Nicola Wealth Management - Proposed Tax Reform 2017: What Accountants Need to Know

Welcome
Introduction by Murray Neilson

Agenda
Introduction & Background Tax Reform: the details
Planning Options Case Study
Q & A

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

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

Tax reform 2017
What’s being plucked ?
• Income Splitting of Dividends from private corporations
• Increase tax on passive corporate income that could reach 70% when paid
out as dividends
• Pipeline planning that converts dividends to capital gains is prevented

n
25% swing in 100 years
10 developed countries
either less upwardly mobile
or less equal in income than
us or both

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 about 7% of all incorporated entities are owned
by the 1%

• 3% per year of service
• Indexed for life
• Survivor benefits
• Cost for each $1000/year of annuity=$21,000 (Couple age 65)
• Biggest pension $132,000/year =$2.8 million
• 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

Indexed Pensions
The Case of the Retired (MP/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 =$3Million (approx.)
Q:How much of these assets are part of their official net worth?
A: Zero

What else is in the rest of the story?

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.

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.
• Medco’s 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. The value of Medco’s
savings is $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

R
A
N
K NAME ORGANIZATION NAME Total Pension obligation for CEO
4
3 Bradley Shaw Shaw Communications Inc. $105,870,010
2
0 Jeffrey Orr Power Financial Corp. $31,247,000
3
8 Brian Ferguson Cenovus Energy Inc. $27,638,957
4
8 Paul Desmarais, Jr. (3) Power Corp. of Canada $26,624,000
4
5 André Desmarais (3) Power Corp. of Canada $26,058,000
5
3 Paul Mahon Great-West Lifeco Inc. $24,468,655
2
3 William Downe Bank of Montreal $22,227,391
7
7 Nancy Southern Canadian Utilities Ltd. $21,330,030
1
6 Steven Williams Suncor Energy Inc. $20,810,979
8
5 Yvon Charest
Industrial Alliance Insurance and
Financial Services Inc.
$20,200,575
4
0 Rich Kruger (2) Imperial Oil Ltd. $18,529,390
1
7 Al Monaco Enbridge Inc. $18,144,000
5
James Smith Thomson Reuters Corp. $17,818,540
9
Donald Guloien Manulife Financial Corp. $17,201,400
2
7 Russell Girling TransCanada Corp. $16,944,000
3
7 Louis Vachon National Bank of Canada $16,186,000
1
0 Darren Entwistle Telus Corp. $15,665,000
6
6 Christopher Huskilson Emera Inc. $15,376,000
2
5 Bharat Masrani Toronto-Dominion Bank $15,177,300
2
2 Sean Boyd Agnico Eagle Mines Ltd. $14,821,325
1
2 David McKay Royal Bank of Canada $12,762,000
1
23 CEO’s of Canadian Public Companies
• All of them have accrued pension benefits
worth more than $10 million
• Average for all 23 is $23 million
• Total accrued benefits are $528 million
• This does not include the present value of
other benefits (such as health care or stock
options)
• The total does not include the value of
pensions or benefits for other senior
management

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
• Owner managers and professionals pay 100% of the cost of their retirement savings,
heath benefits, CPP and cannot receive UIC or Worker’s compensation

Dead Money?????
Corporate Tax =26%
Personal tax =23%
Total Tax =49%
Corporate Tax =50%
Personal tax =21%
Total Tax =71%
How level is this playing field?

Highlights
• 1,200,000 private businesses in Canada and more than 98% of them
are considered small (less than 100 employees)
• Last year 115,000 new business were created but more than 100,000
failed which shows just how risky starting and maintaining a private
enterprise is. The chance of surviving 5 years is less than 20%
• 2,700,000 Canadians are self-employed including many professionals.
That number is 16% of all working Canadians so obviously they cannot
be all in the “1%“
• Small businesses employ more than 8.2 million Canadians or 70% of
the private workforce and generates 42% of private GDP

Die With Their Boots On?
+65%
-25%
Tax payable selling
to children could be
100%+ higher than
selling to a stranger

THORSTEINSSONS LLP
TAX LAWYERS
July 18 2017 Tax Proposals
David Christian
Thorsteinssons LLP

TTHORSTEINSSONSLLP
TAX ON SPLIT INCOME
Specified Individuals
Current Rules:
• Under 18
• Resident in Canada
• Has a parent resident in Canada at any time in the year

TTHORSTEINSSONSLLP
CORPORATE OWNERSHIP
Proposed Rules
 Resident in Canada at end of year, or immediately before death
 Related to another individual resident in Canada who is either
 A parent, if individual under 17 at start of year
 Related, if 17 or over at start of year – related category expanded to
include aunts, uncles, nieces and nephews
 If individual’s income includes income from property, taxable
capital gains or income under section 15 or 246
 The income is derived from a business
 The related person is a “connected individual” (control
threshold)

TTHORSTEINSSONSLLP
EXPANSION OF SPLIT INCOME
Current Coverage
• Dividends from non-public corporations
• Shareholder benefits
• Partnership Income
Proposed Expansion
• Income from Indebtedness
• Capital gains realized on properties the income from which would
be split income
• “Second generation income” of individuals under 24

TTHORSTEINSSONSLLP
SPLIT PORTION
 “Specified Individuals” over 18 are taxed on the “split portion” of their
“split income”
 “Split Portion” generally characterized by unreasonable return
considering the specified individual’s contribution of labour and capital,
risks assumed and amounts payable
 Different rules for those over and under 25

TTHORSTEINSSONSLLP
REASONABLENESS TEST
 25 and over: arm’s length standard for labour, capital, risk and amount
payable (return)
 18 – 24: Same tests except:
 Labour: no functions deemed to be performed except to the extent
that the individual is actively engaged on a regular, continuous and
substantial basis in the activities of the source business
 Capital: any return in excess of prescribed rate is deemed to be
unreasonable

TTHORSTEINSSONSLLP
ANTI-AVOIDANCE
 If more than 50% of income from a business is from property, or its
principal purpose is to derive income from property, an individual is
deemed not to have performed any labour functions
 If a specified individual’s capital contributions come from split income or
debt that to or guaranteed by a related individual, capital contribution is
ignored
 Capital gains realized in non-arm’s length sale in respect of property the
income from which would be split income are deemed dividends that are
not eligible dividends

TTHORSTEINSSONSLLP
POST-MORTEM
 Continuity rules for labour and capital contributions if a specified
individual acquires property as a consequence of the death of another
person
 If property acquired by persons 25 and under on death of parent:
excluded property

TTHORSTEINSSONSLLP
Constraining the Capital Gains Exemption
Proposed rules restrict multiplication of the capital gains exemption
because:
 The government:
 Considers that many individual shareholders may not have
contributed to the business;
 Does not like the ability of family trusts to allocate capital gains
and income among family members
CAPITAL GAINS EXEMPTION

TTHORSTEINSSONSLLP
New Restrictions on Minors
 Minors will no longer qualify for the LCGE in respect of capital gains
that are realized, or that accrue, during minority
 LCGE not available to minors regardless of whether the child is
involved in the business
 If minor acquires qualifying property and disposes of it after 18, the
increase in the value of the property during the time the individual was
a minor will not be eligible for the LCGE
 It may be necessary to have a valuation of the shares completed at the
beginning of the taxation year in which the minor turns 18 years old

TTHORSTEINSSONSLLP
Tying the use of the LCGE to the new TOSI Rules
• Proposals provide that the LCGE will generally not apply if the taxable
capital gain arising from a disposition is included in an individual’s split
income
• If an amount is not included in TOSI only because the recipient of the
income is already taxed at the top marginal tax rate, restriction on LCGE
can apply
• If a taxable capital gain (TCG) from the disposition of a property is
included in individual’s split income, then the amount that the individual
can deduct under the LCGE in computing the TCG is reduced by 2 times
the amount of the TCG included in computing the individual’s split income

TTHORSTEINSSONSLLP
How Property in Trusts is Affected
• New limits for beneficiaries of a trust from claiming any LCGE on
dispositions
• In order for an associated gain from property held by a trust to be eligible
for the LCGE, it must be designated by an “Eligible LCGE Trust”
• An “Eligible LCGE Trust” includes:
• A spousal or common-law partner trust or alter ego trust where the
individual claiming the LCGE is the trust’s principal beneficiary;
• Certain employee share ownership trusts, where the individual
beneficiary is an arm’s length employee of the employer sponsor of the
arrangement

TTHORSTEINSSONSLLP
How Property in Trusts is Affected
• Trust measures apply if:
• trust realizes a capital gain and allocates it to a beneficiary
• trust transfers property with an accrued gain to a beneficiary who
subsequently disposes of the property
• Trust can still roll out property to beneficiaries but, unless an exception
applies, no deduction would be allowed under the LCGE in respect of the
capital gain that is ‘transferred’ from a trust on a rollover of property to a
beneficiary

TTHORSTEINSSONSLLP
Election for Deemed Disposition in 2018
• Transitional rules provide for grandfathering of certain dispositions that
occur in 2018, allowing an individual to elect to realize in 2018, a capital
gain in respect of eligible property by way of a deemed disposition for
proceeds up to the FMV of the property
• Transitional rules provide an opportunity for property that currently does
not qualify for the capital gains exemption in 2017 to be purified as
proposed legislation will reduce the holding period from 24 months to 12
months
• This means that the purification process must happen before December
31, 2017 in order for the crystallization to occur in 2018

TTHORSTEINSSONSLLP
Example
 Facts:
 Spouses incorporate Opco in 1990. Upon incorporation, each spouse subscribed for
50% of the common shares for a nominal amount.
 One spouse was never active in the business and worked part-time for another
employer. The other spouse ran the business and its value grew considerably
 In early 2016, the spouses undertook a standard “freeze” for X. Corp – each spouse
exchanged their common shares for fixed value, redeemable and retractable preferred
shares with an aggregate redemption value of $4M. Their children subscribed for
common shares
 The plan was for each spouse to receive approximately $100K of dividends annually by
way of share redemptions of their preferred shares throughout retirement – Standard
“Wasting Freeze”
 This $200K would represent the majority of the spouses’ annual retirement income.

TTHORSTEINSSONSLLP
“Specified Individual” - Example
● Analysis under proposed rules:
 Each spouse will be a “Specified Individual”
 Related individual (children) resides in Canada and spouses receive
income (dividends) derived from a business carried on by corporation of
which their children are specified shareholders.
 All dividends received by way of share redemption may be subject to TOSI
 Non-active spouse – Clearly subject to TOSI on dividends
 Active spouse – Possibly subject to TOSI on dividends – Will depend on
reasonableness test

TTHORSTEINSSONSLLP
“Specified Individual” – Discussion of Example
 Planning assumed marginal rates on share redemption dividends. Now
potentially subject to highest marginal rate on every dollar received
 Retroactive Taxation? - $4M of preferred share value accumulated prior
to 2017. Appropriate to now tax all that value at highest marginal rates?
 Opco needs more cash to give spouses equivalent amounts of retirement
income – cashflow issue?.
 How much time and money will be needed to justify reasonableness of
dividends?
 What happens on death if spouses die with unredeemed preferred
shares outstanding? – Could entire remaining value be taxed at dividend
rates? – See proposed S.120.4(4) – More facts would be required to
answer this question

TTHORSTEINSSONSLLP
Surplus Stripping
 CRA has previously asserted there is a general scheme in the Act against surplus
stripping
 Removing retained earnings of a corporation by way of capital gains rather
than dividends
 The courts have found that the Act does not contain a general scheme to prevent
surplus stripping
 See Evans v. The Queen, 2005 TCC 684, The Queen v. Collins & Aikman
Products Co., 2010 FCA 251 and Copthorne Holdings Ltd. v. The Queen,
2011 SCC 63
Gregory Bell - September

TTHORSTEINSSONSLLP
Non-Arm’s Length Sale of Shares
 Individual sells shares of Privateco to non-arm’s length
corporation (Newco) to realize a capital gain
 Consideration is a hisg PUC shares or a promissory note
 Cash of Privateco to be used to redeem shares, reduce
capital, or repay promissory note
 Under existing rules (and no change under proposed
rules)
 84.1(1)(b) - Individual deemed to receive a dividend
equal to amount of note in excess of greater of
“hard” ACB and PUC of Privateco shares (in the
example, a dividend of $99 instead of a capital gain
of $99)
 Same result if Individual uses CGE

TTHORSTEINSSONSLLP
 Parent sells Privateco shares
to Child (i.e. a non-arm’s
length individual) for cash to
realize capital gain
 Child sells Privateco shares
to Newco for Promissory
Note
 Cash of Privateco to be used
to repay promissory note

TTHORSTEINSSONSLLP
Under Existing Rules
 84.1 does not apply
 Parent has capital gain
 Parent has sold shares to child
 84.1 can only apply if Parent sells shares
to a non-arm’s length corporation
 Child not deemed to receive a dividend
 Child has “hard” ACB in shares of
Privateco
 Provided Parent does not claim capital
gain exemption (“CGE”)
 84.1(2)(a.1)(ii)

TTHORSTEINSSONSLLP
 84(2) could possibly apply
 84(2) deems amounts distributed
“in any manner whatever” to a
shareholder to be a dividend
 Can apply if cash of Privateco is
considered to be distributed on
discontinuance, winding-up or a
reorganization of Privateco’s
business

TTHORSTEINSSONSLLP
Under Proposed Rules
 84.1 applies to Child
 Child deemed to receive dividend of $99
 Capital gain realized by Parent does not
create “hard” tax ACB
 See proposed amendment to
84.1(2)(a.1)(ii)
 Previous dispositions by non-arm’s
length persons does not create “hard”
ACB

TTHORSTEINSSONSLLP
Non-Arm’s Length Sale of Shares – 84.1
 Department of Finance Explanatory Notes
“The objective of [the amendment] is to ensure that an individual
cannot use more than the greater of their so-called “hard” arm’s
length share cost and the PUC of their share to extract corporate
surplus on a tax-free basis or as capital gains from a corporation.”
 The amendments to section 84.1 apply in respect of dispositions that
occur on or after July 18, 2017.

TTHORSTEINSSONSLLP
Transitional/Technical Issues
Pipeline Planning
 Estates holding high ACB shares where it was planned that pipeline planning be
implemented
 Impacted by 84.1
 May no longer be possible or practical to carry out 164(6) planning, (for example,
July 18, 2017 is more than one year after death)
 For existing pipeline notes or high-PUC shares, could new 246.1 apply on
payment of the note or return of PUC?

TTHORSTEINSSONSLLP
Transitional/Technical Issues
Interaction with Tax on Split Income
 Is 120.4(4) necessary?
 Based on the changes to 84.1 and the LCGE rules, 120.4(4) should
not be necessary
 If 120.4(4) is not repealed should 84.1 be amended?
 Where 120.4(4) applies, an individual is deemed to have an ineligible
dividend equal to twice the taxable capital gain
 There should be an exception in 84.1(2)(a.1)(ii) to create hard ACB in
recognition that the gain has already been taxed as a dividend

TTHORSTEINSSONSLLP
Non-arm’s Length/Intergenerational Transfers
 84.1 generally applies on the transfer of shares of a corporation between siblings and between parents
and their children
 Privateco is owned 50/50 by two siblings
 FMV of a 50% interest is $3 million
 ACB is nominal
 Gain qualifies for the LCGE
 Tax rate on capital gains is 25%
 Tax rate on non-eligible dividends is 45%
 The income tax arising on a sale by one sibling is as follows:

TTHORSTEINSSONSLLP
Post-Mortem Planning - Summary
“Pipeline” Planning
 Impacted by 84.1 amendments
 Existing pipeline notes or shares might be impacted by proposed
246.1
164(6) Planning
 Enhanced 164(6) planning impacted by proposed 246.1

TTHORSTEINSSONSLLP
Post-Mortem Planning
 Pipeline – Existing Rules
 Objective
 Limit tax as a result of death to tax on capital gain realized by deceased
 Can be implemented any time after death of shareholder
 Subject to certain constraints
 Pipeline – Proposed Rules
 Based on draft legislation, pipeline transactions will result in deemed dividend to estate

TTHORSTEINSSONSLLP
84.1 Amendment – Impact on Post-Mortem
“Pipeline” Planning
 Individual A dies owning
shares of Privateco with low
ACB and paid-up capital
(“PUC”)
 Individual A deemed to have
capital gain of $99 on death
 Estate of A has high ACB in
shares of Privateco

TTHORSTEINSSONSLLP
 Estate sells shares of Privateco to
Newco for a promissory note or shares
with high PUC (“Pipeline”)
 Pipeline is to prevent double taxation on
value of shares held at death
 Deemed gain on death
 Dividend on eventual distribution of
Privateco’s assets
 Planning steps may involve
amalgamating Newco and Privateco to
“bump” ACB of Privateco’s capital
property

TTHORSTEINSSONSLLP
 Individual has capital gain on death
 Estate is not deemed to have a
dividend
 84.1 does not apply
 Estate has “hard” ACB
in Privateco shares
 84(2) should not apply –
there are some issues and
concerns that have to be
addressed

TTHORSTEINSSONSLLP
Under Proposed Rules
 Estate is deemed to receive dividend of $99
 See proposed amendment to 84.1(2)(a.1)(ii)
 Previous dispositions by non-arm’s length
persons does not create “hard” ACB
 Estate and Individual A would be
considered non-arm’s length
 Significant impact to many estate plans

TTHORSTEINSSONSLLP
164(6) – Existing Rules
 Eliminates capital gain from deemed disposition on death
 Wind-up company or redeem shares and receive distribution as a
dividend
 Rules require that the steps be implemented within one year of death
 The estate must be a graduated rate estate

TTHORSTEINSSONSLLP
164(6) Enhanced Planning– 246.1 could
apply
 Involves redemption of Privateco shares
to create a capital loss carry back and a
dividend
 Planning enhanced by internal transfer
of capital property to create CDA and
RDTOH
 This planning increased the ACB of the
property

TTHORSTEINSSONSLLP
Policy Concerns Underlying New 246.1
 “…a separate anti-stripping rule to counter tax planning that circumvents the specific
provisions of the tax law meant to prevent the conversion of a private corporation's surplus
into tax-exempt, or lower-taxed, capital gains. In general, the anti-stripping rule would apply
to non-arm's length transactions where it is reasonable to consider that "one of the
purposes" of a transaction or series is to pay an individual shareholder/vendor non-share
consideration (e.g., cash) that is otherwise treated as a capital gain out of a private
corporation's surplus in a manner that involves a significant disappearance of the
corporation's assets. In such a case, the non-share consideration would be treated as a
taxable dividend.“
 Put differently, converting corporate surplus/taxable earnings that should be taxable as
dividends into capital gains at individual shareholder level
 i.e. the opposite of what subsection 55(2) produces at corporate level

TTHORSTEINSSONSLLP
246.1 - Overview
 Broadly speaking, targets two categories of transactions
 “classic” surplus stripping transactions - McNichol, Evans,
MacDonald, among others
 Is new 246.1 intended to be 84(2) on steroids?
 CDA, PUC and boot generating transactions
 Internal vs external CDA generation?

TTHORSTEINSSONSLLP
246.1 - Architecture
 amount receivable directly or indirectly by an individual resident in Canada
 amount receivable directly or indirectly in any manner whatever from a NAL
person
 series of transactions
 disposition of property
 Increase or reduction of PUC
 It can reasonably be considered that
 one of the purposes
 reduction or disappearance of assets
 tax otherwise payable and in consequence of any distribution of property of a
corporation
 is avoided

TTHORSTEINSSONSLLP
246.1 – Non-Arm’s Length Context
 Internal step-up transactions
 ECP crystallizations
 Internal CDA generation transactions
 Post-mortem estate planning
 CDA streaming

TTHORSTEINSSONSLLP
Example 5 – Planning to avoid double tax
Holdco
• Estate’s ACB equals FMV at time of death
• Holdco transfers certain property to Sub to trigger
capital gains to allow payment CDA and RDTOH on
redemption of Estate’s preferred shares. Purpose is
to avoid double tax.
• Other property of Opco sold for cash
• Capital loss in estate carried back under subsection
164(6).
• Does 246.1 apply with respect to CDA created on
property transferred to Sub?
• What about CDA created on third party sales?
Estate
SubPrope
rty
Preferr
ed
shares
Children

TTHORSTEINSSONSLLP
246.1 – Arm’s Length Context
 Text of new 246.1 is extremely broad
 Explanatory notes ambiguous
 Is 246.1 intended to apply to bona fide commercial transactions?
 Sale of assets
 Leveraged buy-outs
 Sale subject to earn out
 Converting arm’s length basis into PUC
 Interaction with 55(2)

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%

Tax options for passive corporate accounts
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 Corporate tax (19%) $20,000
Dividend Paid
to recover RDTOH $85,000
Personal tax (LRIP-42%) $34,900
Personal tax (GRIP-31%) $26,600
Total return = $240,000
Taxable Return=$105,000
$3Million Value

• No CDA/ RDTOH
• Ineligible dividend
• Effective tax rate personally=71%
• Current rules blended tax = 50%
maximum
• Public companies remain at 26%
• Distributions are eligible dividends
• Blended tax = 49%
$3Million Value

Total tax $74,300(71%)
New taxation
RDTOH ( 30.7%) $32,200
Net Corporate tax (49.7%) $52,200
After tax income
paid as dividend $52,300
Personal tax (LRIP-42.3%) $22,100
$3Million Value

Total tax $74,300(71%)
New taxation
RDTOH ( 30.7%) $32,200
Net Corporate tax (49.7%) $52,200
After tax income
paid as dividend $52,300
Personal tax (LRIP-42.3%) $22,100
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
$3Million Value

Longer term impact ?
What is longer term impact?
Assume:
• 50% of taxable income used for
salaries, gifts or expenses
• 50% left in corporation
• Dividends not used for compensation
until retirement
• Tax in corporation equal to total tax
personally
• Deferred tax is 20% of taxable income
paid when dividend declared
Impact on earnings approximately
35bps per year (70bps if all income
taxed corporately)

New IPP Age 60: Maximum Income & Past Service
ContributionsNew IPP in 2015 – 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)

IPP vs. RRSP: Terminal Funding at 60
$26,000 $40,000
$310,000
$1,200,000
$1,550,000
RRSP IPP current IPP past… Terminal… IPP total
Total funding
$1,550,000

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 RRSP’s after age 50
Issues
• Limited to RRSP eligible
assets
• Fully taxable in estate on
second death (insured
version is an option)
• Restricted Liquidity

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?

Whole Life Par – The Basics
Tax free earnings
Pay for life insurance
costs and buy
additional coverage
Excess Savings
Invested in Par
Account
Tax Sheltered

How can Par outperform balanced portfolios ?
• Returns not mark to
market
• Cash value guaranteed
• Private debt higher risk
adjusted return

Where Par WL fits in
Fully taxable
Low risk

Where Leverage applies
Fully taxable
Low risk
Put new capital into lower taxed asset
classes
Borrow funds

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

Mixing passive and active income
Family
Trust
OPCO
$1,000,000 Profit
($3 million portfolio
$100,000 taxable income )
100% Common
• GRIP dividends
to fund
university
• Recover RDTOH
• Salaries to maximize RRSP’s
• Additional dividends for inactive
spouse

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

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.”

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)

Frank and Maria
• Both age 70, 6 children and 11 grandchildren
• 39% shareholder in Abruzzo Contracting for the last 40 years
• Will sell to his partner’s children for $3.6 million
• Frank and Maria own the shares personally
• Abruzzo is a CCPC and would qualify for SBGE treatment
• Total valuation of the company is $9.2 million –Safe Income is $4.2
million
• They own a Holdco (Palermo Holdings) with a real estate portfolio
worth $25 million
• Freeze done 5 years ago at $20 million. Common shares held by
family trust
• Two children have some active involvement in Holdco
• Palermo owns $3 million JLTD Life Insurance
• Palermo owes them $2 million in shareholder loans
• Estate to go in trust to children equally

Frank and Maria
Palermo Holdings
($25 million value)
Giotti
Family
Trust
Abruzzo Construction
($9.2 million value)
$20M Pref 100% Common
39% $3.6M

Impact of tax reform
Questions and Issues
• Tax treatment of sale of Abruzzo shares
(personally and corporately)
• Will they both be eligible for SBGE?
• Impact of tax reform on their estate plan
• Should they change their compensation
model?
• Impact of new rules on dividends paid to
trust from Palermo

TTHORSTEINSSONSLLP
CASE STUDY
 Background:
ConstructcoHoldco
Other
Shareholders
Frank
Frank Maria
39% 61%
Trust
$10m Preferred
Shares
$10m Preferred
Shares

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

Nicola Wealth Management - Proposed Tax Reform 2017: What Accountants Need to Know

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