- the use of 3 family members’ LCGE can shelter future capital gains of $2.25-million from tax– saves tax of up to $562,000
- Planning the structure is important to ensure your company will qualify for the LCGE and to multiply the use of the LCGE
5. Plan to avoid double tax on your private company shares
Any time an individual dies owning shares of a private company, there is an exposure to double tax:
- once when the deemed disposition arises on their shares on death, and
- again if the company disposes of its appreciated assets and distributes the proceeds to the shareholders
Double tax exposure may not exist if you directly own shares of your operating business, but double tax planning will likely be required if you own shares of your operating business through a holding company or have investment assets or real estate in your company. The most common plan to avoid double tax must be completed by the executors of an individual’s estate within one year after the individual’s death. If your will transfers your shares to a spousal trust, the trust should be drafted to provide for its continuance for up to three years after your spouse’s or partner’s death.
Certain powers should be included in your will to enable your executors to complete double tax planning transactions, including power to:
- incorporate new companies and transfer assets to private companies
- wind-up private companies and to have private company shares redeemed, and
- power to make tax elections
The executors should be advised that planning transactions will be required after death to avoid double tax and to seek tax advice.
6. Create trusts in your wills to reduce tax payable by your beneficiaries
Instead of leaving inheritances directly to your spouse and children, consider creating separate trusts in your will for their inheritance:
- this strategy can save tax each year of up to $16,000 for each beneficiary even if the beneficiary receives all of the income. The savings will depend on the income earned in the trust and the province of residency.
- the use of trusts may also facilitate creditor protection and protection on a breakdown of a beneficiary’s marriage – legal advice should be obtained
- accounting records and a trust tax return will be required annually
If you will be receiving a significant inheritance from a parent, these same advantages are available to you if your parent creates a trust in their will for your inheritance.
7. Plan the ownership of your assets and your wills to minimize probate fees
Probate is an administrative procedure under which a court validates a deceased’s will and confirms the appointment of the executors. For estate assets having a value of $2 million, the probate fees range from a nominal fee in provinces such as Alberta, Northwest Territories, Nunavut, Quebec and the Yukon to a high of about $30,000 in Nova Scotia and Ontario.
There is no spousal rollover–double probate may apply without planning. Consider:
- owning your home jointly with the right of survivorship with your spouse to avoid double probate (subject to creditor concerns)
- using a spousal trust to avoid double probate on investment assets
If you live in Ontario, consider the use of multiple wills for your private company shares and receivables to avoid Ontario probate on these assets. Consider named beneficiaries of insurance proceeds or create an insurance trust in your will to avoid probate on insurance proceeds. Similar planning could be considered by your parents.
8. Structure donations in your will to ensure the tax benefit can be claimed
Charitable bequests can offset 100 per cent of net income in the year of death and the year preceding death if structured properly. Common traps:
- donations not meeting the technical requirements of the Income Tax Act
- the donation tax credit is not matched with the tax on death–this may be an issue if you hold the shares of your business or investment assets through a holding company, and
- donations made from the spousal trust after spouse dies is not structured to qualify for a donation tax credit
If your Will makes a donation to registered charities, include a power allowing executors to donate in cash or in kind:
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