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CONFIDENTIAL - NOT FOR DISTRIBUTION
Hot Tax & Estate Issues for InvestorsHot Tax & Estate Issues for InvestorsCIFPs (Halifax) June 10, 2009
Jamie GolombekManaging Director
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AgendaAgenda
Tax planning- Key 2009 tax changes- Pension splitting- Capital loss planning- Spousal / partner loans- TFSA “My Top 5”- Registered Disability Savings Plans- 2009 “best” tax cases
Estate planning- The estate “re”-freeze- Ownership of U.S. vacation property
33
2009 Federal Tax Brackets2009 Federal Tax Brackets
2009 2008 Rate
Less than $40,726 Less than $37,885 15%
$40,726 to $81,452 $37,885 to $75,769 22%
$81,452 to $126,264 $75,769 to $123,184 26%
Over $126,264 Over $123,184 29%
44
RRSP / RRIF Decline in valueRRSP / RRIF Decline in value
FMV of RRSP/RRIF taxable as of date of death on terminal return
- Unless qualifying rollover to spouse, partner, qualifying dependent child
What if RRSP declines in value post-death?
Example:
- Gary dies in June 2008 – FMV of RRSP at date of death is $200,000
- RRSP is paid out to estate in January 2009 – FMV is $120,000
- Loss of $80,000
Budget 2009
- Loss can be claimed on terminal return of deceased
55
FirstFirst--Time Home BuyersTime Home Buyers’’ Tax CreditTax Credit
New $5,000 amount eligible for 15% credit
- Value = $750
“First-time home buyer”
- Neither individual nor spouse/partner owned home in current or previous four calendar years
One claim per family
- Unused credit can be transferred to spouse/partner
66
Home BuyersHome Buyers’’ PlanPlan
Increase to $25,000 (from $20,000)
Withdrawn from an RRSP, tax-free
Must be paid back over 15 years to avoid annual income inclusion
“First-time home buyer”
- Neither individual nor spouse/partner owned home in current or previous four calendar years
77
Small business tax measuresSmall business tax measures
Increase in small business limit to $500,000 (from $400,000)
– Low federal tax rate of 11% on active business income up to limit
Accelerated tax depreciation for computer purchases
– Can write off 100% of cost of computers in year acquired
– No “half-year” rule
– For purchases from January 28, 2009 through January 31, 2011
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Applied against capital gains- Including CG distributions from mutual funds
Must be used against 2008 gains firstExcess can be carried back / carried forward
Form T1A
Report All Capital LossesReport All Capital Losses
2005 2006 2007 2009 + future years2008
99
Capital losses Capital losses -- quizquiz
Capital loss carried back from 2008 to 20072007 reported large capital gain- Client lost all of OAS since income > $103,191
(2007 clawback level)Will loss carryback from 2008 to 2007 restore approx. $5,900 of OAS for 2007?- YES- NO
1010
Capital gain in 2008 Capital gain in 2008 –– OASOAS
Client loses 2008 OAS because large capital gain in 2008 (income > $105,266)Client will also lose 2009 OAS based on 2008 incomeWhat if high 2008 income (gain) was a one-time occurrence?
1111
Capital gain in 2008 Capital gain in 2008 –– OAS (contOAS (cont’’d)d)
Reduction of tax at source – OASForm T1213 OAS
1212
Capital loss planning Capital loss planning -- transferstransfers
Transfer to RRSP?
- Loss denied
- Crystallize first, wait 30 days to buy back
Transfer to TFSA?
- Loss denied
Transfer to RESP?
- OK, but if held for 30 days, “superficial loss”
1313
““Superficial lossSuperficial loss””
Superficial loss- Buy “identical property” within 30 calendar days- Who?
YouSpouse/partnerCorporation controlled by you/spouse/partnerTrust, if you or spouse is majority-interest beneficiary
Transfer to parent / child – OK- Transfer between spouses / partners?
1414
Capital loss planning Capital loss planning ––spousal transfer of lossesspousal transfer of losses
Spousal loss transfer
Victor + Maureen
- Maureen – ABC Shares - $10,000 accrued capital gain
- Victor – XYZ Shares
ACB - $50,000
FMV - $40,000
1515
Capital loss planning Capital loss planning ––spousal transfer of lossesspousal transfer of losses
Step one – Victor sells XYZ shares for $40,000
- Capital loss of $10,000
Step two – Maureen buys XYZ shares, pays $40,000
- Victor’s $10,000 capital loss is now “superficial”
- Added to ACB of Maureen’s shares ($10,000 + $40,000 = $50,000)
Step three – Maureen waits 30 days, sells for $40,000
- ACB - $50,000
- FMV - $40,000
- Capital loss of $10,000 can be used against ABC accrued gain
1616
Capital losses in a family trustCapital losses in a family trust
Trust had capital losses in 2008- Losses cannot be distributed to beneficiaries
Trust distributed capital gains in 2005/2006/2007Problem: How to use losses otherwise trapped in trust?
1717
Pension SplittingPension Splitting
Pension income?- Before age 65?
• Regular monthly pension from DB or DC plan- After age 65?
• Includes RRIF (LIF, LRIF, PRIF) withdrawalsBenefits:
Transfer up to 50% of pension income to lower-income spouse / partnerAvoiding / Minimizing impact of Old Age SecurityclawbacksDoubling of pension income creditReducing net income grind of age credit
1818
Pension Splitting (Example)Pension Splitting (Example)
Form T1032Example: Jack (65) Diane (60)
Pension Income $100,000 NIL
Investment Income 5,000 10,000
Old Age Security NIL
1919
Pension Splitting (solution)Pension Splitting (solution)
Jack (65) + Diane (60)
Jack's 2008 income
Pension income $ 50,000
Investment income 5,000
Diane’s 2008 income
Pension income $ 50,000
Investment income 10,000
Total savings
Income tax savings (ON) 4,194
Old Age Security savings 6,082
Pension income credit (Diane) 414
Age credit restored (Jack) 126
TOTAL $ 10,816
Pension income split 50/50Pension income split 50/50
2020
Pension splitting Pension splitting –– Question #1Question #1
Pension splitting in year of death– Eve received $120,000 of pension income in 2008– Adam died on September 1, 2008– How much can be reported on Adam’s terminal return?
• NIL• $40,000• $45,000• $60,000
2121
Pension splitting Pension splitting –– Question #2Question #2
Pension splitting with RRIF recontribution– Jack received $10,000 of pension income as RRIF minimum
in 2008– Jack recontributed 25% permitted on April 5, 2009– How much could have been reported on his wife’s 2008
return? • NIL• $2,500• $3,750• $5,000
2222
Make Debt TaxMake Debt Tax--DeductibleDeductible
“Singleton Shuffle”
$300,000$300,000
$300,000 $300,000
2323
Make Debt TaxMake Debt Tax--Deductible (contDeductible (cont’’d)d)
Lipson decision – Supreme Court (January 2009)General Anti-Avoidance Rule (GAAR)Use of attribution rules
Source: http://www.scc-csc.gc.ca/Details/d4-eng.aspCredit: Philippe Landreville, PhotographerSupreme Court of Canada Collection
2424
Spousal Loan at 1%Spousal Loan at 1%
Spouse or partner gifts/transfers funds– FULL attribution of income / gains to transferorExceptions:– Pay FMV or prescribed rate loanRate for Q2 2009 – 1%– Lowest ever!
2525
Jack loans Diane $200,000Investment earns 5% annually
Income splitting opportunity: $8,000- Tax Savings (ONT): $8,000 X (46.41% - 21%) = $2,033
annually
Income $2,000
Spousal Loan at 1% (Example)Spousal Loan at 1% (Example)
Jack$200,000
Interest Expense – 1%
Income $10,000Interest expense (2,000)Net income $ 8,000
Diane
2626
Spousal Loan Spousal Loan –– Rate Reset?Rate Reset?
What if you have an existing loan at 3% or 4%?– Can you adjust rate on loan?– Can you refinance with new loan?
2727
Home Renovation Tax Credit (HRTC)Home Renovation Tax Credit (HRTC)
Expenditures over $1,000
Maximum of $10,000– Credit worth 15% of $9,000 = $1,350
Per family (spouse/partner, minor kids)
From Jan 28, 2009 until Jan 31, 2010
Eligible expenses?– Labour, professional services
– Building materials
– Equipment rentals
– Permits
Ineligible?– Routine maintenance
– Furniture, drapery, appliances
– Interest expense
2828
Contribute to ALL Reg PlansContribute to ALL Reg Plans
RRSP Limit– 18% of 2009 “earned income”– Maximum of $21,000
RESP– $50,000 lifetime limit (no annual limit)– Basic grant – $500 / child / year
TFSARDSP
2929
TFSA TFSA –– IntroductionIntroduction
“The TFSA is a new general-purpose tax-efficient savings vehicle for Canadians that complements existing registered savings plans for retirement and education like Registered Retirement Savings Plans (RRSPs) and Registered Education Savings Plans.”Eliminates “double taxation” of savings
3030
Double Taxation of SavingsDouble Taxation of Savings
Unregistered TFSA
Income $ 1,000 $ 1,000
Tax (at 40%) (400) (400)
Income after-tax 600 600
Growth – 10 years / 5.4% 1,015 1,015
Tax (at CG rate – 20%) (83) N/A
Net available to spend $ 932 $ 1,015
3131
Opening Balance Contribution Growth
Ending Balance
2009 – 5,000 250 5,250
2010 5,250 5,000 513 10,763
2011 10,763 5,000 788 16,551
TFSA Withdrawal TFSA Withdrawal –– ExampleExample
Withdrawals from TFSA re-establish contribution room in following yearContribute $5,000/year for 3 years- Total $15,000
Invest at 5% per yearValue at end of 3 years $16,551
In 2012, new contribution room is:
– $5,000 for 2012 + $16,551 withdrawn in prior year
– $21,551
3232
TFSA TFSA –– Question 1Question 1
Fact pattern #1- March 2009 – contribute $4,000- July 2009 – increases in value to $5,000 and
withdrawn- October 2009 – how much can I contribute?
3333
TFSA TFSA –– Question 2Question 2
Fact pattern #2– March 2009 – contribute $4,000– July 2009 – increases in value to $5,000 and
withdrawn– January 2010 – how much can I contribute?
3434
Opportunity #1: Emergency FundsOpportunity #1: Emergency Funds
“Rainy day fund”Tax-free interest income- Highly taxed
• 46.41% in OntarioLiquidity- High-interest savings account- GIC- Money market mutual funds
Ability to re-contribute
3535
Opportunity #2: Tax Rate Planning Opportunity #2: Tax Rate Planning TFSA vs. RRSP TFSA vs. RRSP –– Same Tax RateSame Tax Rate
TFSA RRSP
Income $ 1,000 $ 1,000
Tax (at 40%) (400) –
Amount invested 600 1,000
Growth – 10 years / 5.4% 1,015 1,692 Tax (at 40%) – (677)
Net available to spend $ 1,015 $ 1,015
3636
Opportunity #2: Tax Rate Planning Opportunity #2: Tax Rate Planning TFSA vs. RRSP TFSA vs. RRSP –– High/LowHigh/Low
TFSA RRSP
Income $ 1,000 $ 1,000
Tax (at 40%) (400) –
Income after-tax 600 1,000
Growth – 10 years / 5.4% 1,015 1,692 Tax (at 20%) – (338)
Net available to spend $ 1,015 $ 1,354
3737
Opportunity #2: Tax Rate Planning Opportunity #2: Tax Rate Planning TFSA vs. RRSP TFSA vs. RRSP –– Low/HighLow/High
TFSA RRSP
Income $ 1,000 $ 1,000
Tax (at 20%) (200) –
Income after-tax 800 1,000
Growth – 10 years / 5.4% 1,354 1,692 Tax (at 40%) – (677)
Net available to spend $ 1,354 $ 1,015
3838
Opportunity #3: Education PlanningOpportunity #3: Education Planning
Use RESP first to maximize Canada Education Savings Grants- $2,500 / year – federal grant (20%) =
$500/annually- Plus, carryforward of CESG room
Above $2,500?- Consider TFSA for maximum flexibility
Private school funding
3939
Opportunity #4: Income splittingOpportunity #4: Income splitting
“$10,000/couple opportunity”- Gift $5,000/year to spouse or partner- No attribution of income / capital gains
Gift $5,000/year to each child > 18- Can’t open “in trust for” TFSAs
4040
Opportunity #5: Estate PlanningOpportunity #5: Estate Planning
Tax-free upon death- Leave to spouse, kids, grandkids, anyone!
Spousal / partner tax-free rolloverSuccessor account holder – spouse / partner- Tax-free transfer
Beneficiary designation- Avoid probate tax (where applicable)
4141
RDSPRDSP
$200,000 lifetime limitAge 59 and under to openAge 49 and under to get government funds:– Canada Disability Savings Grants
• Family income < $75,769– 300% of first $500– 200% of next $1,000
• Family income > $75,769– 100% of first $1,000
• Lifetime max: $70,000
4242
RDSP (contRDSP (cont’’d)d)
Canada Disability Savings Bonds– Family income < $21,287
• $1,000 annually (no contributions required)– Family income > $21,287
• Reduced pro-rate until eliminated at income > $37,887
– Lifetime max: $20,000
4343
Dunlop (2009)Dunlop (2009)
Failure to report amount in income10% federal + 10% provincial penaltyT4 slip from Bulk Barn- Not received- “T4 missing from Bulk Barn – will amend when received”
Penalty - YES or NO?
4444
Villanueva (2009)Villanueva (2009)
Failure to report income on return10% penalty of unreported amountTaxpayer filed “blank return”, signedIncluded T4 slip in envelopePenalty – YES or NO?
4545
Jackson (2008)Jackson (2008)
Membership into the “World Network Business Club”Represented by noted author Dan White– "How to Pay Zero Taxes and Keep the Tax Department
Happy!“Claimed various business expenses– a portion of weekly GO commuter Train passes– “daily Starbucks meetings with herself”– Blockbuster Video rentals for meetings with each other at
home– Groceries for meetings with family– Meetings allegedly held at LCBO outlets.”
Judge: “preposterous and outrageously aggressive”
4646
Estate FreezeEstate Freeze
Owner exchanges common shares for preferred shares – FMV $5 MM
ABC Corporation
Business Owner
100%
Common shares
FamilyTrust
New Common shares
KIDS
Beneficiaries of trustPreferred sharesRedeemable at
$5 MM
100%
4747
Estate Refreeze
Owner exchanges OLD pref’d shares for NEW pref’d shares – FMV $3MM
ABC Corporation
Business Owner
Preferred sharesRedeemable at $3 MM
FamilyTrust
New Common shares
KIDS
Beneficiaries of trustPreferred sharesRedeemable at
$5 MM
100%
4848
U.S. Estate Tax Issues for CanadiansU.S. Estate Tax Issues for Canadians
Assume non-resident, non-U.S. citizen (“ALIEN”)U.S. situs property:– U.S. real estate– U.S. securities (even in Canadian accounts, RRSPs,
RRIFs)– U.S. business assets
NON-U.S. situs property:– U.S. bank deposits– Life insurance proceeds– Most debt
4949
2009 U.S. Estate Tax Rates2009 U.S. Estate Tax Rates
Source: BDO Dunwoody LLP, May 15, 2008
From To Tax on bottom
of range Rate on Excess
0 10,000 0 18% 10,000 20,000 1,800 20% 20,000 40,000 3,800 22% 40,000 60,000 8,200 24% 60,000 80,000 13,000 26% 80,000 100,000 18,200 28%
100,000 150,000 23,800 30% 150,000 250,000 38,800 32% 250,000 500,000 70,800 34% 500,000 750,000 155,800 37% 750,000 1,000,000 248,300 39%
1,000,000 1,250,000 345,800 41% 1,250,000 1,500,000 448,300 43% 1,500,000 and over 555,800 45%
5050
U.S. Estate Tax Exemption / RatesU.S. Estate Tax Exemption / Rates
Year Exemption Top Rate
2006 2,000,000 46%
2007 2,000,000 45%
2008 2,000,000 45%
2009 3,500,000 45%
2010 Repealed Repealed
2011 1,000,000 55%
February 26, 2009: President Obama proposes to keep U.S. Estate Tax at 2009 levels
5151
Canada Canada –– U.S. Treaty: Unified CreditU.S. Treaty: Unified Credit
Same exemption limits, but prorated:
$3,500,000 (2009) ×U.S. Situs AssetsWorldwide Assets
5252
U.S. Estate Tax PlanningU.S. Estate Tax Planning
Life insuranceNon-recourse debtCanadian CorporationCanadian TrustPartnership
Thank YouThis material was prepared for investment professionals only and is not for public distribution. It is for informational purposes only and is not intended to convey investment, legal, or tax advice. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management. ™Renaissance Investments and "invest well. live better." are registered trademarks of CIBC Asset Management Inc.
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