2014 Alberta Tax Rate Update
Cédric Paquin, B.Comm, CA, CFP
Regional Vice-President, Wealth Planning
United Financial, a division of CI Private Council LP
General Update
• Federal tax brackets & clawback lower limits indexed by 0.9%
• Increase in the capital gains exemption to $800K; indexed
• CRA prescribed rate back to 1% on January 1, 2014
• TFSA limit $5,500; Contribution room $31,000
• RRSP limit $23,820 (2013) to $24,930 (2014)
– 2013 Deadline (March 3, 2014)
2014 Top Personal Tax Rates - AB
Gross-up on non-eligible dividends decreases from 25% to 18%
2013
27.71%
Integration of ABI
Salary vs. Dividends
2014 Salary vs. Dividend - AB
ABI
Corporate
Tax
Rate
Deferral
Savings /
$100K
(Cost)
Dividend
Under $500K
14%
25%
(0.69%)
($690)
Over $500K
25%
14%
(0.47%)
($470)
Elimination of savings to flow ABI through a corporation (1.2% - 2013)
Salary vs. Dividends
- General Rules
• Pay salaries and/or bonus to decrease corporate income to
SBD limit and maximize RRSP
• Consider enough salary to maximize:
– RRSP ($138,500)
– CPP ($52,500)
– IPP ($135,000 – approx)
Salary vs. Dividends
- Other Factors
• Retirement income strategies
– CPP benefits vs. withholdings
– RRSP, IPP, RCA
– Retirement Allowance
• Dividend gross-up may reduce or eliminate
– OAS
– Age, GST, CCTB and other credit
– Provincial credits
• Cash flow: CPP withholdings & tax installments
• SRED
Integration of Investment Income
Retirement Holdco Strategies
Refundable Dividend
Tax on Hand (RDTOH)
13.34%
Capital
Gains
26.67%
Investment
income
33%
Dividends
$1 for every $3 dividend
paid to shareholders
• Prevents tax deferrals on
investment income
• Tax prepayment/cost
encourages paying dividends
out of a Holdco/Investco.
• Reduces flexibility in
compensation planning
2014 Passive Income - AB
AB
Other
Income
Capital
Gains
Eligible
Dividends
Up front
44.67 %
22.34 %
33 %
Refundable
26.67 %
13.34 %
33 %
Net tax
18 %
9%
0%
Example – 2014 AB
Income earned
through corporation
Corporate income
Corporate tax
Income earned
directly by individual
$ 1,000
(447)
After-tax amount
553
Dividend refund
267
Available for
distribution
820
Personal tax of
individual
(245)
Net cash to individual
$ 575
Personal income
vs.
$ 1,000
Personal tax
(390)
Net cash to individual
$ 610
Summary
Tax pre-payment: $57
Tax cost: $31
2014 Integration Failure - AB
Investment income has become less integrated for all provinces!
AB
Other
Income
Capital
Gains
Eligible
Dividends
Tax savings
(cost)
(3.1 %)
(1.6 %)
(0 %)
Tax deferral
(prepayment)
(5.7 %)
(2.8 %)
(13.7 %)
Capital Dividend Account (CDA)
To integrate non-taxable amounts
Capital
dividends
received
Non-taxable
portion of
capital gains
CDA
balance
Net proceeds
of a life
insurance
policy
CDA Strategies With Investments
• Pay out capital dividends before realizing capital losses
• Trigger capital gains to offset non-capital losses
Example: Opco with $10K in expenses and $30K in loss carry forwards
- Trigger $80K capital gain ($40K taxable capital gain)
- Nil corporate tax / $40K added to CDA account
- Pay $40K tax free capital dividend to shareholder
Advantages:
-
Extract funds tax free
Reduce tax cost of investment income in corporation
Bump-up ACB
Use up corporate losses that will otherwise expire
Lock-in CDA balance
Corporate Investments
- General Tax Strategies
• Draw from corporation as quickly and tax efficiently as possible
- Pay out shareholder loans and CDA tax free
Accumulation
Phase personal income to take advantage of lower tax brackets, credits and
- Create
deductions
• Investments that defer distributions and capital gains avoid
RDTOH and enhance compensation planning
• Pay dividends to recover RDTOH
• Defer
tax and plan for retirement using:
Withdrawal
- Holdco
Phase and/or corporate beneficiary of family trust
- RRSP & IPPs
2014 Tax Free Amounts - AB
Eligible • Federal: $ 48,843
Dividends • Alberta: $ 48,843
Non• Federal: $ 43,430
Eligible
Dividends • Alberta: $ 21,652
Retirement Income Strategies
Non-Reg vs. RRSP vs. Investco.
RRSP vs. Investco
Client objectives: higher cash flow or maximize estate?
RRSP Draws
•
•
•
•
Higher tax on death
No spousal trust on death
Recover AMT
Consider high tax and
clawbacks during RRIF
• RRIF after 65 for pension
credit and splitting
Corp Draws
• Lower tax on draws
• Effect of gross-up on
OAS, Age, GST, CTB
and other credits
• Higher donation credit
• Recover RDTOH
• Reduce prof/admin fees
RRSPs vs. Non-reg
• Draw from RRSPs to use up AMT, deductions and credits.
• Draw from high value RRSPs if in low tax bracket and
projecting high tax bracket and OAS clawback after age 71
• Convert higher RRSP to RRIF to fund lifestyle expenses after
age 65 and use pension splitting
• Convert RRSP to RRIF after age 65 for pension credit
Open Accounts
• Consider T- Class for individuals drawing on open accounts
and:
- subject to high tax rates and clawbacks,
- have charitable intentions, or
- don’t mind leaving large tax bill on death
• Spousal income splitting (but not with corporate class!)
- Payment of lifestyle expenses by higher taxed spouse
- Sale of lifestyle assets
- Low interest loans to spouse or Family Trust
Using open investments
to reduce net income
• Investments with low distributions (Corp class & T-class)
• Capital gain instead of interest or dividends
• Management fees that exceed investment income
• Convert non-deductible debt to deductible debt
• RRSP deductions
Thank you
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