If the estate freeze was not accomplished, the next could have happened: Your father owned the entire shares in the corporate. Upon his death, the corporate’s shares could be considered sold and the gain could be taxable. If the shares within the corporation are sold, tax is due on the profits. If the shareholders then receive the cash in the shape of a dividend, they’re taxed. This is often called double or triple taxation.
The estate freeze froze the worth of your parents’ shares and allocated all future growth of the business to you and your brother. This step eliminated or minimized the primary level of control described above. There continues to be a capital gains tax paid by the corporate when the investments are sold and a tax paid personally while you take the cash as a dividend.
Insurance
Insurance is typically used inside a business to offset the tax loss that happens when the business is passed from one generation to the subsequent. The other use of insurance is to form a part of the conservative portion of an investment portfolio for money that can never be spent. The idea is to place somewhat more emphasis on investments that generate capital gains to extend the corporate’s tax efficiency and protect the insurance from negative markets on the time of death.
After your father dies, the insurance is paid into the corporate and a nominal account (an accounting term for an imaginary account) is created called a CDA (capital dividend account). The value of the CDA is the same as the worth of the tax-free amount of insurance proceeds, which needs to be most, if not all, of $1 million. At this point, a tax-free CDA dividend will be paid to the shareholders, you and your brother.
Should you change all investments into money?
You must first contact the financial institution holding the investments to verify their policies. You will likely find that if probate is required, it should be accomplished before any changes will be made to the investments. This signifies that no changes shall be made to the unregistered account; However, RRSP/RRIF and TFSA accounts with named beneficiaries usually are not subject to probate and will be traded.
Before transacting, consider how beneficiaries might react to your investment decisions and what plans they’ve for the cash they receive. The best solution might be for beneficiaries to finish the mandatory paperwork as quickly as possible in order that they receive the proceeds or non-cash investments inside a couple of weeks.
What about trade investments within the holding company?
With your parents’ personal assets, the beneficiaries receive the cash tax-free after the estate pays the tax, which all appears to be one and the identical. This isn’t the case with investments within the holding company or Holdco. You and your brother receive taxable dividends unless they’re tax-free CDA dividends. If you collect OAS now, you could find that all the things is clawed back when you receive dividends from the Holdco.
Additionally, capital losses inside the holdco reduce the worth of the CDA and capital gains increase the worth of the CDA. It could also be best to money out your whole tax-free CDA dividends before selling an investment that has declined in value. This would scale back the quantity you possibly can withdraw tax-free.
