Hello, everyone. Thank you so much for joining us. I see that we have some clients, colleagues, friends, and new friends. Welcome. Thanks for joining us.

So today, we'll provide a market update, as well as a tax update on business owner succession planning. It's our plan to deliver some essential information that combines investment and tax, and hope that there are lots of takeaways for you. So welcome. OK.

OK, so this is our agenda for today. And we'll start with some introductions, and then I will continue on to provide a market and economic update, and then I'll pass it on to our esteemed guests from MNP to talk about some tax changes, especially for business owners that are looking to pass on their business to family members. And there are some important changes and considerations.

So at the end, we're leaving some time for Q&A. So if you have any questions, please email that to me at Rita.li@rbc.com. OK, so here's a little bit about myself. I'm Investment Advisor at RBC Dominion Securities. Obviously, Dominion Securities is one of the largest and leading wealth management firms in Canada. Personally, I have worked in the investment industry my entire career.

I started my career at a large US institution, and then since then, I worked at some of the top investment firms and pension funds in Canada and abroad. Now I work with clients one on one to provide investment advice and risk management and financial planning. I'm also a chartered financial analyst, and I have my MBA from Richard Ivey School of Business.

So our speakers today are from MNP. MNP is one of the largest accounting firms in Canada that provides accountancy and advisory service. And we have, joining us today, is Andrea Chan, which she is MNP's regional managing partner for Toronto North, and a member of the firm's assurance and accounting team. Andrea works one on one with dental, medical, legal, and other professionals, delivering sound advice to help her clients to achieve their personal and business goals.

We're also joined by Michael Saxe, tax partner at MNP. Michael helps his clients with Canada Revenue Agency disputes, corporate reorganization, compensation strategies, tax-efficient structuring, trusts and estate tax planning. So Michael does it all, and he has in-depth knowledge in terms of taxation.

OK, so we had an exciting year in the market. It's been a good run for this year. And many people want to know what to expect for the rest of the year and for next year as well. And this is from RBC, our capital markets desk. And this is some of our key calls. So for S&P500, which is that more commonly used benchmark for North America, we have a target price of 4,500 end of this year, and 4,900 for 2022. And how do we drive to this price target? There are two main components.

One is our forecast in terms of corporate earnings, which is from earnings per share. And the other component is the price to earning ratio assumption. So I will address both. First of all, our EPS forecast for 2021 is 200, and for 2022, it's 222. And that's assuming that there won't be a corporate tax hike in the US.

And it would be lower if they were to increase the tax for corporations. And on the P/E ratio side, we're assuming a 20-times P/E. And again, if there is a corporate tax hike, then we're assuming a 21 [AUDIO OUT].

I'm sorry. My audio disconnected. Can everyone hear me? Oh, OK. So Andrea, you can hear me? OK. I'll continue sharing. Sorry about that. That has never happened before. OK. All right. OK, so where we left off?

So it's our base case scenario that even if there is a corporate tax hike, the market will be looking through that, which is the reason why we're not changing our target price in that scenario. Oh. OK, so this is just another way to look at how the earnings have done, how the companies have done, in terms of earnings, from a consensus straight point of view.

So, you know, we had the pandemic. There was this lockdown, but the market's been doing well, and that surprised a lot of people. There are two reasons for it. One is that the economy has recovered well. So we're almost at the pre-pandemic level now. So indeed, there was a v-shaped recovery, even though it might not quite feel like that as we slowly reopen. The other component is that the corporate earnings growth have been strong. It's on track for 45% year over year growth, and that definitely has fueled a strong market performance as well.

So for next year, the consensus view is 10% growth, which is not as amazing as this year, but it's also solid as well. And for the technical audience among us, you may want to know how we drive to the earnings growth numbers. So this is just a more detailed breakdown in terms of where that comes from. So if you look at 2021, the majority of the growth comes from revenue growth, and some of the growth will come from growth in profit, through margin expansion.

So I hope this was a clear picture in terms of the corporate earning side of things. And we'll take a look at in terms of the P/E ratio, which is essentially how much you're paying for the market. Right now, the price to earnings ratio is trading at 20 times, which is at a premium to a 20 year average, which is at 15 times. So it is absolutely trading at a premium.

And if we want to take a look at all the world major markets-- so not just Canada and the US. We're looking at Japan, Europe, and Asia. Most of the markets actually are trading close to their 10-year average, with the exception of the US. So US is trading above their 10-year average. And part of that reason is because of the company's shareholder-friendly actions. They're very active in terms of buying back shares, which reduce the total amount of shares outstanding, which fuels EPS growth.

And what I have in the bottom here also shows you the range in terms of the P/E ratio, from peak to trough. As you can see, the bottom P, which we observe from the great financial crisis for 2008, is 13.4 times. So it is a wide range. And when you do see that the market is volatile and it's fluctuating, and it is most of the time driven by the contraction and expansion of the P/E ratio. And of course, that impacts the overall volatility you see in your portfolio as well.

So from a P/E ratio perspective, absolutely, market's trading at a premium. And another way to look at it is from a cash flow lens. When you look at the S&P500 companies from a dividend yield perspective, which as a function of how much dividend is paying per share. And you compare that with the 10-year treasury yield US Treasury, which is in terms of-- that's fixed income, bond yield. Right now, over 50% of the US companies are paying higher yield than the 10 year treasury yield. So from that perspective, it's definitely making a strong case for stocks.

So how has fixed income done this year? It hasn't-- so far this year-- this is from the Canadian bond universe-- it's down 7% in terms of price return. And if you factor in the income yield, the overall total return is down 5%. So it's definitely hasn't done amazingly. And we all know that interest rates are low and inflation's ticking up. So in terms of real rates for most parts of the world, it is very low.

It's not negative. It is definitely negative, as well, in North America-- US and Canada. So the question is why do we still have fixed income in our portfolios? And I've been getting that question as well. Part of the reason is in this graph. So if you take a look at the past 100 years, almost 100 years, the relationship between stocks and bonds, in times where the stock market has a significant pullback, the bonds part of the portfolio have held out well.

So that's still the main reason why we would have fixed income in the portfolio. It's for that purpose, because everyone is different and everyone has different tolerance in terms of wanting to see how much your portfolio fluctuates, or how much volatility that you want to see.

And I want to tie it back to the broader economy. This is from the International Monetary Fund's projection, in terms of global GDP. And you can see that the light blue bar is for 2022. And for US and Canada, the projection is close to 5% for next year. But what does that mean in terms of market performance? And this is from historical data from 1947 to 2019.

If you look at, one, the real GDP is greater than 4%, which is highlighted in gray here. You can see that the average S&P 500 return is 8% and median return is 10%. And of course, this is historical performance and it does not guarantee future results, but it is one of the reasons why we're cautiously optimistic and still constructive on the market for next year.

So I've talked about overall economy, and we're almost back to pre-pandemic levels. And one of the things that we look at is-- one of the measures we look at-- is employment rates. So you can see that in Canada, the unemployment rate has come down to hovering about 7%. And even in the US, it's close to 5%. And we've all been reading about job openings and labor shortage, so definitely, that things are looking up and we're almost back to where we were.

But in a comparison perspective, Canadian households may be a little bit worse off than the US in terms of household indebtedness. So this just shows the household debt to disposable income, where you can see that the Canadian ratio, which is the blue line, is consistent going up, versus in the US, they have good leverage since the great financial crisis. And a large part of that is our very buoyant housing market. So even in comparison to the US, our home prices have really just continued to go up.

And what does all of this mean to you, in terms of your household budgeting, your retirement planning? Well, the report that I really like is Fidelity's retirement report that they do every year. They surveyed about 2,000 people with a median age of 61, and almost an even split between men and women, and they just kind of test temperature in terms of how ready, how Canadians are doing in terms of their retirement.

And you can see that here, some have said, for people that are over 65 age already, they're saying that because of COVID, they are deterring their retirement even further. And here, we have people say-- 11% say that, yes, I'm planning to retire earlier than originally expected as a result of COVID-19. 21 say that I'm planning to retire later, and then we have 69% of people saying that they're still on the right track to retirement and this has not really impacted them as much.

And there are two key drivers to this. One is we're seeing that people that can retire earlier, one is the higher income factor, and the other one is when people live-- the respondents in Ontario generally reported that they will retire later than other parts, regions, that were studied. And what's holding Canadians back from retiring? Some of the key concerns cited were "I'm concerned about the rising cost of living," "I'm concerned that I have not saved enough," and then lastly, "I don't feel like I really have a plan. I'm not sure if I'm ready."

And then there's a lucky segment where they just feel like they will be bored if they retire and there's not enough for them to do. So this is the reason why people like myself, and I believe Andrea and Michael as well, to emphasize having a plan. When we look at the numbers, people that feel positive about retirement, overwhelming majority of them, they do have a written financial plan, and that helps them to feel more positive about their retirement readiness. And it does help you to kind of have a holistic view of your overall net worth, your retirement income sources, and that puts people's mind at ease.

And another very important driving factor, of course, is home ownership. And if you're entering retirement with a mortgage, if people feel more ready if they have home ownership and mortgage-free, so that's also a very important driving factor. So here are some additional resources. If you're interested in reading the retirement report, there's much more to it than that. I'll send the key highlights. So just let me know, and I can send that to you.

And in terms of updates I provided so far, it's been kind of very macro-based. But we have a white paper that dig into schematics that would drive future growth, things like renewable energy, ESG, 5G network, artificial intelligence, machine learning. So that's all in the RBC matching report. So if that's something that you're interested in, definitely reach out as well and let me know so I can send that to you as well.

OK, well, thank you so much for your attention. And this is just my contact information. If you are interested in having a portfolio review, retirement planning, or talking about intergenerational wealth, let me know and I'd love to chat. So with that, I will pass it on to our guest speakers today to talk to you about family tax planning.

Awesome. That was a really great presentation, Rita. Thank you for kicking us off today. You know-- Hi, everyone. Today, Michael and I are going to cover two topics that we've been spending a lot of time talking to our clients about. And the first one, being selling a business to the next generation, and the second being estate planning. And we're hoping over the next half hour, we can quickly share some of our experiences with you.

I know Michael is going to do most of the heavy lifting today, being the tax specialist here. I'm setting you up, Michael. And he'll start us off by kicking up-- or not kicking, but talking about Bill C-208, which is a new bill that enables an owner to transition their business to a family member tax effectively. And prior to this bill, selling a business to a family member looked really different compared to selling to a third party, for tax purposes.

So this bill is a really, really great opportunity for family business transition. Having said that, I should say that it is extremely time-sensitive. So if the situation is applicable to you, hopefully you've already had a conversation with your tax advisors. But if you haven't, feel free to reach out to us as soon as possible so that we can get you some help. I'll pass it on to Michael, who'll go over the details.

All right. Thank you, Andrea and Rita, and thanks for having me. As Andrea said, I'm going to-- well, you can back one slide. It doesn't matter. Sorry, Rita's controlling the things here, so I'll have to go use some signal, Rita. But actually, yeah, if you don't mind going back one slide quickly. If you can't, it's OK.

Anyway, so yeah, as Andrea mentioned, I'm going to talk about business sales of shares of corporations from parents to children. Also as Andrea already said, historically, the tax rules and the way they're set up created a situation where a parent was-- or I should say a family was worse off from an after-tax cash flow perspective when selling a business from down a generation to a child or grandchild, compared to a third party sale. And Bill C-208 8 came out in the summer to kind of level the playing field.

One issue is that, as Andrea just alluded to, the government announced that the tax legislation in Bill C-208 it is being revisited, and it will be amended on or after November 1st. Fortunately, we're at November 25th and nothing's happened yet. However, the House of Commons did begin to sit again this week, so now we are closely monitoring the action there to see if anything comes up, with hope that the changes are delayed.

But right now, with the way the legislation sits is that parents can sell a business to a child or grandchild and end up with a similar after-tax cash flow result than if they sold it to a third party. And as Andrea said, I don't want to take away from saying that we're hoping it's delayed, because it is a good result, but I mean, no one has a crystal ball and it could be any day now, even, that the rules get amended, as the government said that they would. Next slide, please, Rita.

So I know this is a bit busy of a slide with a lot of information, but what I wanted to do here is highlight the disadvantages that resulted pre-Bill C-208, when a parent sold a business or shares of a business to a child, compared to a third party purchaser. So if you assume that Ms. A plans to sell the shares of a corporation that are worth a million dollars and the shares have no cost base, we've outlined four scenarios here, four options what that would look like. Scenario A is parent sells to a third party, and B to D are three different ways that pre-Bill C-208 they could have sold it to a child.

And we're trying to highlight here that there's after-tax implications, of course, to the seller, how much they get they're left with in their pocket. So parent, and how much money purchaser has to come up with-- you can see corporate earnings required-- so how much they need to come up with to fund the payment of a million dollars with pretax dollars. So of course, the lower that you need with pre-tax dollars, the better for the purchaser.

So in Scenario A, Ms. A could sell to a third party, claim the capital gains exemption. They're left with proceeds of about $971,000. And purchaser could set up a corporation, pay the purchase price with the low corporate income tax rate, and have earned $1.1 million to approximately to end up with the million dollars to repay parent seller.

In Scenario B, Ms. A could sell the shares of the corporation directly to their child, receive a promissory note, claim the capital gains exemption on the capital gain, and then child could fund the payment of the purchase price with after-tax cash flow personally. And you can see it's not a great result for child here, as they need $2.1 million, assuming they're in the top rate, to net a million.

In Scenario C, parent can sell the shares to their child for-- or I should say, sorry, to a child's corporation, a corporation the child sets up, for a promissory note. But they would actually, because of a [INAUDIBLE] Tax Act, they would actually be taxed on a dividend and not a capital gain at all. So the highest personal tax rate on dividends right now in Ontario is 47.74%. And then child can use the corporate earnings, just with the after tax, just taxed at the corporate level, to repay parent.

And then lastly, Scenario D is Ms. A could sell the shares of the corporation directly to the child for a promissory note, not claim the capital gains exemptions, so they're taxed on about 25% of the proceeds, and with the current tax rates just over that, and then child could flip the shares over to a corporation and basically use corporate tax dollars to repay parent. So the observations, when you're comparing all these scenarios, is that as a family, the best scenario's Scenario D. But in Scenario A, the least amount-- it's a big difference-- the least amount of tax paid between buyer and seller is $167,000 when a parent sells to a third party.

And then just comparing the situations for parent and child, parent will have the highest after-tax cash flow when selling the child directly in Scenario B. They'll end up with that $971,000. But as I mentioned, child is in the worst situation here because they need to earn $2.1 million approximately to net a million after tax to repay parent. Child prefers Scenario C or D, where they only need to earn, not only, but relative to other situations, $1.1 million to net one million after tax to repay parent. But parent is not in a great situation in C and D, as they end up with only $522,000 or $732,000 respectively.

So as I mentioned, Scenario D is the best if you were going to do a sell amongst family as the after-tax cash flow-- the total tax, sorry, is $406,000. But, as I mentioned, it is far worse a result compared to if parents sold to a third party purchaser. And we saw this all the time in prior situations, where you had family businesses and parent really came to a fork in the road where they had to say, do I want to maximize the results for my family? And you know, sometimes, they did end up going down the third party route because of that. So-- next slide, please, Rita.

So along came Bill C-208. And fortunately, as we mentioned, it made changes to the Income Tax Act to facilitate these intergenerational transfers, changing the rules so that parent can claim the capital gains exemption by selling the shares of their business or corporation to their children, and child could set up a purchaser corporation so that they could fund the purchase price with earnings taxed only at the corporate rate, only with corporate dollars and not personal dollars.

Here are some conditions that need to be met to utilize Bill C-208 planning. Per the current legislation-- again, we're waiting to see what happens with the new one-- but the child has to be over 18, the child has to be active in the business, taxable capital, which is roughly meaning adjusted retained earnings of the company and its associated companies has to be less than $15 million, the business has to be eligible for the capital gains exemption, or I guess more specifically, the individual parent who's selling the shares.

And then a couple other ones that we haven't listed on the slide are that the purchaser corporation can't dispose of the shares of the business within 60 months of the purchase, which is a pretty big one and could cause some issues. Who's to say that situation might not come up, where someone would want to sell for 60 months. So that's a bit of a sticky one, but not much you can do on it. And then also, the child has to control the business being purchased post-sale. Next slide, please, Rita.

The legislation has some interesting reporting to CRA with respect to the valuation of the business. As noted on the slide, one has to submit to CRA an independent assessment of the fair market value of the shares of the business and also an affidavit signed by the taxpayer by a third party attesting to the disposal of the shares. Interpretation of these terms is not totally clear. What is an independent assessment? What is acceptable third party attestation?

But I will say that it is unusual, as I'm sure you would all agree, for anyone to have to report, up front, anything about the valuation of a business or attesting to the disposal of the shares. Usually, when you sell something, you just report it on the tax return. And if CRA wants to ask questions, they ask questions.

So this is one in particular that is important to know about because you want to make sure you meet these criteria with the way the Bill C-208 is currently structured. And it will be interesting to see what happens when the legislation is updated with this one. So that is the update on Bill C-208 and the current opportunity to have intergenerational business transfers. And as Andrea said, now is a great opportunity to explore this. And no one has a crystal ball, but sooner is probably better than later if this is something that could be applicable for you. So I'm going to pass it over to Andrea, and she's going to talk a little bit about estate planning. Thank you.

Thank you. So yeah, so we're going to switch gears a little bit and talk about estate planning in general. And this is a topic that has always been extremely important, but we found that during the pandemic, I guess for obvious reasons, it became even more top of mind for our clients. And they really want to make sure that their family is well looked after if something happens in them.

So we'll start off by laying out what the estate planning process looks like so that you can really start thinking about it. We'll highlight some tax rules that are specific to death, and Michael will walk us through a case study to better illustrate some concepts. Next slide.

So when we're starting the estate planning process with our clients, the first step is always making sure that we understand what our clients ultimately want. And the earlier you do this, the better, so that you can plan ahead. And of course, as needs change, the goals will need to get updated and so will the plan. Understanding our client's wishes generally can get quite involved because there can be a whole lot of goals and it takes time to figure out what someone really wants.

So when you're planning for your own situation, it's important to really delve in with your accountant and spend that time to figure out what your goals are so that you can put together a plan that achieves those goals. Next, we gather all of the information on our client's assets and liabilities so that we can essentially put together a net worth statement. And we'll show you what an example of that looks like shortly.

And as part of the net worth statement, we also estimate the income tax on death, if no planning was done, just so we can set a baseline on what to expect. And then finally, we go through the alternatives and planning options so that you can minimize tax for the estate and ultimately plan how to pay those taxes. And these options will also tie into how you want your assets to be distributed amongst your family members. Next slide. Perfect.

Understanding your client's wishes. Sometimes, this part of the exercise can be the toughest part in terms of really thinking through what you want. So we thought it might be helpful to list out some common objectives that we've seen so that it can help you brainstorm. A basic objective that most of our clients have is to maintain their current lifestyle and consumption needs on retirement. So this is where someone like Rita would be extremely helpful because she could help you put together a financial plan that details how much money you're currently spending on what, and lay out at any one-time expenses that might be on the horizon.

Another objective might be to simplify the current corporate structure. And frankly, that's a good exercise to do on a regular basis to make sure that you have the simplest structure that achieves your goals, right? Another one is minimizing or deferring taxes as you're transitioning out of the business or on death so that either you have more money while you're living, or you're leaving as much as you can to your beneficiaries.

And of course, when you're thinking about transitioning wealth to the next generation, you'll likely want to think about how you want to do it. Is it just cash? Is it shares? Are there real estate, et cetera? And the timing of those transfers-- so is it age-based, as an example. I mean, if you're leaving a lot of your assets to your beneficiaries, it's probably important to educate and prepare that next generation for that inheritance.

Another important wish may be that you want to make sure that your family members continue to get along. So maybe as part of that plan, you might want to ensure that a lot of communication is done with family members beforehand so that everyone's on board with the plan and no one's surprised. And finally, you may have specific foundations or charities that you actually want to give to, either regularly or on death. And of course, you know, this list isn't an exhaustive list, but hopefully it gives you some ideas in terms of planning out your own goals. Next slide.

OK. So this is an example of a net worth statement. So you can see that it lists out all of the assets and liabilities at fair market value and it's at a point in time. And again, from my experience, working with a financial advisor like Rita would be very helpful in gathering this information both efficiently and accurately because sometimes, when you have things everywhere, it can be very difficult to put together. And in terms of breakdown, it would typically include non registered investments like stocks and bonds, registered investments like RRSPs, RRIFs, TFSAs.

You might have real estate, like your home, your cottage, or maybe rental properties, and private company shares. Later on in the presentation, Michael's going to focus on the planning that you can do around private company shares. So hopefully, that will be helpful for those who own a business. And after summarizing those assets, we would also need to reduce that value by subtracting any loans outstanding, like maybe a mortgage that you still have outstanding. And then ultimately, taking off the estimated tax liability on death, if no planning was done. That's typically where an accountant would help you with that calculation. Next slide.

So unpleasant, but you know, let's talk about tax on death. An important rule or concept to remember whenever someone passes away is that in the Canadian tax system, they're deemed to have generally disposed of all of their property on death at fair market value. There are some exceptions. But what that means is on the final tax return, we would need to report the gain or loss on deemed disposition, and ultimately calculate the tax on that final return.

And these returns tend to be more complicated. For example, so on death-- we talked about some exceptions-- you know, your property can generally be transferred to your surviving spouse at costs, and therefore, you don't have to trigger any tax. So you might wonder why you wouldn't always do this, right? And some of the reasons, you really are highly dependent on the surviving spouse's tax situation, so it's important to delve into that situation.

So for example, he or she might not have tax balances or might have tax balances like capital losses carry forward, unused capital gains exemption, low income tax brackets, et cetera. So that it actually makes more sense to trigger a gain. It's better for your family, for tax purposes.

Another exception is on the principal residence, where it's specifically excluded from the disposition rules. And then also keep in mind that while RRSPs and RRIFs transfer over to the surviving spouse, when the surviving spouse passes away, those are RRSPs or RRIFs will be taxed at as income at that time, so it's important to plan for that as a family. And then again, although TFSAs are generally not taxable on death, if there is earned income on those TFSAs after death, that will be taxable.

So I mean, again, this is also not an exhaustive list, but these are just some examples on how tax rules can get quite complicated on death. So it's really, really important to speak to an accountant so that they can break down each asset and income stream line by line to help you understand those tax consequences and the choices that your spouse or an executor can make on your final return. And I'm going to pass it back to Michael, who's going to walk us through a case study and what happens when you don't do any tax planning, and the planning that you can do.

Thank you, Andrea. One point I want to mention on what Andrea was saying too is that as we go through that process-- I mean, I think that's kind of Andrea and mine's kind of oversimplified approach to estate planning-- but we work hand in hand with Rita and other wealth advisors. And the important thing is getting the right information together to do the best job possible. So yeah, that's part of the process.

So going on to a case study here, we have Kate, who passed away in July 2021 and she owned a RRIF, some other assets, and her main asset was a holding corporation that owned marketable securities that were worth $2 million. Next slide, please. Rita, I'm going to keep you on your toes here.

So on debt, the cash, there's no tax payable on that. The fair market value equals the cost. The house, presumably, as Andrea noted, would be covered by the principal residence exemption so there would be no tax on that. The RRIF, 100% of it comes into income and is taxed at full-rate. So in this example, we've assumed the top Ontario tax rate of 53%.

And then the shares of the holding company-- and really, what I'm going to focus on for the rest of this case study-- is deemed to be disposed and there's tax paid on the resulting capital gain. So next slide, please. So the first thing that happens with no planning is that there is a deemed disposition on the personal tax return at $2 million, fair market value, of that private company. And the tax on the capital gain, assuming top rates, is about $535,000. The estate would receive the shares with the cost base of $2 million. Next slide, please.

Later on, you'll somehow just [INAUDIBLE] the assets, and they'll be a dividend when those assets are distributed. The tax on that dividend would be approximately $954,000. You would also obtain a capital loss when the shares are ultimately redeemed, but that's only useful if the actual estate has other capital gains. There's a separation that there's capital losses in the estate, but that deemed disposition, as it's shown on the last slide, is reported on the personal-- the terminal personal tax return. So-- next slide, please.

So you end up with this double tax problem, where, in our example here, and we've use some estimated numbers, but the effective tax rate ends up being close to 75% because, as I've mentioned, you first had this capital gain on death because of the deemed disposition of the private company shares, and that's shown on the terminal personal tax return. And then you've got a dividend to the recipient down the line, the estate, or if it's distributed to the beneficiaries, and they would be taxed on the withdrawal of those assets. Next slide, please.

There's two postmortem planning options that can be utilized to get rid of this double tax problem, and each one tries to rid of one level of double tax. So we've got 164(6) Loss Carryback strategy, or we have the pipeline. And this assumes that there was no planning done prior to death. Estate planning, as Andrea was talking about, I mean, one of the things I would consider, when you're looking at everything, is you might have a double tax issue. So maybe there's a way you can plan out of it before it happens.

Although sometimes, waiting for someone to pass away and undertaking the post-mortem, or a post-mortem planning option, is the best option. So with the 164(6), as you can see here, it gets rid of the capital gain so that you're only taxed on the dividend. So in this case, it gives you an effective tax rate of about 47%. And then the pipeline gets rid of the deemed dividend so you're only taxed on the capital gain, which gets you to about the 26% rate.

And again, I do want to just highlight that this is a simplified example. We're assuming top marginal rates, which may or may not be applicable. And the corporation could have tax account balances that significantly impact the effective tax rate. So you've got to run through the numbers.

Lastly, there's always practical considerations to think of when you're going through these options, whether, for example, if you want to do the Loss Carryback, you might have multiple children who receive the shares of a private corporation from parent, and they might not be on the same page with wanting to distribute everything. Also, if you want to do the pipeline strategy, it could take quite a bit of time until you physically get the cash. So some people don't like it for that reason. Next slide, please.

Some specific issues when it comes to the 164(6) Loss Carryback strategy to think about and work through is that firstly, it has to be undertaken within the first year of the estate. The result, as previously mentioned, could end up being a pretty high tax rate. That's 47%, which might not be the best result. In our example, the pipeline gives you a lower effective tax rate.

As I was just mentioning, you might not want to or be able to liquidate the estate, I mentioned, if there's multiple shareholders, or there could also be the case that the assets in the corporation might be very difficult to legally move around. Say, for example, you have real estate in there. Also, the estate has to be a GRE, or Graduated Rate Estate, which has been effective since 2016 tax rule change that basically created GREs. And it's important to know that the GREs, when you have a GRE, the first year, you can choose the year end for the GRE, and you have to be mindful that, as I mentioned before, you have to file this election within the first year.

So if you file a shorter year end, then you could expedite the limitation that you have to undertake this type of planning. So you have to be careful on that. Next slide, please.

When it comes to pipeline planning, there's always a question of whether it's going to continue to be an acceptable planning option. Right now, CRA has issued many favorable rulings on a pipeline strategy, but there's always a question of whether the government is going to change the rules so that this planning can't be undertaken anymore. There's also a potential for triple tax, depending on the underlying assets. So you really got to work through that.

And one thing that might be possible, if you do have a potential triple tax issue, is you might be able to do some kind of hybrid planning option. So certainly work through this with your tax advisor because, for example, you might be able to do a hybrid planning situation where you utilize both 164(6) and pipeline, and maybe that gets you to the optimal result. One good thing about the pipeline compared to the 164(6) is that there isn't a one-year time limitation like there is in the Loss Carryback strategy, from a tax perspective. Next slide, please.

So moving on past this case scenario, something we wanted to talk a bit about-- and Andrea talked a little bit about this before-- but some tax planning ideas when you are thinking about your estate planning. The first one is will planning when you're doing your estate planning. It's important for anyone, when they're going through this exercise of will planning, that you want to link the assets that you own with your desires for who you want to receive those assets on your passing. And you want to do it in a way that protects the assets. And of course, as accountants, we always gravitate towards minimizing tax.

Although of course, we know not to only focus on that. Something that you can consider-- and Andrea talked a bit about this before-- is with your beneficiaries, maybe you want to introduce trust into your will. And that can be done to specify that trusts are created in terms of minors, or if you have irresponsible children, that the assets go into this trust instead of the beneficiaries, and therefore, the flow of the funds and the control of those funds would stay with the trustees and not the beneficiaries.

Some specific tax planning strategies you can do are, firstly, an estate freeze. This caps the capital gain on death, and it allows individuals that own a corporation to basically freeze their value of the shares today, and then you give new growth shares to family members so that the growth in the company would accrue to them. Something very important-- and Andrea talked about this when she was talking about objectives-- is that you want to make sure that you don't focus too much on the tax element here. The parents, or the freezer, you want to make sure that they have enough money planned out to maintain their lifestyle and really last them the rest of their lives. There's also a lot of tax considerations to work through.

Another option is a refreeze, and this is similar to an estate freeze, but usually done when you've previously done an estate freeze and the value of the corporation has gone down. There could be an opportunity to refreeze the value of those shares at a lower value so that when the parent pass away, then there's a lower capital gains tax or a lower capital gain on passing. Amalgamations, Andrea highlighted this one already, but just to reiterate on it, as individuals work through their working life, they might end up with multiple corporations, for example.

So something to consider is simplifying your structure and amalgamating them. There's tax implications to go through, so always worth looking through that. And of course, there's a practical implication. I mean, usually, when you set up different corporations, they have different purposes, maybe for legal reasons. So you want to be mindful of that before you just put them all together and combine all the assets into one corporation.

We talked about post-mortem planning but sometimes, it's something to consider. When you're going through your estate planning, you can maybe decide that you want to do post-mortem planning and maybe integrate that into your will planning or in addition to it. And I think this one is something to think about. But it is difficult, because you never know, in the future, what the tax rules will look like, what the tax rates will be. It might not be the same when you're planning today as it is tomorrow, but it is something to think about.

Life insurance planning, there's a lot that can be said about this. On a basic level, you want to make sure that there's enough life insurance to fund your tax liability on death and maintain your family lifestyle. There's certainly lots to talk about when it comes to life insurance, and it's something worthwhile to talk to your Rita, your RBC Wealth advisor, to talk more about potential planning opportunities with life insurance.

Lastly, donation planning. On, I guess, the first level, I'd say that if you have publicly traded securities with large, unrealized gains and you have a desire to donate, then there is zero capital gain rate when you donate securities. And it's important, if you're thinking about that, instead of liquidating the securities and giving the cash proceeds, if you just directly donate your publicly traded securities, you can get the 0% capital gains rate, which effectively means that your net cash outflow is much better this way.

Also, we're seeing more people setting up foundations, and this is something to consider, private foundations. This is something to consider, for example, if you have large income in a year, if you sell a business. Then you can make the donation in one year, get the credit in the same year as your big capital gain, and then you have time to distribute the funds from this foundation to specific donations that you want to make donations to. There's also donor-advised funds, which take some of the administration away from you and gets some of the same benefits as a foundation. Next slide, please.

There are other planning ideas to contemplate, and the first thing is just to think about your cash flow planning. And again, Andrea talked a little bit about this, but I think it's really important to work through this with your accountants, your financial advisors, and really think about how much cash do you have. How much do you need for the rest of your life? What's the most tax efficient way to take the money from your different sources and model it out, and model how it looks like and consider the tax implications?

I talked about wealth planning, but I just wanted to mention, it's always a good thought to revisit your will. Even if you have a will, think about what's in it. Family situations change. You could have grandchildren. You could have significant new assets coming into your family. You could have kids that marry. So it's always a good idea, every 5 to 10 years, to revisit your will.

I was recently working through a situation with a client where we asked for their will, and they had been divorced for 20 years and had not changed their will. So probably not ideal. Reviewing asset ownership, this is a question that always comes to us, and questions such as, should I transfer assets to my family members? Should I make family members joint owners of my assets? You really need to be mindful of potential income tax implications for any potential changes in assets, so you definitely want to think about that.

There can also be legal implications. So you want to talk about it with your legal counsel as well. For example, let's say you have multiple kids and you want to make one kid a joint owner. What happens on your passing if you've got multiple kids but you only had one kid attached that asset? I think, ultimately, we're I'm going with this is you want to make sure that you're not exposing your-- and it sounds horrible to say this, but unfortunately it happens with family members sometimes-- but you want to make sure that you're not kind of exposing your assets to litigation. And unfortunately, we see that happen.

Confirming beneficiaries is really important. Your RRIFs, your TFSAs, your RRSPs. RRIFs and RRSPs can transfer to surviving spouses tax free, but not kids. And in other countries, for example, in Europe, it's much more common to leave assets to kids and not spouses. So sometimes, it's just people's natural inclination to want to leave things to kids and not spouses. But because of Canadian tax law, you need to think about maybe giving it to your spouse and not triggering a tax bill right away.

Life insurance, I talked about, but I just want to highlight it's also worth revisiting and reviewing your life insurance. People often don't know how much life insurance coverage they actually have. They don't realize that sometimes there's term insurance and there's permanent insurance. So term insurance expires, and sometimes people forget that. So it's always worthwhile. That's something also your wealth advisor, and Rita at RBC, they can help out with in terms of reviewing your life insurance needs.

Lastly, probate. Often, people want a plan for probate. As I'm sure, everyone knows probate's charged on assets on death, and it's provincially administered. So here, in Ontario, there's a rate of 1.5%. And starting last year in January 2020, the first $50,000 of assets are probate-free.

One thing I do want to mention, because people frequently want to talk to us about probate planning, is I think you need to be very mindful of income tax implications prior to probate because the income tax rates can be much higher, so just be conscious of that. One common planning technique that we see frequently is having multiple wills. You can put-- you can specify your desire for shares of a private company into a second will, and that that's one potential probate-saving technique. Next slide, please, Rita.

And then lastly, we've just listed here questions to contemplate when you are going through your estate planning, or even if you want to know where to start with it. I wrote an article on our MNP website, and I've included the link here, or you can Google my name and "MNP estate planning." And this article gives a lot more information on walking through these questions and thinking about your estate planning. And of course, as I mentioned before, reach out to Rita, your wealth investment advisor.

We, as accountants, we really work hand in hand with wealth investment advisors to make sure that we're doing a good global approach when it comes to estate planning. And again, obviously, from my tax perspective, I always think about tax and zoom into it. But of course, a good estate plan has got to be a much more holistic approach to make sure that, as Andrea said, ultimately, all your wishes are adhered to, which is important. And you get your assets to the right people, and of course, you minimize tax to the extent possible.

So that's it for me. I'll pass it back over to Rita, I think. And thank you for having me. That's our contact information, in case of interest from Andrea and myself.

OK. I think this is a good time to start. Some people may come on a little bit later, and that's OK. So welcome everyone. Thank you so much for joining us this afternoon. So today's topic, we want to focus on principle protection in estate planning.

This is the agenda for today. We'll start with the introduction. And I'll give an update on the current interest rate environment, and then I'll pass it on to Jules. And he will talk to us about principle protection and income guarantee. And then I'll tie it back to overall portfolio construction. And then we'll move on to Q&A. And if you have any questions throughout the presentation, please just email me to rita.li@rbc.com.

So a little bit about myself. I've worked in the investment industry my whole career. I've worked at some of the top investment firms in Canada and abroad. Now, I work with clients one on one. Advice on investment, financial planning and risk management. A chartered financial analyst. And I hold my MBA at Richard Ivey School of Business.

Today, our guest speaker, Jules Kerlinger. He's our retirement solutions specialist. Jules has over 12 years of experience in financial services industry, and he works closely with advisors like myself on education strategy and the benefits of insurance wealth.

So before I pass it on to Jules, I just want to talk a little bit about the current interest rate environment. So interest rates are set by global central banks. And they use it as a monetary tool to manage the economy. They don't want the economy to run too hot or too cold. And their targets in terms of inflation and employment, they monitor.

So there was a time where interest rates were very high. It was in double digit. That was in the 1980s. What happens then was they raised the interest rates because inflation were very high. So Central Bank, the Federal Reserve, the Central Bank for the US, they raised the interest rates to combat inflation. And they did bring up a recession as well in that process. Not to say that that will always happen or it happened again in the future.

But in today's interest rate environment, we all know that interest rates been low and it's been persistently low ever since the Great Financial Crisis. And today, it's very difficult to raise the interest rate for a number of reasons. The high government debt, we're still not at full employment, and inflation is kind of just meeting the target too. But while the issue that we experience is that if you adjust the current interest rate with inflation then really the real interest rates become negative in most of the developed world.

So that presents a problem or sort of an issue for some investors with a more conservative profile. So for example investors that require the principal protection element that GIC has to offer for example. So that is really the reason that I chose this topic today for us and I invited Jules to talk to us about some of the alternatives that can offer the principal protection and income guarantee and what that might look like. OK, so Jules, please take it away.

Perfect. Thank you so much for the introduction Rita. And hello, everyone. So my name is Jules Kerlinger. So I'll be speaking today about insurance wealth, specifically segregated funds. And to see and explore as to how those solutions are viable for many clients. And what options they present as an alternative especially in a low interest rate environment.

So today we're going to be looking at various topics. As you can see before you, just a quick background as to what segregated funds are, some of the benefits, how they meet the needs for various types of investors, and some of the options and partners that we work with here at RBC Dominion Securities. So next slide, please.

So segregated funds are not new. In essence, they are insurance products that are issued by insurance companies, but they're wealth-oriented. So it's not like a life insurance policy, nothing like that because they're invested in the marketplace. So in essence, think about it it's sort of like a hybrid product where even though fundamentally is insurance and has those benefits like bypassing probate, being able to name a beneficiary, it's invested in the marketplace. Which, of course, affords the benefits of being able to grow one's money and get those rates of return combined with the safety of guarantees of insurance.

So they've been around for well over 30 years. We see that a lot of clients these days are looking at segregated funds considering the low interest environment and they've changed. So if you are familiar with segregated funds from way back when, it's not the same type of segregated funds that are available now. These days you have many more options, including ESG funds for those where the environment or responsible investing is important. Or things as well like ETFs, which are very popular these days along with specialty funds and a few other options as well. Next slide.

So it's important to understand, as I mentioned what they are. So it is an insurance contract. So you have two aspects. So you have the investments, the invested capital that could be invested in something that's balanced, more equities, money markets, ESG funds. But then of course you have the insurance level, which provides those guarantees. So you have the maturity guarantee and the death benefit guarantee, and we'll go into that as to what that means exactly.

So with the segregated fund, yes, you do have those protections in place and you have various strategies and ways to configure the contract to really suit the needs as to what a client is looking for. So let's go into what those guarantees actually are and how they work. Next slide, please.

So this is the key differentiator. When you think of like for example, a mutual fund or you think of for example a GIC, fundamentally that's a security. You just invest and it grows. A segregated fund does have guarantees in place, all segregated funds have this. So for example, the death benefit guarantee is designed more for estate protection.

So what that means is that when a client does pass on, the named beneficiaries will receive either the value of the funds, the market value or the value of the death benefit guarantee, whichever is higher. So this guarantees that those named beneficiaries, their loved ones are protected. So let's just say, for example, there was a case with one of our providers where a client did pass away in about March or April of 2020. We know that the markets were down, and the name beneficiaries received a $150,000 top up. So that ensured that that beneficiary was protected even in the height of a market dip under extraordinary circumstances.

Now, the maturity guarantee is also something that comes with all segregated funds. This is for the living, capital protection. So similar to a GIC where it has terms, when one reaches the end of the term, if they decide to liquidate-- so not continue with the segregated fund-- that investor will receive either the market value or the value of the maturity guarantee. Whichever is higher.

I should emphasize though, unlike a GIC, a client can liquidate at any time a segregated fund and they're not locked in. So it's a very liquid product. So let's just say, for example, a client here is in a 15 year term, and at the end of the term the maturity guarantee value is higher than the market value. That client is going to get that higher value. So this ensures that the invested capital is protected.

Resets. So resets are very important when it comes to segregated funds. So we all know when you deposit and let's just say $100,000 or whatever the sum may be, down the line you're with inflation and so forth, the value of your money is not the same. And being invested in the markets as well, your money will grow over time.

So what resets do is that they boost the value of those guarantees, the maturity and the death benefit guarantee. So it keeps up with positive growth from the invested monies in a segregated fund contract. And I should also point out as well that for the guarantees, they never go down in value due to negative performance of the funds. And resets never adjust the values downward. And if we can go to the next slide, we'll show you exactly what that means in action.

So how does this look like in action? In a hypothetical case here? So this hypothetical client invested a million dollars in a 100, 100 Seg Fund. That means, 100% maturity protection, 100% death benefit protection. In front of you, you'll see that dark blue line. That's the market value, the funds. And as we know as investors, when you're investing in something that's balanced, there could be a little bit of volatility. If you go something a little bit more aggressive like equities, there's additional volatility as well.

So in this hypothetical, the client's market value digit down a little bit in the year 2022, 2023. But take a look. You see the yellow and that teal line, which represent the maturity guarantee and the death benefit guarantee, they never decreased. So if hypothetically this client had passed away in 2023, those same beneficiaries would have received a million dollars even though the market value was at $800,000.

So for this type of client, it ensures that they're still able to get the benefits of being invested in the marketplace, but still have those protections in place for their loved ones via the death benefit guarantee. Or for themselves via the maturity guarantee. And then finally, as you can see here in this hypothetical they have annual resets. So in 2024, '25, '26 with the market value increasing, the value of those guarantees are keeping up as well, which is very important. Next slide, please.

So what are the benefits for segregated funds? So estate planning is a major feature. Unlike other products, let's say life insurance, there's no underwriting for segregated funds. So even if you are somebody who may have some health issues, just don't want to go through the underwriting process, a segregated fund is a great alternative to be able to protect one's money right away. So there's no medical protection. And also if one has beneficiaries that live in Canada or abroad, it doesn't matter, a segregated fund can appoint and name international beneficiaries.

Creditor protection. So if somebody is a business owner and they want to protect non-registered or even registered money, just in case you have creditor protection potential also since it is insurance for segregated funds. And then finally, another benefit, and there are others as well, consumer protection. So for GICs, we all know that CDIC coverage is in place. So that means if the issuer of the GIC were to default, the CDIC protects up to $100,000 per GIC per registration type per company.

We have something similar in place for segregated funds. In this case, there's no upper limit and it's up to 85% of those guarantees. So this is very important. And this is a federally mandated organization called Assuris. It just provides extra protection for a segregated fund contract. Next slide, please.

So there are typically two types of investors that look at segregated funds. You have wealth preservers and wealth transferors. A wealth preserver is somebody who's a little bit more interested in capital protection. They want to still be able to invest in the marketplace because they are looking for better rates of return compared to, for example a GIC. But at the same time, they want to have protection via that maturity guarantee. You're looking to take really risk off the table so they know what they're having the segregated fund contract, they will get back at the end of the term guaranteed. And also adding that creditor protection potential.

Another type of client is the wealth transferors. So they're thinking of the next generation, they're thinking about their spouses for example that they want to ensure that there is money in place that's protected via that death benefit guarantee. And they're looking to the benefits of bypassing probate. Probate for many clients, yes, it's a question of cost. But it's also a question of time.

If somebody has a more complex estate that may take time to go through where you have, let's say properties abroad. And you just want to make sure that there's a bit of money that's in place to those beneficiaries quickly, a segregated fund is something that does that. Because it is not only insurance but it's a private contract outside the will, outside the estate. Next slide, please.

So a typical investor profile is somebody looking for alternatives to GICs trust like solutions. Didn't talk too much about that, but a segregated fund can be used in certain scenarios as a trust alternative, low cost, those looking to leave a legacy. Ideally, clients aged between 60 to 90 are more well suited for segregated funds or one is a business owner. You can also have corporately owned segregated funds as well in the name of the corporation. So there are benefits as well.

When one's looking at their portfolio, it's not a question of putting everything in a segregated fund, it's about seeing is it a good fit through a conversation with Rita, and then making those appropriate adjustments. Next slide, please.

So let's just briefly touch upon something called an income segregated fund. So an income segregated fund is a type of segregated fund. It still includes the death benefit guarantee, the maturity guarantee. However, those are at the lowest levels. Why? An income segregated fund provides guaranteed income for life.

So think about it as a sort of pension like solution, an alternative. So this could be for clients where they may not be looking at something like an annuity, which is generally not liquid. They still want to be invested in the marketplace but they want guaranteed income for life. So some of you may have heard of things like income plus and so forth. Some of these are products that were offered by certain carriers. This is that type of product. So this offers guaranteed income for life. It's fully liquid. You can still name beneficiaries.

And how it works is once one is starting to take income, that income will be guaranteed even if the funds over time, because you lived to age 95 or 100 are drawn to zero, you're still getting income contractually guaranteed by the insurer. So this is an option as well for clients who are looking for guaranteed income streams via income segregated funds. Next slide, please.

So our partners. So at RBCDS, we have a whole swath of partners. In a segregated fund context, it's yes a question of looking what are the best performing funds but also what are the best features? Does the contract offer through provider A? Have resets? Are they monthly? Are they annual? Triennial? Et cetera, et cetera. So for us as you can see, we have seven providers.

And I work with Rita to ensure that we find what is the best suited provider for your situation, what you're looking to accomplish. And then from there, we make the recommendation. We work with the biggest providers in Canada when it comes to segregated funds to ensure that we have the best options on the table. Next slide, please.

So just a quick summary. So segregated funds is not a cookie cutter solution for all scenarios. It is situational, but is a powerful tool as an insurance wealth product to look at. And it is something that Rita invited me on, that we're excited to definitely talk about today. So I would say that that marks the end of my portion. Rita.

Thank you so much, Jules. I just want to remind everyone to send in your questions. When I ran these sessions, I do allocate at least half an hour for Q&A. So don't be shy. I know that this can be a little bit of a technical, I guess session as well. So if there's any questions, please send that in.

And I also just wanted to remind everyone that this is not to say this is a recommendation in any way. When we talk about portfolio construction, we talk about return and risk management. You can kind of think of this could potentially fit in the overall portfolio as a sleeve where there is the protection element and then there is the upside market exposure element. Whereas, other parts of the portfolio may be designed to be more aggressive or more conservative. That's all something that will come out from a conversation that we're going to take into consideration everything.

Have a great rest of the day, everyone. And thank you again for tuning in, and thank you again, Jules for your presentation.

Thank you so much. Thank you, everyone. Bye, bye.