Through hard work and good personal financial planning, you may have acquired property or a business that has increased in value. Perhaps your family cottage was bought for next to nothing before the current growing demand for vacation property, or your business that you started from scratch has now grown and debt has reduced. This includes the investments you have retained/saved inside your corporation.
In either case, the growth in the value of your property or business carries a hidden liability.
For example, if you die or sell the shares of business, or decide to sell the family cottage, a capital gains tax is triggered on the amount by which the value of your property exceeds your investment. Many people expect to use their Lifetime Capital Gains Exemption to deal with this tax, however, most businesses won’t be eligible (asset sale vs share sale; active assets vs passive asset rules; etc). Therefore, when dealing with estate planning, it is important to ensure that your estate has enough liquid capital to cover this potential capital gains tax liability. This is most often done through personal after-tax dollars. Business shares, however, can be dealt with differently.
The owners of an incorporated business have the option of buying insurance through the corporation and using corporate dollars to pay the premiums. When the owner dies, the business receives the life insurance benefit proceeds tax-free. It can use the funds to declare a tax-free dividend to the shareholders so that they can purchase the shares from the estate of the deceased. Or, it can be used to redeem the shares of the deceased shareholder directly, thereby providing the cash necessary to pay the tax. When dealing with the capital gains on business shares, particular care must be exercised to avoid undesirable tax consequences.
We can help you minimize the impact of capital gains tax on your estate.