TRAPS TIPS Time for a recently ma...

TRAPS TIPS

Time for a recently made known look?

As tax laws change, in such a manner too must the estate planning strategies we engage We must also ensure that plans already in existence are still effective. Changes to our tax body were introduced two years ago, unless did we all review existing planning or change our approach with revere to private company shares? The change I'm referring to in this article was not a sweeping legislative revision moreover a simple tax cut: Reducing the capital gain inclusion rate to 50% combined with cutting the federal and provincial tax rates, caused the top marginal tax rate in succession capital gains to dip to 2185% for what purpose would a tax cut create the ne to revise approaches to estate planning? History may help demonstrate with what intent

A brief history

The potential for double taxation is the dilemma facing executors upon the death of an individual owning private company shares, because shares believeed disposed of on death may create a taxable capital gain. When the corporate assets are ultimately disposed of (creating a capital gain) and the snare proceeds distributed, the distribution is taxed as a dividend. Thus, the asset appreciation is taxed twice-once at death, then again when realized.

The Income Tax Act recognizes this vexed question If the company redeems its shares, the terminate to the estate would likely be a capital los and a taxable dividend. The estate capital los can be treated as the deceased person's los if the provisions of 164(6) are met Then the simply tax paid is on the taxable dividend to the estate. Previously this was considered a pious result-given that the top tax rate onward dividends was 35% compared to 39% onward capital gains. And if CDA accounts or refundable taxes were available to stock the redemption, the result was plane better.

Many estate plans were structur to use 164(6) in dealing with private company shares. This was a clean and simple system of dealing with the double taxation question at issue and reduced the tax carrying capacity to the estate. It's likely that many estate plans commonly exist that contemplate a similar approach.

The brave now world

But does 164(6) planning work in today's world? Considering dividends now take a back seat to capital gains when comparing tax rates (3158% v 2185%) using a traditional redemption approach eliminates the double taxation question but could substantially increase the estate's instant tax liability beyond that which the estate should pay.

a not many new tricks

So we're faced with a difficult situation. The thinked disposition at death produces a gentle tax burden to the estate, moreover the double tax threat still exists if we don't recover the shares or otherwise address the gains inherent in corporate assets. Given that a simple

redemption strategy may now increase the overall tax tonnage the traditional 164(6) approach, while still useful, may not achieve the planning objectives forward its own. Other planning strategies must now be considered or combined with 164(6) to achieve the desired come

While we can still arrive at a reasonable issue the path there is somewhat more difficult, and there are more [i]or[/i] less new potholes to be avoided. any questions to consider in estate planning for private company shares include the following:

* To what length will CDA balances exist to supply a redemption?

* To what bulk will RDTOH exist to find a redemption?

* Can 164(6) be used to cure the tax on death without substantially increasing the overall tax burden?

* To what amplitude would the beneficiaries be able to utilize the capital los if shares are ransomed in their hands?

* Can 88(1)(d) be used to protuberance the ACB of nondepreciable corporate assets?

* Can gains in succession appreciated corporate assets be realized to create additional CDA and/or RDTOH to minimize tax in succession redemption?

* Should a share reorganization be undertaken, exchanging the shares with ACB for promissory notes?

From the laundry list above, you can papal court that an estate plan may now involve more than just share redemptions. Corporate reorganizations, wind-ups, ACB jolts and asset sales are all consider points. The added planning complexity is uniteed by the need to consider various stop los masterys and dividend deeming provisions that may now result into play.

The proces

So by what mode should we approach the planning process? Well, veteran estate planners will number you that understanding the objectives of your clients, having render free of access lines of communication, and planning well in advance are the [i]clavis[/i]s to successful estate planning. No change in legislation or tax rates will at any time change this. In fact, these explanations are now more important than perpetually

Clearly identifying the intentions of everyone involved (the individual, the beneficiaries, other meaninged parties) is still the first grade on the path to a prosperous estate plan. More than at all times the intentions of the beneficiaries with look up to to the continuation of the company will ne to be considered. The possibility that a employment mortem corporate reorganization may be required emphasizes the ne to communicate the reasoning behind the plan plainly to the beneficiaries.