Canadian Lawyer

30 J U N E 2 0 1 5 w w w . C A N A D I A N L a w y e r m a g . c o m equity partner multiplied by their best year of income. Often a judgeship can be an attractive second act for many lawyers in their 50s and 60s who are unhappy in their practice but have dreams of a solid pension plan dancing in their head. Depending on your income level as a partner, however, your earnings could drop precipitously when joining the judiciary. In 2010-11, puisne superior court judges made about $271,400, according to the 2011 Judicial Compensa- tion and Benefits Commission. A lawyer in a small town might see a salary increase by becoming a judge and realize the benefit of the pension, but in high-rent districts like Toronto and Vancouver it may not be quite as valuable a move — financially speaking. Typically, for partners in large law firms their retirement has been based on selling their partnership interest, which the law firms would be obligated to do, but the payments come out of current billings. "So if now we have lots of mobility amongst junior and mid-tier and senior ranks, all it takes is a bunch of them to leave and the firm doesn't have the capital to pay out. That's the unfunded deferred compensa- tion plan. I know legions of older partners in their 70s and if they retire they will expect the firm to buy their partnership interest back but the young guys might decide to go form their own firm instead," says Berg. "That's happened with scores of firms in the U.S." For the smaller firms in which 90 per cent of Canadian lawyers practise, there is a propensity to accumulate capital within their own private corporation, which is generally good planning, but they often ignore RRSPs as an effective additional tool. "They have one mindset — it works [the private corporation], it's easy and is effective, but they ignore the RRSP and when they retire then they have all their eggs in the one basket," says Berg. "The risk of having it all in one pot — especially the professional corporation, you don't know how the tax law is going to change with respect to that. If all your capital is in your professional corporation and you decide to live outside Canada in retirement, you're going to have to recognize the gain on your PC stock, which can be very substantial." In practically all private-practice envi- ronments, it's largely up to the individual to fend for themselves or enlist a financial adviser to help map out a solid financial future. But with investment performance being mediocre over the last few years, it makes the challenge even greater. "When some people start to realize that retirement is looming it's almost scary for them — maybe because they've had a divorce or they are no longer a partner at a firm or are just at an age they should start looking at it," says Virginia Engel, a partner at Peacock Linder Halt & Mack LLP and chairwoman of the CBA Financial Services Corp. board. "The realization you need to figure out where you want to be in retirement can be very scary. Then combine that with how much money do I need to live on and what am I going to do when I don't go to work, or do I want to work part-time or do some- thing else full-time?" Scotiabank senior wealth adviser Andrew Pyle says, like doctors and dentists, lawyers share similar traits in that they are highly focused on what they specialize in, which means they tend to not be very focused on their own personal issues, such as finance. "It's common to find profession- als who focus so much on their practice and neglect to look at financial management," says Pyle. "If we start layering in on top of that the need to do comprehensive cash flow and retirement planning, and estate planning, they just do not have the time to spend on those things." Making a plan Even if virtually no retirement planning has taken place, it's important to take stock of where you are right now. What is the realistic timeframe between now and when you think you will retire? Consider a couple of timeframes, and even consider whether you might want to work part-time and what that income level might be. Since few lawyers look at a hard stop date where all work will cease, Pyle suggests part-time practice or other kinds of work is a good way to approach the plan. He says once a timeline is in place, take stock of what is saved and where there is capacity for additional contributions to RRSP plans and other tools. "They need to really do a bottom-up analysis of their cash situation and project it forward. As opposed to just throwing out numbers — if you don't have $1 million in X number of years, too bad. You have to approach it from the ground up and be realistic." For lawyers who have their own cor- poration they have some powerful tools that will afford them things average Cana- dians cannot do. "Regular Canadians who don't have a corporation can't hold their life insurance strategies in the corporation, which is a very tax efficient thing to do," Pyle notes as an example. Projecting cash fl ow and creating multiple pots of capital "They have to get hold of their cash flow and a hold of what those cash-flow projec- tions look like and make sure that they are not only tax efficient now, but tax in retire- ment," says Pyle. Projecting where work is going to come from and what revenue it will bring may be tricky, but practitioners should at least attempt to do the exercise. It may be surprising to find how much a solid amount of regular work comes in and can be projected out even up to five years. The next step is to create "multiple pots of capital" so that when retirement does happen you aren't drawing from one source. "The worst thing in the world is ending up in retirement and having limited choices in terms of how you fund that — an RRSP becomes a RIF and that's all there is and now has a big tax issue," says Pyle. Lawyers can also investigate the use of an individual pension plan if they have a corporation. "An IPP is a very effective tool that a lot of professionals use in Canada because the size or the growth of wealth we can get from an IPP is greater than an RRSP. And it's tax efficient, funded from within the corporation." And if a spouse is involved in the prac- tice — for a lot of lawyers spouses are often involved in some way, which is great for income splitting — the spouse too could have an individual pension plan. "IPPs have been around a long time but we find a lot of individuals are just not up to speed on them and some of the accounting advice is not up to speed. For an incorpo- rated lawyer it's a very effective tool." There is also the need to re-evaluate life insurance coverage. "From a tax point of view, when you do a plan for individuals and show them the tax bills that will occur at death, their eyes fall out of their head because they never thought of their RSP becoming income when they die, or the accumulated financial ormance years, it "When rs who have their own cor- For lawyer y have some powerful tools poration they rd them things average Cana- that will affor do. "Regular Canadians who dians cannot

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