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Intergenerational Wealth Planning

Dear Friends,

I recently attended a conference which featured two experts in the area of family planning and intergenerational wealth.  It was brought to my attention that in North America, 125 million people had not completed their wills.

Please see the attached article which paints a picture of the importance of planning for estate matters and family harmony.

All the best,

Peter Richards

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The Planning Puzzle

Summer is here, and with that a little time to slow down and enjoy it with family and friends.  It has also allowed us to reflect on our work and think clearly about the important aspects of a complete wealth preservation plan.

Wealth planning is sometimes simple and sometimes complicated, but should always involve these key pieces of the puzzle:

  • A clear understanding of your key concerns, opportunities and strengths
  • A detailed understanding of your personal and corporate assets.
  • A detailed understanding of your personal goals with respect to long term spending
  • A projection of all assets at reasonable growth rates per asset class, including the impact of inflation on your wealth
  • A tax efficient income plan that changes regularly as your needs change
  • A tax efficient transfer of remaining wealth to the next generations and charity if that becomes important to you
  • A review annually of all assets and assumptions to keep your plan effective

Have a good summer!

Peter Richards

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Tax Planning for Company Shares

The purpose of this memo is to summarize the use of subsection 164(6) to eliminate the potential double tax on the value of your Holding Company Shares.


In general, double tax arises if the estate of a shareholder pays tax on the capital gain arising on the deemed disposition of shares of a private corporate at death, and the same amount of accrued gain is taxed when the company liquidates its assets and distributes the after-tax proceeds to deceased’s heirs as a dividend.


Subsection 164(6) allows the estate of the shareholder to apply any capital loss its realizes within 12 months of the death of the shareholder against the capital gain reported in the final tax return of the deceased shareholder.  Generally, the estate will create a capital loss by triggering a disposition of the holding company shares through a windup of the holding company.

For tax purposes, the windup creates a dividend in the estate and a capital loss that eliminates the capital gain in the final tax return.  Accordingly, no double tax arises because the only tax paid is on the dividend realized by the estate.

Currently the tax cost of the section 164(6) strategy may be higher than doing nothing because the tax rate applicable to dividends is 32.57 per cent while the rate applicable to capital gains is only 23.2 per cent.

To reduce the tax cost of the subsection 164(6) strategy, corporate owned life insurance can be used to allow a portion of the dividend to be received on a tax-free basis.

The life insurance strategy works as follows:

  • at the death, the holding company would receive the tax-free proceeds from the life insurance policy (and therefore would not use its existing assets to fund the share repurchase or capital gain tax);
  • the corporation’s capital dividend account (“CDA”) is credited with an amount equal to the death proceeds (less the adjusted cost basis of the life insurance policy if any);
  • for tax purposes, there is a deemed disposition of the shares owned by the deceased shareholder at fair market value and the deceased realizes a capital gain;
  • the estate of the deceased then acquires the shares.  The adjusted cost base (“ACB”) of the shares to the estate is now equal to the FMV;
  • the holding company is wound up and its assets distributed to the heirs;
  • the windup results in a deemed dividend paid from the corporation to the estate equal to the windup proceeds less the paid up capital (“PUC”) of the shares;
  • the corporation will elect to have part of the deemed dividend paid to the estate treated as a tax-free capital dividend.  The estate does not pay tax on the capital dividend it receives.  Only the balance of the dividend is taxable to the estate;
  • the windup also creates a capital loss in the estate.  Provided the loss is realized within one year of the death, the estate’s capital loss can be carried back and applied to reduce the capital gain taxed on the deceased shareholder’s final tax return.  Accordingly, the deceased shareholder does not pay any tax on the capital gain.


In addition to its use for eliminating double taxation, a tax-exempt life insurance policy can be an effective tool for accumulating and transferring wealth in a corporation.

Because owners have corporate assets that will not be used during their lifetimes, it may be beneficial to accumulate this capital inside a tax-exempt life insurance policy rather than in traditional investments.

Unlike traditional investments where the income produced is subject to tax annually, investments inside a tax-exempt life insurance policy are not subject to taxation on an annual basis.

In addition, the Income Tax Act provides for the insurance proceeds, including the tax-deferred investment component, to be paid out on a tax-free basis upon the death of the insured.

This tax-deferred accumulation and tax-free receipt of proceeds provides for potentially higher growth in value, compared to similar investments held outside a life insurance policy.  Accordingly, tax exempt life insurance is an extremely efficient vehicle for sheltering income from taxation.  In addition, it can be used to transfer wealth on a tax-free basis.


As an alternative to leaving the tax sheltered funds inside the life insurance policy until death, owners have the option of accessing the funds during their lifetimes.  This could allow them to create a supplementary retirement income.  There are two ways of using the policy to generate retirement income.

The Withdrawal Option:

One of these methods is to make withdrawals directly from the policy.  This option allows the policyowner to access the cash value and trigger an amount of income tax based only on the amount withdrawn.

There is a more tax-effective option, referred to as a “Collateral Loan”.  This option is discussed below.

The “Collateral Loan” Option:

A potentially more advantageous method to access the policy’s cash value is referred to as a “collateral loan”.  The most significant benefit of the collateral loan option is that it allows the Policyowner to access the cash value without triggering income tax.  To do so, the policy, on the basis of its cash value, is used as collateral for a loan from a financial institution.  Typically there is no requirement to repay any of the borrowed amounts or related interest provided the outstanding loan balance does not exceed 90 per cent of the cash value of the policy.  Upon the death of the insured’s, the tax-free death benefit from the policy is used to repay the loan and accumulated interest.  Any excess death benefit is paid tax-free to the corporation.  There are steps necessary to eliminate any taxable benefit to the shareholder, should they decide to use the funds for personal reasons.

The shareholder must not obtain a preferred interest rate on personally borrowed funds, using corporate assets as collateral.  If the shareholder does not have enough assets personally to secure the interest rate, a taxable benefit could be assessed. The benefit could be the difference between the two interest rates on the proceeds borrowed. Guarantor fees paid by the shareholder to the corporation will also eliminate the taxable benefit risk.

On death, the proceeds must not be paid directly to the lending institution from the policy.  A promissory note from the estate should be given to the lending institution in exchange for the release of the policy as collateral. The proceeds should be paid directly to the corporation, and the surviving shareholders should elect a tax free capital dividend from the corporation, and then use these funds to repay the loan.

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Changes are Coming for Professionals and Business Owners

The message is clear from Parliament Hill as of late. There are changes on the horizon that will affect business owners and their families deeply.

It is unclear what exactly the changes will be. There has been suggestions of reducing the tax deduction room of business owners who don’t meet a minimum requirement for number of employees. Family members who are shareholders may be taxed at the highest marginal rate on any income and dividends, effectively nullifying the use of income splitting.

Read more from the Ottawa Business Journal here.

However this rolls out in 2016 and beyond, now is the time to explore strategies that will help you protect your family and business.

As always, we welcome questions and conversations that will help you plan and reach your goals.

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