ADVANCED TAX PLANNING STRATEGIES
TRUSTS AND CORPORATE STRUCTURE
CORPORATE SITUATIONS
STRUCTURE
1% 99%
100%
OPCO
HOLDCO
FAMILY TRUST WITH ALL FAMILY MEMBERS
AS BENEFICIARIES
ADVANTAGES*INCOME SPLITTING
- SPOUSE/CHILDREN OVER 18/PARENTS/CHILDREN UNDER 18?
*MULTIPLICATION OF CGE- SALE OR DEATH
*ASSET PROTECTION- HARD/OP ASSETS- CASH: IMMEDIATE AND ONGOING- LIFE INSURANCE PROCEEDS
- REDUCTION IN PROBATE AND PROFESSIONAL FEES WITHOUT LOSS OF CONTROL
*BUSINESS OWNERS RETIREMENT PLAN- UL OVERFUNDED/LEVERAGE
*CONTROL OF DISPOSITION OF SHARES FOR TAX PURPOSES ON DEATH*SUCCESSION PLANNING
- TAX/CONTROL/PROTECTION
-
OPCO(0)
HOLDCO
$$$ UL
FAMILY TRUSTDIVIDEND INCOME SPLIT
$35,000.00/YRCGE MULITPLIED
($750,000.00 X ?)
SALE OF BUSINESS
DAVE• FAMILY – Wife, two kids (ages 19 & 14)• CCPC - $2,500,001.00
DAVE DAVE/WIFE/CHILD19/CHILD14
FMV $2,500,001.00 $2,500,001.00
ACB $1.00 $1.00
CG $2,500,000.00 $2,500,000.00
CGE $750,000.00 3,000,000.00 (750,000.00 X 4)
NET $1,750,000.00 $0.00
TAXABLE PORTION $875,000.00 $0.00
TAX (40%) $350,000.00 $0.00
DIFFERENCE $350,000.00
EXAMPLE – INCOME SPLITTING
DAVE – FAMILY – Wife, two kids (ages 19 & 14) - CCPC – annual income (personal) $200,000.00
Dave Dave/Wife/19 year old
INCOME Dave$200,000.00
Dave$130,000.00
$35,000.00Dividend
$35,000.00Dividend
TAX RATE 39.5% 39.5% 0% 0%
TAX PAYABLE
$79,000.00 $51,350.00
0 0
NET $121,000.00 $78,650.00
$35,000.00
$35,000.00
TOTAL HOUSEHOLD INCOME
$121,000.00 $148,000.00
DIFFERENCE $27,650.00
SITUATION IDENTIFICATION/CLIENT PROFILE
• CLIENT- HAS A CORPORATION- A FAMILY- WIDE VARIATION IN TAX BRACKETS/LIABILITIES WITHIN FAMILY- CLIENT OR CLIENT CORPORATION HAS A SIGNIFICANT ANNUAL INCOME- CLIENT HAS A LARGE ANNUAL TAX LIABILITY (INCOME/CAPITAL GAINS)- WANTS TO BRING CHILD INTO BUSINESS – POSSIBLE SUCCESSION OR TAKEOVER- IS TALKING ABOUT SELLING BUSINESS- IS INVESTING THROUGH CORPORATION- IS RETIRING, OR TALKING ABOUT IT
INTER VIVOS TRUSTS
ADVANCED TAX PLANNING
TRUST BASICS
SETTLOR TRUSTEE
TRUSTEE LegalTRUSTEE
Ownership
BENEFICIARIES
(benefits and use)
TRUST PRINCIPLES
CONTROL PROTECTION TAX PLANNING/TAX REDUCTION FLEXIBILITY – separate benefit & control
- tax deferred roll in/roll out in some cases
UNIQUE PROPERTY HOLDING/OWNERSHIP SITUATIONS
LIMITATIONS
ADVANTAGES/LIMITATIONS
*ADVANTAGES *LIMITATIONS- CONTROL -TRANSFER TO TRUST MAY
BE - TRUSTEES (OFTEN PARENTS) A DISPOSITION- ASSET PROTECTION - 21 YEAR TRUST RULE
- CREDITORS/SPOUSES- TAX REDUCTION
- INCOME SPLITTING- CGE MULITPLICATIONS- TAX DEFERRAL
- ADVANCE ESTATE PLANNING- SUPPLEMENTS WILL/EPA- AVOIDS PROBATE TAXES- REDUCES PROFESSIONAL FEES
KIDDIE TAX - S.120.4 ITA
PERSON UNDER 18 YEARS RECEIVING A DIVIDEND FROM CCPC SOLUTIONS:
- NOT APPLICABLE TO- SALARIES TO CHILDREN- MONEY LENT AT PRESCRIBED RATE
- INVEST IN SHARES WITH DIVIDEND PAYMENTS
- INVENT IN INTEREST BEARING TERM DEPOSIT MATURING WHEN CHILD IS 18
- FIXED INCOME TRUST FOR MINORS- DEBT/INTEREST PAYMENTS FROM
FAMILY- SECONDARY INCOME
TRANSFER OF PROPERTY TO AN INTER VIVOS TRUST
EXISTING:
X
Investment Portfolio(FMV $500.000)
REORGANIZATION:
XFMV Child 1 and
2Disposition (1)
Y
(1) Consideration $500,000 promissory note at 4%
TRUST
FIXED INCOME TRUST FOR MINORS
* S.104(18) FACTORS- RESIDENT- BENEFICIARY YOUNGER THAN 21 YEARS- INCOME RIGHT VESTS (NON-DISCRETIONARY)- ENTITLEMENT OF BENEFICIARY BY 40 ONLY CONDITION
* PLANNING- INTEREST FREE LOAN TO CAPITAL BENEFICIARIES- TRUST INTEREST BY SEPARATE DISCRETIONARY TRUSTS
Secondary Income
$200,000.00 capital
$20,000.00 Growth (attributed to parent)
($8,000.00) Tax
$12,000.00 In minor’s hands – future growth taxed in minor’s hands at lower rates
$200,000.00 capital
$20,000.00 Growth (attributed to parent)
($8,000.00) Tax paid by parent from own funds leave
$20,000.00 Full in minor’s hands – future growth
OWNERSHIP OF FAMILY ASSETS BY AN INTER VIVOS TRUST
* COMMON FAMILY ASSET IS COTTAGE- USED BY VARIOUS FAMILY MEMBERS
Parents
* CONSIDER ACQUIRE COTTAGE BY TRUST- FUNDED BY OPCO DIVIDENDS- PARENTS SHOULD NOT BE BENEFICIARIES OF TRUST
- SPECIFIED BENEFICIARY- PRINCIPAL RESIDENCE
- S.107(2.01) TRUST TO BENEFICIARY- PRINCIPAL RESIDENCE PLANNING
TRUST(1) OPCO
TRUST PLANNING FOR NON-SBC SCENARIOS
* CONSIDERATION ACQUISITION OF NON-ACTIVE BUSINESS ASSET BY A CORPORATION- NOT A “SBC”
* S.74.4(4) TRUST- NO DIVIDEND ENTITLEMENT WHILE A “DESIGNATED PERSON”
EXAMPLE:
Designated Persons
Real PropertyFinanced by mortgage guaranteed by X
OPCOTRUST
PERSONAL SERVICES TRUST
EXISTING:
XEmployer/Employee
REORGANIZATION:
SERVICE AGREEMENT X
Y
Child 1 and 2
1. Employment Agreement with the Trust
PUBCO
PUBCOTRUST
SITUATION INDENTIFICATION/CLIENT PROFILE
SITUATION IDENTIFICATION- FAMILY SITUATION/FAMILY CONCERN OR ISSUE (BLACK SHEEP/DISABLED CHILD/UNDESIRABLE SPOUSE)- CLIENT HAS SIGNIFICANT ANNUAL INCOME- CLIENT HAS LARGE ANNUAL TAX LIABILITY (INCOME/CAPITAL GAINS)- CLIENT HAS FAMILY BUSINESS- CLIENT HAS BUSINESS WITH NON ACTIVE BUSINESS ASSET (EG: REAL ESTATE)- WIDE VARIATION IN TAX BRACKETS/LIABILITIES- CLIENT HAS UNIQUE PROPERTY HOLDING/OWNERSHIP SITUATION- CLIENT HAS SPOUSE AND CHILDREN BUT IN NOT ENGAGED IN INCOME SPLITTING- CLIENT HAS AN ESTATE TAX ISSUE PENDING
21-YEAR RULE
GENERAL
* PREVENTS INDEFINITE DEFERRAL OF TAX PROPERTY HELD WITHIN A TRUST- GENERALLY APPLIES TO CAPITAL PROPERTY
AND LAND INVENTORY
* BE WARY OF IT- S.107(2) PLANNING TOOL
* GENERALLY ARISES IN ONE OF TWO SITUATIONS- TESTAMENTARY SPOUSE TRUST- ESTATE FREEZE
* IMPORTANT EXCEPTIONS- SPOUSE TRUST- ALTER EGO TRUST- JOINT SPOUSAL/COMMON-LAW PARTNER TRUST- TESTAMENTARY SPOUSE TRUST
PLANNING CONSIDERATIONS
* PERSONAL TRUST S.107(2) ROLL-OUT- ELIMINATES 21-YEAR RULE ISSUE- BUT NOW THE ASSETS ARE IN THE HANDS OF A BENEFICIARY
* ALTERNATIVES TO S.107(2)- S.107(2.001)- S.107(2.002)
* ABOVE CAUSE S.107(2.1) TO APPLY- DISTRIBUTION GREATER OF FMV AND COST- CONSIDER IF TRUST HAS TAX SHIELD
TRUST SETTLEMENT CONSIDERATIONS
* BE VERY CAREFUL- S.75(2) IS ONEROUS- PROPERTY NEVER REVERT TO SETTLOR- WATCH OTHER ATTRIBUTION ALSO
* SETTLOR LINEAR RELATIVE TO BENEFICIARIES
* KEY MATTERS TO NOTE- SETTLOR CAN BE TRUSTEE- SETTLOR SHOULD NOT BE BENEFICIARY- TRUST SHOULD BE IRREVOCABLE AND NO VARIATION- SETTLOR PAY COSTS TO ESTABLISH TRUST