The benefits of Corporate Class investing

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

How is a mutual fund corporation designed to work?

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 diversified portfolio

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!

Corporate Class After-tax benefits

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

FMV comparison

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 ClassPlanning opportunities

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 Scenario

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!

Questions?

Thank you

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise indicated and except for returns for periods less than one year, the indicated rates of return are the historical annual compounded total returns including changes in security value. All performance data assume reinvestment of all distributions or dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

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