the benefits of corporate class investing paul mcvean, cga, cfp, tep regional vice-president, wealth...
TRANSCRIPT
Benefits of wealth planning
• Maximize asset values
• Minimize tax now and later
• Minimize risks of untimely death, disability, incapacity
• Ensure wealth is ultimately transferred efficiently and effectively
• Avoid family disputes, costly estate litigation
Referrals you can make
• Tax accountants/lawyers for corporate reorganizations, business sale and succession, professional incorporation
• Corporate lawyers for shareholder agreements
• Estate planning lawyers for wills, trusts, estate administration and estate litigation
• Family law lawyers
• U.S. tax/estate planning experts
Ideal clients for Corporate Class
• Owners of successful operating businesses
– sale, succession, surplus income
• Individuals who pay tax on their investment portfolios
• Families with significant assets and/or investment holding companies
• Seniors looking for retirement cash flow
Investment return – What’s important
Return on investment
Less: fees
= Subtotal
Less: income taxes
= WHAT’S IMPORTANT!!!
Client focus
Media focusAdvisor focus
My focus
2012 top personal tax rates – Ontario
Tax rates on investment income
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
Interest/foreign Eligible dividends Realized capital gains Unrealized capital gains
After-Tax Tax Rate
46.41%
29.54% 23.21%
53.59%
70.46% 76.79%
100%
Investment structures
• Investors hold securities directly
• Interest, foreign income and dividends are taxed each year
• Capital gains taxed when triggered
• Rebalancing or reallocating the portfolio is a taxable event
• Drawing out capital may be a taxable event
Investor
Segregated holdings
• Gov’t & Corporate Bonds• High Yield Bonds, Pref Shares• Domestic & Foreign Equity
Investment structures
• Investors hold units of trusts that hold securities
• Other income, foreign income and dividends are distributed and taxed each year
• Capital gains taxed when triggered
• Rebalancing or reallocating the portfolio is a taxable event
• Drawing out capital may be a taxable event
S.132(6) & (7) of ITA
Investor
Mutual/pooled fund trusts
• Gov’t & Corporate Bonds• High Yield Bonds, Pref Shares• Domestic & Foreign Equity
Investment structures
• Investors hold “tracking” shares of a corporation that holds securities
• Investor may receive minimal distributions of capital gains and/or Cdn dividends
• Rebalancing or reallocating the portfolio is a non-taxable event (S.51 of ITA)
• Drawing out capital may be a non-taxable event
Mutual fund corporation S. 131(8) of ITA
Investor
“Corporate Class”
• Gov’t & Corporate Bonds• High Yield Bonds, Pref Shares• Domestic & Foreign Equity
Diversified portfolio
Typical 60/40 diversified investment portfolio
40%
20%
20%20%
Fixed Income
Canadian Equity
US Equity
Int'l Equity
Eg. Tax on a Corporate Class portfolio
$1,285 of tax versus $15,715 on non-corporate class structureSavings of $14,430!!!
Keys to the Corporate Class structure
For the structure:• Maintain proper balance of equity to fixed income for entire
class– Equity = greater expenses than taxable yield, significant unrealized
growth– Fixed income = taxable yield exceeds expenses, not as significant
unrealized growth– Structure is run to have “taxable yield” = “deductible expenses” on an
annual basis
For the investor:• Elimination of “capital taxes”
– July 1, 2008 – federal capital taxes eliminated– July 1, 2010 – Provincial capital taxes eliminated
• Externally charged tax-deductible fees– Where available
Benefit of tax-deductible fees
• Holding non-registered assets in this version of Corporate Class may actually create annual tax savings instead of an annual tax cost!
Benefits
1. Exposure through portfolio to underlying securities that produce a mixture of interest, foreign income, Cdn dividends and capital gains, but return on investment ultimately taxed preferentially as Cdn dividends and/or capital gains
2. Taxes deferred until funds actually withdrawn from the portfolio
– If underlying capital gains are very significant, capital gains could be distributed to shareholders (T5 slip)
– Chance to withdraw from portfolio tax-free (see #4)
3. Tax-free rebalancing
4. T-Class = tax-free withdrawal of capital
– Structured as a return of capital
= Greater spending power without additional
risk to the portfolio!
Corporate Class structure – four main benefits
Spending power
Value of Investment AlternativesSpending Power of Corporate Class vs Non-Corporate Class
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Sp
end
ing
Po
wer
Corporate Class Non-Corporate Class
$3.10M
$2.19M
1% to 1.5%
Accumulation / spending
• Age 40 to 60
• $25K/yr for 20 years
• Diversified portfolio averaging 7.75%
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
Corporate Class Non-CorporateClass
Growth
ACB
$1,094,300
$1,265,500
Accumulation / spending
Non Corporate Class Corporate Class
Income $41,350 $66,550
Year 25 $0 $0
Non Corporate Class Corporate Class
Income $41,350 $41,350
Year 25 – FMV $0 $1,568,000
Year 25 – After-tax $0 $1,210,000
Option 1: Equal Cash flow For 25 Years
Option 2: Maximize Cash flow For 25 Years
Tax efficiency in this model equal to approximately 3.25% better after-tax returns!!!
Corporate Class planning tips
1. Corporate Class may allow investors to use capital losses earlier– Return on investment generally takes the form of realized/unrealized
capital gains, which can be fully offset by previous capital losses
2. Corporate Class means that income splitting with investment dollars may no longer make sense– Keep tax deduction with higher income-earning family member
3. Fee deduction may help offset high-tax corporate income– ABI > $500K, other forms of investment income (interest, foreign inc.)
4. Corporate Class allows for even more efficient charitable donation planning– Take advantage of 0% inclusion rate when donating marketable
securities
– Bonus savings when donating securities through a corporation
Investment Holdco
Donate $30K Cash:
• Capital gain of $20K
• Corp tax = $4,667
• CDA = $10K
Donate $30K In-Kind:
• Capital gain of $20K
• Corp tax = $0
• CDA = $20K
Charitable donations using Corporate Class
Investment Holdco
T-Class from Account #1 to Account #2
Donate $30K In-Kind:
• Capital gain of $30K
• Corp tax = $0
• CDA = $30K
Charitable donations using T-Class
Corporate Class planning tips
$1M Loan
Dad Daughter #1 Daughter #2
New Investment Holdco
Taxable DividendsCapital Dividends
• Avoid paying refundable tax
• Pay out CDA annually to Dad as S/H cr.
• Unwind tax-free• = 10% total tax
5. Corporate Class allows for interesting income splitting opportunities with low income family members, possibly using corporations
Corporate Class planning tips
6. Retirement funding– Use three pools of assets (reg. non-reg. and corp)– Tax-efficient withdrawals from corp account– Maximize use of low tax brackets to maximize
ultimate estate value/retirement spending– Create income if/when required by:
• Registered account withdrawals
• Non-registered triggering of capital gains
• Dividends from corporation
– Use Capital Dividend account
Client example
Peter & Karen Smith• Business owners
• 5 years from retirement
• Currently drawing $125,000 salary each
– Contributing to RRSP’s
• Spending requirement – $120,000 per year
• Investible assets:
– $300,000 non-registered
– $650,000 registered
– $1 million corporate
Client example
Salary versus dividends
Corporate Tax Consequences Salary DividendsCorporate earnings 207,611$ 207,611$ Less: Salary (199,114) -
Employer portion of CPP (4,614) - EHT (3,883) -
Corporate taxable income -$ 207,611$ Corporate tax - 15.5% - (32,180) After-tax corporate income -$ 175,431$ Less: dividends paid - (129,868) Retained in the corporation -$ 45,563$
Personal Tax Consequences Salary DividendsSalary/dividends 99,557$ 64,934$ Less: Employee portion of CPP (2,307) -
Personal tax (19,330) (4,934) Available 77,920$ 60,000$
Lifestyle 60,000$ 60,000$ RRSP contribution 17,920$ -$
Savings - RRSP's / Corporation 35,840$ 45,563$
Client example
Value of dividends over salary for Peter & Karen Smith
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
Year0
Year1
Year2
Year3
Year4
Year5
Year6
Year7
Year8
Year9
Year10
Year11
Year12
Year13
Year14
Year15
Year16
Year17
Year18
Year19
Year20
Year21
Year22
Year23
Year24
Year25
Year26
Year27
Year28
Year29
Year30
Corp Inv - FMV Corp Inv - Spending Power Corp Inv - Estate RRSP FMV RRSP Spending Power
Assuming 0.5% eligible dividend distribution, 4.5% unrealized growth
Client example
Salary versus dividends• CPP
• RRSP space
• EHT
• Discipline
• Corporate class advantage
Client example
Corporate tax on investment income
Interest/ Capital EligibleForeign Gains Dividends
Return on investment 1,000$ 1,000$ 1,000$ Inclusion rate 100% 50% 100%Subject to tax 1,000$ 500$ 1,000$
Non-refundable tax 19.5% 195 19.5% 98 0.0% - Refundable tax 26.7% 267 26.7% 133 33.3% 333
462$ 231$ 333$ 46.2% 23.1% 33.3%
Added to RDTOH 267$ 133$ 333$ Added to CDA -$ 500$ -$
Capital dividend -$ 500$ -$ Taxable dividend 805 403 1,000 Less: personal tax (262) (131) (295) Net received 543$ 771$ 705$
45.7% 22.9% 29.5%
Paid Out to Individual Shareholder
Assuming Ontario 2012 Income Tax Rates (not including new 2% surtax)
Client example
Retirement funding• 5 “buckets” – when and where to dip
– When to save tax - now versus later
• Using marginal tax brackets effectively
– Issues with registered funds
– Importance of T-Class
• Break the link between cash flow and tax
• How to use CDA & RDTOH
– Trigger capital gains on purpose?
– Importance of discretion
Client example
After-tax value comparison
$2,800,000
$3,300,000
$3,800,000
$4,300,000
$4,800,000
Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20
Minimum withdrawals - Registered Accounts Minimum withdrawals - Dividends
Lowest tax bracket - Registered Accounts Lowest tax bracket - Dividends
Clawback - Registered Accounts Clawback - Dividends
Assumes 6.92% gross return, 2% external fee, 0.5% eligible dividend distribution
Client example
Estate planning• Results of retirement funding:
– Registered assets lower = less terminal tax
– Significant unrealized capital gains on non-registered investments – personal & corporation
• “Pipeline” strategy to unlock corporate assets
– Estate incorporates Newco
– Newco purchases existing Holdco from estate
– Holdco wound-up into Newco – 88(1)(d) bump
– Newco wound-up and assets distributed
Summary
• Focus on wealth planning– Differentiate yourself from “salespeople”– Build COI networks for referrals
• Corporate class provides better after-tax returns
• Corporate class provides unique, integrated planning opportunities– Tie the product to client goals and objectives– Hit the Hot Buttons!
Thank you
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