The benefits of
Corporate Class investing
Benefits of wealth planning
• Maximize asset values
• Minimize tax now and later
• Minimize risks of untimely death, disability,
incapacity
• Ensure wealth is ultimately transferred efficiently
and effectively
• Avoid family disputes, costly estate litigation
Referrals you can make
• Tax accountants/lawyers for corporate
reorganizations, business sale and succession,
professional incorporation
• Corporate lawyers for shareholder agreements
• Estate planning lawyers for wills, trusts, estate
administration and estate litigation
• Family law lawyers
• U.S. tax/estate planning experts
Ideal clients for Corporate Class
• Owners of successful operating businesses
– sale, succession, surplus income
• Individuals who pay tax on their investment
portfolios
• Families with significant assets and/or investment
holding companies
• Seniors looking for retirement cash flow
Investment return – What’s important
Client focus
Return on investment
Less: fees
Media focus
Advisor focus
= Subtotal
Less: income taxes
My focus
= WHAT’S
IMPORTANT!!!
2012 top personal tax rates –
Ontario
Tax rates on investment income
120.00%
100.00%
29.54%
23.21%
80.00%
46.41%
60.00%
100%
40.00%
70.46%
20.00%
76.79%
53.59%
0.00%
Interest/foreign
Eligible dividends
After-Tax
Realized capital gains
Tax Rate
Unrealized capital gains
Investment structures
Segregated holdings
Investor
• Investors hold securities
directly
• Interest, foreign income and
dividends are taxed each year
• Capital gains taxed when
triggered
• Rebalancing or reallocating
the portfolio is a taxable event
• Gov’t & Corporate Bonds
• High Yield Bonds, Pref Shares
• Domestic & Foreign Equity
• Drawing out capital may be a
taxable event
Investment structures
S.132(6) & (7) of ITA
Mutual/pooled fund trusts
Investor
• Investors hold units of trusts
that hold securities
• Other income, foreign income
and dividends are distributed
and taxed each year
• Capital gains taxed when
triggered
• Rebalancing or reallocating
the portfolio is a taxable event
• Gov’t & Corporate Bonds
• High Yield Bonds, Pref Shares
• Domestic & Foreign Equity
• Drawing out capital may be a
taxable event
Investment structures
“Corporate Class”
Investor
Mutual fund corporation S. 131(8) of ITA
• Gov’t & Corporate Bonds
• High Yield Bonds, Pref Shares
• Domestic & Foreign Equity
• Investors hold “tracking”
shares of a corporation that
holds securities
• Investor may receive minimal
distributions of capital gains
and/or Cdn dividends
• Rebalancing or reallocating
the portfolio is a non-taxable
event (S.51 of ITA)
• Drawing out capital may be a
non-taxable event
How is a mutual fund corporation
designed to work?
Diversified portfolio
Typical 60/40 diversified investment portfolio
40%
20%
20%
20%
Fixed Income
Canadian Equity
US Equity
Int'l Equity
Eg. Tax on a diversified portfolio
Eg. Tax on a Corporate
Class portfolio
$1,285 of tax versus $15,715 on non-corporate class structure
Savings of $14,430!!!
Keys to the Corporate
Class structure
For the structure:
• Maintain proper balance of equity to fixed income for entire
class
– Equity = greater expenses than taxable yield, significant unrealized
growth
– Fixed income = taxable yield exceeds expenses, not as significant
unrealized growth
– Structure is run to have “taxable yield” = “deductible expenses” on an
annual basis
For the investor:
• Elimination of “capital taxes”
– July 1, 2008 – federal capital taxes eliminated
– July 1, 2010 – Provincial capital taxes eliminated
• Externally charged tax-deductible fees
– Where available
Benefit of tax-deductible fees
• Holding non-registered assets in this version of Corporate
Class may actually create annual tax savings instead of
an annual tax cost!
Corporate Class
After-tax benefits
Benefits
Corporate Class structure – four main benefits
1.
2.
3.
4.
Exposure through portfolio to underlying securities that produce a mixture of
interest, foreign income, Cdn dividends and capital gains, but return on
investment ultimately taxed preferentially as Cdn dividends and/or capital
gains
Taxes deferred until funds actually withdrawn from the portfolio
– If underlying capital gains are very significant, capital gains could be
distributed to shareholders (T5 slip)
– Chance to withdraw from portfolio tax-free (see #4)
Tax-free rebalancing
T-Class = tax-free withdrawal of capital
– Structured as a return of capital
= Greater spending power without additional
risk to the portfolio!
FMV comparison
Spending power
Value of Investment Alternatives
Spending Power of Corporate Class vs Non-Corporate Class
$3,500,000
$3.10M
$3,000,000
1% to 1.5%
Spending Power
$2,500,000
$2,000,000
$2.19M
$1,500,000
$1,000,000
$500,000
$0
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Corporate Class
Non-Corporate Class
Accumulation / spending
• Age 40 to 60
• $25K/yr for 20 years
• Diversified portfolio averaging 7.75%
$1,265,500
$1,094,300
1,400,000
1,200,000
1,000,000
800,000
Growth
600,000
ACB
400,000
200,000
Corporate Class
Non-Corporate
Class
Accumulation / spending
Option 1: Equal Cash flow For 25 Years
Non Corporate Class
Corporate Class
$41,350
$41,350
Year 25 – FMV
$0
$1,568,000
Year 25 – After-tax
$0
$1,210,000
Income
Option 2: Maximize Cash flow For 25 Years
Non Corporate Class
Corporate Class
Income
$41,350
$66,550
Year 25
$0
$0
Tax efficiency in this model equal to approximately 3.25% better after-tax returns!!!
Corporate Class
Planning opportunities
Corporate Class planning tips
1.
Corporate Class may allow investors to use capital
losses earlier
–
2.
Corporate Class means that income splitting with investment
dollars may no longer make sense
–
3.
Keep tax deduction with higher income-earning family member
Fee deduction may help offset high-tax corporate income
–
4.
Return on investment generally takes the form of realized/unrealized
capital gains, which can be fully offset by previous capital losses
ABI > $500K, other forms of investment income (interest, foreign inc.)
Corporate Class allows for even more efficient charitable
donation planning
–
Take advantage of 0% inclusion rate when donating marketable
securities
–
Bonus savings when donating securities through a corporation
Charitable donations using
Corporate Class
Investment Holdco
Donate $30K Cash:
Donate $30K In-Kind:
• Capital gain of $20K
• Capital gain of $20K
• Corp tax = $4,667
• Corp tax = $0
• CDA = $10K
• CDA = $20K
Charitable donations using T-Class
Investment Holdco
Donate $30K In-Kind:
• Capital gain of $30K
• Corp tax = $0
• CDA = $30K
T-Class from Account #1 to Account #2
Corporate Class planning tips
5. Corporate Class allows for interesting income
splitting opportunities with low income family
members, possibly using corporations
Dad
Daughter #1
Capital Dividends
Taxable Dividends
$1M Loan
New Investment Holdco
Daughter #2
• Avoid paying
refundable tax
• Pay out CDA
annually to Dad
as S/H cr.
• Unwind tax-free
• = 10% total tax
Corporate Class planning tips
6. Retirement funding
– Use three pools of assets (reg. non-reg. and corp)
– Tax-efficient withdrawals from corp account
– Maximize use of low tax brackets to maximize
ultimate estate value/retirement spending
– Create income if/when required by:
• Registered account withdrawals
• Non-registered triggering of capital gains
• Dividends from corporation
– Use Capital Dividend account
Client Scenario
Client example
Peter & Karen Smith
• Business owners
• 5 years from retirement
• Currently drawing $125,000 salary each
– Contributing to RRSP’s
• Spending requirement – $120,000 per year
• Investible assets:
– $300,000 non-registered
– $650,000 registered
– $1 million corporate
Client example
Salary versus dividends
Corporate Tax Consequences
Corporate earnings
Less: Salary
Employer portion of CPP
EHT
Corporate taxable income
Corporate tax - 15.5%
After-tax corporate income
Less: dividends paid
Retained in the corporation
$
Salary
207,611
(199,114)
(4,614)
(3,883)
-
Dividends
$
207,611
$
207,611
(32,180)
$
175,431
(129,868)
$
45,563
Personal Tax Consequences
Salary/dividends
Less: Employee portion of CPP
Personal tax
Available
Salary
$
99,557
(2,307)
(19,330)
$
77,920
Dividends
$
64,934
(4,934)
$
60,000
Lifestyle
RRSP contribution
$
$
60,000
17,920
$
$
60,000
-
Savings - RRSP's / Corporation
$
35,840
$
45,563
$
$
$
Client example
Value of dividends over salary for Peter & Karen Smith
$1,000,000
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Corp Inv - FMV
Corp Inv - Spending Power
Corp Inv - Estate
Assuming 0.5% eligible dividend distribution, 4.5% unrealized growth
RRSP FMV
RRSP Spending Power
Client example
Salary versus dividends
• CPP
• RRSP space
• EHT
• Discipline
• Corporate class advantage
Client example
Corporate tax on investment income
Return on investment
Inclusion rate
Subject to tax
Non-refundable tax
Refundable tax
19.5%
26.7%
$
Added to RDTOH
Added to CDA
$
$
195
267
462
46.2%
267
-
Eligible
Dividends
$ 1,000
100%
$ 1,000
Capital
Gains
$ 1,000
50%
500
$
Interest/
Foreign
1,000
$
100%
1,000
$
19.5%
26.7%
98
133
231
$
23.1%
$
$
133
500
0.0%
33.3%
333
333
$
33.3%
$
$
333
-
Paid Out to Individual Shareholder
Capital dividend
Taxable dividend
Less: personal tax
Net received
805
(262)
543
$
45.7%
$
500
403
(131)
771
$
22.9%
$
Assuming Ontario 2012 Income Tax Rates (not including new 2% surtax)
1,000
(295)
705
$
29.5%
$
Client example
Retirement funding
• 5 “buckets” – when and where to dip
– When to save tax - now versus later
• Using marginal tax brackets effectively
– Issues with registered funds
– Importance of T-Class
• Break the link between cash flow and tax
• How to use CDA & RDTOH
– Trigger capital gains on purpose?
– Importance of discretion
Client example
After-tax value comparison
$4,800,000
$4,300,000
$3,800,000
$3,300,000
$2,800,000
Year 6
Year 7
Year 8
Year 9
Year 10
Year 11
Year 12
Minimum withdrawals - Registered Accounts
Lowest tax bracket - Registered Accounts
Clawback - Registered Accounts
Year 13
Year 14
Year 15
Year 16
Year 17
Year 18
Minimum withdrawals - Dividends
Lowest tax bracket - Dividends
Clawback - Dividends
Assumes 6.92% gross return, 2% external fee, 0.5% eligible dividend distribution
Year 19
Year 20
Client example
Estate planning
• Results of retirement funding:
– Registered assets lower = less terminal tax
– Significant unrealized capital gains on non-registered investments –
personal & corporation
• “Pipeline” strategy to unlock corporate assets
– Estate incorporates Newco
– Newco purchases existing Holdco from estate
– Holdco wound-up into Newco – 88(1)(d) bump
– Newco wound-up and assets distributed
Summary
• Focus on wealth planning
– Differentiate yourself from “salespeople”
– Build COI networks for referrals
• Corporate class provides better after-tax returns
• Corporate class provides unique, integrated planning
opportunities
– Tie the product to client goals and objectives
– Hit the Hot Buttons!
Questions?
Thank you
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund
investments. Please read the prospectus before investing. Unless otherwise indicated and except for returns for periods
less than one year, the indicated rates of return are the historical annual compounded total returns including changes in
security value. All performance data assume reinvestment of all distributions or dividends and do not take into account
sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have
reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be
repeated.
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