The Wealth Building Toolkit: Corporate Estate Planning
Chris Worby and Jeremiah Worby are Trusted Regina based financial advisors and Wealth Management services providers. With over 20 years of experience, Worby Wealth Management has been committed to providing a high standard of financial service to individuals, families and business owners in Regina and area. Worby Wealth Management listens and provides a personalized financial plan. In their latest Worby Wealth Management Trusted Regina Financial Tip, they discuss corporate estate planning.
by Chris Worby - Jan 19, 2023
So you’ve used your corporation to build wealth and to provide a nice, stable income. At the end of it all, we all go the way we do and it’s time to consider the two inevitabilities in life: death and taxes. Upon the death of a shareholder, there is what we call a ‘deemed disposition’ of shares. This means that on the date of death, shareholders are considered to have sold their shares at whatever gain or loss they would incur at that time. Those shares are passed down to a new shareholder in accordance with a will or some corporate documents dictating who becomes the new shareholder. But regardless of what happens after, that shareholder has sold their shares on that date. This can represent some problems. Let’s say no planning was done and the accounting was sloppy. If the shares were worth, say, $1,000,000 at the time of passing but had little to no cost base, that would be a $1M capital gain adding $500,000 to the income line of a taxpayer’s final tax return and a $208,000 best-case scenario tax bill.*
If the inheriting shareholder didn’t have the means to pay the tax bill and there were no other estate assets, they may have to take a dividend to pay the bill meaning they’d have to declare a $310,000 dividend to pay the tax for the dividend as well as to pay the tax for the estate - again, there are better ways to do this but it’s the least tax efficient way to manage the tax bill.
One of the ways to manage the tax bill is to own life insurance in the corporation yet again. There is a notional account called a ‘Capital Dividend Account’ that certain corporate activities create - one of which is a life insurance payout less the ACB of the policy. This ‘CDA’ allows for dividends to flow through to shareholders without attracting taxation. In our example above, if there was an insurance policy in the corporation which is triggered on death which is also when our deemed disposition occurs, there would be money made available to be removed from the corporation with no taxation. This could be used to pay the tax bill and provide tax-free money to remaining shareholders.
These past 3 blogs have shown the corporation as a wonderful tool for both reducing taxes while accumulating wealth, streamlining income for retirement purposes and then how to reduce tax burdens on death. It’s good when we can have all the tools in working condition!
*all personal tax calculations are estimates based on taxtips.ca tax calculator. If you have questions about wealth building, contact Worby Wealth Management to get your questions answered and start investing in an RRSP, TFSA or other investment accounts today.
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The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This Blog was written, designed and produced by Jeremiah Worby and Chris Worby for the benefit of Jeremiah Worby and Chris Worby who are Financial Advisors at Worby Wealth Management, a registered trade name with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities. Mutual Funds, approved exempt market products and/or exchange traded funds are offered through Investia Financial Services Inc.