welcome cifps delegates
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Welcome CIFPs DelegatesMay 7th, 2008
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HOT TAX & ESTATE ISSUES FOR INVESTORS
CIFPsCIFPs Annual ConferenceAnnual Conference
May 7, 2008May 7, 2008
Jamie GolombekJamie Golombek CA, CPA, CFP, CLU, TEPCA, CPA, CFP, CLU, TEPVice President, Tax & Estate PlanningVice President, Tax & Estate Planning
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HOT TAX & ESTATE ISSUES FOR INVESTORS
AgendaAgenda
1. Budget 2008 – including TFSAs
2. Pension splitting
3. Interest deductibility
4. Registered Disability Savings Plans
5. Charitable giving
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HOT TAX & ESTATE ISSUES FOR INVESTORS
2008 federal tax rates2008 federal tax rates
New federal tax brackets
$ 0 – $ 37,885 15%
$ 37,885 – $ 75,769 22%
$ 75,769 – $ 123,184 26%
$ 123,184 + 29%
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Investment income:Investment income:2008 top marginal rates2008 top marginal rates
Interest Capital gains Eligibledividends
B.C. 43.7% 21.9% 18.5%Alberta 39.0% 19.5% 16.0%
Saskatchewan 44.0% 22.0% 20.4%Manitoba 46.4% 23.2% 23.8%
Ontario 46.4% 23.2% 24.0%Quebec 48.2% 24.1% 29.7%
New Brunswick 47.0% 23.5% 23.2%Nova Scotia 48.3% 24.1% 28.4%
P.E.I. 47.4% 23.7% 24.4%Newfoundland 45.5% 22.8% 28.8%
Source: KPMG
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HOT TAX & ESTATE ISSUES FOR INVESTORS
TaxTax--Free Savings AccountFree Savings Account
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HOT TAX & ESTATE ISSUES FOR INVESTORS
TaxTax--Free Savings Accounts (TFSA)Free Savings Accounts (TFSA)
� Starts in 2009
� Eliminates disincentive to save– Avoids double taxation of savings
“Flexible, registered general-purpose accountthat will allow Canadians to earn
tax-free investment income.”
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HOT TAX & ESTATE ISSUES FOR INVESTORS
TFSA vs. unregistered savingsTFSA vs. unregistered savings
Source: Department of Finance
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HOT TAX & ESTATE ISSUES FOR INVESTORS
TFSA:TFSA: EligibilityEligibility
� Must have Social Insurance Number
� Must be over 18 years of age
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HOT TAX & ESTATE ISSUES FOR INVESTORS
TFSA:TFSA: ContributionsContributions
� $5,000 per year (to be indexed)
� Unlimited carryforward of unused TFSA room
� Can recontribute amounts previously withdrawn
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HOT TAX & ESTATE ISSUES FOR INVESTORS
TFSA:TFSA: Taxation & withdrawalTaxation & withdrawal
� Tax-free accumulation of income & gains
� Tax-free upon withdrawal– At any time, for any reason
� No impact on income-tested benefits– GST credit– Child Tax Benefit– Guaranteed Income Supplement (GIS)– Old Age Security (OAS)
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HOT TAX & ESTATE ISSUES FOR INVESTORS
TFSA:TFSA: Miscellaneous rulesMiscellaneous rules
� Can invest in any qualified RRSP investments
� Interest on money borrowed to contribute nottax deductible– But, can use TFSA assets as collateral for a loan
� Effective income splitting betweenspouses/partners– No attribution of income/gains in TFSA
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HOT TAX & ESTATE ISSUES FOR INVESTORS
TFSA:TFSA: Death, divorce, nonDeath, divorce, non--residencyresidency
� Upon death, assets tax-free– Spouse/partner as “successor account holder”– Rollover to spouse’s or partner’s own TFSA
� Upon separation or divorce– Tax-free transfer to spouse’s or partner’s TFSA
� Upon becoming non-resident– Can maintain account– Investment income/withdrawals tax-free– No new contributions permitted
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HOT TAX & ESTATE ISSUES FOR INVESTORS
RRSPs vs. TFSAs?RRSPs vs. TFSAs?
Assumes forgone consumption (saving) is $600. In other words, in the RRSP scenario, while the individualcontributes $1,000 and receives a 40% tax refund, he or she is still sacrificing net consumption of $600.
TFSA RRSPPre-tax income 1,000.00$ 1,000.00$Tax (40%) (400.00) n/aNet contribution 600.00$ 1,000.00$Growth at 6% / 20 years 1,924.28 3,207.14Tax upon withdrawal – (1,282.85)Net cash 1,924.28$ 1,924.28$
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Unlocking federal Life Income Funds (LIFs)Unlocking federal Life Income Funds (LIFs)
� Small balance withdrawals– Age 55– LIF < $22,450 (indexed annually)
� Financial hardship withdrawals– Any age– Unlock up to $22,450
� One-time unlocking of 50%– Age 55– No maximum
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HOT TAX & ESTATE ISSUES FOR INVESTORS
RESP changesRESP changes
� RESP contributions– Can now contribute for 31 years (from 21 years)
� RESP plan length– Must be collapsed after 35 years (from 25 years)
� Access to Education Assistance Payments (EAPs)– Six-month “grace period” after enrolment
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Pension income splittingPension income splitting -- MechanicsMechanicsWho can participate?Who can participate?
� No need to qualify as“retired”
� No age requirement toqualify
� Married / commonlaw– Unless separated at yr-end
� No age requirement toqualify
Pensioner Pensiontransferee
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Pension income splittingPension income splitting -- MechanicsMechanicsWhat isWhat is ““eligible pension incomeeligible pension income””??
A)RPP life annuity
B)RRSP annuityRRIF paymentDC RPP paymentDPSP annuityDPSP instalmentAnnuity taxable element
C) Items in B via spouse/CL death
Pensionincome
Yes
YesYesYesYesYesYes
Yes
Qualifiedpension income
Yes
------
Yes
Age65
Why the
age 65rule?
No OAS – GIS – CPP/QPP – RRSP w/ds – RCA – SDA – EBT – EBP
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Pension income splittingPension income splitting -- MechanicsMechanicsHow does it actually work?How does it actually work?
� Pensioner continues to receiveincome during year
� Joint election at tax time usingnew form T1032
� Up to 50% of eligible pensionincome transferable
� Withheld taxes reallocated withT1032
� Future years’ elections madeannually
T1032
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Benefits of pension income splittingBenefits of pension income splittingThe four benefitsThe four benefits
Push incomeinto a lowertax bracket
ReduceOAS
Clawback
PreserveAge
Credit
Double-upPensionCredit
PensionIncomesplitting
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HOT TAX & ESTATE ISSUES FOR INVESTORS
New RRSP/RRIF creditor protection rulesNew RRSP/RRIF creditor protection rulesBIA amendment processBIA amendment process
Standing senate committee on banking, trade and commerce:“Debtors and Creditors Sharing the Burden”
Bill C-55 – An Act to… amend the Bankruptcy andInsolvency Act… first reading June 2005
Personal Insolvency Task Force Report
2005
2002
2003
Bill C-12 – An Act to… amend the Bankruptcy andInsolvency Act… Royal Assent – December 14, 20072007
Not yet in force…
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HOT TAX & ESTATE ISSUES FOR INVESTORS
IFIC AppearanceIFIC Appearance –– Senate Banking CommitteeSenate Banking Committee
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Interest deductibilityInterest deductibility
� ROC funds
� Line of credit
� Direct tracing
� Spousal loans
� Lipson
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HOT TAX & ESTATE ISSUES FOR INVESTORS
ROC interest deductibilityROC interest deductibility
� Borrow to invest in mutual fund
� Distributions consist partially of ROC
� Is all the interest still deductible?
CRA Technical Interpretation 2007-0236351E5, August 21, 2007
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Update on interest deductibilityUpdate on interest deductibilityCRA administrative practiceCRA administrative practice
ExistingHome LOC
$60K
Dec
Deductibility$0 inv / $60K bal
0%
Bump LOC$40K to $100K
for investing
Jan
Deductibility$40K / $100K
40%
Reduce LOC$20K to $80K
keeping $40K inv
Feb
Deductibility$40K / $80KNow 50%?
No, still 40%.Repayment reducesboth eligible andineligible portions.[TI 2007-0221071 E5]
Solution:Separate LOCs
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Direct tracingDirect tracingHeaps (2008)Heaps (2008)
� Purchased a lot – FMV $630,000– Cash $350,000– Mortgage $280,000– Personal residence on corner
� 100% deductible?– “used exclusively to finance… portion of the property that
was subdivided and sold”
� Pro-rata deductible?– “direct use of the borrowed funds”
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Interest deductibilityInterest deductibilitySpousal loansSpousal loans
� Loans between spouses / partners– No attribution of income /gains if:
� Prescribed rate (4% in 2008 Q2)� Interest paid within 30 days of calendar year
� Example– Loan made Dec. 17, 2007– Interest payable annually (e.g. Dec 17th each year)– Is interest deductible in 2008?
� “payable in respect of the particular year“
CRA Technical Interpretation 2008-0274221I7, April 16, 2008
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Update on interest deductibilityUpdate on interest deductibilitySingletonSingleton
Bank
$300,000
$300,000
Singleton
$300,000
Purchase home
$300,000
Law firm
Home
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Home
Purchase shares$562,500
Update on interest deductibilityUpdate on interest deductibilityLipsonLipson –– SummarySummary
Mortgage:$562,500
Loan:$562,500
Bank
Lipson FamilyInvestments Ltd.
Earl Lipson Jordanna Lipson
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Update on interest deductibilityUpdate on interest deductibilityLipsonLipson –– GAAR?GAAR?
� Provisions of the Act were “misused” and“abused”:– Interest deduction provision and attribution
rules were “used to achieve a purpose forwhich they were never intended.”
� “contrived transaction”
� Lipson appealed – LOST – March 19, 2007
� SCC hearing – April 23, 2008
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HOT TAX & ESTATE ISSUES FOR INVESTORS
The needThe needLegislative purposeLegislative purpose
The purpose of this Act is to encourage long term savings
through registered disability savings plans to provide for the financial security of persons
with severe and prolonged impairments in physical or mental functions.
Canada Disability Savings ActOctober, 2007 draft legislation Section 3 – Purpose
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HOT TAX & ESTATE ISSUES FOR INVESTORS
up 1.9% to 4,417,870
The needThe needPersons who reported having a disabilityPersons who reported having a disability
12.4%
2001 2006
Of those,
1.7Msevere or
very severe
National disability rateParticipation and Activity Limitation Survey 2006: Analytical Report
14.3%
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HOT TAX & ESTATE ISSUES FOR INVESTORS
The needThe needPersons claiming the disability tax creditPersons claiming the disability tax credit
Canadians claiming the disability tax credit in 2005 (last available Statistics Canada data)
514,020How many additional Canadians have a disability
serious enough that they would qualify for the Disability Tax Credit is not known
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HOT TAX & ESTATE ISSUES FOR INVESTORS
The needThe needRDSP overviewRDSP overview
Partially-taxed
Payments
RDSP
Tax-deferredGrowth
NoUse
Restrictions
…
ForPlan
Beneficiary
After-taxContributions
MatchingGrants
QualifyingBonds
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Program qualificationProgram qualificationThe disability tax creditThe disability tax credit
� Beneficiary qualifies for the disability tax credit in the year of establishment
� Is a Canadian resident
� One or more severe and prolonged impairments in physical or mental functions S T A R TS T A R T
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HOT TAX & ESTATE ISSUES FOR INVESTORS
AdministrationAdministrationEstablishing an RDSPEstablishing an RDSP
Qualified RDSP Issuer� Written agreement with
HRSDC� Specimen plan with
MNR� Requires SIN of
beneficiary and SIN or BN of each holder
Plan holder(s)� Beneficiary, if competent � If not, “qualifying person”
– Legal parent if beneficiary is minor
– Guardian, tutor, curator or public agency, per law of the resident province
RDSP
Beneficiary
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HOT TAX & ESTATE ISSUES FOR INVESTORS
AdministrationAdministrationRole of the holderRole of the holder
How to become a holder� Each person or organization
contracting with the plan issuer
� May be joint between parents
� Beneficiary at age of majority – May be made a holder,
but not automatically
� Other successive holders
Scope of role� Principal decision-making
authority, including – Directing investments– Amount of payments– Timing of payments
� Plan to be operated exclusively for the benefit of the beneficiary
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HOT TAX & ESTATE ISSUES FOR INVESTORS
AdministrationAdministrationAbsolute oneAbsolute one--toto--one relationshipone relationship
Beneficiary
=
Plan
Funds in a plan may be transferred from one issuer to another, but the transferor plan must be terminated
in order for the receiving plan to become active
One beneficiaryOne plan
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HOT TAX & ESTATE ISSUES FOR INVESTORS
FundingFundingAllowable contributionsAllowable contributions
� In a given year of contribution, beneficiary must be
– DTC-eligible individual – Age 59 or younger on
December 31, and– A Canadian resident *
� Contributions are not tax-deductible
� Contribution limits– Annual – None– Lifetime – $200,000
* Plan may otherwise continue in-force for a non-resident beneficiary
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HOT TAX & ESTATE ISSUES FOR INVESTORS
FundingFundingAllowable contributorsAllowable contributors
� Only holders have the right to contribute� Others may contribute with the holder’s written consent � Carefully consider current and future availability of grants and bonds
ExampleWell-meaning grandparent wishes to make a large lump sum contribution to a grandchild’s RDSP
Dilemma for plan director– Accept the contribution and possibly lose future grants,
or– Decline inheritance to preserve availability of future grants
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Canada Disability Savings Bond (CDSB)
Canada Disability Savings Grant (CDSG)
Funding Funding Federal assistanceFederal assistance
� Matching grants� “Net family income”
<$75,770– $3 for $1 on first $500– $2 for $1 on next $1,000
� NFI over $75,770– $1 for $1 on first $1,000
� Lifetime maximum– $70,000
� Available until age 49
� Free bond assistance– Independent of
contributions� NFI under $21,229
– Full amount of $1,000� NFI from $21,229 to $37,884
– Clawback range� Lifetime maximum
– $20,000� Available until age 49
$ $
All income figures are for 2008
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HOT TAX & ESTATE ISSUES FOR INVESTORS
FundingFundingGovernment assistance Government assistance –– Whose Whose ““net family incomenet family income””??
“Net family income” is determined by considering the age and spousal status of the beneficiary
Combined net income of
beneficiary’s parents
Beneficiary’s own net income, even
if continuing to live with parents
If cohabiting with a spouse or common-
law partner, their combined net income
18
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HOT TAX & ESTATE ISSUES FOR INVESTORS
FundingFundingHow many people will benefit?How many people will benefit?
Finance Canada has estimated that:
�As many as 180,000 beneficiaries will qualify for CDSG support
�And of those, as many as 105,000will also qualify for CDSB support
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HOT TAX & ESTATE ISSUES FOR INVESTORS
RDSP RDSP –– FundingFundingFederal assistance summary tableFederal assistance summary table
Canada Disability Savings Grant
3 to 1 (300%) on first $500
2 to 1 (200%) on next $1,000
1 to 1 (100%) on first $1,000 – – –
Canada Disability Savings Bond
No personal contribution required
Total potential CDSG and CDSB
Up to $21,229
1,500
2,000
1,000
4,500
21,229to 37,884
1,500
2,000
500*
4,000
37,884to 75,770
1,500
2,000
–
3,500
Over 75,770
–
–
1,000
–
1,000
*Average amount of CDSB, assuming even distribution of families over income range
Family income thresholds (2008)
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HOT TAX & ESTATE ISSUES FOR INVESTORS
PaymentsPaymentsTiming and amount Timing and amount –– General rulesGeneral rules
LDAP: Lifetime disability assistance payment � Must begin no later than year beneficiary turns 60
� Maximum FMV .annually � (Greater of 80 or Age) +3 - Age
60
Two types Two types of RDSP of RDSP
paymentspayments
DAP: Disability assistance payment� Only allowed if specified in the plan documentation� Generally not subject to any LDAP constraint (see below)
restricting either amount or timing of payments
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HOT TAX & ESTATE ISSUES FOR INVESTORS
In a calendar year when:
PaymentsPaymentsException when Exception when maximummaximum and and minimumminimum payments applypayments apply
Total of all past grants & bonds paid
Total of all past contributions made >>
60Maximum payment
cannot exceed LDAP calculation
Except where life expectancy < 5 years
Maximum & minimum are equal to
LDAP calculation
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HOT TAX & ESTATE ISSUES FOR INVESTORS
PaymentsPaymentsAssistance holdback amountAssistance holdback amount
� Running tally of all grants and bonds in the 10 years prior to any disability assistance payment
� Full amount must be paid back to the government upon any disability assistance payment– Earnings and growth on those funds do not have
to be sent to the government
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HOT TAX & ESTATE ISSUES FOR INVESTORS
PaymentsPaymentsPurposePurpose
No restrictions
on the purpose to which
a disability assistance payment
is put
RDSP
Beneficiary
$ Payment
$ Use
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HOT TAX & ESTATE ISSUES FOR INVESTORS
PaymentsPaymentsTaxationTaxation
Each disability payment is a blended return
taxed to the beneficiary
Grants, bonds, and all earnings
Taxable
All contributions
Non-taxable
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HOT TAX & ESTATE ISSUES FOR INVESTORS
PaymentsPaymentsEffect on incomeEffect on income--tested government disabilitytested government disability supportssupports
Federal supports� RDSP income is partially taxable
– Beneficiary is the person taxed on the payments
� Amendments have been made to federal legislation to preserve
– Old Age Security– GST credit– Canada Child Tax Benefit
Provincial supports� BC Exempts assets and income� AB No official response� SK No official response � MB No official response� ON No official response� QC Intention to exempt� NB No official response� NS No official response� PE No official response � NF Exempts assets and income
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HOT TAX & ESTATE ISSUES FOR INVESTORS
PaymentsPaymentsPotential client accumulation across 25 yearsPotential client accumulation across 25 years
Net family income*: Annual deposits (Year 1 shown)*
ContributionsBondsGrantsTotal
Total contributions over 25 years Approximate values: Year 25 @ 5.6%
Available for payments at year 25
Accumulation including holdback
$ 20,000
5001,0001,5003,000
12,500
138,000
158,000
$ 40,000
1,000–
2,5003,500
25,000
183,000
218,000
$ 80,000
1,500–
1,0002,500
37,500
184,000
229,000
$10/wk $20/wk $30/wk
*Assumes child is presently 10 and will fully qualify for bonds & grants at 18
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HOT TAX & ESTATE ISSUES FOR INVESTORS
PaymentsPaymentsDetails of $20,000 NFI example at 5.6% growthDetails of $20,000 NFI example at 5.6% growth
Contributions $12,500
Net family income $20,000Annual contributions $500
Bonds $20,000Grants 37,500Growth on B & G 73,535Growth on contributions 14,888
Subtotal 145,923Less holdback 20,000
Net available for payments 125,923
Gross available $ 138,423
$0
$40,000
$80,000
$120,000
$160,000
5 10 15 20 25
Grants/Bonds growthGrants/BondsContribution growthContributions
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Donation of appreciated securitiesDonation of appreciated securities
�Elimination of capital gains tax on donations of appreciated securities to charity– Publicly-listed stocks– Mutual funds, segregated funds
� Effective May 2, 2006
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Update on donation tax sheltersUpdate on donation tax shelters
� Issue:– Fair market value of prints for purposes
of donation receipt� May 2, 2005
– Klotz v. R. [2005 FCA 158]
� November 21, 2005– CVI Art Management– Nash, Quinn, Tolley [2005 FCA 386]
� April 20, 2006– Klotz, Nash, Quinn, Tolley– Supreme Court of Canada
Leave denied
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Beware tax sheltersBeware tax shelters……
“If it sounds too good to be true, don’t fall for it.Taxpayers need to know that the Canada Revenue Agency
(CRA) is auditing all tax shelter gifting arrangements.”CRA – August 13, 2007
� 26,000 individuals audited � $1.4 billion denied� 20,000 taxpayers underway � $550 million� 50,000 taxpayers to be audited…� November 2007 – Registered Charity suspended
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Charitable donation tax sheltersCharitable donation tax shelters
� International Charity Association Network– “Global Learning Gifting Initiative”
� November 28, 2007 – CRA suspended for one year� Donors
– 2005 - 12,177– 2006 - 22,674
� Revenues: 2001 - $528,000 � 2005 - $314 million� “ICAN now ranks first in Canada in terms of the value of donation
receipts issued in 2006 - $464 million”� United Way of Greater Toronto issued $95,513,617 in tax-receipted
gifts in 2006– 165 full-time and 43 part-time positions
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Charitable donation tax sheltersCharitable donation tax shelters
� International Charity Association Network– “Global Learning Gifting Initiative”
� April 2, 2008 – Federal Court of Appeal
“The public has a legitimate interest in the integrity of the charitable sector. It is reasonable for the Minister to
attempt to safeguard that integrity by carefully scrutinizing tax shelter schemes involving charitable
donations of property and, where there are reasonable grounds to believe that the property has been
overvalued, by taking appropriate corrective action.”
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Banyan Tree Class ActionBanyan Tree Class Action
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Charitable donation tax sheltersCharitable donation tax shelters
� February 27, 2008 - Banyan Tree Foundation Gift Program
� Class Proceedings Act, 1992 on behalf of the class of persons who participated in 2003 - 2007
� Participants borrowed substantially all of the funds donated and actually paid in cash only a small portion of the total donation amounts
� Law firm Fraser Milner Casgrain LLP is also named– Issued favourable tax opinion letters which were a
necessary pre-requisite to the promotion of the gift program to participants
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HOT TAX & ESTATE ISSUES FOR INVESTORS
Charitable donation tax sheltersCharitable donation tax shelters
� Francis Jude Wilson Foundation� March 5, 2008 – CRA revoked registered charity status.
"The result of these arrangements is that, in essence, the Charity received in actual cash returns from the tax
shelters a mere $23,716 in fiscal 2005 and $81,951 in fiscal 2006 yet issued receipts totaling $10,560,650.”
“Preponderance of the Charity’s funds are directed primarily to the benefit of the tax shelter promoters and to
the promotion of the tax shelter arrangement while a scant percentage reverts back to the Charity.”
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HOT TAX & ESTATE ISSUES FOR INVESTORS
CIFPsCIFPs Annual ConferenceAnnual Conference
May 7, 2008May 7, 2008
Jamie GolombekJamie Golombek CA, CPA, CFP, CLU, TEPCA, CPA, CFP, CLU, TEPVice President, Tax & Estate PlanningVice President, Tax & Estate Planning
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