Download - OPTIMIZE TAX-DEFERRED INCOME
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OPTIMIZE TAX-DEFERRED
INCOME
PROTECT THE TRANSFER OF
WEALTH
HARNESS THE POWER OF COMPOUND GROWTH
Invest Today with Tomorrow in MindTM Turning Actionable Tax Ideas into a Lifetime of Advantage for Your Clients
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Capital Preservation1
The answers consistently given are:
Growth2Tax Minimization3
Introduction
When Asked What is Most Important to Clients…
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Large Market and Inefficient Investments
Pre-retirees and retirees represent a “sweet-spot”
People aged 55 and up control 80% of investable assets1
Many are in highly taxed investment vehicles
Over $730 billion sitting in GICs, certificates of deposits and other savings accounts2
$121 billion in fixed income mutual funds3
$19 billion in Canada Savings Bonds4
Introduction
Sources: 1Capgemini, The Canadian Wealth Management Market 2004/2005, 2Investor Economics 2005 Household Balanced Sheet Report, 3IFIC September 2006, 4Government of Canada, Debt Management Strategy, April 2006
Age: 70+27%
Age: 55-7053%
Age: 30-5519%
Age: 16-301%
Total Investable Assets
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Introduction
Not All Cash Flows are Taxed Equally
You keep 53.6%
Tax paid 46.4%
Interest / Income
Tax paid 31.3%
You keep 68.7%
Dividends
Tax paid 23.2%
You keep 76.8%
Capital Gain
You keep 100%
(taxes are deferred)
Return of Capital
Assumes a marginal tax rate of 46.41%, top rate for Ontario; non-eligible dividends
Inefficientcash flow
Efficientcash flow
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What is Invest Today with Tomorrow in Mind™?
Understanding how decisions made today will impact your clients throughout their accumulation, decumulation, and wealth transfer phases of life
Focusing on how long-term tax efficient and tax effective investment strategies impact your clients’ overall wealth plan
Protecting your business from the inevitable impact of your clients’ RRIF drawdown and general tax erosion
Introduction
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Harness the Power of Compound Growth
Flexibility to change investments without incurring a taxable event
Benefit from compounded growth
Keep your client’s assets invested in a lower tax bracket for life
Actionable Strategies
Using Corporate Class to Get Your Client’s Assets Working Harder
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Actionable Strategies
How Does Corporate Class Work?
Defer taxes on capital gains when switching between investments
Enables a lifetime of flexibility
Fund A Fund B
Fund C Fund D
Fund E Fund F
Fund G Fund H
Change investments as your client’s life changes under a tax deferred structure
Corporate Class
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Using Corporate Class:$826,695
Not Using Corporate Class:$642,974
The Difference: $183,721
Your client keeps $183,721 more on their $100,000 investment!
Corporate Class in ActionDuring the Accumulation Phase
*Capital Gain taxes are paid by Non-Corporate Class investors when switching between fundsSource: Globe HySales and Franklin Templeton, January 1, 1986 to March 31, 2006
To simulate the Corporate Class returns for pre-inception periods, annual Series A returns of the Funds were reduced by 22.5 BP (capital tax charges on Corporate Class), BCEF Series F returns were reduced by 169BP (actual return difference between series A and Corporate Class) Assumes: dividends reinvested, all taxes paid MTR 46.41%. Assumes investment on Jan.1 of the year shown and switch on Dec.31 of the year shown, excluding Franklin Templeton Balanced Growth Portfolio where the switch was not made and is indicated as n/a.
Funds: TGF TISF BCEF FTBGP TotalInvestment
Dates:1986-90 1991-96 1996-02 2002-06
Taxes*: $10,257 $45,024 $42,753 n/a $98,034
Actionable Strategies
-100,000200,000300,000400,000500,000600,000700,000800,000900,000
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
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Corporate Class in ActionDuring the Decumulation Phase
Actionable Strategies
Your client gets 30% more After-Tax Income
Scenario assumes effective tax rate is 27.94%. Marginal tax rate of 46.41%, 8% return per year, withdrawing 8% of income per year. The 8% return is hypothetical and for illustration purposes only, actual
fund returns may differ.
Total After Tax Income:
In Corporate Class: $1,034,003
In Series A: $792,280
Series A Corporate Class
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
Amount invested:
Corporate Class:$826,695
Series A:$642,974
30% More After Tax Income
After Tax Income
Year
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Corporate Class in ActionAt the Transfer Phase
Actionable Strategies
Cash Flow Received (over a 20 year period)
$792,280
$1,034,003
$241,723 More Income
$504,288
$639,839
$135,551 More Asset Value
Wealth at Transfer (At year 40)
Your client benefits by a total of $377,274
Capital gains tax paid at year 40 is $186,856 on $826,695 for the Corporate Class Investment and $138,686 on $642,974 for the Series A investment. Assumes both are redeemed at the end of year 40. Net amount after all capital gain taxes paid
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Actionable Strategies
Application #1Application #1
Clients looking for a core investment solution that evolves with their risk tolerance and life stages.
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Quotential and Corporate Class
Benefits:
Switch among 7 fully diversified portfolios
Address your clients’ risk profiles throughout their life stages without triggering a taxable event
Defer tax event until client is in lower tax bracket
Benefit from compounded growth
Actionable Strategies
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Actionable Strategies
Application #2Application #2
Individual and corporate clients seeking preferential tax treatment on their fixed income investments.
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Preferential Tax Treatment on Fixed Income Investments
Actionable Strategies
Corporate Class Tax Shelter
ManagedYield
For Individual Clients:
Beneficial for short-term transitory assets. Clients can hold investments in Corporate Class without triggering taxes
Ideal tax efficient income for clients who are approaching or are in retirement. Income investments are drawn down through a SWP and are in the form of capital gains
For Corporate Clients:
Capital gains have better tax treatment, allowing a corporation to bank any losses to reduce tax liability
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Actionable Strategies
Application #3Application #3
Clients looking to complement their RRSP
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What About RRSPs?RRSP
Tax Deduction
Retirement Savings
Tax-deferred flexibility
Maximum annual contribution
of $19,000
Non-Registered
Tax deduction (with loan)*
Retirement savings
Tax-deferred flexibility (with Corporate Class)
No maximum contribution
Actionable Strategies
Upon Decumulation…RRSP
Full amount is taxed as income
Forced to redeem at 69**
Non-Registered
Cash flow is generally taxed as capital gains***
No forced redemption
*Interest may be deductible if certain criteria are met. Speak to your tax adviser about your specific situation. **Required to either redeem at 69 or rollover into a RRIF. ***Distributions may be taxed as income
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A difference after 20 years after tax!
Monthly Contribution/Payment
After 20 Years…
Corporate Class Loan
$50,000 loan invested in Corporate Class Funds with a monthly interest
payment of $250*
$233,048
($50,000) loan principal
= $183,048
RRSP PAC**
$250 $137,286
*For demonstration purposes only. Assumes the RSP and Corporate Class investments both grow at 8% annually and the $50,000 loan is an interest only loan with a rate of 6% with a marginal tax rate of 46.41%. Interest payment is deductible only if all conditions are met. Investor should talk with their tax advisor to discuss their specific situation. **A pre-authorized contribution (PAC) plan allows you to invest a specific amount of money at regular intervals.
In Accumulation
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Corporate Class vs. RRSPs
$45,762
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Corporate Class vs. RRSPsIn Decumulation
$137,286$137,286
$183,048$183,048
Corporate Class
RSP
Actionable Strategies
$18,644 pre-tax cash flow per year
$3,232 in taxes per year (taxed as capital gains)
$15,412 after-tax cash flow per year
$13,983 pre-tax cash flow per year
$6,490 in taxes per year (taxed as interest income) $7,493 after-tax cash flow per year
Over 20 years
51% More/Year
For demonstration purposes only. Assumes the RSP and Corporate Class investments both grow at 8% annually and the $50,000 loan is an interest only loan with a rate of 6% with a marginal tax rate of 46.41%.
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Tools
Actionable Strategies
Show the Benefits of Corporate Class to Your Clients
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Summary of Corporate Class
Choose from a wide range of investment solutions
7 Quotential Portfolios: Canada’s #1 Managed Program
27 Individual Mutual Funds
Benefit from compound growth – Your clients will have more $$ for retirement and more $$ for their estate
Defer taxes until your clients are potentially in a lower tax bracket = more money in their pocket
Actionable Strategies
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OPTIMIZE TAX-DEFERRED INCOME
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Optimize Tax-Deferred Income
Flexibility to structure income around a clients’ specific requirements
Provide high, predictable cash flow whileensuring the lowest tax bracket on investment returns
Continue to grow your clients’ assets
Actionable Strategies
Using Series T to Put More Money In Your Client’s Pocket
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Actionable Strategies
How Does Series T Work?Using the power of ROC, Series T allows your clients to defer capital gains tax until later and enjoy a higher cash flow now
Market Value
Declining ACB
Original ACB
TimeSample Monthly RoC Distribution
Value
The ACB is lowered by each
monthly distribution. If units
are sold, the market value
minus the current ACB is taxed
as a capital gain.
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Customize Your Cash FlowSwitching between Series T and Series A of the same fund or portfolio is not a taxable disposition. This allows you to fine-tune your clients’ cash flow.
8% targeted distributions are not guaranteed and may change at the discretion of Franklin Templeton Investments.
A T
Actionable Strategies
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Give Your Clients 16+ Years of Tax Deferred Income*
* Assumes 8% annual growth with 6% annual Return of Capital. Returns are hypothetical and for illustration purposes only, actual fund returns and target distributions may differ.
Actionable Strategies
Series T in ActionDuring the Decumulation Phase
Initial Investment in Series T
$600,000
16 2/3 years
Gives you:
$36,000/year (tax deferred)
Ending Value:
$1,017,003
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Series T in ActionAt the Transfer Phase
Total cash flow over 16 2/3 years: $600,000
Total Market Value: $1,017,003
Taxes Payable at the end of 16 2/3 years: $235,995
Net After-Tax Value: $781,008
Total Value to Client over 16 2/3 years: $1.38 million
Actionable Strategies
A higher net value to your client’s Estate
* Assumes 8% annual growth with 6% annual Return of Capital and assumes a tax rate of 46.41%. Returns are hypothetical and for illustration purposes only, actual fund returns and target distributions may differ.
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Applications for Your Practice
Clients looking for regular, tax efficient income through an investment vehicle that can weather different market environments
Also Consider Series T for:
Risk averse clients seeking income and estate preservation
Clients facing an Old Age Security (OAS) clawback
Philanthropic clients planning to give some of their investment to charity
Actionable Strategies
Series T is suitable for:
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Actionable Strategies
Looking for Income and Estate Preservation?The best of both worlds…
*Assumes a tax rate of 46.41%. **Assumes no income distributions and no capital gains distributions ***For demonstration purposes only. Series T Example: Client purchases $500,000 last to die insurance, Cost is based on the average cost of insurance for a 65 year old couple based on Equitable Life Insurance rates. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Unlike GICs, mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government insurer. Assumes that Series T is continued to be held. Taxes will be payable if investment is redeemed.
GIC Series TInitial Investment
$500,000 $500,000
Annual ROR 5% 5%
Return $25,000 gross $25,000 net**
Minus ($11,602 taxes*) ($7,500***)
What’s Left in Your Pocket?
= $13,397 net
= $17,500 net+ $500,000
Insurance Policy
Approximate annual cost to purchase $500,000 Last to Die Insurance Policy
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Actionable Strategies
Clients Fighting the OAS Clawback
Transfer client’s interest-bearing securities worth $100,000 into a Series T fund with an 8% pre-tax ROC distribution1
OAS clawback is reduced by $1,200 and taxes are potentially reduced by $2,952
Client’s total annual after-tax cash flow increases from $58,912 to $63,064*
Don’t let your clients miss out on potentially $4,152 extra cash a year*
1 8% targeted distributions are not guaranteed and are subject to change at any time. Tax rate of 32.98% is assumed based on a client’s gross annual income is $70,000 from pension. The 2006 threshold for OAS Clawback is $62,144.
$64,000
$63,000
$62,000
$61,000
$60,000
$59,000
$58,000
$57,000
$56,000
Keep more of your OAS using Series T funds – OAS Clawback reduced by $1,200
Put more money in your pocket– Taxes reduced by $2,952
Bonus Cash Flow from OAS Clawback Reduction
Bonus Cash Flow from Tax Savings
After Tax Flow from using Regular Funds
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Scenario 1: Redeem Series T and donate its net value in cash Ending market value of units : $100,000 Taxes on capital gains: ($18,564) Your donation receipt+: $81,436 Total Tax Reduction $19,230
Scenario 2: Donate Series T in kind at full market value Your donation receipt: $100,000 Gross tax benefit of the receipt: $46,410 Your capital gains taxes: ($0) Tax credit from receipt and total
Tax reduction: $46,410
Donating Series T in-kind gives your client a tax advantage of $27,180 over a cash donation*
Actionable Strategies
Client Seeking to Reduce Taxes through Charitable Giving
Tax Reduction from Donation
$-
$10
$20
$30
$40
$50
Cash Donation
In-kind Donation
$K
*Based on a $100,000 donation,+ tax credit receipt from $37,794. Assumes a tax rate of 46.41%
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Tools
Actionable Strategies
Show the Benefits of Series T to Your Clients
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OPTIMIZE TAX-DEFERRED
INCOME
PROTECT THE TRANSFER OF
WEALTH
HARNESS THE POWER OF COMPOUND GROWTH
Invest Today with Tomorrow in MindTM Turning Actionable Tax Ideas into a Lifetime of Advantage for Your Clients