David Sung. President

Transcription

1 WELCOME

2 David Sung President

3 Agenda Introduction and Background Tax Reform: The Details Planning Options Case Study Q & A

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7 These changes won t just affect the wealthy as the government has implied. they directly target small business owners who make daily sacrifices to keep their businesses alive, support their families and create jobs in their communities.

8 Physicians are up in arms because they do not have pensions or benefits and the tax changes will make it near impossible for them to save for retirement, to finance maternity or parental leave, to work part time while raising a family (or support a spouse doing so) and to repay debt accrued during their studies.

9 It is the farmers, mom and pop shops, and entrepreneurs, who invested everything into their businesses, that will be most affected by these changes.

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13 Krista Ross CEO of the Fredericton Chamber of Commerce Characterizing the last 45 years of Canadian tax policy as loopholes is insulting to businesses that have worked within the rules in good faith to build their businesses, to save for retirement, and sometimes just to keep their doors open.

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16 John Nicola Chairman & CEO

17 Higher Taxes Actual and Possible Results % higher marginal tax over $200,000 Higher provincial rates in Ontario %>$220,000 Overall tax on first $200,000 lower Reduced TFSAs to $5500 No Income splitting of salaries Stock options fully taxed over $100,000 per year (may have different rules for CCPCs) Change of tax rates for professional corporations and ability to income split? 4% higher corporate tax on passive income

18 Tax Reform 2017 Resurrected and improved Actual and Possible Results % higher marginal tax over $200,000 Higher provincial rates in Ontario %>$220,000 Overall tax on first $200,000 lower Reduced TFSAs to $5500 No Income splitting of salaries Stock options fully taxed over $100,000 per year (may have different rules for CCPCs) Change of tax rates for professional corporations and ability to income split? 4% higher corporate tax on passive income

19 Tax Reform 2017 What s being plucked? Income Splitting of Dividends from private corporations Increase tax on passive corporate income that could reach 72% when paid out as dividends Pipeline planning that converts dividends to capital gains is prevented

20 And Now The Rest of The Story Paul Harvey

21 n 25% swing in 100 years Rising since the 70 s 10 developed countries either less upwardly mobile or less equal in income than us or both

22 Who are the 1% Who Are The 1%? 135,000 Households Average income $500,000+( based on $458,000 for 2013) Investable Net worth about $4Million Currently pay 20% of all personal income tax in Canada Equal to 11% of all businesses in Canada and 5% of self-employed Assuming 2/3rds of the 1% are professionals or business owners, then only 7% of all incorporated entities are owned by the 1% (93% are not)

23 Retiring MPs 3% per year of service Indexed for life Survivor benefits Cost for each $1000/year of annuity=$21000 (Couple age 65) Biggest pension $132,000/year =$2.8Million Income can be split for tax purposes with a spouse No tax on accumulation during working lifetime or until pension starts MP s fund less than 10% of the cost

24 Indexed Pensions The Case of the retired Civil Servant Assumptions and Results Both age 65 Both worked but only one has a pension Pension is $100,000/year indexed with Survivor benefits Both get full CPP/ OAS (about $20,000/ year each indexed) Pension is split for tax purposes; therefore no OAS clawback First year retired income = $140,000/year ($70,000 each) Annual income tax (assume no other income) = $14,000 Average tax rate 20% Net spendable indexed income $112,000/year ($9300/month) Replacement Cost of all pensions combined = $3 Million (approx) Q: How much of these assets are part of their official net worth? A: Zero

25 What Else is in The Rest of the Story?

26 The Doctor and The Civil Servant Cheryl finishes residency at age 30 Starts GP practice with student debt of $175,000 Practice grosses $350,000 per year Overhead is 40% Starts taking salary to maximize RRSP s Is able to leave $50,000 per year in medco to save for retirement and future maternity leaves and payoff student debt. Bob graduates with B Comm. and joins civil service age 25 Entry level salary is $40,000/year Gets MBA at age 30 Moves up the ranks to ADM by age 50 Retires age 60 with salary of $200,000 per year Indexed pension at age 60 is $133,000/year

27 What Else Do We Need To Know? Bob s pension is fully guaranteed. No investment risk. To fund Bob s pension at 4% real rate of return is takes 50%+ of career income. If Bob s option is RRSP or DC pension his maximum contribution employer / employee is 18% of his salary or 36% of what his pension will be. The tax rate on this additional saving is 0% when earned and 0% when accumulating. Medcos tax rate is 13% when earned and 50% when accumulating. Cheryl funds 100% of savings for retirement and accepts risk on returns. Expected RRSP balance for Cheryl age 60 is $1.5M. Value of Medco savings $1.4M. Total $2.9M or 90% of the value of Bob s pension. Cheryl has to fund 100% of sick pay, holiday pay, maternity leave, health benefits. When Bob retires he lowers his tax by splitting pension income with his spouse. He can split income at 60. Jane has to wait until age 65

28 The Cost of Pensions

29 23 CEOs of Canadian Public Companies All of them have accrued pension benefits worth more than $10M Average for all 23 is $23M Total accrued benefits are $528M This does not include the present value of other benefits (such as health care) The total does not include the value of pensions or benefits for other senior management

30 Who is Getting the Benefit of Deferring Taxable Income? Private vs. Public Asset Accumulation in Tax-Deferred Plans Private companies are limited to statutory levels of RRSP s or IPP s Beyond that private companies use Retirement Compensation Arrangements (RCA s) to accumulate additional retirement assets (subject to a 50% withholding tax) Pension income received from public companies can be income split between employee and spouse. Private companies cannot accumulate this level of tax deferred pension or health benefits for either staff or shareholders. Public companies can use stock options to provide deferred compensation benefits taxed at 50% of regular income. Public companies pay tax at 26% on passive income or about half what private companies pay. Owner managers and professionals pay 100% of the cost of their retirement savings, heath benefits, CPP, and cannot receive UIC or Worker s compensation.

31 Selling the Family business $1,100,000 $730,000 Armco John Jane Sell to Armco Opco ($1.2M) Sell to Jane $100,000 $470,000 Government Aka Mordor

32 Selling the Family Farm Jim and Rita Luke $2M Farmco ($2M) Common shares $80,000 Annually 2017 $17, $33,500 Government Aka Mordor

33 Die With Their Boots On? +65% What price will sellers get if the tax cost selling to family is 400%+ More? -25%

34 Dead Money?

35 Morneau says tax changes will target dead money Small Business Who is hoarding the money? Public Companies $630 billion on balance sheets in % = 22% = 72% = Corporate Tax Personal Tax Total Tax = 26% = 23% = 49% How level is this playing field?

36 Taxable Income for a Balanced Portfolio 50% Return Breakdown Capital Gains 1.5% Deferred Gains 2.5% 0% 67% Dividends 1.0% 100% Interest, Rent, Foreign 2.0% Return of Capital 1.0% 0% Total return = 8% Taxable this year = 3.5%

37 Tax Options for Passive Corporate Accounts $3-million value Total Return = $240,000 Taxable Return = $105,000 Total tax LRIP $54,900 (52.2%) Total tax GRIP $46,600 (44.4%) Current Taxation Corporate Tax 49.7% $52,200 RDTOH 30.7% $32,200 Net Corp Tax 19.0% $20,000 Dividend Paid to recover RDTOH $85,000 Personal tax (LRIP) -41.0% $34,900 Personal tax (GRIP)-31.0% $26,600

38 Tax Options for Passive Corporate Accounts $3-million value Total Return = $240,000 Taxable Return = $105,000 Blended Tax = 72% No CDA / RDTOH Dividend taxed at 41% personally

39 Longer Term Impact? What is longer term impact? Assume: 100% of taxable income left in corporation now 50% tax paid on earnings Dividends not used for compensation until retirement (then taxed as high as 41%) Impact on spendable returns after twenty years 70bps-100bps drop in net annual return if all income taxed corporately

40 Tax Options for Passive Corporate Accounts $3-million value Total Return = $240,000 Taxable Return = $105,000 Options to reduce or eliminate taxable income: Pay bonuses or salaries Make Charitable gifts Offset with interest expense Portfolio design Reasonableness will be a requirement

41 Individual Pension Plans

42 New IPP Age 60: Maximum Income & Past Service New IPP in Year Old Value of Pension ( ) Transfer From Employee s RRSP Employer Past Service Contribution 2017 Current Service Contribution 2017 Terminal Funding Total funding available Contributions $ 800,000 $ (490,000) $ 310,000 $ 40,000 $ 1,200,000 $ 1,550,000

43 IPP vs. RRSP: Terminal Funding at 65 Total funding $1,550,000 $1,200,000 $1,550,000 $26,000 $40,000 $310,000 RRSP IPP current IPP past service Terminal funding IPP total

44 IPP yes or no? Issues Limited to RRSP eligible assets Fully taxable in estate on second death (insured version is an option) Restricted liquidity When income received, it can be split with spouse. Future earnings to age 71 can be taxdeferred. Contributions tax deductible Offset high rate tax on passive income after retirement? Amortize funding over 10 years or more if required. Trigger pregnant gains in the year IPP funding occurs? Generally better than RRSPs after age 50

45 Is This True?

46 Life Insurance as an Asset Class Is Insurance and expense or asset? Can it be used to create an income during one s lifetime How does it compare to other fixed income asset classes? On risk? On return? How do you maximize benefits of insurance bought for needs?

47 Whole Life Par: The Basics $100,000 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Tax Sheltered Tax-free earnings Pay for life insurance Costs and buy additional coverage Excess savings invested in par account

48 How Can Par Outperform Balanced Portfolios? Returns not mark to market Cash value guaranteed Balanced portfolio returns with bond like risk

49 Where Leverage Applies Fully taxable Low risk Borrow Funds BANK Put new capital into lower taxed asset classes

50 Things to Consider LOC better than term loan (flexibility, opportunistic, interest only on borrowed funds). No need to increase risk. Look for assets with high cash flow taxed at lower rates. Examples include rental income (return of capital) and writing calls and puts (capital gains), eligible dividends.

51 Mixing Passive and Active Income OPCO $1,000,000 Profit $3M portfolio $100,000 taxable income 100% Common Family Trust Salaries to maximize RRSPs Additional dividends for inactive spouse GRIP dividends to fund university Recover RDTOH

52 Future Models Investment and business loans in Holdco Distribute taxable income by bonus and IPP contribution Holdco $3M portfolio $75,000 of taxable income Beneficiary Family Trust Charitable Gifts Salaries at reasonable levels Fund balance of IPP OPCO $1,000,000 Profit No dividends Does loan to trust at prescribed rate work?

53 Pushback? Morneau dialed in to a conference call Thursday to reassure nervous MPs that the changes would not be applied retroactively, and business owners who use the system to plan for retirement wouldn't see any changes to their current nest egg. Rather, the changes would apply on investments moving forward.

54 Grandfathering? Will existing corporate passive assets continue to taxed under current rules? What about any earnings from those assets? Will CDA and RDTOH balances be kept? What about with respect to future RDTOH/CDA triggered by current assets? Will income splitting be allowed on current passive assets? What does reasonable mean? What financial organizations are able to track old and new assets within the same corporation for reporting purposes? (We would set up separate accounts.)

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57 From Now On The Consequences Are Intentional Liberals have been told the following: Doctors and other professionals leaving Canada Private Corp vs. Public Corp tax rates on passive income Higher tax to transfer business and farms to family vs. strangers Recognition of spouse financial and labour involvement in CCPC Tax advantages they enjoy with DB pension plans Submissions have been made so far

58 What Questions Need To Be Asked? 1. Tax Freedom Day is June 8. Is that too soon or too late (U.S. April 24)? 2. The top 1% of tax filers pay 21% of all income tax. Is that too much or not enough? 3. If we are going to increase our tax burden should it be consumption taxes (GST), corporate taxes, or personal? 4. Can a consensus about approach become Tri-Partisan?

59 Tax Reform 2017 What might you want to do? 1. Maximize the use of Individual Pension Plans (IPPs) 2. Consider the use of a Retirement Compensation Arrangement (RCA) 3. Reduce taxable passive income inside a corporation by looking at how the returns are taxed 4. Combine existing or new insurance with leverage corporately 5. Hold off on triggering pregnant gains on corporate assets until after new rules are known 6. Lock in any loan arrangements to trusts or family at current prescribed rates 7. Review different approaches to sale of business once final rules are clear

60 Next Steps? Bespoke is an adjective for anything commissioned to a particular specification. "Custom-made." Solutions will differ for each family and also change over time. A custom approach is required.

61 THANK YOU

62 Question & Answer