Canadas new tax changes: Are you prepared? Ttrault Wealth Advisory - - PowerPoint PPT Presentation

Canada’s new tax changes: Are you prepared?

ROBERT TETRAULT, B.A., J.D., MBA Vice President, Portfolio Manager CEDRIC PAQUIN, CPA, CA, CFP Wealth Planning Consultant

Tétrault Wealth Advisory Group National Bank Financial

Rob Tétrault Cédric Paquin Rob Tétrault Cédric Paquin

Rob Tétrault, B.A., J.D., MBA, CIM Vice President, Portfolio Manager Ø Head and Founder of Tétrault Wealth Advisory Group Ø Lawyer / MBA / Univ Prof Ø Portfolio Manager of the Year (‘15) Ø Social CommitmentAward (‘16) Cedric Paquin, CA, CFP Wealth Planning Consultant Ø Estate & Tax Expert Ø Over 10 years of Accounting, Financial & Tax Planning Services Ø Background in Succession & Tax planning

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

Keri Wersh, B.A., FSCI, FMA Associate Over 20 years of experience as a licensed Investment Assistant Derrek Funk, B.Comm (Hons.) Investment Advisor Over 10 years of experience in the Financial Services industry Leah Rewucki, B.Comm (Hons.) Associate Over 3 years of experience in the Financial Services industry

Update on proposed tax changes for small business owners Update on proposed tax changes for small business owners

Laffer Curve Laffer Curve

$ Tax Revenue $ Tax Rate 100% 0%

Source: Taxtips.ca

Federal and MB income tax rates in 2017 Federal and MB income tax rates in 2017

25.80% 27.75% 33.25% 37.90% 43.40% 46.40% 50.40% 0% 20% 40% 60%

$0 - $31,465 $31,46 - $45,916 $45,917 - $68,005 $68,006 - $91,831 $91,832 - $142,353 $142,354 - $202,800 $202,801+ Taxable Income

Source: Taxtips.ca

2017 top marginal rates by province 2017 top marginal rates by province

Interest Capital gains Eligible dividends Non-eligible 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 corporate tax rates Growing gap between personal and 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

• 1. Income sprinkling for

dividends and capital gains

• 2. Holding passive

investments inside a corporation

• 3. Converting corporate

draws into capital gains

Improve fairness Close loopholes Ensure the richest Canadians pay their fair share

• f taxes

Income Sprinkling Income Sprinkling

What is dividend income sprinkling? What is dividend income sprinkling?

Taxation of Dividends in Manitoba (2017) Eligible Dividends Non-Eligible 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 (MB) $24,638 $10,118 Tax free dividend if no other taxable income (FED) $51,635 $33,308

Original income sprinkling announcement Original income sprinkling announcement

• Extension of the

“kiddy tax” to adults

• End to capital gains

exemption for minors

• r 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
• perations 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 for small business Consolation prize: Decrease in tax rates for small business

2017 2018 2019+

2015 Conservative budget

10.0% 9.5% 9.0%

2016 Liberal Budget

10.5% 10.5% 10.5%

October 2017 Announcement

10.5% 10.0% 9.0%

Under $500,000 of active business income

Holding Passive Investments in a corporation Holding Passive Investments in a corporation

Theory of Integration: $100,000 small business income Theory of Integration: $100,000 small business income

$89,500 $48,563 $49,600

$10,500 $40,937 $50,400 $- $20,000 $40,000 $60,000 $80,000 $100,000

Corporate income Paid as dividend Paid as salary Income Retained Tax

2017 FED/MB tax rates

Taxation of Corporate Investment Income Taxation of Corporate Investment Income

MB 2017 Invest. Income Capital Gains Eligible Dividends Unrealized Gains Tax 50.67 % 25.34 % 38.33 % 0 % RDTOH/ Part IV 30.67 % 15.34 % 38.33 % 0 % Net Tax 20 % 10 % 0 % 0 %

Original passive income announcement Original passive income announcement

• Existing investments will be grandfathered

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%

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 draws to capital gains Converting corporate draws to capital gains

Original Proposal effective July 18, 2017 Original Proposal effective July 18, 2017

Capital Gain Non-Eligible 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).