Transcript TAX PLANNING USING TRUST RELATIONSHIPS

ADVANCED TAX PLANNING STRATEGIES
TRUSTS AND CORPORATE STRUCTURE
CORPORATE SITUATIONS
STRUCTURE
OPCO
1%
HOLD
CO
99%
100%
FAMILY TRUST WITH
ALL FAMILY MEMBERS
AS BENEFICIARIES
ADVANTAGES
*INCOME SPLITTING
SPOUSE/CHILDREN OVER 18/PARENTS/CHILDREN UNDER 18?
*MULTIPLICATION OF CGE
SALE OR DEATH
*ASSET PROTECTION
HARD/OP ASSETS
CASH: IMMEDIATE AND ONGOING
LIFE INSURANCE PROCEEDS
REDUCTION IN PROBATE AND PROFESSIONAL FEES
WITHOUT LOSS OF CONTROL
*BUSINESS OWNERS RETIREMENT PLAN
UL OVERFUNDED/LEVERAGE
*CONTROL OF DISPOSITION OF SHARES FOR TAX PURPOSES ON
DEATH
*SUCCESSION PLANNING
TAX/CONTROL/PROTECTION
OPCO
(0)
HOLD
CO
$$$ UL
FAMILY TRUST
DIVIDEND INCOME SPLIT
$35,000.00/YR
CGE MULITPLIED
($750,000.00 X ?)
SALE OF BUSINESS
DAVE
•
FAMILY – Wife, two kids (ages 19 & 14)
•
CCPC - $2,500,001.00
DAVE
DAVE/WIFE/CHILD19/CHILD14
FMV
$2,500,001.00
$2,500,001.00
ACB
$1.00
$1.00
CG
$2,500,000.00
$2,500,000.00
CGE
$750,000.00
3,000,000.00 (750,000.00 X 4)
NET
$1,750,000.00
$0.00
TAXABLE PORTION
$875,000.00
$0.00
TAX (40%)
$350,000.00
$0.00
DIFFERENCE
$350,000.00
EXAMPLE – INCOME SPLITTING
DAVE – FAMILY – Wife, two kids (ages 19 & 14)
- CCPC – annual income (personal) $200,000.00
Dave
Dave/Wife/19 year old
INCOME
Dave
$200,000.00
Dave
$130,000.
00
$35,000.
00
Dividend
$35,000.00
Dividend
TAX RATE
39.5%
39.5%
0%
0%
TAX
PAYABLE
$79,000.00
$51,350.0
0
0
0
NET
$121,000.00
$78,650.0
0
$35,000.
00
$35,000.00
TOTAL
HOUSEHOLD
INCOME
$121,000.00
$148,000.
00
DIFFERENCE
$27,650.00
SITUATION IDENTIFICATION/CLIENT PROFILE
•
CLIENT
- HAS A CORPORATION
- A FAMILY
- WIDE VARIATION IN TAX BRACKETS/LIABILITIES
WITHIN FAMILY
- CLIENT OR CLIENT CORPORATION HAS A
SIGNIFICANT ANNUAL INCOME
- CLIENT HAS A LARGE ANNUAL TAX LIABILITY
(INCOME/CAPITAL GAINS)
- WANTS TO BRING CHILD INTO BUSINESS –
POSSIBLE SUCCESSION OR TAKEOVER
- IS TALKING ABOUT SELLING BUSINESS
- IS INVESTING THROUGH CORPORATION
- IS RETIRING, OR TALKING ABOUT IT
INTER VIVOS TRUSTS
ADVANCED TAX PLANNING
TRUST BASICS
SETTLOR
TRUSTEE
TRUSTEE
TRUSTEE
BENEFICIARIES
(benefits and use)
Legal
Ownership
TRUST PRINCIPLES




CONTROL
PROTECTION
TAX PLANNING/TAX REDUCTION
FLEXIBILITY – separate benefit & control
- tax deferred roll in/roll out in
some cases
 UNIQUE PROPERTY HOLDING/OWNERSHIP
SITUATIONS
 LIMITATIONS
ADVANTAGES/LIMITATIONS
*ADVANTAGES
CONTROL
TRUSTEES (OFTEN PARENTS)
ASSET PROTECTION
CREDITORS/SPOUSES
TAX REDUCTION
INCOME SPLITTING
CGE MULITPLICATIONS
TAX DEFERRAL
ADVANCE ESTATE PLANNING
SUPPLEMENTS WILL/EPA
AVOIDS PROBATE TAXES
REDUCES PROFESSIONAL FEES
*LIMITATIONS
-TRANSFER TO TRUST MAY BE
A DISPOSITION
- 21 YEAR TRUST RULE
KIDDIE TAX - S.120.4 ITA


PERSON UNDER 18 YEARS RECEIVING A DIVIDEND FROM
CCPC
SOLUTIONS:
NOT APPLICABLE TO
SALARIES TO CHILDREN
MONEY LENT AT PRESCRIBED RATE
INVEST IN SHARES WITH
DIVIDEND PAYMENTS
INVENT IN INTEREST BEARING TERM
DEPOSIT MATURING WHEN CHILD IS
18
FIXED INCOME TRUST FOR MINORS
DEBT/INTEREST PAYMENTS FROM FAMILY
SECONDARY INCOME
TRANSFER OF PROPERTY TO AN INTER VIVOS TRUST
EXISTING:
X
Investment Portfolio
(FMV $500.000)
REORGANIZATION:
X
FMV
Disposition (1)
TRUST
Child 1 and 2
Y
(1)
Consideration $500,000 promissory note at 4%
FIXED INCOME TRUST FOR MINORS
*
S.104(18) FACTORS
RESIDENT
BENEFICIARY YOUNGER THAN 21 YEARS
INCOME RIGHT VESTS (NON-DISCRETIONARY)
ENTITLEMENT OF BENEFICIARY BY 40 ONLY CONDITION
*
PLANNING
INTEREST FREE LOAN TO CAPITAL BENEFICIARIES
TRUST INTEREST BY SEPARATE DISCRETIONARY TRUSTS
Secondary Income
$200,000.00
capital
$20,000.00
Growth (attributed to
parent)
($8,000.00)
Tax
$12,000.00
In minor’s hands –
future growth taxed in
minor’s hands at lower
rates
$200,000.00
capital
$20,000.00
Growth (attributed to
parent)
($8,000.00)
Tax paid by parent
from own funds leave
$20,000.00
Full in minor’s hands –
future growth
OWNERSHIP OF FAMILY ASSETS BY AN INTER VIVOS TRUST
*
COMMON FAMILY ASSET IS COTTAGE
USED BY VARIOUS FAMILY MEMBERS
TRUST
(1)
*
OPCO
Parents
CONSIDER ACQUIRE COTTAGE BY TRUST
FUNDED BY OPCO DIVIDENDS
PARENTS SHOULD NOT BE BENEFICIARIES OF TRUST
SPECIFIED BENEFICIARY
PRINCIPAL RESIDENCE
S.107(2.01) TRUST TO BENEFICIARY
PRINCIPAL RESIDENCE PLANNING
TRUST PLANNING FOR NON-SBC SCENARIOS
*
CONSIDERATION ACQUISITION OF NON-ACTIVE BUSINESS ASSET BY A CORPORATION
NOT A “SBC”
*
S.74.4(4) TRUST
NO DIVIDEND ENTITLEMENT WHILE A “DESIGNATED PERSON”
EXAMPLE:
OPCO
TRUST
Designated Persons
Real Property
Financed by mortgage guaranteed by X
PERSONAL SERVICES TRUST
EXISTING:
PUBCO
X
Employer/Employee
REORGANIZATION:
PUBCO
TRUST
SERVICE
AGREEMENT
X
Y
Child 1 and 2
1.
Employment Agreement with the Trust
SITUATION INDENTIFICATION/CLIENT PROFILE

SITUATION IDENTIFICATION
FAMILY SITUATION/FAMILY CONCERN OR ISSUE (BLACK
SHEEP/DISABLED CHILD/UNDESIRABLE SPOUSE)
CLIENT HAS SIGNIFICANT ANNUAL INCOME
CLIENT HAS LARGE ANNUAL TAX LIABILITY
(INCOME/CAPITAL GAINS)
CLIENT HAS FAMILY BUSINESS
CLIENT HAS BUSINESS WITH NON ACTIVE BUSINESS
ASSET (EG: REAL ESTATE)
WIDE VARIATION IN TAX BRACKETS/LIABILITIES
CLIENT HAS UNIQUE PROPERTY HOLDING/OWNERSHIP
SITUATION
CLIENT HAS SPOUSE AND CHILDREN BUT IN NOT
ENGAGED IN INCOME SPLITTING
CLIENT HAS AN ESTATE TAX ISSUE PENDING
21-YEAR RULE
GENERAL
*
PREVENTS INDEFINITE DEFERRAL OF TAX PROPERTY HELD WITHIN A TRUST
GENERALLY APPLIES TO CAPITAL PROPERTY
AND LAND INVENTORY
*
BE WARY OF IT
S.107(2) PLANNING TOOL
*
GENERALLY ARISES IN ONE OF TWO SITUATIONS
TESTAMENTARY SPOUSE TRUST
ESTATE FREEZE
*
IMPORTANT EXCEPTIONS
SPOUSE TRUST
ALTER EGO TRUST
JOINT SPOUSAL/COMMON-LAW PARTNER TRUST
TESTAMENTARY SPOUSE TRUST
PLANNING CONSIDERATIONS
*
PERSONAL TRUST S.107(2) ROLL-OUT
- ELIMINATES 21-YEAR RULE ISSUE
- BUT NOW THE ASSETS ARE IN THE HANDS OF A
BENEFICIARY
*
ALTERNATIVES TO S.107(2)
- S.107(2.001)
- S.107(2.002)
*
ABOVE CAUSE S.107(2.1) TO APPLY
- DISTRIBUTION GREATER OF FMV AND COST
- CONSIDER IF TRUST HAS TAX SHIELD
TRUST SETTLEMENT CONSIDERATIONS
*
BE
-
VERY CAREFUL
S.75(2) IS ONEROUS
PROPERTY NEVER REVERT TO SETTLOR
WATCH OTHER ATTRIBUTION ALSO
*
SETTLOR LINEAR RELATIVE TO BENEFICIARIES
*
KEY MATTERS TO NOTE
- SETTLOR CAN BE TRUSTEE
- SETTLOR SHOULD NOT BE BENEFICIARY
- TRUST SHOULD BE IRREVOCABLE AND NO
VARIATION
- SETTLOR PAY COSTS TO ESTABLISH TRUST