Vaive and Associates

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  • Tax-Effective Estate Planning Requires Will Power

    12/04/2021

    Estate planning is basically the process of taking steps to ensure that: 1. Beneficiaries maintain as much of your estate as possible 2. Your estate ends up going where you want it to go Both goals are equally important and there will be many people lining up to assist you along the way. There will […]
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    Estate planning is basically the process of taking steps to ensure that:

    1. Beneficiaries maintain as much of your estate as possible

    2. Your estate ends up going where you want it to go

    Both goals are equally important and there will be many people lining up to assist you along the way. There will be lawyers, accountants, investment advisors, insurance specialists (and more) and while they're important, it's also crucial you don't let them dictate the process. 

    The primary tool for estate planning is the writing of your will. A will contains the set of instructions on how things are going to go after your passing. It names an executor – the person who's going to administer your estate. It gives them the power to make decisions and administer the will. The executor role is important (and often an honour), but it also brings with it a lot of work, responsibility and even stress.

    As mentioned in our last article (and podcast episode), one of the main goals in estate planning is saving or deferring estate taxes. And a spousal rollover will, in general, accomplish that. By leaving your assets directly to your spouse, the tax will be deferred and triggered later when your spouse either sells the assets or passes away.

    A spousal rollover may be tax efficient but may not fit your personal circumstances. For example, if this is your second marriage but your children come from your first marriage, things can get complicated. In this case, you may wish to set up a trust or perhaps divide the assets between your second spouse and your children.

    You can also set up trust provisions that limit your child's access to the estate until they're older, a little more mature and less apt to do something you may deem to be frivolous.

    When leaving something to your children, the assets do not have to be distributed equally. For example, if you have three children and, for whatever reason, you only wish to leave money to two of them, we suggest you include a detailed letter, explaining why you're doing that. This will make your wishes crystal clear to the courts, minimize exposure to litigation and having your will contested by child number three.

    What about other assets? For instance, the beloved cottage that's been in the family for a long time. You want to pass it on to your family so they can continue to enjoy it. But maybe your children don't use it equally. Some might live out of town. How will maintenance and operating costs be divided? It's important to think about what you want to happen and communicate that to the drafters of the will.

    For business owners, don't underestimate the liability that can be created upon your death from owning private company shares. One important tool is an estate freeze. If you have a company growing in value, some reorganizations of your company may be in order, freezing the value of your shares at that point in time. So, if the company continues to get more valuable, it's not creating a higher tax exposure for you.

    Business owners also face the tax hazard of double taxation. Let's say you have a holding company. It used to be a business but now it's all stocks and bonds and worth a million dollars. If you pass away and have no spouse, there's no spousal rollover. Now you've got a million dollar capital gain and your estate pays tax on that. Then later on, when your shares pass to your children and they pull money out of the company, that's going to be a dividend. That will create a second layer of tax on top of the million dollar capital gains tax you paid at the time of your death.

    There are solutions to double taxation but they need to be considered at the time of drafting your will.

    Another solution to consider is insurance to cover the estate's tax liability on death. But, just like life insurance, the policies can be expensive for those who are older or not in good health. 

    Meanwhile, probate fees (the estate administration tax) aren't likely to be as costly as income taxes but they're not inconsequential. One of the ways to mitigate probate fees is to have multiple wills, separating the ones that require probate from the ones that do not. 

    With RRSPs, you may also be able to directly designate a beneficiary. By doing so, the RRSPs would bypass your estate and wouldn't be subject to probate.

    A tax effective will is the key to maximizing the value of your estate. And don't forget to revisit your will often. After all, tax rules change and the value of your assets may change as well. If there's any complexity at all to your estate, you need to give it long, serious thought. Once you have, then you bring in an advisory team to help you put the most tax-effective wrap around your wishes.

    Learn much more about estate planning in Episode 11 of the Vaive and Associates Tax Podcast.

  • What Taxes Will be Applied to Your Assets When You Pass Away?

    12/04/2021

    When we think of estate planning, it’s crucial not to overlook the tax consequences. So, in part one of our two part series on estate planning, we’re answering this question:  From strictly a tax perspective, what happens to my assets when I die?  Here’s a simple way to look at it. Just pretend that, immediately […]
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    When we think of estate planning, it's crucial not to overlook the tax consequences. So, in part one of our two part series on estate planning, we're answering this question: 

    From strictly a tax perspective, what happens to my assets when I die? 

    Here's a simple way to look at it. Just pretend that, immediately before your death, you've sold everything you own for what it's worth. You've now triggered the appropriate taxes, just like anyone else who sells off their assets. Effectively, this is how the CRA treats the situation, even though your assets haven't actually been sold yet.

    Your assets are now subject to two kinds of taxes: Income tax and probate fees.

    Income Tax

    The CRA won't tax your assets on their overall worth. But it will tax the growth in their value. For example, let's say you owned shares in a publicly traded company and you paid $5000 for them. Then, on the day of your death, the shares have grown in value to $40,000. At that point, you will trigger the capital gains tax on that extra $35,000 increase in value.

    The same holds true of most other assets that either show inherent gains or haven't been taxed before.

    So, as you can see, it's a highly taxable situation. 

    But there are exceptions that can help you with planning, and the main one is a rollover. A rollover is basically when an asset passes from one taxpayer to another without any tax consequences. 

    When discussing death and taxes, the most important rollover involves leaving assets to a surviving spouse (legally married or common-law). When you leave all of your assets directly to your spouse, there is a complete deferral on the tax. So everything passes over, as is, and no tax is triggered. 

    But let's say you have a spouse and two children. If your spouse one day remarries, it's possible they may set up their own will so that everything is left to their new spouse. 

    You do also have the option of leaving your assets to your spouse by way of a trust. You'll still get that rollover and tax deferral, but you'll now have a little more control and ability to direct things, ensuring that—upon your spouse's passing—any remaining assets go to your children. 

    There is one other less common exception. If you have an RRSP, you can leave it to a disabled child or grandchild who's financially dependent on you and you will get that same tax deferral.

    Probate Fees (Estate Administration Tax)

    When your family presents your will to a bank or financial institution, looking to remove the money that's been left to them, the bank will often insist the will be probated first. This means the will goes before the courts to be certified as valid and current. Once the will is probated, the bank will release the money. 

    Naturally, there's a fee for this service. Not all provinces have probate fees but, here in Ontario, we do. The fee is 0.5% of your first $500,000 worth of assets and 1.5% on anything above that. 

    So, along with everything else it brings, death can be an extremely taxable event, especially if you don't plan for it. We discuss more on these topics, along with terminal returns, estate returns, and how Canadians can be exposed to U.S. estate tax in Episode 10 of The Vaive and Associates Tax Podcast.

  • Selling Your Business When You’re Operating Through a Corporation

    01/03/2021

    If you’ve made the decision to sell your business, it’s important to do some serious planning first to minimize your overall tax hit. Today, we’re focusing on the sale of incorporated businesses. When you’re selling your incorporated business, you basically have two options: You can sell the shares of the corporation. You can sell the […]
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    If you’ve made the decision to sell your business, it’s important to do some serious planning first to minimize your overall tax hit. Today, we’re focusing on the sale of incorporated businesses.

    When you’re selling your incorporated business, you basically have two options:

    • You can sell the shares of the corporation.
    • You can sell the assets of the corporation.


    At a glance, the two options may seem quite similar but, from a tax perspective, they can actually produce dramatically different results.

    As a vendor, you’ll probably favour selling your shares because you can use the lifetime capital gains deduction and get a better tax result. But your buyer will usually be on the other page, wanting to purchase the assets.

    What is the Lifetime Capital Gains Deduction?

    If you sell your shares in your company and meet certain criteria, the first $892,218 of capitals gains you receive on the sale of the shares will be tax free. For example, if you started your business with nothing, paying nothing for your shares and then built up the business and sold it for $1 million, the first $892,218 of that would be tax-free.

    But, again, there’s certain criteria, both corporate and personal, that must be met.

    Corporate criteria: The LCGD is only available if the company you’re selling is carrying on an active business, primarily in Canada. Additionally, at the time of sale, you also cannot have redundant assets that represent more than 10% of the value of the assets on the balance sheet. A redundant asset is defined as any asset not needed by your business for ongoing operations.

    Personal criteria: The LCGD is generally unavailable if you haven’t held your shares for at least 24 months. You may also be ineligible if your past tax history includes a CNIL or an ABIL (Cumulative Net Investment Loss or an Allowable Business Investment Loss). You should confirm this with the CRA before your sale is completed.

    Why do buyers prefer to purchase the assets of your business?

    Simply put, there’s less risk in buying the assets. If buyers opt to buy the shares in your company, they also take on your risks and liabilities. Even if it’s an issue that came well before the sale, it remains attached to the shares, and now it’s the buyer’s responsibility. This can include lawsuits, product defects, tax reassessments and more.

    But if they’re motivated buyers, they can mitigate the risks of buying assets through due diligence, fully exploring areas that may cause problems. They can also defer a portion of the sale price that can be used to cover off liability issues that may come up in the future.We get into much more depth on this topic in the latest episode of our podcast including: negotiating terms of the purchase and sale agreement, professional fees, working capital and more. Check out Episode 9 of the Vaive and Associates Tax Podcast with Rolland Vaive. 

  • Now That You’ve Incorporated, How Should You Pay Yourself?

    28/01/2021

    Salary vs Dividends One of the common conversations we have with our clients is the topic of, “How do you compensate yourself?” It’s a question we field from every kind of client, but it’s particularly familiar coming from those just starting out and setting up their corporations for the first time. And the answer seems straight forward. […]
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    Salary vs Dividends

    One of the common conversations we have with our clients is the topic of, “How do you compensate yourself?” It’s a question we field from every kind of client, but it’s particularly familiar coming from those just starting out and setting up their corporations for the first time.

    And the answer seems straight forward. You pay yourself by way of either a salary or dividends.

    But deciding on the best option for your unique situation can be a little more complex. So let’s have a look today at both options, with information to help you make the best choice.

    Tax Considerations

    Salaries are a deduction to the corporation. For example, if the corporation has $100 worth of income and the owner draws $100 worth of salary, then the corporation is going to have zero taxable income.

    Meanwhile, a dividend is considered to be an after-tax distribution. In this case, if a corporation has $100 worth of income, it pays tax on that $100 and whatever is left over is paid as a dividend to the shareholder. So there are two levels of tax here: one paid by the corporation and a second paid by the individual receiving the dividend.

    At a glance, with two tiers of taxation, this would seem to be a less favourable option. But that’s not necessarily the case. The laws take into account that the dividend has been taxed once already, so the personal tax that you pay on receiving the dividend can be considerably lower than you’d pay after receiving a salary.

    The bottom line is, because of that reduced rate on dividends, both options generally leave you – tax-wise – in pretty much the same position.

    But there are some other significant differences that will help you make your decision.

    When Salary is the Best Option

    Depending on your age, paying yourself a salary may prove beneficial in helping you build up your Canada Pension Plan entitlement upon retirement.

    Additionally, if contributing to an RRSP or deducting child card expenses are important considerations for you, then paying yourself a salary may, again, be your best path. Salary is considered to be earned income, which entitles you to more room for RRSP contributions and the ability to deduct child care costs.

    Those benefits aren’t available to you when you pay yourself in dividends.

    When Dividends are the Best Option

    The biggest advantage to dividends is simplicity. Essentially, if you own the company and need money, you can just write yourself a cheque whenever you wish.

    And if you’re not really concerned with child care deductions, RRSP room or CPP contributions, then dividends may save you some money through avoidance of CPP costs.

    So, those are the bigger considerations when making your decision on how to pay yourself. The best news of all is, whatever you decide, you’re not locked in for life. If you choose a salary this year, you have the option to switch to dividends for next year.

    You can even split the difference and combine the two, if that’s what make sense for you.

    To hear more on this subject, we invite you to listen to Episode 8 of the Vaive and Associates Podcast.