Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

Closing the Loop on HNW Clients

By Melissa Shin


The good news: marginal income tax rates didn’t go up. The bad news: for high-net-worth clients, the effective tax rate probably did.

In a budget full of few surprises, commitments to close various tax planning loopholes were a more subtle way of increasing revenue in government coffers. The government believes it will save $500 million over the next five years by cracking down on perceived tax avoidance.

“The government is putting forth [initiatives] to ensure the tax base is not eroded by looking at measures that have not made Canadians equal across the board,” says Mike George, director of the wealth and estate planning team at Richardson GMP. “Most Canadians like the idea that the tax base is maintained and that there are no special privileges.”

This may be true for the average Canadian, but for HNW clients, proposals to close these loopholes mean fewer tax planning opportunities.

“The definition of what is considered a loophole and abusive is getting greater and greater, to the point that transactions that are being done for legitimate non-tax reasons are being caught,” says John Campbell, tax group leader and associate partner at Hilborn Ellis Grant LLP in Toronto.

And not just taxpayers suffer. One disappointing development, says George, is the proposed elimination of the ability for investors to double dip when donating flow-through shares to charity.

Previously, investors would receive a resource exploration tax credit upon purchase of flow-through shares issued by oil and gas, mining, or renewable energy companies. These companies use the proceeds for exploration and flow the associated tax deductions through to investors, bringing the investors’ adjusted cost base to zero. Upon sale of these shares, the entire value would be taxed as a capital gain. When investors would donate the shares, they would receive a tax receipt for the entire value, but were not required to pay tax on the capital gains realized on the disposition. This meant that a $100,000 donation of flow-through shares could result in a cost to the shareholder of only $5,000.

The government has proposed to close this so-called loophole: taxpayers would only be exempt from the capital gains tax to the extent that their capital gain exceeds the amount paid for the shares.

George says this move will likely reduce the amount HNW clients will donate to charity.

“It’s a shame since it hits the charitable sector, which is already hurting for money,” he says. “Certainly a large component of our clients were able to direct a significant amount of funds to charity, so they’ll need to reevaluate that strategy altogether.”

Other issues that may affect HNW clients include the proposed change to the ability of affluent parents to split income with low-income, minor children.

“The Income Tax Act says income-splitting cannot be done with related minors, but doesn’t take offense to capital gains-splitting with minors,” says Campbell. “This budget proposes to further restrict the definition of capital gains by taxing certain types of income earned by minor children.” This would take away the ability for HNW clients to shift the tax burden to a child in a lower tax bracket.

The budget also states in Annex 3 that the Aggressive Tax Proposals introduced in the March 2010 budget will be moving forward. These AT Proposals, as covered in the February 2011 issue of Advisor’s Edge Report, would essentially require any professional who receives fees for assisting clients with a tax plan that provides tax benefits to report such activities to the CRA. This also concerns Campbell.

“The [Aggressive Tax] Proposals are an example of anti-avoidance legislation that is so complex and difficult that [it has] taken 10 years to draft,” he says. “[The proposals] are difficult to comply with due to their complexity and are likely going to spend years in court trying to define their application.”

For Campbell, this is yet another sign of government overreaction.

“The reach of this budget is moving towards challenging real investment strategies and real business transactions as opposed to just closing down loopholes,” Campbell says. “Whenever government introduces legislation to prevent perceived abuses, many times they take a sledgehammer to a fly and introduce legislation that’s so complicated that it’s not effective, or it’s so restricted that it has unintended consequences on taxpayers and professionals.”

Knowing that the budget is likely to be voted down, John Nicola, chair and CEO of Nicola Wealth Management in Vancouver, was disappointed with the document’s substance. “If you’re going to lose the vote of confidence anyways, you might as well present a conservative budget,” he says. “I think Canadians are quite ready to have spending and the deficit under control.”

Retirement income
If there’s a second go-around, Nicola wants to see changes to RRIF rules, rather than Individual Pension Plan (IPP) rules. The current budget proposes annual minimum amounts will be required to be withdrawn from IPPs once a plan member reaches the age of 72.

“What should have happened was the reverse,” Nicola says. “The problem is not the IPP, the problem is the RRSP. IPPs are a legitimate, proper way of drawing money out of registered capital without destroying the capital over your lifetime.”

Nicola explains the RRIF rules were designed for a time when interest rates were much higher. “They’re unrealistic. The withdrawal rate should never be 7.4%; it should be 5% at most,” he says. “They should address [that], but don’t want to because [the government] makes a lot of money when people take more money out of their RRSPs and their RRIFs. Not only does [the government] get more money from taxes, but it increases the chance that somebody is going to have an OAS clawback.

“The whole RRSP required withdrawal is antiquated,” he continues. “People live longer and their retirement savings have to last longer. You cannot have rules that destroy their capital before they’ve ended their life expectancy.”

Nicola would also like to see increased RRSP contribution room and percentage room. “That way older people, who can save more money, can put a higher percentage of their income away in retirement savings,” he says.