THE TAXMAN COMETH: FINANCIAL STRATEGY IN AN INCREASINGLY HOSTILE TAX ENVIRONMENT

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1 CIBC WOOD GUNDY THE CM GROUP CALGARY CENTRAL 607 8th Avenue SW Suite 600 Calgary, Alberta, T2P 0A7 Greg Kraminksy First Vice-President, Portfolio Manager Colin Andrews First Vice-President, Portfolio Manager Steven Molina Investment Advisor Blair Howell Senior Investment Advisor Nathaniel Magnuson Associate Investment Advisor Tiziana Diiorio Client Associate Helen Stead Client Associate THE TAXMAN COMETH: FINANCIAL STRATEGY IN AN INCREASINGLY HOSTILE TAX ENVIRONMENT Ryan Ackers, Vice President Business Development & Client Relations GBL Inc. Contributors: Brian Cabral, Navaz Cassam, Laura LaRiviere, Fraser Lang, Tatenda Mawoyo GBL Inc. Published: February 16 th, 2017 The perpetual arms race between increasing and decreasing taxes in Canada, alongside the use of strategies that help taxpayers pay less of their hard earned dollars to government coffers date back to the birth of our great country. Keeping said arms race flourishing are changing governments and the tax policies that follow. Imagine this: You re a business owner, a doctor let s say, who pays yourself an income at or above the highest marginal tax rate annually. Federal tax rates at the top have increased since the new government took power, and depending on which province you reside, your provincial tax rates may have increased as well (congratulations if you reside in British Columbia, you arguably have Canada s best view AND you re paying the lowest marginal tax rates in the country). The new reality is that if you earn $300,000+ per year, you re a member of Canada s top 1%. If you earn over $150,000 per year, you re part of the top 5%. Guess who the government is targeting with their tax policy to fill their coffers? If we look at Alberta, the highest marginal tax rate for business owners paying themselves $300,000 in T4 annually has jumped from the 39% that Albertans have grown accustomed, to 48%. That s a 9% increase on your tax bill for T4 earnings over $300,000 Paige Hilton Client Associate Paige.hilton@cibc.ca THE CM GROUP 1

2 If you earn $400,000 T4 annually, you ll pay a sizeable $159,000 in average income tax. To compound your conundrum, the following changes in tax policy also target top 5% earners: PERSONAL TAXES 48% Top Marginal Rate Reduced TFSA to from $10, 000 to $5,500 Eliminated Family Tax Credit CORPORATE TAXES 50.67% Tax on Investments Eliminated Multiplication of Small Business Deduction (SBD) Intregration (T4 and Dividends) Most of these unfavourable changes to the top 5% were implemented in the short timeframe of just over one year. If you feel backed into a corner, you re probably onto something; and you re not alone. As the saying goes: The Taxman Cometh. When your government wants your money, it shall obtain it. Schadenfreude! WHAT I CAN DO? Registered Savings Vehicles, such as the Registered Retirement Savings Plan (RRSP) and the Individual Pension Plan (IPP) have remained an integral part of a tax savings strategy and an effective way to save for retirement. But for most high income earners, conventional savings vehicles such as the RRSP don t provide adequate benefit to reduce enough tax and maintain their lifestyles at retirement. So what are your options as a high income business owner? The IPP is among the best options available to you today, as it provides up to 61% more annual contribution room than an RRSP and a compelling list of other benefits. WHAT IS THE IPP? Considered the Cadillac of pension plans in Canada, the IPP offers a 2% defined benefit, our highest pension formula, and the same plan that your friend who works for the government* brags about at your barbecues. The IPP makes sense for business owners typically age 40+ who earn $100,000+ annually. It is an excellent means to reduce corporate tax while significantly boosting retirement assets. Major benefits of the IPP include: Up to 61% more contribution room as compared to the RRSP A CRA mandated assumed rate of return of 7.5% Tax deductible unused room (Past Service) contributions from your company, up to $800,000+ Creditor proof and tax sheltered investment growth Additional funding opportunities at retirement to help you supercharge your retirement and get more money out of your corporation before a sale or wind down THE CM GROUP 2

3 IPP VS. RRSP: A SAVINGS COMPARISON These benefits are great and all, but let s get to the real value add: You ll have the one up on your friend at the barbecue because you ll get the same pension as they do, without having to work for the government!* Do these trends and solutions impact me? If you own a business or professional corporation and want to boost your retirement savings while paying less tax, then yes If you re an investment/financial advisor or accountant whose clients rely on you to follow these ongoing trends and solutions and take action in protecting and growing their wealth, then yes If you re the guy at the barbecue, then move along* The good news is you don t have to walk the path alone. GBL is on top of these trends and is at the forefront of their solutions. We re here to help. *Only used to highlight differences in pension plans across public and private sectors. Founded in 1995, GBL is a leading provider of retirement and health solutions for business owners across Canada. With offices in Calgary and Toronto, we have served 6,000+ clients, have 3,000+ Financial/Investment Advisors in our network, actively manage 2,000+ IPPs and RCAs, and have created 1,000+ HAWPS and 3,000+ FMVs. We re known for our industry leading client service and administration, as well as our top notch actuarial group. And we don t manage money, so we ll work alongside your financial advisor but we won t get in their way. We do the heavy lifting in getting your plan set up and managing it so your advisor can focus on growing your assets. Contact us today at info@gblinc.ca or and follow us to learn how we can help Build Your Future. THE CM GROUP 3

4 Quit Monkeying Around! Dimensional Fund Advisors August 2017 In the world of investment management there is an oft-discussed idea that blindfolded monkeys throwing darts at pages of stock listings can select portfolios that will do just as well, if not better, than both the market and the average portfolio constructed by professional money managers. If this is true, why might it be the case? -THE DART BOARD Exhibit 1 shows the components of the Russell 3000 Index (regarded as a good proxy for the US stock market) as of December 31, Each stock in the index is represented by a box, and the size of each box represents the stock s market capitalization (share price multiplied by shares outstanding) or market cap in the index. For example, Apple (AAPL) is the largest box since it has the largest market cap in the index. The boxes get smaller as you move from the top to the bottom of the exhibit, from larger stocks to smaller stocks. The boxes are also color coded based on their market cap and whether they are value or growth stocks. Value stocks have lower relative prices (as measured by, for instance the price-to-book ratio) and growth stocks tend to have higher relative prices. In the exhibit, blue represents large cap value stocks (LV), green is large cap growth stocks (LG), gray is small cap value stocks (SV), and yellow is small cap growth stocks (SG). For the purposes of this analogy you can think of Exhibit 1 as a proxy for the overall stock market and therefore similar to a portfolio that, in aggregate, professional money managers hold in their competition with their simian challengers. Because for every investor holding an overweight to a stock (relative to its market cap weighting) there must also be an investor underweight that same stock, this means that, in aggregate, the average dollar invested holds a portfolio that looks like the overall market. 1 US STOCKS SIZED BY MARKET CAPITALIZATION For illustrative purposes only. Illustration includes constituents of the Russell 3000 Index as of December 31, 2016, on a market-cap weighted basis segmented into Large Value, Large Growth, Small Value, and Small Growth. Source: Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Please see Appendix for additional information. 1 For more on this concept, please see The Arithmetic of Active Management by William Sharpe. THE CM GROUP 4

5 Exhibit 2, on the other hand, represents the dart board the monkeys are using to play their game. Here, the boxes represent the same stocks shown in Exhibit 1, but instead of weighting each company by market cap, the companies are weighted equally. For example, in this case, Apple s box is the same size as every other company in the index regardless of its market cap. If one were to pin up pages of newspaper stock listings to throw darts at, Exhibit 2 would be much more representative of what the target would look like. When looking at Exhibits 1 and 2, the significant differences between the two are clear. In Exhibit 1, the surface area is dominated by large value and large growth (blue and green) stocks. In Exhibit 2, however, small cap value stocks dominate (gray). Why does this matter? Research has shown that, historically over time, small company stocks have had excess returns relative to large company stocks. Research has also shown that, historically over time, value (or low relative price) stocks have had excess returns relative to growth (or high relative price) stocks. Because Exhibit 2 has a greater proportion of its surface area dedicated to small cap value stocks, it is more likely that a portfolio of stocks selected at random by throwing darts would end up being tilted towards stocks which research has shown to have had higher returns when compared to the market. US STOCKS SIZED EQUALLY For illustrative purposes only. Illustration includes the constituents of the Russell 3000 Index as of December 31, 2016 on an equal-weighted basis segmented into Large Value, Large Growth, Small Value, and Small Growth. Source: Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Please see Appendix for additional information. SO THROW AWAY? This does not mean, however, that haphazardly selecting stocks by the toss of a dart is an efficient or reliable way to invest. For one thing, it ignores the complexities that arise in competitive markets. Consider as an example something seemingly as straightforward as a strategy that holds every stock in the Russell 3000 Index at an equal weight (the equivalent of buying the whole dart board in Exhibit 2). In order to maintain an equal weight in all 3,000 securities, an investor would have to rebalance frequently, buying shares of companies that have gone down in price and selling shares that have gone up. This is because as prices change, so will each individual holding s respective weight in the portfolio. By not considering whether or not these frequent trades add value over and above the costs they generate, investors are opening themselves up to a potentially less than desirable outcome. THE CM GROUP 5

6 Instead, if there are well-known relationships that explain differences in expected returns across stocks, using a systematic and purposeful approach that takes into consideration real-world constraints is more likely to increase your chances for investment success. Considerations for such an approach include things like: understanding the drivers of returns and how to best design a portfolio to capture them, what a sufficient level of diversification is, how to appropriately rebalance, and last but not least, how to manage the costs associated with pursuing such a strategy. THE LONG GAME Finally, the importance of having an asset allocation well suited for your objectives and risk tolerance, as well as being able to remain focused on the long term, cannot be overemphasized. Even well-constructed portfolios pursuing higher expected returns will have periods of disappointing results. A financial advisor can help an investor decide on an appropriate asset allocation, stay the course during periods of disappointing results, and carefully weigh the considerations mentioned above to help investors decide if a given investment strategy is the right one for them. CONCLUSION So what insights can investors glean from this analysis? First, by tilting a portfolio towards sources of higher expected returns, investors can potentially outperform the market without needing to outguess market prices. Second, implementation and patience are paramount. If one is going to pursue higher expected returns, it is important to do so in a cost-effective manner and to stay focused on the long term. APPENDIX Large cap is defined as the top 90% of market cap (small cap is the bottom 10%), while value is defined as the 50% of market cap of the lowest relative price stocks (growth is the 50% of market cap of the highest relative price stocks). For educational and informational purposes only and does not constitute a recommendation of any security. The determinations of Large Value, Large Growth, Small Value, and Small Growth do not represent any determinations Dimensional Canada may make in assessing any of the securities shown. Source: Dimensional Fund Advisors Canada ULC (Dimensional Canada). There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Diversification does not eliminate the risk of market loss. All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Colin Andrews is an Investment Advisor with CIBC Wood Gundy in Calgary, AB. The views of Colin Andrews do not necessarily reflect those of CIBC World Markets Inc. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor. CIBC Private Wealth Management consists of services provided by CIBC and certain of its subsidiaries, through CIBC Private Banking; CIBC Private Investment Counsel, a division of CIBC Asset Management Inc. ( CAM ); CIBC Trust Corporation; and CIBC Wood Gundy, a division of CIBC World Markets Inc. ( WMI ). CIBC Private Banking provides solutions from CIBC Investor Services Inc. ( ISI ), CAM and credit products. CIBC World Markets Inc. and ISI are both Members of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. CIBC Private Wealth Management services are available to qualified individuals. The CIBC logo and CIBC Private Wealth Management are registered trademarks of CIBC. This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. CIBC World Markets Inc THE CM GROUP 6