Presentation on theme: "CORPORATE CLIENTS – THE POWER OF 5"— Presentation transcript:
1 CORPORATE CLIENTS – THE POWER OF 5 Michelle ConnollyVice President, Wealth Planning, CI Investments
2 CORPORATE CLIENTS/PROSPECTS – THE POWER OF 5 5 minutes – capture attention regarding your value 5 key tax concepts – understand 5 questions – value of wealth planning
3 CORPORATE CLIENTS/PROSPECTS – THE POWER OF 5 5 minutes – capture attention regarding your value
4 CAPTURE ATTENTION IN 5 MINUTES Can you claim the Lifetime Capital Gains Exemption when you sell your shares?Does your current corporate structure maximize income splitting opportunities?Has your tax advisor discussed creative tax strategies available to your corporation?Have you implemented flexibility and maximized control over retirement income flows?When do you think you will be financially and emotionally ready to retire?What is your overall, average tax rate?Are you a tax-efficient investor?When was the last time you were asked about your wills or succession plan?Today’s Wealth Planners have to ask a lot more questions, and be comfortable in dealing with individual, trust and corporate planning situations44
5 CAPTURE ATTENTION IN 5 MINUTES High-net-worth investor concerns89% concerned about losing their wealth85% concerned about tax mitigation79.2% taking care of heirs71.5% having enough money in retirementFinancial analysisRiskmgmtTax planningWealthtransferWealth planningSource: Building a World Class Experience for Affluent Clients, CEG Worldwide, Morgan Stanley Smith Barney Institute, 200955
6 CAPTURE ATTENTION IN 5 MINUTES 90% of business owners state proceeds from sale will be very important for the financing of retirement52% of business owners do not have any succession plan40% of business owners do not have an estate plan in placeFinancial analysisRiskmgmtTax planningWealthtransferWealth planningSource: RBC Wealth Management, HNW Inc, CIFP66
7 CORPORATE CLIENTS/PROSPECTS – THE POWER OF 5 5 key tax concepts - understand
8 5 KEY TAX CONCEPTS1Selling a small business or an incorporated practice does not guarantee $750,000 in tax-free capital gains88
9 5 KEY TAX CONCEPTS – CAPITAL GAINS EXEMPTION $2M offer for hotel building, equipment and furniture9
10 5 KEY TAX CONCEPTS – CAPITAL GAINS EXEMPTION Is it an asset or share sale?$2M offer for hotel building, equipment and furnitureXCGE is only available on certain qualified property, namely:Canadian controlled small business corporation sharesQualified farm propertyQualified fishing property10
11 5 KEY TAX CONCEPTS – CAPITAL GAINS EXEMPTION Mr. AMrs. A50%50%HoldcoFMV $1.5M passive investment assets$2M offer for Opco100%OpcoFMV $2M active business operation assets11
12 5 KEY TAX CONCEPTS – CAPITAL GAINS EXEMPTION Only individual taxpayers, or individual beneficiaries of a trust, can claim the CGEMr. AMrs. AX50%50%HoldcoFMV $1.5M passive investment assets$2M offer for Opco100%OpcoFMV $2M active business12
13 5 KEY TAX CONCEPTS – CAPITAL GAINS EXEMPTION Shares must be QSBC shares and the following tests are applied:Length of ownership test: shares owned by taxpayer for 24 months;24 month asset test: 50%+ assets used in active business; ANDMoment of disposition test: 90%+ assets used in active businessConsider:Corporation may need to be purified and/or structure modifiedGood rule of thumb is 24 month lead time in planning for saleKeep in mind:Feb 22, 1994 elimination of $100,000 general capital gains exemption – many individuals elected to useTiming: ensure current year capital losses don’t grind down capital gain eligible for CGE treatment2013 Federal Budget: 2014 $800K, indexed thereafterClient CNIL balance and ABIL claimed in prior years?13
14 Incorporate a holdco for investments? 5 KEY TAX CONCEPTS2Should your client:Incorporate?Incorporate a holdco for investments?Set up a separate corporation for each business interest or investment account?1414
15 5 KEY TAX CONCEPTS – PSB, SIB AND ASSOCIATION Personal Services BusinessBusiness providing services where the incorporated “employee” would reasonably be regarded as an officer or employee of the entity to which services are provided. But does not include a business … where more than five full-time employeesConsider employee versus self-employed/independent contractor testsSpecified Investment BusinessThe principal purpose of which is to derive income from property – including interest, dividends, rents or royalties, but does not include a business … where more than five full-time employeesAssociationIn order to employ multiple Small Business Deductions, two or more CCPCs must not be associatedThe associated corporation rules are complex, but generally two or more corporations are “associated” if one corporation controls the other, or if they are directly or indirectly controlled by the same person, group of persons, or related groups of persons15
16 Corporate Tax Accounts – 5 KEY TAX CONCEPTS3Corporate Tax Accounts –What do you need to know?1616
17 5 KEY TAX CONCEPTS – RDTOH ACCOUNT RDTOH – Refundable Dividend Tax on Hand AccountRefundable Portion of Part I tax assessed on investment income (26.67% Cdn/15.25% Foreign)Part IV tax on Canadian Dividends received (33.33%)Dividend Refund$1 from RDTOH for every $3 of taxable dividends paid.All taxable dividends paid by a CCPC generate a dividend refund to the extent RDTOH exists17
18 5 KEY TAX CONCEPTS – CDA ACCOUNT The CDA of a CCPC tracks certain non-taxable amounts received by a corporation that can be distributed on a tax-free basis to Canadian resident shareholders of the CCPC. From a time perspective – calculated on a cumulative basis.CapitalDividendAccount“CDA”Non-taxableportion of netcapital gainsPLUS:CapitalDividendsreceivedPLUS:Non-taxableportion of gainson eligiblecapital propertyPLUS:Proceeds of alife insurance policy(less ACB)LESS:CapitalDividendspaid18
19 What is your clients overall, 5 KEY TAX CONCEPTS4What is your clients overall,average tax rate?1919
20 5 KEY TAX CONCEPTS – OVERALL TAX RATE Corporation – T2Individual shareholders – T1Salary, dividends,capital gainsHow can funds be extracted from the corporation?What is tax impact to corporation?Shareholder needs $X after-tax from corporation to support lifestyle needs now and in retirementPlan - to maximize tax efficiencies, flexibility and planning opportunities. Tax and financial analysis will naturally tie together and highlight investment considerations. How do you minimize total taxes paid given shareholder lifestyle needs?20
21 5 KEY TAX CONCEPTS – OVERALL TAX RATE How would $250,000 in earnings be taxed?Personally $ 95,800 (38.3%)Opco/Profcorp $ 38,750 (13.0%)However, keep in mind have to get money from corporation out to the shareholder to support lifestyle needs – how achieve?Assume client requires $100,000 for lifestyle needs:How much taxes are paid?How much excess funds are left to invest?
23 5 KEY TAX CONCEPTS5How can a corporation be used to generate a flexible, tax-efficient, self-directed retirement?2323
24 5 KEY TAX CONCEPTS – FUNDING RETIREMENT 15-20 years ago – RRSPs/RRIFs, IPPs, and RCAs10-15 years – provincial professional regulatory bodies allow incorporationFinance in the last three years addressed - IPPs (2011 budget), EPSPs and RCAs (2012 budget), RCAs (50% refundable tax)Today – maybe RRSPs/RRIFs, TFSAs, opco sale proceeds, holdco dividends and share redemptionsPlan - to maximize tax efficiencies, flexibility, provide control and planning opportunities. Tax and financial analysis naturally tie together and highlight structure and investment considerations
25 CORPORATE CLIENTS/PROSPECTS – THE POWER OF 5 5 questions – value of wealth planning
26 5 QUESTIONS – VALUE OF WEALTH PLANNING 1When was the last time your tax, legal or financial advisor asked about your business, succession or estate plans?2626
27 5 QUESTIONS – VALUE OF WEALTH PLANNING Business planAt what stage in the corporate life cycle?Organization chart – does voting control lie with management?Contingency PlanningSuccession/estate planWho? How? When?Shareholders Agreement? If yes, when was the last time it was reviewed and compared against the wills of the shareholders?When was the last time provisions in will were reviewed and distributions mapped out to beneficiaries? Would actual distributions match intentions?
28 What purpose does the corporation or structure serve? 5 QUESTIONS – VALUE OF WEALTH PLANNING2What purpose does the corporation or structure serve?2828
29 5 QUESTIONS – PURPOSE OF… OpcoLiability or creditor protectionTax savings and deferral opportunitiesMeans to maximize/monetize the value of the business operationsIncome splitting opportunities/flexibility for compensationMeans to facilitate wealth transfer plansHoldcoFurther means of protectionImplement an estate freezeMeans to purify opcoTrustImplement flexibility over cash/income flowsSet up direct vs. indirect ownership of sharesMaintain an element of control over opcoMultiply access to CGELiability protectionCorporate structure extends a measure of protection to other personal assets of shareholders in the circumstance of a lawsuitOnly the assets of the corporation are at riskFor an incorporated professional – have to look to provincial regulatory guidelines regarding malpractice and the protection provided by the professional corporationCreditor protectionCorporate structure provides protection against trade creditors in situation of insolvency/bankruptcyOften over-rated as most times owner has to co-sign or provide personal guarantees for non-trade creditors
30 5 QUESTIONS – TAX MINIMIZATION Average top marginal personal tax rate (July 1, 2013) – 44.87%Average active business corporate tax rate (July 1, 2013) – 14.6%Tax savings – reduced tax rate, pay less taxWith Small Business Deduction – first $500K is taxed at lower, flat rate$500K personal versus $500K corporate and dividends paid out – depends upon the provinceNon-deductible expenses (life insurance, automobile, meals and entertainment, capital costs) funded with cheaper dollarsTax deferral – pay tax later, perhaps at reduced tax rateSurplus, after-tax dollars should remain in corporation to be invested – more investment capitalWhy generate income, unless needed to support lifestyle?
31 5 QUESTIONS – INCOME SPLITTING Corporations and/or trusts provide flexibility for compensation and income splitting opportunities that does not exist for a sole proprietorDoes shareholder support family members with after-tax funds? Find out “how, what and who” shareholder is spending funds onPotential to access $750K+ Lifetime Capital Gains Exemption, and multiplication of access toIndividualTrustDividends/CGEDividends/CGEDividends/CGECorporationCorporationBeneficiaries31
32 5 QUESTIONS – FACILITATE WEALTH TRANSFER Succession planningFunding retirement, as opposed to RRSPValuation of businessMonetization of goodwillImplement controlEstate planningFamily members – who, age, in/dependent, residence, marital statusEasier to implement at various stages with corporation or trust than a simple will concerning a proprietorshipMultiple will strategy – depends upon the province32
33 5 QUESTIONS – VALUE OF WEALTH PLANNING 3What if?3333
34 5 QUESTIONS – WHAT IF?If business owner or professional is injured and/or cannot manage the business or practice? Is there:Sufficient funds to keep the company running smoothly or provide for their, and their family’s, continued financial well being?A POA (or similar instrument) in place? Does the designated attorney have the business acumen to maintain ongoing operations and protect corporate value? Is key management or appropriate staff in place?A Shareholders’ Agreement in existence outlining steps to be taken?What happens upon the death of the business owner or practitioner?How will the tax liability be financed? Is there liquidity in the estate to pay terminal tax liability or adequate insurance?Does the current will reflect intentions? Does the designated executor (or similar) have the business acumen to maintain ongoing operations and protect corporate value?Is there a Shareholders’ Agreement in existence with a buy-out provision? Adequate financing to execute buy-out?Does current will concur with the Shareholders’ Agreement?
35 5 QUESTIONS – VALUE OF WEALTH PLANNING 4Have you heard of tax-efficient investing?3535
36 5 QUESTIONS – TAX-EFFICIENT INVESTING Cash flow – generating flexible cash flow streams while mitigating associated tax liability. Income – is investment income needed to support lifestyle needs? Flexibility over when reported and type, and tax rate on income. Growth – minimizing distributions/income to facilitate compound growth on account of capital. What is the most tax efficient source of income? Maintenance of portfolio allocation – making strategic or tactical shifts in portfolio – does tax impact client’s decision? Aim is to maximize after-tax rate of return and consider any value-add components3636
37 5 QUESTIONS – VALUE OF WEALTH PLANNING Do you have philanthropic intentions?3737
38 5 QUESTIONS – PHILANTHROPIC INTENTIONS Philanthropy by design, as opposed to philanthropy by defaultPlanning is key…Maximize benefit of $X, or $X donation for minimum dollarsCorporate deduction versus personal tax creditCash versus donation in kindNow versus later
41 IN FINAL… THE POWER OF 5Working with business owners and incorporated professionals, you should:Inquire, pique their interest and relate possible planning opportunities or touch on potential deficiencies you have encountered in similar situations.Ask what their overall, average tax rate is for their corporation and personally over the last two years.Talk to strategies available to business owners and incorporated professionals in relation to investment capital, funding retirement and wealth transfer.Combine forces and promote collaborative approach amongst business owner, wealth advisor, tax advisor and legal advisor.KNOW YOUR VALUE – DO NOT NECESSARILY HAVE TO BE AN EXPERT, OR HAVE THE SOLUTION, BUT CAN FACILITATE AND MOTIVATE ACTION5
42 Thank You FOR ADVISOR USE ONLY This information is provided solely for informational and educational purposes and is not intended to provide, and should not be construed as providing individual financial, investment, tax, legal or accounting advice. Professional advisors should be consulted prior to acting on the basis of the information contained in this publication.®CI Investments and the CI Investments design are registered trademarks of CI Investments Inc.