welcome cifps delegates

Welcome CIFPs DelegatesMay 7th, 2008

FOR ADVISOR USE ONLY –No portion of this communication may be reproduced or redistributed.

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



AgendaAgenda

1. Budget 2008 – including TFSAs

2. Pension splitting

3. Interest deductibility

4. Registered Disability Savings Plans

5. Charitable giving



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%



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



TaxTax--Free Savings AccountFree Savings Account



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.”



TFSA vs. unregistered savingsTFSA vs. unregistered savings

Source: Department of Finance



TFSA:TFSA: EligibilityEligibility

� Must have Social Insurance Number

� Must be over 18 years of age



TFSA:TFSA: ContributionsContributions

� $5,000 per year (to be indexed)

� Unlimited carryforward of unused TFSA room

� Can recontribute amounts previously withdrawn



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)



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



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



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$



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



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



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



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



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



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



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…



IFIC AppearanceIFIC Appearance –– Senate Banking CommitteeSenate Banking Committee



Interest deductibilityInterest deductibility

� ROC funds

� Line of credit

� Direct tracing

� Spousal loans

� Lipson



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



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



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”



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



Update on interest deductibilityUpdate on interest deductibilitySingletonSingleton

Bank

$300,000

$300,000

Singleton

$300,000

Purchase home

$300,000

Law firm

Home



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



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



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



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%



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



The needThe needRDSP overviewRDSP overview

Partially-taxed

Payments

RDSP

Tax-deferredGrowth

NoUse

Restrictions

…

ForPlan

Beneficiary

After-taxContributions

MatchingGrants

QualifyingBonds



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



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



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



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



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



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



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



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



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



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)



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



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



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



PaymentsPaymentsPurposePurpose

No restrictions

on the purpose to which

a disability assistance payment

is put

RDSP

Beneficiary

$ Payment

$ Use



PaymentsPaymentsTaxationTaxation

Each disability payment is a blended return

taxed to the beneficiary

Grants, bonds, and all earnings

Taxable

All contributions

Non-taxable



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



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



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



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



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



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



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




� 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.”



Banyan Tree Class ActionBanyan Tree Class Action




� 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




� 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.”



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

welcome cifps delegates

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