Nadine, 37, is an anesthetist. Her spouse, Andrew, 38, is a construction contractor. Married for 15 years, they have three children, aged 8 to 14. The youngest, Nathan, has an autism spectrum disorder that requires special care.
The family’s financial and legal situation
| Nadine | Andrew | |
| RRSP account | $200,000 | $300,000 |
| TFSA account | $100,000 | $100,000 |
| Non-registered account | $150,000 | $50,000 |
| Pension plan | No | No |
- The couple is married under the regime of separation of property.
- They have jointly owned a home in Laval for fifteen years. They have $500,000 left to pay on the mortgage (15-year amortization). The property is worth $1,200,000.
- The couple’s annual expenses amount to $200,000, excluding the cost of the mortgage.
- Andrew incorporated before his marriage and currently saves $80,000 a year in his company, for a total of $500,000 to date.
- He also opened a family RESP account for the children’s post-secondary education, to which he contributes $300 monthly ($39,000 accumulated to date).
- As for insurance, each spouse has taken out $250,000 in term life insurance as well as disability insurance.
- As far as legal documents are concerned, neither has a protection mandate or a will.
- Nadine and Andrew would like to retire in about twenty years.
To incorporate or not?
Nadine is wondering whether she should incorporate, as her partner Andrew has done. Her company would receive her professional income and be able to pay her a salary in line with her needs.
Points to consider:
- Are Nadine’s annual savings enough to make incorporation an attractive option?
- Since Nadine and Andrew are married under the regime of separate of property, is Nadine sufficiently protected in the event of divorce?
- Could the absence of legal documents lead to serious problems should either of them die or become incapable?
- Are the special needs of their son Nathan taken into account in their plan?
Nicolas Karaoglanian’s advice |
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MBA, FICB, Fin. Pl. |
Verify the couple’s savings capacity
“Nadine and Andrew are both in a good financial position,” Nicolas remarks from the outset. “When Nadine talks about incorporating, she knows she’ll be able to save more money in her company and build up a “nest egg” for retirement. Currently, the couple has quite a high lifestyle, but considering the fact that they have three children and that in retirement their cost of living should be lower, Nadine would be wise to ask her financial planner for a retirement projection with incorporation and without incorporation over the next year, which would give her greater clarity on the decision to make.”
The costs of incorporation
Nicolas continues: “When you think about incorporating, you have to consider the costs involved in setting up a company, and whether the tax savings generated by incorporation justify the set-up costs (registration and permits) and the recurring costs (bookkeeping, annual fees, separate tax return, etc.). On the other hand, since Nadine is able to save the difference between her income and her salary in her company (over $100,000 annually), the advantages could outweigh the disadvantages. The tax deferral resulting from incorporation would then be attractive. She needs to discuss it with her financial planner, who will help her analyze her situation and arrive at the right decision.”
Is the couple’s sharing arrangement fair and balanced?
“Nadine and Andrew are married under the regime of separation of property, which raises the question of equity in the couple,” observes Nicolas. “Each owns his or her own assets, regardless of whether they were acquired before or during the union (including each person’s unregistered savings account), while other assets, such as the house, are part of the family patrimony. To know whether Nadine would be sufficiently protected in the event of divorce, we would have to evaluate the partition of the family patrimony combined with the partition of the matrimonial patrimony.“
“In their case, Nadine’s incorporation would balance the distribution of wealth within the couple. If Nadine keeps her savings in her company, this money is not included in the family patrimony.”
RESP and RDSP: maximize the contributions
Nicolas has some more advice: “Andrew opened a family RESP account, but he hasn’t optimized it yet. He should increase his contributions to the maximum ($625/month or even more, if he can catch up on unused contribution room from previous years) to take full advantage of government grants.”
“Similarly, assuming that their son Nathan, who suffers from autism, is already approved to receive the disability tax credit (DTC), Andrew or Nadine should open an RDSP (Registered Disability Savings Plan) account in his name. The purpose of this plan is to save for the long-term financial security of a person with a disability. Like the RESP, this account is eligible for a government grant: in the case of the RDSP, it varies from 100% to 300% of the contribution amount, depending on the beneficiary’s family income, and will be paid until the beneficiary reaches the age of 49. By opening the account now, Andrew or Nadine can catch up on unused grant room by maximizing their contributions. This account will eventually help Nathan support himself and possibly lead a more independent life.”
Increase life insurance
“Each spouse has taken out $250,000 in term life insurance,” says Nicolas. “They should consult a financial security advisor to determine whether their respective insurance coverage is sufficient to meet their family’s needs in the event of either spouse’s death. At this meeting, Andrew and Nadine will be able to discuss this with their financial security advisor and update their coverage needs.”
Wills and protection mandates
Nicolas is categorical: “Nadine and Andrew must absolutely prioritize the drafting of their wills and protection mandates, especially since they are married under the regime of separation of property, have children, and currently have at least one company. These legal documents are extremely important for their and their family’s financial security, and for avoiding problems and delays in designating a tutor, for example, or in settling their estate. In their wills, they should also consider making bequests to the children through a testamentary trust for each of them, and include one specifically for Nathan only, which must meet the conditions for a qualified disability trust. This type of testamentary trust is more advantageous since it is subject to progressive tax rates.”
Establish a Henson trust
Nicolas has a suggestion: “In their estate plan, the needs of their son Nathan, who suffers from an autism spectrum disorder, should receive special attention. Creating a Henson trust could help maximize the financial resources available to meet his needs. This type of trust is fully discretionary and usually structured to protect a person with a disability. A Henson trust can be created as an inter vivos (living) trust, and also by will. If properly drafted, it should limit the dilution of tax and benefit measures and social services. The parents should discuss this possibility with the notary who will draw up their wills and protection mandates.”
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The situations described are based on a fictitious case and the interpretation of the information provided should in no way be considered a personalized recommendation. Please consult your advisor.
