Solving Capital Gains Tax Exposure

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Capital gains from a business, cottage, second residence, rental property, or non-registered investment are subject to taxation when the property is disposed of.  How and when the property is disposed of requires serious consideration, as the tax implications can be enormous.

Here are some areas where capital gains tax may develop:

• If you own a Family Business Many family businesses have accrued large capital gains over time, due of course to the success of the businesses.  When sold, the business will incur a taxable disposition that could be subject to high taxable capital gains.
• If you own non-registered Investments Any capital asset that is held outside of an RRSP, whether a stock, GIC, or investment fund to name only a few, will be taxed on the difference between its fair market value at time of sale, and the cost of the asset.  The difference between the purchase price and the sale price will be either a taxable gain or loss.
• If you own a Cottage When you sell your cottage, or you and your spouse die, capital gains tax will be triggered on the difference between the cost and the fair market value at the time of sale. One major consideration is how to keep the cottage in the family.

Assuming the kids want the cottage, how can the tax problem be handled?  What if there are not enough assets in the estate to pay the taxman?   If there are not enough assets or cash to pay for the tax bill, it may be that the cottage has to be sold.

Can A Solution Cost Pennies on the Dollar?

One solution that can help overcome tax issues, and provide enormous estate savings, is a permanent life insurance policy.  A permanent life insurance solution will create a non-taxable death benefit that can pay the capital gains tax on the accrued increase in value of a family business, cottage, second residence, or unregistered investment. The most common form of estate policy purchased is a Joint Last-to-Die Life Insurance contract. These types of policies can insure both spouses’ lives, but only pay out on the last death.  The cost of the product is often more affordable than an individual policy since the insurance risk is lessened by insuring two lives.

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Life Insurance policies vary according to contract terms. Please read any Life Insurance policy contract provided, or the segregated fund summary information folder prospectus before the time of purchase. Full details of coverage, including limitations and exclusions that apply, are set out in the policy of insurance. Commissions, trailing commissions, management fees and expenses may be associated with segregated fund investments which may not be guaranteed and their market value changes daily and past performance is not indicative of future results. A description of the key features of a life insurance policy, a segregated fund; and any applicable individual variable annuity contract is contained in information provided by the company from which it is purchased. Talk to your advisor before making any financial decision. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors. The information provided is accurate to the best of our knowledge as of the date of publication and is general in nature, intended for educational purposes only, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors. Rules and their interpretation may change, affecting the accuracy of the information.

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The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This content was prepared by Adviceon® for the benefit of the advisor Harvey Garraway who is a Investment Funds Advisor at Investia Financial Services Inc. a registered trade name with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this presentation comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability.