As we make our way through the fall season, one area we noted physicians have been “cleaning up” is their taxes and terminal planning. First, we help you understand what happens to your estate when you pass away and then how to redirect assets through your medicine professional corporation tax free.
WHAT HAPPENS TO YOUR ASSETS WHEN YOU PASS AWAY?
Upon death, you are deemed to have disposed of assets at their market value at the time of death. The resulting gain is taxed on your terminal tax return. If an asset is left to a spouse, there is no tax due until your spouse sells the asset or passes away. In general, here is how assets are taxed as of 2019:
- Registered assets (RRSP/RRIF) – The value of the RRSP/RRIF is taxed as income.
- Non-Registered Investments – Gains are subject to capital gains tax of 26.76%.
- Vacation property/cottage – Gains are subject to capital gains tax of 26.76%.
- TFSA – The value flows tax free.
- Primary residence – The family home flows tax free.
What about the shares of your medicine professional corporation?
One area that is often misunderstood by physicians is that with no planning there are up to 3 levels of tax that may occur on the distribution of your assets when you and your spouse pass away:
- Personal capital gain on the disposition of shares of the corporation
The corporation was setup with a value of $1. The deemed value of the corporation’s shares at the time of death is the fair market value of the corporate investments, which are taxed as a capital gain.
- Corporate tax on the sale of corporate investments
In order for the beneficiaries to receive their portion of the corporation’s investments, these investments have to be sold. This disposition is taxed as a capital gain.
- Dividend tax on distribution of assets out of the corporation
When the investments are sold and cash is distributed to your heirs, this distribution is a taxable dividend at the heirs’ personal tax rate as non-eligible dividend income from a private corporation.
With no planning,
up to 70% of your corporate investments
may disappear to tax
HOW CAN YOU PASS MONEY THROUGH YOUR CORPORATION TAX-FREE?
Corporate owned life insurance can be received tax free by the shareholders of your corporation. With proper planning, the corporation receives the proceeds of the life insurance and can credit its capital dividend account by an amount equal to the proceeds less the policy’s adjusted cost base. The corporation can declare a capital dividend, which allows the proceeds in the corporation’s capital dividend account to flow to the shareholders tax free.
Once you have enough money to retire on,
you need to pivot from accumulating assets to minimizing tax
The amount of tax payable will depend on the type of post-mortem planning that is done. For example, loss carry back planning, pipeline planning, a transfer of shares and then liquidation of assets or a combination of these strategies may be useful if they are available at the time you and your spouse pass away. One asset that your corporation can own that is guaranteed, not subject to tax and flows through your corporation tax-free is permanent life insurance.
If you want to revisit your life insurance or add permanent insurance to your portfolio with preferred underwriting, please email email@example.com or call 416-222-1311.
Elliott Levine is the President of Levine Financial Group in Toronto
We Save Physicians Money on their Insurance
416-222-1311 I firstname.lastname@example.org