CORPORATE CLIENTS – THE POWER OF
5
CORPORATE CLIENTS/PROSPECTS
– THE POWER OF 5
5 minutes – capture attention regarding your value
5 key tax concepts – understand
5 questions – value of wealth planning
CORPORATE CLIENTS/PROSPECTS
– THE POWER OF 5
5 minutes – capture attention regarding your value
CAPTURE ATTENTION IN 5 MINUTES
Can you claim the Lifetime Capital Gains Exemption when you sell your shares?
Does your current corporate structure maximize income splitting opportunities?
Has your tax advisor discussed creative tax strategies available to your corporation?
Have you implemented flexibility and maximized control over retirement income flows?
When do you think you will be financially and emotionally ready to retire?
Are you a tax-efficient investor?
What is your overall, average tax rate?
When was the last time you were asked about your wills or succession plan?
Today’s Wealth Planners have to ask a lot more questions,
and be comfortable in dealing with individual, trust and corporate
planning situations
CAPTURE ATTENTION IN 5 MINUTES
High-net-worth investor concerns
• 89% concerned about losing their wealth
• 85% concerned about tax mitigation
• 79.2% taking care of heirs
• 71.5% having enough money in retirement
Financial analysis
Source: Building a World Class Experience for Affluent Clients,
CEG Worldwide, Morgan Stanley Smith Barney Institute, 2009
Wealth
transfer
Wealth
planning
Tax planning
Risk
mgmt
CAPTURE ATTENTION IN 5 MINUTES
• 90% of business owners state proceeds from sale
will be very important for the financing of retirement
• 52% of business owners do not have any
succession plan
• 40% of business owners do not have an estate
plan in place
Financial analysis
Source: RBC Wealth Management, HNW Inc, CIFP
Wealth
transfer
Wealth
planning
Tax planning
Risk
mgmt
CORPORATE CLIENTS/PROSPECTS
– THE POWER OF 5
5 key tax concepts - understand
5 KEY TAX CONCEPTS
Selling a small business or
an incorporated practice does not
guarantee $750,000 in tax-free
capital gains
5 KEY TAX CONCEPTS
– CAPITAL GAINS EXEMPTION
$2M offer for hotel building,
equipment and furniture
5 KEY TAX CONCEPTS
– CAPITAL GAINS EXEMPTION
Is it an asset or share sale?
$2M offer for hotel building,
equipment and furniture
CGE is only available on certain
qualified property, namely:
•Canadian controlled small
business corporation shares
•Qualified farm property
•Qualified fishing property
5 KEY TAX CONCEPTS
– CAPITAL GAINS EXEMPTION
Mr. A
Mrs. A
50%
50%
FMV $1.5M passive
investment assets
Holdco
$2M offer for Opco
100%
Opco
FMV $2M active business
operation assets
5 KEY TAX CONCEPTS
– CAPITAL GAINS EXEMPTION
Only individual taxpayers, or individual beneficiaries of a trust,
can claim the CGE
Mr. A
Mrs. A
50%
50%
FMV $1.5M passive
investment assets
Holdco
$2M offer for Opco
100%
Opco
FMV $2M active business
5 KEY TAX CONCEPTS
– CAPITAL GAINS EXEMPTION
Shares must be QSBC shares and the following tests are applied:
i.
Length of ownership test: shares owned by taxpayer for 24 months;
ii.
24 month asset test: 50%+ assets used in active business; AND
iii.
Moment of disposition test: 90%+ assets used in active business
Consider:
•
Corporation may need to be purified and/or structure modified
•
Good rule of thumb is 24 month lead time in planning for sale
5 KEY TAX CONCEPTS
Should your client:
• Incorporate?
• Incorporate a holdco for investments?
• Set up a separate corporation for each
business interest or investment account?
5 KEY TAX CONCEPTS
– PSB, SIB AND ASSOCIATION
Personal Services Business
•
•
Business providing services where the incorporated “employee” would reasonably be
regarded as an officer or employee of the entity to which services are provided. But
does not include a business … where more than five full-time employees
Consider employee versus self-employed/independent contractor tests
Specified Investment Business
•
The principal purpose of which is to derive income from property – including interest,
dividends, rents or royalties, but does not include a business … where more than five
full-time employees
Association
•
•
In order to employ multiple Small Business Deductions, two or more CCPCs must not
be associated
The associated corporation rules are complex, but generally two or more corporations
are “associated” if one corporation controls the other, or if they are directly or
indirectly controlled by the same person, group of persons, or related groups of
persons
5 KEY TAX CONCEPTS
Corporate Tax Accounts –
What do you need to know?
5 KEY TAX CONCEPTS – RDTOH ACCOUNT
RDTOH – Refundable Dividend
Tax on Hand Account
Dividend Refund
•Refundable Portion of Part I tax
assessed on investment income
(26.67% Cdn/15.25% Foreign)
•Part IV tax on Canadian
Dividends received (33.33%)
•$1 from RDTOH for every
$3 of taxable dividends paid.
•All taxable dividends paid by a
CCPC generate a dividend
refund to the extent RDTOH
exists
5 KEY TAX CONCEPTS – CDA ACCOUNT
The CDA of a CCPC tracks certain non-taxable amounts received by a corporation
that can be distributed on a tax-free basis to Canadian resident shareholders of
the CCPC. From a time perspective – calculated on a cumulative basis.
Capital
Dividend
Account
“CDA”
Non-taxable
portion of net
capital gains
PLUS:
Capital
Dividends
received
PLUS:
Non-taxable
portion of gains
on eligible
capital property
PLUS:
Proceeds of a
life insurance
policy
(less ACB)
LESS:
Capital
Dividends
paid
5 KEY TAX CONCEPTS
What is your clients overall,
average tax rate?
5 KEY TAX CONCEPTS – OVERALL TAX RATE
Corporation – T2
Individual shareholders – T1
Salary, dividends,
capital gains
How can funds be extracted from the corporation?
• What is tax impact to corporation?
• Shareholder needs $X after-tax from corporation to support lifestyle needs
now and in retirement
Plan - to maximize tax efficiencies, flexibility and planning opportunities. Tax
and financial analysis will naturally tie together and highlight investment
considerations. How do you minimize total taxes paid given shareholder
lifestyle needs?
5 KEY TAX CONCEPTS – OVERALL TAX RATE
• How would $250,000 in earnings be taxed?
– Personally
$ 95,800 (38.3%)
– Opco/Profcorp
$ 38,750 (13.0%)
– However, keep in mind have to get money from corporation out to the
shareholder to support lifestyle needs – how achieve?
• Assume client requires $100,000 for lifestyle needs:
– How much taxes are paid?
– How much excess funds are left to invest?
5 KEY TAX CONCEPTS – OVERALL TAX RATE
Personal
Professional
Earnings
Salary
Net Income
Corporate Tax
Dividend - Noneligible
Cash Available to Invest by Corp
Earnings
Personal Tax
$
$
$
$
$
$
$
$
38.3% $
$
$
$
Corporate
Opco/Profcorp
Salary
Dividend
250,000
$ 250,000
(153,300)
$
96,700
$ 250,000
(12,600)
13.0% $ (32,500)
13.0%
84,100
$ 217,500
$ (124,200)
84,100
$ 93,300
153,300
$ 124,200
(53,300)
34.8% $ (24,200)
19.5%
100,000
$ 100,000
(100,000)
$ (100,000)
$
-
Cost of Living
Cash Available to Invest by Prof
$ 250,000
$ (95,800)
$ 154,200
$ (100,000)
$ 54,200
Total Taxes
$ 95,800
38.3% $ 65,900
26.4% $ 56,700
22.7%
Total Invested
$ 54,200
21.7% $ 84,100
33.6% $ 93,300
37.3%
5 KEY TAX CONCEPTS
How can a corporation be
used to generate a flexible,
tax-efficient, self-directed
retirement?
5 KEY TAX CONCEPTS – FUNDING RETIREMENT
• 15-20 years ago – RRSPs/RRIFs, IPPs, and RCAs
• 10-15 years – provincial professional regulatory bodies allow
incorporation
• Finance in the last three years addressed - IPPs (2011 budget),
EPSPs and RCAs (2012 budget), RCAs (50% refundable tax)
• Today – maybe RRSPs/RRIFs, TFSAs, opco sale proceeds, holdco
dividends and share redemptions
Plan - to maximize tax efficiencies, flexibility, provide control and
planning opportunities. Tax and financial analysis naturally tie
together and highlight structure and investment considerations
CORPORATE CLIENTS/PROSPECTS
– THE POWER OF 5
5 questions – value of wealth planning
5 QUESTIONS – VALUE OF WEALTH PLANNING
When was the last time your
tax, legal or financial advisor
asked about your business,
succession or estate plans?
5 QUESTIONS – VALUE OF WEALTH PLANNING
Business plan
• At what stage in the corporate life cycle?
• Organization chart – does voting control lie with management?
• Contingency Planning
Succession/estate plan
• Who? How? When?
• Shareholders Agreement? If yes, when was the last time it was reviewed
and compared against the wills of the shareholders?
• When was the last time provisions in will were reviewed and distributions
mapped out to beneficiaries? Would actual distributions match intentions?
5 QUESTIONS – VALUE OF WEALTH PLANNING
What purpose does the
corporation or structure serve?
5 QUESTIONS – PURPOSE OF…
Opco
•
•
•
•
•
Liability or creditor protection
Tax savings and deferral opportunities
Means to maximize/monetize the value of the business operations
Income splitting opportunities/flexibility for compensation
Means to facilitate wealth transfer plans
Holdco
•
•
•
Further means of protection
Implement an estate freeze
Means to purify opco
Trust
•
•
•
•
Implement flexibility over cash/income flows
Set up direct vs. indirect ownership of shares
Maintain an element of control over opco
Multiply access to CGE
5 QUESTIONS – TAX MINIMIZATION
Average top marginal personal tax rate (July 1, 2013) – 44.87%
Average active business corporate tax rate (July 1, 2013) – 14.6%
Tax savings – reduced tax rate, pay less tax
•With Small Business Deduction – first $500K is taxed at lower, flat rate
•$500K personal versus $500K corporate and dividends paid out – depends
upon the province
•Non-deductible expenses (life insurance, automobile, meals and
entertainment, capital costs) funded with cheaper dollars
Tax deferral – pay tax later, perhaps at reduced tax rate
•Surplus, after-tax dollars should remain in corporation to be invested –
more investment capital
•Why generate income, unless needed to support lifestyle?
5 QUESTIONS – INCOME SPLITTING
• Corporations and/or trusts provide flexibility for compensation and
income splitting opportunities that does not exist for a sole proprietor
• Does shareholder support family members with after-tax funds? Find out
“how, what and who” shareholder is spending funds on
• Potential to access $750K+ Lifetime Capital Gains Exemption, and
multiplication of access to
Individual
Dividends/CGE
Corporation
Trust
Dividends/CGE
Dividends/CGE
Corporation
Beneficiaries
5 QUESTIONS – FACILITATE WEALTH TRANSFER
Succession planning
•
•
•
•
Funding retirement, as opposed to RRSP
Valuation of business
Monetization of goodwill
Implement control
Estate planning
• Family members – who, age, in/dependent, residence, marital status
• Easier to implement at various stages with corporation or trust than a
simple will concerning a proprietorship
• Multiple will strategy – depends upon the province
5 QUESTIONS – VALUE OF WEALTH PLANNING
What if?
5 QUESTIONS – WHAT IF?
If business owner or professional is injured and/or cannot manage the
business or practice? Is there:
•Sufficient funds to keep the company running smoothly or provide for their, and their
family’s, continued financial well being?
•A POA (or similar instrument) in place? Does the designated attorney have the business
acumen to maintain ongoing operations and protect corporate value? Is key management
or appropriate staff in place?
•A Shareholders’ Agreement in existence outlining steps to be taken?
•What happens upon the death of the business owner or practitioner?
•How will the tax liability be financed? Is there liquidity in the estate to pay terminal tax
liability or adequate insurance?
•Does the current will reflect intentions? Does the designated executor (or similar) have
the business acumen to maintain ongoing operations and protect corporate value?
•Is there a Shareholders’ Agreement in existence with a buy-out provision? Adequate
financing to execute buy-out?
•Does current will concur with the Shareholders’ Agreement?
5 QUESTIONS – VALUE OF WEALTH PLANNING
Have you heard of taxefficient investing?
5 QUESTIONS – TAX-EFFICIENT INVESTING
Cash flow – generating flexible cash flow streams while mitigating associated
tax liability.
Income – is investment income needed to support lifestyle needs? Flexibility
over when reported and type, and tax rate on income.
Growth – minimizing distributions/income to facilitate compound growth on
account of capital. What is the most tax efficient source of income?
Maintenance of portfolio allocation – making strategic or tactical shifts in
portfolio – does tax impact client’s decision?
Aim is to maximize after-tax rate of return and consider any value-add
components
5 QUESTIONS – VALUE OF WEALTH PLANNING
Do you have
philanthropic intentions?
5 QUESTIONS – PHILANTHROPIC INTENTIONS
Philanthropy by design, as opposed to philanthropy by default
• Planning is key…
• Maximize benefit of $X, or $X donation for minimum dollars
• Corporate deduction versus personal tax credit
• Cash versus donation in kind
• Now versus later
5 QUESTIONS – PHILANTHROPIC INTENTIONS
A
SBD
15.50%
$
1,000
$ (1,000)
$
$155
$
845
No SBD
26.50%
$
1,000
$ (1,000)
$
$265
$
735
Holdco
46.17%
$
1,000
$ (1,000)
$
$462
$
538
B
46.41%
$1,000
($464)
$536
46.41%
$1,000
($464)
$536
46.41%
$1,000
($464)
$536
Corporate
Income
Donation Deduction
Net Income
Corporate income tax savings
Net cost of donation (income - tax savings)
Personal
2013 Tax Credit Rate
Income
Personal tax savings = donation tax credit*
Net cost of donation (income - tax savings)
Increased tax benefit of personal donation (A-B)
*Assumes $200 of other donations
$
309 $
199 $
2
5 QUESTIONS – PHILANTHROPIC INTENTIONS
Facts:
Taxable income
Desired donation
Securities FMV
Securities ACB
Taxable income
Taxable capital gain
Tax deduction
Income tax payable
Average tax rate
Savings - Donation in kind
Capital Dividend Account
$
$
$
$
$
$
$
$
$
$
100,000
10,000
10,000
6,000
Personal
Cash
Securities
100,000 $ 100,000
2,000 $
$
26,775 $
25,907
26.25%
25.91%
$
868
$
-
$
$
$
$
$
$
Corporate - SBD
Cash
Securities
100,000 $ 100,000
2,000 $
(10,000) $ (10,000)
14,260 $
13,950
15.50%
15.50%
$
310
$
2,000
$
$
$
$
$
$
Corporate - Holdco
Cash
Securities
100,000 $ 100,000
2,000 $
(10,000) $ (10,000)
42,476 $
41,553
46.17%
46.17%
$
923
$
2,000
IN FINAL… THE POWER OF 5
Working with business owners and incorporated professionals,
you should:
1.Inquire, pique their interest and relate possible planning opportunities or
touch on potential deficiencies you have encountered in similar situations.
2.Ask what their overall, average tax rate is for their corporation and
personally over the last two years.
3.Talk to strategies available to business owners and incorporated
professionals in relation to investment capital, funding retirement and wealth
transfer.
4.Combine forces and promote collaborative approach amongst business
owner, wealth advisor, tax advisor and legal advisor.
5. KNOW YOUR VALUE – DO NOT NECESSARILY HAVE TO BE AN EXPERT, OR
HAVE THE SOLUTION, BUT CAN FACILITATE AND MOTIVATE ACTION
Thank You
FOR ADVISOR USE ONLY
This information is provided solely for informational and educational purposes and is not intended to provide, and should
not be construed as providing individual financial, investment, tax, legal or accounting advice. Professional advisors
should be consulted prior to acting on the basis of the information contained in this publication.
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