Tax & estate planning update. Agenda. GOLOMBEK January Jamie Golombek - Managing Director, Tax & Estate Planning

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1 Tax & estate planning update Jamie Golombek - Managing Director, Tax & Estate Planning Ottawa Estate Planning Council January 6, 2016 Agenda 1 1. Canadian tax update for individuals 2. Canadian tax update for business owners 3. On the horizon in

2 Canadian tax update for individuals Changes to tax rates in 2016* 3 Decrease income tax by 1.5% (22% to 20.5%) for taxable income from $45,282 to $90,563 Increase income tax by 4% (29% to 33%) for taxable income > $200,000 * Bill C-2, An Act to amend the Income Tax Act, had first reading in House of Commons on December 9,

3 Comparison of 2015 and 2016 federal personal income tax rates 4 Taxable income* $45,282 15% 15% > $45,282 and $90,563 22% 20.5% > $90,563 and $140,388 26% 26% > $140,388 and $200,000 29% 29% > $200,000 29% 33% Will result in more federal tax with taxable income > $217,000 * 2016 federal tax brackets are shown Who is in the middle class? 5 Percentage of Tax Filers * 70% 60% 50% 40% 30% 20% 10% 0% 66% (17.6 million individuals) No tax savings $45,282 33% (8.8 million individuals) Up to $680 tax savings >$45,282 and $217,000 1% (0.3 million individuals) > $217,000 Taxable income * Approximate percentages, determined using the Canada Revenue Agency s most recent tax filing data and income statistics for the 2012 tax year 3

4 Targeting the wealthy 6 Raising Revenue Revenue maximizing top marginal rates 50% (2014 Milligan; 1966 Carter Commission) > 50% (2015 Osberg) Source: Targeting the Wealthy Good Tax Policy or Good Politics? Sarah S. Chiu, 67 th Annual Canadian Tax Foundation National Conference Federal donation tax credits in Total donations: $200 >$200 Taxable income: Any amount $200,000 >$200,000* Federal donation tax credit 15% 29% 33% First-time Donor s Super Credit (2017 is the last year to claim)** Total for first-time donor cash donations 25% 25% 25% 45% 54% 58% * Under Bill C-2, which had its first reading the House of Commons on December 9, 2015, a federal tax credit of 33% would be available for donations that do not exceed the amount of taxable income > $200,000. ***The First-time Donor s Super Credit is available for total monetary donations up to $1,000. 4

5 Mismatch of donations credit with income > $220,000 in Ontario in Top Marginal Tax Rate Federal donations credit % Ontario donations credit 13.16% Ontario surtaxes % Total 53.53% Donation Tax Credit Rate % 11.16% 6.25% 50.41% Tax cost of donations: 3.12% 1. Under Bill C-2, which had its first reading the House of Commons on December 9, 2015, a federal tax credit of 33% would be available for donations that do not exceed the amount of taxable income > $200, Ontario surtaxes are equal to 56% of basic Ontario tax. 3. Assumes at least $200 of other donations have been made in the year. RRSP planning for tax rate changes 9 RRSP contributions made between January 1 and February 29, 2016 For taxpayers with taxable income from $44,701 and $89,401* Claim RRSP deduction in 2015, if possible, for 1.5% tax savings For taxpayers with taxable income > $217,000 Claim RRSP deduction in 2016, if possible, for 4% tax savings * 2015 tax brackets 5

6 TFSA Contribution Limit 10 Year Limit 2009 $ 5, , , , , , , ,500* Cumulative $46, years of age Resident of Canada * Bill C-2, An Act to amend the Income Tax Act, had first reading in House of Commons on December 9, 2015 Home Accessibility Tax Credit ( HATC ) 11 15% tax credit to assist seniors / persons with disabilities with home renovations Up to $10,000 of expenses / year Starts 2016 Eligible expenses assist with mobility / reduce harm Grab bars Ramps Walk-in bathtubs & showers Can claim both HATC and medical expense tax credit 6

7 2016 Lifetime Capital Gains Exemption (LCGE) Additional amount for farmers & fishers 12 LCGE for qualified small business corporation shares is $824,176 LCGE for qualified farm and fishing property is $1 million Applies to sales of property after April 20, 2015 Donation of Proceeds From Sale of Private Company Shares & Real Estate 13 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 Tax benefit would be extended to situations where private corporation shares or real estate sold & proceeds donated* Donation made within 30 days Made to arm s length party After 2016 * Included with Legislative Proposals Relating to the Income Tax Act and Regulations released by the Department of Finance on July 31,

8 Example Donate Real Estate Proceeds 14 Real estate available for a donation: Market value of real estate $1,000,000 Adjusted cost base 600,000 Capital gain $ 400,000 ON - Cost of $1,000,000 donation from proceeds of sale of real estate Proceeds $1,000,000 Adjusted cost base ( 600,000) Capital gain $ 400,000 Tax on capital gain $ 107,000 COST OF DONATION: Donation $1,000,000 Tax on capital gain 107,000 Tax savings from donation ( 504,000) TOTAL COST $ 603,000 TAX SAVINGS $1,000,000 ( 600,000) $ 400,000 $ 0 $1,000,000 0 ( 504,000) $ 496,000 $ 107,000 Assumptions: Bill C-2 will be enacted, increasing the maximum federal personal marginal tax rate and federal donation credit rate to 33%. The donor is not eligible for the First-time Donor s Super Credit. The donor s combined federal/provincial marginal tax rate is 53.5%. The combined federal/provincial donation tax credit rate is 50.4%. 8

9 Form T1135 Foreign reporting 16 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) E-file started for individuals in 2014 T1135 reporting is very complex 17 Very detailed reporting For 2014, simplified reporting for individuals who had accounts with Canadian registered securities dealers or Canadian trust companies Aggregate reporting by country permitted / FMV rather than cost Concern that form still too complex Submissions made on behalf of taxpayers by IIAC and CPAs 9

10 Form T1135 Revised for 2015 tax year 18 Revised T1135 was released in December 2015 Must be used for 2015 tax year Optional if filing or amending a T1135 for a prior year Aggregate reporting by country / FMV is still available in section 7 New, simplified reporting method when foreign property < $250,000 T1135, Part A: Simplified reporting method 19 If total cost of all specified foreign property held at any time during the year was < $250,000, may opt for simplified reporting: 10

11 Testamentary trust rules changing in 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 Graduated Rate Estate 21 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 11

12 Qualified Disability Trust 22 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 Testamentary Trusts Bottom Line 23 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 12

13 Life interest trusts 24 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 Spousal Trust: Inheritance Protection 25 Spouse A During life of Spouse B Spouse B Testamentary Trust After death of Spouse B Spouse B s Kids Spouse A s Kids 13

14 Spousal Trust: Old tax rules (2015) 26 Spouse B Spousal Trust $1,000,000 ($ 250,000) $1,000,000 ($ 250,000) $750,000 $750,000 Spouse B s Kids Spouse A s Kids Spousal Trust: New tax rules (2016) 27 Spousal Trust $1,000,000 ($ 250,000) Spouse B $1,000,000 ($ 250,000) ($ 250,000) CRA is supposed to collect $250K payment from the trust. But will they? $500,000 $1,000,000 Spouse A s Kids Spouse B s Kids 14

15 Life interest trusts taxation on death of life interest beneficiary 28 Upon death of life interest beneficiary, deemed disposition of trust assets triggers tax on accrued capital gain Before 2016: Tax was payable by trust After 2015: Tax is payable by estate of life interest beneficiary* (which does not own the trust assets) but this could still change * The trust is also liable for the tax but CRA has no obligation to collect from the trust Exempt test for life insurance 29 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 15

16 More 2017 Insurance Changes 30 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 tax update for business owners 16

17 Small Business Tax Rate & Non-eligible Dividends 32 Small business tax rate Tax rate on first $500,000 of active business income 10.5% in budget introduced rate reductions Rate drops to 9% by 2019 Non-eligible Dividend Tax Rate Will increase steadily as small business tax rate decreases Small Business Tax Rate Reduction and DTC Adjustment for Non-Eligible Dividends Small business tax rate (%) Gross-up (%) DTC (%) Top federal rate on N/E dividends 21.22% 21.62% 22.21% 22.61% 22.97% 17

18 Why small (and even large) business owners may have funds to invest in a corporation 34 Distributing corporate income to shareholders 35 Corporate income can be distributed either as: Salary/bonus To individuals who work in the business In the year work is performed or up to 180 days afterwards Make RRSP contribution Dividends To shareholders Can t make RRSP contribution In the year income is earned OR a later year Opportunity to defer tax, invest additional funds 18

19 ON $100,000 small business income earned in a Canadian private corporation 36 $100,000 $75,000 $50,000 $25,000 Corporate tax $15,000 Corporate after-tax business income $85,000 Tax deferral advantage: 38.5% Tax rate advantage: 0% Personal tax on dividend $38,500 After-tax dividend $46,500 Personal tax on salary $53,500 After-tax salary $46,500 $0 Corporation $85,000 Dividends > Shareholder $46,500 Employee $46,500 * Active business income < $500,000, eligible for the small business deduction On the horizon in

20 Perceived abuse in using corporations to reduce family taxes 2015 Liberal election platform: will ensure that CCPC status is not used to reduce personal income tax obligations for high-income earners rather than supporting small businesses. Private Companies, Professionals and Income Splitting - Scott Legree & Michael Wolfson approximately $500 million per year is lost, particularly as high-income individuals use CCPC status as an income splitting tool. What the Liberals may have in store for the small business tax rate 39 Some measures that may be introduced: Limit access to the small business tax rate to private corporations that employ a minimum number of employees* Extend kiddie tax beyond minors, so dividends paid to spouse/partner or adult children would also be taxed at top personal tax rate * In Quebec, beginning Jan. 1, 2017, businesses in the service and construction sectors will no longer be eligible for the Quebec small business deduction unless they have more than three full-time employees. 20

21 Lobbying against changes for small business 40 Canadian Medical Association wrote to senior federal government officials: unique nature of medical practice as a business physicians are highly skilled professionals who provide an important public service and are significant contributors to the knowledge economy Stock options Current Rules 41 FMV price Exercise price = Employment income 50% deduction generally available if: Exercise price FMV on date of issue For CCPC, if shares held for 2 years after exercise Benefit/deduction deferred until share disposal Tax treatment is equivalent to capital gains Other conditions apply 21

22 Changes to stock option taxation 42 Proposal: Cap the stock option deduction Employees with up to $100,000 in annual stock option gains will be unaffected Grandfathering: Any decision we take on stock options will affect stock options issued from that date forward" Finance Minister Bill Morneau November 21, 2015 in Ottawa Stock options Current treatment 43 $40 Grant: 5,000 $10; FMV at exercise = $40 Share Price $30 $20 Income 5,000 shares x ($40 - $10) = $150,000 50% stock option deduction (Equivalent treatment to capital gains) $10 $0 Exercise price 5,000 $10 = $50,000 Total tax = $37,500 [$150K ($150K x 50%)] x 50% Assumes a marginal tax rate of 50% on stock option benefits 22

23 Stock options Proposed treatment 44 $150,000 $110,000 Grant: 5,000 $10; FMV at exercise = $40 Income >$100,000 $50,000 No stock option deduction Fully taxable $50,000 $0 Up to $100,000 of income 50% stock option deduction Equivalent treatment to capital gains) Total tax = $50,000 [$150K ($100K x 50%)] x 50% Assumes a marginal tax rate of 50% on stock option benefits Tech firms oppose stock option changes 45 Canadian Council of Innovators (CCI) Formed in November 2015 Includes leaders from 20 elite technology firms, including: Shopify, Hootsuite Media, Wattpad, Hatch, D2L, & the venture capital arm of OMERS Chaired by Jim Balsillie (former CEO of BlackBerry) On December 21, 2015: CCI met with 3 cabinet ministers and top federal government officials CCI urged the government to drop the proposed stock option changes 23

24 Ontario Retirement Pension Plan (ORPP) 46 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) Goodbye to the ORPP? 47 If we have a partner in Justin Trudeau to sit down and work out what they re looking at as an enhancement to CPP, that was always my starting point, that was the solution - Kathleen Wynne, Oct. 13,

25 CPP enhancement? 48 December 21, 2015: Finance Ministers discussed CPP options We ve agreed on a path forward with respect to coming back a year from now to talk about potential options, including not doing anything - Saskatchewan Finance Minister Kevin Doherty Questions? 25