epca presentation april 18 2007 - trusts and budget

TAX SYSTEM OVERVIEWFAMILY TRUST

&

ESTATE PLANNING OPPORTUNITIES

Presented By:Rick Gendemann, CA

ofManning Elliott LLP

April 18, 2007

Agenda for Discussion

• Federal Budget 2007 Highlights

• Income Tax Integration Model

• Family Trusts as an Asset Holding and Estate Planning Tool

• Testamentary Trust and Estate Planning

• Alter Ego and Joint Partner Trust Planning

2007 Federal Budget

• No new changes in federal corporate tax rates

• Confirmation of previous tax rate reductions– 21% to 20.5% effective January 1, 2008– 20% effective January 1, 2009– 19% effective January 1, 2010– 18.5% effective January 1, 2011

2007 Federal Budget

• Significant changes to Capital Cost Allowance (Depreciation) Rates– New rates apply to acquisitions after March 19,

2007– Designed to be more in line with useful life of

the asset– Some rate changes are temporary measures

2007 Federal Budget

• Capital Cost Allowance Changes Current NewBuildings used for manufacturing 4% 10%

Other non-residential buildings 4% 6%

Computer equipment 45% 55%

Natural gas distribution lines 4% 6%

Liquefied natural gas facilities 4% 8%

Manufacturing equipment increased to 50% straight line for assets acquired on or after March 19, 2007 and before 2009

2007 Federal Budget

• Corporate tax instalment thresholds increased to $3,000 for years beginning in 2008

• Frequency for instalments extended to quarterly from monthly if taxable income does not exceed $400,000 in current or prior year

• Tax remittance thresholds also increased for payroll source deductions and GST

2007 Federal Budget

• Investment tax credits (ITC) available to businesses that create one or more new child care spaces in a new or existing licensed child-care facility

• ITC is 25% of eligible cost to maximum of $10,000 for each space created

2007 Federal Budget

• Key personal tax incentives– Increased lifetime capital gains exemption limit

to $750,000 from $500,000 for gains realized on sale of qualified farm/fishing property and qualified small business corporation shares

– Deferral of RRSP conversion to RRIF until age 71

2007 Federal Budget

• Key personal tax incentives– Scholarships and bursaries from elementary

and secondary schools exempt for 2007– Public transit tax credit introduced – Spousal credit increased to match basic credit– Increase in RESP contribution and matching

limits– New child tax credit claim that will provide tax

relief of up to $310 per child under 18

New Tax Regime for Dividends

• Two tiered tax system effective in 2006 for dividends received

• Eligible dividends now taxed at maximum rate of 18.47% in 2007 for a BC resident

• Eligible dividends effectively are from corporate retained earnings previously subject to high rate corporate tax on active business earnings

New Tax Regime for Dividends

• New dividend tax rates change planning for flow through of income through a private company

• Bonus down strategies need to be revisited

• Deferral of taxes may outweigh flow through tax cost until 2010 when there is no net flow through cost disadvantage

Tax Integration Revisited

• Refer to Handout schedule for 2007 tax flow through example

• If corporate active business income in excess of $400,000 there is a deferral benefit of 9.58% and future tax cost of 2.59%

• Consider opportunity to utilize funds from deferral in company to fund expansion, retire debt, etc.

FAMILY TRUST PLANNING

• Structuring of the trust arrangement

– Asset ownership and control– Role and responsibility of trustee– Beneficiary entitlements


• Tax effects on transfer of assets in and out of the family trust

– Minimize capital gains on transfer in– Advantage of tax deferred transfer of assets out

to beneficiaries– Timing of transfers out to beneficiaries


• Planning opportunities and uses of the family trust structure to hold assets

– Asset control versus beneficial interest in value of trust assets

– Protection of family assets – Tax minimization on future value growth– Tax minimization through income splitting


• Asset control versus beneficial interest in value of trust assets

– Trustee controls assets for benefit of beneficiaries

– Can separate control from beneficial ownership– Deferral available on giving up control


• Protection of family assets

– Restricted beneficiary entitlement to ownership through discretionary nature of trust

– Marital asset protection for parents and children of overall family assets

– Creditor protection for family members and family assets


• Tax minimization on future value growth

– Planning for estate freeze if desired– Future growth accrues to potential beneficiaries

on a tax deferred basis– Tax deferred roll out of assets to beneficiaries

in future


• Tax minimization through income splitting

– Flow through nature of trust income realized– Tax cost on income retained in an inter vivos

discretionary family trust– “Kiddie Tax” impact for income allocated to

beneficiaries under 18 years old– Capital gain accrual not caught by kiddie tax

regime


• Estate Planning for Your Family

– Structuring your financial affairs to:• Minimize taxes on death

• Maximize wealth preservation for your beneficiaries

• Planned asset/wealth transfer to beneficiaries


• Freezing the Value of Your Estate

- Locking in today’s value of investments

• Fix the capital gain to be realized on death

• Provide sufficient capital for retirement

• Allow for growth of investments to accrue to beneficiaries of your Estate


• Freezing the Value of Your Estate

• Transfer your investments to a family holding company or a family trust

• Allows for continued control over assets during your lifetime

• Ability to draw down capital in a structured manner- Can plan for tax effect each year of draw down

• Provides capital growth for beneficiaries


Children

Parents

FamilyHoldingCompany

Non voting shares(growth shares)

Voting shares(fixed preferred)

Freezing the Value of Your Estate(Example using a company)

FMV of assets - $1 millionCost of assets - $500,000Capital gain - $500,000

Receive preferred fixed valueshares from company to fund retirement


FMV of assets - $1 millionCost of assets - $1 millionCapital gain - $ NilReceive promissory note from trust to fund retirement

Freezing the Value of Your Estate(Example using a family trust)

FamilyTrust

Children(Beneficiaries)

Parents(Trustees)

- Parents as trustees control trust- Parents manage assets during lifetime- Parents determine distribution of assets to children in future (flexible)


• Freezing the Value of Your Estate– Summary of Advantages

• Freezes amount of taxes payable on death

• Provides for growth in asset value to accrue for the benefit of beneficiaries ( Wealth Preservation )

• Provides structured retirement income planning

• Can still control assets during lifetime

• Potential to defer taxes on asset growth to next generation

ESTATE & TRUST PLANNING

• Planning opportunity for Testamentary trusts created on death of individual– Effective planning with multiple testamentary trusts

created in a Will (separate trusts for each beneficiary)

– Ability to access multiple low marginal tax rates if income retained and taxed in the estate’s hands

– After tax funds can then be distributed as tax free capital to beneficiaries


• Probate Fee Minimization

• Structuring your financial affairs to:• Avoid payment of probate on death (1.4% of Estate)

• Avoid public disclosure of deceased’s assets

• Planned asset/wealth transfer to beneficiaries without potential for Will’s Variation challenges

• Substitute for power of attorney (representation agreement)


• Probate Fee Minimization

– Two new types of Inter vivos Trusts:

• Alter Ego Trust

• Joint Partner Trust


• Alter Ego and Joint Partner Trusts

– Conditions for use:• Taxpayer must be 65

• Taxpayer (and/or spouse) entitled to receive trust income during lifetime

• No other person entitled to income or capital until death of taxpayer (and spouse)


• Closing Thoughts and Comments• Family and estate planning is on ongoing process

for not only ourselves but also for our clients

• To achieve one’s family goals and objectives requires creation of a plan of attack

• Planning process needs to be monitored and evaluated to ensure overall goals and objectives continue to be met


Closing Thoughts and Comments

Leave you with this quote

“If you fail to plan you plan to fail”

epca presentation april 18 2007 - trusts and budget

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