Carol Bezaire, vice-president, tax & estate planning for Mackenzie Financial, says tax planning and managing your clients’ expectations will form the core pillars of maximizing their severance.
“Just planning ahead, if you look at the environment, you have to count on the fact that generally speaking it’s going to take people longer to get replacement employment than it would have four years ago,” she says. “Chances are you will not make as much money the next time you go somewhere. You have to save and make sure you’re going to have downgraded your debt and commitments to meet your next salary.”
One quick way to shelter a severance package is to use rollover RRSP contributions, Bezaire says.
“The first thing to look at is how long the employee has been with their employer. Statistics Canada shows many people who are in their mid-fifties are being let go right now. There is a strong likelihood that they’ve been with the company for more than 20 years. They are going to have RRSP rollover room. You can actually take $2,000 a year of service and move it into [their] RRSP,” Bezaire says. “Over and above that, they’re going to look at their unused contribution room.”
Clients too young to retire could be eligible for a pension adjustment reversal, which will free up additional RRSP contribution room.
“On your tax return, every year you have to put in what your pension adjustment is, which is how much the company put into your pension. If you get out of the pension plan early, you get a pension plan adjustment reversal because that pension amount they take reduces your RRSP room,” she says.
Also, for middle-aged former employees, if it’s possible, she says advisors should look at trying to keep their health and insurance benefits with their group provider, if that provider will let them roll over those benefits without conducting a new underwriting process.
“It’s a good thing to go to the group benefits provider and ask if you can continue with your own insurance, paying the premiums on it. There might be an opportunity for you to continue the benefits individually, without having to go through a physical,” she says. “If you’re responsible for your own healthcare costs it can get expensive. I know one couple of pensioners where it’s going to cost them about $7,000 a year now, because they already have health issues.”
In the current downturn, many severance packages have gone to executives who were generally well paid. For example, consider the number of high-paying jobs in the financial services industry that have been eliminated. Often with these positions come stock options. Bezaire says rolling over stock options can be a thorny issue.
“If you exercise a stock option, the difference between the market value and what you exercise them at is considered an employment benefit. You get that because you work for somebody and that would be fully taxable. You could defer up to $100,000 per period until you sell the stock. People forget that’s looming in the background,” she says. “For many companies the stock value is down. If you sell the stock, whether the price is up or down, you could very well face this deferred taxation employment benefit you would have received.”
Bezaire notes that the options are taxed at 50% income, at the client’s average tax rate.
 | Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com |
(03/18/09)