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
Financial Planning Strategies
Jam ie Golom bek Managing Director, Tax and Estate Planning Ontario Psychological Association February 1 9 , 2 0 1 5
Presented by:
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Agenda
Professional corporation Income splitting Postsecondary education savings RRSP, TFSA or Mortgage? Estate planning
Use of professional corporation
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Use separate business and personal financial accounts:
– Bank accounts – Credit cards – Investment accounts – Lines of credit and loans
Keeping track of expenses
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
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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”
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Com m on structures: Sole proprietor / Professional Corporation
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Sole Proprietor Business I ncom e Business I ncom e
Dividend Shareholder
Corporate tax
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Corporation
* Corporate tax rate is assumed to be 20%
Business incom e 1 ,8 0 0 Business expenses ( 8 0 0 ) Net business incom e 1 ,0 0 0 Tax* ( 2 0 0 ) After-tax 8 0 0 Tax payable $ 2 0 0
Tax on business income is paid by the corporation
ON 2 0 1 5 – Advantage of low corporate tax rates
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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
ON 2 0 1 5 1 5 .5 %
Corporate
ON 2 0 1 5 4 9 .5 % *
Personal
* With taxable income exceeding $220,000
W ithdraw ing funds from a corporation Option 1 – Salary
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Salaries paid to employees are deductible in the corporation Salaries received by employees are included in individual income
* Personal tax rate is assumed to be 43%
Business incom e 1 ,0 0 0 Salary ( 1 ,0 0 0 ) Net business incom e
Shareholder Corporation
Tax payable $ 4 3 0 Salary incom e 1 ,0 0 0 Tax* ( 4 3 0 ) After-tax 5 7 0
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
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W ithdraw ing funds from a corporation Option 2 – Dividends
After-tax income from the corporation is distributed to the shareholder as a dividend Dividends received by shareholders are included in individual income
Tax payable $ 2 3 0 Tax payable $ 2 0 0
* Corporate tax rate is assumed to be 20% Personal tax rate on dividend is assumed to be 29%
Total tax payable $ 4 3 0
Corporation
Net business incom e 1 ,0 0 0 Tax* ( 2 0 0 ) After-tax incom e 8 0 0
Shareholder
Dividend 8 0 0 Tax* ( 2 3 0 ) After-tax incom e 5 7 0
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Corporation
Dividends: Tax deferral
Dividends do not need to be paid in year business income is earned By paying dividends in a later year, tax of $230 can be deferred by shareholder until year dividend is received The $230 deferred amount can be reinvested in the corporation to earn additional income
Net business incom e 1 ,0 0 0 Tax* ( 2 0 0 ) After-tax incom e 8 0 0
Shareholder
Tax payable $ 2 3 0
in 5 years
Dividend 8 0 0 Tax* ( 2 3 0 ) After-tax incom e 5 7 0
* Corporate tax rate is assumed to be 20% Personal tax rate on dividend is assumed to be 29%
Dividend in 5 years
Tax payable $ 2 0 0
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ON 2 0 1 5 – Dividends: Tax savings I ncom e Below Sm all Business Deduction Lim it
With “perfect integration”, the amount of total tax for corporation + shareholder = tax for sole proprietor In 2015, integration is nearly perfect in ON with shareholder income exceeding $220,000
After-tax am ount is $ 1 low er w ith corporation 0 .1 % tax savings Corporation Shareholder Sole Proprietor
Net business incom e 1 ,0 0 0 Tax ( 1 5 5 ) After-tax 8 4 5 Net business incom e 1 ,0 0 0 Tax* ( 4 9 5 ) After-tax 5 0 5 Dividend incom e 8 4 5 Tax* ( 3 3 9 ) After-tax 5 0 6
* With taxable income exceeding $220,000
$ 1 0 0 ,0 0 0 $ 7 5 ,0 0 0 $ 5 0 ,0 0 0 $ 2 5 ,0 0 0 $ 0
>
Shareholder $ 5 0 ,6 0 0
Dividends
$ 8 4 ,5 0 0 Corporation
After-tax dividend $50,600 Personal tax
$33,900 Corporate after-tax business income $84,500 Corporate tax $15,500 Personal tax
$49,500 After-tax Salary $50,500
Em ployee $ 5 0 ,5 0 0 ON 2 0 1 5 – $ 1 0 0 ,0 0 0 sm all business incom e earned in an Ontario professional corporation
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Plan before year end Dividends vs. bonus in ON in 2 0 1 5 Reasons dividends may be preferable to salary/ bonus:
corporation in the year it is earned
I ncom e splitting w ith prescribed rate loans
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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
– Lowest possible!
I ncom e splitting ( cont.) Exam ple of Spousal Loan at 1 %
Income splitting opportunity: $20,000 Tax Savings (ON): $20,000 X (49% - 20% ) = $5,800/ yr
Income $5,000
Jack $ 5 0 0 ,0 0 0 I nterest Expense 1 %
Income $25,000 Interest expense ( 5,000) Net income $20,000
Dianne
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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)
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ON 2 0 1 5 – I ncom e splitting Funding children’s expenses
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Dividends (4%) $40,000 Tax (33.8%*) ( 13,520) Net amount $26,480
$1,000,000 Capital
Can pay for $26,480 of children’s expenses (e.g. private school)
* 2015 ON top marginal tax rate on eligible dividends is 33.8%.
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Dividends (4%) $40,000 Interest (1%) ( 10,000) Net income $30,000 Interest (1%) $10,000 Distribution $30,000
$1 million loan @ 1%
Trust
$1,000,000 Investments
ON 2 0 1 5 – I ncom e splitting ( cont.) Funding children’s expenses w ith a trust
U.S. citizens should consult with a U.S. tax professional prior to implementing loans involving family members.
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Dividends (4%) $40,000 Interest (1%) ( 10,000) Net income $30,000 Interest (1%) $10,000 Tax (49.5%) ( 4,950) After tax $ 5,050 Distribution* $30,000 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.
Can pay for $35,050 ($8,570 more) children’s expenses
$1 million loan @ 1%
Trust ON 2 0 1 5 – I ncom e splitting ( cont.) Funding children’s expenses w ith a trust
$1,000,000 Investments
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
Earnings accrue on tax-deferred basis
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RESP – Typical strategy Start late; m axim ize CESG
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Pays for four years of school at $ 1 2 ,7 6 6 annually
RESP – Results w ith typical strategy Start late; m axim ize CESG
2 7 Cum ulative Contributions Cum ulative CESG Cum ulative Grow th*
* 3% rate of return.
RESP – Better strategy Start early; m axim ize CESG
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RESP – Results w ith better strategy Start early; m axim ize CESG
Pays for 4 yrs
$ 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)
2 9 Cum ulative Contributions Cum ulative CESG Cum ulative Grow th*
* 3% rate of return.
RESP – Best strategy Start early; m axim ize contributions
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RESP – Results w ith best strategy Start early; m axim ize contributions
Pays for 4 yrs
$ 2 2 ,0 9 9 annually Yields $ 9 ,3 3 3 m ore than typical strategy annually ( $ 3 7 ,3 3 2 over four years)
3 1 Cum ulative Contributions Cum ulative CESG Cum ulative Grow th*
* 3% rate of return.
RESP – Education Assistance Paym ents Credit am ounts exceed incom e No tax payable
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* Assumes student attends school full-time for 8 months annually and tuition is $6,000/ year.
The RRSP, the TFSA…
“As the TFSA m atures over the next 2 0 years, it is estim ated that, in com bination w ith existing registered plans, it w ill perm it
their financial assets in tax-efficient savings vehicles.”
Tax-free investing is only a generation aw ay
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Contribution lim its Plan Lim its RRSP $24,930 annual limit in 2015 (18% of $138,500) less Pension Adjustment TFSA $5,500 annual limit in 2015 ($36,500 cumulative limit for 2009 to 2015)
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Reports on tax-free incom e
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The RRSP, the TFSA and the Mortgage Chart 1 Benefit after one year from RRSP, TFSA and debt repayment
( ROR = 5 % , I nterest rate on debt = 5 % , Tax rate today and upon w ithdraw al = 3 3 .3 3 % )
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The RRSP, the TFSA and the Mortgage Chart 2
Benefit over one year from debt repayment and RRSP contribution, with varying tax rates upon RRSP withdrawal (Investment rate of return and interest rate on debt = 5% )
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The RRSP, the TFSA and the Mortgage Chart 4
Benefit over 25 years from an RRSP contribution or debt repayment
(ROR = 2% ; Debt interest rate = 5% ; Tax rate today = 33.33% ; Tax rate at RRSP withdrawal = 20% )
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Estate planning – Testam entary Trusts
Uses for testam entary trusts
Inheritances by minor beneficiaries – Life insurance trust Staged distributions – ½ at age 25, ½ at age 35 Spendthrift beneficiaries Motivate behaviour of beneficiaries – Matching incentive trust Protect kids’ inheritance in case of remarriage
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I nheritance protection using a testam entary trust
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Spouse A Kids Spouse B Second Fam ily Test. Trust
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