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CORPORATE CLIENTS – THE POWER OF 5 Michelle Connolly Vice President, Wealth Planning, CI Investments.

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Presentation on theme: "CORPORATE CLIENTS – THE POWER OF 5 Michelle Connolly Vice President, Wealth Planning, CI Investments."— Presentation transcript:

1 CORPORATE CLIENTS – THE POWER OF 5 Michelle Connolly Vice 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 Todays Wealth Planners have to ask a lot more questions, and be comfortable in dealing with individual, trust and corporate planning situations Has your tax advisor discussed creative tax strategies available to your corporation? When do you think you will be financially and emotionally ready to retire? Can you claim the Lifetime Capital Gains Exemption when you sell your shares? Does your current corporate structure maximize income splitting opportunities? Have you implemented flexibility and maximized control over retirement income flows? When was the last time you were asked about your wills or succession plan? Are you a tax-efficient investor? What is your overall, average tax rate? CAPTURE ATTENTION IN 5 MINUTES

5 High-net-worth investor concerns 89% concerned about losing their wealth 85% concerned about tax mitigation 79.2% taking care of heirs 71.5% having enough money in retirement Source: Building a World Class Experience for Affluent Clients, CEG Worldwide, Morgan Stanley Smith Barney Institute, 2009 Financial analysis Risk mgmt Tax planning Wealth transfer Wealth planning CAPTURE ATTENTION IN 5 MINUTES

6 90% of business owners state proceeds from sale will be very important for the financing of retirement 52% of business owners do not have any succession plan 40% of business owners do not have an estate plan in place Source: RBC Wealth Management, HNW Inc, CIFP Financial analysis Risk mgmt Tax planning Wealth transfer Wealth planning CAPTURE ATTENTION IN 5 MINUTES

7 CORPORATE CLIENTS/PROSPECTS – THE POWER OF 5 5 key tax concepts - understand

8 Selling a small business or an incorporated practice does not guarantee $750,000 in tax-free capital gains 5 KEY TAX CONCEPTS

9 $2M offer for hotel building, equipment and furniture 5 KEY TAX CONCEPTS – CAPITAL GAINS EXEMPTION

10 Is it an asset or share sale? $2M offer for hotel building, equipment and furniture CGE is only available on certain qualified property, namely: Canadian controlled small business corporation shares Qualified farm property Qualified fishing property 5 KEY TAX CONCEPTS – CAPITAL GAINS EXEMPTION

11 Holdco Opco Mr. AMrs. A 50% $2M offer for Opco 100% FMV $2M active business operation assets FMV $1.5M passive investment assets 5 KEY TAX CONCEPTS – CAPITAL GAINS EXEMPTION

12 Only individual taxpayers, or individual beneficiaries of a trust, can claim the CGE Holdco Opco Mr. AMrs. A 50% $2M offer for Opco 100% FMV $2M active business FMV $1.5M passive investment assets 5 KEY TAX CONCEPTS – CAPITAL GAINS EXEMPTION

13 Shares must be QSBC shares and the following tests are applied: i.Length of ownership test: shares owned by taxpayer for 24 months; ii.24 month asset test: 50%+ assets used in active business; AND iii.Moment of disposition test: 90%+ assets used in active business Consider: Corporation may need to be purified and/or structure modified Good rule of thumb is 24 month lead time in planning for sale 5 KEY TAX CONCEPTS – CAPITAL GAINS EXEMPTION

14 Should your client: Incorporate? Incorporate a holdco for investments? Set up a separate corporation for each business interest or investment account? 5 KEY TAX CONCEPTS

15 5 KEY TAX CONCEPTS – PSB, SIB AND ASSOCIATION Personal Services Business Business 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 employees Consider employee versus self-employed/independent contractor tests Specified Investment Business The 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 employees Association In order to employ multiple Small Business Deductions, two or more CCPCs must not be associated The 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 persons

16 Corporate Tax Accounts – What do you need to know? 5 KEY TAX CONCEPTS

17 RDTOH – Refundable Dividend Tax on Hand Account Refundable 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 exists 5 KEY TAX CONCEPTS – RDTOH ACCOUNT

18 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. Capital Dividend Account CDA Non-taxable portion of net capital gains PLUS: Capital Dividends received PLUS: Non-taxable portion of gains on eligible capital property PLUS: Proceeds of a life insurance policy (less ACB) LESS: Capital Dividends paid 5 KEY TAX CONCEPTS – CDA ACCOUNT

19 What is your clients overall, average tax rate? 5 KEY TAX CONCEPTS

20 Corporation – T2Individual shareholders – T1 5 KEY TAX CONCEPTS – OVERALL TAX RATE How 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 retirement Plan - 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? Salary, dividends, capital gains

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?

22 5 KEY TAX CONCEPTS – OVERALL TAX RATE

23 How can a corporation be used to generate a flexible, tax-efficient, self-directed retirement? 5 KEY TAX CONCEPTS

24 5 KEY TAX CONCEPTS – FUNDING RETIREMENT years ago – RRSPs/RRIFs, IPPs, and RCAs years – provincial professional regulatory bodies allow incorporation Finance 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 redemptions Plan - 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 questions – value of wealth planning

26 When was the last time your tax, legal or financial advisor asked about your business, succession or estate plans? 5 QUESTIONS – VALUE OF WEALTH PLANNING

27 Business plan At what stage in the corporate life cycle? Organization chart – does voting control lie with management? Contingency Planning Succession/estate plan Who? 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? 5 QUESTIONS – VALUE OF WEALTH PLANNING

28 What purpose does the corporation or structure serve? 5 QUESTIONS – VALUE OF WEALTH PLANNING

29 5 QUESTIONS – PURPOSE OF… Opco Liability or creditor protection Tax savings and deferral opportunities Means to maximize/monetize the value of the business operations Income splitting opportunities/flexibility for compensation Means to facilitate wealth transfer plans Holdco Further means of protection Implement an estate freeze Means to purify opco Trust Implement flexibility over cash/income flows Set up direct vs. indirect ownership of shares Maintain an element of control over opco Multiply access to CGE

30 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 tax With Small Business Deduction – first $500K is taxed at lower, flat rate $500K personal versus $500K corporate and dividends paid out – depends upon the province Non-deductible expenses (life insurance, automobile, meals and entertainment, capital costs) funded with cheaper dollars Tax deferral – pay tax later, perhaps at reduced tax rate Surplus, after-tax dollars should remain in corporation to be invested – more investment capital Why generate income, unless needed to support lifestyle? 5 QUESTIONS – TAX MINIMIZATION

31 5 QUESTIONS – INCOME SPLITTING Corporations and/or trusts provide flexibility for compensation and income splitting opportunities that does not exist for a sole proprietor Does shareholder support family members with after-tax funds? Find out how, what and who shareholder is spending funds on Potential to access $750K+ Lifetime Capital Gains Exemption, and multiplication of access to Individual Corporation Trust Corporation Dividends/CGE Beneficiaries Dividends/CGE

32 5 QUESTIONS – FACILITATE WEALTH TRANSFER Succession planning Funding retirement, as opposed to RRSP Valuation of business Monetization of goodwill Implement control Estate planning Family members – who, age, in/dependent, residence, marital status Easier to implement at various stages with corporation or trust than a simple will concerning a proprietorship Multiple will strategy – depends upon the province

33 What if? 5 QUESTIONS – VALUE OF WEALTH PLANNING

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 familys, 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 Have you heard of tax- efficient investing? 5 QUESTIONS – VALUE OF WEALTH PLANNING

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 clients decision? Aim is to maximize after-tax rate of return and consider any value-add components

37 Do you have philanthropic intentions? 5 QUESTIONS – VALUE OF WEALTH PLANNING

38 5 QUESTIONS – PHILANTHROPIC INTENTIONS Philanthropy by design, as opposed to philanthropy by default Planning is key… Maximize benefit of $X, or $X donation for minimum dollars Corporate deduction versus personal tax credit Cash versus donation in kind Now versus later

39 5 QUESTIONS – PHILANTHROPIC INTENTIONS

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41 IN FINAL… THE POWER OF 5 Working with business owners and incorporated professionals, you should: 1.Inquire, pique their interest and relate possible planning opportunities or touch on potential deficiencies you have encountered in similar situations. 2.Ask what their overall, average tax rate is for their corporation and personally over the last two years. 3.Talk to strategies available to business owners and incorporated professionals in relation to investment capital, funding retirement and wealth transfer. 4.Combine forces and promote collaborative approach amongst business owner, wealth advisor, tax advisor and legal advisor. 5. KNOW YOUR VALUE – DO NOT NECESSARILY HAVE TO BE AN EXPERT, OR HAVE THE SOLUTION, BUT CAN FACILITATE AND MOTIVATE ACTION

42 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. Thank You FOR ADVISOR USE ONLY


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