October 6, 2011 NexGen for Accountants – BC -2011 Fraser Valley Chartered Accountant Association By: Dale Durand CA CFP, VP Estate and Tax Planning
Disclaimer 2 Invest better: Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their value changes frequently and past performance may not be repeated. The payment of distributions for Dividend Tax Credit Class and the Return of Capital Class should not be confused with a mutual fund’s performance, rate of return or yield. If distributions paid by a mutual fund are greater than the performance of the fund, then your investment will decline. Distributions paid as a result of capital gains realized by a mutual fund and income and dividends earned by a fund are taxable in your hands in the year they are paid. For Return of Capital Class, your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, then you will have to pay capital gains tax on the amount below zero. The contents and information contained herein are for informational and educational purposes only and should not be construed as legal, tax or investment advice. Information contained here is believed to be accurate and reliable at the date of printing, however, NexGen cannot guarantee that such information is complete or accurate or that it will remain current. The information is subject to change without notice and NexGen cannot be held liable for the use of or reliance upon the information contained here.
Trust Mutual Funds – The Move Towards Tax Efficiency Trusts to Corporate Class 3
Most Investments are Tax Islands –Mutual Fund Trusts For Example: Stocks Mutual Funds (Trust) ETFs SMAs Wraps For Consideration: Changing investments has a tax impact Year-end Distributions Unknown amount Unknown type Uncontrollable Unwanted
Corporate Class Mutual Funds –Born 1988 Tax Free Switching Among Funds Provides Tax Deferral Reduces unwanted distributions Taxes payable at “exit” Capital Gain
NexGen Financial – Born 2005 Q. What’s so unique about NexGen’s Funds ? A. Three Things 1. Unlike traditional funds investors may self select their tax treatment as they make their investment 2. We disconnect the historical link between income type and underlying investments 3. Investors can switch between all funds and all taxes classes without triggering taxes
Fees and Minimums Corporate Class Mutual Fund fees contain three elements: Expenses (audit, printing, etc) Management (for the MF company, lowers with higher $ investments and varies with type of investment) Compensation (for the advisor, many times this is eliminated and billed directly by the IA to make this tax deductible – always negotiable rates) Rates including expenses and management range from 1.5 at high to .6 at low. Minimum investment usually $2,500. 7
The NexGen Story The Ultimate Corporate Class Fund 8
9 In the Tax Act, all income is not created equal 9
10 Tax Classes are available for all NexGen Tax Managed Funds except NexGen Canadian Cash Tax Managed Fund which pays Capital Gains and Return of Capital through a corporate series. 10 NexGen’s Innovative Fund Structure
NexGen Tax Objectives: 100% Achieved – 5 Years Running * Capital Gains dividends are declared as necessary to eliminate the overall tax liability of the structure. It was not necessary for some NexGen funds to declare capital gains and therefore some Funds and Series’ did not receive distributions.
12 NexGen Structure – For the Accountants How do we do this and what does CRA think of all this?
13 Basis for Corporate Class Mutual Fund Tax Structure A Tax-Efficient Family Income Strategy – An Example Mrs. Wise and [Modest Income] Class B Shares Mr. Wise [High Income] Class A Shares Adult Child (Modest Income) Any Corporation Class C Shares Minor Child No income Class D Shares Strategy: Utilize the same rules that allow preferential allocations of type and amounts of taxable income to Shareholder who will pay the least tax! Result: Minimized Tax Payable 13
14 How NexGen Works – RRSP’s Absorb High Rate Income High tax rate income Low tax rate income Corporate Class Tax Managed Fund A Taxable investors Inter FundClass Portfolio Non-taxable investors (RRSP’s etc) “Clone”
15 CRA? No Advanced Ruling possible as these are only provided on specific transactions (when provided at all). NexGen is a corporate structure Based on the same laws that allow the accountant to stream preferential income to specific members of the family. All tax liabilities are paid on all investment income (including net capital gains) earned within the structure. Mutual Fund Corporations are allowed to distribute Capital Gain Dividends which is accompanied by a Capital Gain refund mechanism to avoid double tax. All high rate income is offset by returns paid to the RSP Trust. All funds eventually withdrawn from the RSP is fully taxable. Therefore no offense to CRA.
Incorporated Investment Portfolios Two Gifts From CRA to Corporate Owners Tax Deferred Advantage Income Splitting
IIP: Preferential Tax Rate on “Active” Business Income Canadian Private Corporations in Canada enjoy a very low tax rate on the first $500,000 ($500,000 BC) of Active Business Income Comparison of 2011 Corporate Small Business Rates to Top Personal Tax Rates. 43.7% 30.2% = $151,000 13.5% Tax Rate on Top Personal Tax Deferral Small Business Income Tax Rate Advantage Invest Low-Taxed Corporate Income Within the Corporate Structure to defer taxation and achieve Higher Wealth Accumulation
Tax Deferred Advantage Objective: While held in the CCPC reduce (or eliminate) high rate tax drag on unneeded Passive Investment Income. 18
The Right Way versus the Wrong Way to Manage the Tax Deferred Advantage - British Columbia Example: Compare interest bearing security against a Tax Deferred investment Assumptions: Initial Investment: $1,000,000 Incorporated Investment Portfolio
Current BC Corporate (43.7%) and HMTR personal tax (33.71%) rates Result:
141% higher after-tax investment return
Long term tax deferral and conversion from high tax rate to “half taxed” capital gains
The rates of return, annual distribution rates and income components comprising a given distribution contained in the tax cases and reflected in certain graphs and tables are for illustrative purposes only utilizing various assumptions to demonstrate the importance of compound growth and the effects of taxation on a given investment. They are not intended to reflect, nor should they be interpreted, as an indication of future values or returns on investment in respect of any NexGen Fund. 19
Gift #2 -Income Splitting Be Proactive! Objective: Plan now for next year, meet with the Client and their IA. Swing the Tax “Hammer”, let the Investment Advisors swing the Product “Hammer”. Far more margin in planning versus Compliance work. 20
Gift # 2 – Income Splitting A Tax-Efficient Family Income Strategy – An Example Mrs. Wise and [Modest Income] Class B Shares Mr. Wise [High Income] Class A Shares Adult Child (Modest Income) Any Corporation Class C Shares Minor Child No income Class D Shares Strategy: Allocate Income to Family Member that will pay the least income tax on that income! Result: Minimized Tax Payable 21 21
Overview of Taxation of Investment Income in a Private Corporation Investment Income in Corporation Income Type All other investment income (including taxable part of CG’s) Non-Taxable half of Capital Gains Portfolio Dividends 26.67% How it’s Taxed 33% Part IV Tax Approx. 50% Part I Tax NO TAX 100% Corporate Accounts RefundableTax (RDTOH) 100% refundable Capital Dividend Account (CDA) Refunded $1 for every $3 Paid in Dividends Tax Implications Dividend Tax Free Paid to Shareholders Goal 22
23 Do and Do Not’s on IIP Investments If the objective is to grow the funds, do not create any investment income (compound Free of Tax). If the shareholders require cash out the company – Plan ahead with your accountant and financial advisor! Prefer Capital gains and Eligible Dividends! Avoid Interest income! On $1,000 of cash income created in the Corporation, the shareholder would receive net of all taxes the following: (BC, shareholder in the highest tax bracket) Interest $543 Capital Gains $772 Portfolio Dividends $761
Other Issues Remuneration issue RRSP contributions or Corporately held Portfolio Corp assuming mimic tax deferral of RRSP Salary Versus Non-eligible Dividends Dividends – Better exit strategy, flexibility CPP or not to CPP? 30 year old contributing current $4,400 per year, pension at age 65 with current max of $10,000, using 2% cpi (hold versus contribute) If the funds were held inside CCPC (assumes same personal tax cost of “pensions”) At avg 3% ROI, out of funds by age 81 At avg 5% ROI, $427,011 in investments remain Would have received total pension of $515,638 by age 85. 24
25 NexGen Tax Case: Professional Partners Synopsis Many professionals such as accountants and lawyers have historically operated under a partnership structure Capital invested in their firms is repaid on retirement. Often this triggers sizeable capital losses on this investment Professional seek safe ways to harvest these capital losses vs. traditional higher risk options (ie. Flow-Throughs)
26 NexGen Tax Case: Professional Partners These and certain other fees are restricted deductions under the Canadian Income Tax Act. As a result, at retirement, Randy’s tax cost basis will be higher than the capital he will get back.