This document summarizes various financial planning issues for professionals and small business owners in Alberta, Canada. It discusses: 1) Personal and corporate tax rates in Alberta, noting the advantages of dividends and deferring income in a corporation. 2) Common ownership structures for businesses and how they can be reorganized to protect non-active assets, allow for income splitting, and multiply capital gains exemptions. 3) Using life insurance to fund buy-sell agreements between business owners and the different options for where to hold the policies. 4) Recent changes to Alberta legislation allowing spouses and children of certain professionals to own non-voting shares of a professional corporation, enabling better income splitting.

1. Financial Planning Issues Facing Professionals and Small Business Owners Sherwood Park Professional Development Day June 3, 2010 Myron Knodel, C.A., CFP, TEP

2. Tax Rates in Alberta (1) Maximum personal tax rate in Alberta on ordinary income – 39% (2) Maximum personal tax rate in Alberta on non-eligible dividends – 27.71% (3) Maximum personal tax rate in Alberta on eligible dividends – 15.88% (4) Maximum personal tax rate in Alberta if paid from Loan Rate Income Pool (LRIP) – 27.71% Maximum personal tax rate in Alberta if paid from General Rate Income Pool (GRIP) – 15.88%

3. Tax Rates in Alberta Conclusion/Planning Strategies If funds not needed to finance lifestyle leave in corp. to invest for tax deferral Dividends (as apposed to salary) are slightly advantageous and can recover refundable taxes Gross-up on dividends can escalate OAS clawback Salary is earned for CPP, RRSP or IPP purposes Income splitting with lower income family members available High income employees may wish to create personal services businesses 11% tax deferral Tax saving through income splitting with adult children or parents

5. Cash accumulation in corp. may prevent shareholders from claiming their capital gain exemption on a sale of shares

7. Common Ownership Structure Post-Reorganization Non-active assets moved to Holdcos and protected from creditors Income splitting with spouse and adult children Multiplication of the capital gains exemption among family members Opco remains purified in the event of a share sale

8. Life Insurance to Fund Buy/Sell Mr. A Mrs. A Mr. B Mrs. B A Newco Inc B Newco Inc A Children B Children Mrs. A Mrs. B A Family Trust B Family Trust Mr. A Mr. B Mr. A Mr. B Preferred (Freeze) Preferred (Freeze) Common Common Holdco A Holdco B Common Common Opco Inc.

9. Life Insurance to Fund Buy/Sell Where do we put it? Option 1: Opco Available to creditors Possible tax cost to remove on share sale Option 2: Holdco A/Holdco B Possible tax cost to remove on share sale or if Mr. A/Mrs. B retire Option 3: A Newco/B Newco For permanent insurance consider split dollar

10. Problems With Professional Corps. Prior to March 1, 2010 only the professional in Alberta could own shares of a professional corp. Effective March 1, 2010 Alberta amended its legislation to allow spouses/common law partners or children of certain professionals to own non-voting shares. Professionals affected include: Doctors Dentists Chiropractors Lawyers Accountants Optometrists Holding corporations and discressionary trusts still not allowed

12. Separating active and investment assets on a tax free basis not possible

13. GST a cost for doctors and dentists