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GOLOMBEK – January 2016

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Tax & estate planning update

Jamie Golombek - Managing Director, Tax & Estate Planning

Ottawa Estate Planning CouncilJanuary 6, 2016

Agenda

1. Canadian tax update for individuals

2. Canadian tax update for business owners

3. On the horizon in 2016

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Canadian tax update for individuals

Changes to tax rates in 2016*

• Decrease income tax by 1.5% (22% to 20.5%) for taxable incomefrom $45,282 to $90,563

• Increase income tax by 4%(29% to 33%) for taxable income> $200,000

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* Bill C-2, An Act to amend the Income Tax Act, had first reading in House of Commons on December 9, 2015


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Comparison of 2015 and 2016 federal personal income tax rates

Taxable income* 2015 2016

≤ $45,282 15% 15%

> $45,282 and ≤ $90,563 22% 20.5%

> $90,563 and ≤ $140,388 26% 26%

> $140,388 and ≤ $200,000 29% 29%

> $200,000 29% 33%

Will result in more federal tax with taxable income > $217,000

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* 2016 federal tax brackets are shown

Who is in the “middle class”?

66%

33%

1%

0%

10%

20%

30%

40%

50%

60%

70%

≤ $45,282 >$45,282 and ≤ $217,000

> $217,000

Perc

enta

ge o

f Ta

x Filer

s *

Taxable income

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* Approximate percentages, determined using the Canada Revenue Agency’s most recent tax filing data and income statistics for the 2012 tax year

No tax savings

Up to $680tax savings

(17.6 million individuals)




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Targeting the wealthy

Raising Revenue

• Revenue maximizing top marginal rates

• ≤ 50% (2014 Milligan; 1966 Carter Commission)

• > 50% (2015 Osberg)

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Source: Targeting the Wealthy – Good Tax Policy or Good Politics? Sarah S. Chiu, 67th Annual Canadian Tax Foundation National Conference

Federal donation tax credits in 2016

***The First-time Donor’s Super Credit is available for total monetary donations up to $1,000.

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Total donations: ≤ $200 >$200

Taxable income: Any amount ≤ $200,000 >$200,000*

Federal donation tax credit 15% 29% 33%

First-time Donor’s Super Credit (2017 is the last year to claim)**

25% 25% 25%

Total for first-time donorcash donations

45% 54% 58%

* Under Bill C-2, which had its first reading the House of Commons on December 9, 2015, a federal tax credit of 33% would be available for donations that do not exceed the amount of taxable income > $200,000.


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3. Assumes at least $200 of other donations have been made in the year.

Mismatch of donations creditwith income > $220,000 in Ontario in 2016

Top Marginal Tax Rate

Federal donations credit 1 33.00%

Ontario donations credit 13.16%

Ontario surtaxes 2 7.37%

Total 53.53%

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1. Under Bill C-2, which had its first reading the House of Commons on December 9, 2015, a federal tax credit of 33% would be available for donations that do not exceed the amount of taxable income > $200,000.

2. Ontario surtaxes are equal to 56% of basic Ontario tax.

Tax cost of donations: 3.12%

DonationTax Credit Rate3

33.00%

11.16%

6.25%

50.41%

RRSP planning for tax rate changes

RRSP contributions made between January 1 and February 29, 2016

• For taxpayers with taxable income from $44,701 and $89,401*

− Claim RRSP deduction in 2015, if possible, for 1.5% tax savings

• For taxpayers with taxable income > $217,000

− Claim RRSP deduction in 2016, if possible, for 4% tax savings

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* 2015 tax brackets


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TFSA Contribution Limit10

• 18 years of age

• Resident of Canada

Year Limit

2009 $ 5,000

2010 5,000

2011 5,000

2012 5,000

2013 5,500

2014 5,500

2015 10,000

2016 5,500*

Cumulative $46,500

* Bill C-2, An Act to amend the Income Tax Act, had first reading in House of Commons on December 9, 2015

Home Accessibility Tax Credit (“HATC”)

• 15% tax credit to assist seniors / persons with disabilities with home renovations

− Up to $10,000 of expenses / year

− Starts 2016

• Eligible expenses assist with mobility / reduce harm

− Grab bars

− Ramps

− Walk-in bathtubs & showers

• Can claim both HATC and medical expense tax credit

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2016 Lifetime Capital Gains Exemption (LCGE) Additional amount for farmers & fishers

• LCGE for qualified small business corporation shares is $824,176

• LCGE for qualified farm and fishing property is $1 million

− Applies to sales of property after April 20, 2015

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Donation of Proceeds From Sale of Private Company Shares & Real Estate

• Charitable donation tax credit (individuals)

• Tax deduction (corporations)

• Additional tax benefit where public securities donated “in-kind”− Zero tax on capital gain realized on donation

• Tax benefit would be extended to situations where private corporation shares or real estate sold & proceeds donated*− Donation made within 30 days− Made to arm’s length party− After 2016

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* Included with Legislative Proposals Relating to the Income Tax Act and Regulations released by the Department of Finance on July 31, 2015.


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Example – Donate Real Estate Proceeds

Real estate available for a donation:

• Market value of real estate $1,000,000

• Adjusted cost base 600,000

• Capital gain $ 400,000

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ON - Cost of $1,000,000 donation from proceeds of sale of real estate

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2016

Proceeds $1,000,000

Adjusted cost base ( 600,000)

Capital gain $ 400,000

Tax on capital gain † $ 107,000

COST OF DONATION:

Donation $1,000,000

Tax on capital gain 107,000

Tax savings from donation ‡ ( 504,000)

TOTAL COST $ 603,000

2017+

$1,000,000

( 600,000)

$ 400,000

$ 0

$1,000,000

0

( 504,000)

$ 496,000

$ 107,000Assumptions:• Bill C-2 will be enacted, increasing the maximum federal personal marginal tax rate and federal

donation credit rate to 33%.• The donor is not eligible for the First-time Donor’s Super Credit.• The donor’s combined federal/provincial marginal tax rate is 53.5% .• The combined federal/provincial donation tax credit rate is 50.4%.

TAX SAVINGS


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Form T1135 – Foreign reporting

• Foreign income verification statement

• More than $100,000 (CDN) of COST

− Funds in foreign bank accounts

− Shares of non-resident corporations

− Some foreign real estate

• EXEMPT

− Canadian mutual funds (even if the fund owns foreign shares)

− Foreign real estate primarily for personal use

• Penalty – $25 / day (Max $2,500)

• E-file started for individuals in 2014

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T1135 reporting is very complex

• Very detailed reporting

• For 2014, simplified reporting for individuals who had accounts with Canadian registered securities dealers or Canadian trust companies

− Aggregate reporting by country permitted / FMV rather than cost

• Concern that form still too complex

− Submissions made on behalf of taxpayers by IIAC and CPAs

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Form T1135 – Revised for 2015 tax year

• Revised T1135 was released in December 2015

− Must be used for 2015 tax year

− Optional if filing or amending a T1135 for a prior year

• Aggregate reporting by country / FMV is still available in section 7

• New, simplified reporting method when foreign property < $250,000

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T1135, Part A: Simplified reporting method

• If total cost of all specified foreign property held at any time during the year was < $250,000, may opt for simplified reporting:

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Testamentary trust rules changing in 2016

• Testamentary trusts

− Historical tax benefit – income taxed at graduated rates

▪ No longer applies as of 2016, other than for:

◦ Graduated Rate Estates

◦ Qualified Disability Trusts

▪ Encourage review of existing wills & estate plans

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Graduated Rate Estate

• Must be an estate

− Trust created under a will does not qualify

• Applies to first 36 months

− No grandfathering

• Only one GRE per deceased

• Income in GRE taxed at graduated tax rates

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Qualified Disability Trust

• At least one beneficiary qualifies for disability tax credit

• One QDT per beneficiary

− But, QDT can include other beneficiaries

• Income in QDT taxed at graduated rates…

− But, loss of graduated rates if income paid to non-disabled beneficiary

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Trust

Testamentary Trusts – Bottom Line…

The “New Regime”

Extending the time for an estate to settle no longer worthwhile after 36 months

Cannot use multiple testamentary trusts to obtain graduated tax rates

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Life interest trusts

• Life interest beneficiaries entitled to all trust’s income & capital during their lifetime

• Property remaining at death is left to other beneficiaries

• Examples:

− Alter-Ego Trust

− Joint Spousal/Common-Law Partner Trust

− Spousal/Common Law-Partner Trust

• Starting 2016, tax rules are changing for life interest trusts

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Spousal Trust: Inheritance Protection25

Spouse A

Spouse A’s Kids

Spouse B

Spouse B’sKids

During life ofSpouse B

After death ofSpouse B

Testamentary Trust


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Spousal Trust: Old tax rules (2015)26

Spouse A’s Kids

Spouse B

Spouse B’sKids

$1,000,000($ 250,000)

$750,000

$1,000,000($ 250,000)

$750,000

Spousal Trust

Spousal Trust: New tax rules (2016)

Spouse A’s Kids

Spouse B

Spouse B’sKids

Spousal Trust

$1,000,000

($ 250,000)

$500,000

$1,000,000

($ 250,000)

$1,000,000

($ 250,000)

CRA is supposed to collect $250K payment from

the trust. But will they?

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Life interest trusts – taxation on death oflife interest beneficiary

• Upon death of life interest beneficiary, deemed disposition of trust assets triggers tax on accrued capital gain

• Before 2016: Tax was payable by trust

• After 2015: Tax is payable by estate of life interest beneficiary* (which does not own the trust assets)− but this could still change…

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* The trust is also liable for the tax but CRA has no obligation to collect from the trust

Exempt test for life insurance

• Exempt Policies

− Savings component accumulates without annual tax

− Payment of death benefit received tax-free

• Effective 2017, to reflect new life expectancies, exempt policy test will change

− Reduced maximum premiums/deposits

− Lower cash value accumulations

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More 2017 Insurance Changes

• Prescribed Annuity Contracts

− Taxable portion will increase

• Corporate-owned life insurance

− Death benefit – ACB = Tax Free Capital Dividend

− ACB = Premiums paid – NCPI

− Under new rules, it will take longer for ACB to decline to zero

• Grandfathering applies

− Consider purchasing prior to 2017

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2016 tax update for business owners


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Small Business Tax Rate & Non-eligible Dividends

• Small business tax rate

− Tax rate on first $500,000 of active business income

− 10.5% in 2016

• 2015 budget introduced rate reductions

− Rate drops to 9% by 2019

• Non-eligible Dividend Tax Rate

− Will increase steadily as small business tax rate decreases

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Small Business Tax Rate Reduction and DTC Adjustment for Non-Eligible Dividends

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2015 2016 2017 2018 2019+

Small business tax rate (%)

11 10.5 10 9.5 9

Gross-up (%) 18 17 17 16 15

DTC (%) 11 10.5 10 9.5 9

Top federal rate on N/E dividends

21.22% 21.62% 22.21% 22.61% 22.97%


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Why small (and even large) business owners may have funds to invest in a corporation

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Distributing corporate income to shareholders

• Corporate income can be distributed either as:

• Salary/bonus

− To individuals who work in the business

− In the year work is performed or up to 180 days afterwards

− Make RRSP contribution

• Dividends

− To shareholders

− Can’t make RRSP contribution

− In the year income is earned OR a later year

− Opportunity to defer tax, invest additional funds

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Corporate tax$15,000

ON 2016 - $100,000 small business income earned in a Canadian private corporation

$100,000

$75,000

$50,000

$25,000

$0

>Shareholder

$46,500Dividends

$85,000Corporation

After-taxdividend$46,500

Personal taxon dividend

$38,500Corporate after-tax businessincome$85,000

Personal taxon salary$53,500

After-taxsalary

$46,500

Employee$46,500

Tax deferral advantage: 38.5%

Tax rate advantage: 0%

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* Active business income < $500,000, eligible for the small business deduction

On the horizon in 2016


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Perceived abuse in using corporations to reduce family taxes

2015 Liberal election platform:

• “will ensure that … CCPC status is not used to reduce personal income tax obligations for high-income earners rather than supporting small businesses.”

“Private Companies, Professionalsand Income Splitting”- Scott Legree & Michael Wolfson

• “approximately $500 million per year is lost, particularly as high-income individuals use CCPC status as an income splitting tool.”

What the Liberals may have in store for the small business tax rate

Some measures that may be introduced:

• Limit access to the small business tax rate to private corporations that employ a minimum number of employees*

• Extend “kiddie tax” beyond minors, so dividends paid to spouse/partner or adult children would also be taxed at top personal tax rate

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* In Quebec, beginning Jan. 1, 2017, businesses in the service and construction sectors will no longer be eligible for the Quebec small business deduction unless they have more than three full-time employees.


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Lobbying against changes for small business

• Canadian Medical Association wrote to senior federal government officials:

− “unique nature of medical practice as a business”

− “physicians are highly skilled professionals who provide an important public service and are significant contributors to the knowledge economy”

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Stock options – Current Rules

• FMV price – Exercise price = Employment income

• 50% deduction generally available if:

− Exercise price ≥ FMV on date of issue

• For CCPC, if shares held for ≥ 2 years after exercise

− Benefit/deduction deferred until share disposal

• Tax treatment is equivalent to capital gains

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Other conditions apply


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Changes to stock option taxation

• Proposal: Cap the stock option deduction

• Employees with up to $100,000 in annual stock option gains will be unaffected

• Grandfathering:

− “Any decision we take on stock options will affect stock options issued from that date forward"

Finance Minister Bill MorneauNovember 21, 2015 in Ottawa

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Assumes a marginal tax rate of 50% on stock option benefits

Total tax = $37,500[$150K – ($150K x 50%)] x 50%

Stock options – Current treatment

Grant: 5,000 shares @ $10; FMV at exercise = $40

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Exercise price5,000 shares @ $10

= $50,000

Income

5,000 shares x ($40 - $10)= $150,000

50% stock optiondeduction

(Equivalent treatmentto capital gains)

$0

$40

$30

$20

$10

Shar

e Pr

ice


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Stock options – Proposed treatment44

Up to$100,000of income

$0

$150,000

$110,000

$50,000

50% stock optiondeduction

Equivalent treatmentto capital gains)

Income >$100,000$50,000

No stock option deduction

Fully taxable

Total tax = $50,000[$150K – ($100K x 50%)] x 50%

Assumes a marginal tax rate of 50% on stock option benefits

Grant: 5,000 shares @ $10; FMV at exercise = $40

Tech firms oppose stock option changes

• Canadian Council of Innovators (CCI)

− Formed in November 2015

− Includes leaders from 20 elite technology firms, including:

▪ Shopify, Hootsuite Media, Wattpad, Hatch, D2L, & the venture capital arm of OMERS

▪ Chaired by Jim Balsillie (former CEO of BlackBerry)

• On December 21, 2015:

− CCI met with 3 cabinet ministers and top federal government officials

− CCI urged the government to drop the proposed stock option changes

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Ontario Retirement Pension Plan (ORPP)

• Government-administered, defined benefit plan

• Contributions start in 2017 (phased-in for large employers first)

• Exemptions include employers offering a “comparable pension plan”

• Mandatory contributions:

− 3.8% of earnings $3,500 to $90,000 (1.9% employer +1.9% employee)

• Retirement benefits:

− “15% of earnings”, so annual max. = $12,815 (2014 dollars, indexed)

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Goodbye to the ORPP?47

“If we have a partner in Justin Trudeau to sit down and work out what they’re looking at as an enhancement to CPP, that was always my starting point, that was the solution”- Kathleen Wynne, Oct. 13, 2015


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CPP enhancement?

• December 21, 2015: Finance Ministers discussed CPP options

• “We’ve agreed on a path forward with respect to coming back a year from now to talk about potential options, including not doing anything”

- Saskatchewan Finance Minister Kevin Doherty

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Questions?

www.jamiegolombek.com

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