There is a provision in the Canadian tax code that treats death as Deemed Dispositions upon Death. This means that after a person dies, the assets under his name need to be liquidated, and the value-added portion needs to be declared and appropriate taxes paid accordingly. Although Canada has no inheritance tax, a large amount of Capital Gain is likely to make your next generation “inheritable”.
It is very important to start planning your family’s inheritance method as early as possible, and to preserve your family’s wealth. It is necessary to be aware that it may take several years to adjust and implement the optimal inheritance plan.
Here are few steps that tax experts suggest you to consider:
- Start consulting with tax experts as early as possible to understand possible hurdles associated with passing over the inheritance successfully to the next generation without excessive tax consequences.Many entrepreneurs wait until it is too late. Often unforeseen circumstances such as sudden illness or even a death can have some significant consequences to the wealth being passed over from the tax payer. A great example of a very difficult situation is when a company is passed on to a child when the owner dies, but the family is faced with a severe hardship due to the significant amount of tax payable as a result of capital gains accrued due to the death of the tax payer. So, our suggestion to you is, don’t think about it as “ah, I’ll do it one day”, but seriously find an expert or ask your accountant or lawyer to help you create a plan as of how to successfully pass on your wealth to your successors. Do it as soon as possible!
- Minimize capital gains tax
Whether you transfer your business or give it to a family member as a gift, it is considered to be sold at a fair market value, with a capital gains tax of half of the value-added portion and taxed at your highest tax bracket. Capital appreciation will be calculated based on the difference between the initial cost of the business and the value of today’s stock.Transfers to spouses are tax-free, in which case revenues and taxes are deferred until the spouse disposes of the business.
If your company is a qualified small company, you can apply for a lifetime tax exemption to reduce this tax. For the 2016 taxable allowance was $824,176, which means that the total income below this amount is basically tax-free. Exemptions are linked to inflation and they increase each year.
In order to qualify for exemption, the company must meet several conditions: For example, the company must be owned by the same person within the past 24 months, and at the time of transfer, at least 90% of the assets consists of Canadian operations.
- Consider freezing assets
Freezing assets is a way of locking company earnings and capital gains taxes based on the value of the company. The usual practice is to replace the company’s common stock with a fixed-value preferred stock and then issue ordinary shares to your child. The future growth of the company’s value is owned by common stock and will not be taxed until your child sells or presents their stock. These shares can be held by children directly or in trust.
- Consider incorporating business
If you haven’t yet incorporated your business, consider doing so. The owners of unincorporated companies are not eligible for a lifetime capital gains exemption, and usually cannot freeze the company.
- Delay taxationIf you invest funds in your company and continue to receive returns within a few years, you may be able to postpone some capital gains tax. In this case, you may declare to pay capital gains tax within a period of up to 5 or 10 years depending on the circumstances of the investment.
These are our five suggestions to seriously take into consideration to ensure the most optimal wealth family preservation. However, your tax implications will depend heavily on your family’s circumstances and your company’s industry and business structure. Seeking an advice from an experienced tax professional to create the most optimal results to assess your entire situation is advisable.