Tax Planning (Involving Non-Resident Entities)

FOUNDING PRESIDENT PROFESSIONAL ADVISORY STAFF The JCF Professional Advisory COMMITTEE Arthur Pascal c.m; Z”L Phil Nadler cpa, ca Kathy R. Assayag Francine Wiseman EXECUTIVE DIRECTOR Committee Presents CO-CHAIRS OFFICERS

Brenda Gewurz BSc, MBA Robert A. Kleinman fcpa, fca Cliff Benderoff IMMEDIATE PAST PRESIDENT EXECUTIVE VICE-PRESIDENT Sydney Berger cpa, ca

Howard Berish FCPA, CA Joel King bcl, llb Michael Etinson BSc Jonathan Bicher cpa, ca EXECUTIVE OFFICER PRESIDENT L. Michael Blumenstein Samuel Dergel cpa, ca Joelle Mamane cpa, ca Barbara Novek LL.L Sharon G. Druker CHIEF FINANCIAL OFFICER VICE-PRESIDENT Marc Elman cpa, ca Andrew Etcovitch Howard Berish FCPA, FCA Ian Karper Jonathan Green CONSULTANT; PHILANTHROPIC SECRETARY Barry Grossman PLANNING Charles Jacobs cpa, ca PAC Danny Ritter CPA, CA, CFA Lillian Jasinski CIM, FCSI Emanuel Weiner TREASURER Earl Kaplin EXECUTIVE DIRECTOR EMERITUS Armand Kessous

Julian Kotler q.c Heidi Minkoff CPA, CA Charles Leibovich CONTROLLER David Lisbona 2016 Monette Malewski Lee Omer Jacob Yohan Nataf GRANT & SCHOLARSHIP OFICER Barbara L. Novek Mark Potechin Shirley Dayan Lassner Marlene Gilfix Raich cpa, ca CLIENT SERVICES OFFICER Robert Raich Rhonda Rudick Bryna Hersh June 9 Brian Schneiderman SUPPORT Josef Yossi Suissa cpa, ca 2016 Brandon Wiener Richard M. Wise fcpa, fca Gelber Conference Center

1 Cummings Square, Suite 510 Montreal H3W 1M6 jcfmontreal.org

Table Sponsors

BELL PASCAL SERVICES Dear Colleagues, D'ASSURANCES INSURANCE SERVICES

BRUCE KENT GROUP There’s one thing we know for certain. For every rule, regulation and THANK YOU legislation there’s always going to be a change or, at the very least, an COLLINS BARROW LLP update. It can be a time consuming task to try and keep up to date. FULLER LANDAU TO OUR GWBR S.E.N.C.R.L. - L.L.P That’s the focus of today’s seminar—new ever-changing rules that govern LITWIN CPA Inc. our professions. It’s part of what we do, as chairs of the Professional LCA CPA Advisory Committee—provide updates, enrichment and tips to better NEXIA FRIEDMAN LLP interact with and counsel your clients. And the annual seminar is the Phil Nadler CPA, CA perfect opportunity. With your input, we have, once again, developed a PSB BOISJOLI program that we hope will resonate with financial and estate planning ROBINSON SHEPPARD SHAPIRO LLP professionals. SPIEGEL SOHMER INC

As always, we are very fortunate to be able to present a panel of MESSAGE individuals who have an abundance of expertise and experience in their chosen fields. FROM THE CO-CHAIRS You’ll also hear about how mechanisms can be optimized using smart philanthropy. No one knows more about it than the Jewish Community Foundation of Montreal. They are our resource for comprehensive and up -to-date information on the ever-expanding and complicated field of tax- wise charitable giving.

Thank you for joining us today. Your sponsorship, support and professional expertise have played a vital role in strengthening the Foundation’s mission, to provide expert guidance to members of our community who wish to combine their philanthropic and estate planning goals.

We hope this seminar provides professional enrichment and an opportunity to network with colleagues. We look forward to working with you in the future.

Francine Wiseman

2016 Professional Development Seminar

2 63 SMART PHILANTHROPY STARTS HERE. PROGRAM With 46 years in business and managing over $1.2 billion in assets, the JCF has the expertise to help your clients make smart philanthropic choices in a cost effective, tax-wise and personal way which makes perfect business sense.

The Foundation receives gifts that are either deferred gifts or the WELCOMING REMARKS transfer of assets today. Funds are established in the donor’s name. PHIL NADLER CPA, CA & FRANCINE WISEMAN L.L.B , B.C.L Income earned annually is designated according to the donor’s wishes. Co-chairs, Professional Advisory Committee In this way, the JCF helps donors direct their philanthropy to those areas which are most important to them. Each plan is tailored according to UPDATE ON TRUSTS lifestyle needs, estate plans and charitable goals. DIANE TSONOS LL.B.,TEP RICHTER LLP

The Jewish FAMILY GIVING: AT THE HEART OF WHAT WE DO CHANGING PARADIGMS Community RAPHAEL BARCHICHAT LLM, JD, LLM TAX PSB BOISJOLI The family philanthropy process opens a different level of consultation incorporating major tax and estate planning with strategic philanthropy. Foundation of ACCIDENTAL AMERICAN The Jewish Community Foundation is dedicated to serving the needs of STEVE TROW FOUNDER TROW & RAHAL P.C Jewish family foundations- both private and public - throughout the Montreal Montreal area. RENUNCIATION & US VOLUNTARY DISCLUSURE A donor-advised fund within the JCF (a public foundation), is a consult Where smart NINA HEFT CPA, CA PSB BOISJOLI with trustee fund which allows the donor family to set up a board of trustees who will advise the JCF on allocations and investment philanthropy THE JCF PROFESSIONAL ADVISORY COMMITTEE HONOREE PRESENTATION management. The JCF administers the fund and makes charitable KATHY ASSAYAG, EXECUTIVE DIRECTOR donations in the name of the family foundation. starts PHIL NADLER CPA, CA & FRANCINE WISEMAN L.L.B , B.C.L Co-chairs, Professional Advisory Committee The Family Philanthropy Institute provides a centralized source of information, education and community linkage to assist family CHARITABLE TOOLS foundations in maximizing the impact of their philanthropic giving in ROBERT A. KLEINMAN FCPA, FCA both the Jewish and general community.  Knowledge of local, national, and global Jewish communal needs, HOWARD BERISH FCPA, FCA and proven history in bringing organizations together for creative partnerships CLOSING REMARKS  Strategic guidance and consulting of philanthropic best practices FRANCINE WISEMAN L.L.B , B.C.L available through professional staff expertise

2016 Professional Development Seminar

62 3 SPEAKERS We provide the

KATHY R. ASSAYAG BA, ICD. D tools to enable Executive Director, The Jewish Community Foundation of Montreal you to help your Kathy began her career in finance with Deutsche Financial Services where she spent 11 years in corporate lending. She became involved in philanthropy in 2001 at Federation CJA clients achieve and led the Combined Jewish Appeal Campaign to new records in participation rates and funds raised. From 2005 -2011 she was both Vice-President Advancement and Alumni their goals. Relations at Concordia University and President of Concordia University Foundation where she led the largest capital and endowment campaign in the University’s history. Kathy has served on numerous Boards and is currently on the Boards of the Fraser Institute, and Youth Fusion. She is a member of the Institute of Corporate Directors. FINANCIAL ADVISORS CAN BE HEROES NOW AVAILABLE:

Good business demands tax and cost efficiency. The same applies CANADIAN GIFT PLANNING to effective philanthropy. You can help your clients do a lot more HANDBOOK RAPHAEL BARCHICHAT good for a lot less. LLM, JD, LLM Tax PSB BOISJOLI A DISCUSSION GUIDE FOR FAMILY Raphael a Tax Lawyer and Senior Tax Director in international tax and reorganizations If your client knows they want to leave a charitable gift and with PSB Boisjoli LLP in Montreal, Canada. He acts in several local, national and interna- GIVING where they want to direct their philanthropy, the Foundation tional files in the implementation of optimal tax strategies and domestic and cross- border tax planning (involving non-resident entities). Raphael also manages all the stag- provides the knowledge to create greater impact. For more on family philanthropy es of the settlement process for tax disputes and tax audits. He has several years of ex- and what financial advisors perience in tax more specifically international tax. Since 2012, Raphael teaches at HEC Combine sophisticated tax smart giving vehicles to create a donor should know visit University in Montreal, gave several technical tax conferences and published texts and advised fund - a smart, flexible way to give more to the causes articles relating to tax law with Wolters Kluwer (formerly CCH), APFF, CTF, Canadian Bar, and organizations your client cares about. http://jcfmontreal.org/wp- TaxnetPRO and other. He is an active member of the Quebec Bar Association as well as the Canadian Tax Foundation (CTF), the Association de planification fiscale et financière Smart philanthropy requires the expertise of a trusted advisor content/uploads/2015/11/ (APFF), the Ontario Bar Association and the International Fiscal Association (IFA). Rapha- with an eye to the future; unparalleled fund management and Handbook-2015.pdf el sits as a legal counsel on 2 large Québec foundations as well as his Synagogue. reporting to ensure wise philanthropic choices.

Working with the Foundation makes us all better informed and better advisors.

NINA HEFT CPA,CA PRINCIPAL U.S. TAX PSB BOISJOLI Nina is a distinguished tax consultant with more than 25 years’ experience. Before joining PSB Boisjoli in 2001, she had worked in the tax practice of a large Montreal firm where she was in charge of the expatriate tax department. She has specialized and practical knowledge of U.S. tax matters. Nina is a Principal on our team, specializing in U.S. taxation. She specializes in U.S. and cross-border tax issues, providing advice on personal and corporate planning as well as preparing U.S. personal and corporate income tax returns. Nina’s passion and dedication to serving her clients, combined with her profound expertise in U.S. tax matters, makes her a great asset to the PSB Boisjoli team.

2016 Professional Development Seminar

4 61 BENEFITS TO PARTNERING WITH THE JCF

 The JCF has a long and successful track record developing rela- tionships, managing funds and facilitating grant-making HOWARD BERISH FCPA, FCA Howard received his Bachelor of Commerce degree from Concordia University in 1975 and graduated from McGill University in 1979 with a Chartered Accounting degree. In 1996, he  Independence—the JCF has no agenda other than to assist fami- added the Certified Financial Planner designation and in 2001 he became a Fellow of the lies in executing their philanthropic missions Chartered Professional Accountants of Quebec. Howard has specialized in tax for over 30  Immediate income tax reduction years, most recently as the senior tax partner at Collins Barrow (Montreal) LLP. Currently Howard provides consulting services to Collins Barrow (Montreal) LLP and acts as a  No capital gains tax on contributions of appreciated stock Consultant Philanthropic Planning for the Jewish Community Foundation.  Allows for donations of private company stock  Not subject to numerous rules and regulations governing private foundations  Makes grants to virtually any Canadian Charity.  Avoid the time and expense of staff required to handle administrative responsibilities  Complete privacy while private foundations are actually public in ROBERT A. KLEINMAN FCPA, FCA Canada Executive Vice-President, The Jewish Community Foundation of Montreal  Peace of mind - donor’s long term wishes are documented and Robert Kleinman has been working in the planned giving field since August 1994. His previ- respected over time ous work experience was 18 years in the firm of Ernst & Young, with his last position, Part- ner and Director of Tax of the Westmount, Quebec office. Robert has been influential in  No disbursement quotes introducing planned giving strategies to Canadians. He is Past-President of the Centre de Philanthropie du Québec and the Quebec Table of the Canadian Association of Gift Plan- ners (CAGP). He has published numerous articles on taxation and gift planning and is the author of the JCF Gift Planning Handbook—a critical resource consulted by professionals in estate planning and charitable giving.

PHIL NADLER CPA, CA Partner, RICHTER; PAC co-chair Phil has provided tax consultation services to both private corporations and public entities for almost 20 years. His experience covers a wide range of sectors including real estate, manufacturing, retail and entertainment. Phil has provided tax consultation in diverse areas that include estate planning, corporate reorganizations, mergers and acquisitions, divestitures, cross-border real estate planning and insolvency and restructuring planning. He has also provided consulting services to charitable organizations. He has taught tax-related courses at McGill University and has lectured at the Ordre des comptables professionnels agréés du Québec.

2016 Professional Development Seminar

60 5 STEVE TROW Founder TROW & RAHAL P.C DONATION OF MARKETABLE SECURITIES Steve Trow has over 30 years of experience in U.S. immigration and citizenship law. He is particularly interested in the intersection of immigration law and tax law. He CORPORATION: DONATE SHARES advises high net worth clients and their professional advisors on integrating immigra- ASSUME CORPORATION OWNS MARKETABLE SECURITIES WITH tion planning with tax planning; obtaining U.S. visas, green cards and citizenship; and FAIR MARKET VALUE OF $1,000,000 ADJUSTED COST BASE OF $400,000 surrendering U.S. green cards and citizenship. Steve is listed in Best Lawyers in Amer- 2015 2016 ica, Chambers USA, Super Lawyers, and Who’s Who Legal: Corporate Immigration. DONATION (A) $1,000,000 $1,000,000 He is a graduate of Cornell Law School and a member of the District of Columbia Bar. CAPITAL GAIN NIL NIL

TAX BENEFIT OF DONATION 46.57% / 50.57% (B) $ 465,700 $ 505,700 RESULT COST OF DONATION TO CORP (A)-(B) $534,300 $494,300

CAPITAL DIVIDEND ACCOUNT $600,000 $600,000 DIANE TSONOS LL.B.,TEP Richter LLP NET TO CHARITY $1,000,000 $1,000,000 BENEFIT TO SHAREHOLDER ON EXTRA Diane Tsonos is a highly experienced and committed tax professional with more than CAPITAL DIVIDEND ACCOUNT 25 years of estate planning and income tax experience, with a particular focus on $300,000 @ 39.78% / 43.84% $119,340 $131,520 estates settlement, trusts and cross-border estate planning. She is a member of the Quebec Bar and has held the title of Trust and Estate Practitioner (TEP) since 2002. Diane is the partner in charge of the firm’s Estates Group within the Tax Division. Her responsibilities include developing estate plans for owner-managers and providing strategic advice to estate liquidators and trustees to ensure the successful transfer of property to beneficiaries from a multi-disciplinary perspective. She is also actively SELL AND DONATE involved in settling disputes with government revenue departments. Her Canadian VS. STRAIGHT DONATION COMPARISON tax clients operate in the manufacturing and services sectors, with a concentration in BASED ON ALL OF THE BELOW CRITERIA IT IS BETTER TO DONATE MARKETABLE real-estate. SECURITIES VS SELL AND DONATE CASH 2015 2016 COST TO CORPORATION SELL & DONATE CASH $ 599,363 $ 571,020 DONATE MARKETABLE SECURITIES (534,300) (494,300)

ADVANTAGE TO DONATE MARKETABLE SECURITIES $ 65,063 $ 76,720

CAPITAL DIVIDEND ACCOUNT FRANCINE WISEMAN DONATE MARKETABLE SECURITIES $ 600,000 $ 600,000 Founding partner, GWBR Legal; PAC Co-Chair SELL & DONATE CASH (300,000) (300,000)

Francine obtained civil and a common law degrees from McGill University. She has prac- ADVANTAGE TO DONATE MARKETABLE SECURITIES $ 300,000 $ 300,000 tised in the areas of tax and corporate law for over 25 years focusing on mergers and acquisitions, reorganizations, cross-border tax planning, trusts and estate planning. In NET TO CHARITY DONATE MARKETABLE SECURITIES $ 1,000,000 $ 1,000,000 addition to her successful legal practice, Francine operates a residential real estate SELL & DONATE CASH (860,290) (848,290) business with her brothers. Her business, experience combined with her legal practice, has given Francine a practical and solution-oriented perspective. Francine has written ADVANTAGE TO DONATE MARKETABLE SECURITIES $ 139,710 $ 151,710 articles for and has made presentations to numerous and varied organizations. SHAREHOLDER SAVING ON EXTRA CAPITAL DIVIDEND ACCOUNT

ADVANTAGE TO DONATE $ 119,340 $ 131,520

6 59

DONATION OF PREFERRED SHARES 2016 ALTERNATIVE 2- DONATION PREFERRED SHARES > $500,000 HOLDCO OPCO TAX ON DEEMED DISPOSITION $1,000,000 X 50% X 53.31% ($266,550) ($266,550)

TAX SAVINGS ON DONATION $1,000,000 X 53.31% 533,100 533,100

NET TO BENEFICIARIES $266,550 $266,550

DIVIDEND REFUND TO CORP $383,300 NIL

PROCEEDS TO CHARITY $1,000,000 $1,000,000

NET TO BENEFICIARIES - NO DONATION $561,600 $601,700 - DONATION (266,550) (266,550)

COST OF DONATION - DOLLARS $295,050 $335,150

COST OF DONATION 2016 % 29.51% 33.52% COST OF DONATION 2015 % 35.24% 39.80% 6 DIFFERENCE 5.73% 6.28% “With close to 46 years experience and over $1.2 billion in assets, we have the expertise to help you manage your philanthropic activities.” DONATION OF MARKETABLE SECURITIES CORPORATION: SALE AND DONATE

ASSUME CORPORATION OWNS MARKETABLE SECURITIES WITH FAIR MARKET VALUE OF $1,000,000 ADJUSTED COST BASE OF $400,000 2015 2016

SALE PROCEEDS (A) $1,000,000 $1,000,000 ADJUSTED COST BASE (400,000) (400,000)

CAPITAL GAIN $600,000 $600,000 TAX ON CAPITAL GAIN

$600,000 X 50% @ 46.57%/50.57% (B) $ 139,710 $ 151,710 AVAILABLE TO DONATE (A)-(B) $ 860,290 $ 848,290

TAX BENEFIT OF DONATION 46.57%/50.57% (C) $ 400,637 $ 428,980

RESULT COST OF DONATION TO CORP (A)-(C) $ 599,363 $ 571,020

CAPITAL DIVIDEND ACCOUNT $ 300,000 $ 300,000

NET TO CHARITY $ 860,290 $ 848,290

2016 Professional Development Seminar 2016 Professional Development Seminar

58 7 Every year the Foundation 2014 2009 honors those professionals Marc Elman CPA, CA Reuben Dacks z”l whose successful efforts Monette Malewski Phil Friedman encouraged bequests and Steve Moses CPA, CA Jamie Lands gifts to the Foundation. We Robert Raich Richard Vineberg fcpa, fca appreciate their commit- Nancy Rosenfeld Lawrence Yelin DONATION OF PREFERRED SHARES 2016 ment to the future of our Lowen Rosenthal Yair Szlak community and their spirit 2008 > $500,000 Francine Wiseman of partnership. Jonathan Bicher cpa, ca HOLDCO OPCO Lawrence Yelin FAIR MARKET VALUE OF PREFERRED SHARES $1,000,000 $1,000,000 Alvin Fagen cpa, ca Harry Feldman z”l ADJUSTED COST BASE AND PAID UP CAPITAL NIL NIL 2013 Ernest Furt cpa, ca Sheldon Krakower cpa, ca REFUNDABLE DIVIDEND TAX ON HAND $383,300 NIL Steven Korda Charles Leibovich Howard Nemeroff Abe Ludvig cpa, ca SHARES REDEEMED IN FIRST YEAR OF ESTATE YES YES 2016 Honorees David Perlin cpa, ca Stanley Wener cpa, ca Marvin Wexler Samuel Altman

Myer Bick 2007 Serge Bilodeau 2012 Nancy Cleman Ilana Einheiber Jayne Blumenthal David Engel Ted Greenfield Mark Brender Armand Kessous Willie Gryzwacz Seth Dalfen Abbey Kreisman cpa, ca JefFrey Katz Tasso Lagios cpa, ca Stephanie Larochelle Barbara L. Novek Barbara L. Novek Jeffrey Mandel cpa, ca Robert Raich Barry Pascal Robert Raich William Ram Oscar Respitz qc Barry Rashkovan cpa, ca Allan Schouela Richard Vineberg fcpa, fca Joel Segal

Steve Sitcoff 2006 DONATION OF PREFERRED SHARES 2016 2011 Myer Spivak Sen. Yoine Goldstein ALTERNATIVE 1- NO DONATION Osnat (Natou) Suissa Michael Blumenstein Mitch Halickman Sydney Sweibel Alexandre Dufresne Donna Levy Kane Marc Elman cpa, ca Robert Raich > $500,000 Vivian Myron HOLDCO OPCO Bernard Stotland fcpa, fca TAX ON DEEMED DISPOSITION 2015 Barry Rashkovan cpa, ca Richard Vineberg fcpa, fca $1,000,000 X 50% X 53.31% ($266,550) ($266,550) Beverlee Ashmele TAX SAVING ON LOSS CARRYBACK 164(6) 266,550 266,550 Lawrence Chandler 2010 2005 Maia Cooper PROCEEDS ON REDEMPTION 1,000,000 1,000,000 Lawrence Chandler cpa, ca Norman A. Adler Denis Gosselin Robert Golfman Michele Desjardins TAX ON REDEMPTION DEEMED DIVIDEND Fabien Jeanneret Raphael Marcus Sheva Honig $1,000,000 @ 43.84%/39.83% (438,400) (398,300) Irwin Litvack Josh Miller CPA, CA Lowen Rosenthal Barbara Novek NET TO BENEFICIARIES $561,600 $601,700 Sydney Sweibel Barry Pascal Diane Tsonos DIVIDEND REFUND TO CORP. $383,300 NIL Barry Shapiro Leonard Wolman cpa, ca PROCEEDS TO CHARITY NIL NIL Michael Vineberg Francine Wiseman

8 57

2004 2001 1998 Jak Almaleh z”l Daniel Amar David Adler cpa, ca Joel Greenberg Donald S. Davis Morris Birenbaum cpa, ca Charles Jacobs cpa, ca Manuel Shacter qc Marlene Gilfix-Raich cpa, ca Boris Levine c.m z”l Edward Wolkove cpa, ca Lionel Goldman fcpa, fca Robert Rabinovitch Michael D. Worsoff Arthur Pervin DONATION OF PREFERRED SHARES 2015 Harry Shapiro Allan Wiener fcpa, fca Joel Silcoff ALTERNATIVE 1- NO DONATION Abe Soroka cpa, ca > $500,000 2000 HOLDCO OPCO Sen. Yoine Goldstein TAX ON DEEMED DISPOSITION 2003 $1,000,000 X 50% X 49.97% ($249,850) ($249,850) Marvin Corber cm, fcpa, fca Boris G. Levine cm.,z”l Andrew Etcovitch Mark Potechin 1997 TAX SAVING ON LOSS CARRYBACK 164(6) 249,850 249,850 Sen. Yoine Goldstein Steven T. Tabac Joel King Herbert Lukofsky cpa, ca Harry Kleinman z”l PROCEEDS ON REDEMPTION 1,000,000 1,000,000 Alan Kahan cpa, ca Jeffrey Mandel cpa, ca Leonard H. Wisse Al Wexler cpa, ca TAX ON REDEMPTION DEEMED DIVIDEND Earl Merling cpa, ca Joseph Paperman Edward Wolkove cpa, ca $1,000,000 @ 39.78%/35.22% (397,800) (352,200) Sheldon Merling Robert Raich Irwin Shapiro cpa, ca NET TO BENEFICIARIES $602,200 $647,800 Joseph Schlesinger cpa, ca 1999 Eli Solomon cpa, ca Steven Backler z”l DIVIDEND REFUND TO CORP. $333,300 NIL Sidney Sweibel Larry Joseph 1996 Richard Vineberg fcpa, fca Lawrence Chandler cpa, ca PROCEEDS TO CHARITY NIL NIL 2002 Robert Friedman fcpa, fca Barry Clamen fcpa, fca Henry Rosenhek cpa, ca L. Michael Blumenstein Marvin Corber cm, fcpa, fca Leonard Wolman cpa, ca Domenic Diaco Robert Hecht cpa, ca Mortimer Fruchter cpa, ca Charles Gagnon Norman Keesal z”l Ian Roter cpa, ca Murray Lapin qc Robert Lévesque Brian Gans Michael Matheson Barry Shapiro David Stendel z”l David Mizrahi

Joseph Schlesinger cpa, ca 1995

Hillel Becker Allan Chandler cpa, ca Arnold Isaacson z”l Barbara Zukor

1994 Sidney Kaushansky cpa, ca Joseph Levitt cpa, ca

1993 Arnold Isaacson z”l Nathaniel Rappaport qc Leonard Wolman cpa, ca Stanley Yetnikoff cpa, ca Rabbi Mordechai Zeitz

2014 Honourees 7 2015 Honorees

2016 Professional Development Seminar 2016 Professional Development Seminar

56 9 Diane Tsonos, LL.B., TEP

Presented to: JCF Professional Development Seminar

Montréal June 9, 2016 DONATIONS INDIVIDUAL VS. CORPORATION

IF THE DONATION DOLLARS ARE ULTIMATELY BEING FUNDED BY THE CORPORATION, AND TAKING INTO CONSIDERATION THE EFFECT OF INTEGRATION, THE CHOICE IS NOT ALWAYS EVIDENT (SEE BELOW).THUS IF THE CORPORATION IS FUNDING THE INDIVIDUAL TO LIVE AND PAY FOR THE DONATION, THEN IT PAYS FOR THE CORPORATION TO MAKE THE DONATION. Update on Trusts: $2,000 Corporate Income $1,000 Donation Quebec High Rate Individual Graduated Rate Estates Active Income Active Income Property Income Under $500,000 Over $500,000 Corporate Personal Corporate Personal Corporate Personal and Donation Donation Donation Donation Donation Donation

Charitable Donations CORPORATE INCOME $ 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 DONATION (1,000.00) - (1,000.00) - (1,000.00) - TAXABLE INCOME 1,000.00 2,000.00 1,000.00 2,000.00 1,000.00 2,000.00 TAX (185.00) (370.00) (269.00) (538.00) (505.70) (1,011.40) RETAINED EARNINGS 815.00 1,630.00 731.00 1,462.00 494.30 988.60 DIVIDEND REFUND - - - - 306.70 613.40 DIVIDEND PAID 815.00 1,630.00 731.00 1,462.00 801.00 1,602.00 PERSONAL TAX (357.33) (714.65) (291.16) (582.31) (351.16) (702.32) DONATION - (1,000.00) - (1,000.00) - (1,000.00) DONATION TAX CREDIT - 515.60 - 515.60 - 515.60

NET TO SHAREHOLDER $ 457.67 $ 430.95 $ 439.84 $ 395.29 $ 449.84 $ 415.28 Outline 2016 Professional Development Seminar

1) Graduated Rate Estates (GREs) – Practical Issues DONATION OF PREFERRED SHARES 2015 2) Charitable Donations

> $500,000 HOLDCO OPCO ASSUMPTIONS

FAIR MARKET VALUE OF PREFERRED SHARES $1,000,000 $1,000,000

ADJUSTED COST BASE AND PAID UP CAPITAL NIL NIL

REFUNDABLE DIVIDEND TAX ON HAND $333,300 NIL Update on the New Trust Rules: Graduated-Rate Estates and Charitable Donations 2 SHARES REDEEMED IN FIRST YEAR OF ESTATE YES YES

10 55 History CHARITABLE GIVING • Budget 2013 – Announced consultation on elimination of graduated 2015 vs. 2016 rates for testamentary trusts • June 2013 – Release of actual measures, consultation period to Robert A. Kleinman December 2013 Howard Berish • Budget 2014 – Flat top-rate taxation for all trusts except Graduated Rate Estates (GREs) and Qualified Disability Trusts (QDTs) 1. Individual vs. Corporation • August 29, 2014 – Draft legislation released, 30 day consultation, new provisions: 2. Donation of Preferred Shares – Post-mortem loss planning 164(6), 112(3.2) and charitable giving 3. Donation of Marketable Securities 118.1(5) restricted to GREs – Life interest trust rules 104(13.3), 104(13.4) – Restriction on 104(13.1) and (13.2) elections to tax income in trust, 104(13.3)

Update on the New Trust Rules: Graduated-Rate Estates and Charitable Donations 3

History

• October 10, 2014 – Notice of Ways and Means Motion released (re- released October 20, 2014 with further explanatory notes released October DONATIONS 30, 2014) INDIVIDUAL VS. CORPORATION • December 16, 2014 - Bill C-43 received Royal Assent • November 16, 2015 – Letter from Department of Finance to CBA/CPAC 2015 2016 Joint Committee on Taxation, CALU and STEP, addressing mainly life DONATION $100.00 $100.00 interest trust issues

TAX SAVINGS *(48.22) *(51.56) • January 15, 2016 – Draft legislation affecting charitable donations by estates and life interest trust rules, 30 day consultation AFTER TAX COST $51.78 $48.44 CORPORATE TAX RATES ARE ALWAYS LOWER THAN TOP MARGINAL INDIVIDUAL RATES CONCLUSION: ON A PURE CASH BASIS, THE INDIVIDUAL, RATHER THAN THE CORPORATION SHOULD MAKE THE DONATION

2015 2016 FED 29% FED 33% Update on the New Trust Rules: 4 0.835 0.835 Graduated-Rate Estates and Charitable Donations 24.22 27.56 Quebec 24.00 Quebec 24.00 *48.22 *51.56

HOWEVER 2016 Professional Development Seminar

2016 Professional Development Seminar 2016 Professional Development Seminar

54 11 Mark to Market

Comparison IRC §877A – Mark to Market

• Exception for dual–citizens Before Bill C-43 • Mark to Market rules of IRC 877A will not apply if you became at birth • Testamentary trusts were taxed at graduated rates under 117(2) a US citizen and a citizen of another country, and you continue to be a • Inter vivos trusts were taxed at highest marginal rate under 122(1) citizen and are taxed as a resident of that other country & • You were resident of the US for not more than 10 years during the last 15 Post Bill C-43 years • Exception for certain minors • Trusts (other than graduated rate estates or qualified disability trusts) taxed at highest marginal rate under 122(1) • Mark to Market rules of IRC 877A will not apply if you expatriated before the age of 18 ½ & • You were resident of the US for not more than 10 years prior to expatriating

Update on the New Trust Rules: 5 Graduated-Rate Estates and Charitable Donations PSB Boisjoli LLP 400-3333 boul. Graham T +1 (514) 341-5511 Montréal, Québec F +1 (514) 669-0079 H3R 3L5, Canada www.psbboisjoli.ca

Graduated Rate Estate (GRE)

Audit | Tax | Advisory • s. 248(1) conditions to qualify as a GRE: 150 experts at your service – Estate arose on and as a consequence of death – No more than 36 months have passed since death – Estate is a testamentary trust 108(1) – Deceased‟s SIN provided in each post-2015 estate tax return

– Estate designates itself as the GRE in its first tax return that ends after The informationcontained herein is general in nature. It is not intended to reflect special circumstances. You should not act upon unless you have f irst obtained an opinion from a professional based on a thorough review of the facts and 2015 – late designation? their context. – No other estate is designated as the GRE of the deceased in any post- © 2016 PSB Boisjoli LLP. All rights reserved. PSB Boisjoli LLP is an independent member of PrimeGlobal, one of the 2015 taxation year largest associations of accountingfirms, auditing and taxation in the world.

Update on the New Trust Rules: Graduated-Rate Estates and Charitable Donations 6

12 53 Renunciation

Scope & Procedures • New rules as of June 17, 2008 (IRC§877A) • Apply to US citizens or long term green card holders (Green card holder for at least 8 of Why is GRE status important? the last 15 years)

• The new Expatriation rules of IRC§877A will apply if any of the following conditions are 1) Graduated tax rates on income earned and retained in the estate 117(2), met: 122(1) 1. Average annual net income tax for the 5 years ending before the date of expatriation is more than $160,000 (for 2015, adjusted for inflation) 2) No instalment obligations 156.1(2) 2. Total net worth is $2,000,000 or more on the date of expatriation 3. The taxpayer fails to certify on form 8854 that they have complied with all US 3) Off-calendar year end permitted 249(1)(b) federal tax obligations for the 5 years preceding the date of expatriation 4) $40,000 basic exemption for AMT available 127.51

5) Donation credit for donations made in or by the estate 118.1(5.1)

6) Allocation of investment tax credits to beneficiaries

7) Extended time to file notice of objection to an assessment 165(1)(a)

8) Exempt from Part XII.2 tax

Update on the New Trust Rules: Graduated-Rate Estates and Charitable Donations 7 Mark to Market Why is GRE status important? IRC §877A – Mark to Market • All property is deemed to be sold at fair market value the day before 9) Availability of 164(6) and 112(3.2) loss carryback planning expatriation 10) Automatic personal trust status 248(1) personal trust • The first $690,000 (for 2015, indexed for inflation) of gain is not taxable 11) Availability of proposed 104(13.4)(b.1) joint election

• Form 8854 must be filed to establish that the taxpayer has expatriated. You 12) Nil capital gains inclusion for donation of listed securities on death remain subject to tax as a US citizen, until 38(a.1)(ii) 1. you file the initial 8854 form & 13) REPEALED Federal Budget 2016 - Access to new capital gains 2. notify the authorities (consulate) exemption on donation of proceeds of sale of private company shares or • 8854 is due by the due date of filing form 1040NR (June 15th in most cases) real estate (proposed 38(a.1))

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52 13 Streamlined Filing Compliance Why is GRE status important? • On September 1, 2012 the IRS implemented the new Streamlined filing compliance procedure that was available only to non-residents who had never filed their US tax returns 14) Interest in non-resident testamentary trust exempt from deemed • On June 18, 2014 the streamlined procedure was expanded to include US taxpayers living outside disposition on emigration if within 36 months of death 128.1 the US and also certain US taxpayers residing in the US

15) Refund of overpayments 164(1.5)(a) Eligibility for the Streamlined Foreign offshore Program for US citizens living outside the US 1. Non residency requirement 16) Reassessments with consent 152(4.2) • in any one of the 3 most recent years • The taxpayer did not have an abode in the US AND 17) Debt forgiveness transfer agreements 80.04(6)(a)(ii)(B) • The taxpayer was physically outside the US for at least 330 full days • “Abode” is defined as ones home, residence, domicile or place of dwelling: Where you maintain your economic , family and personal ties 2. The taxpayer failed to report income from foreign financial assets, and may have failed to file the FBAR (non-willful conduct)

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Grandfathering Streamlined Filing Compliance • 249(4.1)(a)(ii): Every non-estate testamentary trust has a deemed December 31, 2015 year-end • 249(4.1)(a)(i): Scope & Procedures Every estate has a deemed year-end at the first time after 2015 it is • For each of the most recent 3 years for which the US tax return not a GRE due date has passed, the taxpayer must file delinquent, or • 249(4.1)(b), 249(1)(c): amended tax returns (1040) along with all required forms (5471, New taxation year with calendar year-end deemed to begin 3520, 8938 etc.) • For each of the most recent 6 years for which the FBAR due date has passed, the taxpayer must file delinquent FBARs

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14 51 FBAR penalties

Violation Civil Penalties Criminal Penalties Practical Concerns Negligent violation Up to $500 N/A

Non-willful violation Up to $10,000 for each N/A violation • Software programmes not up-do-date: Pattern of negligent In addition to the N/A – loss carrybacks Activity $10,000 penalty above, – SIN not more than $50,000 Willful failure to file FBAR Up to the greater of Up to $250,000 or 5 – Rates or retain records $100,000 or 50% of the years or both – Section 104(13.1), (13.2) elections amount in the account Knowingly and willfully Up to the greater of $10,000 or 5 years or filing false FBAR $100,000 or 50% of the both • Multiple wills, different liquidators: amount in the account – One estate for tax purposes – Which one administers the GRE?

Non willful conduct = good faith misunderstanding of the requirements of the law, mistake, inadvertence

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Other US filing GRE – taxation years

5471 Example 1: • Information return for controlled foreign Date of death – March 31, 2016 corporations (control by a US person, or Year-end – March 31

group of US persons) 1st taxation year: April 1, 2016 – March 31, 2017 (GRE) – 12 months • $10,000 penalty for late filing 2nd taxation year: April 1, 2017 – March 31, 2018 (GRE) – 12 months 3520 3rd taxation year: April 1, 2018 – March 31, 2019 year-end (GRE) – 12 months • US beneficiary of Canadian trust 4th taxation year: April 1, 2019 – December 31, 2019 ( non-GRE) – 9 months • RESP is considered a Canadian trust • Penalty for late filing is greater of $10,000 or 5% of the gross value of the trusts assets

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50 15 FBAR GRE – taxation years Who has to file an FBAR? Example 2: Date of death – March 31, 2016 1. A US person (including a US citizen) who had a financial interest , or Year-end – September 30 signature authority over at least one financial account located outside the US & 1st taxation year: April 1, 2016 – Sept. 30, 2016 (GRE) – 6 months 2. The aggregate value of all foreign financial accounts exceeded $USD 10,000 at any time during the calendar year 2nd taxation year: Oct. 1, 2016 – Sept. 30, 2017 (GRE) – 12 months 3. The FBAR has to be filed on line, with the Department of Treasury by 3rd taxation year: Oct. 1, 2017 – Sept. 30, 2018 (GRE) – 12 months June 30th each year – no extensions are available 4th taxation year: Oct 1, 2018 – March 31, 2019 deemed year-end 4. Beginning with the 2016 FBAR the filing deadline will change to April th 36 months after death (GRE) – 6 months 15 , same as the tax return, with extensions available to October 15th 5. The FBAR is not filed with the US tax return 5th taxation year: April 1, 2019 – December 31, 2019 (non-GRE) – 9 months

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New 104(13.3) FBAR • 104(13 ) – Income of beneficiary – Amount of trust income included in a beneficiary's income if payable to the beneficiary What if I never filed an FBAR?

• 104(24) – Amount payable • Failure to file the FBAR could result in a civil penalty not to exceed – Amount is payable if paid in the year to the beneficiary or beneficiary $10,000 per year was entitled to enforce payment in the year • Where the failure to file is determined to be willful the penalty may be • 104(6)(b) – Deduction in computing income of trust the greater of $100,000 or 50% of the balance in the account at the time – A deduction may be claimed by a trust for amounts that became of the violation payable to a beneficiary in the taxation year

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16 49 INSURANCE 104(13.1) and 104(13.2) designations UPDATE 2015 • What do 104(13.1) and (13.2) designations permit? – 104(13.1) and 104(13.2) permit income or taxable capital gains payable to a beneficiary to be taxed in the hands of the trust, rather than in the hands of the beneficiary

Presented by :

Nina Heft C.A, C.P.A, C.P.A (Maine) Principal, US Tax T +1 (514) 341-5511 x371 [email protected] PSB Boisjoli LLP

Update on the New Trust Rules: New 104(13.3) Graduated-Rate Estates and Charitable Donations 15

New 104(13.3) US Citizens • 104(13.3) Invalid designation: US Taxation of American citizens: • If you are a US citizen you are required to file a US tax return (Form 1040) Any designation made under subsection 104(13.1) or (13.2) by a trust in & report your worldwide income no matter where you live its return of income under this Part for a taxation year is invalid if the trust’s taxable income for the year, determined without reference to this • In addition, US citizens are also required to report a financial interest or subsection, is greater than nil. signature authority over foreign accounts (FBAR) to The Department of Treasury • Applicable to all trusts – Beginning in 2016 • Foreign accounts include: • A bank account • Brokerage account • Mutual fund • Trust • RRSP • Any other foreign financial account

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48 17 New 104(13.3)

• Why were subsections 104(13.1) and 104(13.2) useful prior to 2016? Choose Method of Terminating Citizenship • A trust resident in a lower tax rate province in comparison to beneficiary • Benefit of graduated rates in testamentary trust when beneficiaries were subject to top tax rate • Renunciation at U.S. consulate - requires voluntary choice and • Utilization of losses and tax credits understanding of consequences • Relinquishment – requires past expatriating act with contemporaneous • Issues: intent to relinquish – retroactive; may protect against Reed/Schumer; may • Loss of the ability to use tax credits extinguish citizenship of children • Revocation of naturalization – retroactive; provides strong defense against Reed/Schumer; but could trigger criminal charges • Failure to satisfy “retention” requirement if born abroad between 1934 and 1952 – occurs automatically at age 26; can later elect to regain citizenship prospectively; provides strong defense against Reed/Schumer; may extinguish citizenship of children

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New 104(13.4) Life Interest Trusts Difficult Cases – Children, Young Adults, Persons With Diminished Mental Capacity • Starting in 2016, new subsection 104(13.4) applies to trusts for which a deemed disposition occurs under 104(4)(a), (a.1) and (a.4) on the death of the life interest beneficiary or the surviving life interest beneficiary. • Expatriation requires voluntary choice and mental capacity to understand – Spousal and common-law partner trusts of consequences – Alter ego trusts • Parents cannot expatriate child; guardian cannot expatriate ward; adult – Joint spousal and common-law partner trusts children cannot expatriate elderly parent – Self-benefit trusts • Expatriation under age 18 is very difficult; young adults may also have problems due to concern about parental influence • Planning for expatriation at age 18 should start one year ahead • Formal finding of incompetence bars expatriation • Mental illness or impairment, Alzheimer’s, dementia or alcohol/drug abuse raise concerns about voluntary choice and understanding

Update on the New Trust Rules: 18 Graduated-Rate Estates and Charitable Donations 18

18 47 Make Sure Client Is Not “Excludable” From U.S. New 104(13.4) Life Interest Trusts

• Criminal exclusion grounds – for serious crimes, and for minor crimes • On the death of the life interest beneficiary or surviving life interest beneficiary involving drugs, dishonesty or morality, at any time in the past, including marijuana, shoplifting, and some student pranks – The trust has a deemed year-end – All income of the trust, including the deemed capital gain under 104(4), • “Petty offense” exception can excuse one minor offense involving is deemed to be payable to the deceased life interest beneficiary and dishonesty or morality, but not drugs taxed in their terminal tax return. • “Conviction” is a term of art in immigration law, with different meaning – Extension of the filing-due date of the trust return and related balance than in criminal law – conditional discharge is a conviction; foreign due-date for taxes owing to 90 days after calendar year in which the pardons don’t help; expunged convictions still count taxation year ends. • Medical exclusion grounds may include arrest for driving under influence – Extension to file T3 slips to 90 days after calendar year in which the taxation year ends. of alcohol, even if not convicted

15 Update on the New Trust Rules: Graduated-Rate Estates and Charitable Donations 19

Plan For Visiting, Working Or New 160 (1.4) Maybe Later Residing In U.S. • The life interest beneficiary and the trust are jointly and severally liable for taxes that arise from the application of subsection 104(13.4) by virtue of • U.S. consulate may refuse to issue visitor visa to expatriate who has subsection 160(1.4). recently relocated abroad after many years in U.S. • U.S. immigration inspector may refuse entry for “business” visit that • How to enforce payment? sounds like “work” • Consider getting U.S. visa that provides authorization to reside and work in Department of Finance Explanatory Notes (released on October 30, 2014): U.S. for client who will visit frequently or remain involved in U.S. business as owner or consultant “Existing subsection 160(2) of the Act empowers the Minister of National • Consider options for coming to U.S. in future for medical care, for career Revenue to assess the liability that arises under subsection 160(1.4) against the trust at any time, and it is intended that the Minister apply opportunities, to care for aging parents, to reside near adult children in subsection 160(2), in respect of an amount owing under subsection old age, or for other reasons 160(1.4), as though the trust were liable in the first instance for that amount.”

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2016 Professional Development Seminar 2016 Professional Development Seminar

46 19 Understand Reed Amendment and New 104(13.4) Life Interest Trusts Schumer/Reed Bills

• Reed Amendment permanently bars from the U.S. any person who • Main issues: “renounces” U.S. citizenship “for the purpose of avoiding taxation” – Could lead to conflicts where beneficiaries of the estate of the life interest • Adopted in 1996 but poor drafting and restrictions on IRS sharing of beneficiary are not the same as the beneficiaries of the life interest trust. taxpayer information have blocked implementation [Second marriage scenario] • No regulations, policy guidance, or procedures to implement it – If 160(2) is not used to enforce payment by the trust, the tax will be payable by the life interest beneficiary‟s estate, which does not own the property. • Yet several persons have been denied entry; others have been denied – Could lead to timing issues regarding the payment of tax, resulting in entry and overcome it; many more have been interrogated about their potential arrears interest charges. Tax becomes due on the date the reasons for expatriating – be prepared! terminal return is due. Whose responsible to pay? • Senators Schumer and Reed have introduced Bills to deny entry to – Will the payment of the estate‟s tax by the life interest trust taint the estate “covered expatriates” who have expatriated since 2008 and disqualify it as a graduated rate estate? • What will our next President choose to do? – 2015 Step Round Table - Late filed 104(13.1) and (13.2) designations for loss carry back planning acceptable, to the extent its not retroactive tax planning.

13 Update on the New Trust Rules: Graduated-Rate Estates and Charitable Donations 21

New 104(13.4)(b.1) Proposed January 15, 2016 Amendment Understand Consequences Of Terminating • The BIG FIX - 104(13.4)(b) will not apply unless: Citizenship – The trust is a testamentary trust that is a post - 1971 spousal or common partner trust, created by the will of a taxpayer who died • before 2017 Termination of citizenship is irrevocable once approved, unless duress, lack of understanding or government error can be proven – Individual is resident in Canada immediately before death • Former U.S. citizens have no right to visit, work or reside in U.S. and have – Joint election is filed by trust and individual‟s GRE no advantage over other non-citizens in applying to do so • Will we see this election in practice? • Child born abroad to former U.S. citizen does not get U.S. citizenship from – The same issues will apply if the election is made that parent, but may get it from the other parent • What happened to 110.6(12) – use of capital gain exemption in trust on • Child who became U.S. citizen before parent expatriates remains U.S. deemed disposition under 104(4)? citizen unless child was born abroad and parent’s expatriation is retroactive prior to birth of child • Names of expatriates are published online in Federal Register • Expatriates cannot purchase or possess firearms in the U.S.

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20 45 Charitable Donations on Death: Old Rules Three Generations Who Do Not Know

They Are U.S. Citizens • Old 118.1(5) – Donation provided for in will deemed to have been made immediately before death – Timing of claim still subject to administrative guidelines, can be made in • Father was born in U.S., moved to Canada as young man and obtained original terminal return if donation made prior to filing of return and Canadian citizenship, was told he would lose U.S. citizenship, but he never receipt or acknowledgement received from charity, otherwise in got a Certificate of Loss of Nationality amended terminal return • Son born in Canada is U.S. citizen because Father was present in U.S. for ten years before Son’s birth (prior law required ten years) – Allowed for surviving spouse to claim donation made in will • Grandson born in Canada is U.S. citizen because Son studied or worked in – Value of gift in kind is fair market value of asset immediately before U.S. for five years before Grandson’s birth, or Son was deemed present in death U.S. due to his job or Father’s job

10 Update on the New Trust Rules: Graduated-Rate Estates and Charitable Donations 23

How To Spot The Unaware U.S. Citizen Charitable Donations on Death: New Rules

• New subsection 118.1(4.1) and (5)

• 118.1(5) is the rule, 118.1(4.1) determines when it applies • Ask “Where were you born?” • 118.1(4.1) – (5) will apply if: • If born in U.S., client is U.S. citizen unless parents were diplomats a) estate arises on and as a consequence of individual‟s death after 2015, with full immunity from arrest, or client has obtained a Certificate and of Loss of Nationality b) gift made by the individual‟s will or the estate • Ask “Do you have a parent, grandparent or great-grandparent who • 118.1(5) Gift deemed made is or ever was a U.S. citizen?” (a) by estate, and (b) at time gifted property is transferred • If so, client MAY be U.S. citizen through derivative naturalization or • 118.1(5.2) parallel rules for deemed gifts of registered plans by birth abroad to U.S. citizen parent who may not know of that and life insurance proceeds citizenship

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2016 Professional Development Seminar 2016 Professional Development Seminar

44 21 Charitable Donations on Death: New Regime Derivative Naturalization – Under Current Law • New regime for donations on death Child Born Abroad Becomes U.S. Citizen – 118.1(3) Deduction from tax for total gifts – 118.1(1) Definition total gifts refers to individual’s total charitable gifts Automatically If: – 118.1(1) Definition total charitable gifts refers to eligible amount of gifts made by individual and trusts – For individuals (c)(i)(A) if gift made by individual or spouse in year of • Child is or becomes U.S. Permanent Resident death or any of the five preceding years – can be claimed in the year of death – January 2016 no change • At least one parent is or becomes U.S. citizen • Child is residing in U.S. in legal and physical custody of U.S. parent – For individuals (c)(i)(B) if gift made by individual in year of death – can be claimed in the year of death or year before death – • All this occurs while child is under 18 years of age January 2016 no change • No application or oath of allegiance required; no certificate is issued – For individuals (c)(i)(C) if gift made by GRE and 118.1(5.1) applies – • Intent of parents and child is irrelevant – cannot “opt out” can be claimed in year of death or year before death – January 2016 • Example – parents and child get green cards together, then one or now can be made by estate both parents naturalize • Example – child born abroad who is not U.S. citizen at birth gets Update on the New Trust Rules: green card to accompany U.S. citizen parent to United States Graduated-Rate Estates and Charitable Donations 25

Charitable Donations on Death: New Regime

• For trusts (c)(ii)(A) if gift made by trust in the year or any five preceding years – can be claimed in the year – January 2016 proposals, no change

• For trusts (c)(ii)(B) if trust is GRE and 118.1(5.1) applies – can be claimed in year Retroactive Presumption Of Intent To Retain made or preceding year of estate – January 2016 proposals, no change U.S. Citizenship • For trusts (c)(ii)(C) added by January 2016 proposals to allow for donation credit to be used by life interest trusts in year of deemed dispositions under 104(4) • Prior to 1990 U.S. citizens who moved abroad and obtained another citizenship were often told by U.S. consular officers that they had lost U.S. citizenship • Some got Certificates of Loss of Nationality; many did not • In 1990 the U.S. adopted a retroactive presumption of intent to retain U.S. citizenship • As a result, many people who think they lost U.S. citizenship but took no action to confirm the loss are still considered by the U.S. government to be Update on the New Trust Rules: 26 Graduated-Rate Estates and Charitable Donations U.S. citizens

22 43 Charitable Donations on Death: New Regime Citizenship By Birth Abroad To U.S. Citizen Parent – Under Current Law Child Is U.S. Citizen • New subsection 118.1(5.1) applies if: At Birth If: – Gift made by a GRE of an individual who dies after 2015 and: − Property gifted acquired by estate on and as a consequence of death or property substituted, or • Born abroad to two U.S. citizen parents, if either parent had U.S. residence for any time before birth of child, or − Deemed gift of registered plans or life insurance 118.1(5.2)

• Born abroad to one U.S. citizen parent who, prior to birth of child, had at • 248(1) definition property substituted least five years of aggregate physical presence in U.S., including at least two years after parent reached age 14 • 118.1(4) deaths prior to 2016, old rules apply • U.S. citizen parent is deemed to be present in U.S. while employed abroad • January 2016 proposals – remove 36 month requirement for the GRE if gift by U.S. government or by international organization, or while unmarried made within 60 months of death dependent residing with grandparent who is so employed • Rules are different for children born before 1987, born out of wedlock, born in U.S. possessions, etc Charitable Donations on Death: Certain Gifts Update on the New Trust Rules: Graduated-Rate Estates and Charitable Donations 27 6 • January 2016 proposals - nil taxable capital gains for deemed disposition on death of listed securities extended to gifts made by estates if 118(5.1) applies Naturalization – The Normal Path For Non- • Under 118(5.1) - must otherwise qualify as GRE but gift can be made within Citizen To Become U.S. Citizen Is: 60 months of death

• Become U.S. Permanent Resident, then • Reside in U.S for at least five years (or three years if residing with U.S. Charitable Donation on Death: citizen spouse); Life Insurance and Registered Plans • Be physically present in U.S. for at least half the days during that five years (or three years); • Special rules for gifts of life insurance and registered plans • Not be absent from U.S. more than six months continuously during that Update on the New Trust Rules: 28 five year (or three year) period – Life insurance – oldGraduated118.1(5.1)(5.2),-Rate Estates and Charitable new Donations118.1 (5.2) • File application, meet other requirements for naturalization, and take oath – Registered plans – old 118.1 (5.3), new 118.1 (5.2) of allegiance

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42 23 Accidental Americans Clients Who Don’t Know They Are American Citizens or Don’t Want to Be American Citizens

Steve Trow Trow & Rahal, PC Washington, DC

Presented by:

LL.B., LL.M., JD, LL.M. Tax PSB Boisjoli LLP

Senior Tax Director, Canadian & International Tax 33

Your Speaker Citizenship By Birth In U.S.

Raphael S. Barchichat is a Tax Lawyer and Senior Tax Director in international tax and reorganizations with PSB Boisjoli LLP in Montreal, • Any child born in U.S. is U.S. citizen, unless parents have full diplomatic Canada. He acts in several local, national and international files in the implementation of optimal tax strategies for domestic and cross-border tax immunity from arrest planning (involving non-resident entities). Raphael manages all stages of • conflict resolutions with the tax authorities. Citizenship and immigration status of parents is irrelevant, unless diplomats Since 2012, Raphael teaches at University de Montréal‟s business school, HEC University, has given several technical tax conferences and • No U.S. residence requirement for parents, or for child later in life; no published texts and articles relating to tax law with Wolters Kluwer (formerly CCH), APFF, CTF, Canadian Bar, TaxnetPRO. He is an active member of the action needed to retain U.S. citizenship; no need to “elect” U.S. Quebec Bar Association as well as the Canadian Tax Foundation (CTF), the • Intent of parents and child is irrelevant – cannot “opt out” „Association de planification fiscale et financière‟ (APFF), the Ontario Bar Association and the International Fiscal Association. Raphael sits as legal • Example – mother is working or studying in U.S. or just visiting counsel for 2 Québec foundations as well as a local prominent Synagogue. Raphael also chairs the Education Subcommittee at the Canadian Tax • Example – parent works for foreign embassy or international organization Foundation. in U.S. but has only “official acts” immunity Raphael holds 6 diplomas in Canadian law and Canadian tax law, including 4 advanced graduate programs, for which he graduated with honors in all of his 6 diplomas. He has completed the Canadian Institute of Chartered Accountants (CICA) in-depth tax course.

Individual Corporate Impact of Tax Planning IntroductionIntroduction Conclusion Tax Rates Tax Rates Changes Ideas 2 5

2016 Professional Development Seminar

24 41 AGENDA When a Dividend is not a Dividend… • Individual Tax Rates Watch Out! Transactions with cash/non-cash dividends (real/deemed) may be caught under new rules. Major changes re: anti-avoidance rule in subsection 55(2) of the Act regarding inter-corporate dividend. • Corporate Tax Rates 1) Purification: Capital Gain Deduction . Availability of CGD? Consider maintaining CGD by distributing non-active business assets. • Impact of Changes 2) Distribution: Regular Income by way of Dividend . If more than one shareholder and “remuneration” is in the form of dividend (rather than salary, management fees or bonus), consider the rights and restriction on the shares (re: Safe • Tax Planning Ideas: Income). • Practical Examples 3) Extraction: Leveraged Appreciated Value • To Incorporate or Not? . Borrowed money to payout the increased value of underlying assets by way of dividend (Consider limitation on interest deductibility). • Salary or Dividend? 4) Optimization: In-House Loss Consolidation • New Section 55 of the Income Tax Act . Utilizing losses of one corporation to offset income from another corporation is permissible under the tax laws, however, consider the impact on using inter-corporate dividends. 5) Asset Protection: Securitized Loan Individual Corporate Impact of Tax Planning . Payment of dividend to effect a securitized loan cannot protect you anymore from a tax Introduction Conclusion Tax Rates Tax Rates Changes Ideas perspective, unless paid out of safe income. 3

Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes ChangesIdeas 45

Your Contact Budget Impacting Tax Rates

Presented by: • 2015 Budget Dates: • Provincial: March 26, 2015

Raphael Barchichat LL.B., LL.M., JD, LL.M. Tax • Federal: April 21, 2015 Lawyer, Senior Tax Director Canadian & International Tax • Federal: December 7, 2015 T (514) 341-5511 x246 [email protected] • 2016 Budget Dates: • Provincial: March 17, 2016 PSB Boisjoli LLP • Federal: March 22, 2016 3333 boul. Graham Suite 400 Montréal, Québec Individual Corporate Impact of Tax Planning H3R 3L5, Canada Introduction Conclusion Tax Rates Tax Rates Changes Ideas 4

Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes Ideas 46

2016 Professional Development Seminar

40 25 Example #3: NAL Income Quantification of SBD Benefit The NEW Federal SBD Limitation • Now we need to refer to Mr. X Mrs. X • Mr. X owns all the shares of RealCo who leases its commercial buildings to third party tenants. o the “Federal SBD” • Mr. X also owns all the shares of SchmataCo who claims annually the full SBD on its ABI selling o the “Québec SBD” schmata. • Mrs. X owns all the shares of ManageCo who • What does it represents in actual dollars? SchmataCo RealCo ManageCo manages all the real estate owned by RealCo. o Québec SBD ▼3.9% tax rate • In 2017, ManageCo earned net income from a non- Non-arm‟s arm‟s length person, i.e. RealCo ($300,000). length income o Federal SBD ▼4.5% tax rate In 2017, is ManageCo allowed the Federal SBD? Operating • No. Why? The new rules prevent ManageCo to Income • Total combined reduction = ▼ 8.4% Management claim SBD; now it must share its SBD with SchmataCo. • If both SBD (federal and provincial) applies fully, then there Rental Income Income • CCPC (ManageCo) provides (directly or indirectly) is a tax savings of up to , year after year. services to a private corporation (RealCo) and CA$ 42,000 CCPC (ManageCo) has an “indirect interest” in the o CA$ 8,400 for each CA$ 100,000 of net income. private corporation (RealCo). • ManageCo has a indirect interest in RealCo because Mr. X and Mrs. X are NAL (§251(1)(a) ITA). Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes Ideas 5 Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes Ideas 40

Tax Impact: Rate Increase INDIVIDUAL EARNS REGULAR INCOME 2015 vs. 2016 Example #4: NAL Income Delta = $33,400 The NEW Federal SBD Limitation Mr. X Mrs. X • Same facts as before, however the commercial ˂> BEFORE BUDGET AFTER BUDGET buildings are held personally by Mr. X. • In 2017, ManageCo earned net income from a non- Unincorporated Unincorporated arm‟s length person, i.e. Mr. X ($300,000). • In 2017, ManageCo employed 4 full-time employees. Individual Individual SchmataCo ManageCo Is ManageCo allowed the Federal SBD? Regular Income $ 1,000,000 Regular Income $ 1,000,000 + • Yes, as the new federal tax rules denies the Tax (499,700) Tax (533,100) multiplication of SBD only where a CCPC Operating Rental (ManageCo) provides (directly/indirectly) services or Cash on hand $ 500,300 Cash on hand $ 466,900 Income Income property to a private corporation. Here, the services Management are provided to an individual. Income • Tax Benefit: Assuming Mr. X is already at the highest marginal tax rates, the deduction resulting from the Effective Tax Rate 49.97% Effective Tax Rate 53.31% management fee paid by Mr. X to ManageCo is deducted at 53.31%. The income inclusion from services rendered by ManageCo are taxed at 18.5%. Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes Ideas 6

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2016 Professional Development Seminar

26 39 Example #1: Merger New Individual Tax Rates Before After The NEW Federal SBD Limitation • Mr. X owns all the shares of RealCo who leases Combined Federal & Québec Individual Tax Brackets and Tax Rates its commercial buildings to third party tenants. Mr. X Mr. X 2016 (starting Jan 1, 2016) 2015 • Mr. X also owns all the shares of Opco who Income Tax Rates Income Tax Rates cannot claim the SBD on its ABI because of the Taxable Canadian Dividends Taxable Canadian Dividends low employee‟s hours. Income Other Capital Income Other Capital Non- Non- Income Gains Eligible Income Gains Eligible • In 2017, Opco earned net income from its Eligible Eligible active business operations $400,000. $14,438 to $14,281 to 28.53% 14.26% 5.64% * 14.85% * 28.53% 14.26% 5.64% * 14.49% * Opco RealCo Amalco • In order to gain access to the Québec SBD, $42,390 $41,935 $42,391 to $41,936 to 32.53% 16.26% 11.16% 19.53% 32.53% 16.26% 11.16% 19.21% Opco and RealCo intends to amalgamate. $45,282 $44,701 $45,283 to $44,702 to 37.12% 18.56% 17.49% 24.90% 38.37% 19.19% 19.22% 26.10% In 2017, is Amalco allowed the Québec SBD? $84,780 $83,865 $84,781 to $83,866 to Operating • The Québec tax rules don‟t actually specify that 41.12% 20.56% 23.01% 29.58% 42.37% 21.19% 24.74% 30.82% $90,563 $89,401 Income the employees have to work in the active $90,564 to $89,402 to Operating 45.71% 22.86% 29.35% 34.95% 45.71% 22.86% 29.35% 34.76% business that would otherwise be eligible to the $103,150 $102,040 / Rental Rental $103,151 to $102,041 to SBD. 47.46% 23.73% 31.77% 37.00% 47.46% 23.73% 31.77% 36.83% Income $140,388 $138,586 Income • Would the answer be the same if Amalco was $140,389 to 49.97% 24.98% 35.22% 39.93% $138,587 + 49.97% 24.98% 35.22% 39.78% already holding the real estate and the $200,000 200 hours / 6,000 hours / 6,200 hours / This table does not take into consideration all deductions and credits. year year year operating business since its incorporation? $200,001 + 53.31% 26.65% 39.83% 43.84% * To a certain extent, dividends could be received tax-free.

Individual Corporate Impact of Tax Planning Individual Corporate Impact of Tax Planning Introduction Conclusion Introduction Conclusion Tax Rates Tax Rates Changes Ideas Tax Rates Tax Rates Changes Ideas 38 8

Example #2: Source of Income

The NEW Federal SBD Limitation New Corporate Tax Rates • Mr. X formed Opco in April 2016. Mr. X • In April 2016, Opco earned net income from: CCPC Federal & Quebec Corporate Tax Rates  arm‟s length persons ($200,000)  non-arm‟s length persons ($300,000) 2016 2015 (Pre-Federal Budget March 21, 2016) Opco • This is the sole income of Opco. YE April 30, 2016 Active Business Active Business Is Opco allowed the Federal SBD? Income Income arm‟s length Non-arm‟s Passive Dividend Passive Dividend RDTOH RDTOH income length income • NEW Test: Is 90%+ of Opco‟s active income $500K Over Income Refund $500K or Over Income Refund earned from providing services or property to or less $500K less $500K arm‟s length persons? Less than 10% de minimis 10.5% 15% 38.67% Federal 11.0% 15% 34.67% rules. 2 1 2 1 30 /3% 38 /3% 26 /3% 33 /3% Income • The identity of the person paying for the service 8% 11.9% 11.9% Quebec 8% 11.9% 11.9% or property is now relevant. The tax residency of 2 1 2 1 the payer is irrelevant. 18.5% 26.9% 50.57% 30 /3% 38 /3% Total 19% 26.9% 46.57% 26 /3% 33 /3% • Answer: No, only a portion of the income ($200K)

will be subject to the SBD. For first 500K profit, (subject to other conditions), for primary and Primary and manufacturing sectors 15% + 11.9% manufacturing sectors the rate is 10.5% + 4% = 14.5% = 26.9% Then, more than 500K profit, 26.9% (15% + 11.9%) Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes Ideas 39 Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes Ideas 10

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38 27 New Corporate Tax Rates Tax Impact: Rate Increase #5: FLOW THROUGH SALARY/DIVIDEND INCOME 2015 VS. 2016

CCPC Federal & Quebec Corporation Tax Rates BEFORE BUDGET AFTER BUDGET Salary & Non-Eligible Dividend Salary & Non-Eligible Dividend 2016 Corporation Corporation (Post-Federal Budget Date March 22nd, 2016) Profit $1,000,000 Profit $1,000,000 Salary A (500,000) Salary A (500,000) Active Business Income Fringe benefits (13,500) Fringe benefits (13,500) Passive Dividend RDTOH Taxable Income $486,500 Taxable Income $486,500 $500K or less $500K or less Over Income Refund Tax Rate 19% Tax Rate 18.5% + AL + NAL * $500K Tax Payable $92,435 Tax Payable $90,003 Dividend B $394,065 Dividend B $396,497 Federal 10.5% 10.5 / 15% 15% 38.67% 2 1 Individual Individual 30 /3% 38 /3% Quebec 8% 8% 11.9% 11.9% Salary (49.97% = 249,850) A $500,000 Salary (53.31% = $266,550) A $500,000 Dividend (39.78% = $156,759) B $394,065 Dividend (43.84% = 173,824) B 396,497 2 1 Total 18.5% 18.5 / 23% 26.9% 50.57% 30 /3% 38 /3% Total Combined Tax (406,609) Total Combined Tax (440,374) Cash on hand $ 487,456 Cash on hand $456,123

NAL Non-Arm’s Length nd Effective date: March 22 , 2016 AL Arm’s Length Effective Tax Rate 51.25% Effective Tax Rate 54.39%

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New Corporate Tax Rates Tax Impact: Rate Increase #6: FLOW THROUGH DIVIDEND INCOME 2015 VS. 2016

BEFORE BUDGET CCPC Federal & Quebec Corporation Tax Rates Salary & Dividend AFTER BUDGET Salary & Dividend Corporation Corporation 2017 Profit $1,000,000 Profit $1,000,000 Active Business Income Salary 0 Salary 0 Fringe benefits 0 Passive Dividend $500K or less $500K or less $500K or $500K or less Over RDTOH Fringe benefits 0 Income Refund Taxable Income $1,000,000 + hours + hours less no hours no hours $500K Taxable Income $1,000,000 + AL but NAL + AL but NAL Tax Rate 19%/ 26.90% Tax Rate 18.5%/26.9 Federal 10.5% 10.5 / 15% 10.5% 10.5 / 15% 15% 38.67% Tax Payable $ 229,500 Tax Payable $227,000 2 1 Dividend C $773,000 30 /3% 38 /3% Dividend C $ 770,500 Quebec 8% 8% 11.8% 11.8% 11.8% 11.8% Individual Individual Salary $ 0 Salary $ 0 2 1 Total 18.5% 18.5 / 23% 22.3% 22.3 / 26.8% 26.8% 50.47% 30 /3% 38 /3% Dividend C 770,500 Dividend C 773,000 Tax (290,089) Tax (324,447) Cash on hand $ 480,411 Cash on hand $ 448,553 NAL Non-Arm’s Length Effective date: January 1st, 2017 AL Arm’s Length Effective Tax Rate 51.96% Effective Tax Rate 55.14%

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28 37 Tax Impact: Rate Increase #3: INDIV. VS. CORP. EARNS BUSINESS INCOME 2015 vs. 2016 How to Qualify for the Full SBD…?

BEFORE BUDGET AFTER BUDGET Unincorporated Unincorporated Individual Individual General Eligibility Criteria General Eligibility Criteria Salary $ 0 Salary $ 0 1) Must be a CCPC (+ de facto) 5) Same criteria as left column Business Income 1,000,000 Business Income 1,000,000 Taxable Income 1,000,000 Taxable Income 1,000,000 2) Taxable capital employed in + Tax (Graduated rate) (499,700) Tax (533,100) 6) 90%+ of its ABI is earned from Cash on hand $ 500,300 Cash on hand $466,900 Canada of MAX $10M (or PUC in Québec) providing services or property to arm‟s length persons. 3) Must be active business income 7) during the year, employees 4) Limit of CA$500,000 of profit worked at least 5,500 hours (or amongst associated said hours were present in the corporations. associated corporation‟s for the previous year) Effective Tax Rate 49.97% Effective Tax Rate 53.31%

Tax Impact: Rate Increase #4: FLOW THROUGH SALARY INCOME 2015 VS. 2016 SBD “Refocusing” v1 BEFORE BUDGET AFTER BUDGET Incorporation Incorporation Corporation Corporation Budget 2015-2016 (March 26, 2015) / “The More than 3 full-time Employee Test” Profit $ 1,000,000 Profit $1,000,000 • ≈ Québec SBD represents a tax reduction of 3.9% on the first $500K of annual income; Salary A (973,710) Salary A (973,710) • Concern: “changes were put in place to support corporations that invest in their growth”. Fringe benefits (26,290) Fringe benefits (26,290) (employer’s portion) Taxable Income 0 • SBD only for “Qualified Corporation”, which was defined as: Taxable Income $0 Tax Rate 18.5%/26.9 • a corporation that employs in its business more than 3 full-time employees Tax Rate 19% Tax Payable $0 • an associated corporation provided similar services and the corporation would‟ve needed Tax Payable $ 0 Individual more than 3 full-time employees if those services had not been provided; or Individual Salary A$ 973,710 • a corporation in the primary or manufacturing sector. Salary A$ 973,710 Dividend 0 Concerned Raised by Various Stakeholders Tax (49.97%) (486,563) Tax (519,085) Cash on hand $ 487,147 • “Many corporations could be penalized by the qualification criterion concerning the Cash on hand $454,625 minimum number of employees”. • For example, for a corporation that employs several dozen people, but almost all of them on a part-time basis. Effective Tax Rate 51.29% Effective Tax Rate 54.54% • Consequently, the minimum number of employees will be replaced by a minimum

Individual Corporate Impact of Tax Planning number of hours worked. Introduction Conclusion Tax Rates Tax Rates Changes Ideas 33

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36 29 SBD “Refocusing” v2 Tax Impact: Integration Problem #1: INDIV. VS. CORP. EARNS INTEREST AND PAYS DIVIDEND Budget 2016-2017 (March 17, 2016) “The More than 5,500 Hours Worked Test” BEFORE BUDGET (2015) AFTER BUDGET (2016 +) Flow-through Corporation Flow-through Corporation • More specifically, a corporation will meet the qualification criterion for a taxation year Corporation Individual Corporation Individual concerning the minimum number of hours worked if, as applicable: Interest Income $ 1,000,000 Dividend (A+B) $ 801,000 Interest Income $ 1,000,000 Dividend (A+B) $ 801,000 Tax (46.57%) (465,700) Tax (39.78%) (318,638) Tax (50.57%) (505,700) Tax (43.84%) (351,158) • during the taxation year, its employees worked at least 5 500 hours; Cash available A $ 534,300 Cash on hand $ 482,362 Cash available A $ 494,300 Cash on hand $ 449,842 • during the previous taxation year, the hours worked by its employees and the RDTOH RDTOH employees of associated corporations are at least 5 500 hours. Beg. $ 0 Beg. $ 0 RDTOH (26 2/3) B 266,700 RDTOH (30 2/3) B 306,700 What Does 5,500 Hours Worked Mean for the Québec Finance Minister? Less: Dividend Refund 0 Less: Dividend Refund 0 (prior year) (prior year) • a maximum of 40 hours per week per worker may be considered; End RDTOH $ 266,700 End RDTOH $ 306,700 • the hours worked must be paid at the time the SBD is claimed; Dividend Refund Dividend Refund Lessor of (*): Lessor of: • the hours worked for a corporation by a person participating in its body of shareholders 33 1/3 dividend paid $ 267,000 38 1/3 dividend paid $ 306,897 (direct or indirect) will also be counted, without regard to whether they are remunerated; End RDTOH B $ 266,700 * End RDTOH B $ 306,700 * Net Corp. Tax (19.9%) $ 199,000 Net Corp. Tax (19.9%) $ 199,000 • reduced proportionally if short fiscal period; Delta = 1.79% Delta = 1.71% Effective Tax Rate 2015 Corp. = 51.76% (2015 Pers. = 49.97%) Effective Tax Rate 2016 Corp. = 55.02% (2016 Pers. = 53.31%) • hours worked by a subcontractor cannot be counted by the corporation, but may be

counted by the subcontractor. Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes Ideas 30

Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes Ideas 18 Tax Impact: Rate Increase #2: INDIVIDUAL EARNS REGULAR INCOME 2015 vs. 2016 SBD: Speaker’s Comments Delta = $33,400 What Does 5,500 Hours Worked Mean for Owner-Managers? BEFORE BUDGET AFTER BUDGET 1. a maximum of 40 hours per week per worker may be unrealistic; • e.g.: owner(s), experienced employee(s), specific project time-frame… Unincorporated Unincorporated 2. hours worked must be paid at the time the SBD is claimed; Individual Individual • Reasonable to assume that this means at the time the tax return is filed. Regular Income $ 1,000,000 Regular Income $ 1,000,000 • Subsection 78(4) provides similar time-frame for the employer (the “179 Tax (499,700) Tax (533,100) day rule”) 3. hours worked by a (direct or indirect) shareholder are counted (even if unpaid); Cash on hand $ 500,300 Cash on hand $ 466,900 • Reasonable to assume that if husband and wife own 50/50 and are active in the business, then we already have 2 full-time “employees”. • If no remuneration is paid to the shareholder, its unclear how will Revenu Effective Tax Rate 49.97% Effective Tax Rate 53.31% Québec audit the amount of hours actually “worked” by the shareholder. Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes Ideas 4. subcontractor hours cannot be counted by corporation, but may be counted by 31 the subcontractor. • Why would subcontracting work not be considered active for the provider?

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30 35 Tax Impact of the New Tax Rates SBD: Speaker’s Comments

• The following example addresses that: 5. Where the new conditions are met, the Québec SBD is totally denied. • $1,000,000 of interest income is earned at the o However, the SBD rate will be reduced linearly between 5,500 hours and highest tax bracket 5,000 hours, and will fall to zero at 5 000 hours. o Québec totally denies the SBD and not shared like for federal purposes. • Example: 6. Reduced proportionally if short fiscal period: o Not reasonable if there is a short period for a seasonal business. • Example 1: Individual earns interest income 7. Unlike the federal, no non-arm’s length income test (AL or NAL is irrelevant for (at highest tax bracket) Québec SBD purposes). • Example 2: Corporation earns interest income 8. Unlike the Federal, Revenu Québec has no discretion on the counting of hours. and pays dividend to individual What about aggregating half hours?

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Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes Ideas 20 Tax Impact of the New Tax Rates

Integration Problem SBD: Speaker’s Comments • The Canadian income tax system is based on the theory of integration. The theory is that there should be no difference between earning income personally, 9. The identity of the person paying for the service or property is irrelevant. or earning it through a corporation and then paying 10. Are the employees required to work to generate the ABI (despite section 4 that income to a shareholder as a dividend. ITA)? o If employees generate non-ABI, can we count them on the 5,500 hours? • With the new 2016 budget rates, the integration 11. The tax residency of the employees seems to be irrelevant (Ontario principle still remains not fully integrated. employee‟s hours could be counted). How is that supposed to help the economy by creating more jobs for “non-resident”. 12. The “hour test” remains an objective test.

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2016 Professional Development Seminar

34 31 SBD: Speaker’s Comments SBD: Speaker’s Comments Mismatch in SBD eligibility Uncertainty re: Eligible Dividends … has created lots of Both SBD SBD ≠ SBD GRIP ≠GRIP 1. Where the new conditions are met, the federal SBD is to be shared. uncertainty (and arguably, Federal √ √ planning opportunities) with Québec √ √ 2. Unlike in Québec, no minimum hours worked are required. respect to eligible vs. non- 3. Revenue Canada can reassess the eligible amount subject to SBD “to eligible dividend. No SBD SBD ≠ SBD GRIP ≠GRIP Federal √ √ be reasonable in the circumstances”. So, CRA‟s reasonableness… Québec √ √ GRIP: What about the 4. The identity of the person paying for the service or property is now relevant. Québec GRIP, where: Federal SBD SBD ≠ SBD GRIP ? ≠GRIP ? • income was subject to Federal Federal √ √ 5. The tax residency of the payer is irrelevant. SBD but not Québec SBD; Québec √ √ 6. There is a 10% de minimis rule for NAL income.

Québec SBD SBD ≠ SBD GRIP ? ≠GRIP ? 7. The NAL test remains a subjective test. • income was subject to Québec Federal √ √ SBD but not Federal SBD; 8. The changes affect, amongst others, professional corporations part of Québec √ √ a group structures involving a central partnership/corporation (law and accounting firms, dentist, physicians…). Those charging directly to third Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes Ideas 22 party clients, such as doctors with RAMQ, appear not to be affected.

Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes Ideas 25 SBD: “Multiplication”

Budget 2016-2017 (March 22, 2016) “The NAL Income” • ≈ Federal SBD represents a tax reduction of 4.5% on the first $500K of annual income; RULE OF THUMB: Salary or Dividend? • Concern: “to address concerns about partnership and corporate structures that multiply access to the SBD”. • When an individual needs to take money out Multiplication of SBD of their corporation, taking a dividend or a • Using Partnerships: Extension of the “specified partnership income” rules where a CCPC provides (directly or indirectly) services or property to a salary (bonus) should be considered due to partnership where the CCPC (or the shareholder of the CCPC) is a member of the partnership (or is NAL) with a member of the partnership. tax implications. • Using Corporations: New tax rules to deny multiplication of SBD, where a CCPC provides (directly/indirectly) services or property to a private • Whether it is better to payout a dividend or a corporation where the CCPC (one of its shareholders or NAL person with such shareholder) has a direct/indirect interest in the private corporation. salary remains a question of fact. Many factors can affect that decision. Individual Corporate Impact of Tax Planning Introduction Conclusion Tax Rates Tax Rates Changes Ideas 24 • Thus, you have to run the math! • So what is the general rule of thumb?

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