2014 Manitoba Tax Rate Update

Cédric Paquin, B.Comm, CA, CFPRegional Vice-President, Wealth Planning

United Financial, a division of CI Private Council LP

General Update

• Federal tax brackets & clawback lower limits indexed by 0.9%

• Increase in the capital gains exemption to $800K; indexed

• MB SBD increased to $425,000

• CRA prescribed rate back to 1% on January 1, 2014

• TFSA limit $5,500; Contribution room $31,000

• RRSP limit $23,820 (2013) to $24,930 (2014)– 2013 Deadline (March 3, 2014)

2014 Top Personal Tax Rates - MB

Gross-up on non-eligible dividends decreases from 25 % to 18 %

201339.15%

Integration of ABISalary vs. Dividends

2014 Salary vs. Dividend - MB

ABI Corporate Rate

Tax Deferral

Savings / (Cost)

$75K Dividend

< $425K 11% 35.4% (0.89%) ($668)

$425 < $500K 23% 23.4% (7.99%) ($5,993)

$500K < 27% 19.4% (4.15%) ($3,113)

Elimination of savings to flow ABI through a corporation (0.6% - 2013)

• Pay salaries and/or bonus to decrease corporate income to $425K

• Consider enough salary to maximize:– RRSP ($ 138,500)– CPP ($ 52,500)– IPP ($ 135,000 – approx)

Salary vs. Dividends- General Rules

• Retirement income strategies– CPP benefits vs. withholdings– RRSP, IPP, RCA– Retirement Allowance

• Dividend gross-up may reduce or eliminate– OAS – Age, GST, CCTB and other credit– Provincial credits

• Cash flow: CPP withholdings & tax installments

• SRED, payroll tax

Salary vs. Dividends- Other Factors

Integration of Investment IncomeRetirement Holdco Strategies

Refundable Dividend Tax on Hand (RDTOH)

$1 for every $3 dividend paid to shareholders

33% Divide

nds

13.34% Capital Gains

26.67% Investme

nt income

• Prevents tax deferrals on investment income

• Tax prepayment/cost encourages paying dividends out of a Holdco/Investco.

• Reduces flexibility in compensation planning

2014 Passive Income - MB

MB Other Income

Capital Gains

Eligible Dividends

Up front 46.67 % 23.34 % 33 %

Refundable 26.67 % 13.34 % 33 %

Net tax 20.00 % 10.00 % 0 %

Example – 2014 MB

Income earned through corporation

Corporate income $ 1,000

Corporate tax (467)

After-tax amount 533

Dividend refund 267

Available for distribution

800

Personal tax of individual

(326)

Net cash to individual $ 474

Income earned directly by individual

Personal income $ 1,000

Personal tax (464)

Net cash to individual $ 536vs.

SummaryTax pre-payment: $3Tax cost: $62

2014 Integration Failure - MB

MBOther

IncomeCapital Gains

Eligible Dividends

Tax savings (cost) (6.2 %) (3.1 %) (0 %)

Tax deferral (prepayment) (0.3 %) (0.1 %) (0.7 %)

Investment income has become less integrated for all provinces!

Capital Dividend Account (CDA)To integrate non-taxable amounts

CDA balance

Non-taxable portion of capital

gains

Capital dividends received

Net proceeds of a life insurance

policy

CDA Strategies with Investments

• Pay out capital dividends before realizing capital losses

• Trigger capital gains to offset non-capital losses

Example: Opco with $10K in expenses and $30K in loss carry forwards- Trigger $80K capital gain ($40K taxable capital gain)- Nil corporate tax / $40K added to CDA account - Pay $40K tax free capital dividend to shareholder

Advantages: - Extract funds tax free - Reduce tax cost of investment income in corporation- Bump-up ACB - Use up corporate losses that will otherwise expire - Lock-in CDA balance

Corporate Investments - General Tax Strategies

AccumulationPhase

WithdrawalPhase

• Draw from corporation as quickly and tax efficiently as possible- Pay out shareholder loans and CDA tax free- Create personal income to take advantage of lower tax brackets, credits and

deductions

• Investments that defer distributions and capital gains avoid RDTOH and enhance compensation planning

• Pay dividends to recover RDTOH (if pers. tax < 33%)

• Defer tax and plan for retirement using:- Holdco and/or corporate beneficiary of family trust- RRSP & IPPs

2014 Tax Free Amounts - MB

•Federal: $48,843•Manitoba: $23,859

Eligible Dividend

s

•Federal: $43,430•Manitoba: $9,439

Non-Eligible

Dividends

Retirement Income StrategiesNon-Reg vs. RRSP vs. Investco.

RRSP vs. Investco

Client objectives: higher cash flow or maximize estate?

RRSP Draws

• Higher tax on death• No spousal trust on death• Recover AMT• Consider high tax and

clawbacks during RRIF• RRIF after 65 for pension

credit and splitting

Corp Draws

• Lower tax on draws• Effect of gross-up on

OAS, Age, GST, CTB and other credits

• Higher donation credit• Recover RDTOH• Reduce prof/admin fees

• Draw from RRSPs to use up AMT, deductions and credits.

• Draw from high value RRSPs if in low tax bracket and projecting high tax bracket and OAS clawback after age 71

• Convert higher RRSP to RRIF to fund lifestyle expenses after age 65 and use pension splitting

• Convert RRSP to RRIF after age 65 for pension credit

RRSPs vs. Non-reg

• Consider T- Class for individuals drawing on open accounts and:- subject to high tax rates and clawbacks, - have charitable intentions, or- don’t mind leaving large tax bill on death

• Spousal income splitting (but not with corporate class!)- Payment of lifestyle expenses by higher taxed spouse- Sale of lifestyle assets- Low interest loans to spouse or Family Trust

Open Accounts

• Investments with low distributions (Corp class & T-class)

• Capital gain instead of interest or dividends

• Management fees that exceed investment income

• Convert non-deductible debt to deductible debt

• RRSP deductions

Using open investments to reduce net income

Thank you

Assante Wealth Management’s advisory services are offered through Assante Financial Management Ltd., Assante Capital Management Ltd. and Assante Estate and Insurance Services Inc. Assante Estate and Insurance Services Inc. is owned by Assante Financial Management Ltd. and Assante Wealth Management (Canada) Ltd. ®The Assante symbol and Assante Wealth Management are registered trademarks of CI Investments Inc., used under licence.