Year End Tax Tips: 2010
Jamie Golombek
Managing Director, Tax & Estate Planning, CIBC Private Wealth Management
December 2010
Agenda

Year end tax tips

Tax shelter update

US Estate tax update

Two big ideas:
 RRSPs for business owners?
 TFSA vs RRSP
Tax loss selling - transfers
 Transfer to RRSP?
-
Loss denied
-
Crystallize first, wait 30 days to buy back
 Transfer to TFSA?
-
Loss denied
 Transfer to RESP?
-
OK, but if held for 30 days, “superficial loss”
Tax loss selling – “superficial loss”
 Superficial loss
- Buy “identical property” within 30 calendar days
- Who?

You

Spouse/partner

Corporation controlled by you/spouse/partner

Trust, if you or spouse is majority-interest beneficiary
 Transfer to parent / child – OK
Tax loss selling – spousal transfer of losses
 Spousal loss transfer
 Victor + Maureen
- Maureen – ABC Shares - $10,000 accrued capital gain
- Victor – XYZ Shares

ACB - $50,000

FMV - $40,000
Tax loss selling – spousal transfer of losses
 Step one – Victor sells XYZ shares for $40,000
-
Capital loss of $10,000
 Step two – Maureen buys XYZ shares, pays $40,000
-
Victor’s $10,000 capital loss is now “superficial”
-
Added to ACB of Maureen’s shares ($10,000 + $40,000 = $50,000)
 Step three – Maureen waits 30 days, sells for $40,000
-
ACB - $50,000
-
FMV - $40,000
-
Capital loss of $10,000 can be used against ABC accrued gain
RRSP annuitants who turn 71 in 2010

Convert to RRIF (or annuity) by December 31

Final RRSP contribution must be made by December 31
 No sixty day rule
 Unless spousal RRSP with younger spouse/partner
RRSP annuitants who turn 71 in 2010

Consider one-time “over-contribution”
 Client (71) has $100,000 of earned income in 2010
 Will create $18,000 of RRSP contribution room for 2011
 Contribute $18,000 to RRSP in December 2010
 Pay penalty of 1% or $180 for month of December
 Deduct contribution in 2011 (or future year) against ANY source of income
Charitable Giving Strategies
 Donations
of publicly listed securities
 NO capital gains tax
 Donations
of stock option proceeds within 30 days
 NO employment income tax
 Public
vs. private foundations
 Immediate tax savings
 Source of annual giving (e.g. donor advised funds)
RESP deadline…

$50,000 per child

No annual maximum

Maximize Canada Education Savings Grants (CESGs)
 20% on first $2,500/annually = $500
 Catch-up CESGs back to 1998
• Max of $1,000 of CESGs per year
 $7,200 per child maximum

Child turned 15 in 2010 with no RESP?
 Contribute at least $2,000 to RESP in 2010 to get CESG for 2010 and make child
eligible for 2011 and 2012 CESGs
Purchase computers - business assets

Claim a half-year’s depreciation, even if asset bought on Dec. 31st

Accelerated tax depreciation for computer purchases
 Can write off 100% of cost of computers in year acquired
 No “half-year” rule
 For purchases from January 28, 2009 through January 31, 2011
Pay investment expenses by Dec. 31

Investment counseling fees (non-registered only)

Professional accounting services

Safety deposit box rental

Interest expense
Spousal/Partner Loan at 1%

Spouse or partner gifts/transfers funds
-
-
FULL attribution of income / gains to transfero
Exceptions:
 Pay FMV or prescribed rate loan

Rate for Q4 2010 – 1%
 Lowest ever!
Spousal Loan at 1% (Example)

Jack loans Diane $200,000

Investment earns 5% annually
Interest Expense – 1%
Jack
Income
$2,000
$200,000
Diane
Income
Interest expense
Net income

Income splitting opportunity: $8,000
Tax Savings (BC): $8,000 X (43.7% - 20%) = $1,900 annually
$10,000
(2,000)
$ 8,000
Tax Shelters

“If it sounds too good to be true, don’t fall for it…The Canada
Revenue Agency (CRA) is auditing all tax shelter gifting
arrangements.”

CRA – August 13, 2007
 Auditing over 170,000 taxpayers
 $5 Billion in denied donations
 2009 - 10,500 taxpayers claimed $285-million in donations through shelters
 2008 - 17,000 taxpayers claimed $480-million
Source: Globe and Mail (September 15, 2010)
Tax Alert (April 2009)
Maréchaux (2010)

Leveraged donation tax shelter

Produces "return on donation of up to 62.4%”

Supported by a tax opinion "from a firm of respected tax lawyers"

"subject only to a risk of challenge by the CRA" described as "slim”

$100,000 donation = $30K cash + $80K “interest-free loan” (included $10K
in fees)

Was there a “gift”?
Federal Court of Appeal – October 28, 2010
Lemberg v. Perris (2010)

Art flip donation tax shelter

Paid $78,500
 CRA allowed only cost of donation

Difference (Amount paid less donation CR)

Undisclosed commissions -

Arrears interest – CRA
$75,000

Interest on Line of Credit to pay tax
$29,000
Sued for:
Appeal filed August 6, 2010 - Court of Appeal file no: C52510
$40,000
$7,500
$151,500
U.S. Estate Tax Update

Assume non-resident, non-U.S. citizen (“ALIEN”)

U.S. situs property:
 U.S. real estate
 U.S. stocks
U.S. Estate Tax Exemption / Rates
Year
Exemption
Top Rate
2006
2,000,000
46%
2007
2,000,000
45%
2008
2,000,000
45%
2009
3,500,000
45%
2010
Repealed
Repealed
2011
1,000,000
55%
Where are we now?
Update…

Monday December 6, 2010:
 President Barack Obama + Republican congressional leaders
• Two years at 35% rate
• Exemption of up to $5 million
 Cost $600 to $800 million
Solution: U.S. equity mutual funds
EXEMPTION:
Cdn mutual funds
that own U.S.
stocks
IRS Chief Counsel
Memo (1/22/2010)
Solution: U.S. equity mutual funds
Rethinking RRSPs
RRSPs for Business Owners
& Incorporated Professionals

Pay “salary” to contribute to RRSP
 $122,222 for 2010 to get 18% maximum
 $22,000 maximum contribution

Does this make sense when corporate income < $500,000 ?
Earn income personally

Assume:
 Corporate income – $1,000
 No corporation
 Tax paid at full personal marginal tax rates
Ontario
Corporate Income:
Income Tax:
Net Cash:
$1,000
(464)
$536
Earn income in corporation

Assume:
 Corporate income – $1,000
 Eligible for small business rate (< $500,000)
 Paid out immediately as “non-eligible” dividend
Ontario
Corporate Income:
Corporate Tax: (ABI < $500k)
Net Corporate Income:
$1,000
(160)
$840
Dividend Payable:
$840
Personal Tax on Dividend:
(274)
Net Cash to Shareholder:
$566
Advantage of Dividends vs. Salary
Ontario
Cash – Corporation:
$566
Cash – Personal:
(536)
Net Advantage:
$30
Percentage:
3.1%
Tax Rate Advantage Dividends vs. Salary
BC
1.0%
AB
1.2%
SK
2.5%
MB
0.8%
ON
3.1%
QC
(0.2)%
NB
1.4%
NS
3.6%
PEI
0.3%
NF
1.1%
Tax deferral opportunity – Dividends vs. Salary

Income earned personally – taxed today

Income earned corporately
 Taxed initially at low corporate tax rate
 Only taxed as dividend when removed from corporation

RESULT: substantial tax deferral on income not needed today!
Ontario
Corporate Income:
Corporate Tax: (ABI < $500k)
Net Corporate Income:
$1,000
(160)
$840
Personal Income:
Personal Tax:
Cash to Shareholder:
$1,000
(464)
$536
Net Deferral Opportunity:
Percentage:
$304
30.4%
Tax deferral advantage – all provinces
BC
30.2%
AB
25.0%
SK
28.5%
MB
34.5%
ON
30.4%
QC
29.2%
NB
27.3%
NS
34.0%
PEI
35.1%
NF
27.4%
TFSA carry-forward room

$10,000 opportunity

$20,000 opportunity (spouses/partners)
 No attribution
TFSA vs. RRSP – Same tax rate
TFSA
Income
RRSP
$1,000
$1,000
Tax (at 40%)
(400)
Amount invested
600
1,000
1,015
1,692
Growth – 10 years / 5.4%
Tax (at 40%)
Net available to spend
–
$1,015
–
(677)
$1,015
TFSA vs. RRSP – High/Low
TFSA
Income
RRSP
$1,000
$1,000
Tax (at 40%)
(400)
Income after-tax
600
1,000
1,015
1,692
Growth – 10 years / 5.4%
Tax (at 20%)
Net available to spend
–
$1,015
–
(338)
$1,354
TFSA vs. RRSP – C.D. Howe Report (February 2010)
TFSA vs. RRSP – Low/High
TFSA
Income
RRSP
$1,000
$1,000
Tax (at 20%)
(200)
Income after-tax
800
1,000
1,354
1,692
Growth – 10 years / 5.4%
Tax (at 40%)
Net available to spend
–
$1,354
–
(677)
$1,015
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