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Year End Tax Tips: 2010
Jamie GolombekManaging Director, Tax & Estate Planning, CIBC Private Wealth Management
December 2010
Agenda
Year end tax tips
Tax shelter update
US Estate tax update
Two big ideas: RRSPs for business owners?
TFSA vs RRSP
Tax loss selling - transfers
Transfer to RRSP?
- Loss denied
- Crystallize first, wait 30 days to buy back
Transfer to TFSA?
- Loss denied
Transfer to RESP?
- OK, but if held for 30 days, “superficial loss”
Tax loss selling – “superficial loss”
Superficial loss
- Buy “identical property” within 30 calendar days
- Who?
You
Spouse/partner
Corporation controlled by you/spouse/partner
Trust, if you or spouse is majority-interest beneficiary
Transfer to parent / child – OK
Tax loss selling – spousal transfer of losses
Spousal loss transfer
Victor + Maureen
- Maureen – ABC Shares - $10,000 accrued capital gain
- Victor – XYZ Shares
ACB - $50,000
FMV - $40,000
Tax loss selling – spousal transfer of losses
Step one – Victor sells XYZ shares for $40,000
- Capital loss of $10,000
Step two – Maureen buys XYZ shares, pays $40,000
- Victor’s $10,000 capital loss is now “superficial”
- Added to ACB of Maureen’s shares ($10,000 + $40,000 = $50,000)
Step three – Maureen waits 30 days, sells for $40,000
- ACB - $50,000
- FMV - $40,000
- Capital loss of $10,000 can be used against ABC accrued gain
RRSP annuitants who turn 71 in 2010
Convert to RRIF (or annuity) by December 31
Final RRSP contribution must be made by December 31
No sixty day rule
Unless spousal RRSP with younger spouse/partner
RRSP annuitants who turn 71 in 2010
Consider one-time “over-contribution”
Client (71) has $100,000 of earned income in 2010
Will create $18,000 of RRSP contribution room for 2011
Contribute $18,000 to RRSP in December 2010
Pay penalty of 1% or $180 for month of December
Deduct contribution in 2011 (or future year) against ANY source of income
Charitable Giving Strategies
Donations of publicly listed securities
NO capital gains tax
Donations of stock option proceeds within 30 days
NO employment income tax
Public vs. private foundations
Immediate tax savings
Source of annual giving (e.g. donor advised funds)
RESP deadline…
$50,000 per child
No annual maximum
Maximize Canada Education Savings Grants (CESGs)
20% on first $2,500/annually = $500
Catch-up CESGs back to 1998
• Max of $1,000 of CESGs per year
$7,200 per child maximum
Child turned 15 in 2010 with no RESP?
Contribute at least $2,000 to RESP in 2010 to get CESG for 2010 and make child
eligible for 2011 and 2012 CESGs
Purchase computers - business assets
Claim a half-year’s depreciation, even if asset bought on Dec. 31st
Accelerated tax depreciation for computer purchases
Can write off 100% of cost of computers in year acquired
No “half-year” rule
For purchases from January 28, 2009 through January 31, 2011
Pay investment expenses by Dec. 31
Investment counseling fees (non-registered only)
Professional accounting services
Safety deposit box rental
Interest expense
Spousal/Partner Loan at 1%
Spouse or partner gifts/transfers funds
- FULL attribution of income / gains to transfero
- Exceptions:
Pay FMV or prescribed rate loan
Rate for Q4 2010 – 1%
Lowest ever!
Jack loans Diane $200,000
Investment earns 5% annually
Income splitting opportunity: $8,000
Tax Savings (BC): $8,000 X (43.7% - 20%) = $1,900 annually
Income $2,000
Spousal Loan at 1% (Example)
Jack$200,000
Interest Expense – 1%
Income $10,000
Interest expense (2,000)
Net income $ 8,000
Diane
Tax Shelters
Auditing over 170,000 taxpayers
$5 Billion in denied donations
2009 - 10,500 taxpayers claimed $285-million in donations through shelters
2008 - 17,000 taxpayers claimed $480-million
“If it sounds too good to be true, don’t fall for it…The Canada Revenue Agency (CRA) is auditing all tax shelter gifting
arrangements.”
CRA – August 13, 2007
“If it sounds too good to be true, don’t fall for it…The Canada Revenue Agency (CRA) is auditing all tax shelter gifting
arrangements.”
CRA – August 13, 2007
Source: Globe and Mail (September 15, 2010)
Maréchaux (2010)
Leveraged donation tax shelter
Produces "return on donation of up to 62.4%”
Supported by a tax opinion "from a firm of respected tax lawyers"
"subject only to a risk of challenge by the CRA" described as "slim”
$100,000 donation = $30K cash + $80K “interest-free loan” (included $10K in fees)
Was there a “gift”?
Federal Court of Appeal – October 28, 2010
Lemberg v. Perris (2010)
Art flip donation tax shelter
Paid $78,500 CRA allowed only cost of donation
Difference (Amount paid less donation CR) $40,000
Undisclosed commissions - $7,500
Arrears interest – CRA $75,000
Interest on Line of Credit to pay tax $29,000
Sued for: $151,500
Appeal filed August 6, 2010 - Court of Appeal file no: C52510
U.S. Estate Tax Update
Assume non-resident, non-U.S. citizen (“ALIEN”)
U.S. situs property: U.S. real estate
U.S. stocks
Update…
Monday December 6, 2010: President Barack Obama + Republican congressional leaders
• Two years at 35% rate
• Exemption of up to $5 million
Cost $600 to $800 million
Solution: U.S. equity mutual funds
EXEMPTION:
Cdn mutual fundsthat own U.S. stocks
IRS Chief Counsel Memo (1/22/2010)
RRSPs for Business Owners& Incorporated Professionals
Pay “salary” to contribute to RRSP $122,222 for 2010 to get 18% maximum
$22,000 maximum contribution
Does this make sense when corporate income < $500,000 ?
Earn income personally
Assume: Corporate income – $1,000
No corporation
Tax paid at full personal marginal tax rates
Ontario
Corporate Income: $1,000
Income Tax: (464)
Net Cash: $536
Earn income in corporation
Assume: Corporate income – $1,000
Eligible for small business rate (< $500,000)
Paid out immediately as “non-eligible” dividend
Ontario
Corporate Income: $1,000
Corporate Tax: (ABI < $500k) (160)
Net Corporate I ncome: $840 Dividend Payable: $840
Personal Tax on Dividend: (274)
Net Cash to Shareholder: $566
Advantage of Dividends vs. Salary
Ontario
Cash – Corporation: $566
Cash – Personal: (536)
Net Advantage: $30
Percentage: 3.1%
Tax Rate Advantage Dividends vs. Salary
BC 1.0%
AB 1.2%
SK 2.5%
MB 0.8%
ON 3.1%
QC (0.2)%
NB 1.4%
NS 3.6%
PEI 0.3%
NF 1.1%
Tax deferral opportunity – Dividends vs. Salary
Income earned personally – taxed today
Income earned corporately Taxed initially at low corporate tax rate
Only taxed as dividend when removed from corporation
RESULT: substantial tax deferral on income not needed today!
Tax deferral advantage – all provinces
BC 30.2%
AB 25.0%
SK 28.5%
MB 34.5%
ON 30.4%
QC 29.2%
NB 27.3%
NS 34.0%
PEI 35.1%
NF 27.4%
TFSA vs. RRSP – Low/High
TFSA RRSP
Income $1,000 $1,000
Tax (at 20%) (200) –
I ncome after-tax 800 1,000
Growth – 10 years / 5.4% 1,354 1,692
Tax (at 40%) – (677)
Net available to spend $1,354 $1,015
Thank You
This material was prepared for investment professionals only and is not for public distribution. It is for informational purposes only and is not intended to convey investment, legal, or tax advice. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management. ™Renaissance Investments and "invest well. live better." are registered trademarks of CIBC Asset Management Inc.
www.jamiegolombek.com