Post Mortem Planning for Private Company Shares –Tips and TrapsPresentation to The Estate Planning Council ofAbbotsfordChris Ireland CA, TEP November 16, 2011
Post Mortem Planning for Private Company Shares Topics to be Reviewed • Dealing with the double tax • Eliminating the double tax • General rules • Potential traps • Planning opportunities2
• Ownership of private company shares • Estate freeze? Trust as equity shareholder?
Dealing With The Double Tax• Fair market value deemed disposition on death • Parents’ freeze preferred shares • Example - $2 million FMV • The first level of tax • $437,000 • Subject to a spousal rollover • Wasting freeze?
Dealing With The Double Tax• Subsequent distributions from the corporation • To the estate/beneficiaries • The second level of tax • $2 million of dividends? • 33.7% tax rate - $674,000• Tax on disposition of corporate assets • The potential for a third level of tax
Eliminating The Double Tax• Contemplated by the Income Tax Act • Subsection 164(6) and post mortem planning • Capital loss planning • Capital losses realized by the Estate offset the deemed capital gains • Timing issue • First taxation year of the estate• Capital gains rates vs. dividend rates • replacing the capital gains with dividends
Trust as Shareholder• Who owns the shares? • Parents directly or through a trust?• Ownership by a trust • Testamentary spousal trust • Alter ego or joint partner trust • Fair market value deemed disposition on the death of specific beneficiaries • Same potential for double tax • Post mortem planning revisited
Pipeline Planning• Preserving the capital gains rate• Alternative to capital loss planning • Estate transfers the high cost base shares to Newco • Promissory note as consideration• One layer of tax only • Corporate distributions – repayment of the promissory note
Pipeline Planning (cont’d) ESTATE NEWCO Bump planning - Wind up or amalgamation HOLDCO/ OPCO
General Rules• Capital loss planning when • Refundable dividend tax on hand balance • Example - $500,000 of RDTOH – capital loss planning up to $1.5 million • Capital dividend account balance • Example - $500,000 of CDA – capital loss planning for $500,000 of value if “grandfathered” • May be more if not grandfathered
General Rules (cont’d)• Pipeline planning for the balance of value • Example – no RDTOH, no CDA • Pipeline planning for the full value • But! – beware of 84.1 trap• Potential to combine bump planning with pipeline planning • Non-depreciable capital property owned by the company
Potential Traps• Stop-loss rules • Capital dividend stop-loss • Grandfathering opportunities – going back to April 26, 1995 • And much more …… • Affiliated stop-loss
Potential Traps (cont’d)• Pipeline planning • 84.1 – changes the promissory note into a deemed dividend • 84(2) and CRA’s views• Bump planning • Who has voting control?• Ownership of shares by a trust
Planning Opportunities• Capital loss planning and a tax free result • Back to grandfathering • Fully insured • $2 million of value and $2 million of life insurance (and CDA) • Roll and redeem if not grandfathered • Transfer of shares to surviving spouse followed by repurchase by company • Requirement for the shares to vest indefeasibly in the surviving spouse • Use of Holding companies • What if no surviving spouse?
Planning Opportunities (cont’d)• Loss of grandfathering? • Ability to prove grandfathering• Drafting the shareholders agreement• Drafting the trust deed/will
Planning Opportunities (cont’d)• Capital gains exemption • Keeping the company pure – special look back rule on death • Minimizing the tax on death • But! – 84.1 again??• Donation planning • Gifts under the will
Planning Opportunities (cont’d)• Pro forma post mortem planning • What is needed if the client died tomorrow? • Changes required? • Work through the post mortem planning possibilities