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APPENDIX B

October 8, 1985
Bulletin #3369

To: All Representatives
Re: New Sales And Planning Opportunity
Income Splitting

In this bulletin we are announcing a new service which will provide both immediate tax savings and future tax savings through Income Splitting. The service is available immediately and should help you compete with the annual Canada Savings Bond campaign.

Until the May 23, 1985 Federal Budget, income splitting between spouses by using demand loans had become routine. But the Budget legislates, or at least proposes to legislate, the demand note routine out of existence. For loans in place before May 23rd, the attribution rules will not apply until 1988, but new loan arrangements will bring the attribution rules down on your right away.

In the Bulletin issued after the Budget we did point out that income splitting could still be accomplished through compound interest and that with proper planning an income split could still be achieved. There were, however, still some practical problems to overcome.

  1. If you used Mortgage Fund or Bond Fund with income reinvested, it would quickly become difficult to separate simple interest from compound interest. Possible, but a bit complicated and hard to sell.
  2. If you used Dividend Fund with income reinvested, the compound income problem was more complex with capital gains dividends and you usually wanted the low income spouse to declare interest instead of dividends.
  3. The compound income calculation became very difficult if you added a DA, but good planning would include a DA in many cases now.
  4. If you had the interest or dividends paid in cash and reinvested, you and your clients would end up with a lot of work every three months and additional costs.
  5. If you wait for compound interest using IDC or GIC, your high income client had to declare a lot of interest income before any income split got started. The problem: clients like more immediate tax savings.

The Solution

We will now allow the One + One to be turned around to allow the initial investment to be made in Dividend Fund with regular dividends automatically invested in Mortgage or Bond Fund.

Until it is reprinted, you can simply use Form F36 by changing the fund names and having the client initial the changes. Provide the client with Summary Statements and the latest annual reports for both funds. The minimum initial investment is $5,000 and the usual DA minimums apply.

For income splitting, you take the application in the name of the low income spouse. Dividends and capital gains are attributed back to the higher income spouse but interest earned from the Mortgage or Bond Fund account is declared by the low income spouse. With one application you can achieve:

  1. Immediate tax savings for the high income spouse through dividend tax credits and tax free capital gains.
  2. Automatic accumulation of interest for the low income spouse to take maximum advantage possible of an income split.
  3. Automatic separation of compound interest whether a DA is added or not. No administration and no cost for you or your client.
  4. Straight forward tax reporting. T5 slips from Dividend Fund are reported by the high income spouse who provides the capital. The T3 from Mortgage or Bond Fund is reported by the other spouse. No need for calculations or for sharing of tax slips.
  5. The income split can start almost immediately if the account is opened just before a dividend is paid.
  6. No need to tie up money in a GIC or report a lot of interest income at high tax rates to initiate the split.

This new service to you and your clients is limited to Dividend Fund because the key to an income split is to create a sizable income flow. Reinvested capital gains do not help split income. That is why only regular dividends and not capital gains dividends are to be invested in the Mortgage or Bond Fund account. That is also why the Growth Funds are not suitable.

A client who wants to get an income split in place and then get into Growth Funds to get some tax free capital gains could let the Dividend Fund account go along until the spouse is holding the fixed part of the planned portfolio and then transfer from Dividend in the spouse's name to Growth Funds in one's own name for convenience in management and tax reporting.

Results Projected

The attached pages show the results of several strategies. While you are no doubt aware of the benefits of dividend income and income splitting for people with substantial income and assets, you should perhaps study the example of an individual who now has less than $1,000 of interest income and as a result does not think he has a tax problem.

Existing Clients

Clients who already have fund accounts in their own names and wish to take advantage of this service may do so by transferring shares from their own Dividend Fund account to the spouse's name ($5,000 minimum). In this case, shares are transferred at their tax cost. It may, however, be desirable for a client to elect that the transfer take place at Fair Market Value in order to expose accrued capital gains for tax purposes. This election would not trigger any tax liability if the gain exposed were covered by the proposed capital gains exemption limit. The spouse must sign the One + One application.

If the money is in one of the other funds, simply have the client request a redemption, enclose the One + One application, and ask that the proceeds be applied to the new Dividend Fund account. Remember that the client could be exposing capital gains in this case. Again, the gains may be exempt from tax under the proposed capital gains exemption limit.

Demand Notes

Gifts and loans now have the same tax results - income attribution. Some clients may still want to take notes back for control, in case of disagreement or in case of marriage breakup. You should ask the client if he will be wanting to use a note.

S. J. McLeod
Sr. Vice-President
Sales