D'Amico Family Wealth Management Group Of RBC Dominion Securities .   Presents Morris Jacobson  ​​ From Spiegel, Sohmer Lawyers “ 2017 - Was a tax tsunami avoided ” 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 December 6, 2017 

HAVE WE AVOIDED THE 2017 TAX TSUNAMI AND TIPS & TRAPS IN ESTATE PLANNING? Presented to D’Amico Family Wealth Management Group RBC Dominion Securities Inc. December 6, 2017 By Morris Jacobson mjacobson@spiegelsohmer.com 514-875-8683

Conversion of Income to Capital Gains no changes to S.84.1; no new S.246.1 (remove RDTOH/CDA) would otherwise have been a disaster; e.g. sale of business pipelines sale of assets can we dig out the old plans again?

No Tax Planning Means Double Tax (Post-Mortem Tax Plan) Mr. A 100 common shares worth $2,051,666 Holdco marketable securities worth $2,000,000 with accrued gain of $200,000 and RDTOH of $75,000 * Double tax 1- deemed disposition of Holdco Shares upon death 2- second round of taxation when Holdco is liquidated and the Estate has to pay tax on dividends it receives .

If Just Liquidate Gain on death = 26.65% x $2,051,666: $546,768.99 Dissolution of Holdco FMV of Marketable securities $2,000,000.00 (a) Tax on disposition of marketable securities = 26.65% x $200,000: =($53,300.00) (b) Addition to RDTOH of $29,966 & RDTOH of $75,000: = $104,966.00 $2,051,666.00 Dividend to Estate: $2,051,666.00 CDA: ($100,000.00) Net Taxable Dividend: $1,951,666.00 Tax at 44.23%: $863,221.87

Tax Disaster Total Tax = $1,409,990.86 Net = $641,675.14 Capital loss in the hands of the estate that does not offset the gain on death, as the redemption of shares was not done in the first year of the Estate

One Solution: 164(6) must elect in the first year following death file an amended return for the year of death January 1, 2016 Estate must be a GRE for 164(6) to qualify

Mixed Pipeline Strategy MacDonald Case CRA’s position Continuation of the business for at least one year; and Followed by a progressive distribution of the corporation’s assets over an additional period of time Redeem shares with a value of 3 x RDTOH $3 x $75,000 - $225,000 Tax = 44.23% x $225,000 - $99,517 of tax but Holdco receives a dividend refund of $75,000. Carry-back loss and under subsection 164(6) reduce tax payable on death by $59,962.50.

Plan Note $1,826,666 Estate Newco Note $225,000 100 A Holdco

88(1)(d) Bump Estate Newco Note $2,051,666 . Estate Newco Note $2,051,666 Marketable securities now have an ACB equal to $2,000,000. Tax liability is paid and RDTOH is refunded – Net assets = $2,051,666

Potential Saving Total Tax on Death: $546,768.99 Less Capital Loss (164(6)): $59,962.00 Tax on Capital Gain: $486,806.49 Tax due to Redemption: $99,517.00 $586,323.49 VS. No Planning: $1,409,999.00 Savings: ($823,675.51)

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 the proposed measures to limit access to the lifetime capital gains exemption”.

It is our understanding that we will be back to the pre-July 18 situation and will still be able to use the optimal structure

Opco Holdco client and family trust

The Bad News That Remains income splitting January 1, 2018: end of income splitting for family members context 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” (simplification to come) moral of the story: for 2017 – maximize dividends

The $50,000 Rule 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? Planning opportunites

BIAS capital Gains Over Dividends

Capital Gains - 2017 23.85% 24.00% 25.20% 26.76% 26.65% 29.38% 27.00% Province Capital Gains / 2017 British Columbia 23.85% Alberta 24.00% Saskatchewan Manitoba 25.20% Ontario 26.76% Quebec 26.65% New Brunswick 29.38% Nova Scotia 27.00% Prince Edward Island 25.69% Newfoundland 24.15%

Eligible Dividends - 2017 British Columbia 31.30% Alberta 31.71% Province Eligible Dividends / 2017 British Columbia 31.30% Alberta 31.71% Saskatchewan 30.33% Manitoba 37.78% Ontario 39.34% Quebec 39.83% New Brunswick 43.79% Nova Scotia 41.58% Prince Edward Island 34.22% Newfoundland 38.47%

Non-Eligible Dividends - 2017 Province Non-Eligible Dividends / 2017 British Columbia 40.61% Alberta 40.24% Saskatchewan 40.06% Manitoba 45.69% Ontario 45.30% Quebec 44.23% New Brunswick 51.75% Nova Scotia 46.97% Prince Edward Island 43.87% Newfoundland 39.40%

Capital Gains vs Dividends 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 $87,680

Other Developments Quebec small business deduction 5,500 hours a year if not, rate goes from 8% to 11.8% 5,000 hours will go from 8% to 9% FEDERAL BUDGET 2016 precludes the multiplication of the small business deduction in certain partnership and corporate structures

Voluntary Disclosure voluntary disclosures where we stand Bell vs Molson

Basic Rules when a person dies, terminal T1 / TP-1 personal income tax returns must be filed for the period January 1 to the date of death. These returns include: all income earned during that period the fair market value (FMV) of any RRSP or RRIF on the date of death any capital gains or losses resulting from the deemed disposition on death of the deceased’s assets at their FMV commencing from the date of death, all of the deceased’s assets and liabilities constitute an estate an estate is treated as a trust for tax purposes and thus files T3 / TP- 646 trust income tax returns every Will results in the creation of an estate, some Wills in addition create one or more testamentary trusts

Common Errors in Settling an Estate Following only the Will and not taking into consideration trusts created by the deceased while he was alive marriage contracts and martial regimes matrimonial regime Quebec - If there is no marriage contract, the regime is partnership of acquests (or community of property). even if there is a marriage contract, you must check if they opted out of the family patrimony check for changes in the matrimonial status, i.e. divorce, widow, etc.

Common Errors in Settling an Estate why is the issue of the matrimonial regime such a big one? your client can’t give what he doesn’t own you could double-up liabilities Article 423 of the Civil Code the surviving spouse has one year to renounce to the family patrimony registered by notarial act en minute family patrimony rules (homes, vehicles, RRSPs and pensions) joint survivor rights and other laws governing foreign assets

Common Errors in Settling an Estate Forgetting that US estate tax returns must be filed 9 months after death US real estate and US securities are two common types of assets that can be subject to US estate tax Canadian terminal returns are due either on April 30 of the year subsequent to death or 6 months after death for deaths that occur in November and December US estate tax returns are due 9 months after death and therefore returns for deaths that occur prior to August can be due before the Canadian terminal returns forgetting to transfer US marketable securities to a holding company. forgetting to properly structure an acquisition of US real estate

Common Errors in Settling an Estate Distributing assets in excess of $12,000 prior to issuance of Revenu Québec preliminary distribution certificate under both federal and Québec legislation, liquidators are responsible for the tax debts of the deceased and the estate up to the value of the assets they distribute without obtaining clearance certificates federal distribution certificates are generally obtained at the end of the administration of the estate under Québec legislation, a liquidator is only allowed to distribute assets of $12,000 prior to obtaining a preliminary distribution certificate. The preliminary certificate generally allows for 75% of assets to be distributed. The final certificate is issued automatically and allows for the remainder of assets to be distributed. The liquidator is personally responsible up to the amount of any distributions not covered by the certificates

Common Errors in Settling an Estate Distributing assets to non-residents without disposal certificates (Section 116 Certificate) or notification or proper withholding

Common Errors in Settling an Estate Not redeeming shares of a private corporation in the first year of the estate to benefit from section 164(6) loss carryback rules any capital gains in the year of death (from actual or deemed dispositions) can be offset by capital losses incurred in the first year of the estate. the redemption of shares in the estate will generally result in a deemed dividend and a capital loss (assuming a deemed disposition of the shares at their FMV on death). If incurred in the first year of the estate, this loss can be carried back to the terminal return to offset the capital gain on the shares (or other assets). this allows for the estate to pay tax on dividend income rather than having the deceased pay tax on capital gains. given the current tax preference for capital gains over dividend income, this is only a good strategy if the redemption of the shares is sheltered by capital dividends or allows the company to obtain a refund of its refundable dividend tax. from January 1, 2016, in order to benefit from 164(6) loss carry-back rules, the Estate must be a Graduated Rate Estate (“GRE”)

Common Errors in Settling an Estate Bad record-keeping and research estimates of V-day values undocumented cost of improvements to property forgotten principal residence elections lack of proper tax background information (capital losses, capital gains exemptions, allowable business investment losses, rollover forms)

US Estate Tax Issues US$5,490,000 Estate tax exemption for 2017 relevance to Canadian residents – “By Pass” Trust or QDOT use of US Inter-Vivos Trust for Wealthy US heirs

Other U.S. “Traps” purchase of condo – Canadian Trust mismatch with respect to the difference in treatment of assets (Principal residence exemption and capital gains exemption and CDA)

Irrevocable Life Insurance Trust trustees own the policy

Life Insurance Holdco Opco Premiums are paid with .82¢ dollars and insurance creates a capital dividend account that can be paid out tax-free

Holdco Assumptions: 3 children and no spouse holding company has marketable securities with accrued value. father has $3,000,000 in cash life insurance in Holdco Father $3,000,000 in cash Life insurance Holdco

Plan . Holdco Child 1 Canadian Child 2 Canadian Child 3 American CDA 15% tax no CDA but potential RDTOH refund Holdco If necessary, equalize American child with personal cash so they all receive the same amount on an after tax basis.