STYLUS Retirement Planning: Tax Presentation

Presentation Overview Investment Income Splitting Private Business Ownership Tax Planning Considerations Cottage Succession

Investment Income Splitting Goal: shift income to family members at a lower tax rate Income Attribution Rules: Prevents the transfer of income to spouse or minor children Income earned on attributed funds are taxed in the hands of the person who transferred the funds Exception to Income Attribution Rules: Loan which pays interest at CRA’s prescribed rate or higher Current rate is 1% Current tax law allows for fixed rate at 1% fixed rate and no adjustment if prescribed rate increases

Investment Income Splitting Income Splitting Strategy Construct an investment portfolio to create a spread between the investment rate of return and the prescribed interest rate Allocate the income on the spread to spouse or minor children who are in a lower tax rate A child with no income can earn $11,000 to $40,000 tax free, depending on the type of investment income Set up a Family Trust for the benefit of a spouse and/or minor children to implement the strategy

Example: $250,000 Loan at 1% Funds invested in a portfolio generating a 5% rate of return $10,000 ($250,000 x 4%) net income of the Trust allocated to beneficiaries who have no other income Trust can be used to pay for Children’s Expenses $18,500 of pre-tax personal income is required to generate $10,000 of after tax income tax pay for Children’s Expenses

Family Trust Trustees Beneficiaries: Spouse and/or children Settler Income Splitting Family Trust Basic Approach Balance Sheet Investments $250,000 Loan Payable $250, 000 Income Statement Investment Income ($250, 000 x 5%) $12, 500 Interest Expense ($250,000 x 1%) ( 2, 500) Net Income—available to allocate to beneficiaries $10, 000

Private Business Ownership Structure Family Trust Trustees Mr. A Operating Company “OPCO” Growth Shares Holding Company “HOLDCO” Spouse and/or Children Beneficiaries

Private Business Ownership Ontario corporate tax rates: Active Business Income (up to $500,000 annually) 15.5% General tax rate (non-M&P)26.5% M&P tax rate25.0% Personal tax rates (ordinary income): $87,000 to $135, % $135,000 to $509, % Switch remuneration strategy from salary and dividends to accumulating funds within a corporation

Private Business Ownership Significant deferral of personal tax if funds are left in the corporation Difference between the low corporate tax rate vs. the high personal tax rates Excess cash and investments will be created Move excess cash in a tax efficient manner from the corporation to an Investment Holding Company Investment Holding Company becomes a part of the retirement income strategy

Private Business Ownership Income Splitting with Low Income Family Members Taxable DividendTaxes Payable $40,000$nil $50,000$1,400 $60,000$3,000 $70,000$4,800 Sale of the Business Vendors prefer to sell the company’s shares to claim the capital gains exemption Capital Gains Exemption increased to $800,000 in 2014 and then indexed going forward Valuable tax savings opportunity Tax savings $185,600 ($800,000 x 23.20%) per person is significant Incentive to take advantage of the capital gains exemption and to multiple it if possible

Tax Planning Considerations Principal Residence Exemption - For most, the biggest tax break in lifetime Property doesn’t have to be located in Canada. Property located in a foreign country and can qualify (e.g. Florida condo) Vacation property (e.g. Cottage, Ski Chalet) Pre-1982; each spouse could have a principal residence

Tax Planning Considerations Consider after tax rate of return in analyzing investment decisions Interest, real estate income, foreign income Top marginal tax rate 46.41% Regular dividends Top marginal tax rate 32.57% Eligible dividends Top marginal tax rate 29.54% Capital gains Top marginal tax rate 23.20%

Tax Planning Considerations Reinvestment of “Attributed” Income Income earned on funds transferred to spouse and/or minor child is generally subject to the income attribution rules and taxed in your hands However, if the investment income is reinvested by your spouse and/or minor child, the income earned on the reinvested income is not subject to the income attribution rules Capital Gains Splitting Capital gains are not subject to the income attribution rules Capital gains will be taxed to the children and not you

Tax Planning Considerations Spousal RRSP Contribution If you are over 71 years old, so that you’re RRSP has matured and has been converted into a RRIF/Annuity, but you have a spouse or common-law partner who is not over 71 You can still make spousal RRSP contributions Employment Income Earned by Children Consider filing tax returns for children, even if no taxes are payable to create RRSP contribution room for future years

Tax Planning Considerations Ceasing RRSP Contributions As you approach 71 and it appears that your annual retirement income for your RRSP savings will be taxed at top marginal rates, assess the merits of continuing to make RRSP contributions RRSP Funds vs. Corporate Funds RRSP balances on death could be subject to personal tax at 46.4%, whereas Corporate retained earnings could be subject to personal tax at 23.2% What do you draw down first, RRSP or funds held within a corporation?

Cottage Succession Emotional assets for many families Large appreciation on paper resulting in a large capital gain tax liability Transfer and/or sale to kids will trigger capital gain and the tax liability Death of surviving spouse will trigger capital gain and the tax liability for the Estate Calculate the estimated taxes payable Based on today’s values What’s the “upside” in future appreciation? Planning involves discussion Cottage succession is a multi-generational issue Collaborative family approach with two way conversation

Cottage Succession When is the right time to part with the cottage? Pass the cottage on through the Estate Gift it to the kids Sell it to the kids Sell it outright Co-ownership should involve a cost sharing agreement Cottage property can claimed as a Principal Residence