BUSINESS OWNER REALIZES EASY TAX WINS
When I met Roy and Katie they had a couple of corporate accounts and RRSPs. Roy was in the process of realizing seven figure proceeds from the sale of one of his businesses. They wanted to review their current investments and define an income strategy for the expected cash. I reviewed their current investment structure, read through their income statements and balance sheets, and their tax returns. There were several opportunities available.
They were earning bond interest in one of their corporate accounts that was being taxed at the highest marginal rate. At the same time they had another corporate account for a different business that had an ongoing interest expense. This represented a great opportunity to restructure their investments to pay less tax. Also, I discovered that Roy had a large shareholder loan outstanding along with a substantial personal capital loss. This represented a great opportunity to pursue a tax-free capital gain investment strategy in Roy's hands personally until the losses were used up. We worked together with Roy's accountant to ensure this was a sound strategy. His previous adviser had simply invested the corporate money without seeing the bigger picture.
Based around an asset category / account type overview table, I effectively organized the different non-correlated asset classes in order to minimize taxes and gain the maximum financial advantage. The allocation levels were based around in-depth discussions of objectives for liquidity, income, growth and minimization of risk. I created a personal wealth spreadsheet that mapped this out and integrated a planned future real estate sale. This tool provided them with peace of mind that their lifetime income objectives should be met.
Once everything had been thoroughly examined on a macro level we looked at specific investment vehicles. At the time, Roy and Katie were using mutual funds and several stocks traded by their previous adviser. Given the significant asset level of the accounts Roy and Katie were well positioned to "graduate" from using mutual funds and commission traded stocks to using a select group of private investment managers.
BUSINESS OWNER SHELTERS MONEY USING IPP
My advisory relationship with Lisa began when she asked me what interest rate I could get her on $400,000 of cash she recently came into. Rather than rushing to the computer to find the best available rate I asked her "do you have any stocks in your RRSP?" To this she responded, "yes, it's mostly in stocks and I just want something I know I will make money on". I then asked, "Do you pay taxes?" Naturally Lisa responded that she paid far too much in taxes as her taxable income was well north of $200,000 per year.
So here was Lisa pursuing a capital gain strategy in her RRSP, where she would never realize the tax break associated with capital gains, and also pursuing a fully taxed interest bearing strategy outside her RRSP. Lisa decided I was different from her current advisors and wanted to have a meeting.
Our first meeting lasted over three hours as I gained a detailed understanding of Lisa's investment assets, the linkages of her different businesses, how some were in her name and some were in her husband's, the status of her adult children, and her long-term objectives. At the end of the meeting, Lisa commented that she has never met a financial professional who had obtained such a comprehensive grasp of her total wealth picture.
Ultimately we created a comprehensive asset allocation that included non-correlated asset categories and began to use that strategic allocation to make disciplined and holistic decisions.
Lisa's age and business/income history made her an ideal candidate to use an Individual Pension Plan (IPP). This structure has enabled us to shelter over $200,000 in a very short period of time that would otherwise have been taxable.
Lisa was contemplating selling her business within a few years. As the value of the business is substantial ($20 million +), I connected Lisa with our firm's mid-market investment banker who specializes in this area. He was able to provide advice on how Lisa should focus her income statement objectives over the next several years to position for optimal value and provided insight into the different categories of likely suitors.
Given the complexities involved, specialized tax and pension advice must be sought to ensure an Individual Pension Plan (IPP) is appropriate to individual situations. An IPP strategy must be considered within the context of a comprehensive financial and estate plan.
MEDICAL PROFESSIONAL REALIZES PEACE OF MIND
Albert and Katrina were very excited about the pending sale of Albert's practice. The deal involved Albert receiving a large lump sum, an income from a vendor take back note, and ongoing rent to Katrina from the building that was in her name.
Their plan was to work part-time and to travel and enjoy life while still in their 50's. They have been doing just that.
Peace of mind and understanding of an integrated retirement income came from my creation of their personal wealth spreadsheet. I mapped out the likely trajectory of their liquid investment assets, which included fixed income and equity management via a select group of private investment managers. I integrated the eventual use of those investment assets going forward with the planned sale of the building and exhaustion of the income from the vendor take back note. As one income source was projected to be consumed it was clear how that deficit would be made up from other sources and this shaped the overall investment strategy.
SENIOR EXECUTIVE DIVERSIFIES STOCK POSITION
Kirk was a very successful, high-level executive for a large publicly traded company. Married with two children, and very busy at work, Kirk managed a lot of responsibility. Common among executives, Kirk had in excess of 50% of his investment assets in his own company stock via direct ownership and stock options.
I created a personal wealth spreadsheet for Kirk that mapped out and integrated the various investment assets I had established for him. This included the company stock he had (and continued to accumulate), a real estate component that included income properties he and his wife had acquired, registered accounts, a tax sheltered joint insurance policy, a diversified equity category comprised of a select group of private investment managers, and his stock options.
It was no surprise that once mapped out and projected forward, Kirk's realization of financial independence would be relatively early and substantial. This clearly defined realization then begged the question, "If the game of financial independence is largely won then why continue the risk of an over concentrated stock position?" I created a stock option/stock position leverage analysis spreadsheet to help Kirk realize what to sell and where to obtain the maximum risk reduction.
It was also no surprise that this resulted in realized taxable capital gains. We were able to offset these taxes to a certain extent by the use of a flow-through share limited partnership. We placed $50,000 in resource flow through shares. This produced a near 100% tax deduction against current income (enough to offset $100,000 in capital gains), implying an approximate after-tax cost of $27,000. After a required two-year hold we sold the shares and realized $83,188.38. However, this was taxed as a capital gain and thus the approximate after tax proceeds were $64,055. The net result was an approximate after tax annual return of 68.6%. I apply a disciplined allocation and systematic rollover strategy for many highly taxed individuals such as Kirk using this tool.
CLIENT EXTRACTS CORPORATE MONEY TAX FREE
Sam had a high value life insurance contract on his life and also some new cash in one of his holding companies from the sale of a building. Sam wanted to draw this money out of the holding company but was afraid of the tax bill. We swapped the life insurance contract into the holding company and extracted the equal dollar value amount of cash out of the company tax free. This gave Sam tax free access to the cash and also a growing insurance policy inside his holding company that if held long enough could eventually pay out the death benefit with credit to the holding company Capital Dividend Account (CDA) and ultimately may be paid out tax free to his estate as a capital dividend.