Canada’s new tax changes: Are you prepared? Tétrault Wealth Advisory Group National Bank Financial ROBERT TETRAULT, B.A., J.D., MBA Vice President, Portfolio Manager CEDRIC PAQUIN, CPA, CA, CFP Wealth Planning Consultant
Rob Tétrault Rob Tétrault Cédric Paquin Cédric Paquin Rob Tétrault, B.A., J.D., MBA, CIM Cedric Paquin , CA, CFP Wealth Planning Consultant Vice President, Portfolio Manager Ø Estate & Tax Expert Ø Head and Founder of Tétrault Ø Over 10 years of Accounting, Wealth Advisory Group Financial & Tax Planning Services Ø Lawyer / MBA / Univ Prof Ø Background in Succession & Tax Ø Portfolio Manager of the Year (‘15) planning Ø Social CommitmentAward (‘16)
TEAM MEMBERS TEAM MEMBERS Claude Tetrault , FSCI Associate Over 40 years of experience in the Investment industry Jean Moquin Associate Client communication & Digital Marketing duties Karen Kazina, CIM, MTI Investment Associate Over 12 years in the securities industry.
TEAM MEMBERS TEAM MEMBERS Derrek Funk , B.Comm (Hons.) Investment Advisor Over 10 years of experience in the Financial Services industry Keri Wersh , B.A., FSCI, FMA Associate Over 20 years of experience as a licensed Investment Assistant Leah Rewucki , B.Comm (Hons.) Associate Over 3 years of experience in the Financial Services industry
Update on proposed Update on proposed tax changes for tax changes for small business owners small business owners
Laffer Curve Laffer Curve $ Tax Revenue $ 100% 0% Tax Rate Source: Taxtips.ca
Federal and MB income tax rates in 2017 Federal and MB income tax rates in 2017 60% 40% 50.40% 46.40% 43.40% 20% 37.90% 33.25% 27.75% 25.80% 0% $0 - $31,465 $31,46 - $45,917 - $68,006 - $91,832 - $142,354 - $202,801+ $45,916 $68,005 $91,831 $142,353 $202,800 Taxable Income Source: Taxtips.ca
2017 top marginal rates by province 2017 top marginal rates by province Eligible Non-eligible Interest Capital gains dividends dividends BC 47.70% 23.85% 31.30% 40.95% SK 47.75% 23.88% 30.33% 39.62% AB 48.00% 24.00% 31.71% 41.29% MB 50.40% 25.20% 37.78% 45.74% NL 51.30% 25.65% 42.61% 43.62% PE 51.37% 25.69% 34.22% 43.87% NB 53.30% 26.65% 33.51% 46.25% QU 53.31% 26.65% 39.83% 43.84% ON 53.53% 26.76% 39.34% 45.30% NS 54.00% 27.00% 41.58% 46.97% Source: Taxtips.ca
Growing gap between personal and Growing gap between personal and corporate tax rates corporate tax rates Source: http://www.fin.gc.ca/n17/data/tppc-pfsp-eng.pdf
July 18, 2017 – Consultation Paper July 18, 2017 – Consultation Paper Improve 1. Income sprinkling for fairness dividends and capital Close loopholes gains 2. Holding passive Ensure the investments inside a corporation richest Canadians pay 3. Converting corporate draws into capital gains their fair share of taxes
Income Sprinkling Income Sprinkling
What is dividend income sprinkling? What is dividend income sprinkling? Taxation of Dividends in Manitoba (2017) Eligible Non-Eligible Dividends Dividends Top tax rate (over $202,800) 37.78% 45.74% Lowest tax rate (under $31,465) 3.84% 16.96% Potential tax savings 33.94% 28.78% Tax free dividend if no other taxable income $24,638 $10,118 (MB) Tax free dividend if no other taxable income $51,635 $33,308 (FED)
Original income sprinkling announcement Original income sprinkling announcement Extension of the • “kiddy tax” to adults End to capital gains • exemption for minors or if “unreasonable” Restriction on capital • gains for shares held by family trusts
Revised income sprinkling announcement Revised income sprinkling announcement Will proceed on dividends • but simplify to reduce compliance burden. Applicable after 2017 Not moving forward with • limits to Capital Gains Exemption Still unclear - draft • legislation expected this fall
What to do? What to do? 2017 Consider paying dividends to family members not involved in • operations prior to the end of 2017 2018 Keep dividend payments “reasonable”; especially for age 18-24 • Consider change in rules before doing estate freeze • Review share structure and dividend entitlement on share • classes owned by all family members
Consolation prize: Decrease in tax rates Consolation prize: Decrease in tax rates for small business for small business 2017 2018 2019+ 2015 10.0% 9.5% 9.0% Conservative budget 2016 Liberal 10.5% 10.5% 10.5% Budget October 2017 10.5% 10.0% 9.0% Announcement Under $500,000 of active business income
Holding Passive Holding Passive Investments in a Investments in a corporation corporation
Theory of Integration: $100,000 small Theory of Integration: $100,000 small business income business income $100,000 $10,500 $80,000 $50,400 $40,937 $60,000 $89,500 $40,000 $48,563 $49,600 $20,000 $- Corporate Paid as Paid as income dividend salary Income Retained Tax 2017 FED/MB tax rates
Taxation of Corporate Investment Income Taxation of Corporate Investment Income MB Invest. Capital Eligible Unrealized 2017 Income Gains Dividends Gains Tax 50.67 % 25.34 % 38.33 % 0 % RDTOH/ 30.67 % 15.34 % 38.33 % 0 % Part IV Net Tax 20 % 10 % 0 % 0 %
Original passive income announcement Original passive income announcement Example Rental or Investment Income $100,000 Corporate tax rate 50.67% Available for distribution $49,330 Top personal tax rate 45.74% Cash in hand 26,766 Effective tax rate 73.23% Existing investments will be grandfathered •
Revised passive income announcement Revised passive income announcement $50,000 of passive • investments will be exempt Existing investments and • income on existing investments will be grandfathered Details in 2018 Federal • Budget
What to do? What to do? 2017 No need to withdraw current investments • 2018+ (pending legislation) Max out RRSPs & TFSAs • Consider IPPs or RCAs • Consider corporate owned life insurance •
Converting corporate Converting corporate draws to capital gains draws to capital gains
Original Proposal effective July 18, 2017 Original Proposal effective July 18, 2017 Capital Non-Eligible Gain Dividend Top tax rate (2017) 25.2% 45.74% Potential tax savings on $1M surplus strip $205,400 • Unintended consequences on: • Post-mortem tax planning • Intergenerational transfer of shares • Worse for transactions in process (70.94% potential tax rate)
Converting corporate draws to capital gains Converting corporate draws to capital gains • Abandoned • New proposal expected in the coming year Photo: Lars Hagberg / Canadian Press
This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity. As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. National Bank Financial is an indirect wholly-owned subsidiary of National Bank of Canada which is a public company listed on the Toronto Stock Exchange (NA: TSX). NBF is a member of the CanadianInvestor Protection Fund. National Bank Financial - Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under license by NBF. NBF is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF), and is a wholly-owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA).
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