Year End Tax Tips: 2010

1. Year End Tax Tips: 2010 Jamie Golombek Managing Director, Tax & Estate Planning, CIBC Private Wealth Management December 2010

2. Agenda • Year end tax tips • Tax shelter update • US Estate tax update • Two big ideas: • RRSPs for business owners? • TFSA vs RRSP

3. Tax loss selling - transfers • Transfer to RRSP? • Loss denied • Crystallize first, wait 30 days to buy back • Transfer to TFSA? • Loss denied • Transfer to RESP? • OK, but if held for 30 days, “superficial loss”

4. Tax loss selling – “superficial loss” • Superficial loss • Buy “identical property” within 30 calendar days • Who? • You • Spouse/partner • Corporation controlled by you/spouse/partner • Trust, if you or spouse is majority-interest beneficiary • Transfer to parent / child – OK

5. Tax loss selling – spousal transfer of losses • Spousal loss transfer • Victor + Maureen • Maureen – ABC Shares - $10,000 accrued capital gain • Victor – XYZ Shares • ACB - $50,000 • FMV - $40,000

6. Tax loss selling – spousal transfer of losses • Step one – Victor sells XYZ shares for $40,000 • Capital loss of $10,000 • Step two – Maureen buys XYZ shares, pays $40,000 • Victor’s $10,000 capital loss is now “superficial” • Added to ACBof Maureen’s shares ($10,000 + $40,000 = $50,000) • Step three – Maureen waits 30 days, sells for $40,000 • ACB - $50,000 • FMV - $40,000 • Capital loss of $10,000 can be used against ABC accrued gain

7. RRSP annuitants who turn 71 in 2010 • Convert to RRIF (or annuity) by December 31 • Final RRSP contribution must be made by December 31 • No sixty day rule • Unless spousal RRSP with younger spouse/partner

8. RRSP annuitants who turn 71 in 2010 • Consider one-time “over-contribution” • Client (71) has $100,000 of earned income in 2010 • Will create $18,000 of RRSP contribution room for 2011 • Contribute $18,000 to RRSP in December 2010 • Pay penalty of 1% or $180 for month of December • Deduct contribution in 2011 (or future year) against ANY source of income

9. Charitable Giving Strategies • Donations of publicly listed securities • NO capital gains tax • Donations of stock option proceeds within 30 days • NO employment income tax • Public vs. private foundations • Immediate tax savings • Source of annual giving (e.g. donor advised funds)

10. RESP deadline… • $50,000 per child • No annual maximum • Maximize Canada Education Savings Grants (CESGs) • 20% on first $2,500/annually = $500 • Catch-up CESGs back to 1998 • Max of $1,000 of CESGs per year • $7,200 per child maximum • Child turned 15 in 2010 with no RESP? • Contribute at least $2,000 to RESP in 2010 to get CESG for 2010 and make child eligible for 2011 and 2012 CESGs

11. Purchase computers - business assets • Claim a half-year’s depreciation, even if asset bought on Dec. 31st • Accelerated tax depreciation for computer purchases • Can write off 100% of cost of computers in year acquired • No “half-year” rule • For purchases from January 28, 2009 through January 31, 2011

12. Pay investment expenses by Dec. 31 • Investment counseling fees (non-registered only) • Professional accounting services • Safety deposit box rental • Interest expense

13. Spousal/Partner Loan at 1% • Spouse or partner gifts/transfers funds • FULL attribution of income / gains to transfero • Exceptions: • Pay FMV or prescribed rate loan • Rate for Q4 2010 – 1% • Lowest ever!

14. Spousal Loan at 1% (Example) • Jack loans Diane $200,000 • Investment earns 5% annually • Income splitting opportunity: $8,000 Tax Savings (BC): $8,000 X (43.7% - 20%) = $1,900 annually Interest Expense – 1% Jack Diane $200,000 Income $2,000 Income $10,000Interest expense (2,000)Net income $ 8,000

15. Tax Shelters • Auditing over 170,000 taxpayers • $5 Billion in denied donations • 2009 - 10,500 taxpayers claimed $285-million in donations through shelters • 2008 - 17,000 taxpayers claimed $480-million • “If it sounds too good to be true, don’t fall for it…The Canada Revenue Agency (CRA) is auditing all tax shelter gifting arrangements.” • CRA – August 13, 2007 Source: Globe and Mail (September 15, 2010)

16. Tax Alert (April 2009)

17. Maréchaux (2010) • Leveraged donation tax shelter • Produces "return on donation of up to 62.4%” • Supported by a tax opinion "from a firm of respected tax lawyers" • "subject only to a risk of challenge by the CRA" described as "slim” • $100,000 donation = $30K cash + $80K “interest-free loan” (included $10K in fees) • Was there a “gift”? Federal Court of Appeal – October 28, 2010

18. Lemberg v. Perris (2010) • Art flip donation tax shelter • Paid $78,500 • CRA allowed only cost of donation • Difference (Amount paid less donation CR) $40,000 • Undisclosed commissions - $7,500 • Arrears interest – CRA $75,000 • Interest on Line of Credit to pay tax $29,000Sued for: $151,500 Appeal filed August 6, 2010 - Court of Appeal file no: C52510

19. U.S. Estate Tax Update • Assume non-resident, non-U.S. citizen (“ALIEN”) • U.S. situs property: • U.S. real estate • U.S. stocks

20. U.S. Estate Tax Exemption / Rates

21. Where are we now?

22. Update… • Monday December 6, 2010: • President Barack Obama + Republican congressional leaders • Two years at 35% rate • Exemption of up to $5 million • Cost $600 to $800 million

23. Solution: U.S. equity mutual funds • EXEMPTION: Cdn mutual funds • that own U.S. stocks • IRS Chief Counsel Memo (1/22/2010)

24. Solution: U.S. equity mutual funds

25. Rethinking RRSPs

26. RRSPs for Business Owners& Incorporated Professionals • Pay “salary” to contribute to RRSP • $122,222 for 2010 to get 18% maximum • $22,000 maximum contribution • Does this make sense when corporate income < $500,000 ?

27. Earn income personally • Assume: • Corporate income – $1,000 • No corporation • Tax paid at full personal marginal tax rates

28. Earn income in corporation • Assume: • Corporate income – $1,000 • Eligible for small business rate (< $500,000) • Paid out immediately as “non-eligible” dividend

29. Advantage of Dividends vs. Salary

30. Tax Rate Advantage Dividends vs. Salary

31. Tax deferral opportunity – Dividends vs. Salary • Income earned personally – taxed today • Income earned corporately • Taxed initially at low corporate tax rate • Only taxed as dividend when removed from corporation • RESULT: substantial tax deferral on income not needed today!

32. Tax deferral advantage – all provinces

33. TFSA carry-forward room • $10,000 opportunity • $20,000 opportunity (spouses/partners) • No attribution

34. TFSA vs. RRSP – Same tax rate

35. TFSA vs. RRSP – High/Low

36. TFSA vs. RRSP – C.D. Howe Report (February 2010)

37. TFSA vs. RRSP – Low/High

38. Renaissance Investments – Advisor site

39. Thank You www.jamiegolombek.com This material was prepared for investment professionals only and is not for public distribution. It is for informational purposes only and is not intended to convey investment, legal, or tax advice. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management. ™Renaissance Investments and "invest well. live better." are registered trademarks of CIBC Asset Management Inc.

40. Questions & Answers