Owner-Manager Remuneration Update

Transcription

1 Owner-Manager Remuneration Update Don Desaulniers and Kevin Stienstra Grant Thornton LLP Toronto Presentation Overview Summary of rate changes Ontario integration Salary vs Dividend planning Remuneration planning strategies o Surplus stripping o Considerations on sale of business o Dividend considerations 2

2 Overview Remuneration planning requires understanding of client needs/objectives up to date understanding of current/future tax rates Guides us in our remuneration decisions: 1. Who will be paid? 2. When they should be paid? 3. How much? 4. What form the payment will take? 3 Summary of rate changes The 2015 federal budget announced the following changes to the small business tax rate and the taxation of non-eligible dividends: Enacted on June 23, 2015 under Bill C-59 4

3 Summary of rate changes Combined effective rates of tax in Ontario: rates are applicable to an individual in Ontario taxed at the top marginal bracket 5 Integration Theory One should be indifferent as to earning income personally or through a corporation. Total after tax earnings received from personal income should resemble total after tax earnings of the same income earned through a corporation and paid out to the individual by dividend. 6

4 Integration analysis How Ontario compares to the rest of Canada (excluding the Territories): 5.00 Tax benefit (cost) of paying dividend vs bonus on ABI subject to the SBD 4.00 % tax benefit (cost) (1.00) (2.00) BC AB SK MB ON QC NB NS PE NL (0.25) (0.18) (0.55) (0.27) 0.63 (0.89) 0.11 (1.25) (0.11) (0.01) (0.87) Integration analysis How Ontario compares to the rest of Canada (excluding the Territories): Tax Deferral by Province - Salary vs Dividend on ABI Subject to SBD % tax deferral BC AB SK MB ON QC NB NS PE NL

5 Integration analysis (Ontario) Active income eligible for the small business deduction (1) Represents effective tax rate on distribution of corporate earnings by dividend in the year earned (1) & (2) Top personal tax rate assumed (2) No EHT costs factored in 9 Integration analysis (Ontario) Active income not eligible for the small business deduction (1) Represents effective tax rate on distribution of corporate earnings by dividend in the year earned (1) & (2) Top personal tax rate assumed (2) No EHT costs factored in 10

6 Integration analysis (Ontario) Canadian Source Aggregate Investment Income (1) Represents effective tax rate on distribution of corporate earnings by dividend in the year earned (1) & (2) Top personal tax rate assumed 11 Integration analysis (Ontario) Capital Gains (1) Represents effective tax rate on distribution of corporate earnings by dividend in the year earned (1) & (2) Top personal tax rate assumed 12

7 Integration analysis (Ontario) Planning considerations coming out of rate change and integration review: (i) Consider paying non-eligible dividends prior to rate changes 13 Integration analysis (Ontario) Planning considerations coming out of rate changes and integration review (continued) (ii) Elimination of bonus-down strategy the aftermath Management of accumulated wealth at the corporate level Asset protection considerations Managing attribution rules Maintaining QSBC status Managing taxable capital (SBD grind) Reorganization considerations (family trust, corporate beneficiary) 14

8 Integration analysis (Ontario) Planning considerations coming out of rate changes and integration review (continued) (iii) Increased costs investing at corporate level Due to rising non-eligible dividend rates Interest and foreign investment income more costly Consider using RRSP/TFSA to manage low risk investments Consider insurance strategies Capitals gains will become more costly but still favourable Eligible dividends have become more attractive Pay dividends to recover RDTOH only when GRIP available (see Mixer Corporation solution) 15 Salary vs Dividend (Ontario) Planning considerations surrounding consumption needs Benefits of paying a salary Attractiveness of "forced" retirement savings Availability to contribute to RRSP Availability to contribute to CPP Availability to contribute to IPP ORPP(?) SR&ED OAS clawback (no dividend gross-up) Childcare expense deductions Employment amount and other credits Bonus 6 month deferral (borrow against) 16

9 Salary vs Dividend (Ontario) Planning considerations surrounding consumption needs Benefits of paying dividends Historical tax savings for owner-manager's at the top rate (Appendix 1A savings eliminated by 2016) CPP costs (employee and employer) EHT costs Wasting freeze (reducing estate exposure) access RDTOH at the corporate level No reasonability test Tax-free distribution possible (low income earners see next slide) 17 Salary vs Dividend (Ontario) Low-Income Dividend Planning The chart below provides the amount of dividends (eligible and non-eligible) that can be received by an individual tax-free (excluding Ontario Health Premium with no other sources of income over the next four years: Non-eligible dividends becoming less attractive for this strategy Careful with ordering provisions (tuition, education and textbook amounts) Consider eligible dividends (will need to monitor AMT considerations) Where family member is not a shareholder/beneficiary, consider 15(2) loan 18

10 Remuneration Planning Strategies Remuneration options o Salary o Capital gains o Dividends Eligible Non-eligible Most advantageous option o Number of considerations, but often capital gains treatment is best. 19 Two options to extract funds as a capital gain o Trigger capital gain personally o Trigger capital gain at corporate level Personal tax rate on capital gains 24.76% Personal tax rate on dividends: o Eligible 33.82% o Non-eligible 40.13% Combined tax rate if gain triggered in corporation 23.36% % (depending if GRIP available) Savings between 9.065% to15.37% 20

11 Trigger capital gains personally o Example 1 Involves sale of shares to non-arms length individual. o Example 2 Involves exchanging shares pursuant to Section 85 to trigger controlled gain. 21 Example 1 o Parent reorganizes so they own preferred shares o Parent sells preferred shares to adult child Note payable Parent Child Common shares Preferred shares Common shares Opco Childco 22

12 Example 1 o Child transfers Opco preferred shares to Childco o Childco assumes note payable to Parent Parent Child Common shares Note payable Common shares Opco Preferred shares Childco 23 Example 1 o Opco redeems preferred shares owned by Childco o Childco repays note payable to Parent Parent Child Common shares Common shares Opco Childco 24

13 Example 2 o Mr. A exchanges Opco shares for new class of shares, electing to trigger capital gain Mr. A Common Shares & Preferred Shares Common shares Opco Holdco 25 Example 2 o Mr. A transfers Opco preferred shares to Holdco in exchange for a note payable. Mr. A Common Shares Common shares Note payable Opco Preferred Shares Holdco 26

14 Example 2 o Opco redeems preferred shares owned by Holdco o Holdco repays note payable held by Mr. A Mr. A Common Shares Common shares Opco Holdco 27 Trigger capital gain at corporate level Funds flowed to shareholder as capital and taxable dividends No GRIP GRIP Capital gain realized 10, , Corporate tax payable (net of refundable taxes) Funds available for distribution 9, , Funds received personally Capital dividend 5, , Taxable dividend 4, , , , Tax on taxable dividends received (40.13%/33.82%) 1, , After-tax funds available 7, , Combined rate of tax paid 25.90% 23.36% 28

15 How to trigger a gain at the corporate level? o Sell corporate assets with unrealized gains o Set up corporate structure whereby a parent company sells shares of a subsidiary company to another related corporation. 29 Succession Planning Strategy Often the succession of family owned business to the next generation involves an estate freeze. The parents own fixed value preferred shares which are redeemed over time, and result in the realization of dividend income. An alternative approach could be used to allow the parents to realize capital gains as opposed to dividends. o Steps are similar to Example 1 o Can benefit from utilization of capital gains reserve 30

16 Succession Planning Strategy Other comments o Consider sale of shares to next generation, especially where value to be repaid within next 10 year. o Consider level of personal income of parents May prefer dividend treatment. Does dividend gross-up cause OAS clawback o Is a wasting freeze the best option. 31 Sale of business Safe income strip o Reduces proceeds of disposition, and defers income that would otherwise be taxed as a capital gain. o Likely converts a capital gain into a dividend o Cost benefit analysis required o Likely depends on length of time vendor plans to retain funds in the corporation. 32

17 Sale of business Sale of goodwill and hybrid transactions o Potential change to taxation of Eligible Capital Property. o What will be the impact on asset sales and hybrid transactions? No overall significant tax cost on funds extracted to personal level. Will reduce tax deferral on funds retained in corporation. Hybrid solutions will still be advantageous for tax purposes. 33 Mixer Corporation Ideally shareholders would like to receive eligible dividends that recover RDTOH. This works where there is GRIP and RDTOH within the same corporation. However, often investments generating passive income are held in a separate corporation from the operating company with a GRIP balance. Consider planning to combine the two with the use of a Mixer corporation. 34

18 Mixer Corporation Can be illustrated as follows: 35 Conclusion Key Takeaways o The concept of bonusing down in no longer advised in most situations. o Consider the impact of the increasing effective tax rate on non-eligible dividends. Do you prepay non-eligible dividend? Cost of corporate investments are increasing. o In most cases attempt to trigger capital gains, even if it means giving up tax deferral in some situations. o The receipt of dividends may be preferred for lower income individuals. o Lots of non tax factors to consider. 36