lessons from the portus scandal - advisor's edge · the bowen report with john j. bowen jr. 42...

CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • APRIL 2005 • WWW.ADVISOR.CA

Rogers Publishing Limited, One Mount Pleasant Rd., Toronto, Ont. M4Y 2Y5 • Publications Mail Agreement Number 40070230

LESSONS FROM THE PORTUS SCANDAL

HOW TO FIND AN ABLEREPLACEMENT WHEN IT’S TIME TO RETIRE

SUCCESSORSSEEKING

Avoiding Tax Audits ■ Insurance Incorporated+

Carl Abbott and heir

apparent, Mark Bertoli

AE04_OFC 03/21/2005 04:06 PM

5Inside Edge with Darin DiehlNefarious newsmakers involved in thelatest hedge fund fiasco serve to remindadvisors that offloading assurance is notan alternative to doing one’s own duediligence.

8LETTERS Smooth TransitionsThe financial advice industry might lookto its legal and accounting counterpartswhen considering retirement and succession planning.

10FRONT END LOAD Anecdotal AdviceFinancial storytellers Scott West andMitch Anthony tout life’s little details.And, irrespective of their moniker,clone funds are zapping into oblivion following the budgetary axing of the foreign content rule.

13TOOLBOX Company PolicyKnow the pros and cons of owning insurance through a corporation.By David Christianson

18COVER STORY Seeking SuccessorsAn unprecedented number of advisorswill soon retire. Do you take down theshingle, or find a successor to build onyour legacy? By Harvey Schachter

27Audit RisksThere are 10 ways to avoid a terse visitfrom the taxman. By Jamie Golombek

31Amicable DivisionFinancial divorce specialist Erika Pennerensures exes don’t get shortchanged.By Michael Berton

32Organizing AssetsCFP Les McDermott helps clientsarrange assets and successions.By Michael Berton

37Tax Break with Gena Katz

38Insurance Insights with David Wm. Brown

41The Bowen Report with John J. Bowen Jr.

42This ’n’That by Andrew RickardDog alimony. Gambling fund.Extreme estate plan. Penny wise.

THE

APRIL • 2 0 0 5 •VOLUME 8NUMBER 4

ONCOVER

www.advisor.ca ADVISOR’S EDGE | APRIL 2005 3

18SWEET SURRENDER

5 Lessons from the Portus Scandal

13 Insurance Incorporated

18 Seeking SuccessorsHow to find an able replacementwhen it’s time to retire

27 Avoiding Tax Audits

42PUPPY LOVE

AE04_003 03/21/2005 04:35 PM Page 3

You’ve heard the analogy before.Many advisors use the term “quarter-back” to describe their role as the cen-tral decision-maker in creating andtending to their clients’ financial plansand investment portfolios. As the quar-terback, you have to coordinate and relyon a team of suppliers, managers andother advisors to achieve your clients’desired goals. While your role requiresyou to hand off the ball once in awhile,you’re the one who calls the plays.

The regulatory cloud over PortusAlternative Asset Management has leftmany advisors looking like they’vedropped the ball. In February theOntario Securities Commission (OSC)enacted a temporary suspension orderagainst the hedge fund firm while itundertakes an investigation intowhether Portus has contravened securi-ties laws regarding record-keeping, salespractices and suitability.

The OSC has scheduled a hearing forMay 17 and class action suits have beenfiled against firms that referred theirclients to Portus. Meanwhile, the main-stream media has focused plenty of itspost-game analysis on the 4% upfrontcommission advisors received for thosereferrals. The headlines don’t look good

for an industry that seems to be foreverdefending its credibility.

But, it’s wrong to portray all advisorswho referred or recommended Portusas simply being myopically focused oncompensation. There is a very realdemand from clients for principal-pro-tected products. The failure, for themost part, lies in the realm of due dili-gence. Some advisors feel let down bytheir firms’ compliance departments—or by their own willingness to offloaddue diligence and suitability.

The issue is especially murky foradvisors on the MFDA platform. Forthe IDA-licensed advisor who recom-mends an alternative investment, thesupplier firm essentially becomes a sub-advisor for that product, and is still sub-ject to the advisor’s oversight. MFDAadvisors are not licensed to recommendmany of these products, but can pro-vide a referral which involves gettingtheir clients to sign a disclosure docu-ment stating the only provision is areferral, and that the supplier companybecomes responsible for suitability.

This is troubling for two reasons.First, recommendation or not, the clientwill still associate any negative outcomewith the referring advisor. And second,

is it really wise for advisors to offloadall due diligence to a product supplierto which they referred a client?

Marc Lamontagne, (CFP, R.F.P.,FMA), a fee-for-service advisor basedin Ottawa, says the first place to start iswith the supplier wholesaler. “Manyadvisors simply don’t leverage thewholesaler relationship properly. Youshould be asking them for independentanalysis of any claim they make aboutthe product.” And while he does hisown due diligence, Lamontagne says it’snever a bad idea to ask for a secondopinion. “Sometimes advisors don’thave the time or training to do a fullanalysis of investment products. In mycase, I have outsourced the function toan independent CFA (Paterson & Asso-ciates).” Even at large firms there areadvisors who look for an extra layer ofdue diligence from a third party.

In the end, advisors who still chooseto completely outsource due diligenceand suitability must understand theycan never offload responsibility.

DARIN DIEHLEXECUTIVE EDITOR &

ASSOCIATE [email protected]

INSIDEEDGESHIRKING RESPONSIBILITYThe perils and pitfalls of outsourcing due diligence and suitability.


AE04_005 03/21/2005 04:37 PM Page 5

Darin Diehl, Executive Editor & Associate Publisher, ADVISOR Group (416) 764-3812, [email protected]

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EDITORIAL ADVISORY BOARDElaine Andrew John OrdInvestors Group BMO Nesbitt BurnsDavid Wm. Brown Jim RogersAl G. Brown and Associates Rogers Group FinancialDavid Christianson Nancy ShewfeltWellington West Total Wealth Management Wellington West Capital Inc.John De Goey Thane StennerAssante Capital Management The Stenner Group, CIBC Wood GundyRobert Fleischacker Lynne TriffonAdvocis, Stonehaven Financial Group T.E. FinancialCynthia J. KettStewart & Kett Financial Advisors Ltd.

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■ The latest market news, in our twice-daily e-mail bulletins

ALWAYS ONLINE @ ADVISOR.CA!

6 ADVISOR’S EDGE | APRIL 2005 www.advisor.ca

AE04_006 03/21/2005 04:38 PM Page 6

CULTIVATING THE

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Re: “Legacy Lessons,” (January, page 7)Outstanding article! I’ve been in this crazy business

for a decade. For years I’ve been thinking that advi-sor/planning firms should be taking a similar route togrowing their businesses, just like law and accountingfirms do. Passing the torch from senior and retiring plan-ners should be seen as a way to grow the business as awhole and not as an internal competition. I’m sure there

are many lawyers who feel their system is inferior as well, but I honestly can’t thinkof a better way to make our industry more credible. You hit the nail on the head.

Ben Campbell, CFPFinancial Consultant Investors Group Financial ServicesWinnipeg

EXPERT CLARIFICATION Re: “Annuity Advantage,” (January, page 19)

Bruce Cumming recommends an annuity-based solution when he says: “First,annuitize each of the RRSPs on a joint life-only basis, with no guarantee periodand no reduction at first death.” I would appreciate you explaining how RRSPs canbe annuitized in that way.

Bob Miller, CFPInvestors Group Financial Services Owen Sound, Ont.

BRUCE CUMMING REPLIES:

Since Steve and Wendy each have a $350,000 RRSP, we go into the annuity mar-ketplace and buy two joint-life registered annuities (not prescribed annuities) justas if we were going to buy a joint-and-last life insurance policy. We list both oftheir birthdays and find what income the insurance company will pay on a monthlybasis starting next month. When the first spouse dies, there is to be no reductionin the amount of the annuity for the surviving spouse—the same monthly amountcontinues to be paid out. This is unlike a pension where there is often only a 60%survivor benefit after the first death, as here we are in effect creating a 100% sur-vivor benefit. We never add any bells and whistles like indexing or guarantee peri-ods. We are striving for the most stripped down, highest-paying annuity.

SMOOTH TRANSFERS

LETTERS


Correction: Our February 2005 Toolbox article, “Retirement Alternative” (page15) incorrectly stated the CRA would refund $1 from the RTA for each dollar paid out of the RCAIA. The correct amount is $2. We regret the error.

AE04_008 03/21/2005 04:14 PM Page 8

YO

UR

PI

CK

S By Joyce Marbach, vice-president and senior investment advisor, Wellington WestCapital, Regina, as told to Heidi Staseson

Book: Storyselling for Financial Advisors: How TopProducers Sell, by Scott West and Mitch Anthony

I’ve recommended the book to friends and my staff. Ireally like the anecdotes the authors use. By showing you areconcerned about protecting your clients’ capital and earn-ing a decent return for them, you’re more likely to make thoseclients feel comfortable with a particular investment.

For example, one advisor will draw pictures for clients.She’ll draw two boxes—one with a line sticking out of thetop, and the other with three lines. She asks clients, “Whatdo you think this is?” Most people have no idea the boxesare two elevators—one hanging from a single cable, and onehanging from three cables. She asks: “Which one would yourather be standing in during an earthquake, at the top of a20-storey building?” The one with the three cables repre-sents diversification. The point is the client is safer becauseit has the extra cables.

There’s an entire chapter highlighting some of WarrenBuffett’s best stories that help simplify business for clients.Buffett writes: “I use all the brains I have, and all the brainsI can borrow.” By hiring me, they’re not only hiring me,they’re also hiring all the people that I have access to, in orderto assist in planning their financial future.

Another example I liked: Say I sit down with you, a brandnew client. I don’t know you from Adam, and I say, “We’regoing to write a book together. I need you to tell me whatthe final chapter is and then I’m going to help you write thebook.” In order to write this book, what we’re going to dois start at the end and work the other way—which is theequivalent of asking, “How much money do you think youneed to retire?” Say the last chapter is: “I lived in PalmSprings. I golfed every day.”Those are the kinds of thingsyou need to know to get clients where they want to be. Some-times it’s hard. Getting the answer you need depends on howyou ask the questions.

ANECDOTAL ADVICE

FRONT

ENDLOADPeople, trends, events and analysis


Disclosure DisparityPercentage of respondents saying they

strongly / somewhat agree that “advisors should be required to disclose all

compensation arrangements to clients,”by financial channel / advisor type.

Source: Advisor Industry Panel Survey, Jan / Feb 2005

(n=381; moe +/- 4.5%, 19/20)

Cartoon by S

ue Dew

ar

IDA Platform

Financial P

lanners

Brokers

MGA Platform

Insurance Speci

alists

77% 75% 74%

59%

47%

AE04_010,011 03/21/2005 04:18 PM Page 10

CA

LE

ND

AR

OF

EV

EN

TSTo submit an event, e-mail

[email protected]


■ APRIL 10 to 12, CFO Canada Summit,The

Fairmont Le Château Frontenac, Quebec City,

www.cfocanadasummit.com ■ APRIL 25 to 26,

Business in China, Marriott Bloor Yorkville,

Toronto, www.canadianinstitute.com ■ MAY 9,

4th Annual Compliance Forum, BMO Institute

for Learning, Scarborough, Ont., www.ific.ca

■ MAY 11 to 14, Advocis National Conference,

World Trade Convention Centre, Halifax,

www.advocis.ca ■ MAY 17,Toronto Insurance

Women’s Association, Annual General Meeting,

Toronto, www.tiwa.org ■ JUNE 7,Toronto

Insurance Conference Golf Tournament,

Stouffville, Ont. Contact: Margaret Parent at

416-410-4842 ■ JUNE 6 to 7, IMCA Canadian

Conference, Le Royal Meridien King Edward

Hotel, Toronto, www.imca.org.

ith the federal budget passing a

third and final parliamentary vote

in March, major mutual fund companies

have started to act on Ottawa’s decision

to eliminate the foreign content rule.

Fidelity announced it will immediately

reduce MERs on the RSP, or clone ver-

sions of all its foreign funds so that the

fees match those of the underlying funds.

Eighteen funds will be affected, said

Fidelity’s Kim Flood. “Their MERs are

currently between eight and 15 basis

points higher than the MER of the under-

lying foreign fund.”

The decision anticipates the eventual

elimination of RSP funds. Fidelity said in a

statement that it will “proceed to eliminate

the funds as soon as the government’s pro-

posed policy change comes into force.”

“It could be May or June before that

happens and there doesn’t seem to be a

uniform industry approach yet for handling

that interim period,” Flood adds.

“We want to provide Canadian

investors with reduced expenses immedi-

ately,” added Fidelity president Rob

Strickland. “We are taking a prudent

approach to the funds themselves. As soon

as it is 100% certain the legislation to

eliminate the foreign property rule will

come into force, we will proceed as quickly

and efficiently as possible to eliminate the

RSP [clone] funds altogether.”

—Doug Watt

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There are a lot of reasons why iUnits ExchangeTraded Funds are a better recommendation forour clients’ portfolios, regardless of whetherthey choose a fee-based or traditional brokerage

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AE04_010,011 03/21/2005 04:19 PM Page 11

Are your clients incorporated? Whetherthey own an operating business (like a pro-fessional practice) or an investment holdingcompany, owning life insurance in the cor-poration may prove attractive and signifi-cantly lower the effective cost of a policy.

If a company qualifies for the small busi-ness deduction, the biggest attraction forowning insurance through the corporationis that the lower tax rate reduces the effec-tive cost of the premiums. On the first$300,000 of profit each year, a corporationpays less tax than an individual (under 20%in most provinces, compared with 39% to48% for the top personal bracket). Thatmeans a non-deductible expense such as an insurance premium can be paid by thecorporation with 80-cent dollars after taxes,instead of 52- to 61-cent dollars.

Then there’s the perception factor. Most people are reluctant to part with their own after-tax salary but they’llwillingly spend corporate money. It feels better to most clients and makes it easier for an advisor to sell a policy thathas a large premium.

There are other good reasons to have the company pick upthe tab. Corporations need protection against the deaths ofindividual partners as well as other contingencies. In situa-tions such as key-person coverage, coverage for bank loans,future executive buyouts, or even certain buy/sell structures,the corporation is the proper beneficiary, owner and payor.

If there are multiple shareholders participating in abuy/sell arrangement (as opposed to a pair of shareholders buying one another out), a corporate policy will be less com-plicated. Use of a corporate policy also creates options for cross-purchase, share redemption and other buy/sell

structures. Assume three partners opt to take out personalpolicies to protect themselves in the event one of them dies.Each would need to take out a policy on the lives of each ofthe other two partners. That’s six policies altogether. With thecorporation being the owner and beneficiary of each policy,a maximum of three policies are needed.

The strategy isn’t for everyone, though. Here are some reasons to avoid corporate ownership:• It can complicate the tax situation.• The death benefit may be partially taxed when it’s

distributed from the corporation to the shareholders.• A large cash surrender value (CSV) can put a company

offside for the $500,000 capital gains exemption, since90% of a company’s assets must be engaged in the activebusiness to qualify.

• Death benefits and CSV are exposed to the corporation’s

Increased incorporation by professionals means advisors should explore theadvantages of having clients own insurance through their companies.

COMPANY POLICY

Illu

stra

tion

by

Ian

Mit

chel

l

TOOLBOX

Continued on page 14

Strategies for advisors from advisors

By DavidChristianson


AE04_013,014,016 03/21/2005 04:22 PM Page 13

TOOLBOXcreditors.

• If the beneficiaries are family mem-bers or the estate of the insured, theinsured will generally be assigned ataxable benefit for the premium.

• Policies can be deemed RetirementCompensation Arrangements (RCAs)in certain circumstances.

• Valuation issues on policy transfersto shareholders are very complex.

• The stop-loss rules (ITA Section112 (3.2)) may apply, unless theinsurance and buy/sell agreementwere both in place April 26, 1995.

Possible Taxation of ProceedsClients won’t like the possible partialtaxation of a tax-free death benefit, butthere’s a way to solve the problem.

First, review the operation of thecapital dividend account (CDA). Thisnotional tax account allows for tax-freedistribution of life insurance proceedsfrom the corporation to its sharehold-ers by way of a capital dividend. Thecorporation always receives the deathbenefit tax-free, but a tax might arise ona dividend to shareholders. The CDAalso covers other capital sources to tryand maintain integrity between theindividual and corporate tax systems.

Only the proceeds that are in excessof the adjusted cost basis (ACB) of thepolicy qualify for the CDA credit andcan be paid out tax-free, and the creditonly applies when a private corporationis the owner and beneficiary. Properdocumentation in the form of a CRAelection must be filed so that the pay-out can be treated as a tax-free capitaldividend.

So, when do the proceeds becometaxable and to what extent? RichardFacia, regional director of sales withNational Life in Winnipeg, offers someexamples and guidelines. Generally, ifthe insured dies when the cash value isat a high point compared to the costbase of the policy, the taxable portionof a dividend can be significant.

In cases where a lender requires col-lateral life insurance on a principal, thecorporation shouldn’t simply accept thegroup policy offered by the bank orlender. That arrangement would deprivethe company of CDA treatment sincethe lender would own the policy—aswould having the lender named as thedirect beneficiary. On the other hand,if the debtor corporation is the ownerand beneficiary of the policy and thebank is the assignee, then the corpora-tion should qualify for a CDA credit.

Here are some solutions:• Consult an expert and ensure the

proposed structure allows proceedsto qualify for the CDA credit.

• Consider using a higher death benefit (see “When Death BenefitsBecome Taxable,” page 16) or anincreasing death benefit. Some lifecompanies offer an option that actu-ally covers the ACB as well as the original face amount to maintainthe after-tax value of the proceeds.

• If there is a holding company and anoperating company, then “Holdco”could own the policy and “Opco”could receive the death proceeds.Under the CRA’s current adminis-trative practice, this avoids ACBproblems. However, the GeneralAnti-Avoidance Rules may apply ifthe structure is used solely to avoidtax. There must be legitimate busi-ness reasons—such as creditorproofing—for the insurance policy,when it’s no longer needed by Opco.When a death benefit is paid,

consider using the cash insurance pro-ceeds in the company (to repay loans orhire someone to replace a key person)and thereby retain the CDA credit for a future tax-free distribution of

Continued from page 13



AE04_013,014,016 03/21/2005 04:22 PM Page 14

16 ADVISOR’S EDGE | APRIL 2005

TOOLBOXcorporate profits. The proceeds do nothave to be paid out at the time of receipt,as the CDA credit carries forward.

Valuation issues arise if the companyis sold or a policy intended as a

personal estate plan funding device istransferred to personal ownership.

One of the most difficult parts ofadvising on taxable benefit matters isdetermining the fair market value(FMV) of a policy. This critical aspect

depends on such factors as cash sur-render value, loan availability and bal-ance, face amount, insurability and lifeexpectancy of the insured, conversionprivileges and replacement value.

Remember, life insurance is not cap-ital property, so when transferring to ashareholder or an employee, the trans-ferring corporation includes the policygain in income. Normally, the ACB ofthe policy to the transferee will equalthe CSV, although under certain circumstances it may be greater.

The shareholder or employee willhave a taxable benefit for the FMV ofthe policy in excess of the considerationpaid for the policy. Say a companytransfers a life policy to Bob, an execu-tive. The policy has a $50,000 CSV, soBob pays the company $50,000. Notaxable benefit results, as the consider-ation is equal to the FMV. If Bob paidnothing for the policy, then he wouldhave a $50,000 taxable benefit.

Here’s where it gets complicated. IfBob had become uninsurable, and therewas a $250,000 death benefit as well asthe $50,000 CSV, the CRA mightargue the market value of the policy isbetween $250,000 and $300,000. Youcould argue for less, but it still mightnot convince the CRA.

A separate issue arises when a cor-poration is paying the premium on per-sonally owned insurance for a share-holder or related person. In those cases,there is a taxable benefit assessed to theshareholder or related person for some,or all, of the premium. But the com-pany may not get an offsetting deduc-tion, unless the insured person is anemployee dealing at arm’s length.

David Christianson, CFP, R.F.P., TEP, is afee-only planner and investment counsel withWellington West Total Wealth Management inWinnipeg. [email protected]


Death Benefit RATIO OF CDA TO DEATH BENEFITOption Deposit Pattern Year 1 Lowest Highest

Increasing Max. for life 97% 73% (yr. 17) 100% (yr. 42)

Max. for 10 yeras 97% 76% (yr. 10) 100% (yr. 30)

Max. for 5 years 96% 84% (yr. 5) 100% (yr. 27)

Minimum 99% 92% (yr. 18) 100% (yr. 32)

Level Max. for life 99% 85% (yr. 23) 100% (yr. 1)

Minimum 99% 92% (yr. 19) 100% (yr. 33)

Source: National Life, Richard Facia. CDA shortfall could reach 27%. Example assumes covered

person is a 45-year-old male non-smoker, with a $1 million sum insured at a 6% credit rate.

A higher death benefit may be necessary to ensure full use

of the tax-free Capital Dividend Account (CDA).

WHEN DEATH BENEFITS BECOME TAXABLE

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opportunitiesbased on merit and

performance.

AE04_013,014,016 03/22/2005 04:50 PM Page 16

S

CCarl Abbott is 56, nineyears away from his anticipated retire-ment. But he’ll be prepared when thatday arrives. He has a 10-year blueprintin place to hand over his Kamloops,B.C. business, Abbott Financial Services(Dundee Private Investors Inc.), to acompetent successor.

Three years ago, Abbott persuaded along-time client to enter the financialservices industry for the express pur-pose of succeeding him. Not only hasAbbott found his replacement, but thatsuccessor has already found his own.

IS IT 2015 YET? NOT QUITE, BUT ADVISORS PLANNINGTO RETIRE IN THE NEXT DECADE SHOULD STARTPREPARING. By Harvey Schachter

“It’s a problem, as the vast majority of people in the business are sole practi-tioners who haven’t provided for their continuity,” says Mark Tibergien, a principalwith Moss Adams LLP in Seattle. Tibergien specializes in succession planning for the financial services industry. “They go far down the road and, sensing their mortality or fatigue, realize it’s time to bail out. But it’s too late and their optionsare limited.”

Tibergien tracked the paths of American Express clients following the exodus ofadvisors who had either retired, died or left the business due to disability. Over a three-year period, he found 70% of clients had ended their relationship withAmerican Express, a clear indication industry organizations are hard-pressed toensure orderly successions.

But that may be difficult given the stubborn nature of advisors, Tibergien says.“If you talk to advisors, they’ll say, ‘I will die with my boots on.’ That’s a machostatement, but it’s also selfish,” he notes, explaining some advisors tend to developa codependency with clients that will often culminate in outright abandonmentwhen the client reaches his twilight years. He recommends advisors within five years of retirement seriously start thinking about their plans for their businessesand their clients.

Even though he’s still two decades away from retiring, he’s already had talks with ayounger associate whom he sees will be fit to do the job. Such proactive planninghas allowed Abbott, his clients and staff feel secure about their futures.

It’s not unusual for an advisor Abbott’s age to start thinking about retirementand the impact the transition will have on the business. More important, he needsto figure out how to extract sufficient value from the business to pay for retirement.While it’s not clear how many advisors will retire in the next decade, with an average industry age of 47 (according to this magazine’s third Annual Dollars & Sense

Survey), and more than 53% of Advocis members being over the age of 55, the total will be significant. Even more alarming, the number of new recruits to the business seems to be tailing off. That should raise red flags about where the advisors of the future will come from. And it should make existing advisors concerned about who will be willing to buy their businesses.


Photography by John L

ee

SEEKING


AE04_018-020,023-025 03/22/2005 04:37 PM Page 18


Cover Story

Carl Abbott and heir

apparent, Mark Bertoli

SUCCESSORS

AE04_018-020,023-025 03/22/2005 04:38 PM Page 19


Transferring TrustAbbott was jolted into consciousnessthree years ago when a high-profileinsurance rep in Kamloops unexpect-edly died, leaving her clients scramblingfor service. Worried about the futuresof his own clients, and those of his staffand seven associates, Abbott decided toprepare. He talked with the children oftwo clients who might be good replace-ments, as well as some associate advi-sors. But his instincts told him the idealchoice—if he could land him—wasMark Bertoli, a long-time client 14years his junior.

For 20 years, Bertoli had trustedAbbott implicitly with his net worthand the two had undertaken some realestate development deals together. Now,Bertoli was on a year-long sabbatical tobe with his family, and to ponder hisfuture after selling the heating and airconditioning business he’d owned.

Abbott invited him to attend a three-day Cartier Partners regional confer-ence. Bertoli, who already had an inter-est in tax planning and trusts, wascaptivated. He was excited by what helearned at the seminars and the manyways advisors can make a difference intheir clients’ lives. It also didn’t hurtwhen Abbott pointed out that, unlikehis previous business, this one camewith no inventory, no carrying costs,and an unlimited number of products.

After further discussion, Bertolibought half of Abbott’s business. Heinitially offered to purchase only 49%,leaving Abbott in control, but Abbottrejected the idea. “It wouldn’t work.That doesn’t reflect an equal partner-ship. Fifty-fifty does,” he says, althoughhe concedes he had considerable

misgivings. “It’s very hard at 56 to sellhalf your book to anyone. I was turn-ing over half my revenue and half myclient base,” he says, adding that severalof his friends were shocked by his deci-sion, and even argued he was making adreadful blunder. But Abbott stressestaking the risk was something he feltcompelled to do, as it would have beenunfair to staff and clients to delay themove until he actually retired.

It was also fairer to Abbott, becauseit ensured client continuity. By stickingaround while his successor came on

board, clients were less likely to flee, andthat would undoubtedly make the valueof the book higher than if it werebought on the eve of retirement, whenthe potential loss of clientele would befactored in.

Bertoli further soothed Abbott’s con-cerns by suggesting they take the valueof the firm’s assets as of December 1,2003, the time the deal was completed,and then set a goal to reach twice thatfigure within five years. Reaching thetarget meant Abbott’s share would



REELING THEM INThe industry must craft waysto recruit new talent.

TO ALL EYES, it appears the

number of new, young advisors entering

the business is declining.

Randy Reynolds, chair of the Advo-

cis board of directors, isn’t quite sure.

There are no accurate numbers but he

sees it as an emerging issue, because

the way people enter the business has

dramatically changed.

In the 1970s, with 150 life insurance

companies offering jobs and sales train-

ing programs to young people, there was

a steady flow of newcomers who stayed

in insurance or went off to other areas

of financial advice. Today, only a few

insurance companies are recruiting and

training new agents, leaving a big gap that

has been filled by the banks. They are

stocking their branch networks with

young people, encouraging them to take

the CFP course.

But whether the numbers are the same

or reduced, Advocis believes more atten-

tion has to be paid to bringing new

people into the business and ensuring

adequate training. Of course, that’s par-

tially based on self-interest, as Advocis’

revenues are dependent on the member-

ship fees paid by advisors. But it also

reflects the need to find the replacements

for the cohort of older advisors who will

be taking retirement in the next decade

or two.

The organization is therefore setting up

a task force to gather industry players and

universities in a symposium to discuss

entrance to the industry. Among the ideas

being considered is allowing university

students to be financed by the industry

while taking courses intended to lead to

a financial services career. Reynolds says

a key focus will be on making the career

path more attractive and accessible. A

young person today understands the path

needed to become an accountant. But it’s

murkier if he wants to become a financial

advisor. “We need a unified effort,” he

says. “Most young people make their

career decision at 17 or 18. The career

stream for financial advice should be

loud and clear.” —H.S.

AE04_018-020,023-025 03/22/2005 04:38 PM Page 20


essentially be the same as when he soldthe remaining 50% of his book.

During their first six months work-ing together, the advisors met with morethan 200 clients to introduce Bertoli,and demonstrate the duo’s similarapproach to conservative investing. Theyalso wanted to dispel any rumours thatAbbott’s departure was imminent. AsAbbott explained his reasons, Bertoliwould back him up by saying: “Yourplanner is planning.”

Nearly all the clients embraced thenew structure, trusting it enough towork with whichever advisor was avail-able. Some of those clients were onesBertoli had initially referred to Abbott.A few took a wait-and-see approach,opting to stick solely with their long-time advisor.

Their success is due in large part tothe fact the advisors share the sameinvestment philosophy and the samework ethic. “Mark works the 6 a.m. to 6 p.m. shift—he’s an early bird—andI work the 8 a.m. to 8 p.m. The rela-tionship would have faltered if there

was a difference in the level of com-mitment to the business,” Abbott says.

Why Sell?Like Abbott, Randy Reynolds hasstarted his succession plan early. How-ever, he doesn’t expect to retire at age 65,seven years from now. He would rathercontinue working and controlling hisbusiness beyond that time, and extract themaximum value. Unlike Abbott, he has-n’t made a deal with a successor, but hashis eye on two potential candidates—hisson, Tim, and a current associate—eachof whom he hopes might be primed fora deal in the near future.

Reynolds, who chairs Advocis’sboard of directors, is also the propri-etor of Financial Advisors BrokerageGroup, an independent Victoria, B.C.-based advisory firm. While he sees thelogic in succession planning, Reynoldsfeels more strongly that selling one’sbook isn’t the sensible route, given thecompensation an advisor receivesthrough trailing commissions. “Thereis very little goodwill and a potential fora decline in the business if clients leave,”he says, noting that an astute buyer willrecognize that limitation and name aprice much lower than the seller hadhoped for.

Reynolds has learned the hard reali-ties of book buying. After he purchasedbooks from two advisors, both passedaway within three months of the sale,before introducing Reynolds to theirclients. “Each [advisor] had built upstrong relationships with clients and asgood as I might be, I couldn’t replacethem,” he explains.

Reynolds forecasts that over the nextfew years, there will be an influx of

books for sale, which will depress over-all value. “I can’t imagine any situationin which a book can be sold for a pre-mium,” he notes. “If you are in poorhealth or can’t stand the business, thensell your book. But if you enjoy it andwish to maximize the value, sellingshouldn’t be an option.”

Rather than sell the business,Reynolds will opt to maintain owner-ship, assuring clients he’s still aroundif needed, while allowing somebody elseto run the day-to-day affairs.

“I can be in my condominium inPalm Springs talking to a client. It does-n’t matter where I am,” he says. Thatethos fits with both Reynolds’ financialsense of what’s best and his emotionalsensibility: “I would dread the future ifI couldn’t continue doing this.”

Reynolds’ thinking about retirement,or to be more accurate, not-quite-retire-ment, was sparked three years ago whenhis son, Tim, entered the business.Although the two have talked aboutTim taking over, Reynolds has made itclear Tim’s got competition—the asso-ciate mentioned previously—should hediscover Tim isn’t the right fit. “Maybein the next couple of years it couldgrow into a formal agreement,” he pon-ders. However, he says it’s too prema-ture to make a deal, and for now,Reynolds is content to watch and wait.

If Reynolds does eventually hand thereins over to his son, he’ll be taking thesame path as Toronto’s Bill Horan. Theformer ScotiaMcLeod investment advi-sor wasn’t really thinking about retire-ment when, in 1996, his son Mattleft Toronto-based Richardson-Green-shields after RBC Dominion Securities



Two advisors forthe price of one

meant better service for clients.

AE04_018-020,023-025 03/22/2005 04:39 PM Page 23


took over. They talked about teamingup. Although Matt had a few options,he was intrigued by the thought ofworking with his father, and that forcedBill to face up to the reality he wasn’tgoing to be in the business forever.

Tag TeamThe father and son team worked togetherfor six years, before Bill, prodded byhealth concerns, retired. Bill’s original halfof the book was more than compensatedfor as the pair had grown it by 150%.Apparently, working together for all thoseyears had instilled client trust. By the timeBill retired, only two or three clients hadactually departed.

For the Horans, working togethermeant sharing the same office and thesame investment advice. If one of themcouldn’t answer a client’s call, the other

would pick up the phone immediately,rather than leaving it for an assistant.The setup was primarily designed to beinterchangeable and for most clients it was, although some still had theiradvisor preferences.

Bill remembers one long-term clientcalling shortly after Matt came onboard. Fumbling his words the clientsheepishly asked: “Do you mind if Italk to Matt?” Rather than beingoffended, Bill was delighted. “It showedme the potential of this transition if weworked it slowly,” he says.

Before Bill retired, that potential grewthree-fold. Clients were assured theywould have an advisor they could trust,and given Matt’s age, the duo could successfully target clients who were the children of some of Bill’s long-term clients. Effectively, two advisorsfor the price of one meant better

NEXT STEPSHaving a succession plan in place increases the value of your business.

IF YOU WANT to start plan-

ning for your future, there are three essen-

tial strategic steps to consider, according

to Mark Tibergien, a succession expert

at Moss Adams LLP.

Client Transition: To ensure continuity

for your clients, prepare a written agree-

ment in which you give instructions to your

executor that if something happens to you,

you’ve nominated a friend who has the

capacity to serve clients effectively as your

interim successor.The better option is to

develop an internal successor who can help

you co-manage the client relationships

until retirement. “This is more common

and more comfortable. There isn’t the

shock of clients having to become

acquainted with somebody new. There is

continuity,” he says.

Management: If you want your business

to continue, you need to decide who is capa-

ble of managing it. That involves finding an

administrative successor, who may or may

not be the same person designated to man-

age client relationships.“The faster you can

reduce dependency on you as the owner, the

faster you will increase the value of your

business,” he advises.

Ownership: Who will own the business

after you leave? Again, this relates to

the other decisions but it is a separate

strategic consideration, particularly if

there isn’t an insider ready to take over.The

options are finding a strategic or financial

buyer, such as an advisory firm or an indus-

try consolidator, or even an individual buyer

in your community. A key question is: Are

you trying to maximize value or optimize

value? “If you want to optimize value,

make sure you sell it to somebody with a

shared belief, who will take care of the

staff and clients, but keep your name on

the door,” he says.

Tibergien notes when you sell to an out-

sider, you should remember this adage:

“Sellers of practices are like fish and

relatives. After a couple of days, the

buyer wants them out of there.” —H.S.


AE04_018-020,023-025 03/22/2005 04:39 PM Page 24


service for clients. To ensure the advi-sors were on the same investment page,they both came in at 7:30 a.m. andspent the first 15 to 30 minutes chat-ting animatedly about the markets andtheir preferences.

Although both were interested inblue-chip stocks, each came at it a dif-ferent way. Matt, a statistics graduate ofthe University of Western Ontario,enjoyed fundamental analysis, while Billhad a veteran’s feel for the market’smoods. In the first few years, Mattwould often defer to Bill when the twowere at investment odds, but that shiftedwith time. “This business is constantlyevolving and it’s a young man’s business,”says Bill. “I grew up with high inflationwhen interest rates were key. Now thekey is global growth. There’s a time fornew approaches to be taken.”

Not that the quarrels were huge. Inmost cases, they were simply battingaround different views in order tounderstand the best direction. Onlyabout a dozen times in the six years didone of them tell the other he couldn’tgreenlight an approach, and the otherlistened with respect, before opting fora different strategy.

At the start, Bill and Matt’s split onthe book was reflective of Matt’s juniorposition. For Bill, the key was not sim-ply to praise Matt’s work, but to showhim with remuneration, which he sayswas driven by Matt’s contribution to thebusiness. Every six months to a year, Billwould increase the remuneration untilwithin a few years they were sharingequally in the proceeds. “There was a fair amount of trust between us,”says Matt. “We didn’t work it out inadvance. My Dad was proactive andusually did it faster than I expected.”

When Bill decided to leave, Mattbought out his share of the businesssince Bill never saw the value in advisorsthat stayed on part-time after retire-ment. “It’s like a hockey player. They hitthe pinnacle of their career and hang onand hang on when they should go,” heexplains. “The Achilles heel in thesearrangements is when the guy who ishead honcho doesn’t say, ‘I’m out ofhere, you’re in charge.’ People in ourbusiness are self-starters. The youngerperson doesn’t want to play second fiddle until the older advisor is 95.”

Given that the advisors deal in directinvestments rather than managed prod-ucts or mutual funds, each has to be fullyengaged in the portfolio process. Initially,Bill had to cut back his work to four daysa week, and after that to three days, as hishealth faltered. But he felt any furtherreduction would be a disservice to hisclients as he wouldn’t be as immersed inthe stock market.

Perhaps the most important factor inthis arrangement (as with any partner-ship) is that the Horans got along well.If a retiring advisor doesn’t intend tosell his book to an external party butplans to smooth the path for hisclients—and maximize the value of hisbusiness—he or she needs to find acompatible partner. Otherwise thetransfer will be troublesome, withclients sensing the differences. Thesmooth and long-term transfers thatCarl Abbott, Randy Reynolds and BillHoran have each prepared show thevalue in advance planning, and point theway for the many advisors who are fac-ing retirement in the next decade.

Harvey Schachter is contributing editor of

Advisor’s Edge.

Looking for more expert insights on what to do with your book ofbusiness, and yourself, when the timecomes for you to retire? Then be sureto check out Advisor.ca’s package onretirement and the retiring advisor.This online package includes:

• Insider strategies on valuing yourbook of business

• Help practising what you preachfrom the authors of The CanadianRetirement Guide

• Links to more online informationand helpful resources

All this can be found in the PracticeZone at www.advisor.ca startingApril 7, 2005. For other onlineresources related to articles in this magazine, please visit www.advisor.ca/edge/.

More online

www.advisor.ca/interact@

AE04_018-020,023-025 03/22/2005 04:39 PM Page 25


RISKSNo two words bring more anxiety toyour clients’ lives than “tax audit.” Butwhat is a tax audit? What is the taxmanactually looking for, and perhaps moreimportant, what red flags will catch theCRA’s attention?

WHAT IS AN AUDIT?A tax audit is the formal examinationof a client’s books and records to deter-mine if she has accurately reportedincome tax liability in accordance withthe law. Canadians are, by nature, acompliant bunch. Just the thought ofbeing selected for a tax audit is oftenenough to encourage voluntary com-pliance, especially as penalties and inter-est levied for non-compliance can besubstantial.

That said, our tax system is based on

a self-assessment model whereby tax-payers are expected to report all theirincome and pay their taxes accordingly.This model can only work if the CRAmakes regular investigations to ensureCanadians pay their fair share of taxeseach year.

Under the Income Tax Act, every tax-able individual is required to file anincome tax return. A return may beselected for audit after it is electroni-cally processed, correcting any mathe-matical errors and matching key infor-mation such as T4s with the CRA’s ownrecords. People who earn a salary pres-ent little risk to the CRA as mostemployers withhold employees’ taxes.Consequently, the CRA typically onlyaudits self-employed individuals.

The CRA uses sophisticated com-puter programs to analyze returns, oftenmaking comparisons of taxpayers’financial information over several yearsand looking particularly at individuals

in similar professions. In addition, itperiodically chooses to review thereturns of a particular group of tax-payers in which there may be perceivedabuses of compliance with the tax law.For example, the CRA may choose toaudit all employees who reported homeoffice expenses.

Your clients should also be aware theCRA sometimes selects returns to auditbased on leads—either from other tax-payers’ returns or from informers. Sowarn clients not to brag about aggres-sive positions they may have taken ontheir tax returns!

CRA’S TOP-10 HIT LISTLast summer, Deloitte and Touchereleased a Top-10 list of tax returnitems most often questioned by theCRA. The professional services firmconducted a poll which, although notscientific, was based on thousands of


Make sure your clients know how to AVOIDattracting scrutiny from the CRA.

BY

JAMIE GOLOMBEK

AUDITAE04_027,028 03/22/2005 04:41 PM Page 27


Canadian personal tax returns submit-ted to its practitioners.

■ 1. ALLOWABLE BUSINESS

INVESTMENT LOSS (ABIL). An ABILis a special type of capital loss thatoccurs when an individual disposes ofdebt or equity in a small business. Oneadvantage of realizing an ABIL over anordinary capital loss is that, while cap-ital losses may only be deducted againstcapital gains, an ABIL may be deductedagainst all sources of income.

■ 2. MEDICAL EXPENSES. Individu-als are allowed to claim both federal andprovincial tax credits for medicalexpenses. Clients who file paper taxreturns need to include their actual med-ical receipts with those returns. Thereceipts need to specify the name of thepractitioner or institution (hospital, clinic,etc.) to which the expense was paid. If anattendant is hired to care for a disabledperson, the attendant’s social insurancenumber should also be on the receipt.

Electronic tax filers, however, shouldkeep all receipts to support their claimsfor medical expenses.

■ 3. CARRYING CHARGES. Thesecharges, on Schedule 4 of the tax return,include all expenses paid to earn invest-ment income, such as interest on moneyborrowed for the purpose of earningincome, as well as management fees onvarious investment wrap programs.

Advise clients to keep documentsevidencing the carrying charges beingclaimed, which, contrary to popularbelief, should not be filed with the taxreturn. In addition, try not to inter-

mingle personal debt and investment-related debt. For example, tell clientsto establish separate lines of credit—one for home renovation and anotherfor investing—to better separate theinterest paid on the investment line ofcredit, should the CRA start askingquestions.

■ 4. STOCK OPTION DEDUCTIONS

AND DEFERRALS. Under the stockoption rules, only half the option gain isgenerally taxable, provided the optionmeets certain qualifying conditions. Themain condition is the option cannot havebeen in the money at the time it wasissued to the employee. Advise clients toobtain a letter from their employer at the time the options are exercised thatverifies they qualify for the deduction.

It’s also possible to defer the inclu-sion of the stock option benefit inincome until the shares acquired uponoption exercise are sold. However, thisdeferral is only possible by filing anelection by January 15 of the year afterwhich the options were exercised.

■ 5. PROVINCE OF RESIDENCE.Alberta, Western Canada’s tax haven ofchoice, is the subject of the next area ofattack by the CRA, particularly regard-ing residents living in British Columbiaand Saskatchewan adopting the practiceof filing their returns as Alberta resi-dents. Remind clients that vacationingin Banff during December isn’t enoughto claim residency in Alberta!

■ 6. CHARITABLE DONATIONS. Asa result of the government’s increasedcrackdown on questionable charitabledonation tax shelters, large donations

(in excess of $25,000) and donationsof property in kind also attract thetaxman’s careful attention.

■ 7. INSTALMENTS. If your clientsare required to pay tax by quarterlyinstalments, tell them to ensure theirpayments are credited to the correct taxyears. Otherwise, there may be a defi-ciency in the amount of tax owing atyear end.

■ 8. DISABILITY TAX CREDIT

(DTC). Judging by the dozens ofreported tax cases involving the DTCeach year, eligibility to claim this creditcontinues to be a source of scrutiny bythe CRA’s auditors. Ensure documen-tation from a medical professional is onfile to validate your client’s claim.

■ 9. ROLLOVERS FROM DECEASED

INDIVIDUALS. Amazingly, the simpletransfer of an RRSP or RRIF to a surviving spouse upon the death of theannuitant can pique CRA’s interest.

■ 10. BUSINESS EXPENSES WITH A

PERSONAL ELEMENT. These includebusiness use of a personal automobile ortravel expenses for business trips whenaccompanied by a spouse. Clients shouldbe encouraged to maintain detailedrecords (log books, conference itineraries,etc.) to ensure the business portion ofsuch expenses can easily be defended.

By informing clients of some of theCRA’s key areas of interest when con-ducting tax audits, and by reinforcingthe need to maintain proper records anddocumentation, you can minimize thelevel of stress a visit from the taxmanmight otherwise cause.

Jamie Golombek, CA, CPA, CFP, CLU,

TEP is vice-president, taxation & estate plan-

ning, at AIM Trimark Investments in Toronto.

[email protected]


Alberta,Western Canada’s tax haven of choice, is the subject of the next area

of attack by the CRA.

AE04_027,028 03/22/2005 04:41 PM Page 28

A D V I S O R O F T H E Y E A R H O N O U R A B L E M E N T I O N


AMICABLEDIVISION

After 18 years of marriage, Kenand Josie* decided to throw in thetowel. Both accepted they’d be happierapart, so long as they were assured their10-year-old daughter, Susan, wouldreceive the support of both parents, andthat they could agree to an equitabledistribution of their assets. Their medi-ation lawyer recommended they obtainthe services of financial divorce specialist Erika Penner.

Ken, age 49, was an emergency roomphysician who worked long hours. Hewas at the top of his career, earning agross income of $292,000. In additionto the family’s house and other jointlyowned assets, he’d built up an RRSPworth $430,000, and a $10,000 stockportfolio.

Josie, a 48-year-old registered nurse,had long been working part-timebecause she and Ken believed she shouldbe home with Susan. Three years beforethe separation, Josie survived a boutwith breast cancer and was now cancer-free. Her most recent annual grossincome was around $50,000. Given

Ken’s schedule and Susan’s needs, therewas little opportunity for Josie to worka lot of hours.

Her decreased earning power meantJosie had not been able to accumulatethe same level of assets as her husband,and she would have significantly lessearning power going forward. The cou-ple decided to sell their family home(valued at $1.5 million with a mortgageof $740,000), and Josie wanted to have sufficient cash flow to pay a newmortgage on a home in the same area. Shealso wanted to start a home-based seniors’care business with acolleague.

The lion’s share oftheir assets belonged to Ken. His earn-ing ability had always been considerablygreater than Josie’s, and he would con-tinue to have a significantly greater abil-ity to save. Josie, on the other hand,would be hampered by the servicingcosts of a large mortgage and the start-up costs for her proposed business.

Initially, Ken offered to equally split thefair market values of their home, hisRRSP, CPP and the outstanding prin-cipal on the debts. He would payspousal support of $5,000 per month


*All client names have been changed.

A divorce specialist helps ensurethe livelihood of a secondincome-earning spouse.

E R I K A P E N N E R

CFP, FICB, PRB, FDS

PERFORMA FINANCIAL GROUP LTD.Richmond, B.C.

HONOURABLEMENTION

Penner revisedher projectionsto advocate a differentasset split.

By Michael Berton

AE04_031,032,035 03/21/2005 04:24 PM Page 31


for two years and child support of$996 per month until Susan’s 19thbirthday. Josie would keep her nurse’spension.

An analysis of the long-term out-come of the initial settlement proposaldetermined that, while fair in the short-term, Ken would have a vastly superiorability to recover financially over thelong-run. Penner also pointed out that,aside from the mortgage, the bulk ofthe couple’s personal debts were associ-ated with Ken’s new car and entertain-ment costs related to his business.

That was unsatisfactory, so Pennerrevised her projections to advocate adifferent asset split, giving Ken all of

the debt associated with his car andbusiness. The new plan divided the pro-ceeds on the house sale 70/30 in favourof Josie, and also split the RRSP60/40 in her favour. In addition, Pen-ner recommended extending the spousalsupport from two years to five years.Ken would continue to pay child support until Susan’s 19th birthday.

Ken was persuaded by Penner’s workand accepted Josie’s counter-proposal.Josie’s five-year spousal support nowgave her the financial security needed tostart a new business and afford a newmortgage. The receipt of 70% of theproceeds from the sale of her matri-monial residence let Josie make a sub-stantial down payment on a home she

loved, and she qualified for a mortgagethrough a broker sourced by Penner.

Josie’s receipt of 60% ($258,000) ofKen’s RRSP, along with an equal splitof their CPP credits, better offset Josie’ssmall employment pension and her limited ability to save in future years.

Penner then referred Josie to aninsurance specialist for the difficult taskof researching what coverage might beavailable, considering her previoushealth problems. Unfortunately, she wasdeemed uninsurable for both disabilityand critical illness coverage. However,Penner advised she might be consideredfor life coverage, albeit with a rated pre-mium, if she maintained a clean healthrecord for at least another year.


A D V I S O R O F T H E Y E A R H O N O U R A B L E M E N T I O N

ORGANIZINGASSETSAn advisor helps a couple get a handle on disparateassets and plan for the future sale of their business.

Business owners Robert andMaureen Taylor* always put theirfirm first—even a decade after openingit. Their hard work had paid off withthe business producing annual discre-tionary profits of $250,000. In addi-tion to their business, they own a num-ber of rental properties and haveaccumulated a $450,000 securities

portfolio. Aside from mortgages on therental properties, they’re debt-free.

In spite of their wealth, the couplewas worried about their financial future.As they entered their mid-50s, theybecame concerned their assets werescattered and difficult to manage. Theyalso had no idea how to locate a successor for their business, or how to

be paid fairly for it. To get a handle on their future, the

couple attended a business successionseminar presented by financial advisorLes McDermott. Afterwards, theyapproached him to ask for assistance.McDermott started by getting them to


*All client names have been changed.

AE04_031,032,035 03/21/2005 04:24 PM Page 32

articulate specific, realistic and measur-able goals.

He found the Taylors wanted to:• Accumulate sufficient assets by thetime Robert turned 60 to provide a netannual retirement income of $55,000(in today’s dollars) for up to 30 years.This would include ongoing incomefrom the rental properties. • Minimize family income taxes.• Plan for the orderly sale and trans-fer of their business to their son, John,and possibly to their younger son,Larry. Sale proceeds would need to total$750,000 and be distributed in theform of $25,000 annual payments toeach spouse.• Preserve assets for their heirs.• Provide enough cash each year forvacation travel.

McDermott then delivered several recommendations. First, he suggested thecouple increase their current salaries to$86,000 to make them eligible for themaximum RRSP contributions in 2005.He also advised them to make the largestpossible contributions for 2004.

Next, subject to business cash flowneeds, McDermott recommended theyeach pay themselves an annual $50,000dividend and put the money in a non-registered managed program. To tweaktheir asset allocation, McDermott re-examined their investment goals andrisk profiles. To reduce tax erosion intheir portfolios, he suggested theyadopt a buy and hold strategy, and keepmost of their equities outside the reg-istered plan to produce more favourablecapital gains and tax treatments.

Since Robert and Maureen were eager to avoid unsettled debts after retirement, a sufficient amount of their

capital would be used to pay off mort-gages on their rental properties. Doingthis would increase their net rentalincome by $35,000 a year.

McDermott referred Robert andMaureen to a qualified estate lawyer whodrafted new powers of attorney for bothproperty and personal care. In conjunc-tion with the redrafting of their wills,McDermott recommended they acquirea joint last-to-die life insurance policy to address the estimated $525,000 tax liability on the death of the surviving spouse. Astheir company was a Canadian ControlledPrivate Corporation, itwas recommended theyenter into a reversesplit-dollar agreementwith the company, whereby it would ownthe policy and pay the premiums.

During the discussions, it becameapparent the Taylors wanted their sonJohn to succeed them in the business.John had worked with them for severalyears and was increasingly taking onmanagement duties. They felt he wouldbe able to take the reins within a fewyears. Larry, the younger son, had not yethad an opportunity to work in the busi-ness and McDermott recommended thefamily hold a meeting to inform bothsons of the potential opportunities.

The Taylors were expecting to selltheir business for $750,000. McDer-mott considered this amount conserva-tive based on comparable business val-ues, but still recommended they havethe business valuated to ensure any salewould be based on defensible calcula-tions. Robert and Maureen could nowsee the continued success of their busi-ness, and its eventual fair market value,

would be dependent not only on theirongoing management and expertise, butalso upon smooth transition planning.Rather than a swift sale, their succes-sion plan would have to evolve over thenext few years.

As a result of the development andimplementation of a written financialplan, Robert and Maureen have organ-ized their financial affairs, improved therate of return and stability of theirinvestment portfolios, significantlyreduced their personal and business taxexposure, and are on track to reach theirretirement goals.

Michael Berton, CFP, CLU, R.F.P., FMA, is

a financial planner with Assante Financial

Management Ltd. and part-time instructor at

the B.C. Institute of Technology in Vancouver.

The opinions expressed are those of the author

and not necessarily those of Assante Financial

Management Ltd. or B.C.I.T.


L E S M C D E R M O T T

CFP, R.F.P., FMA, FCSI

ASSANTE CAPITAL MANAGEMENT LTD.Sarnia, Ont.

HONOURABLEMENTION

The successionplan wouldhave to evolveover the nextfew years.


AE04_031,032,035 03/21/2005 04:24 PM Page 35

BREAKTAX

Testamentary trusts help benefactors trim tax liabilities for the next generation. By Gena Katz

TRUSTS FOR HEIRS

To ensure clients a comfortableretirement, advisors generally focus onearning good returns on investmentsand avoiding tax liabilities. But it’s alsoimportant to think about clients’ heirs.By creating a testamentary trust, it’spossible to ensure the orderly distri-bution of an estate, minimize futuretaxes and assert a degree of controlover assets after a client’s death.

Testamentary trusts are establishedas a consequence of death under theterms of the deceased’s will. As withother trusts, the trustee, beneficiariesand property of the trust are specified,and the testamentary trust is taxed asan individual. However, there are twosignificant differences from othertypes of trusts that potentially makethem an important planning vehicle.

Tax-Saving OpportunitiesFirst, a testamentary trust is taxedusing graduated personal rates, notjust the top marginal rate, and thatcreates income-splitting opportunities.Second, a testamentary trust can havea non-calendar taxation year, whichcan facilitate tax deferral.

The additional set of marginal ratesavailable to a testamentary trust canproduce significant tax savings. Say theinvested assets of a deceased personearn $50,000 annually in interest. Ifthose assets were transferred directlythrough the will to an adult daughter,whose own annual income already is

$75,000, she would pay nearly$22,000 in additional tax.

But if a testamentary trust was inplace, and the $50,000 of income wastaxed inside the trust, her additionaltax burden would be around $12,000.That’s an annual tax savings of$10,000. And even if the beneficiar-ies of the estate need all the income,the testamentary trust can file an elec-tion to pay the tax on its income, eventhough the money may be paid out tothe beneficiaries.

Discretionary TreatmentIf the trust is discretionary, the trusteecan distribute income to beneficiar-ies and/or have income taxed in thetrust in the most tax-effective mannerpermitted by the will.

Testamentary trusts don’t have thesame income-splitting traps associatedwith inter vivos trusts (see February2005 column). The attribution rulesdo not apply to transfers made ondeath and when the trust holds sharesof a family business, the so-called kiddie tax also won’t apply.

In cases where there is more thanone beneficiary, multiple testamentarytrusts can be set up under the samewill, each with its own set of marginalrates. This significantly increases thetax-saving potential. However, whenconsidering how many testamentarytrusts to establish, keep in mind ifthe CRA sees multiple trusts with

common beneficiaries, it will deemthem to be a single trust. Setting upseparate trusts for each beneficiaryalso means the distribution of assetsbetween the trusts must be decidedbefore death.

Trust EstablishmentThe first year-end of a testamentarytrust can be established as any daywithin 12 months from the date ofthe benefactor’s death.

By paying income to beneficiariesbefore the trust year ends, and afterthe individual’s calendar taxation year,any related tax can be deferred for upto one year.

For example, assume a trust has aJanuary 31, 2005 year-end andreceives a large dividend in December2004. If the trust pays (or makespayable) the income to the beneficiaryon January 31, 2005, the dividend willbe included in the beneficiary’s 2005taxable income, so the related tax lia-bility can be deferred until April 30,2006.

Where the testamentary trust is aspousal trust, a further advantage is had by the tax-deferred rolloveravailable for assets transferred to thetrust.

Gena Katz, CA, CFP, is a senior principal with Ernst & Young’s NationalTax Practice in Toronto. “Tax Break”appears monthly.


AE04_037 03/21/2005 04:26 PM Page 37

INSIGHTSINSURANCE

Advisors willing to do their homework will find corporate insurance interesting and lucrative. By David Wm. Brown

GOING CORPORATE

The corporate insurance markethas always held an attraction for advisors. Corporate problems are usu-ally larger than family or personalestate problems, so there are a numberof advantages to consider.

First, the size of corporate policies,and the resulting premiums and com-missions, will be larger. Also, sinceclient meetings are normally held dur-ing business hours, the insurance advi-sor gets to meet and create relation-ships with corporate peers, such astheir accountants and lawyers. Downthe line, those contacts can developinto sources for future business. Advi-sors working successfully in the cor-porate marketplace can also garnerreferences to help executives with theirestate planning.

With all of these advantages, it isno wonder many insurance advisorsare looking to move from the kitchentable to the boardroom table. Butadvising a corporate client requiresspecific knowledge and skills that aredifferent from those used when deal-ing with families. To be considered an expert in the corporate insurancemarket, be prepared to earn a recog-nized designation, like the CharteredLife Underwriter or the CertifiedFinancial Planner.

Such designations identify the advi-sor as someone possessing basicknowledge of the subject area, and acommitment to ongoing education

about insurance as it relates to tax,corporate planning and estate plan-ning. To be effective, become familiarwith the nuances of policy contractsand how they’re used in the corporatemarket. These include rules regardingownership of contracts, the operationof capital dividend accounts, benefi-ciary designations and the differentmethodologies in funding insurancecontracts.

Understanding shareholder agree-ments and the implications of theIncome Tax Act on various corporatestructures is also important. Capitaldividend accounts and the proceeds oflife insurance are frequently usedunder the terms of a buy/sell agree-ment. And various methods can beused to structure the purchase and saleof a deceased shareholder’s shares.These include the criss-cross purchasemethod, promissory note method,share redemption method and hybridmethod. You should be able to discusseach of these and understand the useof capital dividend accounts in eachapproach.

You must also keep abreast of howchanges in the Income Tax Act mightaffect the plan. Further, it’s importantto be aware of rules governing trans-fer of insurance contracts between acorporation and its shareholders, aswell as rules regarding deductibility ofpremiums.

As an insurance advisor, never

impart tax or legal advice, but makesure you can discuss those matters asthey relate to an insurance plan. Inparticular, know the advantages anddisadvantages of a shareholder in aprivate corporation owning insurancepersonally or through the corporation.Also, be aware of the serious incometax ramifications that can result fromincorrectly structuring ownership andbeneficiary designations.

The corporate marketplace presentsadditional funding opportunities fordisability, critical illness and long-termcare benefits. This area has beengreatly overlooked, even by advisorswho profess to be experts in the cor-porate marketplace. Few shareholderagreements are funded with disabil-ity or critical illness contracts, and thecorporate critical illness marketplacehas hardly been touched by advisors.That’s all ripe for change.

Advisors willing to become knowl-edgeable and keep up with the changesmay find rewards in the corporate mar-ketplace. It is, however, critical to learnall the rules and be prepared to continuestudying for as long as you want to practise in this interesting and challenging market.

David Wm. Brown, CFP, CLU, Ch.F.C.,RHU, is a member of the MDRT. He is apartner at Al G. Brown and Associates inToronto. “Insurance Insights” appears everyother issue.


AE04_038 03/21/2005 04:27 PM Page 38

REPORT

Partnering with other professionals helps advisors expand their client bases, and their revenues. By John J. Bowen Jr.

STRATEGIC ALLIANCES

We all need a competitive edge—one thing that sets us apart from otheradvisors. And in a world where finan-cial services and products are increas-ingly being commoditized, the needfor this edge has never been more evident.

In Canada and around the world,the key to gaining that edge is to formstrategic alliances with other profes-sionals, such as chartered accountantsand attorneys. Consider the benefits:

Offer more services. The com-plexity of financial challenges, espe-cially for affluent clients, calls for

comprehensive and multifaceted solu-tions that go far beyond investmentmanagement. They can include estateplanning, tax planning, retirementplanning, asset protection and cashflow and debt management. One ofthe most effective ways to provide arange of services without stretchingyour practice and compromising yourcore skills is to access the expertise ofother advisors.

Open new markets. When ac-countants or attorneys ask you to pro-vide financial services to their clients,you gain access to entirely new clientbases in an extremely cost-effective way.By leveraging the existing relationships,you acquire new clients and move up-market faster than you otherwise might.

Have more satisfied clients.Above all, clients want an advisor theytrust to help them reach their goals.When clients can channel all theirfinancial needs through a single,trusted source, they’re much morelikely to be satisfied with the rela-tionship. That, in turn, makes themmore likely to provide you with addi-tional assets and referrals.

Additional services, new marketsand clients that are more satisfied addup to one thing: increased profits. As the chart shows, Canadian advisorsat all income levels express interest inhaving financial institutions help themdevelop advisor referral and joint ven-ture programs. But the interest level

goes up significantly alongside income.Higher-income advisors clearly have abetter understanding of the benefitsof strategic alliances.

As you consider how strategicalliances might play in your practice,bear in mind different types of pro-fessionals offer different kinds ofopportunities. Wealthy clients tend tobe in contact with their accountantsseveral times a year to discuss a vari-ety of business and personal tax mat-ters, and that creates multiple referralopportunities.

In contrast, most affluent clientswork with their lawyers for limitedtime periods, such as when they’reconstructing an estate plan. However,since the discussions are complex andpersonal in nature, lawyers andwealthy clients have deeper relation-ships. That means a wealthy client ismore likely to follow up on a referralfrom his or her lawyer.

Regardless of the type of strategicalliances you pursue, you’ll create anenvironment in which everyone wins.By opening doors and building trust, you’ll ultimately create newbusiness opportunities for you and all of the organizations you’vepartnered with.

John J. Bowen Jr. is founder and CEO of CEG Worldwide, a U.S.-based globaltraining, research and consulting firm. “The Bowen Report” appears monthly.


THE BOWEN

LESS THAN

$100,000

$100,000 - $200,000

MORE THAN

$200,000

0%

10%

20%

30%

40%

50%

17%

35%

49%

Annual Net Income

ALLIANCEINTERESTPercentage of Canadian

investment advisors who say

they’re looking to develop referral

and joint venture programs with

accountants and attorneys.

579 Canadian financial advisors surveyed.Source: CEG Worldwide.

AE04_041 03/22/2005 05:03 PM Page 41

By Andrew Rickard

DOG ALIMONYA woman in the Italian town of Udine

took her ex-husband to court because

he wasn’t providing her with enough

money to properly look after their dog.

“He has to pay maintenance for our

two children, so why shouldn’t he pay

for the care of our dog, Pepi, which we

bought together?” she asked. “With

food and vet bills a dog can cost

almost as much as a child to raise.”

The Ananova news service reports

Judge Enrico Cavalieri ruled in favour

of the woman, and ordered her former

spouse to pay an annual sum to main-

tain the dog in the lifestyle to which it

was accustomed.

GAMBLING FUNDMark Cuban, the wealthy owner of the

Dallas Mavericks basketball team,

says he’s going to start a new hedge

fund. But he says it won’t invest in

stocks, bonds, or any kind of fund.

Says Cuban: “It’s going to be a fund

that only places bets. A gambling

hedge fund.”

Rather than relying on financial

analysts to manage the investment

portfolio, Cuban believes he can earn

higher returns by allowing the best and

brightest gamblers to run with his

money.

“I have learned that despite all the

claims and books written about effi-

cient markets, the trading of individ-

ual stocks is not efficient,” writes

Cuban on his website (www.blogmav-

erick.com.) “When you think about

betting on sports, there really is far

better information about your local

sports team than there is about any

local business in your market.”

EXTREME ESTATE PLANIf you want to leave a big inheritance

but lack the funds, why not just steal

it? That’s what one man from the

Italian town of Savona decided to do

in 2003, after being diagnosed with

incurable lung cancer.

Reuters news service reports the 53-

year-old father of three held up more

than 10 banks with what he claimed to

be plastic explosives. Described by

police as “pleasant” and “well-cul-

tured,” he would pass a note to the

tellers threatening to blow himself up

if they didn’t produce the cash.He net-

ted about 115,000 Euros before he

was arrested earlier this year.

The robber told police he took some

time off while he was in the hospital

recovering from cancer treatments.

PENNY WISELast November,Grant Petersen of Utah

was fined $82 for driving with a broken

headlight. So he withdrew 8,200

pennies, placed them in a bucket and

delivered them to the court.

According to the Salt Lake Tribune,

a sheriff’s deputy returned the bucket

of change a few hours later, claiming

the method of payment was unaccept-

able. Petersen argued that federal law

gave him the right to use whatever

legal tender he wanted. After count-

less national media caught on, the

court relented and waived the fine.

Petersen later tried to sell the bucket

of pennies on eBay for $25,000.

END QUOTE: XXX XXXXXX XXXXXXXXX

“Avarice in old age is foolish; for what can be more absurd than to increase our provisions for the

road the nearer we approach to our journey’s end?”

—MARCUS TULLIUS CICERO (106-43 BC), ROMAN ORATOR AND STATESMAN


THIS’N’THATIllustration by S

andy Nichols

AE04_042 03/21/2005 04:40 PM Page 42

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