CONFIDENTIAL - NOT FOR DISTRIBUTION

Hot Tax & Estate Issues for InvestorsHot Tax & Estate Issues for InvestorsCIFPs (Halifax) June 10, 2009

Jamie GolombekManaging Director

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AgendaAgenda

Tax planning- Key 2009 tax changes- Pension splitting- Capital loss planning- Spousal / partner loans- TFSA “My Top 5”- Registered Disability Savings Plans- 2009 “best” tax cases

Estate planning- The estate “re”-freeze- Ownership of U.S. vacation property

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2009 Federal Tax Brackets2009 Federal Tax Brackets

2009 2008 Rate

Less than $40,726 Less than $37,885 15%

$40,726 to $81,452 $37,885 to $75,769 22%

$81,452 to $126,264 $75,769 to $123,184 26%

Over $126,264 Over $123,184 29%

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RRSP / RRIF Decline in valueRRSP / RRIF Decline in value

FMV of RRSP/RRIF taxable as of date of death on terminal return

- Unless qualifying rollover to spouse, partner, qualifying dependent child

What if RRSP declines in value post-death?

Example:

- Gary dies in June 2008 – FMV of RRSP at date of death is $200,000

- RRSP is paid out to estate in January 2009 – FMV is $120,000

- Loss of $80,000

Budget 2009

- Loss can be claimed on terminal return of deceased

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FirstFirst--Time Home BuyersTime Home Buyers’’ Tax CreditTax Credit

New $5,000 amount eligible for 15% credit

- Value = $750

“First-time home buyer”

- Neither individual nor spouse/partner owned home in current or previous four calendar years

One claim per family

- Unused credit can be transferred to spouse/partner

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Home BuyersHome Buyers’’ PlanPlan

Increase to $25,000 (from $20,000)

Withdrawn from an RRSP, tax-free

Must be paid back over 15 years to avoid annual income inclusion

“First-time home buyer”

- Neither individual nor spouse/partner owned home in current or previous four calendar years

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Small business tax measuresSmall business tax measures

Increase in small business limit to $500,000 (from $400,000)

– Low federal tax rate of 11% on active business income up to limit

Accelerated tax depreciation for computer purchases

– Can write off 100% of cost of computers in year acquired

– No “half-year” rule

– For purchases from January 28, 2009 through January 31, 2011

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Applied against capital gains- Including CG distributions from mutual funds

Must be used against 2008 gains firstExcess can be carried back / carried forward

Form T1A

Report All Capital LossesReport All Capital Losses

2005 2006 2007 2009 + future years2008

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Capital losses Capital losses -- quizquiz

Capital loss carried back from 2008 to 20072007 reported large capital gain- Client lost all of OAS since income > $103,191

(2007 clawback level)Will loss carryback from 2008 to 2007 restore approx. $5,900 of OAS for 2007?- YES- NO

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Capital gain in 2008 Capital gain in 2008 –– OASOAS

Client loses 2008 OAS because large capital gain in 2008 (income > $105,266)Client will also lose 2009 OAS based on 2008 incomeWhat if high 2008 income (gain) was a one-time occurrence?

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Capital gain in 2008 Capital gain in 2008 –– OAS (contOAS (cont’’d)d)

Reduction of tax at source – OASForm T1213 OAS

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Capital loss planning Capital loss planning -- transferstransfers

Transfer to RRSP?

- Loss denied

- Crystallize first, wait 30 days to buy back

Transfer to TFSA?

- Loss denied

Transfer to RESP?

- OK, but if held for 30 days, “superficial loss”

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““Superficial lossSuperficial loss””

Superficial loss- Buy “identical property” within 30 calendar days- Who?

YouSpouse/partnerCorporation controlled by you/spouse/partnerTrust, if you or spouse is majority-interest beneficiary

Transfer to parent / child – OK- Transfer between spouses / partners?

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Capital loss planning Capital loss planning ––spousal transfer of lossesspousal transfer of losses

Spousal loss transfer

Victor + Maureen

- Maureen – ABC Shares - $10,000 accrued capital gain

- Victor – XYZ Shares

ACB - $50,000

FMV - $40,000

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Capital loss planning Capital loss planning ––spousal transfer of lossesspousal transfer of losses

Step one – Victor sells XYZ shares for $40,000

- Capital loss of $10,000

Step two – Maureen buys XYZ shares, pays $40,000

- Victor’s $10,000 capital loss is now “superficial”

- Added to ACB of Maureen’s shares ($10,000 + $40,000 = $50,000)

Step three – Maureen waits 30 days, sells for $40,000

- ACB - $50,000

- FMV - $40,000

- Capital loss of $10,000 can be used against ABC accrued gain

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Capital losses in a family trustCapital losses in a family trust

Trust had capital losses in 2008- Losses cannot be distributed to beneficiaries

Trust distributed capital gains in 2005/2006/2007Problem: How to use losses otherwise trapped in trust?

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Pension SplittingPension Splitting

Pension income?- Before age 65?

• Regular monthly pension from DB or DC plan- After age 65?

• Includes RRIF (LIF, LRIF, PRIF) withdrawalsBenefits:

Transfer up to 50% of pension income to lower-income spouse / partnerAvoiding / Minimizing impact of Old Age SecurityclawbacksDoubling of pension income creditReducing net income grind of age credit

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Pension Splitting (Example)Pension Splitting (Example)

Form T1032Example: Jack (65) Diane (60)

Pension Income $100,000 NIL

Investment Income 5,000 10,000

Old Age Security NIL

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Pension Splitting (solution)Pension Splitting (solution)

Jack (65) + Diane (60)

Jack's 2008 income

Pension income $ 50,000

Investment income 5,000

Diane’s 2008 income

Pension income $ 50,000

Investment income 10,000

Total savings

Income tax savings (ON) 4,194

Old Age Security savings 6,082

Pension income credit (Diane) 414

Age credit restored (Jack) 126

TOTAL $ 10,816

Pension income split 50/50Pension income split 50/50

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Pension splitting Pension splitting –– Question #1Question #1

Pension splitting in year of death– Eve received $120,000 of pension income in 2008– Adam died on September 1, 2008– How much can be reported on Adam’s terminal return?

• NIL• $40,000• $45,000• $60,000

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Pension splitting Pension splitting –– Question #2Question #2

Pension splitting with RRIF recontribution– Jack received $10,000 of pension income as RRIF minimum

in 2008– Jack recontributed 25% permitted on April 5, 2009– How much could have been reported on his wife’s 2008

return? • NIL• $2,500• $3,750• $5,000

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Make Debt TaxMake Debt Tax--DeductibleDeductible

“Singleton Shuffle”

$300,000$300,000

$300,000 $300,000

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Make Debt TaxMake Debt Tax--Deductible (contDeductible (cont’’d)d)

Lipson decision – Supreme Court (January 2009)General Anti-Avoidance Rule (GAAR)Use of attribution rules

Source: http://www.scc-csc.gc.ca/Details/d4-eng.aspCredit: Philippe Landreville, PhotographerSupreme Court of Canada Collection

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Spousal Loan at 1%Spousal Loan at 1%

Spouse or partner gifts/transfers funds– FULL attribution of income / gains to transferorExceptions:– Pay FMV or prescribed rate loanRate for Q2 2009 – 1%– Lowest ever!

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Jack loans Diane $200,000Investment earns 5% annually

Income splitting opportunity: $8,000- Tax Savings (ONT): $8,000 X (46.41% - 21%) = $2,033

annually

Income $2,000

Spousal Loan at 1% (Example)Spousal Loan at 1% (Example)

Jack$200,000

Interest Expense – 1%

Income $10,000Interest expense (2,000)Net income $ 8,000

Diane

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Spousal Loan Spousal Loan –– Rate Reset?Rate Reset?

What if you have an existing loan at 3% or 4%?– Can you adjust rate on loan?– Can you refinance with new loan?

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Home Renovation Tax Credit (HRTC)Home Renovation Tax Credit (HRTC)

Expenditures over $1,000

Maximum of $10,000– Credit worth 15% of $9,000 = $1,350

Per family (spouse/partner, minor kids)

From Jan 28, 2009 until Jan 31, 2010

Eligible expenses?– Labour, professional services

– Building materials

– Equipment rentals

– Permits

Ineligible?– Routine maintenance

– Furniture, drapery, appliances

– Interest expense

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Contribute to ALL Reg PlansContribute to ALL Reg Plans

RRSP Limit– 18% of 2009 “earned income”– Maximum of $21,000

RESP– $50,000 lifetime limit (no annual limit)– Basic grant – $500 / child / year

TFSARDSP

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TFSA TFSA –– IntroductionIntroduction

“The TFSA is a new general-purpose tax-efficient savings vehicle for Canadians that complements existing registered savings plans for retirement and education like Registered Retirement Savings Plans (RRSPs) and Registered Education Savings Plans.”Eliminates “double taxation” of savings

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Double Taxation of SavingsDouble Taxation of Savings

Unregistered TFSA

Income $ 1,000 $ 1,000

Tax (at 40%) (400) (400)

Income after-tax 600 600

Growth – 10 years / 5.4% 1,015 1,015

Tax (at CG rate – 20%) (83) N/A

Net available to spend $ 932 $ 1,015

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Opening Balance Contribution Growth

Ending Balance

2009 – 5,000 250 5,250

2010 5,250 5,000 513 10,763

2011 10,763 5,000 788 16,551

TFSA Withdrawal TFSA Withdrawal –– ExampleExample

Withdrawals from TFSA re-establish contribution room in following yearContribute $5,000/year for 3 years- Total $15,000

Invest at 5% per yearValue at end of 3 years $16,551

In 2012, new contribution room is:

– $5,000 for 2012 + $16,551 withdrawn in prior year

– $21,551

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TFSA TFSA –– Question 1Question 1

Fact pattern #1- March 2009 – contribute $4,000- July 2009 – increases in value to $5,000 and

withdrawn- October 2009 – how much can I contribute?

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TFSA TFSA –– Question 2Question 2

Fact pattern #2– March 2009 – contribute $4,000– July 2009 – increases in value to $5,000 and

withdrawn– January 2010 – how much can I contribute?

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Opportunity #1: Emergency FundsOpportunity #1: Emergency Funds

“Rainy day fund”Tax-free interest income- Highly taxed

• 46.41% in OntarioLiquidity- High-interest savings account- GIC- Money market mutual funds

Ability to re-contribute

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Opportunity #2: Tax Rate Planning Opportunity #2: Tax Rate Planning TFSA vs. RRSP TFSA vs. RRSP –– Same Tax RateSame Tax Rate

TFSA RRSP

Income $ 1,000 $ 1,000

Tax (at 40%) (400) –

Amount invested 600 1,000

Growth – 10 years / 5.4% 1,015 1,692 Tax (at 40%) – (677)

Net available to spend $ 1,015 $ 1,015

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Opportunity #2: Tax Rate Planning Opportunity #2: Tax Rate Planning TFSA vs. RRSP TFSA vs. RRSP –– High/LowHigh/Low

TFSA RRSP

Income $ 1,000 $ 1,000

Tax (at 40%) (400) –

Income after-tax 600 1,000

Growth – 10 years / 5.4% 1,015 1,692 Tax (at 20%) – (338)

Net available to spend $ 1,015 $ 1,354

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Opportunity #2: Tax Rate Planning Opportunity #2: Tax Rate Planning TFSA vs. RRSP TFSA vs. RRSP –– Low/HighLow/High

TFSA RRSP

Income $ 1,000 $ 1,000

Tax (at 20%) (200) –

Income after-tax 800 1,000

Growth – 10 years / 5.4% 1,354 1,692 Tax (at 40%) – (677)

Net available to spend $ 1,354 $ 1,015

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Opportunity #3: Education PlanningOpportunity #3: Education Planning

Use RESP first to maximize Canada Education Savings Grants- $2,500 / year – federal grant (20%) =

$500/annually- Plus, carryforward of CESG room

Above $2,500?- Consider TFSA for maximum flexibility

Private school funding

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Opportunity #4: Income splittingOpportunity #4: Income splitting

“$10,000/couple opportunity”- Gift $5,000/year to spouse or partner- No attribution of income / capital gains

Gift $5,000/year to each child > 18- Can’t open “in trust for” TFSAs

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Opportunity #5: Estate PlanningOpportunity #5: Estate Planning

Tax-free upon death- Leave to spouse, kids, grandkids, anyone!

Spousal / partner tax-free rolloverSuccessor account holder – spouse / partner- Tax-free transfer

Beneficiary designation- Avoid probate tax (where applicable)

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RDSPRDSP

$200,000 lifetime limitAge 59 and under to openAge 49 and under to get government funds:– Canada Disability Savings Grants

• Family income < $75,769– 300% of first $500– 200% of next $1,000

• Family income > $75,769– 100% of first $1,000

• Lifetime max: $70,000

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RDSP (contRDSP (cont’’d)d)

Canada Disability Savings Bonds– Family income < $21,287

• $1,000 annually (no contributions required)– Family income > $21,287

• Reduced pro-rate until eliminated at income > $37,887

– Lifetime max: $20,000

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Dunlop (2009)Dunlop (2009)

Failure to report amount in income10% federal + 10% provincial penaltyT4 slip from Bulk Barn- Not received- “T4 missing from Bulk Barn – will amend when received”

Penalty - YES or NO?

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Villanueva (2009)Villanueva (2009)

Failure to report income on return10% penalty of unreported amountTaxpayer filed “blank return”, signedIncluded T4 slip in envelopePenalty – YES or NO?

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Jackson (2008)Jackson (2008)

Membership into the “World Network Business Club”Represented by noted author Dan White– "How to Pay Zero Taxes and Keep the Tax Department

Happy!“Claimed various business expenses– a portion of weekly GO commuter Train passes– “daily Starbucks meetings with herself”– Blockbuster Video rentals for meetings with each other at

home– Groceries for meetings with family– Meetings allegedly held at LCBO outlets.”

Judge: “preposterous and outrageously aggressive”

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Estate FreezeEstate Freeze

Owner exchanges common shares for preferred shares – FMV $5 MM

ABC Corporation

Business Owner

100%

Common shares

FamilyTrust

New Common shares

KIDS

Beneficiaries of trustPreferred sharesRedeemable at

$5 MM

100%

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Estate Refreeze

Owner exchanges OLD pref’d shares for NEW pref’d shares – FMV $3MM

ABC Corporation

Business Owner

Preferred sharesRedeemable at $3 MM

FamilyTrust

New Common shares

KIDS

Beneficiaries of trustPreferred sharesRedeemable at

$5 MM

100%

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U.S. Estate Tax Issues for CanadiansU.S. Estate Tax Issues for Canadians

Assume non-resident, non-U.S. citizen (“ALIEN”)U.S. situs property:– U.S. real estate– U.S. securities (even in Canadian accounts, RRSPs,

RRIFs)– U.S. business assets

NON-U.S. situs property:– U.S. bank deposits– Life insurance proceeds– Most debt

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2009 U.S. Estate Tax Rates2009 U.S. Estate Tax Rates

Source: BDO Dunwoody LLP, May 15, 2008

From To Tax on bottom

of range Rate on Excess

0 10,000 0 18% 10,000 20,000 1,800 20% 20,000 40,000 3,800 22% 40,000 60,000 8,200 24% 60,000 80,000 13,000 26% 80,000 100,000 18,200 28%

100,000 150,000 23,800 30% 150,000 250,000 38,800 32% 250,000 500,000 70,800 34% 500,000 750,000 155,800 37% 750,000 1,000,000 248,300 39%

1,000,000 1,250,000 345,800 41% 1,250,000 1,500,000 448,300 43% 1,500,000 and over 555,800 45%

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U.S. Estate Tax Exemption / RatesU.S. Estate Tax Exemption / Rates

Year Exemption Top Rate

2006 2,000,000 46%

2007 2,000,000 45%

2008 2,000,000 45%

2009 3,500,000 45%

2010 Repealed Repealed

2011 1,000,000 55%

February 26, 2009: President Obama proposes to keep U.S. Estate Tax at 2009 levels

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Canada Canada –– U.S. Treaty: Unified CreditU.S. Treaty: Unified Credit

Same exemption limits, but prorated:

$3,500,000 (2009) ×U.S. Situs AssetsWorldwide Assets

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U.S. Estate Tax PlanningU.S. Estate Tax Planning

Life insuranceNon-recourse debtCanadian CorporationCanadian TrustPartnership

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