D'Amico Family Wealth Management Group Of RBC Dominion Securities .   Presents  ​​ Frank Zylberberg from Spiegel Sohmer, Lawyers   “The July 18 Proposed Amendments- Action Plan for 2017” Angelo D’Amico FCSI, CIM, CPA, CMA, CGA, CSWP Vice President - Portfolio Manager Tel: (514) 878-5196 Email: angelo.damico@rbc.com Web : http://www.damicofamilywealthmanagementgroup.ca Christiana Kavadas B. Comm. Associate Tel: (514) 878-5056 Email: Christiana.kavadas@rbc.com Dario Falso Daniel Marro Associate Marketing Assistant Tel: (514) 878-5049 daniel.marro@rbc.com Email: dario.falso@rbc.com November 8, 2017 

THE JULY 18 PROPOSED AMENDMENTS – ACTION PLAN FOR 2017 Presented to D’Amico Wealth Management Group RBC Dominon Securities Inc. November 8, 2017 by Frank Zylberberg T: 514 875-2100

INCOME SPLITTING summary of July 18, 2017 proposed changes extremely complicated on October 16, 2017 the Minister of Finance announced the government’s intention to simplify the rules. “Corporations with family members who meaningfully contribute to the business will not be impacted by the proposed measures on income sprinkling” 2017 – maximize dividends

EXAMPLE 1 EXAMPLE 2 Children Client Spouse Client & Family Client Trust Children Client Spouse Preferred & Voting Shares Common Shares Opco Opco

INCOME SPLITTING Planning not affected by the July 18, 2017 proposed amendments company which has always held passive assets (no connection to an active business) trust with passive assets

INCOME SPLITTING Loan Client’s children Client Trust at prescribed rate Real Estate

CURRENT FILE client owns several properties purchased for investment. Positive income. Cost $750,000 and value of at least $3 million. Mortgage of $250,000 client owns all the shares of a successful Opco. She draws a salary of $100,000 and has $300,000 of real estate income. Her son draws a salary of $100,000 from the business husband (no income) and 2 other university age children following plan is implemented

Holdco Opco condos client client & family preferred shares $500,000 Trust $2 million preferred shares Holdco debt $500,000 Opco condos

client can withdraw $500,000 tax free client keeps $100,000 of salary if so desired; not necessary each of husband and 2 university children receives $40,000 to $50,000 of dividends; instead of $100,000 salary, the son receives a dividend of $82,000 from Holdco client redeems frozen pref’s every year optimal flow of dividends from Opco to Holdco to family rate of tax on real estate income has been effectively reduced to almost 20%

aside from the benefit of freezing the client’s interest in the real estate, there are other tax advantages In a similar file, accountant had suggested taxing real estate income as active: risky no income splitting because of new rules passive investment income rules would apply cancel son’s salary and replace with dividend of $82,000 from holdco

instead of salary to son, active company now pays tax on $100,000 of income at 18% however the $82,000 is now used to pay a dividend to the son and generates a tax saving on the real estate income of approximately $31,418

CAPITAL GAINS EXEMPTION what was originally proposed on October 16, 2017, in the context of the above statement regarding income sprinkling, the Minister also stated the following: “In addition, the government today announced it will not be moving forward with proposed measures to limit access to the lifetime capital gains exemption”.

is this clear enough? Can we be sure that TOSI rules will not apply? when will we know? Will we still have time to crystallize? Will there still be an election?

hopefully we will be back to the pre-July 18 situation and will still be able to use the optimal structure:

real estate Opco Holdco client and family portfolio investments trust

PASSIVE INCOME RULES what is the concept? what is grandfathered? complexity; will you need a second holding company to keep your accountant sane? if there is enough grandfathered value, can we defer the effect of the new rules forever? current file – will a creditor proofing dividend create more grandfathered assets?

CONVERSION OF INCOME TO CAPITAL GAINS no changes to s.84.1; no new s.246.1 would otherwise have been a disaster; e.g. family business transfers pipelines hybrid plans can we dig out the old plans again?

bias for capital gains over dividends e.g. – parent owns all the shares of OPCO having a value of $2 million parent intends to freeze into preferred shares; active child will subscribe for common shares parent will redeem $200,000 of shares per year

$2 million preferred shares Child Parent 100% common shares $2 million preferred shares Opco redemption of shares yields a deemed dividend of $200,000 per year, all ineligible tax is $87,680

instead have parent sell the shares for $2 million to child, payable over 10 years 10 year reserve for an intergenerational sale of SBC shares no capital gains exemption will be claimed by parent child will transfer shares to a holding company $200,000 per year capital gain to parent. Taxes are $53,300 as opposed to $79,600

Holdco Opco s.55(2) example Client Key employee $2 million preferred shares 90% common shares Key employee 10% common shares s.55(2) example

home purchase example flipping portfolio unexpected tax bill overdo an asset protection dividend

HYBRID PLANS combine sale of assets and sale of shares benefits for vendor and buyer example

FACTS Assume the following:   Assume the following: an operating corporation (referred to in this section as “Opco”) has the following assets: Goodwill with a nominal tax cost and a fair market value of $4,000,000; Depreciable capital property having an original cost of $500,000, a fair market value of $1,000,000 and an undepreciated capital cost of $100,000; $500,000 of net working capital; an individual is the sole shareholder of Opco the shareholder had not used any portion of his capital gains deduction ($835,000) the shares of Opco qualifies for the capital gains deduction Opco has agreed to sell its assets to an arm's length purchaser

CALCULATIONS Sale of Assets Hybrid Goodwill Proceeds of disposition   Proceeds of disposition $ 4,000,000 Tax Cost $ -- Taxable Capital Gains $ 2,000,000 Addition to CDA Inventory/Working Capital $ 500,000 Gain Depreciable Capital Property Proceeds of Disposition $ 1,000,000 Original Cost UCC $ 100,000 Taxable Capital Gain $ 250,000 Recapture $ 400,000

Personal Tax-Dividends CALCULATIONS Sale of Assets Hybrid Corporate Income Tax   Tax on Capital Gain $ 1,137,825 Less: Refundable Tax (RDTOH) $ (690,075) $ (690 075) Net Corporate Tax (capital gain) $ 447,750 Tax on Recapture $ 107,600 Net Corporate Cash $ 4,944,650 Less: RDTOH Recovery Dividends $ (1,800,195) Less: CDA $ (2,250,000) Available for Distribution $ 894,455 Less: Hybrid Amount $ - $ (835,000) Total Available for Distribution $ 59,455 Personal Tax-Dividends $ (1,181,335) $ (815,217) Total Personal After-Tax Cash $ 3,763,315 $ 4,129,379 Tax Benefit of Hybrid $ 366,064