The Current Developments in Personal Financial Planning is a series of continuing education courses for Certified Financial Planners, Chartered Professional Accountants, life agents and other financial services professionals. We recommend 6 hours of continuing education credits for each offering of the Course. You should check to ensure that the Course meets the continuing education requirements of the organization for which you are acquiring continuing education credits.
Completion of the course requires reading certain chapters of the quarterly update to The
Personal Financial Planner’s Manual and correctly answering at least 60% of the 10 questions on a multiple-choice examination.
Your answers must be submitted by September 30, 2024.
Read the following chapters and topics and make note of the amount of time that you spend reading the material and completing the examination. You can expect to spend at least 6 hours doing so.
Section 8 – Estate Planning
Chapter 5 – More Trusts
Section 9 – Business Ownership
Chapter 4 - Taxation of Shareholders
Chapter 5 – Taxation of Business Ownership
Note that:
1. Your client, Michael Strong, is in his 70s and wants to retire but cannot because the majority of his wealth is his business. It is proving very difficult to find a buyer. He does not want to sell his business to someone who will lay off his staff or consolidate the business. A neighbour told him that an Employee Ownership Trust (EOT) would offer an attractive succession opportunity. Assume that the legislation to permit Employee Ownership Trusts has been passed into law.
What
would you advise your client?
1.
Substantially all of the fair market value of
its assets must be attributable to assets used in an active business carried on
in Canada.
2. The Income Tax Act will waive capital gains taxes on a controlling interest in a company sold to an EOT.
3.
The sale of the shares to an Employee Ownership
Trust must occur at fair market value.
4. Capital gains resulting from a qualifying business transfer that was paid for in instalments can be brought into income over a maximum of 5 years.
*2. Your client, Adam Manger, is one of 3 managers of Business Inc. The owner, Carol Strange, wishes to retire and cannot find a buyer who will continue the business. Adam has suggested that they look into setting up an Employee Ownership Trust (EOT). Assume that the legislation to permit Employee Ownership Trusts has been passed into law.
What would you advise Adam?
1. Qualifying employees must include all employees except employees who hold significant economic interest or have not completed a reasonable probationary period of up to 12 months.
2. An EOT will allow for shares to be held indefinitely for the benefit of employees.
3. Individuals who held a significant economic interest in the business prior to the sale would not be able to serve as trustees.
4. An EOT could make distributions to beneficiaries under a formula that could only consider an employee’s length of service and hours worked.
*3. An Employee Ownership Trust (EOT) is distributing a $2 million dividend that it received from its wholly-owned qualifying business based on the following formula:
·
((A
÷ B × 50%) + (C ÷ D × 50%)) where:
- A is the beneficiary’s years of
employment service to the qualifying business,
- B is the total years of employment service of all beneficiaries to the qualifying business,
- C is the beneficiary’s employment income in the last five years (including overtime pay) from the qualifying business, and
- D is the total employment income of all beneficiaries in the last five years from the qualifying business.
Kristina has worked for the EOT-owned qualifying business for nine years and earned $300,000 of employment income from the qualifying business in the last five years. Together, the EOT beneficiaries have accumulated 5,000 years of employment service and $120 million in employment income over the last five years.
Assume that the legislation to permit Employee Ownership Trusts has been passed into law.
What amount of the distribution would Kristina be eligible to receive?
*4. Peter Swift is a major shareholder of Magic Works Inc., a Canadian-controlled private corporation. He acquired 1,000 shares in Magic Works for $100 each. In 2009, he sold 300 shares for $800 each. Peter's cumulative net investment loss (CNIL) was $0. For the first time, he used the lifetime capital gains exemption. The amount of capital gains on dispositions of qualifying farm property, qualifying fishing property, qualifying small business shares, and personal property for which he previously claimed deductions was $210,000. This month, he sold another 300 shares for $3,389.45 each. Peter's cumulative net investment loss (CNIL) is $0.
For
2024, the maximum amount of capital gains arising from the disposition of
qualified small business corporation shares eligible for the Lifetime Capital
Gains Exemption (LCGE) is $1,016,836 and the LCGE limit
is $508,418 and they are indexed annually to the Consumer Price Index.
What is the amount of
Peter's taxable income arising from the sale?
5. A client, Virginia Claus, is selling her shares in a family-run, small business corporation. The shares have an adjusted cost base (ACB) of $175,000 and have appreciated in value by $1,068,188. She has never used the lifetime capital gains exemption. She will have an effective tax rate on any taxable income from the sale of 40%. The sale of shares would be eligible for the lifetime capital gains exemption. Virginia had a cumulative net investment loss of $32,000.
For 2024, the maximum
amount of capital gains arising from the disposition of qualified small
business corporation shares eligible for the Lifetime Capital Gains Exemption
(LCGE) is $1,016,836 and the LCGE limit is $508,418 and
they are indexed annually to the Consumer Price Index.
What is the amount of
Virginia's liability for income tax?
6. Your clients, Michael and Annette Jerome, have two children, Elizabeth and Albert. The family business, Rebel Inc., operates a number of retail locations. The parents are transitioning ownership of the corporation to Elizabeth and Albert. Elizabeth is actively involved in the business on a regular, continuous, and substantial basis and Elizabeth has taken over the management of the business. Albert has no interest in being involved in the business. Each of the four family members owns 25% of the shares of Rebel Inc. Your clients have asked you if an Intergenerational business transfer (IBT) would be a tax-efficient way to transfer the corporate business.
Assume
that the legislation to permit Intergenerational business transfer (IBT) has
been passed into law.
Which
conditions required for a Genuine Intergenerational Share Transfer are the
Jeromes unable to meet?
1. The parents must control the subject corporation immediately before disposition of its shares.
2. Management of the business must be transferred to the children.
3. The purchaser must be a corporation controlled by one or more persons each of whom is an adult child of the Transferor.
4. The children must carry on the business.
*7. Your clients, Michel and Jacqueline Whyte, have two children, Muriel and John. The family business, Holy Pot Inc., operates a number of retail locations offering CSB remedies. The parents are transitioning ownership of the corporation to Muriel and John. Muriel and John are actively involved in the business on a regular, continuous, and substantial basis and have taken over the management of the business. Each parent owns 50% of the shares of Holy Pot Inc. Their shares have a negligible adjusted cost base and a fair market value of $800,000. Your clients have met the conditions for an Intergenerational business transfer (IBT) and sold their shares to a corporation controlled by their adult children.
Assume
that the legislation to permit Intergenerational business transfer (IBT) has
been passed into law.
What are the income
tax consequences?
8. Your clients, Ernie and Lynn Lawton, created an inter vivos family trust for their children. A prescribed rate loan of $400,000 at an interest rate of 5% is exchanged for cash, which is then invested. For 2024, the trust earns interest income of $42,000. The trust pays interest of $20,000 to the parent to satisfy the terms of the prescribed rate loan. The trustees will allocate and make payable the net income of the trust to the trust’s beneficiaries. Assume the legislation to implement the Alternative Minimum Tax (AMT) regime released on August 4, 2023 has been enacted.
What is the amount of
the trust's federal income tax liability?
9. Your clients, Lance and Darleen Elton, passed away leaving a testamentary trust for their minor children. For 2024, the trust earns interest income of $42,000 and eligible dividend income of $35,000. The trustees will allocate and make payable the regular net income of the trust to the trust’s beneficiaries. Assume the legislation to implement the Alternative Minimum Tax (AMT) regime released on August 4, 2023 has been enacted.
What is the amount of the trust's federal income tax liability?
*10. Your clients, Charles and Cindy Shock, created an inter vivos family trust for their adult children. The Shock Family Trust owns a rental property. During 2024, the trust earned rental income of $65,000. During the prior year, the trust had a rental loss of $30,000. The trustees will allocate and make payable the net income of the trust to the trust’s beneficiaries. Assume the legislation to implement the Alternative Minimum Tax (AMT) regime released on August 4, 2023 has been enacted.
What is the amount of
the trust's federal income tax liability?