The benefits of Corporate Class investing

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The benefits of Corporate Class investing

• Paul McVean, CGA, CFP, TEP
• Regional Vice-President, Wealth Planning

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Benefits of wealth planning

• Maximize asset values
• Minimize tax now and later
• Minimize risks of untimely death, disability,
  incapacity
• Ensure wealth is ultimately transferred
  efficiently and effectively
• Avoid family disputes, costly estate litigation

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Referrals you can make

• Tax accountants/lawyers for corporate
  reorganizations, business sale and succession,
  professional incorporation
• Corporate lawyers for shareholder agreements
• Estate planning lawyers for wills, trusts, estate
  administration and estate litigation
• Family law lawyers
• U.S. tax/estate planning experts

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Ideal clients for Corporate Class

• Owners of successful operating businesses
• sale, succession, surplus income
• Individuals who pay tax on their investment
  portfolios
• Families with significant assets and/or
  investment holding companies
• Seniors looking for retirement cash flow

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Investment return Whats important
Client focus

• Return on investment
• Less fees
• Subtotal
• Less income taxes
• WHATS IMPORTANT!!!

Media focus
Advisor focus
My focus
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2012 top personal tax rates Ontario
29.54
23.21
46.41
100
76.79
70.46
53.59
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Investment structures

• Investors hold securities directly
• Interest, foreign income and dividends are taxed
  each year
• Capital gains taxed when triggered
• Rebalancing or reallocating the portfolio is a
  taxable event
• Drawing out capital may be a taxable event

Segregated holdings
Investor

• Govt Corporate Bonds
• High Yield Bonds, Pref Shares
• Domestic Foreign Equity

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Investment structures
S.132(6) (7) of ITA

• Investors hold units of trusts that hold
  securities
• Other income, foreign income and dividends are
  distributed and taxed each year
• Capital gains taxed when triggered
• Rebalancing or reallocating the portfolio is a
  taxable event
• Drawing out capital may be a taxable event

Mutual/pooled fund trusts
Investor

• Govt Corporate Bonds
• High Yield Bonds, Pref Shares
• Domestic Foreign Equity

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Investment structures

• Investors hold tracking shares of a corporation
  that holds securities
• Investor may receive minimal distributions of
  capital gains and/or Cdn dividends
• Rebalancing or reallocating the portfolio is a
  non-taxable event (S.51 of ITA)
• Drawing out capital may be a non-taxable event

Corporate Class
Investor
Mutual fund corporation S. 131(8) of ITA

• Govt Corporate Bonds
• High Yield Bonds, Pref Shares
• Domestic Foreign Equity

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How is a mutual fund corporation designed to work?
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Diversified portfolio
Typical 60/40 diversified investment portfolio
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Eg. Tax on a diversified portfolio
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Eg. Tax on a Corporate Class portfolio
1,285 of tax versus 15,715 on non-corporate
class structureSavings of 14,430!!!
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Keys to the Corporate Class structure

• For the structure
• Maintain proper balance of equity to fixed income
  for entire class
• Equity greater expenses than taxable yield,
  significant unrealized growth
• Fixed income taxable yield exceeds expenses,
  not as significant unrealized growth
• Structure is run to have taxable yield
  deductible expenses on an annual basis
• For the investor
• Elimination of capital taxes
• July 1, 2008 federal capital taxes eliminated
• July 1, 2010 Provincial capital taxes
  eliminated
• Externally charged tax-deductible fees
• Where available

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Benefit of tax-deductible fees

• Holding non-registered assets in this version of
  Corporate Class may actually create annual tax
  savings instead of an annual tax cost!

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Corporate Class After-tax benefits
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Benefits
Corporate Class structure four main benefits

• Exposure through portfolio to underlying
  securities that produce a mixture of interest,
  foreign income, Cdn dividends and capital gains,
  but return on investment ultimately taxed
  preferentially as Cdn dividends and/or capital
  gains
• Taxes deferred until funds actually withdrawn
  from the portfolio
• If underlying capital gains are very significant,
  capital gains could be distributed to
  shareholders (T5 slip)
• Chance to withdraw from portfolio tax-free (see
  4)
• Tax-free rebalancing
• T-Class tax-free withdrawal of capital
• Structured as a return of capital
• Greater spending power without additional
• risk to the portfolio!

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FMV comparison
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Spending power
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Accumulation / spending

• Age 40 to 60
• 25K/yr for 20 years
• Diversified portfolio averaging 7.75

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Accumulation / spending
Option 1 Equal Cash flow For 25 Years
Non Corporate Class Corporate Class
Income 41,350 41,350
Year 25 FMV 0 1,568,000
Year 25 After-tax 0 1,210,000
Option 2 Maximize Cash flow For 25 Years
Non Corporate Class Corporate Class
Income 41,350 66,550
Year 25 0 0
Tax efficiency in this model equal to
approximately 3.25 better after-tax returns!!!
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Corporate ClassPlanning opportunities
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Corporate Class planning tips

• Corporate Class may allow investors to use
  capital losses earlier
• Return on investment generally takes the form of
  realized/unrealized capital gains, which can be
  fully offset by previous capital losses
• Corporate Class means that income splitting with
  investment dollars may no longer make sense
• Keep tax deduction with higher income-earning
  family member
• Fee deduction may help offset high-tax corporate
  income
• ABI gt 500K, other forms of investment income
  (interest, foreign inc.)
• Corporate Class allows for even more efficient
  charitable donation planning
• Take advantage of 0 inclusion rate when donating
  marketable securities
• Bonus savings when donating securities through a
  corporation

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Charitable donations using Corporate Class
Investment Holdco

• Donate 30K Cash
• Capital gain of 20K
• Corp tax 4,667
• CDA 10K

• Donate 30K In-Kind
• Capital gain of 20K
• Corp tax 0
• CDA 20K

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Charitable donations using T-Class
Investment Holdco

• Donate 30K In-Kind
• Capital gain of 30K
• Corp tax 0
• CDA 30K

T-Class from Account 1 to Account 2
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Corporate Class planning tips

1. Corporate Class allows for interesting income
   splitting opportunities with low income family
   members, possibly using corporations

• Avoid paying refundable tax
• Pay out CDA annually to Dad as S/H cr.
• Unwind tax-free
• 10 total tax

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Corporate Class planning tips

• Retirement funding
• Use three pools of assets (reg. non-reg. and
  corp)
• Tax-efficient withdrawals from corp account
• Maximize use of low tax brackets to maximize
  ultimate estate value/retirement spending
• Create income if/when required by
• Registered account withdrawals
• Non-registered triggering of capital gains
• Dividends from corporation
• Use Capital Dividend account

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Client Scenario
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Client example

• Peter Karen Smith
• Business owners
• 5 years from retirement
• Currently drawing 125,000 salary each
• Contributing to RRSPs
• Spending requirement 120,000 per year
• Investible assets
• 300,000 non-registered
• 650,000 registered
• 1 million corporate

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Client example

• Salary versus dividends

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Client example
Assuming 0.5 eligible dividend distribution,
4.5 unrealized growth
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Client example

• Salary versus dividends
• CPP
• RRSP space
• EHT
• Discipline
• Corporate class advantage

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Client example

• Corporate tax on investment income

Assuming Ontario 2012 Income Tax Rates (not
including new 2 surtax)
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Client example

• Retirement funding
• 5 buckets when and where to dip
• When to save tax - now versus later
• Using marginal tax brackets effectively
• Issues with registered funds
• Importance of T-Class
• Break the link between cash flow and tax
• How to use CDA RDTOH
• Trigger capital gains on purpose?
• Importance of discretion

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Client example
Assumes 6.92 gross return, 2 external fee, 0.5
eligible dividend distribution
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Client example

• Estate planning
• Results of retirement funding
• Registered assets lower less terminal tax
• Significant unrealized capital gains on
  non-registered investments personal
  corporation
• Pipeline strategy to unlock corporate assets
• Estate incorporates Newco
• Newco purchases existing Holdco from estate
• Holdco wound-up into Newco 88(1)(d) bump
• Newco wound-up and assets distributed

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Summary

• Focus on wealth planning
• Differentiate yourself from salespeople
• Build COI networks for referrals
• Corporate class provides better after-tax returns
• Corporate class provides unique, integrated
  planning opportunities
• Tie the product to client goals and objectives
• Hit the Hot Buttons!

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Questions?
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Thank you

• Commissions, trailing commissions, management
  fees and expenses all may be associated with
  mutual fund investments. Please read the
  prospectus before investing. Unless otherwise
  indicated and except for returns for periods less
  than one year, the indicated rates of return are
  the historical annual compounded total returns
  including changes in security value. All
  performance data assume reinvestment of all
  distributions or dividends and do not take into
  account sales, redemption, distribution or
  optional charges or income taxes payable by any
  securityholder that would have reduced returns.
  Mutual funds are not guaranteed, their values
  change frequently and past performance may not be
  repeated. CI Investments and the CI
  Investments design are registered trademarks of
  CI Investments Inc.