Don’t let your clients spend their Christmas bonuses all in one place

Don’t be surprised when your client tells you that he spent his Christmas bonus on a new 50-inch TV, especially if you haven’t told him how he could make better use of the extra cash.

Christine Van Cauwenberghe, director of tax and estate planning at Investors Group, says many people will be tempted to spend their bonuses on impulse purchases, but paying down debt or topping up an RRSP should come first.

“There’s nothing wrong with taking a portion of the bonus and spending it on some personal item,” says Van Cauwenberghe, “but we recommend that clients don’t spend the entire thing and forget about other objectives in their financial plan.”

Before anything, that holiday payday should go toward paying down high-interest debt like outstanding credit card balances. After that, clients should consider adding to their RRSP contributions.

“Make sure your client’s RRSP contribution is maximized, so they can get tax receipts to use as a deduction against taxable income for 2007,” explains Van Cauwenberghe. Doing this could also land your client with a nice refund cheque from the government, which he or she can blow on a big purchase later. “You can have your cake and eat it too,” she says.

If your clients can’t contribute further to their RRSPs, or if they have money left over, Van Cauwenberghe suggests spending the cash on the kids. She’s not talking about buying them a new computer, though. Instead, take the money and put it toward their Registered Education Savings Plans. The government removed the limit on annual contributions this year, so clients can put any amount into their children’s RESPs. They won’t get a tax deduction like they do with their RRSPs, but they’ll get a 20% matching grant from the government, which could go a long way when it’s time to send the kids off to university.

Once that’s done, Van Cauwenberghe says clients should consider paying down non-deductible debt, such as a mortgage. “See if you can double up on mortgage payments because you can’t deduct that interest against any of the ongoing taxable income,” she explains. “The faster you get non-deducible debt down, the sooner you can start saving for other purchases.”

Reducing taxable income is another good idea. That can be achieved by making a charitable donation before the end of the year.

Finally, if there’s anything left over, it’s a good idea to put that cash in non-registered investments. Van Cauwenberghe says investing in a corporate class mutual fund is ideal as clients can access a number of different products without triggering capital gains.

Of course, investing in an RRSP won’t have your clients watching football on a giant screen, so you can encourage them to drop a bit of bonus money on a big-ticket item too. But how much should they spend? “There’s no rule of thumb,” says Van Cauwenberghe, “but some people say use a third to pay down debt, a third to invest and a third to party like it’s 1999.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com