2014 Nova Scotia Tax Changes
Capital Gains Exemption
• The Capital Gains Exemption has increased to
$800,000 for the 2014 tax year (indexed to inflation
for tax years after 2014)
• Maximum tax savings of $200,000 ($800,000 x 50%
x 50%)
• Additional $50,000 exemption provides maximum
tax savings of $12,500 ($50,000 x 50% x 50%)
Personal Income Tax Rates
• Indexing of tax brackets and personal amount
– Federal - 0.9%
– Nova Scotia – 0%
• Top Tax Bracket - $150,000
• Only 2014 tax rate changes are to non-eligible
dividends
Non-Eligible Dividend Gross-Up
• Gross up rate for 2014 is 18% (previously 25%)
• Bad News - tax rates going up between 2.86% and
4.69% (depending on tax bracket)
• Good News – impact on income tested items such
OAS clawback and medical expenses
2014 Ontario Personal Tax Rates
• Top marginal tax rates for individuals – income
exceeding $136,270:




Regular income: 50.00%
Eligible dividend: 36.06%
Non eligible dividend: 39.07%
Capital gain: 25.00%
2014 Nova Scotia Corporate Tax Rates
Tax rates for corporate income:
• Active business income eligible for SBD provincial limit
(below $350,000): 14.0% (2013 limit was $400,000 and
rate was 14.5%)
• Active business income eligible for SBD Federal limit
(between $350,000 and $500,000): 27.0%
• Active business income not eligible for SBD (over
$500,000): 31.0%
• Investment income: 50.7%
Impact on Planning Solutions
• Incorporation provides greater benefits:
 Tax deferral of up to approximately 36% on income eligible for
provincial SBD (ultimate tax savings: 2.4%)
 Tax deferral of up to approximately 23% on income eligible for
Federal SBD (ultimate tax cost: 5.52%)
 Tax deferral of up to approximately 19% for other business income
(ultimate tax cost: 5.88%)
 Tax prepayment of up to approximately 0.7% for corporate
investment income (ultimate tax cost: 4.93%)
• Added benefits to splitting income
• Added benefits for Corporate Class solutions
Salaries
• Reasonableness
• CPP / EI - premiums and benefits
• RRSP contribution room
• Earned income required by lower income spouse to
claim child care expenses
Taxable dividends
• Which family members are shareholders?
• Eligible vs. non-eligible
 Eligible - lower marginal tax rate
 Eligible - higher gross up (38% vs. 18%)
• Refundable dividend tax on hand (RDTOH) –
corporate tax refund of 33.33%
Redemption of preferred shares
• Is the client already taking dividends?
• Minimize estate tax liability
Tax-free sources
• Tax-free capital dividends
• Shareholder’s loans
• TFSA’s
• Personal non-registered accounts (not tax free but
potentially lower tax than withdrawals from
corporation)
New Advisor Tax Reference Card
New Advisor Tax Reference Card
Testamentary Trusts
Are testamentary trusts dead?
Introduction
• Testamentary trusts: powerful planning tool
providing tax and non-tax benefits
• Recent tax proposals that might impact on tax
benefits
• What’s left if tax proposals adopted as proposed?
Testamentary Trust – Main Features
• Created by Will
• Becomes effective only at the time of death of the testator
• Separate taxpayer for tax purposes: progressive tax rates
• Income paid/payable to a beneficiary is deductible to the trust
and taxable to the beneficiary
• Amount paid keeps its nature in the hands of recipient
beneficiary
• Income paid to a beneficiary may be taxed in the trust
Testamentary Trusts for Liquid Assets
Examples of testamentary trusts
Trust for
a child
Trust for
a spouse
Your
Spouse
Child
His/her
child
His/her
child
Example # 1 (Current Tax Rules)
Testamentary spousal trust:
• Example: $1,000,000 investment portfolio produces $50,000
income
Outright to high-rate spouse:
• $50,000 x 50.00% (NS 2014) $25,000 tax
Trust for
spouse
In testamentary trust instead:
•
•
•
•
$29,590 x 23.79%
$14,363 x 29.95%
$6,047 x 36.95%
$50,000 income
• Annual tax saving:
$7,039 tax
$4,301 tax
$2,234 tax
$13,574 total tax
$11,426
Spouse
Example # 2 (Current Tax Rules)
Family testamentary trust:
Income splitting with low-rate beneficiaries
• $1,000,000 in trust for Daughter and her 3
children
– investments produce $50,000 income
– each child requires $16,667 (1/3) per year for tuition, rent, various
expenses and children have no other income
– Tax each child pays (NS 2014):
•
•
•
•
$8,481 x
0%
$2,657 x 8.79%
$5,529 x 23.79%
$16,667 income
=
=
=
=
$0 tax
$233 tax
$1,315 tax
$1,548 tax
– Total tax of all 3 children on the $50,000: $4,644 tax
– Compare tax to Daughter on $50,000 with no trust:
$50,000 x 50.0%
=
$25,000 tax
Annual tax saving:
$20,356
Trust
Child
Her child Her child Her child
Pay children’s
expenses out of
trust income
Recent Tax Proposals
• Budget 2013: intention to hold public consultations on
the application of progressive rates to testamentary
trusts and estates
• Finance announced on June 3, 2013 a series of
proposals with respect to testamentary trusts and
estates and opened a written consultation process that
ended on December 2, 2013
• The proposed measures would apply in 2016, with no
grandfathering
Recent Tax Proposals
• Main change: elimination of graduated rates –
application of current top flat rate (rate applicable to
income over $135,054 in 2013)
• Trusts and estates affected:
– Trusts created by Will
– Estates after 36 months of existence (flat top-rate estates)
– Grandfathered inter vivos trusts (pre-June 18, 1971 trusts)
• Very limited exceptions
• Multiple other related tax measures
Recent Tax Proposals
Impact on spousal trusts if adopted as proposed:
• Tax benefits eliminated
• Other possible reasons for spousal trusts:





Control over use of trust’s assets
Control over devolution on second death (ultimate beneficiaries)
Assistance in managing assets
Assistance in case of incapacity
Added asset protection
Recent Tax Proposals
Impact on family trusts if adopted as proposed:
• Tax benefits may be reduced but not eliminated in appropriate
circumstances
• Progressive rates for trusts for minor children
• Income splitting with low-rate beneficiaries still possible (for example
with children and grandchildren) based on proposals
• Other reasons for family trusts
 Control over use of income and capital of inheritance – to a certain age if intended
 Added asset protection (spouse/partner and other creditors)
Recent Tax Proposals
Tax Planning continues around the Estate trust:
• Plan to continue estate for 36 months to benefit from marginal tax
rates
– Allocation among beneficiaries without immediate distribution
– Income from allocated assets allocated to specific beneficiary
– Leave income allocation and timing of distributions to trustee
Conclusion
• Still recommend testamentary trusts – with comments on proposed
tax changes that might impact on potential tax benefits they provide
• Tax proposals might not be adopted as proposed: wait for final
legislation
• Still a great planning tool providing tax and other benefits in
appropriate circumstances
Corporate Class Practical
Considerations & Planning
Opportunities
Individuals – Don’t miss out on tax
credits and deductions
•
Utilize dividend tax credit and management fee deduction – sometimes
the fact that a client paid no tax in a given year means we may have
missed an opportunity.
– If a client has little other income and a large non-registered Corporate
Class account, certain non-refundable tax credits (e.g. dividend tax
credit, personal amount, age amount, medical expense tax credit) and
other tax credits (e.g. donation credit) may go unused.
– Similarly, management fees that exceed other sources of income may
create a non-capital loss or result in low tax brackets going unused.
 May be an opportunity to trigger unrealized gains on an annual
basis to utilize above.
Individuals currently invested with
a broker
•
Brokerage accounts typically have heavy weighting in Canadian stocks.
•
Canadian stocks often have significant portion of return in form of
dividends which create a dividend tax credit – if client has no other
income, he or she can receive approximately $30,500 of eligible dividends
tax-free in Nova Scotia.
•
Start the conversation from an investment perspective – if they are
convinced they want an actively managed diversified portfolio, then
without Corporate Class they will have interest and foreign income and
capital gains from rebalancing.
•
Canadian dividends are grossed up by 38% – potential impact on OAS
clawback when net income exceeds $71,592 ($1 of dividend / $1.38
taxable / 20.7% clawback, not 15%).
Prospective clients
Dealing with unrealized gain – compare tax cost of triggering gains on
existing portfolio with “pay back period” of Corporate Class
– Lower distributions and reduced capital gains with Corporate Class
– If Corporate Class management fees exceed all other sources of
income, the non-capital loss can be carried back for next 3 years to
offset gain triggered on previously held portfolio
Important line items on personal tax return
– Taxable amount of dividends – line 120 and sch.4
– Interest and other investment income – line 121 and 130 and sch. 4
– Carrying charges – line 221 and sch. 4
– Social benefits repayment (OAS clawback) – line 422
Corporations
Helpful to understand how a corporation is taxed
– Passive investment income not eligible for small
business rate
– Interest and foreign income taxed at 50.7% in Nova
Scotia
– Capital gains ½ the rates of interest and foreign
income
– Portfolio dividends at 33.33% in all provinces – 100%
refundable through RDTOH account
Refundable Dividend Tax on Hand
RDTOH – Refundable
Dividend Tax on Hand
account (temporary tax)
•Refundable portion of Part I
tax assessed on investment
income (26.67% Cdn/17.33%
Foreign)
•Part IV tax on Canadian
dividends received (33.33%)
Dividend Refund
•$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
• $1 of dividend received from
our Corporate Class will result
in no corporate tax payable if
distributed to the shareholder
Utilizing non-capital losses inside a
corporation
•
Unused tax-deductible management fees inside a corporation create noncapital losses that carry forward for 20 years.
•
Opportunity exists to crystallize unrealized gains to use non-capital losses
and create CDA.
– CDA created will allow for tax-free payment to the shareholder –
consider where shareholder personally requires access to corporate
investments.
•
Alternatively, accountant may use current year or previous year’s noncapital losses to offset Part IV tax on dividend income (need to determine
if it makes sense to use against this temporary tax).
•
Can also carry back 3 years to offset previous gains (e.g. gains realized
on transfer into Corporate Class).
T-Class – ideal clients
• First step – quantify gain that would be triggered on
SWP without T-Class and corresponding tax payable
– Brand new clients have ACB = FMV, i.e. no gain
– Management fees reduce taxable income
• Additional income for seniors may trigger OAS
clawback
• Individuals currently in a high tax bracket who expect
to be in a lower tax bracket in the future will benefit
from the deferral
• Individuals who intend to donate Corporate Class
shares in the future
T-Class – corporate clients
T-Class inside a corporation is only beneficial in select circumstances
– Eliminates corporate tax on SWP – but would tax deduction created by
management fees offset tax on gain without T-Class?
– Are funds from SWP being retained inside corporation or being paid out to
the shareholder?
– If funds are being paid out to shareholder, what if any personal tax is
payable?
• Tax free withdrawals if shareholder loan exists, high PUC on shares
(limited circumstances), capital dividend account balance exists
• Generally combined corporate and personal tax is less with regular
SWP vs. use of T-Class given CDA created with SWP
Thank you
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