1) Owning a U.S. vacation property can subject a Canadian resident's estate to U.S. estate taxes upon death. 2) Under the Canada-U.S. Tax Treaty, Canadian residents only face U.S. estate taxes if their worldwide assets exceed US$3.5 million. 3) For a Canadian resident with a U.S. property worth $1.2 million and total worldwide assets of $8 million, U.S. estate taxes in 2009 would be $209,430, but would be eliminated if the property passed to a Canadian resident spouse due to marital tax credits.

1. www.bmonesbittburns.com In this issue
• Exchange Traded Funds
NetWorth • Individual Pension Plans
• Owning a U.S. Vacation Property (Part 1 of 2)
Summer 2009
Transferring Your divided among members of your family,
increasing the number of potentially
Business to the Next available QSBC exemptions.
The benefits
Generation An estate freeze can encompass the
flexibility desired to meet your particular
ntrepreneurs who have built successful
E companies often want to see their
business passed on effectively to the
next generation. However, a sale or transfer
needs. Because you receive ‘frozen’
preferred shares with voting rights, you can
effectively retain control of your business.
The preferred shares generally have a stated
of ownership of the business will generally dividend rate to help provide retirement
trigger capital gains tax. If the value of the income and you can redeem the shares over
Nellie Chowbay, FMA, FCSI shares of your business has increased, you time for additional income. If you also want
Investment Advisor or your estate may be burdened with a to participate in some of your company’s
substantial tax bill. The business may even future growth, you might choose to retain
Financial Planner
have to be sold to cover the liability. some of the new common shares for yourself.
Tel: 416-359-5365
Email: nellie.chowbay@nbpcd.com Owners of family businesses may Other considerations
want to consider an estate freeze The suitability of an estate freeze will depend
Gary Lewin, B.A (Hons), FMA A potential strategy used to transfer wealth on a number of factors, including the
Associate Investment Advisor
or implement a succession plan and to anticipated future health of your company,
manage the tax liabilities on a transfer is your financial position and long-term
Tel: 416-359-7136 to freeze the value of your shares during objectives. If the value of your business isn’t
Email: gary.lewin@nbpcd.com your lifetime. An “estate freeze” allows you likely to increase significantly after the freeze,
to fix the value of all or part of the capital or if you will need cash and are planning to
BMO Nesbitt Burns Inc. gains accrued to date on the shares of your sell the business shortly afterwards, then an
business. The future growth in the business estate freeze may not be appropriate. Some
1 First Canadian Place, 47th Floor is transferred to the eventual owners, business owners have regretted freezing
Toronto, ON typically your children. A depressed value their business too early in their lifetime.
M5X 1H3 of your business resulting from the current
economic downturn may make this an You should also consider the costs
opportune time to consider a freeze. associated with a freeze, such as valuation
Fax: 416-359-4941
costs, accounting and legal fees and the
Toll-free: 1-800-263-2286 By limiting the tax liability on an appreciating
expense of setting up and maintaining a
asset in this way, your estate may avoid
Web: www.nelliechowbay.com trust. Careful assessment of your financial
facing a potentially higher tax liability in the
future, upon your death. Your estate’s tax and lifestyle objectives, current net worth
liability can be limited to the fixed present and cash needs, growth potential of your
value of your ‘freeze’ shares, and any future assets and your future financial needs can
capital gains can be taxed in the hands of help determine whether an estate freeze
the new owners. Sufficient life insurance would be beneficial in your situation.
could then be obtained to cover your fixed Because of the complexity of the relevant
death tax liability.
tax rules and the need to avoid any
If your business is a Qualified Small unforeseen tax pitfalls in implementing an
Business Corporation (QSBC), an estate estate freeze, professional tax advice (as
freeze may allow you to take advantage well as legal and estate planning advice) in
now of the $750,000 lifetime capital gains the design and implementation of an estate
exemption for QSBC shares. Any future freeze will be required. For more information,
growth in the value of the shares can be please consult with your tax advisor.

2. NetWorth Summer 2009
representative sample of the securities that make up the
Exchange Traded Funds index. When investors purchase a unit of an ETF, they
participate in the performance of the index, to the extent
What are Exchange Traded Funds (ETFs)?
possible. ETFs are listed on stock exchanges and are treated
An ETF is a basket of securities that is managed to track
like a publicly-traded security – that is, you can buy or sell
the performance of a benchmark market index as closely
them throughout the trading day.
as possible. An example is the Dow Jones Industrial Average
Index (DJIA), which is comprised of 30 of the largest Why you may consider an ETF?
American companies. An investor who wants to invest in The inherent simplicity of ETFs is an attractive
these 30 companies can do so easily by purchasing a Dow characteristic for many investors. However, it is not the
Jones Industrial Average ETF such as the Dow Diamonds only one. ETFs offer several unique features and benefits,
ETF. ETFs cover a wide range of indices and can include including:
equity, fixed income or investment themes (e.g., an ETF that
focuses on infrastructure investments). Lower cost
DJIA Index and Dow Diamonds ETF ETFs tend to charge lower expenses than many other
16000
diversified investment options. Lower costs mean that more
14000 of your money is working over the long term.
12000
Portfolio Transparency
I n d ex Va l u e
10000
8000
An ETF investor can view the current trading price of an
6000 DJIA Index
DOW Diamonds ETF
ETF at any time during the course of a regular trading day.
4000
2000
Investors can verify the composition of an ETF’s actual
0 portfolio on a daily basis, in addition to following the
Jan 20/98 Jan 20/99 Jan 20/00 Jan 20/01 Jan 20/02 Jan 20/03 Jan 20/04 Jan 20/05 Jan 20/06 Jan 20/07 Jan 20/08 Jan 20/09
Date benchmark index for the ETF. This provides ongoing
Source: Yahoo Finance transparency, which can be particularly helpful during
The Dow Diamonds ETF tracks the Dow Jones Industrial Average Index so closely that this chart uncommonly volatile investment markets.
appears to be one line. This is an excellent example of how an ETF can provide access to index
performanace.
Investment Flexibility
Today, ETFs continue to attract interest from investors
Offering excellent flexibility, most ETFs can be bought and
in increasing numbers and, as a result, ETFs now provide
sold at current market prices at any time during the trading
exposure to most security indices around the world. As
day. Unlike other similar investments, ETFs offer excellent
of December 31, 2008, there were over 1,500 ETFs in the
investment liquidity. Buy when you want; sell when you want.
world with over US$730 billion in assets1. The chart below
highlights their growth in popularity in the U.S. market Diversification
since 1990.
By aiming to replicate a specific index, an ETF essentially
Growth of ETF Assets in the U.S. incorporates all or a representative sample of the securities
700 that make up that index, regardless of the number of
600 562
582 securities involved. This offers investors lower portfolio
535
500
variability and can reduce the impact that volatile markets
417 can have in terms of rising and falling prices, especially
$ Billions
400
310
when compared to holding the individual securities within
300
an index.
212
200
142 Tax Advantage
105
100 74
40
0.1 0.15 0.18 0.8 1 2 5 8 18 As an index investment, ETFs tend to have low portfolio
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
turnover and therefore are expected to have fewer taxable
events that result in tax consequences for unitholders. Also,
Source: National Stock Exchange: NSX
the ETF redemption structure minimizes the tax
How do ETFs work? consequences to other, non-redeeming unitholders, and
offers a greater ability to control when taxes arise.
The increasing popularity of ETFs results, in part, from
their simplicity. An ETF tracks as closely as possible the If you want to hear more about ETFs and your options, let’s
performance of its benchmark by purchasing all or a discuss.
1
Source: Wall Street Journal February, 2009.

3. NetWorth Summer 2009
Comparing IPPs and RRSPs
• An IPP allows for up to 65% more in tax-deductible
contributions than available through an RRSP. The older
the IPP member, the greater the contribution
• IPP contributions are tax deductible to the
sponsoring employer and exempt from payroll taxes
• All assets within an IPP are protected from creditors.
The last 12 months of contributions are not creditor
protected under an RRSP
• Under an IPP, additional tax deductible contributions
are required from the sponsoring company if investment
returns are less than 7.5% per year on average. Weak
investment performance within an RRSP cannot be offset
by additional contributions
• In most provinces, IPP assets are locked-in and may not
be withdrawn in cash until retirement
• IPPs are more complex than RRSPs
• Unlike RRSPs, expenses of the IPP (including actuarial
consulting fees, investment related fees and interest
expense on funds borrowed for contributions) are tax
deductible when paid directly by the company sponsor
• In many cases, significant lump-sum past service
Individual Pension Plans – contributions are possible at the time an IPP is established
• Significant tax-deductible lump-sum contributions
For Professionals & Small are allowed at retirement to provide for improved early
Business Owners retirement benefits
• RRSP eligible investments, are generally allowed for an IPP.
For many company owners and professionals that are However, IPPs have a 10% investment concentration limit
focused on managing and building their business, retirement which is designed to ensure diversification of plan assets
is often an afterthought. The demands of the organization Depending on the plan member’s province of residence,
often take priority over personal retirement and financial IPP assets may be transferred at retirement to a Life Income
planning matters. Registered Retirement Savings Plans Fund (LIF), a Locked-In Retirement Income Fund (LRIF), a
(RRSPs) are traditionally used by many business owners Registered Retirement Income Fund (RRIF) or a life annuity.
to save for retirement because they offer tax deductions for The IPP may also be continued and pension payments made
amounts contributed and tax deferral on the growth of the directly from the plan.
assets. RRSP contribution limits however may not allow
some business owners the opportunity to save enough to Is an IPP right for you?
maintain their desired standard of living in retirement. Suitable candidates for an IPP are business owners, key
An Individual Pension Plan (IPP) is a unique retirement executives and professionals over age 40 who are allowed
planning solution that has become increasingly popular to incorporate (such as doctors, lawyers, dentists, engineers
and accountants). To qualify, the IPP member must be
among business owners, professionals and executives. An
receiving T4 income from an incorporated employer and
IPP is a defined benefit pension plan that is designed for the
the company sponsor must have the resources to fund the
benefit of one individual; however, a spouse may be added
IPP on an ongoing basis.
to the IPP if employed by the same or a related company.
The concept of an IPP is to compensate high income earners Planning for retirement is critical for all Canadians – for
disadvantaged by RRSP limits; providing them with greater executives, professionals and small business owners,
tax advantages and potentially higher pension benefits. it’s vital to consider all your options. At BMO Nesbitt Burns,
we offer a turn key IPP solution that includes professional
With an IPP, the amount of the pension is determined by investment advice, custody of plan assets, a corporate trustee
a formula, and the contribution limit equals the cost of arrangement and the services of an established independent
providing that pension (as calculated by an actuary). actuarial firm. Let’s discuss whether an IPP will benefit you.

4. NetWorth Summer 2009
The following article is the first of two excerpts from the
PricewaterhouseCoopers LLP publication entitled “Estate Tax Update,”
Calendar year
which has been reprinted with permission. This portion discusses U.S.
2009 2010 2011 and after
estate tax concerns for Canadians owning a U.S. vacation property.
The second (and final) portion, which concludes with a brief discussion Unified credit N/A (taxes
$1,455,800 $345,800
of possible ownership options available to reduce U.S. estate tax amount repealed)
exposure, will be included in the Fall 2009 issue of NetWorth. Highest estate 45% 0% 55%
tax rate
Owning a U.S. Vacation Example: The $1,000,000+ property
Property (Part I) Consider Jack, a Canadian resident (who is not a U.S.
citizen). Jack owns a Florida home worth $1.2 million. His
The estate of a Canadian resident* may be required to pay worldwide estate is worth $8 million.
U.S. estate tax on a U.S. vacation home owned by the
deceased. However, the Canada-U.S. Tax Treaty (“the If the property passes to a Canadian-resident spouse, the
Treaty”) provides some relief. As a result, Canadian Treaty provides further tax relief, through the marital credit.
residents will have a U.S. estate tax liability only if their For example, if Jack’s will provides that the U.S. property
worldwide assets are valued at more than US$3.5 million. passes to his wife, Vera (who also is not a U.S. citizen), his U.S.
estate tax will be reduced, as shown in the bottom two rows:
While U.S. estate tax applies to other U.S. assets, such as U.S.
securities, this Estate Tax Update discusses the estate tax only
Year of death
as it applies to U.S. real estate. All amounts are in U.S. dollars.
2009
How is U.S. estate tax calculated?
If you own a U.S. property, you will be required to pay U.S. U.S. estate tax before unified credit $427,800
estate tax based on the value of the property at the date of Unified credit $218,370
Without
your death. For 2009, estate tax rates start at 18%, and reach marital credit Final U.S. estate tax $209,430
45% for properties worth more than $1.5 million.
With Marital credit $209,430
You can reduce your estate tax liability by claiming a tax
marital credit Final U.S. estate tax $nil
credit (referred to as the unified credit) equal to the greater of:
• $13,000; and
• $1,455,800 (i.e., the U.S. estate tax on $3.5 million of assets) Canadian tax implications
multiplied by the value of your U.S. assets, divided by your U.S. estate tax is often greater than Canadian tax. On death,
worldwide assets. a taxpayer will pay Canadian income tax on the accrued
capital gain on the U.S. home and will also be subject to U.S.
Therefore, if your U.S. home accounts for 15% of the value
estate tax on the value of the home. Canada may provide a
of your worldwide estate, you will be entitled to a unified
foreign tax credit for U.S. estate tax paid on the U.S. home.
credit of $218,370 ($1,455,800 x 15%).
Because Canadian capital gains rates are significantly lower
Future estate tax rates and credit amounts than the top U.S. estate tax rate and Canadian tax applies
Unless new legislation is enacted, in 2011 the United States only to the gain in the property rather than the value, the
is scheduled to return to its former higher rates and lower estate likely will pay tax at the U.S. estate tax rate. In
exemptions. Most practitioners believe that the 2009 rates addition, the provinces generally do not allow a foreign tax
and exemptions will be extended. credit for U.S. estate tax paid. As a result, the deceased may
be subject to some double taxation at the provincial level.
While nothing is certain, it seems prudent to plan on the
assumption that the U.S. estate tax will be around in some In the Fall edition of NetWorth, we will discuss some possible
form beyond 2009. strategies to reduce this potential U.S. estate tax exposure.
* This article addresses the tax issues for Canadian residents who are not U.S. persons for U.S. income and estate tax purposes. For U.S. income tax purposes, a U.S. person is an individual who is a U.S. citizen
or U.S. resident alien. For U.S. estate and gift tax purposes, a U.S. person is a U.S. citizen or an individual who is domiciled in the United States.
M27050 07/09-406
This article has been reproduced with the permission of PricewaterhouseCoopers LLP, whose written permission is required before any part can be reproduced elsewhere. This publication is intended to inform
readers of developments as of the date of publication, and is neither a definitive analysis of the law nor a substitute for professional advice, and does not signify endorsement of any organization, product or
service named in this publication. Readers should discuss with professional advisers how the information may apply to their specific situations. © 2009 PricewaterhouseCoopers LLP. All rights reserved.
“PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the
network, each of which is a separate and independent legal entity.
If you are already a client of BMO Nesbitt Burns, please contact your Investment Advisor for more information.
The comments included in the publication are not intended to be a definitive analysis of tax law: The comments contained herein are general in nature and professional advice regarding an
individual’s particular tax position should be attained in respect of any person’s specific circumstances.
All insurance products and advice are offered through BMO Nesbitt Burns Financial Services Inc. by licensed life insurance agents, and, in Quebec, by financial security advisors.
BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée provide this commentary to clients for informational purposes only. The information contained herein is based on sources that we believe to be reliable,
but is not guaranteed by us, may be incomplete or may change without notice. The comments included in this document are general in
nature, and professional advice regarding an individual’s particular position should be obtained. BMO Nesbitt Burns Inc. and BMO Nesbitt
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“BMO (M-bar Roundel symbol)” is a registered trademark of Bank of Montreal, used under licence. “Nesbitt Burns” is a registered
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