Introduction to Budget 2017 Update & Tax Tips For Investors – Jamie Golombek

March 29, 2017

[An Introduction to Budget 2017 Update & Tax Tips For Investors]

Hello, everyone. And thank you for joining us today. On behalf of CIBC Investor's Edge, I would like to welcome you all to this webinar with Jamie Golombek. My name is Dimple and I'm your host for this event.


Now a few things to know before we get started, CIBC Investor Services Inc., does not provide investment or tax advice or recommendations so everything we share today is for education purpose only. Also we are recording today's session and it will be available on our website. You would find the link for the replay on our homepage.

[CONTROLS Full screen control Q & A window]

If you wish to view this full screen, you may do so by clicking on the expander arrows located on the top right-hand corner of your screen. And should you have any questions during the presentation please take a note and you will have the opportunity to submit this question at the end of the presentation. 

[SPEAKER Jamie Golombek Managing Director, Tax and Estate Planning]

Today we will discuss about the measures in the 2017 Federal Budget that affect investors as well as tax planning tips that may allow investors to maximize after tax investment income given the current economic climate. We are so excited and proud to have Jamie Golombek as our presenter this afternoon. Jamie is quoted frequently in the national media as an expert in taxation. He writes a weekly column called Tax Expert for National Post and has appeared as a guest on BNN, CTV News, The National, and he is also a regular personal finance guest on the Marilyn Denis Show. So with great pleasure, please join me in welcoming Jamie Golombek. Thanks very much. And thanks everyone for joining us. 

[Presentation Agenda]

My plan is to talk for about 40 minutes, 45 maximum, and go through a variety of items that specifically relate not just to the budget but to tax planning season generally. So my agenda is very straightforward. What I want to do is I want to cover some tax filing tips, what's new and what's gone after the budget. I'd like to look at income splitting, specifically how can we split family income including investment income with family members. Talk about the perennial question that everyone gets asked, RRSPs, TFSAs or paying down that debt? Talk briefly about paying for post secondary education using RESPs, very tax effective way to get guaranteed rate of return of 20% on your annual contribution. And I'll talk about some donation strategies for investors specifically to maximize the tax effect of your donations. And then finally, because it's tax season, I'll spend a few minutes talking about how to reduce your tax deductions at source to avoid getting that big refund every year and having that money work for you throughout the year. So let's begin. And again, if you have a question, feel free to ask us and we'll address the questions towards the end of the session. 

[An Introduction to Budget 2017 Update]

So what's new and what's gone for this year's tax filing season? Well, we'll start with the Budget. There is, to be honest, not a lot there. We will spend a few minutes covering it but there were no major policy changes. This government continues to focus and target most of it's tax policy on the middle class and continues to look at ways to tax the wealthy Canadians. So the question we asked ourselves is who is this middle class that we keep talking about? Because we saw the tax cut last year, the middle income tax cut, affecting the middle class. But if you actually break it down, we actually ran some analysis and we looked at all the Canadians that filed tax returns. The most recent data comes from the 24 tax year season. And we analyzed all those returns. About 35 million people living in Canada, and of those about 26 million people filed returns. Doesn't mean the other 9 million or so didn't file. It just means that those are probably children that didn't have to file. So we're talking about 26 million people, of those 2/3 of those people, that's 68%, had income under $45,000 a year. And that means that they did not benefit whatsoever from the middle income tax cut. The middle income tax cut affected about 8 million people. That's 31% of the filing population, and that would have income anywhere from $45,000 and above. And if you look at the 1% where they're targeting specifically a number of tax measures including the new high tax rate, you're looking about an income cut off in Canada of roughly $250,000. And that's the top 1%. That affects about 253,000 people. So the question that begs is, you know, how high can you go when it comes to targeting wealthy Canadians? If anyone took an economics course in university, you might recall something called the Laffer Curve that looked at the point of maximum government revenue. And they said, Look, if we set a tax rate of 0, the government collects no revenue. If we set a tax rate of 100%, the government also collects no revenue because no one's going to work if all your money goes to tax. Somewhere between 0 and 100% is the correct rate of tax in which the government collects maximum revenue. And then the debates are all over the map as to what that rate is. Is it 50%? Is it above 50%? Clearly, the government believes that somewhere around 50% or more. Many economists believe that once you hit 50% there's a true disincentive to work. People work less and ultimately the government collects less. And also people start engaging tax experts, accountants, lawyers, financial planners, et cetera, to do planning to try to reduce their taxes when their tax rate becomes too burdensome and too onerous. So we'll see but right now, if you take a look at our federal brackets there were no changes in the current budget. So we have five brackets in 2017, and they were indexed to inflation. So you see the first bracket for about $45,000 is 15%. We go up to that middle income tax cut between $45,000 and $92,000 that's 20.5, that's down from 22%. We have the next bracket at 26, then 29, and then we have that new high income bracket that was to affect people over $200,000 that's been indexed so it's $202,800 for 2017. And that's the 33%. When we add provincial tax rates on top of that, depending on the province that you live in, you find that on the left column your rate for ordinary income at the highest margin is over 50% in 7 out of 10 provinces. Provinces like Ontario, Quebec, New Brunswick, and Nova Scotia, you're looking at almost 54%. And, again, when you get over 50% you question whether from economic policy perspective this is the right thing to do. And especially when we see what's going on right now in the United States, we see tax reform being proposed by President Trump, his top rate being applied of a federal rate of 33%. Depending on where you live in the United States, for example, someone in Florida pays no personal state income tax so imagine a medical professional working in Ontario paying tax at 53.5% gets a job offer in Miami and can move to the United States as a mobile medical professional and be taxed at a 33% rate. So these are some of the issues that I think the current government needs to address. Capital gains have not been affected. That's taxed at half your marginal rate. And then eligible dividends would come from your Canadian dividend paying stocks or indirectly by your mutual funds or your ETFs. Those are taxable at a preferred rate. Non-eligible dividends is simply if you have a private company income's taxed at a low business rate, the dividends are slightly taxed at a higher rate to recognize the fact that income was already taxed in corporation. 

[What wasn’t in the Budget]

So what was not in the budget? Well, as you know by now, the capital gains inclusion rate was rumored to go up to either 66 and two thirds, or 75%. One professor at UBC, British Columbia suggested that it should go to 80%. It was left at 50%. So any capital gains that you would incur are taxable at 50%. And there was some planning transactions available that you could've done before the budget, and if you did those transactions, you could make an election to do those transactions at the cost instead of recognizing the gain because the inclusion rate didn't go up. Stock option deduction remains at 50%. That's closely tied to the capital gains inclusion rate from employee stock options. They were supposed to be in the liberal election platform a $100,000 annual limitation exercise of employee stock options. That has not happened yet. No changes to the dividend tax rate. There was rumor that they were going to change the dividend tax credit rate as well. No changes at all and currently no material changes to the taxation of private companies, including professional corps, yet. Because this is coming, and I'll talk a little bit about that a little bit later on. 

[“Boutique” Tax Credits]

So I guess the main theme in the budget was this continued focus on Boutique Tax Credits. There's a whole bunch of these tax expenditures, the income tax act. They're complicated. They're hard to administer and they're expensive. And I question whether or not they actually lead to results. In other words, when you pay people to enroll their kids in physical fitness, are the kids actually more physically fit? In other words, does it encourage behavior that's going to be done anyway or does it actually promote new behavior? 

[Children’s Fitness/ Art Credits]

Now, we saw in last year's 2016 Federal Budget, the elimination of the children's fitness amount and the children's arts amount. Those are gone for 2017. In addition, last year we saw the elimination of the education amount and the text book amount. We still have the tuition amount that's still available, but the education and text book amounts have been eliminated for 2017. In terms of tuition, what they have done this year in the 2017 Budget is the 15% non-refundable credit. It's carried forward indefinitely. $5,000 can be transferred to a parent or grandparent, but they've now expanded the definition that eligible courses would now include occupational skills courses taken at a post-secondary level institution. For example, a course taken to improve numeracy or literacy that would ultimately improve job skills will now qualify for the tuition credit.

[Public Transit Credit]

Also on the chopping block for 2017 effective July 1st, the public transit credit. That is being eliminated and instead those funds are going to be used to improve public transit. In other words, the subsidizing that was going on through the tax system, led to some bizarre administrative complexity with being able to claim the credit. There was a case I wrote about in the paper a number of months ago when an individual tried to claim the public transit credit for use of what's called a PRESTO card in the greater Toronto area and it wasn't a monthly pass. Effectively, it was a series of rides and he had to prove that he took the right number of rides over the right number of receipts and he ended up going to court. And CRA denied him because he didn't have the proof of how many rides he took. In the end, the judge was sympathetic, but it just illustrates the complexity of administrating this type of credit. At the end of the day, does it really help people to take more public transit or does it subsidize something they're going to do anyway? So this is what's happening on the transit credit. 

[Disability Tax Credit]

In terms of disabilities, people with disabilities, we have had something called the Disability Tax Credit that's worth about $1,200 federally plus a provincial savings depending on the province you live in. You must have a permanent impairment that's expected to last at least 12 months and must be present 90% of the time. Under the current rules, there's a complex system that tells who can certify depending on the type of disability. In most cases a medical doctor, an MD, can certify on the case of blindness. Obviously an optometrist can do it. Speaking, a speech language pathologist, I'm not going to go through this list. What the government has done, however, is they've expanded the definition of who can qualify to fill out the disability tax credit certificate which must be sent to the CRA for approval to now include a nurse practitioner recognizing the fact that nurse practitioners do have this capability and knowledge, and I think this will be helpful in terms of people being able to qualify for the disability tax credit. And that's important obviously for the credit itself, but also to promote eligibility to open up a registered disability savings plan. RDSPs have been quite important ways to save for someone with a disability's future because of the generous government grants, $70,000 of grants and $20,000 of bonds depending on the income of the disabled beneficiary. What they're also doing is revamping the caregiver credit. This is complicated stuff. We currently have three credits: An Infirm Dependent Credit, a Caregiver Credit, a Family Caregiver Tax Credit. They all sound the same. They're all different. They're too complicated to go over. It's all being phased out. Instead, they're proposing a brand new credit for this year for 2017 with an income phase-out range between $16,000 to $23,000, and the credit amount about $6,900 lower with minor kids. So what is going to happen is you're going to have a much simpler tax filing process system for the 2017 year. We don't have all the details yet, but just stay tuned for that. I think this is a positive development. 

[Medical Expense Tax Credit]

On the medical expense credit side, currently we can claim a 15% non-refundable credit for medical expenses once you've spent at least 3% of your net income or $2,237, whichever is lower. That number's $2,268 for 2017. Now, if someone was taking medications for infertility, those are currently eligible as long as you have a diagnosis from a medical doctor that you have this medical condition of infertility. The government is changing this and they're saying that now you can include any costs for treatment such as IVF, in-vitro to conceive a child even for an individual that doesn't have a medical infertility condition. So specifically we're thinking of same sex couples, single people that would like to conceive a child that don't necessarily have an infertility issue, but obviously cannot be able to conceive other ways. And I think, again, this is a positive development for those individuals. 

[Some Other Federal Tax Credits]

In terms of some of the other credits for 2017, everyone the basic personal amount. That's gone up by inflation. That's $11,635. These are all at the 15% Federal level. And effectively, every Canadian gets the first $11,635 tax free. If you have a spouse or partner you get another $11,635, but that's reduced dollar for dollar based on the spouse or partner's income. If you're over 65 there's an age amount of $7,000 If you have pension income it's a $2,000 pension amount. Again, these are all based on a 15% non-refundable federal credit and there may also be provincial credits on top of those depending where you live. Now, I don't think we've seen the end of this in terms of changes to the tax credit system. The government announced that they are reviewing Federal Tax Expenditures, that the review would not be completed in time for the budget. So stay tuned because I expect more announcements to come on the further elimination or refinement of these boutique tax credits in the months ahead. 

[Canada Savings Bonds Status]

In terms of the Canada Savings Bonds, you may have seen this in the paper. They were introduced back in 1946 shortly after the war. They really peaked in the mid 80s as you can see by the volume in terms of the chart in terms of what was sold. And unfortunately today, interest has waned dramatically. And currently it's less than 1% of the federal market debt, just under about $5 Billion. And it really is no longer a cost effective source of funds. As a result, in the budget, the government announced that these are going to be discontinued in 2017. There are lots of sources to be able to park money in secure manners There are GICs available. There are money market funds. There's government bonds. There's a whole variety of alternatives that you can do. But Canada Savings Bonds after this year will no longer be an option. Now, if you have a private company, or you're a professional that has incorporated your practice, changes may be coming to the taxation of private companies. In the 2015 liberal election platform, the government said that they'll ensure that CCPC, that's Canadian Controlled Private Corporation status is not used to reduce personal income tax obligations for high-income earners rather than actually supporting small business. And they quoted a study that looked at professionals and income splitting and saying a cost of about half a billion dollars a year is lost as high-income individuals like doctors, lawyers, and accountants use CCPCs as a way of income splitting. So there were no changes in the budget yet. But what they did do is they said they're looking at three things that concern them. Number one, holding a passive investment portfolio inside a private company which could provide some financial advantages. Number two, sprinkling income so that income can be paid out into the hands of lower income family members. And number three, converting your private company's regular retained earnings into capital gains taxed at lower rates. A paper is going to be issued later this year to go over those changes, and we may see some changes coming. So what are they actually getting at? 

[Perceived Abuse in Using Corporations to Reduce Family Taxes]

Let me just spend a couple of minutes to walk you through an example, a theoretical example, that shows you some of the perceived abuses that the government has with these private companies including specifically opcos that are generating active income as well as professional corporations including medical corporations, dental corporations, and various other professions that are allowed to incorporate. It all is based on the theory of integration which says that if you earn $100,000 of income for example, you should be indifferent whether you earn the income in your corporation or you earn it personally. 

[Theoretical Integration - $100,000 Small Business Income Earned in a Canadian Private Corporation]

So let's compare that. $100,000 of small business corporation assuming it qualifies for the small business deduction, it tracks a low rate of tax, Federal and provincial of about 14.5%. That nets you $85,500 after tax. To get that money out of the corporation that's after tax dollars. The corporation pays a dividend to its shareholder of $85,500. The dividend is paid to pay tax on that of about $35,000, and your net at the end of the day $50,500. How would that compare to the same $100,000 earned either as salary from an individual that was non-incorporated or earned inside the corporation but paid out as a bonus at the end of the year. So you have $100,000 of income, and this income is taxed at a top rate of let's say 50%, 49.5, and we are left with 50.5. In other words, $50,500. You can see that an after tax basis the theory of integration says that an individual should be indifferent. We used the top marginal rates in this example. We could rerun these numbers at any rate. We can run them at lower rates too. The same thing would hold. Integration says that you should be indifferent between whether income is taxed in your private company and paid as a dividend or taxed in your own hands without the corporation. We can see that here. This is true in every province in Canada right now. We have an integration difference of under 1%. So we have basically perfect integration in Canada. There is no tax advantage. However, what there is, is a substantial tax deferral advantage for the business owner or the professional who's incorporated that does not need all of her money currently. She can choose to leave that money in that corporation, pay a small business rate of only 14.5%, and defer, in this example, 35% tax forever until the money is taken out as a dividend. That I think is what the government is concerned about, the tax deferral advantage, in some provinces as high as 40%. In Ontario it's 39%. I think that's one concern. 

[Income Splitting: Capital Gains]

The second concern is with Income Splitting. Typical example, we'll have a corporation owned by multiple shareholders. It's often done by a family trust. Two ways to income split, one is pay dividends from the corporation to the family trust ultimately out to the spouse and kids with lower tax rates. I remind you that if the kids are under the age of 18, it doesn't work because of the kiddie tax. Once the kids are over 18 though, it's effective income splitting. Similarly with capital gains. You sell the shares of the corporation. The capital gain is realized by the trust, allocated out to the family members and low and behold four people have been able to split the capital gains which are taxed at only 50%. It gets even better if the corporation qualifies for the lifetime capital gains exemption which is $836,000 per person. So imagine you got a spouse and two kids, you have four individuals, four times 835 is three and a half, nearly three and a half million dollars of tax-free capital gains. Adding again, this is something the government is concerned about. We'll see a paper probably I'm guessing in the summer. There will be comments on that, and then I suspect we'll have some changes announced in the fall. So stay tuned. We haven't seen the end of private corporation reformed tax.

[Principal Residence Exemption (PRE): General Rules]

Another change that you'll find for the first time in your 2016 tax return deals with the Principal Residence Exemption. As I think we all know in Canada, the capital gain from the sale of your principal residence is exempt from tax. However, you can only have one principal residence per family since 1981. So if you've got a home in the city and you've got a vacation property, you need to choose at the time of sale which one will be designated as the principal residence during the years of ownership.

[Old Reporting Rules]

Now, under the old rules, if your entire gain qualified for the exemption, you didn't have to report it, which I found surprising. The biggest gain that anyone had in their entire life for the most part is not reportable. And the government said we got to change the rules. Now a lot of the rules were changed dealing with foreign buyers and the concern about them claiming residence exemption but contained in the rules that were announced in October of 2016, just a few months ago, was a rule effective immediately which says, that if you sold your principal residence in 2016 or anytime thereafter, including today, you must report that sale on your return. And if you don't do that, you can't claim the exemption. And if you're late, the penalty is $100 a month up to $8,000. 

[New Reform – Changes to the PRE]

So there's a new form. It's actually the continuation of schedule 3 that asks you to fill out all the details of the sale of your principal residence. They want the street name, the address, the year you bought it, the proceeds of disposition. It's now easier for the CRA to identify any dispositions they want to audit. For example, we talked about flippers. These are individuals that buy a home, they move the family in, they start renovating that home. They renovate one room, then they renovate the next room. Their full time job is renovating their home. A year later they sell it. They make a profit. The claim the residence exemption because, after all, they were living in it. It was a principal residence. But then again, they move somewhere else and they do the same thing again. They buy a home. They renovate it. And they do this year after year after year. As a recent case just showed, this is a flipping transaction. It doesn't qualify for the Principal Residence Exemption. It's not even capital gains treatment. It would be fully taxable business income. And now the CRA can monitor the frequent use of the exemption. In addition, there's a limit to how much land qualifies for Principal Residence Exemption with certain exceptions which we won't get into today. The half-hectare rule. Now, they'll be able to identify based on the address, if there's too much land involved maybe some of the capital gain has to be prorated and is not fully exempt. Well, that's it for our changes for the 2016 filing season and the budget.

Now we're going to talk about some general tax planning ideas. 

[Splitting Investment Income with Family Members]

We'll start with income splitting. We've written a report, it's available online, called The Great Divide. It looks at various income splitting strategies that can lower your family's taxes. 

[The Great Divide: Common Ways to Split Income]

The impetus for writing this was the elimination of the family tax cut. As you know, when you file your 2016 tax return, this doesn't exist anymore. We had something called Family Income Splitting, where if you had kids under 18 you could transfer $50,000 of income from your high-income spouse or partner to your lower-income spouse or partner, and realize up to $2,000 of federal tax savings. That has been eliminated for 2016, however, other income splitting is still possible. For example, pension income splitting, higher-income spouse paying expenses, prescribed rate loans, et cetera. 

[Family Tax Cut Credit Eliminated]

Let's just take a moment and go through each of these first three ideas. And the rest of them you can read on your own.

[Pension Income Splitting]

So pension income splitting, that has not been affected at all. It's a joint election. It's on Form T1032. It's in all the software packages. Your accountant should be doing this for you. You can transfer up to 50% of your pension income to a lower-income spouse or partner. Number one, you could have savings of up to 15% on the pension income depending on it. You could double the pension income credit that we talked about earlier, the $2,000 amount. If you're subject to a grind of your age credit because your income's too high. You could reduce that grind and in some extreme cases if you're in OAS clawback territory, by moving pension income or in some cases RRIF withdrawals after 65, and taxing that in the other spouse's hands, you may be able to actually preserve all of your OAS.

[Pension Splitting – Example  Ontario 2016]

Just a quick example, if you've got Barb and Hal, 66 and 64, and currently Barb has this great pension of $100,000. She's collecting CPP and OAS of $20,000 for income of $120,000, whereas Hal has only some investment income of $10,000. If we actually do some income splitting and we're able to split $50,000 of income, half to Barb and half to Hal, the net result after going through these calculations would be about $4,400 of tax savings. We would not be able to get the pension credit because, again, Hal's not 64 yet. The age credit's available, the OAS clawback would be fully preserved. So we're looking at savings of nearly $12,000 by the couple. Again, a great opportunity to consider pension splitting. Something that's important to remember is the type of income that can be split. So if it was pension income then in fact each of them would get a credit in that example and you could split pension income from a registered pension fund at any age. You don't have to be 65. However, when it comes to RRIF payments or annuitizing your RRSP, and again, this is not an RRSP withdrawal. You have to take your RRSP and convert it to a registered annuity. Then it qualifies but only from age 65. So as many people have pointed out to us isn't there some age discrimination here? And absolutely there is. There is definitely age discrimination because if you're a member of a pension plan and you take your pension early, you can pension split before age 65. However, if you are a member of an RRSP, you're contributing to an RRSP, even if you convert to a RRIF at 62, it doesn't qualify for the pension splitting. 

[IFIC Lobbying to Change Pension Splitting Rules]

And, in fact, the industry has been lobbying, Investment Funds Institute of Canada wrote a letter a couple of years ago, specifically to the house of commons standing committee on finance asking for changes to change the pension income splitting rules to make them more fair, more equal to registered contributions. Of course, sometimes you have to be careful what you ask for. 

[Quebec’s Solution for Pension Splitting]

There was lobbying a few years ago for Quebec. Quebec says, for Quebec tax purposes we're going to change the law. We'll just take it away for everyone until age 65. So I think we got to be very careful what you ask for in terms of lobbying because there is a risk here that the government may do the same thing as Quebec did for Quebec purposes. So right now we are stuck with 65. A much simpler solution for income splitting is if you can in your family have the higher-income spouse pay all the expenses of the house. 

[Higher-income Spouse Pays Household Expenses]

So let's say, for example, you have $60,000 of expenses. We've divided them equally. So we have a high-income spouse, we have a low-income spouse. We have after taxing income of $70,000 for the high-income, $30,000 for the low-income. We're splitting the expenses. So at the end of the day the $40,000 is left over to the high-income spouse. The low-income spouse has $0. And we have $40,000 as a family to invest. if instead we said, OK, let's have the high-income spouse pay all of the expenses of the household and leave the low-income spouse with the full $30,000 to invest. In this case, the low-income spouse would preserve all of their money to be taxed in an investment account at a lower rate because she or he is at a lower tax rate than the high-income spouse. This is a very simple straightforward way to be able to do not even income splitting but be able to preserve capital in the hands of lower-income spouses without worrying about the attribution rules.

[Prescribed Rate Loans]

Now what are the attribution rules? The attribution rules are rules in the Income Tax Act that say that if you transfer money to your spouse or partner all the income or gains attribute back to you. When you transfer funds to the kids, then all the income but not the gains transfer back to you. The exception is if instead of doing at transfer you do a loan at the prescribed interest rate. The government has just confirmed that the prescribed rate will stay to 1% until the end of June. That's the lowest rate in the history of Canada, and in fact, you can lock in that rate for the duration of the loan. So how does this effectively work?

[Income Splitting Example of Spousal Loan at 1%]

So let's say we've got this couple here, Jack and Dianne. Dianne's the high-income earner. Jack is the lower-income earner. And we're going to do a loan of half a million dollars. Now, for this example, we're going to assume a 5% rate of return. I've used interest income here just to make the numbers simple. There is currently no investment that we could find that will give you 5% interest today. However, typically speaking in a balanced portfolio, this would consist of some Canadian dividends, some foreign income, some capital gains realized and unrealized, and maybe a bit of interest increment 1 or 2%. So we're thinking that over the long-term you would get an average 5% rate of return. For the purpose of today to keep the math simple, we just assume it's fully taxable interest income instead of tax preferred capital gains 50% tax rate or Canadian eligible dividends. So Dianne's a high-income earner loaning half a million dollars over to her husband, Jack, charging 1% interest on a loan. So we've got $25,000 of income at 5%. The interest payable by Jack to Dianne at 1% is tax deductible. But it is taxable to Dianne. So really the net income that we can split is $20,000. If Dianne lived in Ontario, and your top rate was 53.5%, and Jack lives in Ontario and his bottom rate is 20%, then you're looking at a 33.5% difference. That's $6,700 a year of potential tax savings. 

[Income Splitting – Kids Action Plan]

Now you can do this with your children as well. I'd never want to loan my 11-year-old half a million because he wouldn't pay me back. But instead what you can do is if the kids are under 18, go to a lawyer, set up a family trust, and make a loan to the family trust at 1% and then have the investment income paid out to the kids or used to pay their expenses. So if the kids have hockey, summer camp, private school, any expenses to the kid paid out of the trust. The kids generally have no other income. They pay no tax. For example, if you're using a Canadian dividend strategy maybe investing in Blue chip Canadian stocks directly in your portfolio or maybe an ETF that has a high-yield Canadian dividend, currently in Ontario, for example, and it varies by province, but you can receive about $51,000 of Canadian dividends if you have no source of income. And all of that would be tax-free. And that's simply because the basic credit that we talked about earlier combined with the dividend tax credit. So very simple way to do some income splitting with family members. 

[Investing in RRSPs or TFSAs vs. Paying off Debt]

Now the classic question we get asked every year especially coming up to mortgage season is should we invest excess money in an RRSP, a TFSA, or use it to pay out debt? 

[Contribution Limits]

Now the RRSP limit this year is $26,000 up to 18% of your earned income. So if your earned income last year was $144,000 less any pension adjustment, you can contribute up to $26,000.




[TFSA Contribution Limit]


TFSA limit is remaining at $5,500. Cumulatively though that's $52,000. And I would say that if you have been 18 years of age and a resident of Canada since 2009, the only excuse that you have for not having $52,000 in a TFSA is that you don't have any money. Because TFSAs allow you to earn tax-free investment income for life. There is no income every year on whatever you earn. There is no income on debt. The entire amount is tax-free. And if you name a beneficiary in all provinces other than Quebec because outside the estate, and there's no probate fees or probate taxes to pay. So I can't think of a reason why someone would not have a TFSA if they've got cash in a non-registered account. 


[Reports on Tax-Free Income]


We've written four reports over the last six years dealing with tax-free income. The most recent one was called Mortgages or Margaritas. That looks at the whole issue of paying down debt versus saving for retirement. We've found that Canadians are worried about household mortgage debt and the mortgage rates are high, not the mortgage rates, the interest rates aren't high. The mortgage balances are high. And Canadians are concerned that they should be paying down their debt. And there's even an article on that in the Globe and Mail this morning. 


[Mortgages or Margaritas – February 2015]


We disagree. If you take a look historically at rates of return, if your mortgage is below 3%, so for example, people are getting mortgages at two and a half, two and three quarters, 2.6%, and over the long-term you've got a long enough time rise in 10, 15, 20, 30 years. It seems to us that it makes sense to don't aggressively pay down your debt, especially if it's mortgage debt below 3% and instead invest it in an RRSP or a TFSA. Over the last four years the average return at a balance portfolio has exceeded 6%. So again, returns vary. Mortgage rates are certainly guaranteed in terms of you know what you're getting. But in today's low interest rate environment, our view is that you should be taking some money every year, setting it aside for retirement rather than aggressively paying down your mortgage debt. In terms of the math beyond all this, at the end of the day the RRSP equals the TFSA equals paying down debt. 



[The RRSP, the TFSA and the Mortgage Chart 1]


Assuming your tax rate today is the same as the tax rate on retirement, and assuming that the rate or return is the same, in other words you have a 5%, let's say, rate of return in your RRSP, 5% of your TFSA, and a 5% on your mortgage. Because theoretically RRSPs equal TSFAs because ones with pre-tax income, ones with after tax income, similarly paying down debt is using after tax income. It's similar to the TFSA. Where we differ, of course, is rates of return. Bottom line, is if you think your tax rate today is high, will be lower in retirement, we would do RRSPs instead of TFSAs. If your tax rates low today conversely, and it would be higher in retirement we would max TFSAs before looking at RRSPs. And ultimately we would look at your expected rate of return. If the rate of return on your investments over the long-term is higher than it is expected to be on your mortgage or your debt then clearly we believe that contributing to an RRSP or TFSA will outweigh aggressively paying down debt, especially when your mortgage rate is below 3%. 


[Maximizing Wealth: “Tax-free” RESPs for Education Funding]


One final idea in terms of maximizing wealth is if you've got kids, please do not forget about the RESP, the Registered Education Savings Plan which allows you to contribute up to $50,000 over your lifetime for a beneficiary's post secondary education. 


[Registered Education Savings Plan (RESP)]


Now this is after tax money. You don't get a deduction for your contributions, but you do get a 20% guaranteed rate of return from the government in the form of the Canada Education Savings Grant. That's 20% on the first $2.500 a year that you contribute with carry forward room that will double that from $500 to $1,000, all the earnings accrue on a tax deferred basis. 


[RESP – “Typical Strategy Start Late; Maximize CESG]


Typical example, people start late. They wait and they wait and they wait. 


[RESP – Results with “Typical” Strategy]


The kid's 10 years old. We say if you don't start at age 10, you're going to lose out on the maximum of $7,200 of government grants. So we start at age 10. We continue to contribute to age 17. We put in $36,000. We get the 20% grant, that's $7,200. Even at a modest 3% compounded annual nominal return, this pays for four years of school at $13,000 a year. But imagine if we can convince these parents to put in the same $36,000, get the same 20% Canada Education Savings Grant but instead start it from year one. $2,500 a year till we hit that maximum of $36,000. At the same 3% rate of return, we've now paid four $16,350 per year for four years of post-secondary education. That's about $65,000. And in almost every scenario that we've seen, this money is tax-free because the red is your contributions, those come out tax-free. The yellow is the Canadian Grants, and the blue is the 3% rate of return. The yellow and the blue are taxable to the student. Student has the basic personal amount of $11,000. If they're an undergrad in Canada they're paying tuition of about $6,000 of $7,000. So that's about $17,000 of credits. In my example here, $36,000 of the $64,000, was return of contributions. So you're looking at another about 28, 29, 30 thousand dollars, maybe even 40 thousand, little less. $30,000 of income over four years, $7,500 a year to the kid. But the kid has $17,000 of basic credit. So no tax at all in most cases on the RESP. 


[Donation Strategies for Investors]


Donation strategies. Let me just spend a couple of minutes on the charitable donation credit and show you how to maximize your opportunity if you're an investor. 


[Top Marginal Tax rate vs. Top Charitable Donation Credit Rate for All Provinces in 2017]


So first of all, the top marginal rate in Canada is on the left column. So for example, for someone in Alberta, the top rate is 48%. However, the top charitable donation credit in Alberta for example, is actually higher at 54%. That was supposed to be fixed a couple of years ago but the provincial government has not yet corrected that. Look at all the other provinces and you get an idea of where you stand. Manitoba top rate at 50%, donation rate of 50%. Some provinces in red are slightly below. For example, in Ontario, a donor in the top bracket of 53% will get a donation credit of only 50%. And that's because Ontario has not matched the high-income credit completely. 



[25% First – Time Donor’s Super Credit (FDSC) Last Chance in 2017]


We still have for 2017 your last chance for the first time donor super credit which can show you the substantial amount of increased credits depending on the amount of donations you make if you're a first time donor. It means you haven't made a donation by you or your spouse or partner after 2007. It's one time only. $1,000 of monetary donations you could be getting back depending on your income level up to 58% plus provincial credits on top of that. So this is a last opportunity in 2017 to use the first time donor super credit. There's no mention of extending that in the budget. 

Now the best thing I can tell you today in terms of being a charitable giver and an investor, is your opportunity to donate publicly-traded shares to registered charity. 


[Example: Donation Using Appreciated Shares]


Because the capital gains tax you'll pay on that is zero. Let me show you an example. You have some shares in your portfolio. They're worth $1,000. You paid $600 for them. And you have a capital gain of $400. If you were to sell the shares, the capital gains tax assuming let's say a 50% marginal rate on 50% of the gain, you'd pay about $100 of tax on that donation. You'd receive a receipt of about 50%, so you get $500 back less the $100 of tax. Effectively it costs you $600 to give $1,000 to charity. 

On the other hand, if you were to donate that stock in kind, directly to a registered charity the tax on the capital gain is zero. You still get a receipt worth 50% depending on your province $500, you've reduced the cost from $600 to $500 in terms of that donation. So in other words it's the most tax effective way to be able to give to charity. This is what I do every year. This is what people should do every year. Go through your portfolio. If you're going to be making charitable gifts, find the biggest accrued gain that you have, donate that in kind to the registered charity of your choice. If you have a bunch of registered charity, the amounts are small, consider donating it to a public foundation and then making the recommendations through a donor advised fund for them to allocate the funds to all the smaller charities that you want to allocate. It's a wonderful way of giving to charity in the most tax-effective way possible. 


[Donation of RRSP/RRIF Proceeds Donor has 50% Marginal Tax Rate]


Another idea is being able to donate money from your RRSP or RRIF. So to do that it's effectively a withdrawal, so you take $1,000 out of your RRSP or RRIF, pay tax at your marginal rate of 50%. You make $1,000 charitable donation. You have a 50% credit on that. And effectively you pay no tax. So effectively you can give your RRSP or RRIF while you're alive or on debt to a charity and there's no cost to you. There may actually be a benefit. If you're not in the top tax rate, let's say you're in a 30% marginal tax rate, if you take $1,000 out of your RRSP or RRIF you pay $300 of tax, but your donation credit anything above $200 a year, is eligible for the high donation rate. That's called 50%. So you have an additional $200 of benefit that you can get to reduce taxes on other income beyond the RRSP and RRIF withdrawal. So, in fact, a donation in this way can be beneficial to reduce taxes on investment income, pension income, and employment income or business income. So it's a wonderful way to give to charity in the most tax-effective manner possible. 


[Reduce Your Tax Deductions at Source]


One final idea to leave you with and then we'll turn it over for some questions. Reducing tax at source. 


[Plan Not to Get a Refund!]


I'm always amazed during tax season that people are happy about getting a tax refund. Because after all at the end of the day it's your own money. Why would you be happy about getting your own money? In fact, there's even a term for this in the dictionary called intaxication which has been defined as the euphoria of getting a refund that lasts until you realize it was your own money to begin with. The most common reason why people get refunds, and I'm not talking about getting back a few hundred dollars, if you regularly get back thousands of dollars every year in a tax refund, that is a sign of poor tax planning. The reason you're getting it back probably is because you're making deductions that are not taken into account by your employer when they pay you every couple of weeks on your paycheck. 


[Ways to Reduce Tax Withholdings for RRSP Contributions]


So, for example, if you have a group RRSP at work, use your RRSP contributions deduct at source. They'll reduce your pay automatically by the tax and you won't get a refund. But if you don't have such a plan, fill out the T1213 form with the CRA. On that form you list all the deductions and credits, things like RRSP contributions. You're putting $10,000 into an RRSP. Donations, deductible child-care expenses, deductible spousal support, things like that. You include those on this form, send it to the CRA. They'll issue an approval letter which you then take to your payroll department at work and authorize your employer to reduce your tax at source. And then what do you do with this? You'll have more money every couple of weeks depending on when you get paid. With that reduced tax deductions, you're able to save automatically. 


[Create a Savings Plan to Benefit from Reduced Deductions]


You can set up and automatic investment savings program, redirect that money into your RRSP or TFSA, maybe the kids RESP or ultimately an accelerated mortgage payment. 


[Thank You]


So we've been through a whole bunch of material today. There's additional supporting material available on the CIBC website. We've got approximately 10 minutes left. And we're going to head shortly into our questions and answers period. Thank you.


[Q & A]


Thank you, Jamie. That was an amazing presentation. So while Jamie is reviewing the questions, I wanted the audience who joined in later to know that you can type in your questions in the Q&A panel located on the right-hand side of your screen. And since our presentation today pertains to 2017 budget updates and tax planning, I would encourage you to ask questions more specific to this topic only. Also a little reminder that if you wish to listen to this webinar again, a link will be emailed to anyone that registered, or you can also access this on the CIBC Investors Edge website. We have some questions coming in. So just give us a few moments and we should be able to go through that quickly. All right. So we've got a few questions that have come in and I'll try to address those to the extent possible. So we had a question specifically on the impact to Toronto Transit Commission other transit commissions around the country. And that specifically deals with the issue of the public transit credit and the elimination of that on July 1st. I think there's been a lot of work that's gone into this from the government. I have to give the bureaucrats some credit here. I don't think it will impact government usage - transit usage The idea at the end of the day was the opportunity to redirect the government money directly into transit programs to thinks like Go and TTC and things like that. So I don't think it would decrease ridership. I think they have studied that and they have showed that the public transit credit really doesn't benefit in terms of the usage. Sure, it's helpful for the average person saving $15 a month or whatever the number was depending on the usage, but at the end of the day, does not mean that they won't take transit. So I'm not overly worried about that particular one. We have a question here that donates with $1,000, so a question about donations. So if I donate $1,000 of RRSPs which has an ACV of $500, how do I report this on a tax return? Well, great question. When you take money out of the RRSP, the $1,000 of RRSP is actually considered to be a withdrawal. So you'll get a T4RSP slip and it will show some withholding tax. You include that on your return and then you will get a donation receipt from the particular charity and you'll use that to off-set the tax and even get a refund potentially of the withholding tax. So very, very straightforward. We had a question about, give us more details about that prescribed rate loan at 1%. Which department should I ask? Well, certainly feel free to contact us at CIBC. We have an article we've written on income splitting specifically that goes over all of this. And if you take a look at that article, we get a copy to you we're happy to go through that strategy. It's clearly in there. We had an interesting question on paying minor children a salary from a family company. And the question specifically had to do with the basic exemption. Is that appropriate and does the child actually have to claim this amount as income? So the issue of reasonability for a family company's salaries has been going on for decades. At the end of the day you can pay your children a salary from your company. You better make sure that the kids are old enough to work and that the amount that you're paying them is reasonable because there have been cases where people have paid kids that are four years old, seven years old, and the judge has denied it and said there's no amount that you could pay these kids that would be reasonable. So I would say as long as the amount is reasonable, they're actually doing some work, they're helping with some filing, with some marketing, some envelopes stuffing, something like that, you can pay them up to $11,000. We think it's a good idea if you do so to issue T4s to the kids and there wouldn't be any tax withheld if it's under the basic amount and then have the kids file returns. And that sets up the best documentary evidence, specifically for this type of income splitting. But you got to be careful. A question from Arthur, does income from a RRIF qualify as pension income? Absolutely. So income from a RRIF qualifies as long as, again, you got to be at least 65 years old and then you can do pension splitting. We have another interesting question for a family trust. And the question from Jerry was, is a family trust available to someone without a private corporation? Absolutely. A family trust is a form of separated, a legal ownership of property from the beneficial use and enjoyment of that property. Anyone can set up a family trust. You don't need a private company to set up a family trust. So you would go to a lawyer, you get a trust document done. You'd settle that trust typically with a gold coin. And effectively you would then, let's say, do a loan to the family trust, charge 1%, you get the loan documented and then that family trust would open up the account, do all the investing in the account, and then allocate income on the regular, regular basis out to the beneficiaries depending on needs. As long as you're charging the prescribed rate, then a very, a very great way to do income splitting. Although, again, we wouldn't do it in terms of, unless you had I would say a minimum of half a million dollars to invest. We have a specific question on asking for information about IVF costs, specifically all the government said is that if you've got the receipt, these are things like you need the medical receipts, prescription receipts, et cetera, and those will qualify for the medical expense credit. So you just keep those receipts, you claim them when you file your return, and that would simply qualify for the medical expense tax credit. We had an interesting question here from Vito. And he's asking about whether there's any policy hope that Canada would mirror the US and permit mortgage interest deductibility. And quite frankly, I don't think so. If anything, I think the US might go the other way one day. You see, in Canada when you sell your principal residence the entire gain is tax free. There's actually no limit on that. The US has limits when you sell your home on what portion's allowed to be tax free. In exchange for that in the US they have interest deductibility on a personal mortgage. At the end of the day, if you look at tax policy, it doesn't really make a lot of sense to allow people to write off interest on personal investments. Your home is a personal investment. Just like if you get a Visa card, and you're paying a 20% interest to buy a large screen TV. That interest is not deductible because you're borrowing for personal consumption. On the other hand, if you're borrowing on margin, and investing in your investor account, then the interest is deductible because you're borrowing for the purpose of earning investment income. If you borrow it to buy common shares the interest is deductible because you're borrowing for the purpose of earning income. Similarly with business. So I do not think that we'll see that change. I also don't think it should change from a policy perspective. It would be nice. At the end of the day though, interest rates are very low right now and the deduction's probably not worth as much as it would've been when interest rates are higher. So we're running out of time. I think we can have time to do one more question. Let me try to choose a good one here. We have an interesting question here that looks specifically at the issue of joint investments. The question was can myself and my wife change the ratio on a joint investment account every year? And this is a subject of a lot of confusion. At the end of the day, you can have a joint account. The rules for taxation, because of the attribution roles that we talked about earlier say that the taxation has to follow the contribution to the account. So, for example, if a husband opens account, adds wife to the account, if all the money came from husband, then all the investment income and the gains must report on the husband's return. Now, very often people do 50-50. There has to be proof that the other spouse or partner contributed to the account to be able to justify the allocation to that. There's lots of great information on the internet if you just Google taxation of joint accounts. I've written about it. A lot of other people have written about it. That's all the time we have. I remind you to visit CIBC Investor's Edge for more information. I also have my own website, where you'll find thousands of articles on every topic that we've talked about. Back over to you. Thanks again, Jamie. It looks like that's all the time we have today. Jamie, I speak on behalf of all the audience that I thoroughly enjoyed listening to your insight. On behalf of CIBC Investor's Edge, I would like to thank the audience. We really appreciate you being here. Should you have any questions or comments, please visit the Investor's Edge website or please feel free to get in touch with us by phone, chat, or email. Thank you for joining us today, and we will see you.