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)

Tax Alert (April 2009)

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

U.S. Estate Tax Exemption / Rates

Where are we now?

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)

Solution: U.S. equity mutual funds

Rethinking RRSPs

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 carry-forward room

$10,000 opportunity

$20,000 opportunity (spouses/partners) No attribution

TFSA vs. RRSP – Same tax rate

TFSA vs. RRSP – High/Low

TFSA vs. RRSP – C.D. Howe Report (February 2010)

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

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