Lorena Boda, Manager, Grant Thornton LLP Craig Ross, Partner, Pallett Valo LLP Andrew Somerville, Senior Manager, Grant Thornton LLP

Transcription

1 Lorena Boda, Manager, Grant Thornton LLP Craig Ross, Partner, Pallett Valo LLP Andrew Somerville, Senior Manager, Grant Thornton LLP Outline What is Estate Planning? Estate Planning Considerations Post-mortem Planning Residency of non-resident trusts "The hardest thing to understand in the world is the income tax." Albert Einstein 2

2 What is Estate Planning? Estate planning is the process of arranging for the distribution of an individual's estate while meeting objectives. "Planning is bringing the future into the present so that you can do something about it now." Goals Retire comfortably Own a home Provide for children/ maximize after-tax inheritance Provide for children's/grandchildren's education Business succession Other personal goals Alan Lakein, Personal Time Management author 3 Estate Planning Considerations Take an inventory of your assets/liabilities Determine estate distribution objectives Estimate tax exposure Analyze tax minimization strategies Assess liquidity and funding alternatives for tax liabilities and other liabilities Implementation: Will(s) and other strategies Road map for executor/ piece of mind "The only thing that hurts more than paying an income tax is not having to pay an income tax." Thomas Dewar 4

3 Case Study Mr. Smith is 70 years old. He is widowed and has two adult children, Donna and David. His wishes are that the two children equally inherit his estate. Mr. Smith owns the following assets: Assets Fair Market Value Cost House $1,000,000 $200,000 Cottage $500,000 $400,000 RRSPs $300,000 $300,000 Investments $800,000 $500,000 Total $2,600,000 $1,400,000 5 Analyze tax exposure Assets Fair Market Value Cost Capital Gain Income House $1,000,000 $200,000 $nil (Note 1) n/a Cottage $500,000 $400,000 $100,000 n/a RRSPs $300,000 $300,000 n/a $300,000 Investments $800,000 $500,000 $300,000 n/a Total $2,600,000 $1,400,000 $400,000 $300,000 Tax rate 25% 50% Taxes $100,000 $150,000 6 Note 1) The capital gain is nil because of the principal residence exemption Total taxes owing: $250,000 Funding alternatives? Net after-tax estate distribution allocation (liquid vs illiquid assets)

4 Other considerations Probate fees (in Ontario $50,000 at 0.5% and rest at 1.5%) Funeral costs and other costs Land transfer tax Professional fees Valuations/ appraisals Timing of distribution of funds Estate tax filings and elections 7 Tax minimization strategies For Tax purposes: Spousal rollover Principal residence designation Graduated rate estates Charitable donation planning Gifting/transferring property before death Estate freeze Planning for private company shares (post-mortem planning) Life insurance proceeds and capital dividend election For Probate purposes: Spousal rollover Alter ego trusts RRSP/RRIF designations Gifting/transferring property before death Estate freeze Separate Wills 8

5 Estate Freeze freeze value of assets/ cap taxes at death defer taxes to the next generation income splitting and flexibility multiple use of the lifetime capital gains exemption Before After 100% common shares FMV $5,000,000 ACB $100 PUC $100 Mr. Smith Opco Mr. Smith 100% pref. shares (vtg) FMV $5,000,000 ACB $100 PUC $100 Donna Opco 100 Class A c/s FMV $10 ACB $10 PUC $10 David 100 Class B c/s FMV $10 ACB $10 PUC $10 9 Estate Freeze Why use a Family Trust instead of direct ownership? control and management creditor proofing preferred in cases where there are spendthrift beneficiaries minor beneficiaries (beware of kiddie tax) non-resident beneficiaries (beware of reporting requirements) 100% common shares FMV $5,000,000 ACB $100 PUC $100 Before Mr. Smith Mr. Smith 100% pref. shares (vtg) FMV $5,000,000 ACB $100 PUC $100 After Trust Beneficiaries: Donna David 100 common shares FMV $10 ACB=PUC=$10 Opco Opco 10

6 Post-mortem planning 100% common shares FMV $5,000,000 ACB $1,000,000 PUC $1,000,000 Mr. Smith Owners of private company shares face an inherit risk of double taxation at the time of death. Alternatives to consider: Do nothing Subsection 164(6) election Pipeline planning Investco "The tax collector must love poor people, he's creating so many of them." Bill Vaughan Marketable securities 11 Post-mortem planning (continuation) Do nothing 164(6) election Pipeline Deemed disposition Proceeds $5,000,000 $5,000,000 $5,000,000 ACB $1,000,000 $1,000,000 $1,000,000 Capital gain $4,000,000 $4,000,000 $4,000,000 25% $1,000,000 (A) $1,000,000 $1,000,000 Redemption of shares Proceeds $5,000,000 $5,000,000 PUC $1,000,000 $1,000,000 Deemed dividend $4,000,000 $4,000,000 40% $1,600,000 (B) $1,600,000 Capital loss & 164(6) Reorganization Total tax $2,600,000 (A+B) $1,600,000 $1,000,000 12

7 Post-mortem planning (continuation) Other considerations: Deadline for 164(6) election Capital dividend account (CDA) and stop loss rules Refundable dividend tax on hand account (RDTOH) 88(1)(d) bump (in pipeline planning) 13 Residency of non-resident trusts 14

8 Residency of non-resident trusts Mr. X (trustee) Non-resident Beneficiaries: Son 1 (non-resident) Son 2 (non-resident) Son 3 (non-resident) Residency test for common law purposes: where the central management and control of the trust is exercised Trust Mr. A (settlor) Canadian resident Old section 94 of Income Tax Act: Trust is deemed resident of Canada if two conditions are met: There is a Canadian resident beneficiary; and There is a Canadian resident settlor related to the beneficiary. 15 Residency of non-resident trusts (continuation) New section 94 of Income Tax Act (legislative changes enacted in 2013): Trust is deemed resident of Canada if one of the two conditions are met: There is a resident contributor; or There is a resident beneficiary. "Resident contributor" and "resident beneficiary" along with many other terms are specifically defined in section 94 of the Act. Resident contributor: a person resident in Canada and who has made a contribution to the trust Connected contributor: a contributor to the trust at a particular time other than a person who has made a contribution at a non-resident time Resident beneficiary: a person resident in Canada who is a beneficiary under the trust and there is a connected contributor Contributor: a person (including a person that has ceased to exist) that at or before the particular time has made a contribution to the trust 16

9 Residency of non-resident trusts "In the middle of difficulty lies opportunity." Albert Einstein 17 Changes to the Taxation of Testamentary Trusts and Estates The Planners Perspective 18

10 Changes to the Taxation of Testamentary Trusts and Estates The Planners Perspective Topics for discussion: 1. Testamentary Trusts and Income Splitting 2. The Graduated Rate Estate 3. Qualified Disability Trust 4. Life Interest Trusts 19 Testamentary Trusts and Income Splitting Before Bill C-43 - personal trusts were defined as (a) testamentary trusts and (b) inter vivos trusts where the taxpayer did not acquire his or her interest for consideration. S 104 (2) set out that a trust shall, for the purposes of the Act, be deemed to be, in respect of the trust property, an individual 117 (2) sets out the basic income tax rates for individuals and therefor for trusts. BUT 117(2) was subject to 122(1) which taxes inter-vivos personal trusts at the highest personal rate 20

11 Testamentary Trusts and Income Splitting Changes in Bill C-43 Amends personal trust to mean a trust (other than a trust that is, or was at time after 1999, a unit trust) that is (a) a graduated rate estate, or (b) a trust in which no beneficial interest was acquired for consideration payable directly or indirectly to (i) the trust, or (ii) any person or partnership that has made a contribution to the trust by way of transfer, assignment or other disposition of property; Amends section 122(1) to remove the reference to inter-vivos trusts, such that all trusts other than graduated rate estates and qualified disability trusts are taxed in accordance with this section, and both testamentary and inter-vivos trusts are subject to the highest marginal rate and excluded from section 117 of the Act. any 21 Testamentary Trusts and Income Splitting Planning Points Far fewer spousal trusts in first marriages. No more testamentary trusts for kids to split income with themselves. Still look for opportunities to incorporate testamentary family trusts for spouse and children where deferring tax on a deemed disposition is not an issue i.e. insurance proceeds No significant decrease in the use of testamentary family trusts for children s shares in larger estates 22

12 Graduated Rate Estate Comes into force on December 31, 2015 The Graduated Rate Estate is defined as the estate that arose on and as a result of the individuals death if No more than 36 months has passed since death The estate is a testamentary trust The estate designates itself as a graduated rate estate No other estate designates itself as a graduated rate estate in respect of the same individual 23 Graduated Rate Estate The estate as testamentary trust There is no amendment to the definition of testamentary trust. Therefore in order for an estate to be a testamentary trust, it must arise on and as a consequence of the death of an individual, and Must be created by the deceased individual The only contributions can be by the deceased individual on and as a result of death Pretty clear that the Minister only intends the estate to be a graduated rate estate 24

13 Notes Graduated Rate Estate From a legal perspective, when we are talking about the testamentary trust that is the estate, we mean all of the property interests of a deceased individual that is in the control of the personal representative, is governed by his or her Will (if any), and is available to satisfy creditors and others. In other words, there is no question that a deceased contributes all of his or her own property to his or her estate, and that the vesting of the property in the estate representative happens on and as a result of death. What doesn t apply insurance proceeds naming beneficiaries or a trust, RRSPs and other plans naming a beneficiary, joint property where beneficial ownership passes by right of survivorship, alter ego and joint-spousal trusts 25 Graduated Rate Estate Planning Points Estates that are disposed of in accordance with more than one Will should not effect the whole of the estate from being eligible as a graduated rate estate, why Multiple Wills have never created multiple estates from a legal perspective. It is merely a probate tool that exists only in the regulations of Ontario. From the context of family law, creditor/debtor law, and international law, the existence of multiple Wills is meaningless. There is always only one estate. Remember that all estates are by definition trusts. if for no other reason than there will be only one return and one designation. Different executors on different Wills should not prevent filing one return. 26

14 Graduated Rate Estate Other types of continuing testamentary trusts, such as insurance trusts, continue to be testamentary trusts, but because they are not the estate, they do not get the benefit of graduated rates. Do we care? Is it enough to keep the estate open in order to get the benefit of the graduated rate estate? Seemingly yes, given all the trouble the amendments go to explaining what happens to continuing trusts after the end of a graduated rate estate. 27 Graduated Rate Estate Can executors exercise discretions and make payments under testamentary trusts before trusts start? Seemingly yes, but might be complicated by changes to trustees between estate and separate trusts. Broad power to encroach during administration might be wise, such as Notwithstanding any other terms of this my Will, for any time that my Trustees are in possession of any part of my estate that is directed to be set aside and invested and administered for the benefit of any person(s) with an interest in my estate (hereafter such trust ), I hereby authorize my Trustees to exercise the power and discretion granted in accordance with such trust, and to make any distributions contemplated by such trust, notwithstanding that the part directed to be set aside for such trust still forms part of my general estate, provided that such distributions shall be made on account of such part. 28

15 Qualified Disability Trusts Main planning tools for beneficiaries with disabilities and who rely on the Ontario Disability Support Program (ODSP) Henson/Absolute Discretionary Trusts Main tool because no limit to maximum contribution. Limits on distributions. Must be absolute discretionary must have ability to distribute to other beneficiaries. RDSP Huge benefit. Only for those qualifying for Disability Tax Credit. Maximum $200k contribution. Exempt for ODSP, no restrictions on withdrawals for ODSP purposes. Life Benefit Trust Uses RRSP proceeds to buy annuity paid to trust for disabled beneficiary. Limited use. Not totally exempt for ODSP. 29 Qualified Disability Trust (QDT) Defined as a QDT if It s a testamentary trust Resident in Canada Makes an election jointly with one or more beneficiaries to be a QDT The electing beneficiary qualifies under the same test as the disability tax credit No election is made in respect of any other trust for that beneficiary No capital is distributed to any non-electing beneficiary 30

16 Qualified Disability Trust Issues Because qualifying beneficiary must jointly elect, and because disability tax credit requires high degree of disability, might need guardianship of disabled beneficiary to properly elect Strict recovery penalties if distributions of capital made to nonqualifying beneficiaries Unlike Lifetime Benefit Trusts, trusts need not have absolute restriction that only qualifying beneficiary can be eligible to receive income normal Henson Trust will qualify. 31 Qualified Disability Trust Continued Traditional Henson-style trust directs income not paid to disabled beneficiary to be paid to others after accumulation of income is not available. This protects its status as an absolute discretionary trust for ODSP and the QDT rules do not seem to prohibit distributions of income to others in years the election is not made. In any year only one trust can elect for any beneficiary, but, unlike GRE, no restriction on type of testamentary trust. If the designation is yearly, seemingly can have multiple Henson-style trusts and plan around which makes the designation in any year. 32

17 Continued Qualified Disability Trust If the ODSP recipient beneficiary does not qualify under the disability tax credit test, regular Henson Trust language might not be the best plan. A family or sprinkling style absolute discretionary trust, which provides a broad class of discretionary income beneficiaries with differing income tax rates. This might soften the burden of the new testamentary trust taxation. 33 Life Interest Trusts Life interest trusts, unlike graduated rate estates and QDTs, is not defined by the Act. Life interest trusts refers to the category of trusts that allow capital property to be transferred or allocated to the trust without the deemed disposition of that property, namely alter-ego trusts, joint spousal/common-law partner trusts and testamentary spousal and common-law partner trusts. 34

18 Life Interest Trusts Alter Ego and Joint Partner Trusts Any taxpayer over the age of 65 years can transfer capital property to a trust at the ACB on the condition that no person other than the taxpayer and the taxpayer s spouse or common-law partner can have the benefit of the property during their lives. Alter Ego trusts are one of the most common and effective probate avoidance tools. Also an effective tool for asset management during incapacity, and can be effective for conflict avoidance where a child is being disinherited or treated differently. 35 Life Interest Trusts Testamentary Spousal Trusts 70(6) Where the property of a deceased taxpayer to which the disposition of capital property on death at FMV would otherwise apply is transferred by Will to a trust: Under which the spouse is entitled to receive all the income of the trust, and No other person is entitled to any income or capital during the life of the spouse Then the trust receives the property at the ACB. 36

19 Life Interest Trusts Uses of Testamentary Spousal Trusts Not purely for income-splitting any more Remain popular for clients who want greater protection from future partner/spousal claims against survivor. Remain almost necessary in second marriage cases with children from prior marriages. 37 Life Interest Trusts The relevance and controversy derives from the new section 104(13.4) of the Act directing that on the death of the relevant life interest, all of the income resulting from the deemed disposition is income of the life tenant, where previously it was income of the trust or estate. Huge controversy in the first instance because many spousal trusts are for second spouses where the remainder beneficiaries of the trust are different than the beneficiaries of the life tenant. So, big tax bill for estate that does not have the benefit of the capital property that is deemed to be disposed of. 38

20 Life Interest Trusts Example Bob and Donna are both widows/widowers. They are in their 80s and both have 2 children in their 50s. Bob and Donna have been married for 20 years. Bob has significantly less assets than Donna. Donna dies first and leaves a $2mil securities account in a spousal trust for Bob. The remainder beneficiaries are her own children. She also leaves him $500k in RRSPs as named beneficiary. The ACB of the account at Donna s death is $1.5 mil. At Bob s death the account is worth $3mil and the ACB is $2mil. The gain that is realized on Bob s death is $1mil. Like many on death, Bob s income excluding the disposition of the spousal trust assets is well into the highest marginal rate. As a result of the new rule, $500k is added to Bob s income at death, resulting in a tax liability to Bob s estate and his beneficiaries of almost $250k without the benefit of the assets the liability derives from. 39 Life Interest Trusts Conflicting Legal Obligations New s.160(1.4) makes Bob s Estate and the spousal trust jointly and severally liable for the tax on the deemed disposition. It is still Bob s estate that needs to report and pay. The obligation of any estate trustee is to maximize the estate for the beneficiaries. The trustees of the spousal trust have a duty to Donna s children, not Bob s. 40

21 Life Interest Trusts The first reaction to this was the glut of potential litigation arising when the life tenant s estate is potentially gutted to the detriment of his or her beneficiaries, and the beneficiaries of the deceased individual are unjustly enriched by the shift of the tax burden. No advisors seem comforted by the CRA s right to collect the tax from the life interest trust. 41 Life Interest Trusts Other concerns include Alter ego trusts and joint partner trusts are, by definition, not testamentary trusts, and therefore not eligible as a Graduated Rate Estate. Besides losing access to graduated rates, which might not be a big deal in some cases These trusts have no access nil gains for donations of securities These trusts have no access to new flexible donation rules Even though we don t care about the shifting liability for tax for alter ego trusts from a litigation perspective, we do if the alter ego trust provides for charitable gifts, because the gift is by the trust, but the tax is in the estate. Only the GRE can get the credits, and the trust cannot transfer the funds to the GRE without losing testamentary, and therefore GRE status. 42

22 Life Interest Trusts Other concerns continued With respect to testamentary spousal trusts Access to Graduated Rate Estate still available for 36 months and donation rules are still available, BUT If donation was to be made on the death of the life interest, again the gift and the tax do not match. The gift is by the trust in the first estate, but the tax is in the estate of the life tenant. 43 Life Interest Trusts Solutions The best solution we know of to the litigation problem, and which we are already incorporating into our drafting, is providing the estate trustees of the life tenant with a power of appointment over a sum in the life interest trust equal to the liability arising in the life tenant s estate, and to be paid as directed by the estate trustees. A power of appointment should not taint a GRE because a power of appointment is considered a power over property that devolves onto the estate trustees upon and as a result of death. In other words, the life interest trust is not contributing to the estate, the general power of appointment is part of the estate that vests in the executor and arises as a result of the death of the life tenant. 44

23 Life Interest Trusts Solutions continued The donation credit and capital gains issues are more difficult. The use of a general power of appointment in favour of the estate does not work here because the payment or transfer would be by the life interest trust, and therefore the tax receipt would be in the name of the life interest trust, not the estate where the tax is. One option to consider to get the funds and the donation in the same place as the tax might be - at the time of the settlement of the life interest trust, or the execution of the Wills, having the parties draw up a promissory note for an amount determined by the intended donation payable to the life tenant on death. The receivable becomes an existing asset of the deceased life tenant, repayment should not taint the GRE of the estate of the life tenant, and now the tax and the funds and the gift are all in the same place. 45 Life Interest Trusts Solutions Continued The same gift would need to appear in the Will of the deceased life tenant. The promissory note does not fix the loss of the nil capital gains inclusion if the securities are in the life interest trust and the tax and gift are in the estate of the life tenant. All of this is submitted in an environment where we understand there are ongoing consultations attempting to rectify the life interest trust problem. So, stay tuned 46

24 International Tax Foreign Affiliate Rules 47 Presentation Outline Overview of the foreign affiliate ("FA") tax regime Surplus rules Overview of the controlled foreign affiliate ("CFA") regimes What is foreign accrual property income ("FAPI")? 48

25 Objectives achieved using sets of rules: Foreign Affiliate rules no current taxation of active business income (ABI) and full or partial deduction in respect of foreign taxes on repatriation to Canada relevant determinations residence of FA nature of income country where income earned foreign tax paid Controlled Foreign Affiliate rules current taxation of foreign accrual property income (FAPI) of CFA to Canadian shareholder relief for foreign taxes 49 What is a foreign affiliate? A foreign affiliate is a corporation that is not resident in Canada in which the taxpayer (Canco) has: an equity percentage of at least 1%, AND the total equity percentage of the taxpayer and each person related to the taxpayer is not less than 10% Equity percentage direct and indirect ownership of any class of shares. 50

26 Foreign Affiliate Rules - Example Canco Forco 2 is foreign affiliate of Canco. Forco 1 is NOT a foreign affiliate of Canco 9% 100% Forco 1 Forco 2 51 Forco 1 and Forco 2 each only have one class of outstanding common shares. Impact of foreign affiliate status: Dividends deemed to come out of one of four of the foreign affiliate's surplus pools with the result being that the dividend or a portion thereof may be deductible in the calculation of the taxpayer's income. Dividends paid by foreign subsidiaries that are not foreign affiliates (equity interest of less than 10%) are generally fully taxable. Surplus rules are generally only applicable if the Canadian shareholder of the foreign affiliate is a corporation. 52

27 Example Individual Individual Individual Canco Dividend Canco 9% Dividend 100% 100% Dividend Forco Forco Forco Dividend does not come out of surplus and is fully taxable to Canco Dividend is fully taxable to individual as regular income. Dividend is paid out of a surplus pool and may be fully deductible to Canco. 53 Foreign affiliate surplus: Earnings of a FA generate surplus which is categorized into certain pools: Exempt Surplus Active business income ("ABI") that is earned in a treaty/tiea country by an FA that is resident in a treaty/tiea country Taxable Surplus ABI that is earned in a non-treaty/tiea country or by a foreign affiliate that is resident in a nontreaty/tiea country FAPI Hybrid Surplus Capital gains from the disposition of shares of the capital stock of another FA or of a partnership interest, where the shares of the FA or partnership interest is excluded property. Pre-acquisition surplus Generally this is invested capital. Dividends paid by a foreign affiliate are deemed to be paid out of one of the surplus pool 54

28 FA surplus regime examples Canco Canco Canco ES Dividend TS Dividend TS Dividend FA resident in Good country FA resident in Bad country FA resident in Good country ABI in Good country ABI in Good country ABI in Bad country 55 Foreign affiliate dividends: Dividends paid by a foreign affiliate are deemed to be paid out of one of the surplus pool Exempt surplus Repatriated to Canadian corporations without any incremental Canadian tax Taxable surplus Taxable in Canada with a deduction for foreign tax (generally if foreign tax is at least 25% than there should not be any further Canadian corporate tax) Hybrid surplus 50% of dividend is deductible, the remaining portion is taxable with a deduction for any foreign tax paid. Pre-acquisition surplus Full deduction but reduces the tax basis of the FA shares. 56

29 Foreign affiliate regime: Relevant factors Residence of subsidiary Common law residence Central management and control Corporate tie-breaker in treaty Treaty residence Liable to tax Nature of subsidiary's activities/income Country where income earned Applicable foreign taxes 57 CFA regime CFA Status Applies to a Canadian taxpayer in respect of participating percentage in a corporation that is a CFA earning FAPI CFA non-resident corporation FA 10% threshold at least 1% of the shares of any class and at least 10% of any class together with related persons controlled by the taxpayer, OR the taxpayer and four other Canadians (no affiliation required) AND/OR certain non-arm's length persons (including non-arm's length persons of the four other Canadians) may be a CFA even though taxpayer does not have de jure control very broad, requiring determination of residence and relation of arm's length shareholders must monitor shareholding changes between other shareholders 58

30 CFA example Forco is a CFA of Canco A and Canco B Forco is a FA of Canco A as it owns 1% of Forco shares directly and at least 10% with its foreign parent Foreign Parent Forco is a CFA of Canco A A Canco A deemed to own shares of CancoB (another Canadian resident shareholders) and shares of Foreign sub (because it deals at non-arm's length with CancoB) Canco B Foreign Parent B Foreign sub B 9% Canco A 20% 70% 59 1% Forco CFA regime FAPI Status Applies to a Canadian taxpayer in respect of participating percentage in a corporation that is a CFA earning FAPI FAPI includes: passive income (e.g. interest, royalties, rent) certain business income deemed to be passive income generally where Canadian tax base eroded or earned in a non-qualifying country certain capital gains computed using Canadian rules in Canadian dollars can be recharacterized as ABI in certain circumstances relief for foreign taxes paid by CFA 60

31 Consequences of FAPI Included in income of lowest level Canadian shareholder (can be an individual, corporation, trust, etc.) with a deduction for any foreign tax on the FAPI income. The ACB of the FA's shares is increased for any net FAPI. FAPI earned by a FA that is not a CFA is not taxable to the Canadian shareholder on a current basis but does impact the surplus calculations. FAPI capital losses cannot offset FAPI income Canadian shareholder cannot offset foreign accrued property losses (FAPL) against other sources of income. FAPI profits from CFA can be repatriated back to the Canadian shareholder without any further Canadian tax. 61 Business other than active business Certain types of business income that would ordinarily be active business income are deemed to be FAPI. The purpose of most of these rules is to prevent erosion of the Canadian tax base: 95(2)(a.1) income derived by a CFA from the sale of property where the cost to any person of the property is relevant in computing the income from a business carried on in Canada by the taxpayer or a non-arm's length person. There are a few exceptions to this rule: Does not apply where the property is manufactured, grow, extracted or processed in the country in which the CFA's business in carried on. does not apply where more than 90% of the CFA's gross revenue for the year from the sale of property is from the sale of property to arm's length persons. 95(2)(a.2) income from reinsurance of risks in respect of Canadian persons or property situated in Canada. 95(2)(a.3)-(a.4) income from certain debt and lease obligations. 62

32 Business other than active business 95(2)(b)(i) income derived by the CFA from a service business when consideration for the service is deductible in computing the income from a business carried on in Canada by the taxpayer or non-arm's length persons. 95(2)(b)(ii) income derived by a CFA from a service business where the services are performed by any taxpayer of whom the CFA is a foreign affiliate. 63 Summary Taxation of FA Income FA ABI Income from property Good Country Bad Country Non-CFA CFA Exempt Surplus Income is exempt surplus and is fully exempt income when repatriated to Canada Taxable Surplus Income is not taxable when earned, but subject to tax when paid as a dividend with a full or partial deduction depending on foreign taxes paid FAPI Income is subject to tax in Canada under CFA regime in the year it is earned 64

33 Disclaimer This material deals with complex matters and may not apply to particular fact situations. As well, this material and the references contained therein reflects laws and practices which are subject to change. For these reasons, the material should not be relied upon as a substitute for specialized professional advice in connection with any particular matter. Although the material has been carefully prepared and reviewed, no persons involved in the preparation of the material accepts any legal responsibility for its contents or for any consequences arising from its use. 65 Thank you! Lorena Boda, Manager Succession & Estate Planning Grant Thornton LLP Suite City Centre Drive Mississauga, ON L5B 2T4 T: F: lorena.boda@ca.gt.com Andrew Somerville, Senior Manager International Tax Grant Thornton LLP Suite City Centre Drive Mississauga, ON L5B 2T4 T: F: andrew.somerville@ca.gt.com Craig Ross, Partner Wills, Estates and Trusts Pallett Valo LLP Suite City Centre Drive, West Tower Mississauga ON L5B 1M5 T: x231 F: cross@pallettvalo.com 66