Case study – Lack of communication

Dale (48) & Paula (45) own and operate a very successful food distribution business in Toronto.  Each year for the past 20, the company has been in the enviable financial position of having excess capital required from operating both the business and their personal life style.

Their accountant, knowing the lifestyle needs of Dale & Paula always would recommend a combination of salary and dividends as a way to finance their personal needs.  In addition, it was always recommended by the accountant to maximize their RRSP contributions in order to reduce their taxable income and to build their wealth in a tax deferred vehicle.  All sound financial advice.

Brian, is Dale’s nephew and has been advising the couple on their RRSP investments for the past 12 years.  In 2012 and 2013 Brian’s advice on 2 different opportunities performed extremely well taking the RRSP accounts from the low $200’s to the mid $800’s.  Currently both accounts are valued at $900,000 each.

When we were asked to consult with Dale & Paula on estate planning and business succession ideas, upon completion of our process we learned the following:

1.  Even though each RRSP account in 2013 had over $750,000, the accountant who had no knowledge of such growth, continued to withdraw from the business in order to make the annual  RRSP contributions.  This was recommended in 2014 & 2015 as well.

2.  We realized that the lack of communication between the professionals assisting Dale & Paula was now starting to cost money in the form of unnecessary taxation.

Problem

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The RRSP accounts with moderate growth will already put both Dale & Paula into the highest tax bracket on minimum withdrawal at age 72.  To continue to fund that vehicle is counter productive.

Solution

Keep the capital inside the business and pay a lower corporate tax opposed to income tax on salaries or dividends.  Invest the excess into a tax-exempt life insurance policy that will grow tax-deferred and then dispose of tax free.

Summary

This case for us reminds us that while most advisors are completely knowledgeable and helpful in their own area expertise, very few have the resources or inclination to step outside and fully execute an integrated or customized planning process.  Above is just one example of how the lack of communication between advisors can negatively effect the outcome of a financial plan.