So you’ve used your corporation to build wealth and to provide a nice, stable income. At the end of it all, we all go the way we do and it’s time to consider the two inevitabilities in life: death and taxes. 

Upon the death of a shareholder, there is what we call a ‘deemed disposition’ of shares. This means that on the date of death, shareholders are considered to have sold their shares at whatever gain or loss they would incur at that time. Those shares are passed down to a new shareholder in accordance with a will or some corporate documents dictating who becomes the new shareholder. But regardless of what happens after, that shareholder has sold their shares on that date.

This can represent some problems. Let’s say no planning was done and the accounting was sloppy. If the shares were worth, say, $1,000,000 at the time of passing but had little to no cost base, that would be a $1M capital gain adding $500,000 to the income line of a taxpayer’s final tax return and a $208,000 best-case scenario tax bill.*

If the inheriting shareholder didn’t have the means to pay the tax bill and there were no other estate assets, they may have to take a dividend to pay the bill meaning they’d have to declare a $310,000 dividend to pay the tax for the dividend as well as to pay the tax for the estate - again, there are better ways to do this but it’s the least tax efficient way to manage the tax bill.

One of the ways to manage the tax bill is to own life insurance in the corporation yet again. There is a notional account called a ‘Capital Dividend Account’ that certain corporate activities create - one of which is a life insurance payout less the ACB of the policy. This ‘CDA’ allows for dividends to flow through to shareholders without attracting taxation. 

In our example above, if there was an insurance policy in the corporation which is triggered on death which is also when our deemed disposition occurs, there would be money made available to be removed from the corporation with no taxation. This could be used to pay the tax bill and provide tax-free money to remaining shareholders.

These past 3 blogs have shown the corporation as a wonderful tool for both reducing taxes while accumulating wealth, streamlining income for retirement purposes and then how to reduce tax burdens on death. It’s good when we can have all the tools in working condition!

*all personal tax calculations are estimates based on taxtips.ca tax calculator.

Here you are, ready to retire, and you’re getting all your ducks in a row: assessing your RRSP to RRIF options, seeing how you can maintain OAS through the household, and you have spent your career building wealth in a corporation so that’s a major tool in your kit.

The first and most interesting thing is that, by definition, assets built in your corporate investment account are going to be retained earnings which means you’ll be paying yourself dividends. The upside of dividends is that you also get a dividend tax credit. 

The benefit of dividends is this: let’s say you were targeting this $95,000/yr of net income. From my last blog, we know you’d need to take approximately $130,000 of gross income to provide that net of taxes. A non-eligible dividend to make the same $95,000 net income needs to only be $120,000 - dividends allow for more tax-advantaged income for sure and the saving of $10,000 in this case.*

Another option is to use a life insurance policy. If a corporation were to own a policy with the shareholder as life insured, there could be a cash value built up in the policy against which a loan could be set up to be settled upon the passing of the shareholder. As the insurance policy is not required to declare gains for tax purposes year over year, this tax deferral can lead to larger amounts within the policy and more money available for a loan. 

You’ve noticed I keep referencing ‘tools’ throughout this series. That’s because you can’t screw a screw with a hammer, and you can’t drive a nail with a saw. I mean, I suppose you could do those things but let’s attempt a little efficiency here! I think of retirement planning as exactly this, pulling out the right tool for the job. And in this example of having a high level of corporate assets, insurance is a great tool to help build that wealth to do the job of providing security of income in retirement.

In the next blog, we’re going to talk about insurance in corporations again but from more of an estate planning perspective - no surprise but insurance is very helpful in dealing with taxes in an estate.

*all personal tax calculations are estimates based on taxtips.ca tax calculator.