Tax + Inflation Impacts on Business & Estate Values
Taxed to death vs taxed at death
Taxes exist around every turn and corner in your personal and small business life. Taxes on your corporate net earnings, on employee paystubs, when you purchase something, when you invest and do well, when you draw on government or employer pensions or when we sell our cabin or rental property. This list is not exhaustive, but some might say they are taxed to death. The reality is most Canadians don’t realize that we are taxed at death a term your accountant will know as the terminal tax submission.
‘Cheque please Ottawa’: Five ways to pay for your final tax bill
Upon your death one of the many roles your executor is responsible for includes creating a laundry pile of all the assets you owned i.e. investments, savings, business holdings, retirement income streams, real estate, any items that can be assessed value. The Canada Revenue Agency (CRA) takes this laundry pile and assesses one final tax bill owing. This balance owing can be paid from five sources: Read More
- Cash – does your estate hold sufficient liquidity/available cash?
- Savings – can your beneficiaries/estate save up for this final bill? If yes, how much needs to be saved?
- Debt Tools – do your beneficiaries have sufficient debt tools or credit limits to help pay for this bill?
- Selling Assets – selling estate assets like the family cabin, heirlooms to create cash.
- Life Insurance – a liquidity contract that removes the first four options off the table, pays your CRA balance and allows your beneficiaries to keep everything.
If you had to choose: Pay your estate or pay Ottawa?
Knowing we have five methods to pay for terminal tax – there is one method that completely removes the need to wait for probate which can take about 9-12 months (in the presence of a current, valid will) or up to three times longer without one. Should your estate settlement become litigious, this vehicle’s value is protected against creditors to ensure your beneficiaries – benefit. Emotional benefits include not putting your loved ones into a position of having to liquidate your family legacy. So, instead of depleting your estate by accessing cash, savings, debt tools or selling assets – option five truly allows you to slice your cake, choose the piece and eat it too. Life insurance gives you the option of preserving your estate vs paying the government with what has taken a lifetime to build.
Reducing taxes and using freed up dollars to bolster retirement income? Too good to be true?
Most Canadians are familiar with TFSAs and RRSPs as the main strategies for retirement savings. TFSAs grow tax deferred and are accessible tax free. RRSPs grow tax deferred but are taxable at retirement and death. The one advantage of RRSP over TFSA’s is that you can deduct contributions which may yield refunds for the reporting year. What if you could transfer your personal RRSP into your corporation and have your business deduct the contributions vs using personal after-tax dollars? Read More
To quantify this, would you prefer to purchase something that requires 11% or 48% more effort? That is the difference between corporate (11%) and personal tax rates (48%) in AB. It has a huge impact on purchasing power. What if you took this purchasing power and were able to contribute up to 60% more than a regular RRSP – creating a larger retirement pension? It’s not too good to be true – its known as an Individual Pension Plan (IPP).
Trapped, stagnant cash / retained earnings damming up in your corporation or holding company?
A sign of business growth and maturity may lead to amassing cash within your corporation. These pool of funds can further improve your business by way of infrastructure upgrades or investments. Potential downfalls to money sitting idle in your corporation is that it doesn’t earn interest (aka work for you). If retained earnings are not needed for working capital some common areas of investments are corporately owned real estate and/or investments. This allows you to leverage the lower tax rates offered within your corporation to purchase these interest earning vehicles. Read More
For small business reporting less than $500,000 of net income before taxes annually – real estate and investments can be a good option. For businesses that earn greater than $500,000 (net, before taxes) the passive income earned on these investments can unintentionally lead to a doubling of corporate tax rates. These scenarios may not always be preventable, however, it highlights the importance of constantly staying in touch with your business advisory team.
Slowing, or preventing the accidental doubling of corporate tax rates
Once your corporate passive income streams hit $50,000 annually – you start to grind away at the Small Business Deduction Limit (SBD) currently set at $500,000. CRA sets a claw back ratio of (5:1). Your corporation loses the lowest corporate tax rate (11% in AB) once your passive income hits $150,000 plus. Hitting and exceeding this threshold can trigger a near doubling of corporate taxes due. Unlike rental income and interest earned on corporate owned investments – Individual Pension Plans (IPP) and Corporate Owned Life Insurance with Cash Values do not count against this 5:1 rule. These vehicles grow tax deferred without having to claim gains as income. Furthermore, an IPP can lower your net profits (and with-it taxes owed) as the contributions to this pension are tax deductible.
Alberta, British Columbia & Nova Scotia