Gobeil’s Strategic Financial Planning Course™

Sample Question

(12 minutes – 6 marks) Shane Rain and his wife, Angela, have been married for 15 years and have three children between 6 and 12 years of age.

Eighteen months ago, Shane started working for Injection Moldings Inc. His employment benefits include a Deferred Profit-Sharing Plan (DPSP) with a fair market value of $11,000 and a long-term disability with a 120-day elimination period.

Shane also has a federally-regulated, Locked-in Retirement Account with a fair market value of $39,000 from his former employer’s pension plan.

Shane and Angela have self-directed Registered Retirement Savings Plans with a fair market value of $54,000 and a Registered Education Savings Plan for their children with a fair market value of $24,000. Two years ago, Shane contributed $10,000 to Angela’s Registered Retirement Savings Plan.

In January, Shane was injured and made a disability claim. His recovery period is estimated to be 12 months. In addition to the funds in their chequing account, Shane and Angela will need $10,000 to cover expenses until his disability payments begin.

For 2020, the Year’s Maximum Pensionable Earnings is $58,700.

Response Instructions

Determine and explain the most appropriate course of action in obtaining the additional funds of $10,000?

CONCEPTS

Locked-In Retirement Account

If, after May 8, 2008, you enter into a contract for a federally regulated locked-in account and meet one or both of the conditions for financial hardship, you could withdraw as cash a limited amount from any combination of federally regulated locked-in accounts (PBSA Reg. 20(1)(d)).

You could make withdrawals for financial hardship based upon:

  1. expenditures on medical or disability-related treatment; or
  2. low income for the year.

If you were to meet both of these conditions, you could make withdrawals based upon financial hardship, but your total permitted withdrawals for any calendar year, regardless of reason, cannot exceed 50% of the YMPE.

For 2020, the Year’s Maximum Pensionable Earnings is $58,700.

The amount of the total permitted withdrawals is $29,350, calculated as (50% × the Year’s Maximum Pensionable Earnings) or (50% × $58,700).

Deferred Profit-Sharing Plan (DPSP)

Unlike Registered Retirement Savings Plans where registration of the plan with the Minister of National Revenue is routine, there are tighter restrictions for the registration of Deferred Profit-Sharing Plans. In particular, all amounts must vest with the beneficiaries once they have two years of participation in the plan (ITA 147(2) and Personal Financial Planner's Manual 7-5-4).

Registered Retirement Savings Plan (RRSP)

Withdrawal of part of its assets before a Registered Retirement Savings Plan matures does not cause deregistration of the plan. However, the annuitant or the annuitant's spouse/common-law partner, in certain circumstances, must report the amount as taxable income on a tax return (ITA 146(8) and Personal Financial Planner's Manual 7-3-12). However, in order to available as cash, the funds in the Registered Retirement Savings Plan must be liquid.

Registered Education Savings Plan (RESP)

If you were to withdraw assisted contributions, other than by way of transfer to another Registered Education Savings Plan, when no beneficiary under the Registered Education Savings Plan is eligible to receive an Education Assistance Payment, the trustee must repay the Canada Education Savings Grants on those assisted contributions (CESA Reg. 11(1) and Personal Financial Planner's Manual 7-4-20).

If you have made both assisted and unassisted contributions to a Registered Education Savings Plan, the regulations consider the assisted contributions to be withdrawn before unassisted contributions (CESA Reg. 2).

If a contributor withdraws assisted contributions, Human Resources and Social Development Canada will not pay a Canada Education Savings Grant in respect of an individual who was a beneficiary under the Registered Education Savings Plan at the time of the withdrawal throughout the period that begins on the day of the withdrawal and ends on the last day of the second year following the year in which subscriber made the withdrawal.

RESPONSE TEMPLATE

A. What is your assessment of using Shane’s Deferred Profit-Sharing Plan?




B. What is your assessment of using Shane’s Locked-In Retirement Account?




C. What is your assessment of using Shane’s Registered Retirement Savings Plan?




D. What is your assessment of using Angela’s Registered Retirement Savings Plan?

  



E. What is your assessment of using their Registered Education Savings Plan?




F. What is your recommended course of action?




SUGGESTED SOLUTION

A. What is your assessment of using Shane’s Deferred Profit-Sharing Plan?


 All amounts contributed to a Deferred Profit-Sharing Plan must vest with the beneficiaries once they have two years of participation in the plan. With 18 months of service, Shane is not a vested member of the Deferred Profit-Sharing Plan and cannot withdraw these funds over the next four months.

So, his Deferred Profit-Sharing Plan cannot be a source of funds.


B. What is your assessment of using Shane’s Locked-In Retirement Account?


 Shane has a federally-regulated, Locked-in Retirement Account.

Because Shane meets one or both of the specified conditions for financial hardship, he can apply to withdraw an amount up to $29,350. Any amount withdrawn would be taxable.

 However, he would have greater flexibility with his retirement funds than if he used his self-directed Registered Retirement Savings Plan because he would have a smaller amount locked-in than if he used some other source of funds.

So, his Locked-in Retirement Account could be a source of funds, but he would have to apply for a withdrawal and any amount withdrawn would be taxable to Shane.


C. What is your assessment of using Shane’s Registered Retirement Savings Plan?


Shane can withdraw funds from his Registered Retirement Savings Plan. Any amount withdrawn would be taxable to Shane.

So, Shane’s Registered Retirement Savings Plan could be a source of funds, but any amount withdrawn would be taxable to Shane.


D. What is your assessment of using Angela’s Registered Retirement Savings Plan?

Angela can withdraw funds from her self-directed Registered Retirement Savings Plan. However, two years ago, Shane contributed $10,000 to Angela’s Plan, so any amount withdrawn would be taxable to Shane.

So, Angela’s Registered Retirement Savings Plan could be a source of funds, but any amount withdrawn would be taxable to Shane.


E. What is your assessment of using their Registered Education Savings Plan?


Shane and Angela have a Registered Education Savings Plan for their children. If they were to withdraw assisted contributions, other than by way of transfer to another Registered Education Savings Plan, when no beneficiary under the Registered Education Savings Plan is eligible to receive an EAP, the trustee must repay the Canada Education Savings Grants on those assisted contributions. Any contributions would not receive Canada Education Savings Grants for the next two years.

So, their Registered Education Savings Plan could be a source of funds, but they would lose the Canada Education Savings Grants.


F. What is your recommended course of action?


 You should withdraw funds from Shane’s Registered Retirement Savings Plan as they are needed, but also apply for a withdrawal from his Locked-in Retirement Account.

 As a general principle, it is desirable for Shane and Angela to have comparable amounts of registered assets for retirement and Shane has significantly more than Angela, so you should withdraw funds from Shane’s Registered Retirement Savings Plan, rather than Angela’s.

 You would have more control over funds in a Registered Retirement Savings Plan than a Locked-in Retirement Account, but you must obtain approval before you can withdraw funds under the hardship clause. Shane might as well apply but use his non-locked-in Registered Retirement Savings Plan while awaiting permission.


MARKING KEY

Check each item if you have included it in your response.

 A. Did you determine that with 18 months of service, Shane is not yet a vested member of the Deferred Profit-Sharing Plan and cannot withdraw these funds over the next four months?

 B. Did you determine that his Locked-in Retirement Account could be a source of funds, but he would have to apply for a withdrawal and any amount withdrawn would be taxable to Shane?

 C. Did you determine that Shane and Angela’s Registered Retirement Savings Plans could be a source of funds and any amount withdrawn would be taxable to Shane?

 D. Did you determine that their Registered Education Savings Plan could be a source of funds, but they would lose the Canada Education Savings Grants?

 E. Did you recommend that they withdraw funds from Shane’s Registered Retirement Savings Plan as they are needed?

 F. Did you recommend that they also apply for a withdrawal from Shane’s Locked-in Retirement Account?

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