Below is a great article written by Tim Cesnick and published in The Globe and Mail.
Family trusts and life insurance options are often overlooked when thinking of how to pay for a post-secondary education
Now that my kids have decided they want to be brain surgeons, I’ve been thinking about how to pay for their post-secondary education. Two methods of saving for a child’s education are often overlooked. The first is a family trust, and the second is life insurance.
FAMILY TRUST
A trust is simply a legal relationship between three parties: The settlor (the person creating the trust), the trustee (the person who holds and controls the property of trust) and the beneficiary (the person for whom the property of the trust is being held). The nice thing about a trust is that it’s possible to have the income of the trust taxed in the hands of the beneficiaries, who may pay little or no tax if they are minors and have little or no other income.
Setting up a trust does come with a cost, so it’s not generally going to make sense unless you’re willing and able to commit a sustantial sum to the trust over a short period of time. You can make this a loan to the trust if you want, so that you can take back your capital again later, as a repayment of the loan.
Once the money is in the trust, any interest and dividend income earned in the trust will be attributed back to you to be taxed in your hands while the beneficiaries of the trust are minors (unless you charge the taxman’s prescribed rate of interest on a loan to the trust), but capital gains can be taxed in the hands of the beneficiaries. Also, any second generation income (that is, income on the income, even if it’s interest or dividends) can be taxed in the hands of your children.
You can pay for all or part of your child’s education costs out of the income or capital of the trust. The taxman will consider payments to third parties, including reimbursements to you, as being paid to the beneficiary as long as those payments were clearly for the benefit of your child. To the extent that little or no tax has been paid on the income of the trust over the years (by having income taxed in your child’s hands), you’ll effectively be using pre-tax dollars to pay for the child’s education.
The benefits of the trust include: protection of the assets of the trust from creditors, splitting income with your children, maintaining control over the assets, and flexibility to use the trust funds for things other than education. There’s a lot to consider when setting up a trust.
LIFE INSURANCE
Life insurance is an interesting tool because you can accumulate investments inside a policy on a tax-sheltered basis. Further, if it is the life of your child that is insured, you’re able to transfer ownership of the policy, including the accumulated investments inside the policy, to your child free of tax once he or she reaches age 18. Your child can then make withdrawals of those investments from the policy to pay for education. While those withdrawals are generally going to be taxable to your child, he’ll likely pay little or no tax if he has little or no other income.
One of the benefits of choosing a whole life insurance policy is that the returns have been incredibly stable over the years, even throughout 2008. The reason for this is that the insurance companies are allowed to smooth, or average, the returns you receive over a period of years.
Consider some numbers. If you pay $2,750 annually into a whole life policy each year until your child is 18, there could be $70,000 to $75,000 in the accumulating fund to be accessed (varies by insurance company), assuming a 5 per cent annual return inside the policy. If you set aside the same $2,750 in a tax-free savings account (TFSA) you could end up with approximately $84,000 earning that same 5 per cent, but this would assume a portfolio that is largely in equities that is subject to the volatility of the markets. If you earned, say, 6 per cent in the TFSA, you’d have close to $92,000 in this case, with the volatility.
Life insurance also offers asset protection, flexibility to use the assets for any purpose, and a death benefit ($265,000 in my example) over and above the investment component of the policy if your child passes away prematurely. Insurance is just another tool to consider.
As usual, please do not hesitate to contact Hugues Boisvert should you have any questions. hboisvert@hazlolaw.com.com
Wednesday, March 27, 2013
Tuesday, March 26, 2013
Business Owners: Why do you need a Holding Company (Holdco)??
Here is a great article written by Rolland Vaive, CA, TEP, CPA - an excellent accountant based in Ottawa and specializing in complicated tax matters.
_______________________________________________________
Speak to any tax accountant for more than a minute and they'll surely be talking about holding companies, or HoldCo's for short.
A holding company is not a term which is defined in the Income Tax Act. It is a term which is used to define a corporation which holds assets, most often income generating investment assets. It does not typically carry on any active business operations.
A HoldCo can arise for a variety of reasons. In the early 1990's, the personal marginal tax rate in Ontario was slightly higher than 53%, while the corporate rate of tax was considerably lower than that. High income individuals who had significant investment assets could realize a tax deferral by transferring their investment assets to a HoldCo, particularly in situations where they did not need the income which was being generated by the investments. This breakdown between the corporate rate of tax and the personal rate of tax lead to many HoldCo's being formed.
HoldCo's may also come about as an effective means of creditor proofing profitable operating companies, as a result of Canadian estate planning, or as a means of avoiding U.S. estate tax and Ontario probate fees.
Regardless of their origins, the investment income generating HoldCo is taxed in an unusual manner, which I will attempt to explain.
The underlying concept of HoldCo taxation is called "integration". In general terms, integration means that an individual should pay the same amount of tax on investment income if they earned it personally or if they earned it through a corporation and withdrew the after-tax income in the form of dividends. When we look at some real numbers, you will see that this in fact generally holds true. However, it is possible to exploit some breakdowns in integration, at which time it may become quite beneficial to earn your investment income through a HoldCo.
Let's look at the theory. We often hear about how corporations are taxed at low tax rates. In situations where a private company is earning income from active business operations carried on in Canada, that is quite true. In these situations, the rate of tax would be a flat tax rate of 18.620% if the company was resident in Ontario. The other provinces have similarly low rates of tax on "active business income". The low rate of tax does not apply to investment income, which is what the HoldCo would be generating.
For an Ontario resident private company generating investment income, the combined Federal and Provincial rate of tax would be a flat 49.7867% on all forms of investment income, other than dividends from other Canadian corporations. Bear in mind that only 1/2 of capital gains are included in income, so the effective corporate rate of tax on capital gains would be 24.8934%.
A portion of the tax that HoldCo pays each year on its' investment income goes into a notional pool called the RDTOH pool. This is an acronym for "refundable dividend tax on hand". Of the 49% rate of tax that is paid by the corporation, 26.67% will go into the RDTOH pool each year and is tracked on the corporation's Federal tax return. If HoldCo pays a taxable dividend to its' shareholders in a particular year, it gets back part of its RDTOH pool. More specifically, the company will get back $1 for every $3 of dividends that it pays. This RDTOH recovery is called a dividend refund, and would be a direct reduction of the corporation's tax liability for the year. If the corporation pays a large dividend to a shareholder, the dividend refund would also be large and may result in the company actually getting money back from the Canada Revenue Agency. In short, the HoldCo will pay a large tax liability on its investment income up front, but it can get a large portion of it back at a later date if it pays out dividends. The dividend refund is an attempt to compensate for the fact that the dividend will attract tax in the hands of the shareholder. Without this mechanism, the 48% rate of tax on investment income combined with the tax paid by the shareholder on the dividend that they receive would result in an onerous rate of tax.
It is possible that a second notional tax pool may arise in HoldCo if it is generating capital gains on its' investment assets. You will recall that only 1/2 of capital gains are included in income. The other 1/2 portion of the capital gain which is not included in income will get added to the capital dividend account, or "CDA", of HoldCo. The CDA balance is something which needs to get tracked by the company on a regular basis, since it does not appear anywhere on the company's financial statements or tax returns. The CDA is important because it is possible for HoldCo to pay a dividend to a shareholder and elect to pay it out of the CDA balance, making the dividend tax-free to the shareholder. If a company realizes a capital gain of $10,000 , only $5,000 will be included in taxable income, with the remaining $5,000 being added to the company's CDA balance. The company could then pay a $5,000 dividend to the shareholder. By electing to do so out of the CDA balance, the shareholder would not be taxed on the dividend.
Lets look at this in conjunction with the RDTOH balance. If the company pas a dividend to a shareholder out of the CDA balance, it is tax free to the shareholder, but it is not going to generate a dividend refund to HoldCo. HoldCo only gets a dividend refund if the dividend is a taxable dividend to the shareholder.
Armed with this theory, we can look at a live example of how this would work. Lets consider the example of an Ontario resident individual who is holding shares that have an adjusted cost base (i.e. tax cost) of $1,000. These shares have experienced a dramatic increase in value, and are now worth $100,000. The individual is going to sell these shares and would like to know if there is any advantage to doing so through a HoldCo. The individual is in the highest marginal tax rate (currently 31.310 % on Canadian source dividends and 46.410 % on everything else). The individual wants the after tax money, so they would withdraw everything from the HoldCo once the shares are sold. If they were to go the HoldCo route, they would elect to transfer their shares to HoldCo at their $1,000 tax cost prior to the sale (to transfer them at fair market value would defeat the purpose), and would have the capital gain realized within HoldCo. In the process of transferring the shares to HoldCo, they could arrange to have HoldCo issue a note payable to them equal to their original $1,000 tax cost.
Integration tells us that selling the shares through a HoldCo should give us the same result as selling the shares personally. If the individual wants to get the money out of the HoldCo following the sale of the shares, they would elect to take part of the proceeds from the share sale out of HoldCo as a non-taxable repayment of their $1,000 note and as a non-taxable payment our of the CDA balance. The remaining cash would be withdrawn from the company as a taxable dividend, leading to a dividend refund in HoldCo.
As this example illustrates, there is no advantage to using the HoldCo to sell the shares even without considering the professional fees associated with the HoldCo. So why do it?
Well, there may be some good reasons for doing it. Firstly, the example assumes that the individual withdraws all of the cash from HoldCo in the year of the share sale, and at a time when they are in the highest marginal tax rate. If the cash from the sale was left in the corporation and withdrawn as a dividend a year or two later when the individual was not in the highest marginal tax rate, then the results may be quite good. The HoldCo would get the dividend refund at a rate of $1 for every $3 of dividends in that later year when the dividend is paid, and the shareholder may not incur a significant tax liability on the dividend that he or she receives.
Alternatively, it may be possible to transfer the shares to HoldCo well before a sale is to happen. In this way, future growth in the value of the shares could be shifted to other family members. When the shares are sold, the growth in value since the time of the transfer could be paid as a dividend to these other family members. If these family members are in a low marginal tax rate, they would not incur much tax on the dividend, and the results could be quite good when compared to the alternative where the shares continue to be held by the individual and sold by him or her personally.
There are a host of issues to be considered before embarking on such an exercise, including the corporate attribution rules and the tax on split income to name but a few.
As always, seek professional advice before undertaking any steps.
_______________________________________________________
Speak to any tax accountant for more than a minute and they'll surely be talking about holding companies, or HoldCo's for short.
A holding company is not a term which is defined in the Income Tax Act. It is a term which is used to define a corporation which holds assets, most often income generating investment assets. It does not typically carry on any active business operations.
A HoldCo can arise for a variety of reasons. In the early 1990's, the personal marginal tax rate in Ontario was slightly higher than 53%, while the corporate rate of tax was considerably lower than that. High income individuals who had significant investment assets could realize a tax deferral by transferring their investment assets to a HoldCo, particularly in situations where they did not need the income which was being generated by the investments. This breakdown between the corporate rate of tax and the personal rate of tax lead to many HoldCo's being formed.
HoldCo's may also come about as an effective means of creditor proofing profitable operating companies, as a result of Canadian estate planning, or as a means of avoiding U.S. estate tax and Ontario probate fees.
Regardless of their origins, the investment income generating HoldCo is taxed in an unusual manner, which I will attempt to explain.
The underlying concept of HoldCo taxation is called "integration". In general terms, integration means that an individual should pay the same amount of tax on investment income if they earned it personally or if they earned it through a corporation and withdrew the after-tax income in the form of dividends. When we look at some real numbers, you will see that this in fact generally holds true. However, it is possible to exploit some breakdowns in integration, at which time it may become quite beneficial to earn your investment income through a HoldCo.
Let's look at the theory. We often hear about how corporations are taxed at low tax rates. In situations where a private company is earning income from active business operations carried on in Canada, that is quite true. In these situations, the rate of tax would be a flat tax rate of 18.620% if the company was resident in Ontario. The other provinces have similarly low rates of tax on "active business income". The low rate of tax does not apply to investment income, which is what the HoldCo would be generating.
For an Ontario resident private company generating investment income, the combined Federal and Provincial rate of tax would be a flat 49.7867% on all forms of investment income, other than dividends from other Canadian corporations. Bear in mind that only 1/2 of capital gains are included in income, so the effective corporate rate of tax on capital gains would be 24.8934%.
A portion of the tax that HoldCo pays each year on its' investment income goes into a notional pool called the RDTOH pool. This is an acronym for "refundable dividend tax on hand". Of the 49% rate of tax that is paid by the corporation, 26.67% will go into the RDTOH pool each year and is tracked on the corporation's Federal tax return. If HoldCo pays a taxable dividend to its' shareholders in a particular year, it gets back part of its RDTOH pool. More specifically, the company will get back $1 for every $3 of dividends that it pays. This RDTOH recovery is called a dividend refund, and would be a direct reduction of the corporation's tax liability for the year. If the corporation pays a large dividend to a shareholder, the dividend refund would also be large and may result in the company actually getting money back from the Canada Revenue Agency. In short, the HoldCo will pay a large tax liability on its investment income up front, but it can get a large portion of it back at a later date if it pays out dividends. The dividend refund is an attempt to compensate for the fact that the dividend will attract tax in the hands of the shareholder. Without this mechanism, the 48% rate of tax on investment income combined with the tax paid by the shareholder on the dividend that they receive would result in an onerous rate of tax.
It is possible that a second notional tax pool may arise in HoldCo if it is generating capital gains on its' investment assets. You will recall that only 1/2 of capital gains are included in income. The other 1/2 portion of the capital gain which is not included in income will get added to the capital dividend account, or "CDA", of HoldCo. The CDA balance is something which needs to get tracked by the company on a regular basis, since it does not appear anywhere on the company's financial statements or tax returns. The CDA is important because it is possible for HoldCo to pay a dividend to a shareholder and elect to pay it out of the CDA balance, making the dividend tax-free to the shareholder. If a company realizes a capital gain of $10,000 , only $5,000 will be included in taxable income, with the remaining $5,000 being added to the company's CDA balance. The company could then pay a $5,000 dividend to the shareholder. By electing to do so out of the CDA balance, the shareholder would not be taxed on the dividend.
Lets look at this in conjunction with the RDTOH balance. If the company pas a dividend to a shareholder out of the CDA balance, it is tax free to the shareholder, but it is not going to generate a dividend refund to HoldCo. HoldCo only gets a dividend refund if the dividend is a taxable dividend to the shareholder.
Armed with this theory, we can look at a live example of how this would work. Lets consider the example of an Ontario resident individual who is holding shares that have an adjusted cost base (i.e. tax cost) of $1,000. These shares have experienced a dramatic increase in value, and are now worth $100,000. The individual is going to sell these shares and would like to know if there is any advantage to doing so through a HoldCo. The individual is in the highest marginal tax rate (currently 31.310 % on Canadian source dividends and 46.410 % on everything else). The individual wants the after tax money, so they would withdraw everything from the HoldCo once the shares are sold. If they were to go the HoldCo route, they would elect to transfer their shares to HoldCo at their $1,000 tax cost prior to the sale (to transfer them at fair market value would defeat the purpose), and would have the capital gain realized within HoldCo. In the process of transferring the shares to HoldCo, they could arrange to have HoldCo issue a note payable to them equal to their original $1,000 tax cost.
Integration tells us that selling the shares through a HoldCo should give us the same result as selling the shares personally. If the individual wants to get the money out of the HoldCo following the sale of the shares, they would elect to take part of the proceeds from the share sale out of HoldCo as a non-taxable repayment of their $1,000 note and as a non-taxable payment our of the CDA balance. The remaining cash would be withdrawn from the company as a taxable dividend, leading to a dividend refund in HoldCo.
As this example illustrates, there is no advantage to using the HoldCo to sell the shares even without considering the professional fees associated with the HoldCo. So why do it?
Well, there may be some good reasons for doing it. Firstly, the example assumes that the individual withdraws all of the cash from HoldCo in the year of the share sale, and at a time when they are in the highest marginal tax rate. If the cash from the sale was left in the corporation and withdrawn as a dividend a year or two later when the individual was not in the highest marginal tax rate, then the results may be quite good. The HoldCo would get the dividend refund at a rate of $1 for every $3 of dividends in that later year when the dividend is paid, and the shareholder may not incur a significant tax liability on the dividend that he or she receives.
Alternatively, it may be possible to transfer the shares to HoldCo well before a sale is to happen. In this way, future growth in the value of the shares could be shifted to other family members. When the shares are sold, the growth in value since the time of the transfer could be paid as a dividend to these other family members. If these family members are in a low marginal tax rate, they would not incur much tax on the dividend, and the results could be quite good when compared to the alternative where the shares continue to be held by the individual and sold by him or her personally.
There are a host of issues to be considered before embarking on such an exercise, including the corporate attribution rules and the tax on split income to name but a few.
As always, seek professional advice before undertaking any steps.
Friday, March 22, 2013
Business Owners - Are you missing out on some serious tax savings???
what is a Corporate Reorganization??
A Corporate Reorganization is a way to reorganize and restructure your company so that you can reap the rewards of the existing tax regulations - often resulting in tens of thousands of dollars of potential tax savings every year into the future.
why do I need a Corporate Reoganization?
As a Business Lawyer, I sometime see situations where businesses are set up with a certain structure to take advantage of particular circumstances that were relevant at the time they were set up, but as we all know, situations change over time.
It is therefore sometimes the case that the favourable conditions existing at the time your corporate structure was put in place are no longer there, and you might end up with a somewhat cumbersome of inefficient structure in today's business climate, particularly from a tax point of view.
On a daily basis, I work with companies in this situation to help them reorganize and restructure so that they can reap the rewards of the existing tax regulations - often resulting in tens of thousands of dollars of potential tax savings every year into the future.
In many situations, for example, I may recommend a corporate reorganization, whether for corporate tax planning, creditor proofing or other organization purposes. I can also assist you in the transfer of assets on a tax-deferred basis from one entity to another, or from one corporation to another. Alternatively, I could recommend amalgamating two corporations or winding up one into the other for tax planning purposes or to rationalize a corporate structure.
Often, I will investigate the options thoroughly and advise you of the best plan to meet with your objectives.
There are many reasons companies may need to be reorganized:
•to establish and implement a family trust in the course of corporate reorganization;
•to create holding companies for creditor-proofing reasons;
•to divide the assets of a corporation among the shareholders;
•to incorporate a business, so that it may be carried on in corporate form;
•to carry out an estate freeze in the most effective manner;
•to transfer a business from a corporation to a partnership to deduct losses, take in a partner, or eliminate capital tax
If you think you are a candidate and would like to know more, I can advise on whether a corporate reorganization is required, the benefits of such a reorganization, and the disadvantages, if any.
Finally, I can also develop a plan to implement the corporate reorganization, and work with your advisors (accountants, financial planners, insurance) to execute the plan.
Please contact me should you wish more information on the above.
A Corporate Reorganization is a way to reorganize and restructure your company so that you can reap the rewards of the existing tax regulations - often resulting in tens of thousands of dollars of potential tax savings every year into the future.
why do I need a Corporate Reoganization?
As a Business Lawyer, I sometime see situations where businesses are set up with a certain structure to take advantage of particular circumstances that were relevant at the time they were set up, but as we all know, situations change over time.
It is therefore sometimes the case that the favourable conditions existing at the time your corporate structure was put in place are no longer there, and you might end up with a somewhat cumbersome of inefficient structure in today's business climate, particularly from a tax point of view.
On a daily basis, I work with companies in this situation to help them reorganize and restructure so that they can reap the rewards of the existing tax regulations - often resulting in tens of thousands of dollars of potential tax savings every year into the future.
In many situations, for example, I may recommend a corporate reorganization, whether for corporate tax planning, creditor proofing or other organization purposes. I can also assist you in the transfer of assets on a tax-deferred basis from one entity to another, or from one corporation to another. Alternatively, I could recommend amalgamating two corporations or winding up one into the other for tax planning purposes or to rationalize a corporate structure.
Often, I will investigate the options thoroughly and advise you of the best plan to meet with your objectives.
There are many reasons companies may need to be reorganized:
•to establish and implement a family trust in the course of corporate reorganization;
•to create holding companies for creditor-proofing reasons;
•to divide the assets of a corporation among the shareholders;
•to incorporate a business, so that it may be carried on in corporate form;
•to carry out an estate freeze in the most effective manner;
•to transfer a business from a corporation to a partnership to deduct losses, take in a partner, or eliminate capital tax
If you think you are a candidate and would like to know more, I can advise on whether a corporate reorganization is required, the benefits of such a reorganization, and the disadvantages, if any.
Finally, I can also develop a plan to implement the corporate reorganization, and work with your advisors (accountants, financial planners, insurance) to execute the plan.
Please contact me should you wish more information on the above.
Thursday, March 21, 2013
Business/Corporate Lawyers…Are you looking for a better alternative?? Employment opportunities with HazloLaw
Business/Corporate Lawyers…Are you looking for a better alternative??
HazloLaw – Business Lawyers for Business Owners, is
a leading Boutique Business law firm headquartered in Ottawa, Ontario. Our Firm
provides entrepreneurs and business owners with strategic, effective and
tailored solutions for their legal and business needs. Through the use of
technology, our business lawyers achieve an exceptionally high level of
personalized service and responsiveness and are recognized for providing
superior counsel and guidance to clients in a wide range of industries -
locally, nationally and internationally. Our Firm is located at 449 Sussex
Drive in the Byward Market; we are expanding with the
following opportunities:
Business Lawyers / Corporate Counsels – 10-15+ years’
experience
We are looking for senior business lawyers with
corporate/commercial law practices to join our growing and innovative business
law group. Our firm is structured to be the ideal platform for business lawyers
who want to focus on their practice and their clients and not the mundane day to
day operations of a law firm. For more information about this opportunity,
please contact our Chief Executive Officer, Hugues Boisvert
today at
hboisvert@hazlolaw.com
Ref. #201363
Business Lawyers - 3-8+ years’ experience
We are looking for business lawyers with three to
eight years of experience in general corporate/commercial matters and who have
developed a client base. Experience in mergers and acquisitions, corporate
reorganization, tax structuring, and corporate/ commercial agreements will be a
decisive factor in the selection process. The positions will appeal to those
looking for personal growth, opportunities to develop technical skills and
financial rewards based on performance. For more information about this
opportunity, please contact our Chief Executive Officer, Hugues Boisvert
today at
hboisvert@hazlolaw.com Ref. #201364
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