So you’ve used your corporation to build wealth and to provide a nice, stable income. At the end of it all, we all go the way we do and it’s time to consider the two inevitabilities in life: death and taxes. 

Upon the death of a shareholder, there is what we call a ‘deemed disposition’ of shares. This means that on the date of death, shareholders are considered to have sold their shares at whatever gain or loss they would incur at that time. Those shares are passed down to a new shareholder in accordance with a will or some corporate documents dictating who becomes the new shareholder. But regardless of what happens after, that shareholder has sold their shares on that date.

This can represent some problems. Let’s say no planning was done and the accounting was sloppy. If the shares were worth, say, $1,000,000 at the time of passing but had little to no cost base, that would be a $1M capital gain adding $500,000 to the income line of a taxpayer’s final tax return and a $208,000 best-case scenario tax bill.*

If the inheriting shareholder didn’t have the means to pay the tax bill and there were no other estate assets, they may have to take a dividend to pay the bill meaning they’d have to declare a $310,000 dividend to pay the tax for the dividend as well as to pay the tax for the estate - again, there are better ways to do this but it’s the least tax efficient way to manage the tax bill.

One of the ways to manage the tax bill is to own life insurance in the corporation yet again. There is a notional account called a ‘Capital Dividend Account’ that certain corporate activities create - one of which is a life insurance payout less the ACB of the policy. This ‘CDA’ allows for dividends to flow through to shareholders without attracting taxation. 

In our example above, if there was an insurance policy in the corporation which is triggered on death which is also when our deemed disposition occurs, there would be money made available to be removed from the corporation with no taxation. This could be used to pay the tax bill and provide tax-free money to remaining shareholders.

These past 3 blogs have shown the corporation as a wonderful tool for both reducing taxes while accumulating wealth, streamlining income for retirement purposes and then how to reduce tax burdens on death. It’s good when we can have all the tools in working condition!

*all personal tax calculations are estimates based on taxtips.ca tax calculator.

Here you are, ready to retire, and you’re getting all your ducks in a row: assessing your RRSP to RRIF options, seeing how you can maintain OAS through the household, and you have spent your career building wealth in a corporation so that’s a major tool in your kit.

The first and most interesting thing is that, by definition, assets built in your corporate investment account are going to be retained earnings which means you’ll be paying yourself dividends. The upside of dividends is that you also get a dividend tax credit. 

The benefit of dividends is this: let’s say you were targeting this $95,000/yr of net income. From my last blog, we know you’d need to take approximately $130,000 of gross income to provide that net of taxes. A non-eligible dividend to make the same $95,000 net income needs to only be $120,000 - dividends allow for more tax-advantaged income for sure and the saving of $10,000 in this case.*

Another option is to use a life insurance policy. If a corporation were to own a policy with the shareholder as life insured, there could be a cash value built up in the policy against which a loan could be set up to be settled upon the passing of the shareholder. As the insurance policy is not required to declare gains for tax purposes year over year, this tax deferral can lead to larger amounts within the policy and more money available for a loan. 

You’ve noticed I keep referencing ‘tools’ throughout this series. That’s because you can’t screw a screw with a hammer, and you can’t drive a nail with a saw. I mean, I suppose you could do those things but let’s attempt a little efficiency here! I think of retirement planning as exactly this, pulling out the right tool for the job. And in this example of having a high level of corporate assets, insurance is a great tool to help build that wealth to do the job of providing security of income in retirement.

In the next blog, we’re going to talk about insurance in corporations again but from more of an estate planning perspective - no surprise but insurance is very helpful in dealing with taxes in an estate.

*all personal tax calculations are estimates based on taxtips.ca tax calculator.

There are many tools that are useful to build wealth. Virtually everyone has access to account types such as RRSPs and TFSAs. These are accounts which have special tax treatments such that we can reduce our overall taxation while we are alive and accumulating wealth. Pensions and group RRSPs are also useful and often an employer will give additional funds to these plans which is of obvious benefit.

For those of us who are not employees though, we may be able to use another tool - the corporation. If someone is self-employed and legally able to have their corporation take their income, this can be very helpful.

The key to using a corporation efficiently is that the earnings a taxpayer has is not all required. Active income for a small business conducted in Saskatchewan is taxed at a low rate of 11%. If a person’s income level is high enough that they don’t require all of it, leaving income behind in a corporation to invest may be much more efficient than taking it all as income and then investing.

Let’s look at an example:

John needs $95,000/year after tax for lifestyle but earns $250,000/yr gross. If he took all this money, paid tax and then invested the remainder, he’d have approximately $66,760* to invest at the end of the year.

If he were able to and chose to use a corporation, however, he’d take $130,000 gross income from the corp and pays approximately $35,000 in tax leaving $120,000 behind. 11% tax for taxes leaves him with $106,800 for investing.

The difference of using a corporation in this example leaves him with an additional $39,920 or 60% more money to invest to build his wealth.

Clearly, corporations are a fantastic tool for building wealth. The next blog is going to look at strategies to get this money out of the corporation on a tax-advantaged basis.

*all personal tax calculations are estimates based on taxtips.ca tax calculator.

It's near the end of another year. You've probably been busy planning parties, planning pranks, and soon to be attending holiday events, but there's one thing that needs your attention – your personal finances.  It's time to start reviewing how much money you have saved up for retirement and other important costs in life. 

HERE'S HOW 

Do you have any RRSP room left for 2022?

What will happen to you and your loved ones if something unexpected occurs?  Do you have contingency plans in place?  Being prepared for the unexpected is something that should be planned for.  Insurance isn’t always for everyone, but if the need arises, having something in place can help alleviate unwanted stress and burden.

Life Insurance