Some Canadians may look to pay off debt, set up an emergency fund or contribute to their tax-free savings account or registered retirement savings plan with their year-end bonuses.Domepitipat/iStockPhoto / Getty Images
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Receiving a bonus from work is often a welcome financial boost, but helping clients determine the best strategy for that money can be especially challenging in today’s economic climate.
Many Canadians are inclined to treat themselves, advisors say, but one idea is to adopt the approach of spending and saving equal portions, says Lydia LaPointe, a chartered financial consultant at York Financial Services Inc. in Fredericton.
“Dividing the bonus and doing different things with the money may be the most satisfying solution,” she says.
Others may look to pay off debt, set up an emergency fund or contribute to their tax-free savings account or registered retirement savings plan (RRSP). In the latter case, Kelly Ho, certified financial planner (CFP) and partner at DLD Financial Group Ltd. in Vancouver, says an RRSP contribution can result in a tax refund that can then be reallocated toward paying down debt.
Ms. Ho will often show clients various options by number crunching some data and how decisions affect their overall financial plan. For example, she may run a report to demonstrate the impact of paying down debt aggressively.
“Illustrating the concepts for clients is always a lot more effective than telling them,” she notes.
For clients aiming to purchase their first home, contributing their bonus to the new tax-free first home savings account (FHSA) can be highly beneficial. The FHSA allows both tax-deductible contributions and tax-free withdrawals for a home purchase, says Nick Giovannetti, CFP and managing partner at EastCap Wealth Planning Inc. in Waterloo, Ont.
“It’s a powerful way to save for a home while optimizing for tax efficiency,” he says.
Alternative strategies for bonuses
For those looking to open up new avenues for increasing their income or advancing in their careers, Mr. Giovannetti says clients could invest a portion of their bonus toward personal or professional development.
“This can include funding an education savings plan, enrolling in courses or certifications that enhance skills, or even attending industry-leading conferences,” he says.
“This approach not only enriches their personal and professional growth but also positions individuals as leaders in their field.”
Mr. Giovannetti may also advise harnessing charitable giving as a way to achieve both tax efficiency and social impact. If the bonus is redirected into investments, one strategy involves donating stocks or mutual funds that have appreciated in value directly to a charity. That allows the client to avoid the capital gains tax while also receiving a tax receipt for the fair market value of the donation.
“This [strategy] maximizes the impact of the donation and the tax benefit for the donor,” he says.
Chyanne Hodgson, an independent financial advisor in Airdrie, Alta., has a different approach when working with clients who are unsure of the best plan for their bonuses.
“Year-end bonuses are a lot of fun, but they can encourage behaviour in clients that detracts from their financial future instead of benefiting it,” she says.
Ms. Hodgson’s main focus is improving a client’s relationship with money and taking a closer look at some of their related behavioural practices.
She cites the example of overspending due to the catharsis of a financial windfall. To address this, Ms. Hodgson advises her clients to focus on two things. First, they should examine their need to “blow off some steam” by allocating a small portion of their bonus to unrestricted fun or frivolity. Then, she urges clients to allocate the rest to the goal they’re already working toward.
“When you take that bonus and bend it to what the client is working to achieve, it becomes an asset beyond the financial class,” she says. “It becomes a tool for lasting behavioural change instead.”
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