1. Professional Wealth Management TRIMMING TAXES DOUGLAS KERR FMA RBC DOMINION SECURITIES WWW.DOUGLASKERR.COM

2. 2 The Basics – Personal Investments– A quick review The Basics – It starts at home or or “There are dollars in the details”  RRSP’S – T4 Income  Current contribution limit for 2008 is $20,000 plus any past unused contribution room, $21,000 in 2009  Interest vs. dividends vs. capital gains  Always keep your highly taxed investments in a registered account whenever/wherever possible  Watch for “free money/tax credits” - IE: RESP’S, Flow Through Shares  Philanthropy – If you got it give it away!  New Tax Free Savings Account - $5000.00/ Year starting in 2009

3. Professional Wealth Management Individual Pension Plans (IPPs)

4. 4 Individual Pension Plans: Enhancing retirement benefits  An Individual Pension Plan (IPP) is an employer-sponsored pension plan designed typically for one or two members  Designed to maximize contributions permitted by the Income Tax Act  An IPP results in enhanced retirement benefits through higher tax-deductible contribution limits when compared to a traditional registered Retirement Savings Plan (RSP).  “RRSP on Steroids”

5. 5 Suitable Candidates Incorporated business owners and Incorporated Farmers Incorporated professionals Works best for: Individuals between the ages of 40 and 71 Individuals earning T4 income of $116,667 or more Individuals with past service dating back to 1991

6. 6 Key Advantages of an IPP  Contributions are generally higher than an RSP (“RSP upgrade”).  Employer tax deductions for: Current service contributions Past service contributions Top-up contributions to make up for low investment returns Terminal funding contributions  Related expenses are tax deductible to the corporation (actuarial fees, investment management fees).  IPP assets are protected from creditors under provincial pension legislation.

7. 7 IPP Considerations  IPPs are subject to pension legislation at both the federal and provincial levels, requiring that their funds be “locked-in”.  Certain provinces mandate minimum annual contributions to the plan.  Administration costs, including set-up fees, annual reports and actuarial valuations that need to be filed every three or four years.

8. 8 Investment Strategy: Prescribed 7.5% rate of return assumption Return Objective 7 1/2% Valuation Year Start Date De ficit Surplus 9% 5%  Additional contributions can be made to shore up any deficit  Some measure of surplus can be retained without limiting contributions (generally 2 times annual contribution)

9. 9 IPPs and RSPs – A comparison * Assumes past service to 1991 and $116,667 annual income. RSP transfer of $305,400 not included. Age in 2008 Maximum 2008 RSP Contribution Maximum 2008 Current Service IPP Contribution Maximum Past Service Employer Contribution (*) Maximum First Year Tax-deductible IPP Contribution 40$20,000$21,828$52,960 $74,788 45$20,000$23,980$88,565 $112,545 50$20,000$26,340$127,595 $153,935 55$20,000$28,932$170,464 $199,396 60$20,000$31,778$217,552 $249,330 65$20,000$48,138$488,164 $536,302 70$20,000$52,875$566,512 $619,387

10. 10 IPPs and RSPs: Case study #1  Incorporated in 1988  Earning T4 income of $117,000  Contributed maximum amount to RSP each year; RSP balance is $600,000 Case study #1: James, age 50 RSP contribution RSP total $20,000$349,041 $25,833$640,395 $33,763$1,101,164 $44,127$1,818,462 $57,672$2,921,169 YearAge RSP transfer Past service cost employer IPP current cost employer IPP total 200850$305,400$127,595$26,340$491,579 201355$37,820$901,777 201860$54,293$1,576,072 202365$1,051,831$3,676,468 202870$154,277$6,077,880

11. 11 IPPs and RSPs: Case study #2  Incorporated in 2008 – no past service  Earning T4 income of $117,000 Case study #2: Wendy, age 40 YearAge IPP current cost employer IPP total RSP contribution RSP total 200840$21,828$22,632$20,000$20,736 201345$31,342$194,959$25,833$169,071 201850$44,993$513,131$33,763$424,517 202355$64,589$1,071,511$44,127$847,048 202860$92,722$2,019,002$57,672$1,526,578 203365$1,442,904$4,946,676$75,375$2,597,452 203870$263,526$8,467,719$98,512$4,259,411

12. 12 Payment Options at Retirement  Transfer IPP funds to a locked-in RSP, (except in Quebec & PEI)  Pay pension from IPP at retirement  Purchase a life annuity

13. 13 IPP – Annual Administration  Calculation of Pension Adjustment (PA)  Annual Information Return (to Canada Revenue Agency and provincial regulators)  Pre-completion of T3P (Trustees’ Tax Declaration)  Annual member statement  Investment Information Summary (in Ontario)  Quarterly Contribution Summary reports and monitoring

14. 14 Special Manitoba Rules  Annual payment not required – great option for business owners with highly variable income  MB legislation states that the holder of a locked in account (LIRA or LIF) with Manitoba legislation can do a one time split of his or her LIRA or LIF of up to 50% of the value into a non-locked in Protected Retirement Income Fund (PRIF).

15. Professional Wealth Management RBC Dominion Securities Retirement Compensation Arrangement (RCA)

16. 16 What is a Retirement Compensation Arrangement (RCA)? A type of “Supplemental Executive Retirement Plan” (SERP) that provides high income earners ($300,000 and up) the flexibility to overcome the “income gap” they face at retirement. Allows for payment of benefits in excess of those payable in registered pension plans. Must be sponsored by a company.

17. 17 RCA – Taxation  Contributions to an RCA are 100% deductible to the Company acting as the plan sponsor Not subject to payroll taxes Not taxable to the Participant while in the RCA 50% must be deposited in the Refundable Tax Account (RTA)  50%of all realized investment income in the RCA Investment Account must be deposited in the RTA  Benefits are taxable to the Participant only upon receipt  RTA refunds the RCA Investment Account $1 for every $2 of benefits paid

18. 18 RCA – Flow of money Company Splits tax deductible contributions equally between RCA Investment Account 50% of realized income to RTA Refundable Tax Account (RTA) Refunds 50% of benefits paid to RCA Investment Account Participant Receives taxable RCA benefits Pays benefits to Participant

19. 19 Suitable RCA Candidates Senior executives Incorporated professionals Incorporated Business owners

20. 20 Key Benefits for Employees Employee benefits: Retirement benefit is commensurate with earnings (no limit) No prescribed withdrawal dates (flexibility) No restrictions on maximum or minimum payouts at retirement Not taxable until receipt of benefits (income recognition deferral) Generally creditor protected No effect on RSP or RPP limits Non-locked in funds Not subject to probate fees at death

21. 21 Key Benefits for Employers Employer benefits: Significant & immediate tax deduction Can be tailored to retain key employees Longer vesting period than RPP Exempt from payroll taxes No investment restrictions

22. 22 Where to draw from an RCA? Taxation depends on place of residency In jurisdiction where income tax rate is less than tax rate of jurisdiction where plan was established Some provinces have more favorable tax rates over others Non-residents of Canada subject to withholding tax (25%) Non-residents of Canada can lower tax if countries have tax treaty

23. Professional Wealth Management Buy Sell Agreements – the Basics

24. 24 Buy Sell Agreements – the Basics  Allows for the smooth transfer of shares or other business assets.  Primary purpose is to facilitate the transition without jeopardizing the financial health of the departing or disabled shareholder and/or his/her family OR the corporation.  Creates liquidity in a typically Illiquid situation.

25. 25 Buy Sell Agreements – the Basics Common Triggering events  Death of a partner  Disability of a partner  Retirement

26. 26 Buy Sell Agreements – the Basics  Funding a Buy-Sell Agreement  Establishing A Sinking Fund – Few businesses have the resources.  Obtain a loan from a financial institution – Hard to convince a bank to lend you funds when a key partner is leaving.  Buy out via installments – Lengthy and costly and creates no value in growing the company  Life Insurance – Most popular – Usually cheapest, provides immediate influx of cash. Tax benefits.

27. 27 Buy Sell Agreements – the Basics  Further too: Life Insurance as a tool – pros and cons  Multiple shareholders can become complicated. Corporate owned insurance requires only one policy as opposed to many.  Creditor protection – Corporate owned insurance policies are NOT protected. Individually owned policies payable to the other shareholders usually are.  Trimming taxes – Life policy premiums are generally not deductible but the proceeds are.  Cost sharing with corporate owned policies – Like a group plan, the larger the pool the less the risk for the insurance firm. Eg: If one shareholder is in poor health or significantly older than the others, the cost to insure individually could be insurmountable. Shared cost could be much cheaper.

28. Professional Wealth Management Corporate Estate Freeze

29. 29 Corporate Estate Freeze  An estate freeze is a tax reduction and/or deferral strategy in which their client locks in or “freezes” the value of appreciating assets (company shares) by transferring the future growth of assets into the hands of other taxpayers.  If the sale is not imminent and you expect the value of the business to increase, then consider reorganizing the company (e.g. estate freeze) such that some or all of the future capital gain can accrue to other family member shareholders. This can have the effect of multiplying the use of the capital gain exemption among family members if the shares qualify. However, keep in mind that the future capital gain allocated to the family members would now not belong to you. A typical simple estate freeze usually involves a parent who wishes to transition their business to their children without triggering a large tax bill. The general steps to perform an estate freeze are: 1) Parents trigger their common shares to their company. 2) The parent receives back preferred shares of equivalent value. The preferred shares would likely: i) Be voting if the parent wishes to retain control over the corporation. ii) Pay a dividend to ensure a regular income flow.  3) The children receive new common shares from the corporation. Any future growth of the corporation would be reflected in the value of these shares

30. 30 Corporate Estate Freeze  Three Important Items to consider: The company is growing and is expected to continue to do so The company or the shares are not expected to be sold after the death of the parent The parent/owner has sufficient assets to enjoy a comfortable retirement

31. Professional Wealth Management Corporate Investment Shelter

32. 32 Corporate Investment Shelters This strategy is ideal for individuals who own a holding company and:  Don’t require the income from the holding company  Have excess income distributed from their operating company to their holding company  Wish to pass proceeds to any remaining shareholders or to the estate

33. 33 Corporate Investment Shelters  The corporation can use excess earnings, which would otherwise be invested in taxable vehicles, to fund a tax exempt life insurance policy. The corporation must be the owner and beneficiary of the policy, and the shareholder must be the insured.  Upon death of the shareholder, the proceeds are payable to the corporation, tax-free.  The insurance proceeds create a credit in the corporation’s Capital Dividend Account (CDA), which can then be used to pay a tax-free, capital dividend to the shareholder’s estate. The amount of the credit in the CDA is equal to the entire death benefit proceeds minus the Adjusted Cost Basis of the policy. Any proceeds in excess of the CDA credit can be paid to the estate as a taxable dividend.

34. 34 Questions? Thank You Questions?

35. 35 Thank you This presentation has been prepared for use by RBC Dominion Securities Inc.*, Royal Mutual Funds Inc., RBC Private Counsel Inc. and RBC DS Financial Services Inc., Member Companies under RBC Investments. The Member Companies, Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities which are affiliated. In Quebec, financial planning services are provided by Royal Mutual Funds Inc. or RBC DS Financial Services Inc. and each is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc., Royal Mutual Funds Inc. or RBC Private Counsel Inc. Insurance products are only offered through RBC DS Financial Services Inc., RBC DS Financial Services Inc., RBC DS Financial Services Inc., subsidiaries of RBC Dominion Securities. *Member CIPF. The strategies, advice and technical content in this presentation are provided for the general guidance and benefit of our clients, based on information that we believe to be accurate, but we cannot guarantee its accuracy or completeness.This presentation is not intended as nor does it constitute legal or tax advice. Clients should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This will ensure that their own circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change. ™Trademark of Royal Bank of Canada, used under licence. RBC Investments is a registered trademark of Royal Bank of Canada, used under licence. ©Royal Bank of Canada 2007.