1. 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)
Web :
Christiana Kavadas
B. Comm.
Associate
Tel: (514)
Dario Falso Daniel Marro
Associate Marketing Assistant
Tel: (514)
November 8, 2017 

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

3. 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

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

5. 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

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

7. 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

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

9. 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%

10. 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

11. 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

12. 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”.

13. 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?

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

15. real
estate
Opco
Holdco
client and family
portfolio
investments
trust

16. 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?

17. 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?

18. 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

19. $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

20. 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

21. 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

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

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

24. 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

25. CALCULATIONS Sale of Assets Hybrid Goodwill Proceeds of disposition
Proceeds of disposition
$ ,000,000
Tax Cost $
Taxable Capital Gains
$ ,000,000
Addition to CDA
Inventory/Working Capital
$ ,000
Gain
Depreciable Capital Property
Proceeds of Disposition
$ ,000,000
Original Cost
UCC
$ ,000
Taxable Capital Gain
$ ,000
Recapture
$ ,000

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