Investment income is the income your client's bank and non-registered accounts earn each year. Planworth has one setting that controls what happens to that income: whether it stays invested or is paid out as cash to fund taxes and spending. The setting is on by default in every new plan.
Where to find the setting
Open the plan and select Assumptions.
Select Spending Goals.
Find Other Spending Assumptions.
Turn on or off Assume non-registered and bank account income is re-invested unless required for cash flow.
Select Save.
You can also set the default for new plans in Advisor Settings under Spending.
What counts as investment income
Planworth adds up these items for each year:
Interest from bank accounts
Interest and other income from non-registered accounts
Canadian, US and international dividends
Distributions from alternatives
Capital gains triggered by portfolio turnover or growth
Capital gains realized when you withdraw from a non-registered account
Capital gains on donated securities
A few rules apply:
Registered accounts and TFSAs are not included.
Unrealized growth is not investment income. It stays in the account balance until it is realized
In the plan's first year, only income earned after the plan start date is counted.
What the setting does
When the setting is on (the default), investment income stays in the account unless the client needs it for cash flow. The account balance and its adjusted cost base both grow by the income that stays in. That amount is not available to spend or save. If the client has a shortfall, Planworth takes the investment income first and only then draws on account principal.
When the setting is off, Planworth pays all investment income out as cash. That cash goes toward taxes and spending first. Anything left over is saved according to the deposit order on the Excess/Deficiency settings. The account balance then keeps only unrealized growth..
Taxes don't change with the setting. Planworth taxes the same investment income whether it stays invested or is paid out.
Example
A client has a non-registered account with a $100,000 balance and an $80,000 adjusted cost base (ACB). The account earns $7,000 of investment income this year. With the setting on, the balance becomes $107,000. Here is what happens for three different withdrawals.
Withdrawal | Investment income withdrawn | Investment income re-invested | Ending balance |
$5,000 | $5,000 | $2,000 | $102,000 |
$10,000 | $7,000 | $0 | $97,000 |
$107,000 (full balance) | $27,000 ($7,000 income plus $20,000 capital gain) | $0 | $0 |
In the first case, the withdrawal is smaller than the income, so the $2,000 left over stays invested. In the second case, the withdrawal uses all the income and then some principal. In the third case, selling the whole account also realizes a $20,000 capital gain, which Planworth reports as investment income.
Personal and corporate accounts
The setting applies to personal bank and non-registered accounts only. There is no matching checkbox for corporations.
Corporate accounts always re-invest their investment income. The amount re-invested is limited to the lesser of two figures: the corporation's investment income, or the cash left after corporate tax, dividends, other outflows and shareholder loan repayments. If the corporation needs cash for those items, less income is re-invested.
The checkboxes on Assumptions > Corp / Trusts > Corporations do something different. They control whether Planworth clears out the CDA, ERDTOH and NERDTOH balances when excess exists. They also control how deficiency dividends are allocated. They don't change whether investment income is re-invested.
Why investment income is withdrawn
Planworth looks for a shortfall in every plan year, not just in retirement. If expenses and taxes are more than the client's inflows, Planworth covers the gap from the client's accounts. For bank and non-registered accounts, it takes the investment income first and then the principal.
Withdrawals from non-registered accounts
When Planworth sells non-registered investments to cover a shortfall, it splits the withdrawal into two parts:
The capital gain is reported as Investment Income.
The return of the original cost base is reported as Non-Taxable Withdrawals.
Non-Taxable Withdrawals is made up of three lines:
Bank Account Withdrawals
Non-Reg Non-Tax. Withdrawals
TFSA Withdrawals
Interest withdrawn from a bank account counts as investment income, not as a non-taxable withdrawal. TFSA withdrawals are never Registered Income. Registered Income covers only taxable withdrawals from registered accounts: RRSP, RIF, LIF, DCP, LIRA and taxable FHSA withdrawals.
To see the breakdown, go to Details > Personal - Cash Flow > Cash Flow Details. The lines are in the cash flow result section.
