The Opportunity in Trusts

With Dale Durand, VP, Estate & Tax Planning

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Disclaimer

Invest better: Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual fund securities are not covered by the Canadian Deposit Insurance Corporation or by any other government deposit insurance. Mutual funds are not guaranteed, their value changes frequently and past performance may not be repeated. There can be no assurance that the NexGen money market funds will be able to maintain their net asset values per security at a constant amount or that the full amount of your investment in such funds will be returned to you.

The payment of distributions for Dividend Tax Credit Class and the Return of Capital Class should not be confused with a mutual fund’s performance, rate of return or yield. If distributions paid by a mutual fund are greater than the performance of the fund, then your investment will decline. Distributions paid as a result of capital gains realized by a mutual fund and income and dividends earned by a fund are taxable in your hands in the year they are paid. For Return of Capital Class, your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, then you will have to pay capital gains tax on the amount below zero.

The rates of return, annual distribution rates and income components comprising a given distribution contained in the tax cases and reflected in certain graphs and tables are for illustrative purposes only utilizing various assumptions to demonstrate the importance of compound growth and the effects of taxation on a given investment. They are not intended to reflect, nor should they be interpreted, as an indication of future values or returns on investment in respect of any NexGen Fund.

Tax liabilities on investment income and capital gains earned by a mutual fund cannot be mitigated nor can they be fully managed in all circumstances. The risk increases the greater the investment return earned by the mutual fund. As a result, a mutual fund may be required to make taxable distributions to investors in a NexGen Tax Class for which a distribution or type of distribution is not optimal or in accordance with their tax preference. The tax efficiency of the Return of Capital Class and the Compound Growth Class is enhanced the greater the demand for the Capital Gains Class, Dividend Tax Credit Class and the Registered Fund Class.

The contents and information contained herein are for informational and educational purposes only and should not be construed as legal, tax or investment advice. Information contained here is believed to be accurate and reliable at the date of printing, however, NexGen cannot guarantee that such information is complete or accurate or that it will remain current. The information is subject to change without notice and NexGen cannot be held liable for the use of or reliance upon the information contained here.

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• Many types of trusts– Testmentary Trusts– Inter vivos

• Family Trusts• In trust for accounts

• Many strategies available to you– Income splitting– $750,000 Tax Free – Capital Gains Exemption– Alter ego trusts– Prescribed rate loans

The Opportunity in Trusts

Our focus today

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Taking Advantage of Trusts

As an Investor . . . – You can select investments that suit your needs

However . . . • You cannot control performance but;• You CAN control the impact of taxes

What if you could add 2 or 3 per cent to annual after-tax rate of returns?

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Improve Your Tax Alpha!

“Tax alpha is the additional after-tax return

you can add to your portfolio by taking steps to

minimize the tax burden”

~ Tim Cestnick, Finance Writer & Tax Authority

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Stop Throwing Money Away!

There is no longer any reason to pay excess tax on your hard earned Investment Income.

1. Invest your Personal After Tax Savings tax efficiently

2. Use every tax return in the family (including a Trust’s to increase the family’s tax Alpha)

3. Pay for expenses such as private schools and children’s sport programs from a Trust

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Family Trusts

• To set aside capital for an individual or group

• To facilitate legal income splitting

• To “creditor proof”

Key Points

• A Trust is a “person” and it always holds “After Tax Personal Dollars”

• Trusts require a separate annual T3 tax return

– T5 slips are always come from Corporations

• Investment advisors use “In Trust For” Accounts

– Informal versions of a legal Trust

– Not to be confused with the Family trusts

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Tax Efficient Family Trusts

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Family Trusts – A Primer

• Trust are either testamentary or inter vivos• Family Trust are usually inter vivos or “while alive”• Inter vivos trust have no graduated tax rates (all income at the HMTR)• Must be careful to avoid Attribution (capital gains only for minors)

• All income flows through a Trust to a beneficiary intact– Dividends retain the appropriate dividend tax credit and Capital gains are

only half taxable.

• Taxable income may be flowed through to the beneficiaries without immediately distributing cash to the beneficiary– Tax bill but no cash!– Capital may then be distributed tax free later

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Trust Terminology

• Settlor– The person who establishes the Trust by contributing property. This is

often an initial nominal item such as a Gold Coin. Three things must be in place to properly establish a Trust

• Certainty of property• Certainty of intention• Certainty of beneficiaries

• Beneficiaries– Could be anyone, but must be specifically named– Commonly, “the Family”

• Trustee– Named protector of the Trust (and its stated intentions as stated in the

Trust document)– Fiduciary Duty of utmost Good Faith– Usually Parents plus one other (total of 3).

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Powers of the Trustees

A well structure trust document should include the power to:

1. Invest

2. Pay debt and taxes

3. Distribute, retain or convert assets

4. Borrow

5. Lend

6. Incorporate, enter partnerships, carry on business

7. Manage property

As well as:– The Power of Sale and;– The Right to act as Officer/Director

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Strategy 1: Income Splitting

Key Points:

• Control the timing, frequency and type of distributions among Beneficiaries to save tax dollars

• A Family Trust can be implemented to facilitate income splitting– Identify potential recipients and where Tax Alpha can be

created• Family members?

– Spouse– Minor Children

– Use every beneficiary’s (and the Trust’s) tax return to achieve maximum tax efficiency

– Consult your accountant & lawyer

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Use Your Family to Income Split

Strategy:Allocate Income to Family Member that will pay the least income tax on that income! But the trustees control everything!

Result: Minimized Tax Payable

A Tax-Efficient Family Income Strategy – An Example

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Strategy 2: Multiply the Small Business Capital Gains Exemption

• Lifetime $750,000 gain exemption on the sale of eligible small business shares

Circumstance:• The Trust owns the common shares of the Canadian Controlled Private

Corporation• The beneficiaries of the trust are the family members.• The owner manager is the Trustee, the Trust is the Vendor of the share sale• Capital gain eligible for Small Business Capital Gains Exemption can flow

through the trust to the beneficiaries• Hence, the multiplication of this exemption among the family

– Special Note: Last Federal Budget (not passed) aimed to limit this multiplication to those 18 years and older.

– May assume that this will be in the next Federal Budget

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Simple Structure to Maximize Tax Planning Opportunities

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Strategy 3: Alter Ego Trusts

• To efficiently structure an estate while retaining control of the capital

• For individuals 65 or Older• Only beneficiary is the Individual• Capital is contributed to the Trust• Only this one beneficiary is entitled to income and capital.• Benefit is:

– Creditor proofing– By passes Probate– Bypasses Will– No 21 year rule– Incapacity planning– Disadvantage: Loss of marginal rates at death

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Strategy 4: Prescribed Rate Loans

• Individuals in the highest tax bracket can income split and avoid income attribution

• The individual lends capital to the Trust and in return takes back a note with a government prescribed rate– Similar to the Spousal prescribed rate loan strategy

• Current Prescribed rate is 1% (an all time low!)

• Income to lender and expense to the Trust if used for income producing investments.

• Any type of income can be allocated to any beneficiary• Must be sure to follow all rules (ie pay interest no more than 30 days after

December 31) in order to maintain the 1% rate

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Strategy 4: Prescribed Rate Loan Example

Investing without the Trust LoanEligible Dividends Earned @ 6% 60,000$ Taxes Payable @ 28.19% (HMTR on Eligible Dividends) 16,914-$ After tax Cash 43,086$

Using a Trust Loan to Invest Investment AccountsLender Trust Lender Trust Beneficiaries

Step 1 Loan 1,000,000-$ 1,000,000$ Step 2 Lender invests Step 3 Annual Interest charged 10,000$ 10,000-$ Step 4 Eligible Dividends Earned @ 6% 60,000$ Step 5 Allocated to Beneficiaries 50,000-$ 50,000$

Incremental Taxable income 10,000$ -$ 50,000$ Taxes Payable 4,641-$ -$ -$ After tax Cash to Parties to Loan 5,359$ -$ 50,000$ 55,359$

12,273$

Annual Tax Returns

Year 1 Advantage of the Trust Loan Strategy

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Solutions: A Comprehensive Corporate Class

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Tax Efficient or Inefficient: Options are Available

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FYI: Personal Tax Rates

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For more information

Access the following materials: – A soft copy of this presentation– Client-friendly documents on tax efficient investing

and NexGen– A link to the replay of this presentation (within 48

hours)

Located at . . .

www.nexgenfinancial.ca/trusts

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Thank You

Questions?

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