corporate clients – the power of 5 michelle connolly vice president, wealth planning, ci...

CORPORATE CLIENTS – THE POWER OF 5

CORPORATE CLIENTS/PROSPECTS – THE POWER OF 5

5 minutes – capture attention regarding your value

5 key tax concepts – understand

5 questions – value of wealth planning


5 minutes – capture attention regarding your value

Today’s Wealth Planners have to ask a lot more questions, and be comfortable in dealing with individual, trust and corporate

planning situations

Has your tax advisor discussed creative tax strategies available to your corporation?

When do you think you will be financially and emotionally ready to retire?

Can you claim the Lifetime Capital Gains Exemption when you sell your shares?

Does your current corporate structure maximize income splitting opportunities?

Have you implemented flexibility and maximized control over retirement income flows?

When was the last time you were asked about your wills or succession plan?

Are you a tax-efficient investor?What is your overall, average tax rate?

CAPTURE ATTENTION IN 5 MINUTES

High-net-worth investor concerns• 89% concerned about losing their wealth• 85% concerned about tax mitigation• 79.2% taking care of heirs• 71.5% having enough money in retirement

Source: Building a World Class Experience for Affluent Clients, CEG Worldwide, Morgan Stanley Smith Barney

Institute, 2009

Financial analysis

Risk mgmt

Tax planning

Wealth transfer

Wealth planning


• 90% of business owners state proceeds from sale will be very important for the financing of retirement

• 52% of business owners do not have any succession plan

• 40% of business owners do not have an estate plan in place

Source: RBC Wealth Management, HNW Inc, CIFP

Financial analysis

Risk mgmt

Tax planning

Wealth transfer

Wealth planning



5 key tax concepts - understand

Selling a small business or an incorporated practice does not

guarantee $750,000 in tax-free capital gains

Selling a small business or an incorporated practice does not

guarantee $750,000 in tax-free capital gains

5 KEY TAX CONCEPTS

$2M offer for hotel building, equipment and furniture

5 KEY TAX CONCEPTS – CAPITAL GAINS EXEMPTION

Is it an asset or share sale?

$2M offer for hotel building, equipment and furniture

CGE is only available on certain qualified property, namely:

•Canadian controlled smallbusiness corporation shares

•Qualified farm property

•Qualified fishing property

CGE is only available on certain qualified property, namely:

•Canadian controlled smallbusiness corporation shares

•Qualified farm property

•Qualified fishing property


Holdco

Opco

Mr. AMr. A Mrs. AMrs. A

50%50% 50%50%

$2M offer for Opco 100%100%

FMV $2M active business operation assetsFMV $2M active business operation assets

FMV $1.5M passive investment assetsFMV $1.5M passive investment assets


Only individual taxpayers, or individual beneficiaries of a trust, can claim the CGE

Holdco

Opco

Mr. AMr. A Mrs. AMrs. A

50%50% 50%50%

$2M offer for Opco 100%100%

FMV $2M active businessFMV $2M active business

FMV $1.5M passive investment assetsFMV $1.5M passive investment assets


Shares must be QSBC shares and the following tests are applied:

i. Length of ownership test: shares owned by taxpayer for 24 months;

ii. 24 month asset test: 50%+ assets used in active business; AND

iii. Moment of disposition test: 90%+ assets used in active business

Consider:

• Corporation may need to be purified and/or structure modified

• Good rule of thumb is 24 month lead time in planning for sale


Should your client:• Incorporate? • Incorporate a holdco for investments?• Set up a separate corporation for each

business interest or investment account?

Should your client:• Incorporate? • Incorporate a holdco for investments?• Set up a separate corporation for each

business interest or investment account?

5 KEY TAX CONCEPTS

5 KEY TAX CONCEPTS – PSB, SIB AND ASSOCIATION

Personal Services Business• Business providing services where the incorporated “employee” would reasonably be

regarded as an officer or employee of the entity to which services are provided. But does not include a business … where more than five full-time employees

• Consider employee versus self-employed/independent contractor tests

Specified Investment Business• The principal purpose of which is to derive income from property – including interest,

dividends, rents or royalties, but does not include a business … where more than five full-time employees

Association• In order to employ multiple Small Business Deductions, two or more CCPCs must not

be associated• The associated corporation rules are complex, but generally two or more corporations

are “associated” if one corporation controls the other, or if they are directly or indirectly controlled by the same person, group of persons, or related groups of persons

Corporate Tax Accounts – What do you need to know?Corporate Tax Accounts –

What do you need to know?

5 KEY TAX CONCEPTS

RDTOH – Refundable Dividend Tax on Hand Account

•Refundable Portion of Part I tax assessed on investment income (26.67% Cdn/15.25% Foreign)•Part IV tax on Canadian Dividends received (33.33%)

Dividend Refund

•$1 from RDTOH for every $3 of taxable dividends paid. •All taxable dividends paid by a CCPC generate a dividend refund to the extent RDTOH exists

5 KEY TAX CONCEPTS – RDTOH ACCOUNT

The CDA of a CCPC tracks certain non-taxable amounts received by a corporation that can be distributed on a tax-free basis to Canadian resident shareholders of the CCPC. From a time perspective – calculated on a cumulative basis.

Capital Dividend Account“CDA”

Non-taxable portion of net capital gains

PLUS:Capital

Dividendsreceived

PLUS:Non-taxable

portion of gains on eligible

capital property

PLUS:Proceeds of a life insurance

policy(less ACB)

LESS:Capital

Dividendspaid

5 KEY TAX CONCEPTS – CDA ACCOUNT

What is your clients overall, average tax rate?

What is your clients overall, average tax rate?

5 KEY TAX CONCEPTS

Corporation – T2 Individual shareholders – T1

5 KEY TAX CONCEPTS – OVERALL TAX RATE

How can funds be extracted from the corporation?• What is tax impact to corporation?• Shareholder needs $X after-tax from corporation to support lifestyle needs

now and in retirement

Plan - to maximize tax efficiencies, flexibility and planning opportunities. Tax and financial analysis will naturally tie together and highlight investment considerations. How do you minimize total taxes paid given shareholder lifestyle needs?

Salary, dividends,

capital gains


• How would $250,000 in earnings be taxed?– Personally $ 95,800 (38.3%)– Opco/Profcorp $ 38,750 (13.0%)– However, keep in mind have to get money from corporation out to the

shareholder to support lifestyle needs – how achieve?

• Assume client requires $100,000 for lifestyle needs: – How much taxes are paid? – How much excess funds are left to invest?

Earnings 250,000$ 250,000$ Salary (153,300)$ -$ Net Income 96,700$ 250,000$ Corporate Tax (12,600)$ 13.0% (32,500)$ 13.0%

84,100$ 217,500$ Dividend - Noneligible -$ (124,200)$ Cash Available to Invest by Corp 84,100$ 93,300$

Earnings 250,000$ 153,300$ 124,200$ Personal Tax (95,800)$ 38.3% (53,300)$ 34.8% (24,200)$ 19.5%

154,200$ 100,000$ 100,000$ Cost of Living (100,000)$ (100,000)$ (100,000)$ Cash Available to Invest by Prof 54,200$ -$ -$

Total Taxes 95,800$ 38.3% 65,900$ 26.4% 56,700$ 22.7%

Total Invested 54,200$ 21.7% 84,100$ 33.6% 93,300$ 37.3%

Personal

Professional

CorporateOpco/Profcorp

Salary Dividend


How can a corporation be used to generate a flexible, tax-efficient, self-directed

retirement?

How can a corporation be used to generate a flexible, tax-efficient, self-directed

retirement?

5 KEY TAX CONCEPTS

5 KEY TAX CONCEPTS – FUNDING RETIREMENT

• 15-20 years ago – RRSPs/RRIFs, IPPs, and RCAs• 10-15 years – provincial professional regulatory bodies allow

incorporation• Finance in the last three years addressed - IPPs (2011 budget),

EPSPs and RCAs (2012 budget), RCAs (50% refundable tax)• Today – maybe RRSPs/RRIFs, TFSAs, opco sale proceeds, holdco

dividends and share redemptions

Plan - to maximize tax efficiencies, flexibility, provide control and planning opportunities. Tax and financial analysis naturally tie together and highlight structure and investment considerations


55 questions – value of wealth planning

When was the last time your tax, legal or financial advisor asked about your business, succession or estate plans?

When was the last time your tax, legal or financial advisor asked about your business, succession or estate plans?

5 QUESTIONS – VALUE OF WEALTH PLANNING

Business plan • At what stage in the corporate life cycle?• Organization chart – does voting control lie with management? • Contingency Planning

Succession/estate plan• Who? How? When? • Shareholders Agreement? If yes, when was the last time it was reviewed and compared against the wills of the shareholders?• When was the last time provisions in will were reviewed and distributions mapped out to beneficiaries? Would actual distributions match intentions?


What purpose does the corporation or structure serve?

What purpose does the corporation or structure serve?


5 QUESTIONS – PURPOSE OF…

Opco• Liability or creditor protection• Tax savings and deferral opportunities• Means to maximize/monetize the value of the business operations• Income splitting opportunities/flexibility for compensation• Means to facilitate wealth transfer plansHoldco• Further means of protection• Implement an estate freeze• Means to purify opcoTrust • Implement flexibility over cash/income flows• Set up direct vs. indirect ownership of shares• Maintain an element of control over opco• Multiply access to CGE

Average top marginal personal tax rate (July 1, 2013) – 44.87%Average active business corporate tax rate (July 1, 2013) – 14.6%

Tax savings – reduced tax rate, pay less tax•With Small Business Deduction – first $500K is taxed at lower, flat rate •$500K personal versus $500K corporate and dividends paid out – depends upon the province •Non-deductible expenses (life insurance, automobile, meals and entertainment, capital costs) funded with cheaper dollars

Tax deferral – pay tax later, perhaps at reduced tax rate•Surplus, after-tax dollars should remain in corporation to be invested – more investment capital•Why generate income, unless needed to support lifestyle?

Average top marginal personal tax rate (July 1, 2013) – 44.87%Average active business corporate tax rate (July 1, 2013) – 14.6%

Tax savings – reduced tax rate, pay less tax•With Small Business Deduction – first $500K is taxed at lower, flat rate •$500K personal versus $500K corporate and dividends paid out – depends upon the province •Non-deductible expenses (life insurance, automobile, meals and entertainment, capital costs) funded with cheaper dollars

Tax deferral – pay tax later, perhaps at reduced tax rate•Surplus, after-tax dollars should remain in corporation to be invested – more investment capital•Why generate income, unless needed to support lifestyle?

5 QUESTIONS – TAX MINIMIZATION

5 QUESTIONS – INCOME SPLITTING

• Corporations and/or trusts provide flexibility for compensation and income splitting opportunities that does not exist for a sole proprietor

• Does shareholder support family members with after-tax funds? Find out “how, what and who” shareholder is spending funds on

• Potential to access $750K+ Lifetime Capital Gains Exemption, and multiplication of access to

Individual

Corporation

Trust

Corporation

Dividends/CGEDividends/CGE Dividends/CGEDividends/CGE

BeneficiariesBeneficiaries

Dividends/CGEDividends/CGE

5 QUESTIONS – FACILITATE WEALTH TRANSFER

Succession planning• Funding retirement, as opposed to RRSP • Valuation of business• Monetization of goodwill • Implement control

Estate planning• Family members – who, age, in/dependent, residence, marital status• Easier to implement at various stages with corporation or trust than a

simple will concerning a proprietorship • Multiple will strategy – depends upon the province

What if?What if?


5 QUESTIONS – WHAT IF?

If business owner or professional is injured and/or cannot manage the business or practice? Is there:•Sufficient funds to keep the company running smoothly or provide for their, and their family’s, continued financial well being?•A POA (or similar instrument) in place? Does the designated attorney have the business acumen to maintain ongoing operations and protect corporate value? Is key management or appropriate staff in place?•A Shareholders’ Agreement in existence outlining steps to be taken?•What happens upon the death of the business owner or practitioner? •How will the tax liability be financed? Is there liquidity in the estate to pay terminal tax liability or adequate insurance?•Does the current will reflect intentions? Does the designated executor (or similar) have the business acumen to maintain ongoing operations and protect corporate value? •Is there a Shareholders’ Agreement in existence with a buy-out provision? Adequate financing to execute buy-out?•Does current will concur with the Shareholders’ Agreement?

Have you heard of tax-efficient investing?

Have you heard of tax-efficient investing?


5 QUESTIONS – TAX-EFFICIENT INVESTING

Cash flow – generating flexible cash flow streams while mitigating associated tax liability. Income – is investment income needed to support lifestyle needs? Flexibility over when reported and type, and tax rate on income. Growth – minimizing distributions/income to facilitate compound growth on account of capital. What is the most tax efficient source of income? Maintenance of portfolio allocation – making strategic or tactical shifts in portfolio – does tax impact client’s decision? Aim is to maximize after-tax rate of return and consider any value-add components

Do you have philanthropic intentions?

Do you have philanthropic intentions?


5 QUESTIONS – PHILANTHROPIC INTENTIONS

Philanthropy by design, as opposed to philanthropy by default

• Planning is key…

• Maximize benefit of $X, or $X donation for minimum dollars

• Corporate deduction versus personal tax credit

• Cash versus donation in kind

• Now versus later

Corporate SBD No SBD Holdco15.50% 26.50% 46.17%

Income 1,000$ 1,000$ 1,000$ Donation Deduction (1,000)$ (1,000)$ (1,000)$ Net Income -$ -$ -$

Corporate income tax savings $155 $265 $462

Net cost of donation (income - tax savings) A 845$ 735$ 538$

Personal2013 Tax Credit Rate 46.41% 46.41% 46.41%Income $1,000 $1,000 $1,000Personal tax savings = donation tax credit* ($464) ($464) ($464)Net cost of donation (income - tax savings) B $536 $536 $536

Increased tax benefit of personal donation (A-B) 309$ 199$ 2$

*Assumes $200 of other donations


Facts:Taxable income 100,000$ Desired donation 10,000$ Securities FMV 10,000$ Securities ACB 6,000$

Cash Securities Cash Securities Cash SecuritiesTaxable income 100,000$ 100,000$ 100,000$ 100,000$ 100,000$ 100,000$ Taxable capital gain 2,000$ -$ 2,000$ -$ 2,000$ -$ Tax deduction -$ -$ (10,000)$ (10,000)$ (10,000)$ (10,000)$ Income tax payable 26,775$ 25,907$ 14,260$ 13,950$ 42,476$ 41,553$ Average tax rate 26.25% 25.91% 15.50% 15.50% 46.17% 46.17%Savings - Donation in kind -$ 868$ -$ 310$ -$ 923$ Capital Dividend Account -$ -$ -$ 2,000$ -$ 2,000$

Personal Corporate - SBD Corporate - Holdco


IN FINAL… THE POWER OF 5

Working with business owners and incorporated professionals, you should:1.Inquire, pique their interest and relate possible planning opportunities or touch on potential deficiencies you have encountered in similar situations. 2.Ask what their overall, average tax rate is for their corporation and personally over the last two years.3.Talk to strategies available to business owners and incorporated professionals in relation to investment capital, funding retirement and wealth transfer.4.Combine forces and promote collaborative approach amongst business owner, wealth advisor, tax advisor and legal advisor. 5. KNOW YOUR VALUE – DO NOT NECESSARILY HAVE TO BE AN EXPERT, OR HAVE THE SOLUTION, BUT CAN FACILITATE AND MOTIVATE ACTION

This information is provided solely for informational and educational purposes and is not intended to provide, and should not be construed as providing individual financial, investment, tax, legal or accounting advice. Professional advisors should be consulted prior to acting on the basis of the information contained in this publication.

®CI Investments and the CI Investments design are registered trademarks of CI Investments Inc.

Thank You

FOR ADVISOR USE ONLY

corporate clients – the power of 5 michelle connolly vice president, wealth planning, ci...

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