Year End Tax Update Fall 2015

Transcription

1 Year End Tax Update Fall 2015 Kevin Tran Director, Tax Advisory Services October 2015 August 2015

2 Agenda 1 Proposed Tax Changes Liberal Platform 2 Year-End Tax Planning - Simple Ideas 3 Distribution Planning 4 Questions 2

3 Proposed Tax Changes Liberal Platform 3

4 Proposed Tax Changes Liberal Party Win Key tax initiatives in the Liberal party platform: Increase the tax rate on incomes over $200,000 from 29% to 33% Cap how much can be claimed through the stock option deduction Rollback the $10,000 Tax-Free Savings Account contribution limit to $5,500 Reduce the small business rate from 11% to 9% Cancel the Conservatives Family Tax Cut credit Timing not specified. Changes could apply to 2015, but not likely before

5 Key Tax Changes The Liberals have promised to: increase the tax rate on incomes over $200,000 from 29% to 33% The Bottom Line The table below shows how much additional tax you would pay, assuming all your income is interest or ordinary income (such as salary). Taxable income Additional tax 1 $1,000,000 $31,330 drop the second lowest tax rate from 22% to 20.5%, decreasing taxes by up to $671 (based on 2015 tax brackets) $800,000 $23,330 $600,000 $15,330 $400,000 $7,330 $300,000 $3, Ignores indexing 5

6 Alberta to Personal Income Tax System NDP Changes to Alberta's Personal Income Tax Rates Taxable Income Bracket 2014 (single rate) and later On first $125,000 of taxable income 10% 10% 10% On next $25,000, from $125,000 to $150,000 10% 10.5% 12% On next $50,000, from $150,000 to $200,000 10% 10.75% 13% On next $100,000, from $200,000 to $300,000 10% 11% 14% On taxable income above $300,000 10% 11.25% 15% 6

7 Tax Rate Changes Impact of Proposed Changes to Top Marginal Tax Rates 2015 and 2016 tax rates base on new Liberal party platform, assuming effective January 1,

8 Alberta Personal Tax Measures Impact of Proposed Changes to Top Marginal Tax Rates 7.75% top personal rate increase 4% federal tax rate increase 3.75% provincial tax rate increase In 2016, top personal tax rate in Alberta increases from 40.25% to 48% 8

9 Key Tax Changes Proposed Changes What Can You Do? Income Tax Increase Increase the Federal tax rate on incomes over $200,000 from 29% to 33% Stock Option Deduction Cap Reduce the 50% deduction on employee stock options. Certain exceptions may apply for start-up company employees (up to $100,000) Consider accelerating taxable bonuses and discretionary dividends to Assuming any cap would not be effective until after 2015, consider exercising your stock option benefits in

10 Key Tax Changes Proposed Changes What Can You Do? TFSA Contribution Limit TFSA contribution limit was increased from $5,500 to $10,000, starting The Liberals have pledged to return the limit to $5,500. Reducing Tax for Small Bus. The Liberals promised to reduce the small business rate to 9%, but did not specify the timing. Consider contributing $10,000 to your TFSA for We are unsure if this change will be retroactive. Consider deferring the CCPC s active business income to after

11 Other Tax Initiatives Other tax changes are as follows: Replace the UCCB, CCTB with a new Canada Child Benefit that is income-tested and tax-free Cancel income splitting up to $2,000 (pension income splitting will be retained) Loosen qualification rules for the RRSP Home Buyer s Plan for a downpayment on a second home Restore the traditional retirement age to 65 on Old Age Security (OAS) and Guaranteed Income Supplement (GIS) eligibility 11

12 Year End Tax Planning Simple Strategies 12

13 Tax Loss Selling Consider selling investments with accrued losses before year end to offset capital gains Settlement must take place in 2015 (trades no later than December 24 th 2015) Unused capital losses can be carried back 3 years or carried forward indefinitely to offset capital gains in other years The Canadian dollar has depreciated significantly The foreign exchange gain in U.S. investments should be carefully considered 13

14 Tax Loss Selling Example Mr. Smith bought 1,000 shares of a U.S. company for $5 USD a share in 2012 when the foreign exchange rate was 1 to 1. As of today, the shares have fallen to $4 USD a share. The current exchange rate is 1 to 1.3. In USD In CDN 4,000 USD (5,000) USD 5,200 CDN (5,000) CDN (1,000) USD Loss 200 CDN Gain 14

15 Beware the Superficial Loss Rules Rules apply if investments disposed of and then reacquired within 30 days. Classified as a superficial loss, and deemed nil. The actual loss is not permanently denied, added to the ACB of the reacquired asset. Rule applies when the asset is sold to a related corporation or transferred by an individual to his/her RRSP or TFSA. 15

16 Superficial Loss Example Taxpayer sold 500 shares in Corp X for $8,000 on Dec. 24, They had an ACB of $10,000. On Jan 5, 2015 he reacquires 500 shares of Corp X for $7,500. Shares sold on December 24, 2014 Proceeds $ 8,000 ACB ( 10,000) Actual loss ($ 2,000) Superficial loss deemed to be nil nil ACB of shares purchased on Jan 5, 2015 Proceeds $ 7,500 Denied loss 2,000 New ACB $ 9,500 16

17 Transfer Capital Losses One spouse has capital losses, no gains The other spouse has capital gain, no losses Can transfer unrealized losses to spouse 17

18 Transfer Capital Losses Example Anne owns Publico shares. ACB $500,000. FMV $100,000. Husband Henry reported capital gains of $400,000 in Let s transfer Anne s losses to Henry. Henry can carry losses back to 2014 and recover taxes paid. 18

19 Transfer Capital Losses Step 1 Anne sells Publico shares. Triggers $400,000 capital loss on the sale. Step 2 Henry buys Publico shares for FMV $100,000. Result: Superficial loss rules kick in. Loss denied to Anne will increase Henry s ACB. Henry s ACB is now $500,000. Step 3 Henry sells Publico shares for FMV $100,000. Triggers capital loss of $400,000 he can use. 19

20 Transfer Capital Losses Time line is important Step 1: Anne sells Step 2: Henry buys 30 days after Step 1 Henry sells 20

21 Corporate Tax Loss Selling & The Capital Dividend Account Private corporations have Capital Dividend Accounts. Purpose: to track certain tax-free surpluses accumulated by private companies These surpluses can be distributed in the form of tax-free capital dividends to the shareholders of the corporation Be sure to payout Capital Dividends prior to realizing significant capital losses! 21

22 Corporate Tax Loss Selling & CDA Example ABC Co. has a CDA balance of $150,000 as of October 1, During the last half of the year, ABC decides to trigger some gains and realize some capital losses as part of the year end planning process. One stock position has an accrued gain of $50,000. The other has an accrued loss of $100,000. CDA at Dec. 31st = $150,000 + $25,000 - $50,000 = $125,000 CDA with careful planning (i.e. prior to triggering the losses) = $150, ,000 = $175,000 22

23 Year End Distribution Planning A Salary Alternative 23

24 Ideal Client Scenarios Clients currently taking out a large salary out of the company (i.e. $300,000 or more) Owner of an Opco that has grown significantly in value (i.e. there must be a sufficient accrued gain in the shares) A similar strategy can also be done where either an Opco or Holdco possesses assets which have significantly appreciated in value (i.e. real estate, intellectual property, etc.) 24

25 Distribution Planning Advantages Allows for tax efficient distributions for shareholders normally taking out large salaries Annual tax savings of approx % depending on the salary amount normally taken Further tax savings can be achieved via deferral if cash is retained in a holding company Considerations Must determine the FMV of Opco (a valuation may be required) 25

26 Structure Before Proposed Planning Shareholder 100% c/s Holdco 100% c/s Opco 26

27 Proposed Reorganization Steps 1. Shareholder incorporates a NewCo. 2. Holdco will exchange all of its common shares in Opco for new fixed value preferred shares and new common shares. Shareholder 100% c/s 100% c/s Shareholder 100% c/s 100% c/s Holdco NewCo Holdco NewCo Opco 100% c/s new p/s Opco 100% new c/s 3. Holdco will sell a portion of the preference shares to NewCo in exchange for a note payable each year in order to trigger capital gains and create a CDA balance. 27

28 Proposed Distribution Steps 1 2 Opco will pay up to Holdco tax free inter-corporate eligible dividends Holdco will then pay to Shareholder a combination of: tax-free capital dividends from it s CDA balance created above; and taxable eligible dividends received from Opco 28

29 Cost of Implementation Costs Tax and legal fees to complete a reorganization would be starting from $10,000. Additional minor tax advisory & legal fees required to maintain plan year to year (i.e. filing the CDA election forms and drafting the proper dividend resolutions). The fees for a valuation have not been included as additional valuation costs may not be necessary. The cost of a valuation will vary, but can be expected to start at $8,

30 Risks and Concerns Tax risk is concerned moderate. Advisors, Financial Consultants and Relationship Managers are encouraged to first speak with us with their client situation before approaching any of their clients as there is a moderate level of risk associated with this plan and may not be suitable for everyone. 30

31 Other Considerations Using prescribed rate loans to split income ( Spousal loan and Education trust for minors etc. ) Government s prescribed rate is currently 1% until at least the end of 2015 If the 1% rate is locked in, it will remain in effect for the duration of the loan Protects against future rate increases An individual who has no income can receive approx. $50,000 in eligible dividends tax free ( Considering basic personal amount and dividend tax credits) 31

32 Other Considerations Charitable donations December 31 st is the last day to make donations for the 2015 calendar year Charitable giving should be considered when there are large tax events during the year Aqueduct Foundation can help in these situation Consider gifting publicly traded securities with accrued gains 32

33 Questions? 33

34 Disclaimer This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc. Scotia Capital Inc. is a member of the Investment Regulatory Organization of Canada and the Canadian Investor Protection Fund. This publication is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax or legal advisors and we recommend that individuals consult with their qualified advisors before taking any action based upon the information found in this publication. While care and attention is expected to ensure the accuracy of the material in this publication, Scotia Capital Inc. does not warrant the accuracy of the material and disclaims any liability resulting from any direct or consequential loss arising from any use of this publication or the information contained herein. This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or preferred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of Scotia Capital Inc. 34