1. Wealth Management Strategies in Light of the 2018 Federal Budget
Suzanne Schultz, CPA, CA, CFP
Vice President and Estate Planning Specialist
March 2018

2. TOPICS
How will Federal Budget proposals affect passive saving in a corporation?
What are some solutions to help business owners save for retirement?
Case Study
July 7, 2019
RBC Wealth Management Financial Services Inc. |

3. The History of the New Proposals
2015 Election Platform to target unfair tax advantages afforded business owners
July 2017 consultation paper released with much push back from public
Dec 2017 legislation on income sprinkling announced
Feb 2018 Passive investment proposal announced (much less onerous than July paper)
July 7, 2019
RBC Wealth Management Financial Services Inc. |

4. What was possibly unfair?
Income in a corporation subject to the small business deduction is taxed at preferential tax rates. If the net income is then used to invest passively, the business owner would have much more to invest than an individual would have.
Example: An individual and a corporate owner each earn $100,000 in pre-tax income. Assume high tax rates apply to individual, corp gets small business deduction.
Individual
Corporation
Income Earned
$100,000
Personal Tax
$15,000
Corporate Tax
$53,530
Net Income Available
$85,000
$46,470
Over time the corporate owner would be able to accumulate
significantly more than the individual.
July 7, 2019
RBC Wealth Management Financial Services Inc.

5. What do the new proposals say?
Starting in 2019, if a corporation earns more than $50,000 in passive income in a year, the small business deduction will begin to be clawed back. Reduction of $5 for every $1 of passive income above $50, Full claw back once income reaches $150,000.
No impact if no passive investment income
Passive investment income for this purpose will include rents, royalties, interest, portfolio dividends (foreign and Canadian), taxable capital gains.
July 7, 2019
RBC Wealth Management Financial Services Inc. |

6. Examples:
Example 1: Corporation has $1 million passive investment portfolio, 5% rate of return. With income of $50,000 per year there is no claw back of the small business deduction.
Example 2: Corporation has $125,000 of passive income. Excess income is $125,000 less $50,000 = $75,000. SBD reduction is $5 for every $1 so $75,000 x 5 = $375,000. This corporation would be left with only $125,000 of its normally $500,000 small business deduction.
July 7, 2019
RBC Wealth Management Financial Services Inc. |

7. Income Sprinkling Rules- Big Picture
The December proposals will limit income splitting using private corporation shares in certain cases.
Kiddie tax (high tax rates) has applied to dividends paid to minor children for many years now
New Tax on Split income (like kiddie tax) will apply to a related shareholder over age 17 with some exceptions
Deemed actively engaged in the business (20 plus hours per week)
If deemed actively engaged in any 5 previous taxation years, rules will not apply in future
Over age 25, amounts must be reasonable
Aged 18-24, rules will consider if capital contributions were made
Spouses over age 65 are excluded
July 7, 2019
RBC Wealth Management Financial Services Inc.

8. What does this all mean?
Some business owners may not be able to income split with family members like they used to.
Might keep more cash back in the business or be subject to high personal taxes
BUT…if invest too much passively in the corporation, there could be higher tax due to the small business deduction claw back.
Tax efficient investment choices in corporations will become more important than ever.
July 7, 2019
RBC Wealth Management Financial Services Inc. |

9. One Solution: Corporate Insurance as an Asset Class
Permanent insurance can be held as an asset in a corporation
Investments can be held inside the insurance policy (universal life or whole life)
Investment income inside the policy is tax exempt (no T-slips) so will not affect small business deduction, nor be subject to any corporate tax at all.
Insurance death benefit is tax free to corporate recipient
Insurance death benefit can be paid via capital dividend account to beneficiaries, avoiding a layer of personal tax on the ultimate distribution
July 7, 2019
RBC Wealth Management Financial Services Inc. |

10. Holdco Estate Transfer Strategy
A strategy for those who plan to leave some Holdco funds to beneficiaries
53% to Heirs
Invest in
Stocks, bonds
Taxable
Dividend
(47% tax)
Proceeds in Holdco
Tax-free
Insurance
Dividend
(0% tax)
Life Insurance
in Holdco
100% to Heirs
Invest Portion

11. Case Study: Corporate Wealth Transfer
Sam, age 60, non-smoker, in good health
Corporate FMV = $5 million
Corporation has assets that include $1 million of fixed income investments earning 3.5%
Objectives:
Maximize the transfer of wealth to the next generation
Minimize tax during their lifetime
Assumes a 53.53% marginal tax rate, 45.30% dividend tax rate, and a % corporate investment tax rate. Values and rates are not guaranteed and are subject to change.

12. Comparison of Planning with the $1M Fixed Income
757,105

13. Comparison of Planning with the $1M Fixed Income
1,289,213

14. Comparison of Planning with the $1M Fixed Income

15. Summary
Tax Proposals can affect how much tax business owners will pay.
Will be very impactful to medical professionals who typically invest passively in their professional corporations
Planning will remain an important piece of the puzzle to help match a client’s goals with savings strategies to minimize tax but also provide for future spending
Permanent tax-exempt life insurance is an effective investment choice within a corporation that can help minimize current taxes but also taxes on transfer of corporate value to beneficiaries.

16. Thank you
RBC Wealth Management Financial Services Inc. |
July 7, 2019