Estate Planning

4.Estate Planning

You have worked hard for your money and now comes the time to preserve your Capital and

plan for your Family.  Creditor protection will have been a paramount undertaking while you were accumulating your Wealth and now the same protection is required, albeit from the taxation system.  The general rule is that taxes are payable on death and you’d like to continue your Winning Streak as a Business Owner.

At present you could be sitting on Retirement Beach.  You still might be working, providing services through the original HoldCo to the OpCo you sold to the new owners.  Or you could be traveling (ie. dentist looking for new cavity fighting offerings through the DentCo), or on a Speaking & Book Tour.  If you have the IPP in place you are still maintaining an OpCo (if you took the pension) and you could be investing through the business.

Then all of a sudden you pass away L.

Corporation StandPoint

Since the incorporated business survives the Business Owners’ passing, the business may  only be affected minutely depending upon the nature of the business’ structure.  The OpCo/HoldCo structure of the corporation will determine the outcome of the corporation’s existence.  The company could be transferred to a spouse tax-free or the OpCo could be ‘wound-up’ and taxable dividends paid to the shareholders.  There are many options available to minimize tax and your Trusted Wealth Professional can help you chose.

Corporately Owned Exempt Life Insurance

As previously mentioned, the Exempt Policy is received tax-free by the corporation and can be distributed as capital dividends (again, tax-free).   The amount of coverage will be determined by the purpose of the policy; the proceeds could be used to fund a Buy Sell Agreement or to pay off business liabilities.

Since you’ve conducted in advance a detailed tax analysis such that insurance solutions address business taxes, death expenses, income replacement and inheritance for your Family and/or Charities, you will have considered Split-Dollar insurance and possible Criss-Cross insurance.  Criss-Cross is where shareholders, usually 2, purchase policies on each other’s life.  When one shareholder dies, the proceeds can be used within the confines of a Buy-Sell Agreement to purchase the shares of the deceased shareholder.

Estate Freeze and Valuation of Business

In many cases, the question of “How Big Is Your Stack?” will have been determined in advance.  Understanding the size of your Business and the overall size of your Estate provides the data necessary for planning; succession or otherwise.   Dividing your Estate and Business amongst current shareholders and your family (spouse plus children) can be done in advance possibly via an Estate Freeze.

An Estate Freeze can help cement the personal tax liability upon death and the applicability of the LifeTime Capital Gains Exemption.  The transfer of shares that occurs during an Estate Freeze must allow for the maintenance of current lifestyle expenses.  Partial Freezes may occur, but again, the strategy involves consideration of tax, income, growth and succession.  Family Trusts are also an option here to transition the business and/or wealth when appropriate.

Holding Companies

HoldCo’s can be utilized prior to death to separate assets.  You could for example have non-active, or ‘passive’ investment assets transferred into a HoldCo and include non-active-business  spouse/children as shareholders.  Apportioning shares, versus providing an inheritance (via insurance), is a conversation you can have amongst your family and your Team of Wealth Professionals.

Specialty Trusts

Trusts bypass the estate and are not included in probate, thus there are no probate fees on the assets held within the trust at death.

If there are considerable unknowns with respect to the succession of the business, it is possible to place the business into a Discretionary Trust upon death of the business owner.  The trustee has considerable discretionary powers to continue the operation of the business, allocating assets and possibly the sale/wind-up of the business.

Spousal Trusts are quite common as the business owner may wish that capital assets transfer to the children, but income be provided for their spouse.  Typically this arrangement is setup when a second marriage occurs; the spouse can live in the matrimonial home but upon the death the children from the first marriage would receive the principal residence.

Trusts  are deemed a ‘separate tax payer’ and it is possible to transfer shares into the trust so that the business can carry-on without having to pay  considerable tax.  This is quite applicable when the surviving spouse is already in the highest tax bracket and the Spousal Trust can defer if not minimize the tax implications.

Trusts and the 21 Year Rule

The CRA examines the assets in a trust every 21 years and levies tax similar to the deemed disposition rules.   However, with careful planning the opportunity to transfer assets to the beneficiaries may exist.  Your Trusted Wealth Professional will be able to guide you especially if it is shares of a CCPC that are being transferred.

Trusts Overall

There are many types of Pre-Death Living Trusts and Post-Death Testamentary Trusts.  Transferring cash or (appreciated) assets to these trusts requires careful planning and consideration as not all transfers receive favourable ‘rollover’ treatment as Spousal, Joint-Partner or Alter Ego trusts.

Wealth Transfer and Splitting

Your Estate and Business, when valued, will have a ‘size’.  There will be many opportunities to ‘split’ the ‘size’ of your Wealth, both in the present and in the future via 1. Inheritance/Insurance and 2. shares with growth potential.   And this division can occur across ‘active’ and ‘passive’ assets, and non-business assets as well.  Each situation will be unique and attention must be paid to the business value of certain ProfCo’s as the ‘valuation’ might be less than originally desired.


USA/Foreign Assets

Jurisdictional regulations regarding international Trusts, assets, foreign citizens, etc … are beyond the scope of this Condensed Overview.  But suffice it to say, there are many Wealth Management and Wealth Transfer strategies with specific criteria and conditions that only apply to CCPC and Canadian citizens.  Consult with your Trusted Wealth Professional in this regard.


Registered Assets and IPPs

“What happens when I die?” is the most frequent question asked when enrolling in any type of ‘registered’ saving plan.  If you haven’t retired yet, death typically dictates that 1.Spouse, 2.Beneficiaries and then 3.Estate/OpCo are the order of disbursements.  If you have retired, the order is the same, but the monthly payments, lump sum and or commuted value require a consultation with your Trusted Wealth Professional.

Intergenerational Wealth Transfer, via an IPP, is an appealing feature of this type of registered plan.  If the business owner has ‘transferred’ or sold the business to the next family generation, upon the 2nd death (if there was a spouse), the IPP pension assets are deemed surplus and are transfer back to the OpCo’s pension plan.  And this amount could be considerable if Terminal Funding was enacted.  More details will be available when The Business Owners Guide to the IPP is published.

Note: Typical pension plans only pay for the member, and possibly the spouse, and then surplus funds are returned to the Plan (ie. OMERS, Teachers, etc …).  But since the OpCo sponsors the IPP, the surplus assets (if any) are returned to the sponsoring company; the CRA (or any other governing body) does not have access to these funds.


Gifted assets to a spouse are non-taxable.  There is no gift-tax in Canada but appreciated assets are deemed to have been disposed of at Fair Market Value (FMV) and any appreciation is thus taxable as a capital gain.

Probate Fees

In Ontario there are probates fees of 1.5% with no limit on asset total.  Quebec does not have probate fees at all.

Personal Final Taxation & Beneficiaries

You’ve safely grown, tax-free your RRSP, LIRA, IPP, RCA, TFSA, Exempt-Life-Insurance investment portion, etc …, you may have been drawing on your RIF, LIF or taking the pension from an IPP (or other source) and now you’ve passed away.  You may have used the tax refund generated by your RRSP contribution to fund the TFSA (a registered plan with recently changed limits).  Suffice it to say, there is taxation when you die, naming of the Beneficiary simplifies the transferring of the funds and possibly helps minimize probate fees.

Non-registered plans do not allow the opportunity to name a Beneficiary and will be deemed to have been disposed of at Fair Market Value (FMV) and taxed personally before probate fees are applied.

It might make sense to ensure that assets are held with the designation of Joint Ownership with Right of Survivorship.  But the legal definition of Intent surfaces in this regard, as well as concerns about creditor protection.  Consult your legal professional in this regards.

Final Tax Return

Personally your executors or tax accountant will need to file a final tax return in the year of your death.  And if you hold shares of a CCPC, the Fair Market Value( FMV) will determine if there are Capital Gains personally owing and/or is you qualify for the LifeTime Capital Gains Exemption.

Deemed Disposition occurs when you die and your investments are considered to be sold at FMV.  From January 1 until the date of your death, your in-year income, and all real estate that is not already transferred to a Trust, or Gifted, becomes taxable.  Exceptions apply in the case of primary residences and spousal transfers.  You might find yourself (in today’s market) House-Rich and Cash-Poor.  But if these assets are then sold, they are taxable in the hands of the seller (ie. cottage property, rental property, etc …)

Wills and Power of Attorney

Initially you should have a Will in place, possibly a Power of Attorney will have been enacted at that time, and executor(s) identified.  A second will, or a Business will, may be in place to separate the assets.  And perhaps multiple additional wills if there are assets held in several foreign jurisdictions.

All bequeathments should have named beneficiaries to ensure control and transfer of assets.   The beneficiaries could be charities.  In any and all cases, clear ownerships rights need to be established to avoid any ‘distant’ interpretation or challenges.

Power of Attorney’s can also help determine if a Living Will is required.

Note: The Wills should be structured to make sure they do not overlap or invalidate each other.

Trusts before Wills?

Trusts can transfer assets while you’re still alive and hence can be more powerful than Wills that require Death as a triggering event.  Trusts also maintain an element of control (vs. Gifts) as the Beneficiaries may not be ‘financially mature’.

The trustee must act within the confines of the trust which is a legal entity and  more binding than a Will.  Trusts are generally not challenged in court. Trusts also have a measure of secrecy attached to them as Trusts avoid the probate process, whereas Wills are typically probated for significant estates.

Unfortunately Trusts are taxed at the highest marginal tax rate, but many Trusts are established as Flow-Through entities and thus pay no tax at all.

Overall Wealth Transfer Strategy (re: Death)

Generally speaking, the goal may be to try and reduce the value of your Business.  And your Estate.

The aforementioned Cash Retention and then Cash Extraction Wealth Strategies will serve you well.  Beneficiaries for assets and insurance, HoldCo’s for splitting of ‘passive’ business assets, a variety of Trust options (ie. Living Trust), tax-free Gifts, etc … will purposefully mitigate taxation and creditors.

The Income Tax owing upon Death is typically the greatest liability that the Business Owner faces, both personally and with the Corporation.