When most high-net-worth Canadians create a financial plan, they might expect to come out of it with a smarter budget and a tune-up of their portfolio, not discover a potential gap that could have cost them tens of thousands without the right advice. But that’s precisely what a detailed plan uncovered for one client.
At the time, this person was planning to move back to Toronto from California. After more than a decade working on the West Coast, he had amassed about US$10 million in a single stock with an adjusted cost base of $300,000. Given the growth of the stock, the client braced himself for a hefty tax bill when he crossed the border – either by a deemed disposition or by liquidating the stock before his move, which would have paid the capital gains tax in the U.S.
But, before he moved, he spoke to an advisor and shared details about his life that changed the outcome. While moving assets to the U.S. from Canada would trigger a deemed disposition, his advisor informed him that the case for transfers to Canada from abroad, he would face no tax consequences when he arrived. In essence, his adjusted cost base was reset at US$10 million, or the prevailing market value as of the date he enters Canada as a tax resident. Canada is not taxing the gain realised while he was not a tax resident in Canada.
That’s just one benefit of taking a holistic approach to your finances, which involves considering your entire financial life – such as taxes, business, estate planning and more – not just investments. Looking more broadly at your money and sharing information could help you uncover new ways to increase your wealth and protect your assets.
What does a holistic financial plan look like?
Many people view financial planning as being only about investments and budgeting. But to maximize wealth preservation, savings and growth, it’s essential to create a comprehensive plan that looks at a number of key pillars. For high-net-worth individuals especially, financial plans should also consider taxes, estate plans, cash flow, life insurance, Wills, future business opportunities, real estate, gifts to children in your lifetime, and philanthropy.
A holistic plan begins by identifying areas to consider based on your situation. The plan typically outlines your family structure, corporate structure, cash flow, powers of attorney and current net worth. It also includes an estate analysis using three different points in time, based on the earnings and spending assumptions, to determine what will be left over for your heirs and any tax implications.
If your situation is more complex or unusual, make sure your advisor has access to a network of experts to help guide you through specific needs. These professionals include Canadian and U.S. tax specialists, Wills and estates lawyers, insurance specialists and philanthropy experts who can help you optimize your gifting strategy.
Filling in potential gaps
When creating a holistic plan, it’s essential to have someone who can be objective and provide you with that steady and calming voice to help you navigate through common information gaps. After all, sharing details about your life and wealth can be emotional, and it’s natural to want to hold back some information.
Simple oversights can have significant unintended consequences. For instance, say you decide to gift the family cottage to a child. A common mistake is assuming that because there’s technically no sale, there are no taxes to pay. However, the transfer of ownership would create a deemed disposition on the property, creating tax consequences. You may end up with a tax bill that will need to be paid now, with no ‘sale proceeds’ with which to pay them. If you held onto the cottage until you passed away, you could direct your estate to pay those taxes instead.
Having that level of clarity and planning is particularly important when decisions involve family. Most people assume their kids are more capable of handling your affairs than they are or that they’ll always get along after you’ve passed. Many advisors have seen first-hand the damage that can be caused by leaving family to interpret your wishes.
A holistic plan could help avoid potential issues and maintain family harmony by assigning a third party who doesn’t have a vested interest in the outcome to become the executor of your estate. Ideally, you want someone outside your immediate family who understands your needs and has the time and experience to offer this service.
How often should I update my financial plan?
Your holistic financial plan could evolve as your needs change, so make sure to revisit it from time to time. Still, whenever you experience a significant event in your life – a marriage, the birth of a new child or grandchild, the sale of a company, a big move – it’s worth having a conversation with your advisor.
Even outside of those pinnacle events, reviewing the plan every three to five years is still a good idea to ensure it remains relevant. While your advisor and their team provide guidance, it’s ultimately up to you to share the details about your life that can help shape your plan.
A holistic plan can do more than help you build a portfolio to meet your goals; it considers other aspects of your life to help you find tax savings opportunities and more effective ways to use your wealth. Working closely with your advisor to build a comprehensive plan that looks beyond your investments can help set you up for the future.
