Tax Update 2015: What you need to know. Jamie Golombek, Managing Director, Tax and Estate Planning

Transcription

1 Tax Update 2015: What you need to know Jamie Golombek, Managing Director, Tax and Estate Planning

2 Agenda 1. Canadian & U.S. tax update 2. Retirement income planning 3. Best tax cases of the past year 2

3 2015 Tax Update Canadian tax

4 Liberal majority government: Real (Tax) Changes Now? Proposed changes: Decrease TFSA limit to $5,500 (from $10,000) Cancel Family Tax Cut (income splitting) Replace UCCB with Canada Child Benefit Cancel education and textbook credits Decrease income tax by 1.5% (22% to 20.5%) with income from $44,700 to $89,401 Increase income tax by 4% (29% to 33%) with income > $200,000 4

5 Liberal proposed changes to federal personal income tax rates Taxable income Current Proposed $44,701 15% 15% > $44,701 and $89,401 22% 20.5% > $89,401 and $138,586 26% 26% > $138,586 and $200,000 29% 29% > $200,000 29% 33% 5

6 Donation of Proceeds From Sale of Private Company Shares & Real Estate Charitable donation tax credit (individuals) Tax deduction (corporations) Additional tax benefit where public securities donated in-kind Zero tax on capital gain realized on donation Budget extends benefit where private corporation shares or real estate sold & proceeds donated Donation made within 30 days Made to arm s length party After

7 Example Donate Real Estate Proceeds Real estate available for a donation: Market value of real estate $1,000,000 Adjusted cost base 600,000 Capital gain $ 400,000 7

8 Cost of $1,000,000 donation from proceeds of sale of real estate Before 2017 Proceeds $1,000,000 Adjusted cost base ( 600,000) Capital gain $ 400,000 Tax on capital gain $ 88,000 COST OF DONATION: Donation $1,000,000 Tax on capital gain 88,000 Tax savings from donation ( 440,000) TOTAL COST $ 648,000 After 2016 $1,000,000 ( 600,000) $ 400,000 $ 0 $1,000,000 0 ( 440,000) $ 560,000 50% of capital gains are taxable, at a rate of 44% in Saskatchewan in 2015 assuming the donor pays tax at the top marginal rate. This does not include the effect of changes to federal tax rates proposed by the Liberal government. 44% x Donation Amount, which assumes that $200 of donations have already been made in the year and the donor is not eligible for the First-time Donor s Super Credit. 8

9 Lifetime Capital Gains Exemption (LCGE): Increase for Farmers & Fishers LCGE for qualified small business corporation shares is $813,600 LCGE for qualified farm and fishing property increased by Budget 2015 $1 million Applies to sales of property after April 20,

10 Small Business Tax Rate & Non-eligible Dividends Small business tax rate Tax rate on first $500,000 Currently 11% Budget rate reduction Rate drops to 9% by 2019 Non-eligible Dividend Tax Rate Will increase steadily as small business tax rate decreases 10

11 Small Business Tax Rate Reduction and DTC Adjustment for Non-Eligible Dividends As of 2019 Small business tax rate (%) Gross-up (%) DTC (%) Top federal rate on N/E dividends 21.22% 21.62% 22.21% 22.61% 22.97% 11

12 Small business tax rate & non-eligible dividends Federal Corporate Income Tax Paid by a Small Canadian-Controlled Private Corporation with $500,000 of Taxable Income 12

13 Foreign Property: Report Offshore Stash (T1135) Foreign income verification statement More than $100,000 (CDN) of COST Funds in foreign bank accounts Shares of non-resident corporations Some foreign real estate EXEMPT Canadian mutual funds (even if the fund owns foreign shares) Foreign real estate primarily for personal use Penalty $25 / day (Max $2,500) 13

14 T1135 Current Requirements E-file started with 2014 filing Very detailed reporting Alternative reporting for accounts with Canadian registered securities dealers or Canadian trust companies Country aggregate reporting permitted / FMV rather than cost 14

15 T1135 Reporting Changes announced in 2015 Concern that form still too complex Submissions made on behalf of taxpayers by IIAC and CPA BUDGET 2015: Revised form for 2015 reporting Total cost < $250,000 Simplified reporting Total cost $250,000 Existing (complex!) reporting 15

16 Testamentary trust rules changing in 2016 Testamentary trusts Historical tax benefit income taxed at graduated rates No longer applies as of 2016, other than for: Graduated Rate Estates Qualified Disability Trusts Encourage review of existing wills & estate plans 16

17 Graduated Rate Estate Must be an estate Trust created under a will does not qualify Applies to first 36 months No grandfathering Only one GRE per deceased Income in GRE taxed at graduated tax rates 17

18 Qualified Disability Trust At least one beneficiary qualifies for disability tax credit One QDT per beneficiary But, QDT can include other beneficiaries Income in QDT taxed at graduated rates But, loss of graduated rates if income paid to non-disabled beneficiary Trust 18

19 Testamentary Trusts Bottom Line The New Regime Extending the time for an estate to settle no longer worthwhile after 36 months Cannot use multiple testamentary trusts to obtain graduated tax rates 19

20 Life interest trusts Life interest beneficiaries entitled to all trust s income & capital during their lifetime Property remaining at death is left to other beneficiaries Examples: Alter-Ego Trust Joint Spousal/Common-Law Partner Trust Spousal/Common Law-Partner Trust Starting 2016, tax rules are changing for life interest trusts 20

21 Spousal Trust: Inheritance Protection Spouse A During life of Spouse B Spouse B Testamentary Trust After death of Spouse B Kids Spouse B s Kids 21

22 Spousal Trust: Current rules when surviving spouse dies Al put $200,000 in a spousal trust for Bea: Beneficiaries when Bea dies = Al s kids Bea has $200,000 assets of her own: Beneficiaries when Bea dies = Bea s kids Beneficiaries when Bea dies Trust (created by Al) Al s kids Assets $600,000 * Tax on trust assets ($400K CG x 25%) ( 100,000) Net available $500,000 Bea s estate Bea s kids $200,000 ( 0) $200,000 * It is assumed that trust assets have a FMV of $600,000 and an ACB of $200,000, yielding a $400,000 capital gain, and that the tax rate on capital gains is 25% for the trust and Bea. 22

23 Spousal Trust: Rules after 2015 when surviving spouse dies Al put $200,000 in a spousal trust for Bea: Beneficiaries when Bea dies = Al s kids Bea has $200,000 assets of her own: Beneficiaries when Bea dies = Bea s kids Beneficiaries when Bea dies Trust (created by Al) Al s kids Assets $600,000 * Tax on trust assets ($400K CG x 25%) ( 0) Net available $600,000 Bea s estate Bea s kids $200,000 ( 100,000) $ 100,000 * It is assumed that trust assets have a FMV of $600,000 and an ACB of $200,000, yielding a $400,000 capital gain, and that the tax rate on capital gains is 25% for the trust and Bea. 23

24 Testamentary donations after 2015 A donation made under your will may be claimed Deaths in 2015: In your final or prior tax year Deaths after 2015 (within 36 months after death): In your estate; or In your final or prior tax year Deemed made when donation completed 24

25 Exempt test for life insurance Exempt Policies Savings component accumulates without annual tax Payment of death benefit received tax-free Effective 2017, to reflect new life expectancies, exempt policy test will change Reduced maximum premiums/deposits Lower cash value accumulations 25

26 More 2017 Insurance Changes Prescribed Annuity Contracts Taxable portion will increase Corporate-owned life insurance Death benefit ACB = Tax Free Capital Dividend ACB = Premiums paid NCPI Under new rules, it will take longer for ACB to decline to zero Grandfathering applies Consider purchasing prior to

27 2015 Tax Update U.S. tax

28 Who Pays U.S. Estate Tax? Canadian (Not a U.S. citizen, green-card holder or U.S. domiciliary) Estate tax on U.S.-situs property, such as: U.S. real estate U.S. securities (even if held in Canadian accounts, including RRSP, RRIF, TFSA) U.S. business assets Tangible personal property located in the U.S. (boats, vehicles, artwork) U.S. person residing in Canada (U.S. citizen, green-card holder or U.S. domiciliary) Estate tax on worldwide estate: Includes life insurance that is essentially owned by the decedent 28

29 U.S. Estate Tax Update Estate tax applies on the fair market value (FMV) of property owned upon death* Estate tax exemption $5,430,000 $5,450,000 Estate tax rates 18% to 40% 18% to 40% * A U.S. person pays U.S. estate tax based on worldwide gross estate, while a non-resident alien pays U.S. estate tax based on U.S.-situs assets. 29

30 $5.43 MM Exemption = $2.118 MM Unified Credit From To Rate Amount - 10,000 18% 1,800 10,000 20,000 20% 2,000 20,000 40,000 22% 4,400 40,000 60,000 24% 4,800 60,000 80,000 26% 5,200 80, ,000 28% 5, , ,000 30% 15, , ,000 32% 32, , ,000 34% 85, , ,000 37% 92, ,000 1,000,000 39% 97,500 1,000,000 5,430,000 40% 1,772,000 2,117,800 30

31 U.S. Estate Tax Exemption Prorated Under the Canada-U.S. treaty, Canadians are allowed a prorated unified credit: Unified Credit x U.S. Situs Assets Worldwide Assets * * Worldwide assets include death benefits from life insurance owned by an individual. 31

32 Example of 2015 U.S. Estate Tax Calculation: Canadian (Not a U.S. Person) Estate Assets Fair Market Value U.S Condo $ 1,000,000 Other Assets 9,000,000 Total Estate Assets $10,000,000 Estate Tax on $1 million U.S. Condo $ 345,800 $1,000,000 Unified Credit: $2,117,800 x ( 211,780) $10,000,000 Estate Tax Payable $ 134,020 32

33 U.S. Estate Tax Changes Proposed in the 2015 U.S. Budget Existing for Proposed for Estate tax rates 18% 40% 18% 45% Estate tax exemption $5.43 million indexed to inflation $3.5 million not indexed to inflation 33

34 * 2015 High rate threshold (millions) Highest estate tax rate 100 Years of U.S. Estate Tax $60 $50 $40 $30 $20 $10 $- $50 million 77% $10 million $5.43 million 40% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% High rate threshold Highest estate tax rate * In 2010, could elect high rate threshold of $5 million and highest estate tax rate of 35%. Source of data: Historical Look at Estate and Gift Tax Rates, CCH

35 Proposed elimination of U.S. estate tax Sen. John Thune sponsored a bill to eliminate the estate tax April 16, 2015: Bill passed by the U.S. House of Representatives (Republican) Stepped up basis would still be allowed Estimated effect: Cost: $14.6 billion in 2016; $269 billion in next 10 years Impact: 5,400 estates this year (0.2% percent of deaths) Creation of 139,000 jobs stands little chance of making it out of the Senate, much less past the president s veto pen New York Times, April

36 Obama s State of the Union 2015 And let's close the loopholes that lead to inequality by allowing the top one percent to avoid paying taxes on their accumulated wealth. 36

37 Angel of death loophole Only the wealthiest 0.14% of Americans pay any estate tax due to $5.43M exemption 37

38 Angel of death loophole - Example Decedent Beneficiary Future capital gain Taxable to beneficiary Often tax free! No tax on capital gains & usually no estate tax Capital gain $4.4 million Cost basis $1 million Stepped-up cost basis $5.4 million 38

39 A Simpler, Fairer Tax Code January 17, 2015 Release * Obama proposals: Deemed disposition on death, except: No disposition for assets left to spouse (i.e. CG only taxed on death of second spouse) No tax on: Small family businesses (until they are sold) CG from most tangible personal property (e.g. clothing, furniture, and small family heirlooms) $250,000 CG on a residence ($500,000 per couple) $100,000 other CG ($200,000 per couple) Increase maximum tax rate on all capital gains and dividends from 20% to 28% * 39

40 Passive Foreign Investment Companies (PFICs) Rules designed to prevent deferral of U.S tax on passive investments held offshore (i.e. not in U.S.) Many unintended consequences Canadian mutual funds will almost always be PFICs 40

41 PFICs: Renaissance offers U.S. tax reporting statements 41

42 PFIC: IFIC lobbying efforts April 2014 June 2014 August 2014 August 2015 Met with the U.S. Treasury & Joint Committee on Taxation Submission to the Committee on Ways and Means Discussions with U.S. government officials Engaged PWC to work towards High-Tax Exemption for funds in Canada and other similarly-taxed jurisdictions 42

43 Retirement Income

44 Do traditional retirement rules need to be retired? How much income do you need to retire: 60%, 80%, 100%? What rate of withdrawal is appropriate: Is 4% too low?! 44

45 A different, personalized approach Plan for expenses, not income Consider known expenses: What lifestyle is desired in retirement? Will any debts be outstanding? As well as unknown expenses: Potential health care costs? Inflation? And timeframe how long will retirement expenses last? 45

46 What resources will be available to meet expenses? Government income: CPP, OAS Private pension plans RRSPs / RRIFs / TFSAs Non-registered accounts Inheritances 46

47 Government plans Canada Pension Plan (CPP) Max $12,780 in 2015 Old Age Security Max $6,765 in clawback range: $73k to $118k Eligibility age increasing to 67, starting in

48 Taking CPP early (between ages 60 and 65) Taking CPP/OAS late (after age 65) With normal life expectancy, you should receive the same total benefits if you take: Early CPP 1 and get a lower benefit for a longer time or Late CPP/OAS 2 and get a higher benefit for a shorter time But not everyone lives to the expected age: If you may die earlier (e.g. health problems), take earlier If you may die later (e.g. robust health), take later 1 CPP retirement benefits are reduced for each month prior to age CPP and OAS retirement benefits are increased for each month beyond age 65, up to age

49 Voluntary CPP supplements Photo: THE CANADIAN PRESS/Sean Kilpatrick, Rideau Hall in Ottawa on Wednesday, November 4,

50 Ontario Retirement Pension Plan (ORPP) Government-administered, defined benefit plan Contributions start in 2017 (phased-in for large employers first) Exemptions include employers offering a comparable pension plan Mandatory contributions: 3.8% of earnings $3,500 to $90,000 (1.9% employer +1.9% employee) Retirement benefits: 15% of earnings, so annual max. = $12,815 (2014 dollars, indexed) 50

51 Goodbye to the ORPP? 51

52 New RRIF Factors Age (at start of year) Old Factor (%) New Factor (%) Age (at start of year) Old Factor (%) New Factor (%) & over Legislation passed on June 23 52

53 Age 71 Capital Preserved ($100,000) Real $ Age (at start of year) Under Existing RRIF Factors Under New RRIF Factors Difference (% more remaining) , , ,000 77, ,000 62, ,000 44, ,000 24, ,000 10, % rate of return, 2% inflation 53

54 Reducing RRIF minimums was a good start but there s still risk that many Canadians will outlive their savings 54

55 TFSA Contribution Limit Increase Year Limit 2009 $ 5, , , , , , ,000 Cumulative $41, years of age Resident of Canada New Liberal government proposes to reduce the annual limit from $10,000 to $5,500 55

56 TFSA Age of Max. Contributors (2013) Distribution of Individuals Contributing the Maximum Amount to their TFSA by Age,

57 TFSA Income of Max. Contributors (2013) Distribution of Individuals Contributing the Maximum Amount to their TFSAs by Income

58 Wealthy Canadians Benefit Most From TFSA Limit Increase 58

59 Business owners Investing via TFSA vs. investing in a corporation 59

60 SK 2015 SBD Income Needed to Make TFSA Contribution $20,000 $15,000 Corporate tax $2,295 Personal tax $5,363 $10,000 $5,000 $0 Corporate after-tax income $15,363 Corporation Dividends Personal after-tax income Available for TFSA contribution $10,000 Shareholder 60

61 SBD Income, SK 2015 After-tax Amount to Shareholder after One Year $10,700 5% Rate of Return $10,600 $10,500 $10,400 $10,300 $10,200 $10,500 $10,400 $10,578 $10,584 $10,100 $10,000 All income Interest Eligible dividends Capital Gains TFSA CORPORATE 61

62 SBD Income, SK 2015 After-tax Amount to Shareholder over Time 62 $50,000 5% Rate of Return Value after 30 years: Deferred CG - $48,800 $40,000 TFSA - $43,200 $30,000 $20,000 Annual CG - $41,900 Eligible dividends - $39,000 $10, Interest - $28,000 62

63 Best Tax Cases of the Year

64 Berger v. The Queen (2015 TCC 153) Berger was laid off from job as a sports reporter for Fan590 Afterwards he started a sports blog Claimed losses of $26,540 and $37,866: Expenses predominately for travel to Toronto Maple Leaf away games Argued he wanted to attract sufficient readers to blog and then would later try for sponsorship revenue Minister denied expenses on basis that they were personal and not incurred in course of commercial activity/business Court said 64

65 Queen v. Tallon (2015 FCA 156) Tallon suffered from severe chronic pain and her doctor recommended spending the winter in warmer climates to ease her condition Tallon claimed travel expenses as a medical expense As U.S. was not warm enough, and medical costs were too high, destinations included: Thailand, Indonesia, Cambodia, Burma, Ecuador, Venezuela, Costa Rica & India Expenses allowed by Tax Court, CRA appealed Court said 65

66 Martin v. the Queen (2014 TCC 200) June 2010, Martin stopped working for brokerage firm (Peak) He couldn t get employment or regulatory approval to start own firm Martin s former clients continued to do business with Peak Martin said this was a theft by Peak of his clientele 66

67 Martin v. the Queen (2014 TCC 200) (cont d) For 2010, Martin claimed: $14,000 loss, due to lost income from clients Estimate: $2,000/month x 7 months from July December $800,000 capital needed to produce 3% $14,000,000: Court said loss of $2 million personal property due to financial difficulty Multiplied by 7, relying upon the proverbial exhortation to thieves to pay back sevenfold what they stole 67

68 Questions & Answers

69 Thank You renaissanceroadshow.ca Renaissance Investments is offered by and is a registered trademark of CIBC Asset Management Inc.

70 Jamie Golombek Managing Director, Tax and Estate Planning, CIBC Wealth Advisory Services Jamie Golombek is Managing Director, Tax and Estate Planning at CIBC Wealth Advisory Services, where he works closely with advisors and clients from CIBC Private Wealth Management, Wood Gundy, Imperial Service and other CIBC partners to deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with an international investment company. Jamie previously worked for Deloitte and Touche as a tax specialist in the Toronto office, specializing in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column, Tax Expert, in the National Post, and has appeared as a guest oncbc Newsworld and The National. He regularly appears as a personal financial expert on CTV s The Marilyn Denis Show. Jamie received his B.Comm. from McGill University, earned his Chartered Accountant designation in Ontario and qualified as a U.S. Certified Public Accountant in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In September 2006, Jamie was awarded the Institute of Chartered Accountants of Ontario s Award of Distinction, which honours young CAs who have brought distinction to themselves and to their profession through leadership and achievement in their professional, community and/or personal lives. Jamie is the past chair of the Investment Funds Institute of Canada s Tax Working Group, and a member of the Ontario Institute of Chartered Accountants, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. Jamie also teaches an MBA course in personal finance at the Schulich School of Business at York University in Toronto. 70

71 Disclaimer Renaissance Investments is offered by CIBC Asset Management Inc. This 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 nor does it constitute an offer or solicitation to buy or sell any securities referred to. The information contained in this document has been obtained from sources believed to be reliable and is believed to be accurate at the time of publishing, but we do not represent that it is accurate or complete and it should not be relied upon as such. Any information or discussion about the current characteristics of this fund or how the portfolio manager is managing the fund that is supplementary to information in the prospectus is not a discussion about material investment objectives or strategies, but solely a discussion of the current characteristics or manner of fulfilling the investment objectives and strategies, and is subject to change without notice All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. Individual circumstances and current events are critical to sound investment planning. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the Renaissance Investments family of funds simplified prospectus before investing. Renaissance Investments is a registered trademark of CIBC Asset Management Inc. 71