Articles

What is an estate freeze for your business?

An estate freeze refers to a transaction where you lock-in or "freeze" the value of appreciating assets such as the shares of your company.

The intent is to transfer the future growth of the assets and their associated tax liability to other taxpayers, usually family members.

Estate freezes generally makes sense only when you expect that the company will keep growing in value, resulting in capital gains, and where there is a clear successor or next generation of owners.

The advantages include:

Reducing potential estate taxes.

May allow you to multiply the Lifetime capital gains exemption among multiple shareholders.

Transfers growth shares to other family members at little cost.

If you would like more information on estate freezes, please don't hesitate to reach out.

Corporately Owned Whole Life Insurance

There are a lot of benefits to owning permanent life insurance in your corporation.

Not only does is protect your family and business, but it could also be used as a way to accumulate money in a tax shelter within your corporation.

It can provide tax deferred growth, which is especially attractive for business owners.

Specifically, there is a cash surrender value that grows on a tax deferred basis and then you also have the actual tax-free death benefit.

This tax strategy is great because it moves funds, within the corporation, that would otherwise be subject to tax, into a corporately owned life insurance policy.

Many owners think that permanent insurance is too expensive, but it may actually cost you more in tax by not having the insurance in place because it is a way to "unlock" trapped money in your company.

If you would like more information on this strategy, please feel free to reach out.

What is the Lifetime Capital Gains Exemption and how does it work?

The lifetime capital gains exemption provides Canadian business owners with a significant tax benefit when selling shares of a qualified small business corporation.

For 2024, the capital gains exemption is $1,016,836.

So, if you plan properly and you are married with 3 kids, then you could use everyone's capital gain exemption when selling the business. This could allow you to shelter over $5,000,000 in capital gains if you sold your business. This means a tax savings of over $1,270,000.

There are rules as to how and when you can use the exemption, so you have to make sure you have things set up properly.

Also, if you have already used some of your capital gains exemption in the past, don't worry, as it has been increasing every year and you most likely still have some available to use.  

If you want more information on the Lifetime Capital Gains Exemption, please feel free to reach out.

Today we are going to discuss the concept of Multiple Wills.

Multiple Wills is an estate planning that every business owner should consider.

Basically, a business owner can have one Will or a Primary Will for personal assets, while they would have a secondary Will for business assets.

The biggest benefit of this strategy is probate avoidance.

The purpose of probate is to certify that the Will is valid, and that proper notice is provided to all interested parties. It also helps to ensure the payment of all taxes and liabilities associated with the estate. 

In Ontario, there is no probate fee for estates with assets up to and including $50,000. For estates of more than $50,000, the fee is 1.5% or a rate of $15 for each $1,000 of the estate's value.

So, if you had an estate worth $4 million, then the fee would be $60,000.

But if your only personal assets were a home worth $1 million and your business was worth $3 million, the multiple wills strategy could save you $45,000 in probate.

Remember, proper planning leads to time and money saved.

What is an Alter Ego Trust and how does it work?

An Alter Ego Trust is a special type of trust permitted under the Income Tax Act where you are the Settlor, Trustee and Beneficiary for as long as you are living. The main criteria to be able to set up an Alter Ego Trust is that you must be 65 years of age or older.

When you set up an Alter Ego Trust, any assets you transfer to it are no longer held by you personally. Instead, the Trust holds the assets, and you hold and manage them in your capacity as Trustee, for your own benefit.

Advantages of Alter Ego Trusts

One of the biggest advantages is that Probate is not required.

Since Alter Ego Trust assets are held by you in your capacity as Trustee and not personally, they do not form part of your estate when you pass away. This means probate is not required. So, if you put your personal residence into an Alter Ego Trust, then you still maintain the Principal Residency tax exemption and you will avoid probate.

For example, if you are a widow or widower and have a home worth $2 million, then the probate savings would be $30,000.

Other advantages include:

Your privacy is maintained.

Alter Ego trusts are not a matter of public information.

Beneficiaries can receive their inheritance with less delay.

Some incapacity planning is achieved.

If you become incapacitated, then a replacement trustee can be applied to take care of your affairs.

Some Disadvantages of Alter Ego Trusts

You will need to set up an Alter Ego trust with a lawyer, so legal fees will apply.

Annual tax returns will need to be filed so there will be additional accounting fees.

Income retained in the Trust will be taxed at the highest marginal rate.

Any income generated by the trust assets and retained in the trust (i.e., rather than paid out to yourself as the beneficiary) will be taxed at the highest marginal tax rate.

If you would like more information on Alter Ego Trusts, please contact us via email and we will be happy to help.

Borrowing from your corporation

There are certain times when it may be better to borrow from your company then going to a financial institution.

For example, if you are selling your home and the new home closes before the sale, then you may want to take a bridge loan from your corporation.

Here are the rules:

Shareholder loans that are not repaid within one year after the end of the corporation's taxation year must be included in the individual's income and are subject to tax.

For example, if a corporation has a December 31st year-end, and you borrowed the money during 2023 then any shareholder loan must be repaid by December 31, 20244.

But, if you were to borrow the money on January 2^nd, 2024, the loan will not have to be repaid until December 31^st, 2025.

Also, the shareholder loan must carry a reasonable interest rate. Zero-rate interest loans or loans which carry interest at a rate below the CRA's prescribed interest rate (currently five per cent) will result in a taxable benefit being included in the individual's income for the period the loan is outstanding.

What is the Capital Dividend Account?

A lot of business owners may not realize that they have what is known as a Capital Dividend Account.

The Capital Dividend Account (CDA) is a special corporate tax account that gives shareholders designated capital dividends, tax-free.

There are a few situations when this can happen.

The first is when a company generates a capital gain from the sale of an asset, 50% of the gain is subject to a capital gains tax. The non-taxable portion of the total gain realized by the company is then added to the capital dividend account (CDA), which is then distributed to shareholders.

The balance in the CDA increases by 50% of any capital gains a company makes and decreases by 50% of any capital losses incurred by the company.

Another way is from the proceeds of corporately owned life insurance.

By using life insurance, the business owner may not only have protected the company against potential losses but created the ability to pass the value of its assets out of the corporation in the most tax-effective way possible.

If you want more information on the Capital Dividend Account, please feel free to reach out.