CIFPs: Tax & Budget 2012 Update

CIFPs: Tax & Budget 2012
Update
Jamie Golombek
Managing Director, Tax & Estate Planning, CIBC Private Wealth Management
May 2012

Agenda
Know your tax rate
Personal tax case update
Taxation of advisors’ commissions
Budget 2012 – select personal tax issues

What are the 2012 tax brackets
Federal Brackets
Rate
$42,707 or less 15%
$42,707 to $85,414 22%
$85,414 to $132,406 26%
Over $132,406 29%

Trivia Question 1
What percentage of Canadian tax-filers had total income less than $50,000 in
2009
a) 35%
b) 45%
c) 55%
d) 65%
e) 75%
49,999 99
49,999 99
50000 00

Trivia Question 2
What percentage of Canadian tax-filers earned
less than $100,000 in 2009
a) 83%
b) 87%
c) 91%
d) 95%
e) 99%
99,999 99
99,999 99
50000 00

Trivia Question 3
What percentage of Canadian tax-filers earned
more than $250,000 in 2009
a) 4%
b) 3%
c) 2%
d) 1%
e) Under 1%
250,000 01
250,000 01

What is this

Case Study
Interest income - $15,000
Eligible dividends - $50,000
Stock
• Proceeds - $100,000
• ACB - $ 38,000
• Commissions $ 2,000

Tax rates – Average v. Marginal
Cash income $125,000
Taxable income $115,500
• Dividends (@ 141%) $70,500
• Capital gains (50%) $30,000
• Interest income $15,000
Marginal Tax Rate 39%
Total Tax: (Fed + ON) $ 16,387
Effective tax rate 14%

A (Non) Typical Family
Income of $100,000
Two kids
RRSP - $18,000
RESP - $ 5,000 (maximize CESGs)
TFSA - $10,000
Tax - $20,000 (net of RRSP refund based on $18K)
Net income after tax - $47,000
• Mortgage
• Groceries
• Life

Clients need help…
RESP
RDSP
TFSA
RRSP
Mortgage

Canadian foreign reporting forms
Canada is looking more carefully at foreign reporting:
• T1134-A: Information Return Relating to Foreign Affiliates that
are not Controlled Foreign Affiliates
• T1134-B: Information Return Relating to Controlled Foreign
Affiliates
• T1135: Foreign Income Verification Statement
• T1141: Information Return in Respect of Transfers or Loans to a
Non-Resident Trust
• T1142: Information Return in Respect of Distributions from and
Indebtedness to a Non-Resident Trust
Reporting is required for all Canadian residents
(including U.S. citizens who reside in Canada)

Report Offshore Stash (T1135)
Foreign income verification statement
More than $100,000 (CDN)
• Funds in foreign bank accounts
• Shares of non-resident corporations
• Foreign real estate
EXEMPT
• Canadian mutual funds
(even if own foreign shares)
Penalty - $25/day (Max $2,500)
If “gross negligence”, penalty
increases to $500/month
(Max $12,000)
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T1135 – Foreign Income Verification Statement
CRA changed its “one chance” administrative policy and assesses
penalties even for first-time failure
2009 & 2010 T1135 cases:
• Leclerc v The Queen (2010 TCC 99)
• Sandler v. AG (2010 FC 459)
• Seabrook et al v The Queen (2009 TCC 532)
2011 Asper cases – 7 companies:
• T1135s not filed from 2000 to 2005, but all income reported
• Penalties (over $75,000) upheld under judicial review
• FCA dismissed appeal
“although the Minister's decision was unreasonable, no practical end
would be served by returning the matter to him for redetermination”

T1135 – Foreign Income Verification Statement
2012 decision
Bruce Douglas
2008 return, due June 15, 2009
• Filed March 2010
$2,500 penalty + interest
Objected – Tax Court of Canada
“(T)his Court has held that even strict penalties
should not be applied if a taxpayer has taken all
reasonable measures to comply with the
legislation.”

Taxation of Insurance Commissions
- Advisors’ Own Policies
CRA’s Interpretation Bulletin IT-470R:
• “where a life insurance salesperson acquires
a life insurance policy, a commission received
by that salesperson on that policy is not
taxable provided the salesperson owns that
policy and is obligated to make the required
premium payments thereon.”
CRA update:
• “where the particular salesperson has
purchased the particular life insurance policy
for personal use rather than investment or
business purposes.”

Taxation of Insurance Commissions
- Advisors’ Own Policies
Bilodeau v. the Queen (2009 TCC 315)
• Two $1 million Transamerica Life UL policies
• Deducted $43,000 of commissions as an expense
Judge: $43,000 of commissions received was
taxable income
• “Had he not been a broker, he would not have
received that commission…he earned the
commission in issue as part of his professional
activities as a broker.”

Taxation of Insurance Commissions
- Advisors’ Own Policies
Li v. The Queen (2009 TCC 530)
• Insurance advisor Linzi Li denied a $7,000
commission income deduction offset
• Judge: “there are no provisions in (the Act) that allow
such a deduction.”

Taxation of Insurance Commissions
- Advisors’ Own Policies
2010 CALU CRA Roundtable
• CRA asked to provide guidance
• Situations or fact patterns
• Apply Bilodeau vs. its administrative position
• “the administrative position described in paragraph 27 of IT-
470R would not apply where the amount of commission income
was significant.”
• CRA stated that its administrative position “is not intended to
apply where the insurance was obtained for investment or
business purposes.”
2012 CRA Technical Interpretation
• Non-taxable policy does not apply to home & auto insurance

Taxation of Insurance Commissions
- Advisors’ Own Policies
Bégin v The Queen (Bégin v The Queen, 2012 TCC 18)
• Deducted premiums paid in order to obtain commissions
• Let policies expire without having to repay commissions
• Profitable = commissions received > premiums paid
• Plan was to “abandon the life insurance policies shortly before
the end of the minimum membership period, which was 24
months.”
• “objective was to earn income by using to his advantage the
system some insurance companies use to pay their
salespersons.”
Judge: Commission earned “while practicing his
profession as insurance agent and is therefore taxable.”
Judge: Premiums were “personal or living expenses” that
are specifically not deductible under the Income Tax Act.

Budget 2012
Changes to the OAS system
Registered Disability Savings Plans (RDSPs)
Employee Profit Sharing Plans
Travellers’ Exemptions
The Penny (A lesson in rounding)

OAS Changes – The Three Pillars
1. OAS/GIS system
2. CPP/QPP system
3. Voluntary tax-assisted savings (RRSPs,
TFSAs, PRPPs)

OAS Increase in Life Expectancy

OAS Decline in Workers Per Senior

OAS – Age Limit
Currently collect at age 65
2012 maximum - $6,481
Clawback
• Starts at $69,562
• …15% up to…
• Ends at $112,772
Moving to age 67

OAS – Age limit – Changes
Implementation begins April, 2023
Ends January, 2029
Won’t affect current OAS recipients
If you are 54 years or older today (born before April 1,
1958)
-- Age 65
Born on February 1, 1962 or later
-- Age 67
Born between April 1, 1958 and January 31, 1962
-- Phase in

OAS Phase-in Chart

Option to Defer OAS Payments
Voluntary deferral of OAS pension for up to five years
Actuarially neutral
Starting on July 1, 2013
Example #1
» Michael turns 65 in
September 2013
» Defers pension to age 66
» Annual pension would be
$6,948 vs. $6,481 (in
2012 dollars)
Example #2
» Rita turns 65 in December
2013
» She forgoes OAS until age 70
» Annual OAS would be $8,814
vs. $6,481 (in 2012 dollars)

OAS/GIS – Proactive Enrolment
Must currently apply to get OAS
Otherwise, can only collect 11 months
retroactively
Grosvenor v AGC, 2011 FC 799
Starting in 2013, proactive enrolment regime to
be phased in (to 2015)

Registered Disability Savings Plans (RDSPs)
• $200,000 lifetime contribution limit
• Age 59 and under to open an RDSP, up to age 49 to
get government funds
• Complex withdrawal requirements

RDSPs - Government Benefits
Matching Canada Disability Savings Grants
(CDSG)
• Family income < $85,414
»300% of first $500
»200% of next $1,000
• Family income > $85,414
»100% of first $1,000
• Lifetime max: $70,000

RDSPs - Government Benefits (continued)
Canada Disability Savings Bonds (CDSB)
• Family income < $24,863
• $1,000 annually (no contributions required)
• Family income > $24,863
» Reduced pro-rate until eliminated at
income > $42,707
• Lifetime max: $20,000

Improvements to RDSPs
Plan holders over age of majority
Proportionate repayment rule
Maximum and minimum withdrawals
Rollover of RESP investment income
Termination of RDSP following cessation of
eligibility for the DTC

Employees Profit Sharing Plans (EPSPs)
34

EPSP Features
Non-arm’s length employees can participate
Unlimited contributions by employer and employee
No income tax withholding at the time of contributions to
an EPSP (deferral of tax until April 30 of following year,
no installments)
No CPP or EI premiums
Income-splitting can be achieved
No vesting period
No restrictions on qualifying investments
No registration with CRA or other agencies

EPSP – Government Consultations
Government announced consultation with stakeholders
on August 30, 2011
End of consultation period: October 25, 2011
Issues for consultation include:
1. Eligibility to participate in an EPSP (non-arm’s length employees)
2. Limitations on contributions
3. Withholding requirements (income taxes, CPP & EI premiums)
4. Role of minor children (income-splitting)

EPSP – Budget 2012
EPSP payments made to a “specified employee”
• An employee who has a significant equity interest in their employer
• Does not deal at arm’s length with their employer.
New tax payable on an “excess EPSP amount”
• EPSP allocation > 20 per cent of employee’s salary
Applicable to EPSP contributions made on or after March 29, 2012

Travellers’ Exemptions
Current Rules
• Under 24 hours ZERO
• More than 24 hours $50
• More than 48 hours $400
• More than 7 days $750
As of June 1, 2012
• Under 24 hours ZERO
• More than 24 hours $200
• More than 48 hours $800
No changes to booze/tobacco limits!

Eliminating the Penny

Canada’s last (new) penny…
Source: CBC

Eliminating the Penny
Royal Canadian Mint ceased production of new pennies
Cent will remain Canada’s smallest unit for pricing goods & services
Pennies can be used in cash transactions indefinitely
Non-cash payments, such as cheques, credit cards and debit cards will
continue to be settled to the cent
When pennies are not available, cash transactions should be rounded to the
nearest five-cent increment
• “fair and transparent manner”
Rounding should only be used on the final bill of sale after the calculation of
GST/HST

Rounding Down / Up

Rounding Down / Up - Example

Rounding Down / Up - Example

www.jamiegolombek.com
Thank You
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