In this issue

• Case Study: Using an Inheritance to the Best Advantage

• Registered Education Savings Plans

• Take Action To Meet Your Retirement GoalsNetWorthwww.bmonesbittburns.com

Summer 2010

Is it Wise to Make Giftsto Adult Children?Parents often want their adult children tobenefit from their wealth today rather thanhaving to wait for an inheritance. Thedecision to give to children must be madecarefully after considering all theconsequences and potential unforeseenevents. Consider these factors:

• Loss of control over the funds or property once they are gifted

• Future change to your health or financial situation

• Exposure of the funds or property to the children’s creditors, spouses or heirs

• Effect on the children’s work ethic or lifestyle

• Potential undue influence on you by the children to make the gift

• Effect on the distribution of your estate

• Income taxes

Below are some answers to the most frequentlyasked questions about gifts to children:

How can I help my child purchase a home?

You can avoid some of the above pitfalls byregistering a mortgage against the property.The mortgage can be forgiven in your Willor offset against the child’s inheritance.

Will the gift be taxable?

In Canada there is no gift tax but there iscapital gains tax if the gift consists of capitalproperty with an unrealized capital gain.Capital gains tax will also apply if thecapital property is sold to the child for lessthan fair market value.

Will my childs' spouse have a right to the

gift in the event of marriage breakdown?

Each province in Canada has different rules

that offer varying degrees of protection forproperty received by gift or inheritance.This protection may apply to a propertyclaim on marriage breakdown, or to a claimagainst the estate of a spouse. However, thestatutory protection may not be sufficientbecause there are many exceptions and theyare strictly interpreted. In addition, childrenmay move from one province to another,making it uncertain what the applicable lawwill be in the future. Transferring the giftedproperty to a trust is sometimesrecommended. In addition to offering someprotection from spousal claims, it can alsoprevent the child from voluntarilytransferring the property to the spouse.

Alternate Strategies

You may decide to re-examine your intentions to make gifts to your adult children once allthe known and potential consequences areconsidered. As previously stated, a good option may be to create a trust so that theproperty being set aside for the children canstill be used for the children’s benefit withoutcomplete loss of control. In addition, the trustmay protect the property from those makingclaims against your children. Professionaladvice is essential if the trust route is chosen to ensure that it provides the appropriateprotection for your circumstances and avoidscertain tax traps. You should seek independentlegal advice if you want to make large gifts toyour adult children. A safe philosophy forgifting to children is never give away anythingthat you may need or want back. Remember,once the gift is made, there is no reversing it.

Your BMO Nesbitt Burns InvestmentAdvisor can assist you in locating an estate planning specialist.

Jason McKersieInvestment Advisor

Tel: 416-359-5619

Anni Torma Sales Assistant

Tel: 416-359-4292

1 First Canadian Place47th Floor, P.O. Box 150Toronto, ONM5X 1H3

Fax: 416-359-6144Toll-free: 1-800-263-1883

Web: www.jasonmckersie.com

NetWorth Summer 2010

Case Study: Using an Inheritanceto the Best AdvantageManaging your wealth isn’t simply a financial exercise. Itrequires an appreciation of your unique needs and an in-depth understanding of your goals and dreams and howthese affect the people you care most about.

This case study provides an example of BMO Nesbitt Burns’comprehensive and personalized approach to wealthmanagement and highlights just a few of the many ways inwhich we can help you to achieve your unique wealthmanagement goals.

Professionals in their mid-forties, the Goodwins enjoy acomfortable lifestyle. The investments they’ve made in theirown education have clearly paid off and they want the sameopportunities for their children. While their incomes arehigh, money in the bank always seems to be low. They arestriving to get their finances under control with more toshow for their hard work. They are expecting to receive aninheritance from a parent’s estate and want to make themost effective use of this money.

Assessing the Needs

After conducting a thorough review of the Goodwins’financial position, they were provided with a clear picture oftheir current net worth, the impact of the inheritance andwhere they stand relative to their key goals – university

education for the children and an active retirement. Theywere then shown how much of their income was going totaxes, servicing debt, savings, daily living expenses anddiscretionary spending. The review showed them that,although the inheritance would have a significant impact ontheir current lifestyle, they needed a realistic, long-termwealth management plan to ensure their assets willcontinue to be sufficient to support their goals.

Building the Plan

• A number of strategies were explained that would allowthe Goodwins to make the best use of their income, as wellas various options for their inheritance. These includedpaying off debt, funding education and retirement savings.The impact that each strategy would have on their shortand long-term goals was then reviewed.

• The Goodwins decided that the best approach would be tomanage their cash flow by using part of the inheritance topay off high interest rate and non-tax deductible debt andthe balance to establish an investment portfolio using theirpersonalized investment strategy.

• The Goodwins are maximizing their tax-deferred savingsand maximizing RRSP and TFSA contributions. They arealso making RESP contributions for their children.

• Until now, the Goodwins’ estate plan had simply namedeach other as the beneficiary of their respective registeredplans. The importance of a professionally prepared Willand Powers of Attorney to ensure that their wishes arecarried out should anything happen to either of them wasexplained. A meeting was then set up with an estateplanning lawyer to prepare their Wills and Powers ofAttorney, to discuss guardianship of their children, choiceof executor and reducing taxes for the surviving spouseand children after death.

Upon receipt of their inheritance, a meeting will be set up toensure all the necessary paperwork is in order and finalizethe various plans they agreed to put in place.

At BMO Nesbitt Burns, we can help simplify this verycomplex and important aspect of your life and ensure allyour financial goals are expertly addressed. When you havequestions or concerns, or an issue or opportunity that youwant to discuss arises, you have only one call to make.

Our process involves mapping out and managing anindividualized, comprehensive plan that addresses yourunique needs, bringing in expert resources when neededand conducting regular reviews of your progress. Thisallows you to relax and enjoy life today, confident that yourfinancial concerns are being fully addressed and opportunities that could enhance your financial picture arebeing brought to your attention.

NetWorth Summer 2010

Registered EducationSavings PlansWhile a post-secondary education is an invaluable personalasset, it can be expensive to fund. Government cutbacks andinflation further undermine your ability to save for yourchild’s education. However, the good news is that CRA hassignificantly enhanced the Registered Education SavingsPlan (RESP) rules over the past few years. In addition to thetax advantages, there are increased contribution limits,additional termination options and the Canada EducationSavings Grant (CESG).

An RESP is a tax deferral plan designed to help save for astudent’s post-secondary education. The contributor to theRESP is called the subscriber and the future student is thebeneficiary. Although contributions to an RESP are not taxdeductible, all of the income in the plan compounds on a taxdeferred basis. In addition, there is also the CESG – a federalprogram that will deposit grants directly into your child’sRESP based on your contributions. Finally, when theaccumulated income and CESG are withdrawn from theRESP to pay for education expenses, the beneficiary studentpays the taxes, not the subscriber. Withdrawals of CESGsand the accumulated income are taxed in the student’s

hands as ordinary income (i.e. there are no dividend taxcredits or reduced capital gain tax rates). Generally, thisincome would attract little or no tax if withdrawn over a fewyears due to the student’s basic personal exemption andtuition and education tax credits.

While most RESPs are set up by parents for the benefit of achild, anyone who wants to help fund someone’s educationmay set up an RESP, including grandparents, aunts, uncles,godparents and friends. You may even set up a plan for yourself.

There are two types of RESPs: single beneficiary and familyplans. As the name implies, with a single beneficiary planthere is only one beneficiary. You may name anyone as the beneficiary – any related or non-related child or adult, evenyourself or your spouse. A family plan is one RESP that is setup for the benefit of more than one child within a family.Each beneficiary of a family plan must be related to thesubscriber by blood relationship or adoption.

RESP Contributions

Your RESP contributions are not tax deductible nor are theyconsidered taxable when withdrawn. The main reason forcontributing to an RESP is that all of the investment incomegenerated compounds on a tax-deferred basis. The tax-deferred compounding of income can result in substantialgrowth in the plan. When the income and CESG are paid outfor education expenses – called Education AssistancePayments (EAPs) – the funds are taxed in the student’shands and not the subscriber’s.

To obtain the maximum benefit from an RESP and theCESG, it makes sense to start your savings program early.Together we can determine the best way to finance yourchild’s education and then develop a savings program thatensures you’ll meet your education savings goals.

Planning Tips & Considerations:

• A child may be the beneficiary of more than one RESP. If more than one adult is contributing to an RESP for abeneficiary, ensure all of the contributions made to theseparate plans for that child do not exceed the RESPlifetime contribution limits. Exceeding the limits will resultin penalties.

• Open a family plan when possible in the event one childdecides not to pursue post-secondary education. A family plan allows contributions to be made into one RESP for all of the children. The main benefit of a family plan is that the RESP income does not have to be paid outproportionately between the beneficiaries.

If one child does not pursue post-secondary studies, the other beneficiaries may use the income and CESG(within their limits) for their education.

NetWorth Summer 2010

If you are already a client of BMO Nesbitt Burns, please contact your Investment Advisor for more information. The comments included in the publication are not intended to be a definitive analysis of taxlaw: The comments contained herein are general in nature and professional advice regarding an individual’s particular tax position should be attained in respect of any person’s specific circumstances.BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée provide this commentary to clients for informational purposes only. The information contained herein is based on sources that we believe to be reliable,but is not guaranteed by us, may be incomplete or may change without notice. The comments included in this document are general in nature, and professional advice regarding an individual’s particularposition should be obtained. BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée are indirect subsidiaries of Bank of Montreal.“BMO (M-bar Roundel symbol)” is a registered trademark of Bank of Montreal, used under licence. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under licence. TM/® Trade-marks/registered trade-marks of Bank of Montreal, used under licence.

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Take Action To Meet Your Retirement GoalsAs a result of the market turbulence in the past few years,many Canadians, especially those who are nearing retirement,are questioning whether they can afford to retire as originallyplanned. To get back on track to ensure a financially secureretirement, here are a numbers of strategies you can consider:

Save more, save smarter

Saving more will certainly help, but getting the most out ofyour investments is equally important. One sure way to growyour savings faster is to minimize taxes on your investmentincome. Here are some strategies you can consider:

Maximize RRSP savings. The RRSP is the primary retirementsavings vehicle for Canadians who do not have a pension planat work. Yet a recent study indicates that only one-third ofeligible Canadians make RRSP contributions; and of these,only 22% contribute the maximum allowable amount. If youhave so far underused the RRSP, it is time to catch up! Becauseof tax-free compounding, even a small increase in your savingscan make a big difference over an extended period.

Make full use of the TFSA. Like the RRSP, the TFSA allowsyou to accumulate retirement savings tax-free. Even better,the TFSA allows you to make withdrawals tax-free, andgives you complete freedom to decide when and how muchto withdraw. These unique characteristics make the TFSA avaluable and effective tax planning tool in retirement, somaximizing your TFSA savings should be a key part of yourretirement savings strategy.

Structure your portfolio asset allocation in a tax-efficient

manner. If you have investment assets in both registered andnon-registered accounts, tax-efficiency planning is essential.Interest income, dividend income and capital gains are alltaxed differently in Canada, so it makes sense to place the mostheavily taxed assets inside tax-sheltered accounts (i.e. theRRSP and the TFSA) while leaving those that are morefavorably taxed in your non-registered accounts.

Extend your work life

Canadians are living longer and healthier lives, and many ofthem plan to work in some capacity after reaching traditionalretirement age to stay “mentally active”. Delaying retirement ortaking up part-time work during retirement can also behealthy for your pocket book, because:

• You continue to receive an income stream, which enablesyou to delay withdrawing from your retirement savings. As aresult, you can accumulate a larger retirement nest-egg; plusyou shorten the period during which you need to makewithdrawals from those savings.

• If your investments have suffered during the recent marketturmoil, the ability to leave them intact allows you to “sit it out” for market recovery.

• If you belong to a pension plan at work, working longer may result in a larger pension income when you fully retire.

To review your retirement plan and help you decide which of these strategies are most appropriate for you, let's discuss.