Financial Planning Strategies Presented by : Jam ie Golom bek - PowerPoint PPT Presentation

Financial Planning Strategies Presented by : Jam ie Golom bek Managing Director, Tax and Estate Planning Ontario Psychological Association February 1 9 , 2 0 1 5

Agenda  Professional corporation  Income splitting  Postsecondary education savings  RRSP, TFSA or Mortgage?  Estate planning 2

Use of professional corporation

Keeping track of expenses  Use separate business and personal financial accounts: – Bank accounts – Credit cards – Investment accounts – Lines of credit and loans 4

Good records separate business and personal expenses  Keep good records (logs, receipts), especially for expenses that have both business and personal elements such as: – Home office expenses – Vehicles used for both business and personal trips – Computers, phones with both business and personal use  Non-deductible personal expenses generally include: – Travel to/ from work – Clothing for work – Personal meals – Home expenses that do not relate to a home office 5

Personal expenses – An extrem e case  Taxpayer admitted: “there could be or ‘may be’ personal expenses amongst the amounts in dispute”  670 receipts placed “into a drawer without organizing them” – spa treatments, vitamins, gym memberships – vacuum cleaner, driveway sealing – household items (including a Magic Bullet blender that was returned) – women’s clothing – grocery items and alcohol consumed by taxpayer / family / friends – movie ticket stubs given as “entertainment for his clients” 6

Com m on structures: Sole proprietor / Professional Corporation Prof. Corporation Business I ncom e Dividend Sole Proprietor Shareholder Business I ncom e 7

Corporate tax Tax on business income is paid by the corporation Corporation Business incom e 1 ,8 0 0 Business expenses ( 8 0 0 ) Net business incom e 1 ,0 0 0 Tax payable Tax* ( 2 0 0 ) $ 2 0 0 After-tax 8 0 0 * Corporate tax rate is assumed to be 20% 8

ON 2 0 1 5 – Advantage of low corporate tax rates Corporate ON 2 0 1 5 ON 2 0 1 5 Personal 4 9 .5 % * 1 5 .5 %  Take advantage of “cheaper” corporate dollars to pay non-deductible expenses (e.g. life insurance premiums) – Example – Annual life insurance premiums – $10,000 non-deductible – Paid personally – Earn $19,814 to net $10,000 (49.5% personal tax rate) – Paid corporately – Earn $11,834 to net $10,000 (15.5% corporate tax rate) – SAVINGS: $ 7,980 annually * With taxable income exceeding $220,000 9

W ithdraw ing funds from a corporation Option 1 – Salary  Salaries paid to employees are deductible in the corporation Corporation  Salaries received by employees Business incom e 1 ,0 0 0 are included in individual income Salary ( 1 ,0 0 0 ) Net business incom e 0 Shareholder Salary incom e 1 ,0 0 0 Tax Tax* ( 4 3 0 ) payable $ 4 3 0 After-tax 5 7 0 1 0 * Personal tax rate is assumed to be 43%

Salaries – RRSP contribution room + CPP  RRSP contribution room – 18% of prior year’s earned income – Maximum contribution room: $24,930 – Maximum contributions can be made with 2014 salary of $138,500  CPP premiums on earnings to $53,600 – Max. employee premium: $2,480 – Max. employer premium: $2,480 – Total premium: $4,960 1 1

W ithdraw ing funds from a corporation Option 2 – Dividends  After-tax income from the Corporation corporation is distributed to the Net business incom e 1 ,0 0 0 shareholder as a dividend Tax  Dividends received by payable Tax* ( 2 0 0 ) $ 2 0 0 shareholders are included in After-tax incom e 8 0 0 individual income Shareholder Dividend 8 0 0 Tax payable Tax* ( 2 3 0 ) $ 2 3 0 After-tax incom e 5 7 0 Total tax payable $ 4 3 0 * Corporate tax rate is assumed to be 20% Personal tax rate on dividend is assumed to be 29% 1 2

Dividends: Tax deferral  Dividends do not need to be Corporation paid in year business income is Net business incom e 1 ,0 0 0 earned Tax  By paying dividends in a later payable Tax* ( 2 0 0 ) $ 2 0 0 year, tax of $230 can be After-tax incom e 8 0 0 deferred by shareholder until year dividend is received Shareholder  The $230 deferred amount can be reinvested in the corporation to earn additional income Dividend in 5 years Dividend 8 0 0 Tax payable Tax* ( 2 3 0 ) $ 2 3 0 After-tax incom e 5 7 0 in 5 years * Corporate tax rate is assumed to be 20% Personal tax rate on dividend is assumed to be 29% 1 3

ON 2 0 1 5 – Dividends: Tax savings I ncom e Below Sm all Business Deduction Lim it Corporation  With “perfect integration”, the amount of total tax for corporation + shareholder Net business incom e 1 ,0 0 0 = tax for sole proprietor  In 2015, integration is nearly perfect in ON Tax ( 1 5 5 ) with shareholder income exceeding $220,000 After-tax 8 4 5 Sole Proprietor Shareholder After-tax am ount is Net business incom e 1 ,0 0 0 Dividend incom e 8 4 5 $ 1 low er w ith Tax* ( 4 9 5 ) Tax* ( 3 3 9 ) corporation After-tax 5 0 5 After-tax 5 0 6 0 .1 % tax savings * With taxable income exceeding $220,000 1 4

ON 2 0 1 5 – $ 1 0 0 ,0 0 0 sm all business incom e earned in an Ontario professional corporation $ 1 0 0 ,0 0 0 Corporate tax $15,500 Personal tax $ 7 5 ,0 0 0 on salary Personal tax $49,500 on dividend $33,900 Corporate $ 5 0 ,0 0 0 after-tax business income After-tax After-tax $84,500 dividend $ 2 5 ,0 0 0 Salary $50,600 $50,500 $ 0 Corporation Shareholder Em ployee Dividends > $ 8 4 ,5 0 0 $ 5 0 ,6 0 0 $ 5 0 ,5 0 0 | 15

Plan before year end Dividends vs. bonus in ON in 2 0 1 5  Reasons dividends may be preferable to salary/ bonus: 1. Tax deferral of 34% if small business income is not withdrawn from the corporation in the year it is earned 2. Payroll tax savings over $7,000 annually (CPP/ EI) per employee 1 6

I ncom e splitting w ith prescribed rate loans

I ncom e splitting - Attribution rules  Gifts/ transfers of funds to spouse or partner – FULL attribution of income/ gains back to transferor  Gifts/ transfers of funds to children – Attribution of income (but not capital gains) back to transferor  Exceptions: – Pay FMV or prescribed rate loan • Rate is 1 % until June 3 0 , 2 0 1 5 – Lowest possible! 1 8

I ncom e splitting ( cont.) Exam ple of Spousal Loan at 1 % • Dianne loans Jack $500,000 • Investment earns 5% annually $ 5 0 0 ,0 0 0 I nterest Expense 1 % Jack Dianne Income $5,000 Income $25,000 Interest expense ( 5,000) Net income $20,000 Income splitting opportunity: $20,000 Tax Savings (ON): $20,000 X (49% - 20% ) = $5,800/ yr 1 9

I ncom e splitting – kids action plan  If kids < 18, set up family trust (through lawyer)  Loan to trust at 1% (promissory note)  Investment income earned in trust paid out to kids (or used for their benefit)  Kids pay zero (minimal) tax  Tax-free (public company) dividends to kids – about $50,000 (ON 2015) 2 0

ON 2 0 1 5 – I ncom e splitting Funding children’s expenses $1,000,000 Capital Dividends (4%) $40,000 Can pay for Tax (33.8%*) ( 13,520) $26,480 of Net amount $26,480 children’s expenses (e.g. private school) * 2015 ON top marginal tax rate on eligible dividends is 33.8%. 2 1

ON 2 0 1 5 – I ncom e splitting ( cont.) Funding children’s expenses w ith a trust $1 million loan @ 1% Trust $1,000,000 Investments Dividends (4%) $40,000 Interest (1%) $10,000 Interest (1%) ( 10,000) Net income $30,000 Distribution $30,000 U.S. citizens should consult with a U.S. tax professional prior to implementing loans involving family members. 2 2

ON 2 0 1 5 – I ncom e splitting ( cont.) Funding children’s expenses w ith a trust $1 million loan @ 1% Trust $1,000,000 Investments Can pay for $35,050 ($8,570 more) Dividends (4%) $40,000 children’s expenses Interest (1%) $10,000 Interest (1%) ( 10,000) Tax (49.5%) ( 4,950) Net income $30,000 Distribution* $30,000 After tax $ 5,050 After-tax funds 5,050 TOTAL $35,050 * Approximately $50,000 of eligible dividends can be earned tax-free by an individual who has no other income and claims the basic personal amount in ON in 2015. 2 3

Savings for Post Secondary Education

Registered Education Savings Plan ( RESP)  Maximum lifetime contributions: $50,000  No deduction for contributions  Canada Education Savings Grant (CESG): – 20% of first $2,500 of annual contributions ( $ 5 0 0 / year) – Can carry forward unused room • Up to $ 1 ,0 0 0 CESG for a “catch-up” contribution  Earnings accrue on tax-deferred basis 2 5

RESP – Typical strategy Start late; m axim ize CESG 2 6

RESP – Results w ith typical strategy Start late; m axim ize CESG Pays for four years of school at $ 1 2 ,7 6 6 annually Cum ulative Cum ulative Cum ulative Contributions CESG Grow th* * 3% rate of return. 2 7

RESP – Better strategy Start early; m axim ize CESG 2 8

RESP – Results w ith better strategy Start early; m axim ize CESG Pays for 4 yrs of school at $ 1 5 ,8 7 4 annually Yields $ 3 ,1 0 8 m ore than typical strategy annually ( $ 1 2 ,4 3 2 over four years) Cum ulative Cum ulative Cum ulative Contributions CESG Grow th* * 3% rate of return. 2 9