Financial Confidence | Financial FAQs
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Financial FAQs

Financial FAQs for Wealth Management

What is a Risk Assessment

Risk assessment is a step in a risk management procedure. Risk assessment is the determination of quantitative or qualitative value of risk related to a concrete situation and a recognized danger and threat (also called hazards). Quantitative risk assessment requires calculations of two components of risk (R): the magnitude of the potential loss (L), and the probability (p) that the loss will occur. Many businesses and industries control risks and perform risk assessments on a continual basis. Methods for assessment of risk may differ between industries and whether it pertains to general financial decisions or environmental, ecological, or public health risk assessment.

What is an Estate Plan

Estate planning is the process of anticipating and arranging for the disposal of an estate. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses. Guardians are often designated for minor children and other beneficiaries in incapacity.

What is a Family Trust

Trusts can be used in the family context for estate planning. The creation of a family trust for the small business owner offers a chance for the owner to consider how best to deal with the transfer of wealth from one generation to the next. Amendments to the Income Tax Act (Canada) R.S.C. 1985 (Fifth Suppl.), (the “ITA”) have created a concern over whether a family trust is still a beneficial estate planning tool. While the tax advantages of family trusts may not be as great as a result of these measures, there are many reasons why a family trust may still be viewed as advantageous for both tax and non–tax reasons.

  • Minor and Disabled Beneficiaries

    • One of the most advantageous benefits of a family trust is that the beneficiaries can benefit from the trust while the trustee manages and exercises control over the income and capital of the trust. In situations where there are minor beneficiaries or disabled individuals this is an attractive feature. Since minor children do not have the legal capacity to enter into a binding contract or the authority to deal with a contract even if ownership is transferred to them.
    • Trusts are used as a mechanism to hold the assets at least until the child reaches the age of majority (the age of majority varies from province to province) if not later. A trust can own and effectively manage property through the trustee, thus preserving and investing the capital until such time as the minor beneficiary is in a position to handle his or her own affairs. The trustee can be given unlimited power by the settler of the trust in relation to payment of income and the distribution of capital from the trust. This is referred to as a “discretionary trust.” This discretionary power allows the trustee to determine what would be in the best interests of the minor beneficiaries in terms of timing for entitlement.
  • Will and Probate Fees

    • Wills are an obvious estate planning tool. While it is important to have a valid will in place, provisions within a will can be subject to variation by the court where a dependent can establish that there has been inadequate provision for the proper maintenance and support of that dependent. Generally, provincial legislation sets out that the claim of a dependent is limited to the estate of the person at the time of death. If a family trust has been established prior to death, property may have been transferred to that trust which would have otherwise formed part of the estate of the deceased. The property held in the family trust will not form part of the estate and therefore the dependent is unable to make a claim to the property.
    • A family trust can provide a vehicle to avoid probate fees. If a family trust is set up irrevocably, where the settler is not a beneficiary, the property that has been transferred to the trust does not form part of the deceased’s estate. This property then, is not included in the valuation of property upon which probate fees are determined. It should be noted that when planning for probate fees, other adverse tax consequences involved in transferring the property to a trust (i.e. capital gains are realized on appreciated property) must be considered.
  • Small Business

    In the small business context, a family trust allows the business owner to begin planning for the distribution of capital and income of that owner’s business interest when there are minor children or disabled children. This is true even where children are not disabled or minors. A trust allows the business owner to “wait and see” or to determine if a child is mature or shows an interest in a family-owned business before distributions are made to the children.

    Another important concern for the business owner is creditor protection. The business owner is always subject to creditors by the very nature that they are in business. A family trust can be an important consideration from this perspective because assets may be protected in the trust. When legal and beneficial ownership of property is transferred such as in the arrangement of a trust, then generally the property is preserved from the claims of creditors of the settler. This is the case unless there has been an intention by the settler to defraud creditors as set out in the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B–3 or provincial fraudulent conveyance legislation.

    A further attribute is that beneficiaries can also be protected from their own creditors by means of a family trust. If a trust is totally discretionary, then a beneficiary does not have the absolute right to receive any income or capital from the trust. The creditors of the beneficiaries can therefore not make a claim against income or capital of the trust because the beneficiary is not in control of the assets of the trust. Because creditors include an ex–spouse of the beneficiary, arguably a family trust arrangement may protect assets where there is a possibility that a matrimonial breakdown may occur.

    From the business owner’s view, a family trust arrangement may also be attractive because of the confidentiality factor. A trust document is a private document that need not be disclosed to other parties such as the case with a will. The only reporting requirement of a trust is the filing of a T–3 Return with Canada Customs and Revenue Agency (CCRA). The ability to keep arrangements very confidential may be an important consideration from the business owner’s perspective.

  • Transferring Future Growth of Family Business

    Income splitting is not the only motivation for small business shares to be held in a family discretionary trust. Often, common shares of a small business are acquired by such a trust as a result of an estate freeze. On an estate freeze, the “freezer” exchanges common shares in the corporation for fixed value preferred shares (at the fair market value of the exchanged common shares) which are generally redeemable/retractable shares with voting control in the corporation. This transaction can take place without immediate tax consequences to the freezer and bring about a “crystallization” of the freezer’s capital gains exemption (s.85 of the “ITA”). The trust can then subscribe for new common shares (at a nominal price). The effect of this transaction is to “freeze” the tax liability, which would result from the disposition of capital property (e.g. the freezer’s shares) and to allow the future growth in the value of the company (and any tax liability associated with this growth) to be attributable to the new common shares. It should be noted as well, that new common shares may also qualify for the capital gains exemption thus “multiplying” the exemption.

    Note should be taken of the case of Romkey and Romkey v. Her Majesty the Queen, 2000 DTC 6047, where the Federal Court considered whether the attribution rules were applicable when dividends were paid on common shares to a trust for children of the settler. The court determined that the attribution rules were applicable because the issued shares to the trust were a transfer of property by the children’s parents. The Federal Court of Appeal decision was appealed to the Supreme Court of Canada but the appeal was denied. However the CCRA has, since this decision, indicated that the attribution rules would not apply in a typical estate freeze. This would be the case as long as the shares held by the trust were purchased for fair market value with funds provided by someone other than a parent.

    A discretionary trust allows the ultimate decision as to who is to receive the shares and control the business to take place at a later time, so that successors can be determined over a period of years. It should be noted that this period cannot extend beyond 21 years without tax consequences. There is a deemed disposition every 21 years of all capital property in a trust (104(4) of the ITA. Shares held by the trust can be distributed to capital beneficiaries of the trust tax–free at the trust’s cost. This allows for the shares to be held for a period of less than 21 years and then distributed to appropriate beneficiaries in a tax efficient manner (s. 107 (2) of the ITA).

What is Wealth Management

Wealth management is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services. High Net worth Individuals (HNWIs), small business owners and families who desire the assistance of a credentialed financial advisory specialist call upon wealth managers to coordinate retail banking, estate planning, legal resources, tax professionals and investment management. Wealth managers can be an independent Certified Financial Planner CFP, MBAs, Chartered Financial Analysts CFA’s, or any credentialed professional money manager who works to enhance the income, growth and tax favored treatment of long–term investors. Wealth management is often referred to as a high–level form of private banking for the especially affluent. One must already have accumulated a significant amount of wealth for wealth management strategies to be effective.

What is a Segregated Fund

A segregated fund is an investment fund that receives the pooled funds of investors who bought individual variable insurance contracts (IVICs) from the sponsoring insurance company. The contract holder makes deposits through the IVIC and the insurance company then invests the deposited money into segregated funds. These funds are segregated from the other assets of the insurance company. The insurance company owns the segregated fund-assets and holds them in trust for IVIC owners.

What is an Exempt Market Security

The exempt market is intended to give qualified investors more options to grow their assets, while providing companies with a larger pool from which to attract crucial capital. It also provides a cost-efficient way for public and private businesses to raise money without the burden, expense and time required to assemble full disclosure prospectuses to list on a publicly traded exchange.

The Private Capital Markets Association of Canada (PCMA) formerly called Exempt Market Dealers Association of Canada (EMDA), is focused on strengthening and developing the private capital markets to ensure robust capital raising opportunities across Canada and ensure Canadian investors have access to diverse private market investment options. The private capital markets provide investors with an opportunity to access a wide range of asset classes and investment options typically accessible to only the largest institutional investors. Learn more about PCMA at

Exempt market securities dealers (EMDs) are registered under provincial securities legislation in one or more jurisdictions in Canada. The regulatory framework for EMDs is set out in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, which applies in every jurisdiction across Canada.

EMDs may act in two primary capacities in the capital markets: 1) as a dealer or underwriter for any securities which are prospectus exempt, or 2) as a dealer for any securities, including investment funds which are prospectus qualified (mutual funds) or prospectus exempt (pooled funds), provided they are sold to clients who qualify for the purchase of exempt securities. The qualification criteria for exempt purchasers and exempt securities are found in National Instrument 45-106 Prospectus and Registration Exemptions.

What is a Financial Literacy

Financial literacy is having the knowledge, skills and confidence to make responsible financial decisions.
• Knowledge refers to an understanding of personal and broader financial matters
• Skills refer to the ability to apply that financial knowledge in everyday life
• Confidence means having the self-assurance to make important decisions
• Responsible financial decisions refers to the ability of individuals to use the knowledge, skills and confidence they have gained to make choices appropriate to their own circumstances

Being financially literate can help Canadians to:
• Decide how they will spend their money and meet their financial obligations
• Make sense of the financial marketplace and buy the products and services best suited to their needs
• Manage their personal finances and plan ahead for life events, such as home ownership or retirement
• ask and understand how they can benefit from local, provincial and national government programs and systems
• Assess the financial information and advice they receive from relatives and friends, professionals or the media
• Maximize the use of the resources they have access to, including workplace benefits, private and public pensions, tax credits, public benefits, investments, home equity, and access to credit

From Financial Consumer Agency of Canada

Pension Plan

Pension plan is a type of retirement plan, usually tax exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee’s future benefit. The pool of funds is then invested on the employee’s behalf, allowing the employee to receive benefits upon retirement.

In many ways, a pension plan is a method in which an employee transfers part of his or her current income stream toward retirement income. There are two main types of pension plans: defined-benefit plans and defined-contribution plans.

In a defined-benefit plan, the employer guarantees that the employee will receive a definite amount of benefit upon retirement, regardless of the performance of the underlying investment pool.

In a defined-contribution plan the employer makes predefined contributions for the employee, but the final amount of benefit received by the employee depends on the investment’s performance.