Document

Report
Tax Strategies for 2007 and beyond
Advocis Wealth Weekend - Banff
August 2007
Jamie Golombek CA, CPA, CFP, CLU, TEP
Vice-President, Tax & Estate Planning
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Agenda
TAX STRATEGIES FOR 2007 AND BEYOND…
1.
Tax rates
2.
Federal Budget 2007 highlights
3.
Pension splitting
4.
SWPs and T-Flex
5.
Hot cases
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Federal tax rates 2007
TAX STRATEGIES FOR 2007 AND BEYOND…
New federal tax brackets
0 – $ 37,178
15.5%
$ 37,178 – $ 74,357
22%
$ 74,357 – $ 120,887
26%
$ 120,887 +
29%
$
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Investment income – 2007 top marginal rates
TAX STRATEGIES FOR 2007 AND BEYOND…
Interest
Capital gains
Eligible
Dividends
43.7%
39.0%
44.0%
46.4%
46.4%
48.2%
46.8%
48.3%
47.4%
48.6%
21.9%
19.5%
22.0%
23.2%
23.2%
24.1%
23.4%
24.1%
23.7%
24.3%
18.5%
17.5%
20.4%
23.8%
24.6%
29.7%
23.0%
28.4%
24.4%
32.5%
B.C.
Alberta
Saskatchewan
Manitoba
Ontario
Quebec
New Brunswick
Nova Scotia
P.E.I.
Newfoundland
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Increasing RRSP maturity age limit
TAX STRATEGIES FOR 2007 AND BEYOND…
 Mandatory conversion at age 71 (up from 69)
 Reconvert RRIF back to RRSP
or
Open new RRSP (if contribution room available):
– Contribute up to $19,000 for 2007
– Contribute up to $20,000 for 2008
 No minimum RRIF withdrawals
– 70 in 2007? – No minimum for 2007 and 2008
– 71 in 2007? – No minimum for 2007
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RESP changes
TAX STRATEGIES FOR 2007 AND BEYOND…
 Elimination of $4,000 annual contribution limit
– Ability to lump-sum fund RESPs
 Lifetime limit increased to $50,000 (from $42,000)
 Increase in maximum annual CESG entitlement
– $500 per year (i.e., $2,500 X 20%)
– $1,000 per year for catch-up CESGs
(i.e., $5,000 X 20%)
 Maximum CESG limit of $7,200 unchanged
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Child Tax Credit – NEW
TAX STRATEGIES FOR 2007 AND BEYOND…
 $2,000 amount per child < age 18
– 2,000 X 15.5% = $310 per child
 Unused portion transferable to spouse/partner
 Not income-tested
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Registered Disability Savings Plan (RDSP)
TAX STRATEGIES FOR 2007 AND BEYOND…
 Beneficiary must be eligible for disability tax credit
 Contribution limit: $200,000 lifetime
– No annual limit
– Not deductible – earnings/growth tax-deferred
 Anyone can contribute
– Contributions can’t be refunded to contributor
 Contributions until end of year beneficiary turns 59
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Canada Disability Savings Grant (CDSG)
TAX STRATEGIES FOR 2007 AND BEYOND…
 Family income < $74,357
– 300% on first $500 / 200% on next $1,000
– Contribute $1,500 + $3,500 of CDSG = $5,000
 Family income > $74,357
– 100% on first $1,000
 Lifetime limit $70,000
 CDSGs until end of year beneficiary turns 49
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Canada Disability Savings Bonds (CDSBs)
TAX STRATEGIES FOR 2007 AND BEYOND…
 Maximum of $1,000 annually
– Family net income < $20,883
– Phased out at net family income of $37,178
 No contributions required
 Lifetime limit of $20,000 of CDSBs
 CDSBs until end of year beneficiary turns 49
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RDSP withdrawals
TAX STRATEGIES FOR 2007 AND BEYOND…
 Must begin at age 60
 Subject to maximum annual limits based on life
expectancy
 Taxed in hands of beneficiary
 Withdrawals excluded from federal incometested benefits calculations
– OAS & EI benefits
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Other changes
TAX STRATEGIES FOR 2007 AND BEYOND…
 Lifetime capital gains exemption increased to
$750,000
– Small business owners, farmers and fishers
 Elementary and secondary school scholarships
 Spousal amount
– Elimination of “marriage penalty”
– Increased to $8,929 (but no income threshold)
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Other changes (cont’d)…
TAX STRATEGIES FOR 2007 AND BEYOND…
 Increase of quarterly instalment threshold
– $3,000 ($1,800 for Quebec residents)
– Effective 2008 and future years
 Donations of eligible securities to private
foundations
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Donation of appreciated securities
TAX STRATEGIES FOR 2007 AND BEYOND…
 Elimination of capital gains tax on donations
of appreciated securities to charity
– Publicly listed stocks
– Mutual funds, segregated funds
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Elimination of capital gains tax…
TAX STRATEGIES FOR 2007 AND BEYOND…
 Mark wants to donate $100,000 worth of funds to
his favourite charity
Market value
ACB
Capital gain
Taxable gain (50% vs. 0%)
Tax on capital gain (at 45%) (A)
Tax benefit of gift (at 45%) (B)
Net tax benefit (A+B)
Net savings from new proposal
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Donate cash
Donate funds
$100,000
(20,000)
$100,000
(20,000)
80,000
40,000
(18,000)
45,000
27,000
80,000
NIL
NIL
45,000
45,000
$18,000
Win – Win – Win
TAX STRATEGIES FOR 2007 AND BEYOND…
 Client wins
– Saves $18,000 of tax
– Increases ACB of investment
 Charity wins
– Receives significantly larger gift
 Advisor wins
– Adds values through tax idea
– Generates new business/sale
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What’s missing from Budget 2007?
TAX STRATEGIES FOR 2007 AND BEYOND…
 Capital gains tax relief (six-month reinvestment)
– Promised in January 2006…
 Broad-based income splitting
– Limited to pension income splitting (Oct. 31, 2006)
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Pension income splitting
TAX STRATEGIES FOR 2007 AND BEYOND…
 Canadian resident
 Income that qualifies for “pension credit”
– Age 65+
 Annuity
payments out of an RPP, RRSP or DPSP
 RRIF withdrawals
– Under 65
 RPP
lifetime annuity payments
 Allocate up to 50% of income to spouse/partner
 Effective for 2007 and subsequent years
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Systematic withdrawal plans (SWPs)
TAX STRATEGIES FOR 2007 AND BEYOND…
 Enables payments from account on a
regular basis
 Each “payment” is a withdrawal
– Withdrawal = redemption
 Tax efficient
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SWP example
TAX STRATEGIES FOR 2007 AND BEYOND…
Investment: 30,000 shares @ $10
$300,000
Market appreciation: 6%*
18,000
Investment after one year
$318,000
Redemption (12 x $1,500):
Balance remaining
* Based on the assumption that the fund will return 6% per annum
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18,000
$300,000
SWP example (cont’d)
TAX STRATEGIES FOR 2007 AND BEYOND…
$ 10.00
Price @ Jan. 1
Market appreciation*
+
6%
# of shares sold
Original price
1,698
x $ 10.00
Price at year end
$ 10.60
Total cost
$ 16,980
Cash required
$ 18,000
Proceeds of disposition
$ 18,000
Price
÷ $ 10.60
# of shares sold
1,698
* Based on the assumption that the fund will return 6% per annum
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Adjusted cost base
Capital gain
- $ 16,980
$ 1,020
SWP example (cont’d)
TAX STRATEGIES FOR 2007 AND BEYOND…
Capital gain
$1,020
Taxable capital gain 50%
$ 510
Taxes payable 45%
$ 230
Effective tax rate on $18,000
* Based on the assumption that the fund will return 6% per annum
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1.3%
Effective tax rate on SWP withdrawal
TAX STRATEGIES FOR 2007 AND BEYOND…
Effective tax rate
25%
20%
15%
?
10%
5%
0%
1
2
3
4
5
25
Year
Assumption: Top marginal rate of 45%
* Based on the assumption that the fund will return 6% per annum
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105
Introducing T-Flex
TAX STRATEGIES FOR 2007 AND BEYOND…
 What is T-Flex?
 Benefits
 How T-FLEX works
 Additional investor material
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What is T-FLEX?
TAX STRATEGIES FOR 2007 AND BEYOND…
T-FLEX: Tax-efficient flexible distribution
series that allows investors to
choose from three target annual
distribution levels to generate a
tax-efficient cash flow stream
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Benefits
TAX STRATEGIES FOR 2007 AND BEYOND…
 Steady monthly cash flow
 Sustainable distributions
 Flexibility
 Tax efficiency
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Return of capital
TAX STRATEGIES FOR 2007 AND BEYOND…
 Occurs when a fund returns portion of original
capital or distributes unrealized gains
 Not considered income, dividends or capital gain
 Reduces the adjusted cost base of units/shares
 Results in potentially higher capital gain when
units/shares are redeemed
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The new tax efficiency spectrum – General
TAX STRATEGIES FOR 2007 AND BEYOND…
Most efficient
1. Return of capital
2. Eligible Canadian dividends
3. Capital gains
4. Interest & foreign income
(e.g., global dividends)
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Least efficient
What is ROC?
TAX STRATEGIES FOR 2007 AND BEYOND…
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Return of capital
TAX STRATEGIES FOR 2007 AND BEYOND…
What is “return of capital”?
Return “on”
capital
 GOOD
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Return of your
own capital
 BAD
ROC – Non-cash deductions – The good –
Part I
TAX STRATEGIES FOR 2007 AND BEYOND…
Distributable cash in REIT:
$100
Eligible tax deductions:
Financing expense (over 5 years)
Capital cost allowance
(20)
(40)
Taxable distribution
$40
Return of capital
$60
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ROC – The good – Part II
TAX STRATEGIES FOR 2007 AND BEYOND…
FMV at beginning of year
$1,000
Fund:
Income + realized gains
Unrealized gain
Less: distribution
FMV at end of year
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60
30
(80)
$1,010
ROC – Example
TAX STRATEGIES FOR 2007 AND BEYOND…
 January 1, 2004 – $1,000 investment, 100 units
 Annual “yield” – 10%
 Annual profits – 5%
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ROC – The bad
TAX STRATEGIES FOR 2007 AND BEYOND…
January 1, 2004
Profit of income trust:
Less: distribution
December 31, 2004
Price at year-end
January 1, 2005
Profit of income trust:
Less: distribution
December 31, 2005
Price at year-end
$1,000.00
50.00
(100.00)
$950.00
$
$
9.50
$950.00
50.00
(100.00)
$900.00
9.00
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January 1, 2006
Profit of income trust:
Less: distribution
December 31, 2006
Price at year-end
$
$900.00
50.00
(100.00)
$850.00
8.50
Return of capital – The ugly…
TAX STRATEGIES FOR 2007 AND BEYOND…
“Half the more than 250 income trusts could be
categorized either as pyramid schemes or outright
ponzi schemes . ”
– Dr. Al Rosen
National Post,
April 27, 2007
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ROC interest deductibility
TAX STRATEGIES FOR 2007 AND BEYOND…
 Borrow to invest in an income trust
 Distributions consist partially of ROC
 Is all the interest still deductible?
CRA Technical Interpretation 2003-0000825, dated May 13, 2003
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How T-FLEX works
TAX STRATEGIES FOR 2007 AND BEYOND…
 Monthly distribution is based on preferred target
annual level (i.e., 4%, 6% or 8%)
 Reset annually to maintain original target level
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How T-FLEX works:
Calculation of monthly payments at share level
TAX STRATEGIES FOR 2007 AND BEYOND…
Year 1
1.
2.
3.
Determine NAVPS on December 31 of
previous year
Calculate target annual distribution
amount (6% of NAVPS)
Divide by 12 for monthly payout
Monthly distribution per share for Year 1
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$10.00
$10.00 x 6% = $0.60
$0.60 / 12 = $0.05
5 cents
How T-FLEX works:
Calculation of monthly payments at share level
TAX STRATEGIES FOR 2007 AND BEYOND…
Year 2
Scenario A: Assumes NAVPS increases
NAVPS on December 31 of Year 1
6% of NAVPS
Monthly distribution per share for Year 2
$10.20
$0.612
5.1 cents
Scenario B: Assumes NAVPS decreases
NAVPS on December 31 of Year 1
6% of NAVPS
Monthly distribution per share for Year 2
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$9.80
$0.588
4.9 cents
How T-FLEX works:
Calculation of monthly payments at fund level
TAX STRATEGIES FOR 2007 AND BEYOND…
Year 2
Scenario A: Based on NAVPS of $10.20
Shares
x distribution per share
= monthly cash flow
10,000
$0.051
$510
Scenario B: Based on NAVPS of $9.80
Shares
x distribution per share
= monthly cash flow
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10,000
$0.049
$490
What is the adjusted cost base (ACB)?
TAX STRATEGIES FOR 2007 AND BEYOND…
 Cost of a mutual fund investment for
tax purposes
 ACB
= Cost of mutual fund units
+ reinvested distributions
- ROC distributions
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How T-FLEX works:
The big picture
TAX STRATEGIES FOR 2007 AND BEYOND…
Scenario 1: 6% target distribution, 7% return
Cumulative monthly
distributions paid
over 20 years:
approximately
$130,000.
Year
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How T-FLEX works:
The big picture
TAX STRATEGIES FOR 2007 AND BEYOND…
Scenario 2: 6% target distribution, 5% return
Cumulative monthly
distributions paid
over 20 years:
approximately
$108,000.
Year
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Corporate class structure: impact of switching
TAX STRATEGIES FOR 2007 AND BEYOND…
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Gains & losses – Trust structure
TAX STRATEGIES FOR 2007 AND BEYOND…

Fund A has $1,000 in capital gains

Fund B has $1,000 in capital losses

Distributions:
– Fund A – $1,000 of capital gains
– Fund B – no distribution
 $1,000
capital loss carryforwards
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Gains & losses – Corporate structure
TAX STRATEGIES FOR 2007 AND BEYOND…

Class A has $1,000 in capital gains

Class B has $1,000 in capital losses
• No distribution for Class A or Class B
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Advantages of Capital Loss Carry Forwards
TAX STRATEGIES FOR 2007 AND BEYOND…
$1.22 Billion
Capital Loss Carry Forward
AIM
2000
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Trimark
Commissions paid to corporations – Wallsten
TAX STRATEGIES FOR 2007 AND BEYOND…
 Wallsten et al v. The Queen [2001 FTR 35913]
 Insurance salesperson redirected commissions
received personally to corporation
– Valid assignment under tax law notwithstanding
violation of contract
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Commissions paid to corporations –
CRA’s comments
TAX STRATEGIES FOR 2007 AND BEYOND…
 ITTN No. 22 – January 11, 2002
– Not accepting decision
– Underestimated impact
– If illegal, commissions must be reported
personally
 Cannot
be transferred to corporation,
regardless of documentation
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Update on advisor incorporation
TAX STRATEGIES FOR 2007 AND BEYOND…
 MFDA Rule 2.4.1 suspended until
December 31, 2008
– B.C., Saskatchewan, Ontario, Nova Scotia
 Recent CRA comments
– Technical interpretation 2006-017653117, dated April 18, 2006
 Canadian Securities Administrators
working group
– Registration Reform Project
 Recent IDA comments
– Proposed amendments to By-Law 39
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Advisor incorporation
TAX STRATEGIES FOR 2007 AND BEYOND…
 Boutilier v. the Queen, 2007 TCC 96 (Feb. 2007)
 Advisor assigned mutual fund trailers to
corporation
 CRA reassessed him personally
– No formal employment contract
– No remuneration from corporation
– No business expenses paid by corporation
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Singleton
TAX STRATEGIES FOR 2007 AND BEYOND…
Singleton
$300,000
Purchase home
Home
$300,000
Law firm
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Singleton
TAX STRATEGIES FOR 2007 AND BEYOND…
Singleton
$300,000
Purchase home
Home
$300,000
$300,000
$300,000
Law firm
Bank
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GAAR – Lipson
TAX STRATEGIES FOR 2007 AND BEYOND…
 Lipson v. the Queen, 2006 TCC 148
 Singleton-type planning
 Can you use attribution rules to your advantage?
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Lipson – Summary
TAX STRATEGIES FOR 2007 AND BEYOND…
Purchase shares
$562,500
Earl Lipson
Jordanna Lipson
Loan:
$562,500
Home
Lipson Family
Investments Ltd.
Mortgage:
$562,500
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Bank
Lipson – GAAR?
TAX STRATEGIES FOR 2007 AND BEYOND…
 Provisions of the Act were “misused” and
“abused”:
– Interest deduction provision & attribution
rules were “used to achieve a purpose for
which they were never intended.”
 “contrived transaction”
 Lipson appealed – LOST – March 19, 2007
– Leave is being sought to SCC…
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Beware of joint accounts
TAX STRATEGIES FOR 2007 AND BEYOND…
 Spouse vs. adult children
 Control issues
– Signing authority
– Account available to creditors of son/daughter
– Account subject to division of matrimonial
property
 Tax & trust planning issues
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Joint accounts at the SCC
TAX STRATEGIES FOR 2007 AND BEYOND…
 Pecore v. Pecore,
2005 CanLII 31576 (ON C.A.)
 Saylor v. Brooks,
2005 CanLII 39857 (ON C.A.)
 SCC confirms both decisions
– May 3, 2007
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Creditor protection for RRSP/RRIF
TAX STRATEGIES FOR 2007 AND BEYOND…
2002
Personal Insolvency Task Force Report
Saskatchewan Registered Plan (Retirement Income)
Exemption Act
2003
Standing Senate Committee on Banking, Trade and
Commerce: “Debtors and Creditors Sharing the Burden”
2004
2005
Bill C-55 – An Act to… amend the Bankruptcy and
Insolvency Act… first reading June 2005
2007
Bill C-62 – An Act to… amend the Bankruptcy and
Insolvency Act… Senate – 1st reading – June 2007
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Tax Strategies for 2007 and beyond
Advocis Wealth Weekend - Banff
August 2007
Jamie Golombek CA, CPA, CFP, CLU, TEP
Vice-President, Tax & Estate Planning
FOR ADVISOR USE ONLY –
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