Download ThE USE oF rETUrN oF CApITAl For INvESTMENTS INSIDE A

return of capital Class
NexGen Wealth Accumulation Case Example
2014
The Use of Return of Capital for Investments inside
a Canadian Controlled Private Corporation (CCPC)
MONTHLY ROC
DISTRIBUTION
I Synopsis
I For example
After tax funds are routinely held
and invested inside a CCPC to take
advantage of the Tax Deferred
Advantage of lower corporate rates
versus higher personal tax rates.
(see description in case entitled “Tax
Deferred Advantage of Corporate
Investments”). Tax efficient growth of
these funds can be achieved by using
the NexGen Compound Growth Class.
Tax efficient withdrawal of these funds
can be achieved by using the NexGen
Dividend Tax Credit Class or Capital
Gains Class.
Jeremie is the owner manager with considerable levels of investments within his
CCPC “Moxie Incorporated”. He and his family are in need of a monthly flow of
cash from his corporate investments and in the past have used a Return of Capital
product to produce the cash within the Corporation to withdraw for his personal
use. These withdrawals are classified as salary or non-eligible dividends by his
accountant. The funds attract a relatively high rate of tax each year on Jeremie’s
personal tax return (including those returns filed by other family members).
Return of Capital (ROC) products
(including NexGen’s) are routinely
used incorrectly within the CCPC
investments. The definition of Return
of Capital is to systematically return
the client’s own capital and defer all
investment growth to a later date. If
the ROC Class is used to create cash
within the corporation with the explicit
objective of paying these funds to
the Shareholders of that corporation
a deferral is created within the
corporation and a taxable event in the
hands of the shareholder (dividend
or salary). While there is no double
taxation in this scenario, clearly the
income taxes are paid too early.
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I NexGen Solution
Jeremie could create the required cash flow within the corporation by using
NexGen’s Dividend Tax Credit Class which has the objective of paying monthly
Canadian Eligible Dividends. This lowers the tax cost of paying these dollars
out to the family. He could also use NexGen’s Capital Gains Class which has the
objective to distribute any growth as an annual capital gain which also lowers the
tax cost of distribution to the family. Depending on the province of residence and
year in question, Jeremie would select the Tax Class that creates the lowest tax
bill to him and his family.
I Exceptions to the Use of Return of Capital within the CCPC
There are two primary exceptions to the use of ROC within the CCPC. First,
should Jeremie have a shareholder’s loan due to him from his corporation,
creating predictable monthly cash flow to repay this loan may be done using
ROC. Second, if Jeremie requires life insurance for any reason, the policy
might be purchased by the corporation holding his investments with his life as
the insured. The premiums on the policy could be paid using ROC within the
corporation which essentially results in these premiums being financed using a
much better pre-tax rate. Eventually when death occurs and the policy is paid
out, the funds are paid to the corporation (tax free) and may be paid out to the
shareholders (Jeremie’s family) via the Capital Dividend Account (tax free for
both the corporate and personal levels).