2015 PROFESSIONAL DEVELOPMENT SEMINAR June 11 2015 Gelber

2015 PROFESSIONAL DEVELOPMENT SEMINAR June 11, 2015 Gelber Conference Centre

. WELCOMING REMARKS Brenda Gewurz President, Jewish Community Foundation of Montreal 2015 Professional Development Seminar

The Professional Advisory Committee Phil Nadler CPA, CA Co-chair 2015 Professional Development Seminar

Insurance Update - 2015 Presented By Barry Pascal Bell Pascal Insurance Services And Peter Everett, LLB, CLU, TEP Vice-President, Planning and Business Development, PPI

Insurance Update - 2015 Topics for discussion • Policy valuations • Ownership and beneficiary designations • Capital dividend account • Leveraging • Exempt policy legislation update • Case Study

Insurance Update - 2015 Consider – transfer of personally owned policy • Deemed proceeds = CSV FMV – can be considerably higher than any CSV Policy Owner

Insurance Update - 2015 Consider – donation of policies • If otherwise going to lapse the policy • CSV and FMV proceeds Policy Owner

Insurance Update - 2015 • Potential planning with “multi-life” policies Insured Policy Owner Beneficiary

Insurance Update - 2015 Potpourri Separating ownership from adjusted cost basis • Can increase CDA credit • Business reasons

Insurance Update - 2015 Subs 15(1) assessment • Sub paid premium for parent Subs 246(1) assessment • Parent paid premium in respect of Sub Potpourri

Insurance Update - 2015 Potpourri Rebeiro decision • Refer to CDA in shareholder agreements • GRIP too? ?

Insurance Update - 2015 - Leveraging Borrower Loan interest Use of the Borrowed Funds? Policy Owner Security Financial Institution Rate of return

Insurance Update - 2015 - Leveraging • Considerable value in leveraging in the right circumstances • Use of Different Structures • Flexibility • Personal and corporate borrowers • Holdco-owned policy and shareholder borrower • Trust-owned policy and beneficiary borrower • Permits access to policy values • ‘Hedged’ versus ‘unhedged’ • Secure long-term lending commitment

Insurance Update - 2015 - Leveraging • Provides cash flow improvements when using borrowed funds for business or investment purposes, such as • Funding shareholder agreements • Financings and re-financings • Acquire income-producing properties • Estate planning

Insurance Update - 2015 - Leveraging Plus… • Tax Savings on Capital Dividend Account Traditional Approach ROI @ Life Expectancy 6. 17% After Tax

Insurance Update - 2015 - Leveraging Plus… • Tax Savings on Capital Dividend Account • Additional Capital Dividend Account Traditional Approach ROI @ Life Expectancy 6. 17% ROI @ Life Expectancy 11. 21% After Tax

Insurance Update - 2015 • Exempt policy changes – August 29/14 • Single premium is history • No shelter advantage to high surrender charges • Minimum premium paying period roughly 8 years • Reduction in longer-term maximum funding levels for level cost of insurance charges (‘LCOI’)

Insurance Update - 2015 • Exempt policies • Continue to provide shelter for investment income accruals within limits • “Insurance GAAR” not included in legislation • Changes to income inclusion portion of ‘prescribed annuity contracts’ • Grandfathering (subsection 148(11))

Insurance Update - 2015 • Modifications and recalibration of the Investment Income Tax (Part XII. 3) • 15% of a life insurer’s ‘taxable Canadian life investment income for the year’ – see subsections 211. 1(1) and 211. 1(3) • Modifications to the 250% test that applies to policies issued before 2017 after 2016

Don’t forget grandfathering for stop-loss purposes • ITTN 12 (February 1998 - stop-loss provisions – grandfathering) • See PPI Advisory TS-109 (April 2014) • Snapshot on April 26, 1995 • Beneficiary of policy – doesn’t have to be the owner of the policy • Agreements in writing before April 27, 1995

Estate and Charitable Planning A CASE STUDY

Client Profile • Jim is a 64 -year old single male residing in Montreal • Sole shareholder of his corporation – prior to the estate freeze • Started the business 30 -years ago • Valuation of $10 million • Three children and 4 grandchildren • None of the children are involved in the business, nor do they have plans to be

Consider This • Jim recently completed an estate freeze, exchanging his common shares for $10 M of fixed value preferred shares • New common shares issued to a family trust of which Jim, his Holdco (‘Jimco’), his children and all future grandchildren are beneficiaries • He doesn’t need to realize the capital on the shares (although he’d like the option) • There is nominal ACB and PUC, and no GRIP • Upon his death there is a large tax bill What do you do?

The Options 1. No insurance 2. Life insurance solution to the pay the tax 3. Life insurance solution to reduce and pay the tax 4. Life insurance solution with charitable gift to eliminate tax 5. Life insurance with charitable gift to reduce and pay tax

No Insurance OPTION 1 Jim ACB: $0 FMV: $10 M Jim. Co Jim’s Estate Capital Gain: $10 M Taxes: $2. 5 M

Results No Insurance Tax Payable ($2, 500, 000) Insurance Proceeds $0 Insurance Premiums $0 Net to Beneficiaries $7, 500, 000 Increase over Base n/a

Objectives • Preferred shares are to pass to the children after death of father • Value of shares doesn’t need to be realized, but… • Cash is required to pay the tax

The Problem Where does the $2. 5 M of capital come from to pay the tax?

Life Insurance Solution to Pay Tax OPTION 2 • The CA on the file recommended Jim purchase a permanent $2. 5 M single life insurance policy • Use the insurance proceeds to pay the tax

Life Insurance Solution to Pay Tax OPTION 2 Jim’s Estate Jim ACB: $0 FMV: $10 M Jim. Co CDA Dividend $2. 5 M Capital Gain: $10 M Taxes: $2. 5 M

Results No Insurance to Pay Tax ($2, 500, 000) Insurance Proceeds $0 $2, 500, 000 Insurance Premiums $0 ($1, 225, 000) Net to Beneficiaries $7, 500, 000 $8, 775, 000 Increase over Base n/a 17% Tax Payable

Life Insurance Solution to Reduce and Pay Tax OPTION 3 • How much insurance? • Look to the objectives - Pay the tax • Share redemption • Partially taxable • Reduces share amount for possible pipeline planning • Actual insurance amount is less than capital gains tax

Life Insurance Solution to Reduce and Pay Tax OPTION 3 Capital Gains Tax Otherwise Payable $10, 000 x 50% $2, 500, 000 ÷ 1 + (. 50* -. 40**) = $2, 500, 000 = $2, 275, 000 *Marginal Tax Rate **Dividend Tax Rate

Life Insurance Solution to Reduce and Pay Tax OPTION 3 Jim’s Estate ACB: $0 FMV: $10 M Share Redemption (CDA) $2. 275 M Jim. Co Taxes: $0 $2. 275 M Capital Gain: $8, 862, 500 Taxes: $2. 215 M

Results No Insurance to Pay Tax Insurance to Reduce and Pay Tax ($2, 500, 000) ($2, 215, 000) Insurance Proceeds 0 $2, 500, 000 $2, 275, 000 Insurance Premiums 0 ($1, 225, 000) ($1, 115, 000) $7, 500, 000 $8, 775, 000 $8, 945, 000 n/a 17% 19% Tax Payable Net to Beneficiaries Increase over Base

Life Insurance with Charitable Gift to Eliminate Tax OPTION 4 The two previous scenarios just dealt with the tax Can we take this even further?

Life Insurance with Charitable Gift to Eliminate Tax OPTION 4 • Client objectives: • Eliminate Tax • Donate to Charity • Preserve Capital for Beneficiaries • Life insurance and CDA to reduce tax as much as possible • Charitable donation to further reduce tax

Life Insurance with Charitable Gift to Eliminate Tax OPTION 4 Donation: $4 M Jim’s Estate ACB: $0 FMV: $10 M Share Redemption: $10 M Jim. Co Taxes = 2 M $5 M Charitable Organization Tax Savings = $2. 0 M Capital Gain: 0 Taxes = 0

Results Insurance with Charitable Gift to Eliminate Tax Payable $0 Insurance Proceeds $5, 000 Insurance Premiums ($2, 450, 000) Charitable Gift ($4, 000) Net to Beneficiaries $8, 550, 000 Increase over Base 14%

Life Insurance with Charitable Gift to Reduce and Pay Tax OPTION 5 • Same life insurance amount as first gift scenario • Give away enough to make estate whole • After taking into account insurance premiums

Life Insurance with Charitable Gift to Reduce and Pay Tax OPTION 5 Donation: $116, 940 Jim’s Estate ACB: $0 FMV: $10 M Share Redemption: $5 M Jim. Co Taxes = 0 $5 M Charitable Organization Tax Savings = $58, 470 Capital Gain: $7. 5 M Taxes = $1. 875 K

With Gifts Results Insurance with Gift to Eliminate Tax Insurance with Gift to Reduce & Pay Tax $0 ($1, 816, 530) Insurance Proceeds $5, 000, 000 Insurance Premiums ($2, 450, 000) Charitable Gift ($4, 000) ($116, 940) Net to Beneficiaries $8, 550, 000 $10, 616, 530 Increase over Base 14% 21% Tax Payable

Results Comparison Beneficiaries Charity Tax 1. No Insurance $7, 500, 000 0 ($2, 500, 000) 2. Insurance to Pay Tax $8, 775, 000 0 ($2, 500, 000) Insurance to Reduce and Pay Tax $9, 035, 000 0 ($2, 125, 000) $8, 550, 000 $4, 000 0 $10, 616, 530 $116, 940 (1, 816, 530) 3. Insurance with 4. Charitable Gift to Eliminate Tax 5. Insurance with Gift to Reduce and Pay Tax

Thank You This presentation is for general information purposes and advisor use. The information contained in this presentation must not be taken or relied upon by the advisor as legal, accounting, taxation, financial, actuarial or other advice made to them, or to any other person or firm, by Bell Pascal and PPI or any of its affiliates. Please refer to insurance company illustrations, policy contracts and information folders regarding any insurance matters referred to in this presentation. Advisors must seek independent professional advice with regard to the verification and use of the information contained in this presentation. Copying or reproduction of this presentation is not allowed without the express prior written consent of Bell Pascal & PPI. June 2015

. Presentations to 2015 Honourees Brenda Gewurz, Phil Nadler, Francine Wiseman 2015 Professional Development Seminar

NEW ERA IN ESTATE PLANNING Changes to the Taxation of Estates, Testamentary Trusts and Life Interest Trusts Barbara L. Novek Sweibel Novek S. E. N. C. R. L. – L. L. P. June 11, 2015

Introduction n New rules effective 2016 will affect all those involved in estate planning, whether as financial advisors, tax advisors, or will preparers, as well as those acting as liquidators, trustees and advisors to trusts and estates. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 47

Estate Plan or Will Affected by New Rules n n n n Does will create trust for benefit of spouse or common-law partner? Does will create one or more trusts for children? Does will create trust for disabled beneficiary? Does will provide gift to charity, either on death or out of spousal trust following death of spouse? Does will provide for immediate settlement of estate and funding of testamentary trusts? Does individual have multiple wills? Does estate plan call for redemption of private corporation shares funded by life insurance? Is individual a settlor or beneficiary of an inter vivos spousal, common-law partner, alter ego, or joint spousal common-law partner trust? SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 48

Current Regime n n Testamentary trusts benefit from graduated tax rates, choice of year-end, other advantages; Planning involving testamentary spousal trust, multiple testamentary trusts for children, and charitable remainder trusts; Post-mortem planning (including loss carrybacks and insurance funded redemptions to avoid double taxation); Planning involving inter-vivos spousal trusts, common-law partner trusts, alter ego trusts, joint spousal common-law partner trusts (“life interest trusts”). SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 49

Changes Announced n n n Budget 2013 proposed flat top rate taxation and elimination of other advantages for testamentary trusts; Draft legislation tabled August 2014 introduced measures going beyond flat tax that have profound consequences on postmortem planning relating to private corporation shares, charitable donations and use of spousal and other life interest trusts; Amendments adopted December 2014; Effective January 2016; No grandfathering. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 50

New Regime Subject to two exceptions, testamentary trusts will no longer have the benefit of: n n n n n Graduated tax rates (they will be subject to the highest marginal tax rate); Choice of year-end (calendar year-end mandatory); Exemption from tax instalments; Exemption from AMT; Ability to allocate ITCs to beneficiaries; Extended period for filing notice of objection; Ability to allocate first year’s capital losses to last year of deceased to avoid double tax (164(6) ITA); Relief from application of stop-loss rules to avoid double tax in respect of private corporation shares (112(3. 2) ITA); and Flexibility in claiming tax credits for charitable donations on death. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 51

Exceptions Where Graduated Rates Remain Available: Graduated Rate Estate (“GRE”) n Qualified Disability Trust (“QDT”) n SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 52

Qualified Disability Trust (“QDT”) n n n Testamentary trust that arose on and as a consequence of death; Trust resident in Canada throughout the year; Jointly elects in tax return each year with electing beneficiary and includes SIN; Electing beneficiary qualifies for disability tax credit under 118. 3 ITA; Electing beneficiary does not make QDT election in respect of any other trust. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 53

QDT Status n n QDT subject to graduated rates for each year it elects and satisfies conditions; Recovery tax triggered if any of conditions cease to be satisfied, or if trust makes capital distribution to non-electing beneficiary. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 54

Planning for Disabled Beneficiaries – QDTs Issues: n No grandfathering; n No relief for late election; n Only one QDT per individual; n Potential loss of graduated rates; n Recovery tax. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 55

Planning for Disabled Beneficiaries – QDTs n n n n Must review existing testamentary trusts for disabled beneficiaries; Is year-end changed to Dec 31? What if separate trusts established by each parent, grandparent? – only one qualifies; Need T 2201 - disability certificate; Future planning- obtain T 2201 - even if do not need for income tax purposes today; "Henson Trust"- generally do not allocate to beneficiary- pay tax in trust so as not to issue a T 3 slip, thus loss of graduated rates even more costly; At death of disabled beneficiary capital to non-disabled beneficiaries; creates tax liability for undistributed income (previously taxed at graduated rates); ensure after-tax income is distributed. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 56

Graduated Rate Estate (“GRE”) n n n Estate (not trust) that arose on and as a consequence of individual’s death; No more than 36 months have passed since death; Estate is a testamentary trust under ITA; Estate designates itself as a GRE in its first tax return after 2015; Deceased individual’s SIN is provided; and No other estate is designated as GRE of individual. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 57

GRE Status n n GREs entitled to graduated rates, off-calendar taxation years, flexible donation credit rules, and other benefits; For new and existing estates important to check: q q n Have more than 36 months passed since individual’s death? Any tax returns filed after 2015? If yes, was designation made? Did the individual leave multiple wills? Has any other estate been designated? Preservation of GRE status to be considered when drafting wills. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 58

GRE Designation n n Must be made in first estate tax return after 2015 q Applies to deaths before and after 2015; q What if forgotten? q Is late designation possible? Only one GRE designation q Do multiple wills with different liquidators create multiple estates? SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 59

GRE Qualification n n Only available to “estate” and only for 36 months q If assets transferred to testamentary trust within 36 months of death, trust will not benefit from graduated rates; q No income splitting with multiple testamentary trusts; q If estate extends beyond 36 months, ceases to qualify; Estate must be “testamentary trust” under 108 ITA q Avoid transfers and loans to Estate. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 60

Calendar Year-End n n n No grandfathering; Existing estates that do not qualify as GREs will have deemed year-end December 31, 2015; May have two year-ends in 2015; Consequences if fail to file (penalties, loss of statute-bar protection); Consider triggering income or gains in 2015 to benefit from last year of graduated rates. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 61

Designation To Pay Tax n n n n Currently, trust may make designation to pay tax inside trust on income payable to beneficiary; Surprise change starting in 2016; Designation will be invalid, except to extent that trust has losses; Designation to use donation tax credits or ITCs in trust will be invalid; Applicable to all trusts, inter-vivos and testamentary, including GREs; Affects planning; Will late or amended designation be allowed if trust subsequently has loss carryback? SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 62

New Rules Affecting All Trusts With Life Interest Beneficiaries n n Applicable to spousal, common-law partner, alter ego and joint spousal common-law partner trusts, whether inter-vivos or testamentary; No grandfathering – applies to all such trusts starting in 2016, regardless of when created; Trust will have deemed year-end at the end of the day of death of the life interest beneficiary; All income of trust for shortened year, including capital gain on deemed disposition arising on death, is deemed payable in the year to the deceased life interest beneficiary. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 63

Liability For Tax On Deemed Disposition Arising On Death Of Life Interest Beneficiary n n n Capital gain on deemed disposition will be taxed in deceased life interest beneficiary’s (i. e. spouse’s) terminal return, not in the trust; Potential mismatch between persons receiving trust assets and persons responsible for tax; Unfair burden or windfall in certain cases; Trust will be solidarily liable for tax; Practical problems for trustees and liquidators; May affect planning to eliminate gain. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 64

Example – Spousal Trust n Facts: q Ralph and Mary are married; each has children from previous marriage. q Ralph died in 2010. Under Ralph’s will, his assets were left to a spousal trust under which Mary is entitled to all the income during her lifetime, but no capital; on Mary’s death the property of the spousal trust goes to Ralph’s children. q Mary dies in 2016. At that time spousal trust holds assets with value and unrealized capital gain of $2 M and Mary personally owned assets having value and unrealized capital gain of $2 M. Under Mary’s will her estate goes to her children, while balance of spousal trust goes to Ralph’s children under his will. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 65

Example – Spousal Trust (cont’d) n Tax Consequences: Mary’s terminal return will include $4 M of capital gains, resulting in taxes of approximately $1 M. (If pre-2016, Mary would have capital gain of $2 M, and trust would have capital gain of $2 M and each would have $500, 000 of tax. ) q CRA/RQ may assess all tax against Mary’s estate, leaving her children with only $1 M after tax, while Ralph’s children get the full $2 M from Spousal Trust. Is this the intended result? q Since the Trust is solidarily liable, CRA/RQ may (but not obliged to) assess spousal trust for $500, 000 of tax triggered upon gain of assets in spousal trust. Would trustees of spousal trust then have fiduciary duty to claim $500, 000 from Mary’s estate since tax liability is that of Mary? q SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 66

Other Situations n n Same children from common marriage, but surviving spouse remarries and has more children. Assets in spousal trust go only to children of first marriage, but children of both marriage, as heirs of surviving spouse, are liable for tax; Spouses have same children, but, following death of first spouse, surviving spouse excludes one or more of the children from his/her estate (e. g. because of substance abuse or other problem). Excluded child receives assets from spousal trust. If tax is borne by estate of surviving spouse, excluded child effectively receives benefit at the expense of others. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 67

Possible Solutions to Mis-Match n n n Clause in will providing for spousal trust to fund tax liability, but must avoid “tainting” estate of surviving spouse by transferring assets to it; Payment of tax by spousal trust directly to tax authorities or distribution to ultimate beneficiaries of spouse’s estate; Clause in will demonstrating testator’s intention that tax liability be borne by spousal trust and that trust cannot recover same from spouse’s estate; Gift in marriage contract; Problem – if testator has already died or no longer has capacity. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 68

Checklist for Advisors n n n n Review wills and estate plans; Consider new will (or amendment) where client has capacity; Address ultimate tax burden on death of beneficiary of spousal trust; Review purpose of testamentary trusts; Review planning for disabled beneficiaries; Maintain estate’s existence (36 months); Review charitable donations; Maximize flexibility. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 69

Charitable Remainder Trust That Is Also Spousal Trust Misallocation of tax liability; n Additional tax on spouse’s death. n SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 70

Charitable Remainder Trust - Spousal Trust n Example q Mr. X establishes a spousal trust in his will. Income beneficiary for life- Mrs. X, no capital encroachment allowed. Capital beneficiary at death of Mrs. X - JCF. Assets in trust appreciated securities. q Results today - Gift by Mr. X at death based on value of securities and mortality of Mrs. X. Disposition of securitieselect under 118. 1(6) to eliminate gain. At Mrs. X's death, further appreciation of securities taxed in trust and allocated to JCF -no tax paid. q Under new rules – At death of Mrs. X, appreciation of securities taxed in her final tax return even if JCF owns the assets. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 71

Charitable Remainder Trust - Spousal Trust Example (cont’d) n Possible Remedies: q Taint the spousal trust- add JCF as a discretionary income beneficiary; q Gift securities in will not in a trust- take back an income flow for life for Mrs. X. Can receive capital gains exemption on appreciated marketable securities and receive tax receipt from JCF based on split-receipting rules; q Use assets which don't appreciate- invest in fixed income. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 72

New Flexible Donation Rules at Death n n New rules effective 2016, for deaths after 2015, will allow greater flexibility as to who can claim donation tax credits and the corresponding timing, as a result of will gifts, but must be GRE to benefit. Current Regime – A will gift is deemed to have been made by the testator immediately before death. Will gifts, not “hard”, for example where the testator suggests that a donation be made but does not oblige the liquidators to do so would be considered to have been made by the liquidators in the estate/trust when the donation is made. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 73

New Flexible Donation Rules at Death (cont’d) n Changes – After 2015, will donations (also designations of RRSPs, RRIFs, TFSAs, and life insurance policies) will be deemed to be made by the estate/trust at the time of transfer of property. However, if the estate is a GRE then the donation may be claimed in: the estate in the taxation year in which the donation was made (property transferred); or q an earlier taxation year of the estate; or q the last two taxation years of the deceased (i. e. “final” return or year before). q n This will help with donation planning, particularly where a subsection 164(6) transaction is contemplated. SWEIBEL NOVEK S. E. N. C. R. L. – L. L. P. 74

. CLOSING REMARKS Francine Wiseman PAC co-chair 2015 Professional Development Seminar

. Thank you! to our sponsors: Table Sponsors • • • BELL PASCAL SERVICES D'ASSURANCES INSURANCE SERVICES BRUCE KENT GROUP COLLINS BARROW LLP DE GRANDPRÉ CHAIT FULLER LANDAU GROUPE M. BACAL GROUP GWBR S. E. N. C. R. L. - L. L. P LITWIN CORREA CPA MNP • • NATIONAL BANK OF CANADA NEXIA FRIEDMAN LLP PSB BOISJOLI RICHTER S. E. N. C. R. L. /LLP ROBINSON SHEPPARD SHAPIRO LLP SPIEGEL SOHMER INC Program Sponsors • • • JAMES FRIEDMAN & ASSOCIATES INC PHILLIPS FREIDMAN KOTLER SWEIBEL NOVEK S. E. N. C. R. L. - L. L. P 2015 Professional Development Seminar