Legacy & Estate Planning
Passing on what you built, on purpose.
An estate plan decides who receives what, when, and how much is lost along the way. Most of that loss is tax, delay and dispute. Much of it can be planned for.
The goal
Passing wealth to children tax-efficiently
There is no single tool that moves wealth to the next generation without cost. There is a sequence of decisions: what to give now, what to hold, how each asset is owned, and how the estate will pay what it owes.
At death, you are generally treated as having sold your capital property at fair market value. This is the deemed dispositionWhen someone dies, the tax rules generally treat them as having sold their capital property at fair market value immediately before death, even though nothing was sold. Any resulting gain can be taxed on the final return., and any gain is reported on your final returnThe personal tax return filed for the year of death, sometimes called the terminal return. It reports income to the date of death, including gains from the deemed disposition.. Assets left to a spouse, or to a qualifying spousal trust, can usually defer that tax until the second death. That is why many family plans are built around the second death.
Other assets follow their own rules. Life insurance and some registered accounts can pass directly to a named beneficiary. RRSPs and RRIFs can be taxable as income on the final return, depending on who receives them. A plan considers each asset, not just the will.
These strategies are complex and are implemented with your accountant and lawyer. This is general education, not tax or legal advice.
Walkthrough
What happens to your corporation at death
Private company shares are where many estates are most exposed. Step through the sequence to see where the second layer of tax comes from, and what can address it.
Step 1 of 4
The owner passes away
The shares of the private corporation become part of the estate. Nothing has been sold, and the business may carry on as before.
The tax rules, however, have already been engaged.
Step 2 of 4
Capital gains tax on the final return
The shares are subject to a deemed dispositionWhen someone dies, the tax rules generally treat them as having sold their capital property at fair market value immediately before death, even though nothing was sold. Any resulting gain can be taxed on the final return. at fair market value immediately before death. Growth in their value since they were acquired is a capital gain, reported on the final return.
Leaving the shares to a spouse can defer this tax, but generally only until the spouse’s death.
Step 3 of 4
Taxed again on the way out
The estate now holds shares with a higher tax cost. Inside the corporation, nothing has changed.
When the corporation pays that value out to the estate or the heirs, for example by redeeming the shares or winding up, the payment can be taxed as a dividend. The same value can be taxed twice. This is the double taxation problem.
Step 4 of 4
The planning tools that can address it
Several techniques can reduce the second layer. Which one fits depends on the corporation’s assets, its shareholders and the family’s plans, and it is chosen with your accountant and lawyer.
Post-mortem pipeline
The estate transfers the shares to a new corporation and draws the value out over time. Done correctly, the value may be taxed once, as a capital gain. It depends on careful timing and CRA administrative positions. See pipelineA post-mortem technique in which the estate transfers private company shares to a new corporation and draws funds out over time, so the value may be taxed once as a capital gain rather than again as a dividend. It depends on careful timing and CRA administrative positions..
Loss carryback under subsection 164(6)
The corporation redeems the estate’s shares within the estate’s first taxation year. The resulting capital loss can be carried back to offset the gain on the final return. Strict timing and stop-loss rules apply. See loss carryback under subsection 164(6)A rule that can let an estate carry a capital loss realized in its first taxation year back to the deceased’s final return, to offset the gain from the deemed disposition. It is often paired with a share redemption and is subject to strict timing and stop-loss rules..
Corporate-owned life insurance and the Capital Dividend Account
When a corporation receives a life insurance death benefit, the amount above the policy’s adjusted cost baseThe tax cost of an asset, generally what was paid for it plus certain adjustments. A capital gain is measured against it. A life insurance policy has its own adjusted cost basis, calculated under separate rules. is generally credited to its Capital Dividend AccountA notional account a private corporation keeps to track certain amounts it received tax-free, such as the untaxed portion of capital gains and qualifying life insurance proceeds. The balance may be paid to shareholders as a capital dividend, which Canadian residents can generally receive tax-free when the election is filed correctly.. The corporation may then pay capital dividends that can be received tax-free by Canadian-resident shareholders, including the estate, subject to the tax rules.
These strategies are complex and are implemented with your accountant and lawyer. This is general education, not tax or legal advice.
Capital Dividend Account
The Capital Dividend Account, explained
The Capital Dividend AccountA notional account a private corporation keeps to track certain amounts it received tax-free, such as the untaxed portion of capital gains and qualifying life insurance proceeds. The balance may be paid to shareholders as a capital dividend, which Canadian residents can generally receive tax-free when the election is filed correctly. is a running tally, not a bank account. It tracks certain amounts a private corporation has received that were not taxed at the corporate level.
Two sources matter most in estate planning. The first is the non-taxable portion of capital gains the corporation realizes. The second is life insurance death benefits the corporation receives, to the extent they exceed the policy’s adjusted cost basis.
When the account has a positive balance, the corporation can elect to pay a capital dividend. Shareholders resident in Canada can generally receive it tax-free. The election must be filed correctly and on time, and paying more than the balance can lead to penalties.
Capital losses can reduce the balance, so timing matters. Your accountant should confirm the balance before any election is made.
These strategies are complex and are implemented with your accountant and lawyer. This is general education, not tax or legal advice.
Post-mortem planning
Planning that happens after death, prepared before it
Post-mortem planning is the work an executor and the estate’s advisors do in the months after a death to reduce double taxation. The techniques are applied after death. Whether they are available often depends on decisions made years earlier.
The share structure, the shareholder agreement, the corporation’s assets, the will’s instructions to the executor and whether insurance is in place all affect which options remain open.
The executor usually needs to act quickly. Some options depend on the estate’s first taxation year and on whether it qualifies as a graduated rate estateAn estate that meets certain conditions and can be taxed at graduated personal rates for a limited period after death, with access to some planning options that other trusts do not have..
These strategies are complex and are implemented with your accountant and lawyer. This is general education, not tax or legal advice.
Estate liquidity
Cash, when the estate needs it
Tax on the final return is owed whether or not anything has been sold. An estate made up of a business, a property and a portfolio can be rich in assets and short of cash.
Without liquidity, an executor may have to sell at a poor time, borrow, or draw funds from a business that needs them to operate. Each option can reduce what the family receives.
Life insurance is one common source of estate liquidity, because the benefit is paid when it is needed. It can be owned personally or by a corporation, and that choice affects who receives the proceeds and how. Other sources include cash reserves, planned sales and credit.
These strategies are complex and are implemented with your accountant and lawyer. This is general education, not tax or legal advice.
Equalizing inheritances
Fair is not always equal
Many families have one child who works in the business and others who do not. Leaving the shares to all of them equally can create conflict. Leaving the shares to one can leave the others with far less.
Equalization means giving each child something of comparable value, suited to their role. The child in the business receives the shares. The others receive other assets, or insurance proceeds sized to balance the estate.
The same question arises with a cottage, a rental property or a family trust. Your will, any trust and your beneficiary designations need to work together, and the balance should be revisited as values change.
These strategies are complex and are implemented with your accountant and lawyer. This is general education, not tax or legal advice.
Ontario probate
Estate Administration Tax and multiple wills
Every plan rests on a current will and powers of attorney for property and for personal care, prepared by your lawyer. Without them, the law decides, and the courts may be involved.
In Ontario, an executor often needs a certificate of appointment, commonly called probateThe court process that confirms a will and the executor’s authority to deal with the estate. In Ontario it involves Estate Administration Tax, based on the value of assets that pass through the estate., before banks and others will release assets. Estate Administration TaxOntario’s tax on the value of an estate when the executor applies for a certificate of appointment, often called probate tax. Assets that pass outside the estate are generally not included. is based on the value of the assets that pass through the estate.
Assets that pass by beneficiary designation, such as life insurance or registered accounts with a named beneficiary, generally pass outside the estate. Jointly held assets with a right of survivorship may too, although joint ownership brings its own risks.
Some business owners use multiple wills. A primary will deals with assets that need probate. A secondary will deals with assets that often do not, such as shares of a private corporation. This can reduce Estate Administration Tax on those assets. Multiple wills must be drafted by a lawyer, and the division of assets between them needs care.
These strategies are complex and are implemented with your accountant and lawyer. This is general education, not tax or legal advice.
Questions
Common questions
Is there tax when I leave assets to my children?
Canada does not have an inheritance tax paid by the person who inherits. Instead, tax is generally owed by the estate. At death you are treated as having sold your capital property at fair market value, and the resulting tax is paid before assets are distributed. RRSPs and RRIFs can also be taxable, depending on who receives them.
Why can private company shares be taxed twice?
The shares can be taxed as a capital gain on the final return. When the corporation later pays that same value out to the estate or the heirs, the payment can be taxed again as a dividend. Post-mortem planning and corporate-owned life insurance can help address this, depending on your circumstances.
Does life insurance go through probate?
When a beneficiary is named on the policy, the proceeds are generally paid directly to that beneficiary and do not form part of the estate. If the estate is the beneficiary, the proceeds can be subject to Estate Administration Tax and to claims against the estate.
What is the Capital Dividend Account?
A notional account a private corporation keeps to track certain amounts that were not taxed at the corporate level, including qualifying life insurance proceeds. The balance may be paid to Canadian-resident shareholders as a capital dividend, which can generally be received tax-free when the election is filed correctly.
Do I still need a lawyer and an accountant?
Yes. Wills, trusts and corporate reorganizations are prepared by your lawyer and reviewed by your accountant. We coordinate with both and design the insurance and planning that supports their work.
Begin
The best time to plan is while every option is still open.
A first conversation is private and carries no obligation. We will listen, ask careful questions and tell you plainly what we see.
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