Article written by Jennifer Black and Dedicated Financial Solutions.
Avoiding Double Taxation of Your Business
If you own a business, there are many reasons to have a comprehensive estate plan. One of those reasons is to avoid double taxation – on you and on your estate – when you pass away.
Here’s how double taxation could occur. If the value of your share of the business has grown over the years, when you die and are deemed to have disposed of your shares, your estate will have to report the capital gain on your final, or terminal, tax return. Your estate now owns the business.
If the business is to be wound up, a dividend will have to be declared and the estate will therefore have a capital loss.
But because you the individual and your estate are two different taxpayers, the estate’s loss can’t be used to offset your capital gain, so can’t be taken advantage of, thus leaving your beneficiaries to pay more tax.
This is a complicated issue and the Canada Revenue Agency’s rules are not hard and fast, so be sure to meet with your tax advisor and/or accountant to go over this aspect of your estate plan. There are three ways to address the problem of double taxation.
1.If the estate doesn’t want to continue to operate the company, or if the company has no more ongoing business, your estate trustee can file an amended terminal return for you (but only during the first year after your death). In this case, the capital loss can be declared on the terminal return. This approach is best if your beneficiaries need the proceeds of your estate soon and/or if they don’t have funds to cover any final income tax owing.
2.You can plan to create a new company and have the shares of your business rolled over into the new company – the new company would essentially buy your business’s shares from your estate. The purchase must be paid for over time, not in a lump sum, to satisfy CRA rules.
3.After following the strategy outlined in #2, you could arrange to increase the adjusted cost base of your business’s assets. Increasing the adjusted cost base will reduce any gains realized if assets are sold, thus reducing double taxation.
Strategies #2 and #3 are best if your estate will be wound up within a year of your death and if your company will not have any ongoing business.
But as indicated, these are complicated matters. Talk to the experts at Dedicated Financial Solutions to determine which, if any, of these approaches could be useful to avoid double taxation in your unique situation. The experienced tax and estate-planning professionals at Dedicated Financial will look at your whole financial picture and tailor a comprehensive estate solution that’s right for you.
Contact them today!