We are pleased to see this year’s federal budget leaves Fair Market Value transfers of life insurance alone. The planning sense to holding insurance in a corporation remains clear and the concept of FMV is replete throughout the ITA. It is likely that discussions between advocacy groups and the Department of Finance will continue on this subject; particularly concerning the adjustment of the calculation of Adjusted Cost Base (ACB) upon transfer. With more business reorganizations likely given succession planning needs, charitable giving becoming a quintessential part of tax planning, family law adopting FMV as a part of Net Family Property, and the attractiveness of holding insurance in a corporation and releasing captive assets, FMV transfers will remain a critical part of planning.
After the near disastrous federal budget proposals of 2011, we are glad to see that Individual Pension Plans were left alone. Past Service remains intact, deductibility remains unchanged and accrual assumptions remained fixed at 7.5%. The problem of importing Defined Benefit rules to withdrawals and wind up assumptions are in need of further adjustment but perhaps, through consultation (something that this Department of Finance does undertake) these issues can be resolved.
Last year’s budget, and resulting regulations has successfully ended aggressive use of Retirement Compensation Arrangements (RCA). They remain intact and enjoy expanded use as demographic realities see companies and organizations embark upon a plan of funding supplemental retirement plans.
The Health and Welfare Plan (Trust) did not make an appearance in this year’s budget. The attempt to codify the structure through the Employee Life and Health Trust remains a virtually unused section of the Income Tax Act. The Federal Court of Appeal has successfully dealt with the aggressive use of Health and Welfare Trusts. For those small businesses who seek to augment benefits in a cost effective manner, or to those who simply need to make medical and dental costs deductible, the HAWP remains an excellent option.
For several years federal and provincial governments have been committed to a policy of reducing corporate taxation as a means to spur economic activity. While this policy has been largely successful, governments have not paid adequate attention to the principal of integration. Integration has been a central tenant of the income tax system since the Carter Commission and it remains the mechanism by which fairness and equality is maintained. We all want to see a robust economy in which business flourishes but creating two taxes systems, one for shareholders and one for employees; this incongruence strikes at the heart of our Canadian polity, and one must think that Mr. Flaherty saw the innate unfairness of the tax system.
One would assume that the provinces will follow suit and move closer to, or achieve integration. The decline of the “dividend only” compensation strategy is at hand; it is our view that sensible planning and prudent savings using registered plans that include IPPs will be the result.
Leveraged Insured Annuities and 10/8s have been part of advanced insurance based planning for over a decade. The Department of Finance and Canada Revenue Agency has targeted them for about that long. Recent Court decisions gave some in the planning community reason for elation. The old adage that if they can’t come through the front door to get you they will come in through the side, is in evidence here. The ability to radically reduce, or in certain cases eliminate taxation always meant that government would target these strategies.
While we at GBL did not participate in these strategies we have sympathy and understanding for those who advocated them. For those who believe that insured annuities and 10/8s represent valid strategies that are not at odds with public policy, I implore you to make your case.
Thoughts for Budget 2014
Canada’s fiscal situation is improving. Creating an environment for entrepreneurialism is both a federal and provincial concern. Policies need to be enacted that will encourage business, both Canadian and multi-national in nature to want to expand here in Canada. Canada should continue to promote Research & Development, and adopt policies that encourage the fruits of that R&D to remain in Canada. In addition to fostering economic growth, the Government must also look to individual taxation as equally key. It is time to introduce full income splitting, augmented TFSA limits and to lower overall personal tax rates. Canada has a unique opportunity to become an entrepreneurial beacon to the rest of the world.
Budget 2013 sees necessary adjustments in our tax system. Hardly an attack on entrepreneurs, this budget creates an environment for prudent planning and a return to fiscal surplus. It is a balanced document that should be widely applauded.