2014 manitoba tax rate update cédric paquin, b.comm, ca, cfp regional vice-president, wealth...
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2014 Manitoba Tax Rate Update
Cédric Paquin, B.Comm, CA, CFPRegional Vice-President, Wealth Planning
United Financial, a division of CI Private Council LP
General Update
• Federal tax brackets & clawback lower limits indexed by 0.9%
• Increase in the capital gains exemption to $800K; indexed
• MB SBD increased to $425,000
• CRA prescribed rate back to 1% on January 1, 2014
• TFSA limit $5,500; Contribution room $31,000
• RRSP limit $23,820 (2013) to $24,930 (2014)– 2013 Deadline (March 3, 2014)
2014 Top Personal Tax Rates - MB
Gross-up on non-eligible dividends decreases from 25 % to 18 %
201339.15%
Integration of ABISalary vs. Dividends
2014 Salary vs. Dividend - MB
ABI Corporate Rate
Tax Deferral
Savings / (Cost)
$75K Dividend
< $425K 11% 35.4% (0.89%) ($668)
$425 < $500K 23% 23.4% (7.99%) ($5,993)
$500K < 27% 19.4% (4.15%) ($3,113)
Elimination of savings to flow ABI through a corporation (0.6% - 2013)
• Pay salaries and/or bonus to decrease corporate income to $425K
• Consider enough salary to maximize:– RRSP ($ 138,500)– CPP ($ 52,500)– IPP ($ 135,000 – approx)
Salary vs. Dividends- General Rules
• Retirement income strategies– CPP benefits vs. withholdings– RRSP, IPP, RCA– Retirement Allowance
• Dividend gross-up may reduce or eliminate– OAS – Age, GST, CCTB and other credit– Provincial credits
• Cash flow: CPP withholdings & tax installments
• SRED, payroll tax
Salary vs. Dividends- Other Factors
Integration of Investment IncomeRetirement Holdco Strategies
Refundable Dividend Tax on Hand (RDTOH)
$1 for every $3 dividend paid to shareholders
33% Divide
nds
13.34% Capital Gains
26.67% Investme
nt income
• Prevents tax deferrals on investment income
• Tax prepayment/cost encourages paying dividends out of a Holdco/Investco.
• Reduces flexibility in compensation planning
2014 Passive Income - MB
MB Other Income
Capital Gains
Eligible Dividends
Up front 46.67 % 23.34 % 33 %
Refundable 26.67 % 13.34 % 33 %
Net tax 20.00 % 10.00 % 0 %
Example – 2014 MB
Income earned through corporation
Corporate income $ 1,000
Corporate tax (467)
After-tax amount 533
Dividend refund 267
Available for distribution
800
Personal tax of individual
(326)
Net cash to individual $ 474
Income earned directly by individual
Personal income $ 1,000
Personal tax (464)
Net cash to individual $ 536vs.
SummaryTax pre-payment: $3Tax cost: $62
2014 Integration Failure - MB
MBOther
IncomeCapital Gains
Eligible Dividends
Tax savings (cost) (6.2 %) (3.1 %) (0 %)
Tax deferral (prepayment) (0.3 %) (0.1 %) (0.7 %)
Investment income has become less integrated for all provinces!
Capital Dividend Account (CDA)To integrate non-taxable amounts
CDA balance
Non-taxable portion of capital
gains
Capital dividends received
Net proceeds of a life insurance
policy
CDA Strategies with Investments
• Pay out capital dividends before realizing capital losses
• Trigger capital gains to offset non-capital losses
Example: Opco with $10K in expenses and $30K in loss carry forwards- Trigger $80K capital gain ($40K taxable capital gain)- Nil corporate tax / $40K added to CDA account - Pay $40K tax free capital dividend to shareholder
Advantages: - Extract funds tax free - Reduce tax cost of investment income in corporation- Bump-up ACB - Use up corporate losses that will otherwise expire - Lock-in CDA balance
Corporate Investments - General Tax Strategies
AccumulationPhase
WithdrawalPhase
• Draw from corporation as quickly and tax efficiently as possible- Pay out shareholder loans and CDA tax free- Create personal income to take advantage of lower tax brackets, credits and
deductions
• Investments that defer distributions and capital gains avoid RDTOH and enhance compensation planning
• Pay dividends to recover RDTOH (if pers. tax < 33%)
• Defer tax and plan for retirement using:- Holdco and/or corporate beneficiary of family trust- RRSP & IPPs
2014 Tax Free Amounts - MB
•Federal: $48,843•Manitoba: $23,859
Eligible Dividend
s
•Federal: $43,430•Manitoba: $9,439
Non-Eligible
Dividends
Retirement Income StrategiesNon-Reg vs. RRSP vs. Investco.
RRSP vs. Investco
Client objectives: higher cash flow or maximize estate?
RRSP Draws
• Higher tax on death• No spousal trust on death• Recover AMT• Consider high tax and
clawbacks during RRIF• RRIF after 65 for pension
credit and splitting
Corp Draws
• Lower tax on draws• Effect of gross-up on
OAS, Age, GST, CTB and other credits
• Higher donation credit• Recover RDTOH• Reduce prof/admin fees
• Draw from RRSPs to use up AMT, deductions and credits.
• Draw from high value RRSPs if in low tax bracket and projecting high tax bracket and OAS clawback after age 71
• Convert higher RRSP to RRIF to fund lifestyle expenses after age 65 and use pension splitting
• Convert RRSP to RRIF after age 65 for pension credit
RRSPs vs. Non-reg
• Consider T- Class for individuals drawing on open accounts and:- subject to high tax rates and clawbacks, - have charitable intentions, or- don’t mind leaving large tax bill on death
• Spousal income splitting (but not with corporate class!)- Payment of lifestyle expenses by higher taxed spouse- Sale of lifestyle assets- Low interest loans to spouse or Family Trust
Open Accounts
• Investments with low distributions (Corp class & T-class)
• Capital gain instead of interest or dividends
• Management fees that exceed investment income
• Convert non-deductible debt to deductible debt
• RRSP deductions
Using open investments to reduce net income
Thank you
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