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The problem of Estate Capital Gains Tax

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Compliant content provided by Adviceon® Media for educational purposes only.


You and your heirs may think that all of your assets will pass over to them tax free. Let’s examine how estate taxation can erode the value of one’s property and cause business succession problems

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The Family Business Many successful family businesses have accrued capital gains in the millions, from the time the owner started years ago. The tax payable is so high that the business cannot afford the liability once the owner dies, at least without liquidating. One way to cover the tax liability is to save for it. The problem arises if the owner dies too soon, or the money gets used for an emergency or a new opportunity; or if the savings goal is impossible for the company to achieve. A better method might be to simply buy life insurance to immediately cover the entire estimated liability risk, which is due at the same time the benefit is paid upon the owner’s death (or the death of a surviving spouse). A sole owner may buy enough life insurance to add additional capital to offer stability if the company were to be sold, or where a wife, son, or daughter wants to take it over.

Investments Any capital asset that has accrued value over the initial purchase price, will have capital gains (if yet unrealized) taxed in the estate. At that time if there is no surviving spouse or dependent, an RRSP will all be taxed fully as income. Again, life insurance allows the payment of any gains tax and/or a capital replacement of the estate’s lost RRSP value.

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The Cottage Perhaps you acquired a cottage that has increased in value from next to nothing, over several years of inflation while people have sought after vacation properties. Just like the business, a cottage can have capital gains growth. Thus, that asset can also later present you with a tax liability. If you die, or sell it, capital gains tax will be triggered on the portion that exceeds the amount originally invested. Consider passing the cottage on to the children. Personal life insurance, purchased with after-tax dollars, can offer a non-taxable death benefit to pay the tax. You can buy additional life insurance for business needs, or create future income for a spouse, or dependent child, if necessary.

Does your family want to keep the cottage after your death? If so, would you want them to inherit the cottage together with a large income tax bill? Where the property passes to the deceased’s spouse, taxation of the capital gain may be deferred. Once it passes to the next generation, tax is finally due at once.

The most effective and least expensive way to cover any capital gains tax liability on a family cottage is to purchase a life insurance policy on the owner(s) for the projected amount due in the estate. Purchase a permanent life insurance plan. These plans often offer a competitive rate of return on your investment and the full amount is payable at death entirely tax-free. An additional benefit is that by virtue of the life insurance guarantee, the entire coverage needed is available after the payment of just one monthly premium. If you die, your beneficiaries will have the cash to pay the debt, rather than having to quickly sell the cottage to pay taxes due. Consider taking out a permanent policy on your life (or a joint policy that insures your spouse as well) that will increase in value to meet the tax on the rising capital gain on your cottage property.

 


 

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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.

Mutual funds, approved exempt market products and/or exchange traded funds are offered through Investia Financial Services Inc.

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.

 

Mutual funds, approved exempt market products and/or exchange traded funds are offered through Investia Financial Services Inc.

The particulars contained herein were obtained from sources which we believe reliable but are not guaranteed by us and may be incomplete. The opinions expressed have not been approved by and are not those of Investia Financial Services Inc. This website is not deemed to be used as a solicitation in a jurisdiction where this Investia representative is not registered.

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