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Tax and Estate Planning for Business Owners

The broadcast is now starting, all attendees are in listen only mode. Good afternoon, ladies and gentlemen, welcome to today's webcast. We are pleased to be partnering with MacKenzie Investments to bring you this call today. My name is Tom Hunter and I will be your host for the call. We would like to thank you for taking time out of your day to spend with us. Part of our goal today is to provide further insight into common tax, estate and retirement planning issues and concerns for Canadian business owners. Topics that we hope to cover throughout the call today include growing wealth in your business, understanding taxes and corporate investing, retirement planning, our versus corporate investing, benefits of an investment holding company and tax investment tax efficient investment strategies for business owners to consider on the next slide. I would like to just maybe highlight a little bit about CIBC Wood Gundy before we introduce our guest speaker. CIBC Wood Gundy is one of Canada's best known FULL-SERVICE investment advisory firms. We are wholly owned by CIBC Group of Companies and backed by the Collective Resources of CIBC. There's over 80 branches across Canada and collectively we're managing about one hundred and fifty billion and assets under administration at this point. Recently, we've been named Canada's best wealth management provider by World Finance Magazine, which is a leading UK based financial magazine. On the next slide, I'll just take a moment to discuss my team, the Tom Hunter group.

 

We've been working with investors and managing capital now since nineteen ninety seven, which brings about 35 years of collective experience within my group. We've also helped navigate investors through two of the worst stock market environments in history, that being the financial crisis of 2008 09, as well as the technology bubble and the pending bear market that ensued in the early part of the decade. We think we provide investment expertize, service and wealth management solutions to individuals, professionals and business owners, and we take a team approach. We are dedicated to helping our clients achieve their wealth goals through ongoing education, timely content and events. Like today, our philosophy is predicated on what we call the power of investing for dividends, which we'll talk about a little bit later in the presentation. It is a proven investment approach that works in all markets and really leverages the power of compounding on the next slide. I'll just take a moment to illustrate our partners and highlight that team approach that we really subscribe to here at CIBC. With Gundy, we are focused on leveraging the full resources of of all of the group of companies within CIBC. And we have strategic partners in all areas of finance, including areas of financial planning, insurance, tax and estate trust services, as well as private wealth services. And we take a lot of pride in really meeting all of the goals and objectives of our clients on the next slide.

 

It basically highlights our belief. And in terms of the way the Tom Hunter group manages capital, the best way that I would look to summarize it is that we are dividend investors. And so we subscribe to a proven investment approach where when you look at the way capital is managed through that dividend philosophy, it is arguably one of the most efficient ways to compound wealth over time. Our philosophy is rooted in the core belief that businesses are the true generators of wealth. It's not the stock market itself. It's taking an ownership position and great businesses, which I'm sure many of the listeners today can appreciate. What I like to do now is, is turn to the next slide, which highlights that philosophy a little bit further in terms of the way my team manages capital. Essentially, we are long term investors. We're very patient. As we allocate capital, we buy on a gradual basis and we're buying on a regular basis. We don't allocate capital within a client portfolio all at once. We like to be patient. We like to build our positions gradually. We encourage all of our clients to act and invest like owners and not traders with respect to to putting their capital to work. And as our clients see themselves as part owners in these great businesses that we invest in, we believe it makes them fundamentally a better investor and they think differently about their investments. One of our key criteria for investing capital is this appreciation for knowing what you own and knowing exactly why you want it.

 

And we think, again, having that philosophy really helps you, whether those periods when the markets are a bit. More challenging today's environment, we know you certainly have had a nice rally since the election back in the fall, and we know that there's been a melt up or grind higher in terms of the market environment that we're in, which makes it certainly a more cautious investment environment to be putting capital to work. What I'd like to do is maybe pause there and begin to turn the call over today to Matt McGowan, who is the senior vice president with McKensie Investments. And that is going to introduce our guest speaker today over to Matt. Thanks very much, Tom. It is always a pleasure to work with you and your group in bringing original content to your clients. I'd like to thank everyone for joining the line once again today. And thank Frank DePietro for guiding the call today. Frank Pietro is the assistant vice president of tax and estate planning at Mackenzie Investments. He has been with us for over 10 years and works with advisors like Tom to guide his clients through tax and estate scenarios specific to business owners. And that's exactly what Frank will be covering today in his tax and estate planning for business owners presentation. That's all for me. So please welcome Frank DePietro.

 

Great. Thank you, Matt. And thank you, Tom. And good afternoon, everyone. Thank you for joining the call today. As I've mentioned, the company is focused on business owners and this is an area that our team spend a significant amount of time trying to help Canadian business owners accumulate wealth and prepare for retirement and deal with all facets of the financial and tax and estate planning issues that come with being a business owner in Canada. Our team has done a lot of work in this area. We've developed some quite a bit of content in modular fashion that is designed to sort of meet your needs depending on the phase of your life that you may be in. So within those modules, there's approximately four of them. And if you're interested in obtaining a copy of those modules, I'd encourage you to be in touch with Tom and his team. But today, what we're going to do is really just focus on a small component of those modules. And Tom alluded to it earlier. It's in the area of accumulating wealth with your corporation. So we take a look at what we're going to cover in the next 30, 35 minutes. Tom highlighted this already. So just to kind of reiterate, talk about using your corporation as a vehicle for growing wealth, why it makes sense. And many of you may already be incorporated and have been advised to incorporate. And so you may have a good understanding already of why you've done so.

 

But we're going to take that a little bit further and not only talk about sort of your business and the reason why you incorporated your business, but taking a look at that structure as a mechanism for saving for your retirement and building wealth in your corporation. And then also we'll touch on the use of holding companies, because for many of you, this may already be in place or may be a consideration in the near or distant future. And then we will turn it over back to Tom and that who will moderate our Q&A session. So let's talk about growing wealth in your business. And we're going to take a look at this from two angles. We're going to look at it first. From a perspective of your business, all of you have incorporated business or thinking about incorporating a business because you operate an active business, you're doing something that generates income or revenue and you may decide to incorporate or it may have already decided to incorporate that business. Now, before we have a discussion around growing wealth, I present this slide really just as a backdrop and really don't want to get too technical here. But I think it's important to understand sort of what our tax system is designed to do under the integration theory that we have in place in Canada. And in a nutshell, what integration is all about is it says that our tax system is designed in a way to ensure that no matter whether you incorporate your business or not, the total amount of tax you pay on the income that you earn should be identical.

 

Meaning if you don't incorporate your business, you earn that income personally. You're going to pay a certain level of personal tax on that income or if you incorporate your business and earn your income. Through a corporation, you may already know that there's two layers of tax in our system, our business, the corporate tax is one layer, so your business will pay a certain level of tax. And then at some point time in the future, when your business makes a decision to issue dividends to you, you know that there's another layer of tax at the personal level. So this idea of integration says that the total tax as your business would pay, as well as the personal tax to pay on the dividend, should be equal to what the personal tax would be had you not incorporated simply earned that income personally. All right. Now we have certain mechanisms in place that are designed to integrate our systems, things like a dividend tax credit and other mechanisms. So just keep this in mind as we talk about earning income through your business and how you accumulate wealth. So let's start with your active business. We're going to look at two angles here. We're going to first take a look at them in just a few moments talking about how your business is taxed from the business income that it generates.

 

OK, and then we're going to take a look at investment income, right? Because from a tax perspective, these two are very different and are taxed vastly different from each other. So let's just touch on business income. And again, if you have already incorporated or you've been advised to incorporate, you may already know this. But basically, I have a Canadian business owner. There's a there's a number of tremendous incentives to incorporate in your business. One of the significant tax incentives is the eligibility to access what we call the small business deduction. And the small business deduction is the opportunity to pay a reduced tax rate on the first five hundred thousand dollars federally of income. So this is, again, an incentive for business owners to generate your urge to start up a business and generate income in that business. Now, Nova Scotia as well has the small business deduction as well, and so Nova Scotia does offer a reduced tax rate on the small business income. Now, in Nova Scotia, the small business limit is limited to 350000, meaning that in Nova Scotia you'll be entitled to a reduced tax rate on the first 350000 preventible. OK, now, what opportunities does this provide? Well, it means that your business accesses a reduced tax rate on that. First, we'll call it half a million dollars. Take a look at the federal no versus non incorporating in paying tax personally on that same half million dollars.

 

Right. If you're familiar with our personal tax rate system, you know that we have a progressive tax rate system, meaning that as your income increases, the amount of additional tax, the government takes increases as well. And in Nova Scotia, for example, that top tax rate is about 54 percent once your income is in excess of 200000 dollars. So we can get to quite significant tax rates on personal income. So this ability to accept a reduced tax rate offers what we call a tax deferral, meaning that your business can pay tax at a reduced rate, which we talked about earlier, is the first layer of tax, that corporate layer. Now, we know that additional level of tax would be trigger once your business issues a dividend. But remember, as a business owner, you have tremendous control and flexibility as to when to take that dividend. So the story here is that to the extent that you can keep profits in your business, you can benefit from a significant tax deferral. And in Nova Scotia, that tax deferred the difference between paying tax at 54 percent versus paying tax at 13 and a half percent, which is the small business rate in Nova Scotia. So this slide just highlights that small business rate of 13 and a half percent, and you might wonder, well, what happens after we meet those threshold? So once we exceed the five hundred thousand dollar threshold federally and the 350 provincially, then the tax rate on your business income does increase.

 

And we can see on the slide here that the combined rate is 31 percent, but still relatively low tax rates compared to your personal tax rates, which again could rise up to 54 percent quite rapidly. So let's just take a look at a quick example to highlight this tax deferral opportunity, let's just say we have only to the printing business generates one hundred thousand dollars of business income. And we'll just assume that she doesn't need all of this income personally because she has other sources of income to fund her day to day expenses. Now, for simplicity will assume that Holly is in the top tax bracket in Nova Scotia, which again is 54 percent for income. And if she's receiving dividends and eligible dividends for marginal tax rate, it's almost 47 percent. So we'll quickly run through the numbers as to what this tax deferral opportunity represents. So if she has one hundred thousand dollars of income that she earns in an incorporated business, the corporate tax rate at 13 and a half percent is thirteen thousand five hundred dollars. The after tax earnings of the business, the retained earnings, therefore, is eighty six thousand five now Pawley takes us out in the form of a dividend, then we trigger that second layer of tax that we talked about earlier.

 

So the total tax that Hollywood paid by earning that income through her corporation is about fifty four thousand one hundred twenty nine dollars. Now, if Holly had not incorporated and simply earned that hundred thousand dollars personally. At a 54 percent marginal tax rate, she would have to pay fifty four thousand dollars on that same income. So what's this tax deferral that I'm talking about? Well, the tax deferral is the difference between what she would pay personally, a 54 percent versus what she does pay in the business, a 13 and a half percent. So you can see that the deferral in this case, Holly, is an opportunity if she can afford to keep the profits in her business to defer 4500 dollars of tax, OK? So it's a significant opportunity. And we call it a deferral because at some point. We will pay tax on this when the money comes out and you'll see that in Nova Scotia, the tax system is fairly integrated, meaning that if you earn the income, simply take that income out of the business right away. The total taxes you pay through the business is essentially the same as what you'd pay if you earned it personally. So there's no real tax savings opportunity by incorporating if you're simply just taking all the money out of your corporation after it's earned, the real opportunity is to retain the profits in the business and allow the business to accumulate that wealth over the long term.

 

And on this slide, we highlight that opportunity where Whorley year after year takes advantage of this 4500 dollar tax deferral. We see that quite considerably over a long term. She could accumulate quite a significant amount of wealth in her corporation by taking advantage of the small business deduction. On this flight, again, we highlight that 40 and a half percent deferral for Nova Scotia, but we also can can operate a business anywhere in Canada and you can see that the deferral is significant no matter where your business exists. It's just the numbers are a little bit different across the various provinces. So one of the key takeaways from the business income portion of this presentation will just remember that your business income is taxed at low rates. That creates a significant opportunity to defer tax and allows you a great opportunity to rapidly accumulate a significant amount of wealth in your corporation. OK, now let's turn our attention now to investment income. At some point, your business, your incorporated business may start to accumulate more wealth or more assets than your business needs. So you're not reinvesting some of that profits back into more machinery or additional equipment or what have you. But it's starting to accumulate in your corporation. And you start to think of that pool of money as a savings and potentially as retirement savings. So at some point, you may sit down with Tom and his team and talk about your corporate investments and talk about this excess money that's in your corporation and start to invest it.

 

Now, what happens from a tax perspective when you start to invest those passive assets? Well, let's just spend a few moments talking about that. One of the key things to keep in mind when we're thinking about investment income earned through your corporation is that the tax rates that apply on the investment income is not the same as the tax rates that apply on your business income. All right, your corporate tax rates on investment income generally are much, much higher than those active business rates. In many cases, those investment corporate rates are much higher than top personal marginal rates. And it's important to keep in mind that there's no progressive tax rate system as there is with personal rates. Investment rates earn in a corporation are subject to a high rate of tax on Daulaire one. So there's no progressive system if high rate of tax on every single dollar of investment income earned. It's also important to keep in mind that investment income retains its character, meaning that interest income is fully taxable the way it is, as if you had earned interest income personally. Corporations also do receive preferred tax treatment if it earns dividends, Canadian dividends. And we'll talk about this in a couple of moments, as well as if your business or your investments within your corporation earn capital gains so they sell investments for a profit.

 

The corporation itself also benefits from the 50 percent inclusion rate, meaning that half of the profits are taxable and half of the profits are tax free. And we'll touch on that in a couple more. They might be thinking already. OK, well, what is the tax rate on investment income earned in a corporation? Will go back to our table that we presented earlier on the different race, I've added to the far right the tax rates that apply on investment income. As you can see that when you combine the federal and the provincial tax rate, that we have a fairly significant, significantly high tax rate on investment income, the fifty four point seven percent. And again, that's on every dollar of investment income that's generated. So the story here is that we need to really think about how our corporate investments are invested to take into account tax efficiency, to think about what kind of tax are we exposing our corporate investments to and what can we do to try and minimize the amount of tax that our corporation is subject to? OK, and we'll talk a little bit about that as well. But on this plan, I just try to provide a bit of a visual for you to understand how investment income flows through your corporation. And we said earlier that, you know, investment income retains its character. So each type of investment income works a little bit differently. So if we start with interest income, interest income could be income and interest earned on investment bank accounts typical of those money market investments, very, very conservative investments that generate interest income.

 

As I mentioned, all this income generated by your corporate investments are subject to a high that high initial tax rate of fifty four point seven percent. OK, now that's the first layer. We talked about immigration at the outset and said, OK, well, your corporation is subject to one layer and you as the shareholder are subject to another layer once the dividend is paid out to you personally. Now, if your corporation is paying taxes 54 and now you've got to pay tax again, personally, that's a significant amount of tax. And so I said earlier, there's there's mechanisms in place to integrate. And one of those mechanisms when it comes to investment income is referred to as the refundable dividend tax on hand or the Ardito Age. And this is a concept that is really important to understand because it means that there's some of the initial cash that's paid upfront on that interest, earned income that is refundable back to your business, to your corporation, and it's refundable at a point in time when the dividend is ultimately paid out to you. OK, now that might seem a little bit of money at this point, but we'll walk through an example and hopefully that will clarify what I mean by this refundable dividend tax mechanism.

 

OK. Next is the dividend, the Canadian dividend, so your corporation could be invested in publicly traded companies here in Canada. Tom and his team have a very focused dividend philosophy. And so your corporation could be earning Canadian dividends in this business. From a tax perspective, Canadian dividends are subject to what they call part for tax, which is a flat rate of tax of 38 and a third percent. But the nice thing about Canadian dividends and the taxes paid on a Canadian dividend is that your corporation is fully refundable on that tax, meaning that every dollar of corporate tax your corporation pays upfront is refunded and it's refunded when those dividends of Canadian Canadian dividend flow out to you personally. OK, so this could be a part of your strategy as well. If you know that you're in a tax bracket, which is much lower than that part for 38 and a 30 percent tax rate to ensure that your sit down with Tom and his team as well as your accountant to ensure that those dividends are being paid out to you personally, that the overall tax rate that you pay is much lower than that 38 percent. And finally, capital gains. I mentioned that half of the capital gains are taxable. The other half are tax free. So what happens to that tax free portion? Well, a tax free portion gets credited to what we call the capital dividend account, or what's commonly referred by to its acronym, the CDA, the CDA as a business owner is very, very important for you to understand and to track and to know what's available in that KDAY.

 

Why is that? Well, the CTA represents money in your business that can be paid out to you by way of a special type of dividend known as a capital dividend on a completely tax free basis. And, you know, a business owner, that it can be extremely difficult to get money out of your business tax free, so if there's ever an opportunity to do it, you will take advantage of that opportunity. So one way we can. Try to extract more money out of our business tax free is to get as much credit to the CDA as possible and that can be done through the investments that are selected within your corporation. So on this slide, I really just highlight a little bit more about the capital dividend account. Again, it's a notional account. It's not an account per say that opened up at a bank or anything like that. This is a notional account that's tracked and it's tracked on your corporate tax return. And what attracts, again, is the tax free portion of any money that's available to you as a shareholder. Generally, it comprises of capital gains, the tax free portion of the capital gains that we talked about, as well as other nontaxable receipts. Maybe you have life insurance policies in place where the death benefits get paid to the corporation.

 

Typically, those death benefits get paid to your capital dividend account. And as I as I mentioned, this is very, very important. If you have positive balances in the CDA, that represents money that you can take out as a tax free capital dividend. When it comes to investing, if we can focus our investments on investments and generate capital gains, then we can help to increase the capital dividend account and likewise also increase the amount of money you can draw out of your corporation tax free. So let's just put this all into perspective and talk about how investment income flows through your corporation. And in this example, if we go back to Whorley, remember our previous example, we used one hundred thousand dollars of business income. This time we're going to say it's one hundred thousand dollars of interest income. So we've done a great job of accumulating money in her corporation. It's been invested in a very conservative interest bearing investments, and it generates one hundred thousand dollars of interest income. You, as a business owner will want to know how much tax do I pay on this income? Right. Because we know that business owners or as investors, that it's not about what you earn, but it's more about what you get to keep, because what you get to keep is what you can use to spend or to reinvest. And there's a lot going on when you earn it through the corporation.

 

So let's kind of put it all into perspective here. If your corporation or one hundred thousand dollars of interest income, it is subject to that high rate of tax up front of fifty point six seven percent. OK, on an after tax basis, there's approximately seventy six thousand dollars. OK, now that number looks a little strange because we are incorporating the refundable portion. Some of that initial tax upfront is refundable to you when the dividend is paid out. Now, if we flow out those earnings to you as a dividend and you're taxed at the top rate, there is about thirty five thousand seven hundred dollars for personal tax. So the total tax, the total taxes your corporation pays, as well as you as a shareholder when this interest income goes out to you is fifty nine thousand. Call it six hundred dollars. I saw an effective tax rate of fifty nine point six percent. So 60 percent of your interest returns are being paid to tax and you're only getting to keep 40. So if it's clear to say that interest income really is not a tax efficient form of investment income to earn in your corporation. On this slide, we sort of highlight what the combined corporate personal tax rates on the various types of income, you can see that as we move further to the right, the tax rates sort of become lower and lower. Clearly, capital gains here are the most favorable, reducing the taxes that your corporation, you and the shareholder pay by half.

 

OK, so what does it all mean? What are the key takeaways that you want to take away from this segment of the presentation? Well, remember that investment income is subject to high corporate tax rates, and that really results in the need to consider more tax efficiency in the selection of your corporate investment. And if you are using mutual fund investments that you focus on mutual fund investments that avoid taxable distributions on an annual basis, these distribution tend to increase the corporate tax that your business could be exposed to and a focus on capital gains, again, for the reasons that we talked about earlier, reduced taxes, increasing the CDs. Now, this sort of segway into the next component we've seen already that it can make a tremendous amount of sense to accumulate wealth in your business. And so naturally, the question becomes then, should I be using my corporation for retirement purposes and using it as a vehicle for the primary vehicle for retirement savings? And so there's a lot of debate as to whether for business owners your RSP is the primary choice, or would you consider setting aside Arizpe as a vehicle and instead use a corporation? OK, that's a key question that many business owners ask us. And and you should also be asking with your professional advisers, your accountant and Tom and his team, and sit down with you to figure out what is the best solution for you.

 

I'm going to talk a little bit about some of the factors in play here and we'll walk through an example. But really, I should start this section by saying there is no one size fits all solution for everyone. Everybody's circumstances are going to be different. Everybody's personal situation is going to be different and everyone is going to need a customized plan for their themselves and their business. But just to sort of highlight what some of those factors are in making that decision of whether or not you should be paying out enough money out of your business to ensure you're maximizing your RSP or whether you should be. You know, say forgo your RSP and instead use your corporation as a vehicle. Lots of factors at play here. I've identified a few of them on here, primarily being what your personal tax rate might be, what your corporate tax situation might be, will also depend on your cash flow needs. How much income you'll need to draw from your business to fund day to day expenses, your desire for a pension plan, retirement benefits that could play a role here. If you're not drawing income from your business, you're not contributing to CPI, which could impact your future retirement pension from the Canadian government. So that can play a role in this analysis as well. And also whether there's income splitting opportunities, whether you have other family members who are shareholders of your business, and whether there are opportunities to flow out income to those various family members, that will also be an important factor in this type of analysis.

 

But so let's just talk a little bit about what you might think about in terms of your own personal plan and which direction you should take. So what I've done is put a bit of an example together. Now, there's a lot of numbers here, so I'm not going to go to too deep in the weeds here with respect to these numbers, but really just want to sort of conceptualize this idea for you. And so the example we've taken is in a business owner in Nova Scotia who is thinking about whether they should be using their RRSP as the primary vehicle for saving or whether they should be using their corporation. So in this example, the first charge here is a business owner in Nova Scotia who decides to pay out all of his income in the business as a salary so that they generate the RSP contribution room necessary to use their RSP. OK, so if you work through the numbers here, we start out with about one hundred and forty six thousand 720. We pay salary. And remember, as a business owner, you know this, that you're on the hook for both ends of CPP, both the employer as well as the employee portion.

 

So it's a significant cost to you as a business owner. And we have factored in this cost as well as the potential benefit into this analysis. So the idea being that once you've paid out into CPP as well as paid off salary, your business has no income and maximizes your RRSP, so you make your RRSP contribution of 26000. From a personal tax perspective, you're going to be taxed on the difference between the salary you've taken in the RSP. But once you've factored in the taxes, what you're left with in hand on a cash flow basis, it's about seven, 78000, 670. OK, if we take a look at the RSP as well as the CPA, because we've now made a contribution to CPP and what we've done here is taken one year's worth of contributions. OK, we just try to simplify this. So this is one year's worth of contributing to TPP as well as to your RRSP. And look forward 15 years and we made some assumptions on investment growth rates, et cetera, 15 years out, your RFP and TPP would have a value of about 70000. We know that when you draw on that for personal income, you pay tax on that income. What are you left with in your pocket to spend in retirement? This chart shows 49000 225. OK, if we just now look at an example where we forget the RSP and we say we're not going to invest in the RSP, but rather you're going to use your business as the primary vehicle.

 

So instead of paying out a salary, we're going to leave the money in the business. And we know that our business is going to be subject to the low rate of tax. So we factor that in now to make this an apples to apples comparison. You saw earlier that in the RFP example you had about seventy eight thousand six seventy of after tax cash flow. So we need to do an apples to apples comparison here. So what we do is pay out a dividend large enough to ensure that you get the same amount of after tax cash flow. And that's what we do in this analysis. What's left in your business after paying corporate tax and after issuing a dividend to you in this example of about twenty eight thousand one hundred dollars? Now, this is the money that you're going to set aside for retirement. And so we invest that money in your corporation and we are considering tax efficient investments in your corporation and we make the same assumption around rates of return, etc., and we look 15 years out and we assume in that 15th year that we sell those investments, that we go through the process of paying tax along the way. What's left in your pocket on an after tax basis is about 55000 755. So when we compare both scenarios which provide you with the same level of after tax cash flow, you can see that based on one year's worth of contributions, you end up with about 13 percent more by using your corporation.

 

OK, now, am I here to tell you that you as a business owner should be foregoing your RFP altogether and not utilizing it? Absolutely not. What I'm what I'm hoping you get out of this is to get you thinking a little bit deeper about your own personal circumstances and taking a look to see what makes more sense for you. As I mentioned, there's lots of factors that go into this analysis, and tax efficiency is one of them. If you're being very tax efficient with your investments, it could it could be very beneficial for you to use your corporate structure as a vehicle. If you're not being very efficient with your corporation, you might actually consider your RSP. And in fact, CIBC came out earlier this month with a report on its own of its own from Jamie Golombek was a very well respected tax expert who did very similar analysis. And his analysis concluded that, you know, for various types of portfolios where you're generating taxable income and may actually make sense to use your speed. So, again, it's about trying to maximize the opportunity available with your specific situation. Everybody's situation is different and you'll want to get further advice in this area. And this is why Tom and his team is here to help you with that planning.

 

Just one last line with respect to this analysis, and that is with respect to taking this and expanding on it a little bit deeper now, we saw already that the analysis I've presented is based on one year's worth of contribution. We've had a lot of business owners say, hey, Frank, can you show me what this strategy looks like, where we do it every year over 15 years? Oh, and by the way, what if I wanted to do some kind of combination strategy where I pay just enough money as a salary to generate the maximum amount of SEPI benefit? And then invest the rest in the corporation. And so we've done that and you can see that using the corporation still can be very beneficial over the long term. Again, focusing on tax efficiency, OK? So when it comes to tax efficiency, this is where Tom and his team can really help you take a look at the investments within your corporate structure and provide further advice in this area. One area, there's a number of different strategies you can consider, but one area is if you are using mutual funds for investment to consider what we call corporate class investments. Not going to go into a deep discussion today on corporate class investments. If you're interested to talk about this again, I'd encourage you to be in touch with Tom and his team. But this is really a different style or a different type of mutual fund investment that is designed with tax efficiency in mind.

 

And in my mind, in my opinion, these are great for all sorts of taxable type of investors. But to me, there's no better fit for a corporate class for investment than there is for small business owners in Canada who have accumulated wealth in their business. Why? These are designed to be tax efficient. They're designed to reduce taxable distribution. They're designed to focus on capital growth, which are all perfect fit for corporate investment. And just to highlight one example of this, this is one of McKenzies investments we call the symmetry conservative portfolio that is often used in corporate investment portfolios, what it's designed to do is remain a very conservative investment profile. So it's not subjecting clients to too much risk yet. The returns are comparable both on both the trust and corporate side. We do make this investment available in a mutual fund trust, which is your typical mutual fund, as well as in a corporate class version. And what you'll see is that from a tax perspective, what this chart is showing is in percentage terms, how much tax you as a shareholder would pay on distribution. So you can see that a trust investment exposes the investor to a lot more tax than a corporate class investment, which is highlighted by the red bars. So just to give you a sense that there are investments available that can remain conservative, yet achieve some of your tax efficient desires that your corporation could take advantage of.

 

And one final segment of this presentation that I'll conclude here, I'll just spend a couple more moments in the use of holding companies to get lots of questions around the use of holding companies. And it does tie into that section of the presentation that we've already talked to and I should highlight. That we talked about how your corporation is exposed to high corporate tax rates on investment income, and I'll just clarify that those high tax rates do apply regardless of whether those investments are held in your operating company or if they're held in a holding company. The tax issues are the same. OK, so we get lots of questions as to why would I set up a holding company or when would it be the right time to set up a holding company where the whole holding company would own shares of your operating company? It can be done for tax planning purposes, but generally, I said the tax issues are the same. So you don't get away from the high tax rates by siphoning off your investment assets into a holding company. So what are some of the reasons you would use a holding company? Well, I've highlighted a few of them here. One of them being that it can help you purify your operating company for purposes of being eligible for the capital gains exemption.

 

And we haven't talked about the capital gains exemption today, but this is a very, very important exemption if you're considering selling your business. But it's also good planning that you that you are eligible to claim this exemption even if you aren't planning to sell your business. This exemption allows you to eliminate tax on the potential sale of the shares of your business. But remember, even if you're not planning to sell your business, if you pass away owning shares of your business, you're going to be deemed to have sold the shares. So it's always good planning to be on side with the rules to ensure that your business is eligible for that exemption. So there's a there's a number of tests not going to go through them today. But one of the main tests is that your operating company cannot have too much by way of passive investment assets. So one of the strategies of using a holding company is to create that holding company and extract that money out of the operating company, to put it into the holding company, to ensure that the shares of your operating companies continue to meet the test for the capital gains exemption. So, again, it's good planning to if your business is accumulating more and more investable money, it might be time to incorporate a holding company that could hold some of those passive assets. It's also done for creditor protection by having a holding company retain or hold assets, investible passive assets, you are essentially creditor proofing those assets from any potential claims made by any possible business creditors.

 

So creditor protection is one great use of a holding company. Another one is in the case where you might have multiple shareholders of your operating company. And in that case, each one of the shareholders are going to have very different financial circumstances, personal circumstances, their retirement planning, their dividend planning to be vastly different. So in that case, what a holding company allows you to do is to, as a shareholder of the operating company, take the dividends from the operating company and place them into your own personal holding company. And that will allow you the freedom and the flexibility to do your own financial planning with respect to your future earnings. So your holding company could then issue dividends to you when you see fit. Or you could have family members who are also shareholders of your holding company to allow you further tax planning and income splitting opportunities. So that's just a few ideas as to some of the uses and of incorporating a holding company into your overall corporate structure. And again, it does kind of go nicely with the conversation of accumulating wealth, because at some point you may accumulate enough wealth in your company where you'll want to introduce a holding company into that picture. So that concludes the formal portion of my presentation we've talked about quite a bit at this point, but I guess what I'll do now turn it back over to Tom and Matt, who will moderate the Q&A.

 

Thank you very much. At this time, I would like to invite participants to ask questions through the control panel. On the right hand side screen, you will see a tab titled Questions. And within that tab, once you click on the plus side, you will be able to type in your questions and we'll be able to read them to Frank. So while we get started, I will hand it over to Frank to read our first question here.

 

Thank you, Matt. It's Tom here from ABC with Gabby, and our first question is, Tom, do you have access to corporate class funds through CIBC with. And I would say yes, absolutely. In fact, I'll allow Matt McGowan to maybe answer this in a bit more detail in terms of the product offering with Mackenzie Investments.

 

Absolutely, Tom. I'm happy to hear that question. I am happy to say that Mackenzie has one of the most robust and tax efficient corporate structures in the industry. Got a number of four and five star performers available both as trust and corporate class funds. And I would add that Tom and his team have a direct line to my team and I can answer any of the questions that you may have regarding corporate class mutual funds.

 

Perfect. Thank you, Matt. And our next question that has come in is, is for Frank. Frank, what is the most common tax mistake made by business owners?

 

The most common mistake. Yes, yes, yeah, boy, I think, you know, we can answer that by by by, you know, just being a little bit more general and saying that that low level mistakes that are made are where business owners aren't being more proactive in the planning and and tend to be reactive. So whether it be things like not thinking ahead about what they're what the optimal compensation structure should be from their business, not thinking ahead about, you know, who should be the shareholders of the business or even going so far as talking about today, not giving people thought about the investment selections that are made with the corporate investment or thinking too far ahead about what the most optimal way to save for retirement should have been. So I think at times what we tend to see is business owners who, you know, they're just so busy working in their business. Business owners have very little time to sit down and think about the business and about their future. And instead of working in the business day in, day out, 80 hours a week. So a mistake we see is not enough time spent on maximizing the use of this structure in a multiple of different faceted ways.

 

Thanks very much, Frank. That is all that we've got for questions at the moment. I would remind everybody on the call that you can reach out to Tom and his team for any additional questions that you may have. And I will ask that we advance to the last slide and I will pass it back to Tom to close the call.

 

Well, thank you. Thank you, Matt, and thank you to all of our listeners today. We certainly appreciate your time. I'd like to say a special thanks for France, too, for being our guest speaker today and providing us further insight into tax and estate planning and retirement planning issues for business owners. We certainly hope that everyone found it a value. We hope that it was thought provoking for many of you today. And what I would encourage is that if anybody has any follow up questions to today's webcast, feel free to reach out to myself and my team through the Tom Hunter group dossier or on this part of the slide. Here you can see our contact information for my associates and as well as myself. And we'd be happy to have a conversation around this topic and others if you have questions. I also know that my team and I, we do offer a monthly investment newsletter. It's called the CIBC World Markets Report. And we send them by e-mail to get your interested investors as a way of staying in touch with those investors. And if you would like to be added to that distribution list, please let us know. Reach out to us. Also, today's call really highlighted some strengths within McKensie investments, whether it's the corporate class funds or their expertize in tax and estate planning. And we do have bulletins available through McKensie that if any of the business owners on the call today are interested in learning more about some of the topics discussed today, please reach out to our team and we can certainly make that available. So with that, I'd like to say that this concludes our call today. We thank you again all for taking time out of your day to be with us. And we look forward to bringing more content like this in the near future. And that's it for today. Thank you.