On October 5, 2017, NWM hosted a group of over 500 people at the Fairmont Hotel Vancouver to discuss the Finance Minister Bill Morneau and the Canadian government's proposal for tax reform impacting the majority of Canadian business owners. NWM President, David Sung, opened the evening with an overview of the proposed tax changes. He provided some context and asked the audience to consider the political undertone of the Liberal government's tax proposal and the way in which they have handled the public push-back. John Nicola, Chairman & CEO, an overview of what the government is proposing exactly and the impact it will have. He went on to discuss some planning options available to Canadian business owners.

1. WELCOME

2. President
David Sung

3. Introduction and Background
Tax Reform: The Details
Planning Options
Case Study
Q & A
Agenda

7. These changes won’t just affect the wealthy
as the government has implied…. they
directly target small business owners who
make daily sacrifices to keep their
businesses alive, support their families and
create jobs in their communities.
“
”

8. Physicians are up in arms because they do
not have pensions or benefits and the tax
changes will make it near impossible for
them to save for retirement, to finance
maternity or parental leave, to work part
time while raising a family (or support a
spouse doing so) and to repay debt accrued
during their studies.
“
”

9. It is the farmers, mom and pop shops, and
entrepreneurs, who invested everything
into their businesses, that will be most
affected by these changes.
“
”

13. Characterizing the last 45 years of
Canadian tax policy as loopholes is insulting
to businesses that have worked within the
rules in good faith to build their businesses,
to save for retirement, and sometimes just
to keep their doors open.
“
”
Krista Ross
CEO of the Fredericton
Chamber of Commerce

16. Chairman & CEO
John Nicola

17. Higher Taxes
Actual and Possible
Results 2016
• 4% higher marginal tax over $200,000
• Higher provincial rates in Ontario.
53.53%>$220,000
• Overall tax on first $200,000 lower
• Reduced TFSAs to $5500
• No Income splitting of salaries
• Stock options fully taxed over $100,000 per
year (may have different rules for CCPCs)
• Change of tax rates for professional
corporations and ability to income split?
• 4% higher corporate tax on passive income

18. Tax Reform 2017
Actual and Possible
Results 2016
• 4% higher marginal tax over $200,000
• Higher provincial rates in Ontario.
53.53%>$220,000
• Overall tax on first $200,000 lower
• Reduced TFSAs to $5500
• No Income splitting of salaries
• Stock options fully taxed over $100,000 per
year (may have different rules for CCPCs)
• Change of tax rates for professional
corporations and ability to income split?
• 4% higher corporate tax on passive income
Resurrected and
improved

19. Tax Reform 2017
What’s being plucked?
• Income Splitting of Dividends from private corporations
• Increase tax on passive corporate income that could reach 72% when paid
out as dividends
• Pipeline planning that converts dividends to capital gains is prevented

20. And Now… The Rest of The Story
Paul Harvey

21. n
25% swing in 100 years
10 developed countries either less
upwardly mobile or less equal in
income than us or both
Rising since the 70’s

22. Who are the 1%
Who Are The 1%?
• 135,000 Households
• Average income $500,000+( based on $458,000 for 2013)
• Investable Net worth about $4Million
• Currently pay 20% of all personal income tax in Canada
• Equal to 11% of all businesses in Canada and 5% of self-employed
• Assuming 2/3rds of the 1% are professionals or business owners, then only
7% of all incorporated entities are owned by the 1% (93% are not)

23. • 3% per year of service
• Indexed for life
• Survivor benefits
• Cost for each $1000/year of annuity=$21000 (Couple age 65)
• Biggest pension $132,000/year =$2.8Million
• Income can be split for tax purposes with a spouse
• No tax on accumulation during working lifetime or until pension starts
• MP’s fund less than 10% of the cost
Retiring MPs

24. Indexed Pensions
The Case of the retired Civil Servant
Assumptions and Results
• Both age 65
• Both worked but only one has a pension
• Pension is $100,000/year indexed with Survivor benefits
• Both get full CPP/ OAS (about $20,000/ year each indexed)
• Pension is split for tax purposes; therefore no OAS clawback
• First year retired income = $140,000/year ($70,000 each)
• Annual income tax (assume no other income) = $14,000
• Average tax rate 20%
• Net spendable indexed income $112,000/year ($9300/month)
• Replacement Cost of all pensions combined = $3 Million (approx)
Q: How much of these assets are part of their official net worth?
A: Zero

25. What Else is in The Rest of the Story?

26. The Doctor and The Civil Servant
 Bob graduates with B
Comm. and joins civil
service age 25
 Entry level salary is
$40,000/year
 Gets MBA at age 30
 Moves up the ranks to
ADM by age 50
 Retires age 60 with salary
of $200,000 per year
 Indexed pension at age
60 is $133,000/year
 Cheryl finishes residency at
age 30
 Starts GP practice with
student debt of $175,000
 Practice grosses $350,000
per year
 Overhead is 40%
 Starts taking salary to
maximize RRSP’s
 Is able to leave $50,000 per
year in medco to save for
retirement and future
maternity leaves and payoff
student debt.

27. What Else Do We Need To Know?
• Bob’s pension is fully guaranteed. No investment risk.
• To fund Bob’s pension at 4% real rate of return is takes 50%+ of career income. If Bob’s
option is RRSP or DC pension his maximum contribution employer / employee is 18% of
his salary or 36% of what his pension will be.
• The tax rate on this additional saving is 0% when earned and 0% when accumulating.
• Medcos tax rate is 13% when earned and 50% when accumulating.
• Cheryl funds 100% of savings for retirement and accepts risk on returns.
• Expected RRSP balance for Cheryl age 60 is $1.5M. Value of Medco savings $1.4M. Total
$2.9M or 90% of the value of Bob’s pension.
• Cheryl has to fund 100% of sick pay, holiday pay, maternity leave, health benefits.
• When Bob retires he lowers his tax by splitting pension income with his spouse.
• He can split income at 60. Jane has to wait until age 65

28. The Cost of Pensions

29. 23 CEOs of Canadian Public Companies
• All of them have accrued pension benefits
worth more than $10M
• Average for all 23 is $23M
• Total accrued benefits are $528M
• This does not include the present value of
other benefits (such as health care)
• The total does not include the value of
pensions or benefits for other senior
management

30. Who is Getting the Benefit of Deferring Taxable Income?
Private vs. Public Asset Accumulation in Tax-Deferred Plans
• Private companies are limited to statutory levels of RRSP’s or IPP’s
• Beyond that private companies use Retirement Compensation Arrangements (RCA’s) to
accumulate additional retirement assets (subject to a 50% withholding tax)
• Pension income received from public companies can be income split between employee
and spouse.
• Private companies cannot accumulate this level of tax deferred pension or health benefits
for either staff or shareholders.
• Public companies can use stock options to provide deferred compensation benefits taxed at
50% of regular income.
• Public companies pay tax at 26% on passive income or about half what private companies
pay.
• Owner managers and professionals pay 100% of the cost of their retirement savings, heath
benefits, CPP, and cannot receive UIC or Worker’s compensation.

31. Selling the Family business
John JaneArmco
Opco
($1.2M)
Sell to Armco
$1,100,000
$100,000
Government
Aka Mordor
Sell to Jane
$470,000
$730,000

32. Selling the Family Farm
Jim and Rita Luke
Farmco
($2M) Common shares$2M Pref @4%
Government
Aka Mordor
$80,000
Annually
2017 $17,500
2018 $33,500

33. Die With Their Boots On?
+65%
-25%
What price will sellers
get if the tax cost
selling to family is
400%+ More ?

34. Dead Money?

35. Corporate Tax
Personal Tax
Total Tax
Morneau says tax changes will target “dead money”
Public CompaniesSmall Business
50% =
22% =
72% =
= 26%
= 23%
= 49%
How level is this playing field?
$630 billion on
balance sheets
in 2014
Who is hoarding
the money?

36. Taxable Income for a Balanced Portfolio
Deferred
Gains
2.5%
Return of Capital
1.0%
Interest,
Rent, Foreign
2.0%
Dividends
1.0%
Capital
Gains
1.5%
Return Breakdown
50%
67%
100%
0%
0%
Total return = 8% Taxable this year = 3.5%

37. Tax Options for Passive Corporate Accounts
$3-million value
Total Return = $240,000
Taxable Return = $105,000
Total tax LRIP $54,900 (52.2%)
Total tax GRIP $46,600 (44.4%)
Current Taxation
Corporate Tax 49.7% $52,200
RDTOH 30.7% $32,200
Net Corp Tax 19.0% $20,000
Dividend Paid
to recover RDTOH $85,000
Personal tax (LRIP) -41.0% $34,900
Personal tax (GRIP) -31.0% $26,600

38. Tax Options for Passive Corporate Accounts
$3-million value
Total Return = $240,000
Taxable Return = $105,000
• No CDA / RDTOH
• Dividend taxed at 41% personallyBlended Tax = 72%

39. Longer Term Impact?
What is longer term impact? Assume:
• 100% of taxable income left in corporation now
• 50% tax paid on earnings
• Dividends not used for compensation until
retirement (then taxed as high as 41%)
• Impact on spendable returns after twenty years
70bps-100bps drop in net annual return if
all income taxed corporately

40. Tax Options for Passive Corporate Accounts
$3-million value
Total Return = $240,000
Taxable Return = $105,000
Options to reduce or eliminate
taxable income:
• Pay bonuses or salaries
• Make Charitable gifts
• Offset with interest expense
• Portfolio design
Reasonableness will be a requirement

41. Individual
Pension Plans

42. New IPP Age 60: Maximum Income & Past Service
ContributionsNew IPP in 2017 – 60-Year Old
$ 1,200,000
$ 1,550,000
2017 Terminal Funding
Total funding available
$ 40,0002017 Current Service Contribution
$ 310,000Employer Past Service Contribution
$ (490,000)Transfer From Employee’s RRSP
$ 800,000Value of Pension (1991 – 2017)

43. IPP vs. RRSP: Terminal Funding at 65
$26,000 $40,000
$310,000
$1,200,000
$1,550,000
RRSP IPP current IPP past serviceTerminal funding IPP total
Total funding
$1,550,000

44. IPP yes or no?
• When income received, it can be split with
spouse.
• Future earnings to age 71 can be tax-deferred.
• Contributions tax deductible
• Offset high rate tax on passive income after
retirement?
• Amortize funding over 10 years or more if
required.
• Trigger pregnant gains in the year IPP funding
occurs?
• Generally better than RRSPs after age 50
Issues
• Limited to RRSP eligible assets
• Fully taxable in estate on second
death (insured version is an
option)
• Restricted liquidity

45. Is This True?

46. Life Insurance as an Asset Class
• Is Insurance and expense or asset ?
• Can it be used to create an income during one’s lifetime
• How does it compare to other fixed income asset classes? On
risk? On return?
• How do you maximize benefits of insurance bought for needs?

47. $0
$20,000
$40,000
$60,000
$80,000
$100,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
Whole Life Par: The Basics
Tax-free earnings
Pay for life insurance
Costs and buy additional
coverage
Tax Sheltered
Excess savings
invested in par
account

48. How Can Par Outperform Balanced Portfolios?
• Returns not mark to
market
• Cash value guaranteed
• Balanced portfolio returns
with bond like risk

49. Where Leverage Applies
Put new capital into lower taxed asset classes
BANK
Borrow Funds
Fully taxable
Low risk

50. Things to Consider
• LOC better than term loan
(flexibility, opportunistic, interest
only on borrowed funds).
• No need to increase risk. Look for
assets with high cash flow taxed at
lower rates.
• Examples include rental income
(return of capital) and writing calls
and puts (capital gains), eligible
dividends.

51. Mixing Passive and Active Income
Family
Trust
100% Common
 GRIP dividends to
fund university
 Recover RDTOH
 Salaries to maximize RRSPs
 Additional dividends for inactive
spouse
OPCO
$1,000,000 Profit
$3M portfolio
$100,000 taxable income

52.  Salaries at reasonable
levels
 Fund balance of IPP
Future Models
 Investment and
business loans in
Holdco
 Distribute taxable
income by bonus and
IPP contribution
 Charitable Gifts
Holdco $3M portfolio
$75,000 of taxable income Beneficiary
• No dividends
• Does loan to trust at
prescribed rate work?
Family
Trust
OPCO
$1,000,000 Profit

53. Pushback?
“Morneau dialed in to a conference call
Thursday to reassure nervous MPs that the
changes would not be applied retroactively, and
business owners who use the system to plan for
retirement wouldn't see any changes to their
current nest egg. Rather, the changes would
apply on investments moving forward.”

54. Grandfathering?
• Will existing corporate passive assets continue to taxed under current rules?
• What about any earnings from those assets?
• Will CDA and RDTOH balances be kept? What about with respect to future RDTOH/CDA
triggered by current assets?
• Will income splitting be allowed on current passive assets?
• What does reasonable mean?
• What financial organizations are able to track “old” and “new” assets within the same corporation
for reporting purposes? (We would set up separate accounts.)

56. www.nicolawealth.com/tax

57. From Now On The Consequences Are Intentional
Liberals have been told the following:
• Doctors and other professionals leaving Canada
• Private Corp vs. Public Corp tax rates on passive income
• Higher tax to transfer business and farms to family vs. strangers
• Recognition of spouse financial and labour involvement in CCPC
• Tax advantages they enjoy with DB pension plans
• 21000 Submissions have been made so far

58. What Questions Need To Be Asked?
1. Tax Freedom Day is June 8. Is that
too soon or too late (U.S. April 24)?
2. The top 1% of tax filers pay 21% of all
income tax. Is that too much or not
enough?
3. If we are going to increase our tax
burden should it be consumption
taxes (GST), corporate taxes, or
personal?
4. Can a consensus about approach
become Tri-Partisan?

59. Tax Reform 2017
What might you want to do?
1. Maximize the use of Individual Pension Plans (IPPs)
2. Consider the use of a Retirement Compensation Arrangement (RCA)
3. Reduce taxable passive income inside a corporation by looking at how the returns are
taxed
4. Combine existing or new insurance with leverage corporately
5. Hold off on triggering pregnant gains on corporate assets until after new rules are known
6. Lock in any loan arrangements to trusts or family at current prescribed rates
7. Review different approaches to sale of business once final rules are clear

60. Next Steps?
Bespoke is an adjective for anything commissioned to
a particular specification. "Custom-made."
Solutions will differ for each family
and also change over time.
A custom approach is required.

61. THANK YOU

62. Question & Answer