EPCA Presentation April 16 2008 - Rick Gendemann

1. TAX SYSTEM OVERVIEW
FAMILY TRUST
&
ESTATE PLANNING OPPORTUNITIES
Presented By:
Rick Gendemann, CA
of
Manning Elliott LLP
April 18, 2007

2. Agenda for Discussion
• Federal Budget 2007 Highlights
• Income Tax Integration Model
• Family Trusts as an Asset Holding and
Estate Planning Tool
• Testamentary Trust and Estate Planning
• Alter Ego and Joint Partner Trust Planning

3. 2007 Federal Budget
• No new changes in federal corporate tax
rates
• Confirmation of previous tax rate
reductions
– 21% to 20.5% effective January 1, 2008
– 20% effective January 1, 2009
– 19% effective January 1, 2010
– 18.5% effective January 1, 2011

4. 2007 Federal Budget
• Significant changes to Capital Cost
Allowance (Depreciation) Rates
– New rates apply to acquisitions after March 19,
2007
– Designed to be more in line with useful life of
the asset
– Some rate changes are temporary measures

5. 2007 Federal Budget
• Capital Cost Allowance Changes
Current New
Buildings used for manufacturing 4% 10%
Other non-residential buildings 4% 6%
Computer equipment 45% 55%
Natural gas distribution lines 4% 6%
Liquefied natural gas facilities 4% 8%
Manufacturing equipment increased to 50% straight line for assets
acquired on or after March 19, 2007 and before 2009

6. 2007 Federal Budget
• Corporate tax instalment thresholds
increased to $3,000 for years beginning in
2008
• Frequency for instalments extended to
quarterly from monthly if taxable income
does not exceed $400,000 in current or prior
year
• Tax remittance thresholds also increased for
payroll source deductions and GST

7. 2007 Federal Budget
• Investment tax credits (ITC) available to
businesses that create one or more new child
care spaces in a new or existing licensed child-
care facility
• ITC is 25% of eligible cost to maximum of
$10,000 for each space created

8. 2007 Federal Budget
• Key personal tax incentives
– Increased lifetime capital gains exemption limit
to $750,000 from $500,000 for gains realized
on sale of qualified farm/fishing property and
qualified small business corporation shares
– Deferral of RRSP conversion to RRIF until age
71

9. 2007 Federal Budget
• Key personal tax incentives
– Scholarships and bursaries from elementary
and secondary schools exempt for 2007
– Public transit tax credit introduced
– Spousal credit increased to match basic credit
– Increase in RESP contribution and matching
limits
– New child tax credit claim that will provide tax
relief of up to $310 per child under 18

10. New Tax Regime for Dividends
• Two tiered tax system effective in 2006 for
dividends received
• Eligible dividends now taxed at maximum rate of
18.47% in 2007 for a BC resident
• Eligible dividends effectively are from corporate
retained earnings previously subject to high rate
corporate tax on active business earnings

11. New Tax Regime for Dividends
• New dividend tax rates change planning for flow
through of income through a private company
• Bonus down strategies need to be revisited
• Deferral of taxes may outweigh flow through tax
cost until 2010 when there is no net flow through
cost disadvantage

12. Tax Integration Revisited
• Refer to Handout schedule for 2007 tax flow
through example
• If corporate active business income in excess of
$400,000 there is a deferral benefit of 9.58% and
future tax cost of 2.59%
• Consider opportunity to utilize funds from deferral
in company to fund expansion, retire debt, etc.

13. FAMILY TRUST PLANNING
• Structuring of the trust arrangement
– Asset ownership and control
– Role and responsibility of trustee
– Beneficiary entitlements

14. FAMILY TRUST PLANNING
• Tax effects on transfer of assets in and out
of the family trust
– Minimize capital gains on transfer in
– Advantage of tax deferred transfer of assets out
to beneficiaries
– Timing of transfers out to beneficiaries

15. FAMILY TRUST PLANNING
• Planning opportunities and uses of the
family trust structure to hold assets
– Asset control versus beneficial interest in value
of trust assets
– Protection of family assets
– Tax minimization on future value growth
– Tax minimization through income splitting

16. FAMILY TRUST PLANNING
• Asset control versus beneficial interest in
value of trust assets
– Trustee controls assets for benefit of
beneficiaries
– Can separate control from beneficial ownership
– Deferral available on giving up control

17. FAMILY TRUST PLANNING
• Protection of family assets
– Restricted beneficiary entitlement to ownership
through discretionary nature of trust
– Marital asset protection for parents and children
of overall family assets
– Creditor protection for family members and
family assets

18. FAMILY TRUST PLANNING
• Tax minimization on future value growth
– Planning for estate freeze if desired
– Future growth accrues to potential beneficiaries
on a tax deferred basis
– Tax deferred roll out of assets to beneficiaries
in future

19. FAMILY TRUST PLANNING
• Tax minimization through income splitting
– Flow through nature of trust income realized
– Tax cost on income retained in an inter vivos
discretionary family trust
– “Kiddie Tax” impact for income allocated to
beneficiaries under 18 years old
– Capital gain accrual not caught by kiddie tax
regime

20. FAMILY TRUST PLANNING
• Estate Planning for Your Family
– Structuring your financial affairs to:
• Minimize taxes on death
• Maximize wealth preservation for your beneficiaries
• Planned asset/wealth transfer to beneficiaries

21. FAMILY TRUST PLANNING
• Freezing the Value of Your Estate
- Locking in today’s value of investments
• Fix the capital gain to be realized on death
• Provide sufficient capital for retirement
• Allow for growth of investments to accrue to
beneficiaries of your Estate

22. FAMILY TRUST PLANNING
• Freezing the Value of Your Estate
• Transfer your investments to a family holding
company or a family trust
• Allows for continued control over assets during
your lifetime
• Ability to draw down capital in a structured manner
- Can plan for tax effect each year of draw down
• Provides capital growth for beneficiaries

23. FAMILY TRUST PLANNING
Freezing the Value of Your Estate
(Example using a company)
Children
FMV of assets - $1 million
Cost of assets - $500,000
Parents
Capital gain - $500,000
Receive preferred fixed value Non voting shares
shares from company to fund retirement (growth shares)
Voting shares
(fixed preferred) Family
Holding
Company

24. FAMILY TRUST PLANNING
Freezing the Value of Your Estate
(Example using a family trust)
Children
FMV of assets - $1 million (Beneficiaries)
Cost of assets - $1 million Parents
Capital gain - $ Nil
Receive promissory note from
(Trustees)
trust to fund retirement
- Parents as trustees control trust Family
- Parents manage assets during lifetime Trust
- Parents determine distribution of
assets to children in future (flexible)

25. FAMILY TRUST PLANNING
• Freezing the Value of Your Estate
– Summary of Advantages
• Freezes amount of taxes payable on death
• Provides for growth in asset value to accrue for the
benefit of beneficiaries ( Wealth Preservation )
• Provides structured retirement income planning
• Can still control assets during lifetime
• Potential to defer taxes on asset growth to next
generation

26. ESTATE & TRUST PLANNING
• Planning opportunity for Testamentary
trusts created on death of individual
– Effective planning with multiple testamentary trusts
created in a Will (separate trusts for each beneficiary)
– Ability to access multiple low marginal tax rates if
income retained and taxed in the estate’s hands
– After tax funds can then be distributed as tax free
capital to beneficiaries

27. ESTATE & TRUST PLANNING
• Probate Fee Minimization
• Structuring your financial affairs to:
• Avoid payment of probate on death (1.4% of Estate)
• Avoid public disclosure of deceased’s assets
• Planned asset/wealth transfer to beneficiaries
without potential for Will’s Variation challenges
• Substitute for power of attorney (representation
agreement)

28. ESTATE & TRUST PLANNING
• Probate Fee Minimization
– Two new types of Inter vivos Trusts:
• Alter Ego Trust
• Joint Partner Trust

29. ESTATE & TRUST PLANNING
• Alter Ego and Joint Partner Trusts
– Conditions for use:
• Taxpayer must be 65
• Taxpayer (and/or spouse) entitled to receive trust
income during lifetime
• No other person entitled to income or capital until
death of taxpayer (and spouse)

30. ESTATE & TRUST PLANNING
• Closing Thoughts and Comments
• Family and estate planning is on ongoing process
for not only ourselves but also for our clients
• To achieve one’s family goals and objectives
requires creation of a plan of attack
• Planning process needs to be monitored and
evaluated to ensure overall goals and objectives
continue to be met

31. FAMILY TRUST PLANNING
Closing Thoughts and Comments
Leave you with this quote
“If you fail to plan
you plan to fail”