If the property freeze was not accomplished, that is what might have occurred: your dad owned all of the shares within the company. On his dying, the shares of the company can be deemed to be bought, and tax can be owing on the achieve. Then, when the investments within the company are bought, tax is owing on the beneficial properties. Then, when the shareholders draw the cash within the type of a dividend, they get taxed. That is known as double or triple taxation.
The property freeze froze the worth of your dad and mom’ shares, and all future development of the company was attributed to you and your brother. This transfer eradicated or minimized the primary layer of tax described above. There’ll nonetheless be capital beneficial properties tax, paid by the company, when the investments are bought, and tax if you draw the cash as dividends, paid personally.
Insurance coverage
Insurance coverage is usually used inside a company to compensate for the tax loss because the company is transferred from one era to the subsequent. The opposite use of insurance coverage is to type a part of the conservative piece of an funding portfolio on cash that may by no means be spent. The concept is to have somewhat extra of a tilt towards investments that generate capital beneficial properties, for tax effectivity within the company, and the insurance coverage protects towards unfavorable markets on the time of dying.
At your dad’s passing, the insurance coverage is paid into the company and creates a nominal account (an accounting time period for an imaginary account) referred to as the CDA, capital dividend account. The worth of the CDA will equal the worth of the tax-free quantity of the insurance coverage proceeds, which ought to be most if not all the $1 million. At the moment, a tax-free CDA dividend will be paid out to the shareholders, you and your brother.
Do you have to transfer all of the investments to money?
You’ll first want to substantiate with the monetary establishment holding the investments what its insurance policies are. You’ll possible discover that the place probate is required, it have to be accomplished earlier than any adjustments to the investments will be made. This implies no adjustments to the non-registered account; nevertheless, RRSP/RRIF and TFSA accounts with named beneficiaries usually are not topic to probate and will be traded.
Earlier than making any trades, think about how the beneficiaries might react to your funding selections, and their plans for the cash they’ll obtain. The very best answer is more likely to have the beneficiaries full the mandatory paperwork as quickly as doable so that they obtain the proceeds or investments in form inside a couple of weeks.
What about buying and selling investments within the holding firm?
Together with your dad and mom’ private holdings, the beneficiaries obtain the cash tax-free, after the property pays the tax, which can appear all one and the identical. This isn’t the case with investments within the holding firm, or holdco. You and your brother will obtain taxable dividends except they’re tax-free CDA dividends. If you’re gathering OAS now, you would possibly discover all of it clawed again when you draw dividends from the holdco.
Additionally, capital losses throughout the holdco scale back the worth of the CDA, and capital beneficial properties enhance the worth of the CDA. It might be finest to pay out all of your tax-free CDA dividends earlier than promoting an funding that’s down in worth, which would cut back the quantity you may pay out tax-free.
