contributions for Joeare limited by her participation in the pension plan. She has about $60,000 in her RRSPs. Joeis deciding on whether to accept the severance package. He is wondering what the earliest age he could retire and still receive an unreduced retirement pension. Joeis also trying to decide on whether a lumpsum payout or receiving the monthly pension would be better if his life expectancy is 90. His unreduced pension would otherwise commence in January of the year when he was 60 years of age and would be payable at the beginning of each month. Estate Planning and Insurance Joe and Olivia do not have wills and have done little in the way of estate planning. Oliviais particularly worried about what will happen to her business when she dies and wonders how she could pass the business on to Emma while minimizing any tax liability. Oliviahas a $300,000 term life insurance policy on her own life with Joenamed as the beneficiary. Ten years ago, she purchased a long-termdisability insurance policy with a future income option, a provision for own occupation and a benefit for residual disability. When she purchased the policy, she bought coverage for $2,000 per month, which was 60% of her salary at the time. She has not exercised the future income option. Joehas group term convertible life insurance coverage of two (2) times his salary, group long-term disability coverage and group health insurance for the family that covers basic medical expenses. Objectives Olivia and Joe are thinking more about retirement. They expect to work for at least another twelve years and perhaps longer if they still enjoy what they are doing. Retiring may be a gradual and long-term process. Joeis considering the possibility of opening a construction company, however, this would require a capital investment of $300,000. Oliviahas offered to borrow the money from OS BeautyInc and lend it to him on the condition that the loan must be repaid within three years. Oliviadoes not really care if Joepays interest on this loan; she will leave that decision up to hm. Joewould like to know what the implications are if he accepts the loan from OS BeautyInc. Financial Statements A statement of net worth and statement of cash flow follow: Assets Liquid Assets Net Worth Statement: Oliviaand Joe Schmoe as at December 31st of last year Investible Assets and Business Assets - Non-registered Olivia Joe Total 1,500 1,500 3,000 3,620 3,620 7,240 5,120 5,120 10,240 ACB OSBeauty Ltd. 25,000 350,000 350.000 ABC Corp Shares 13,400 19,600 19,600 CanBond Fund 12,000 15,500 15,500 5-year $20,000 Strip Bond 14,000 14,000 14,000 All Growth Canadian Fund 18,000 24,600 24,600 385,10038,600 423,700 Investible Assets and Business Assets - Registered Olivia's RRSP Joe's RRSP Personal Use Assets 180,000 180,000 60,100 60,100 180,000 60,100 240,100 ACB House $140,000 Cottage in Kawarthas 160,000 Personal Vehicles 60,000 146,000 146,000 145,000 145,000 14,400 14,400 28,800 292,000 290,000 Furnishings Personal Belongings 100,000 Classic Corvette 40,000 70,000 37,500 37,500 75,000 70,000 342,900 412,900 755,800 Total Assets Liabilities and Net Worth 913,120516,7201,429,840 Olivia Joe Total Mortgage on Kawarthas Cottage 25,00025,000 50,000 Total Liabilities 25,000 25,000 50,000 Net Worth 888,120 491720 1,379,840 Statement of Cash Flow: Oliviaand JoeSchmoefor last year Cash Inflows Olivia's Salary 100,000 Joe's Salary 75,000 Dividend and Interest Income 53,240 Total Cash Inflows $228,240 Cash Outflows Income Taxes 80,814 Mortgage (interest only) Cottage 4,000 Property Taxes 4,200 Home Insurance 1,200 Utilities 4,460 Maintenance 4,000 Landscaping and Security 5,000 Food 9,600 Household Expenses 800 Telephone 800 Personal Care 1,900 Clothing Transportation 6,500 6,800 Entertainment 2,400 Eating Out 5,000 Gifts 4,000 Charitable Donations 4,000 Holidays 4,000 Private School 21,000 Medical Expenses 3,000 Life and Disability Insurance 1,600 Sundry Payroll deductions 800 Principal Repayment on Cottage 7,000 Additions to Money Market Fund 1,240 Foreign Equity Growth Fund 5,000 CanBond Fund 3,000 Strip Bond 14,000 Olivia's RRSP 13,500 Joe's RRSP 600 Joe's RRP 3,560 Total Cash Outflows 223,774 Unaccounted for Difference in Cash 4,466