Chris Ireland - Estate & Accounting

1. Post Mortem Planning for Private Company Shares –
Tips and Traps
Presentation to The Estate Planning Council of
Abbotsford
Chris Ireland CA, TEP
November 16, 2011

2. 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 opportunities
2

3. • Ownership of private company shares
• Estate freeze? Trust as equity shareholder?

4. 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?

5. 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

6. 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

7. 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

8. 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

9. Pipeline Planning
ESTATE
OTHER
SHAREHOLDERS
SHARES &
PROMISSORY
NOTE
NEWCO
?
HOLDCO/
OPCO

10. Pipeline Planning (cont’d)
ESTATE
NEWCO
Bump planning
- Wind up or
amalgamation
HOLDCO/
OPCO

11. 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

12. 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

13. Potential Traps
• Stop-loss rules
• Capital dividend stop-loss
• Grandfathering opportunities – going back to April 26, 1995
• And much more ……
• Affiliated stop-loss

14. 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

15. 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?

16. Roll and Redeem Strategy – With Holdcos
OPCO

17. Planning Opportunities (cont’d)
• Loss of grandfathering?
• Ability to prove grandfathering
• Drafting the shareholders agreement
• Drafting the trust deed/will

18. 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

19. 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

20. Thank you