As physicians begin to consider retirement, they often inquire about the fate of their corporation and the assets within it upon their retirement. Here is a brief overview of some concepts for consideration. Your corporation is a distinct legal entity from the physician and is owned by its shareholders. The corporation’s articles of incorporation define its existence, the classes of shares (such as A, B, C), voting rights, share values, and the various rights of each shareholder.
Upon retirement, a few things to consider.
- Name change. Your Medicine Professional Corporation (MPC) is permitted to practice medicine only if one voting shareholder is a member of the College with a valid certificate of registration. Retirement nullifies this condition so now your corporation will become a holding company that “holds” the investments you built up while you were working.
- Tax planning. Transitioning your Medicine Professional Corporation into a holding corporation post-retirement offers additional tax planning benefits, including income splitting and access to lower tax rates for you and your spouse/partner as you may be able to pay them dividends.
- Insurance. Regarding your life insurance, if the name of your corporation has changed, it is prudent to update the life insurance policy to reflect the new corporate name as the owner and beneficiary. As for tax consequences associated with a change in the owner and beneficiary of your life insurance, generally, a name change in the corporate name does not trigger any tax implications because there is no transfer of ownership to a new entity; the corporation remains the same despite the name change.
- Estate planning. Remember, your corporation is its own entity and therefore there is estate tax to consider. When considering estate matters, it’s common for the shares of a corporation to be transferred tax-free to a surviving spouse or a spousal trust upon the owner’s death. Upon the passing of both the owner and their spouse, the next step involves distributing the corporation’s assets to the children, which may trigger up to three levels of taxation.
EXAMPLE
For simplicity, lets assume you have $5,000,000 in corporate investments with a cost base of $2,000,000 when you and your spouse pass away. Here is how this is taxed.
- TAX ON YOUR CORPORATE SHARES
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 (less the $1 adjusted cost base for the shares) which will be taxed as a capital gain. The shares are worth $5,000,000 and will result in a capital gain tax of $1,300,000 – that means your estate will pay out $1,300,000 to Revenue Canada and only has $3,700,000 for distribution. - TAX ON THE CORPORATIONS’ INVESTMENT GAINS
Once the investments owned by the corporation (stocks, bonds, mutual funds) are sold, there is capital gains tax on these investments. Assuming the cost base of the corporation’s investments is $2,000,000, there will be a capital gain of $3,000,000. Passive investment income for Canadian Private Corporations is taxed at 50.17% which results in corporate tax on the investment gains. - TAX ON THE ASSET DISTRIBUTION TO YOUR HEIRS
When the investments are sold and assets are ultimately distributed to your heirs (i.e. your children), the distribution of these assets will likely be done at least in-part as a taxable dividend at the heirs’ personal tax rate on dividend income. If so, the payment of taxable dividends will trigger a dividend refund from the Corporation’s RDTOH account. The highest tax rate on personal dividend income is 47.74% which would result in tax.
Assuming some advanced tax planning is put in place, the tax could be limited to the capital gains on the shares of the corporation – which is still $1,3M paid to Revenue Canada. Most of our clients want to minimize tax. It’s crucial to explore tax and insurance planning within the corporation to prepare for the eventual transfer of assets upon your demise. Without proactive planning, as much as 71% of the corporation’s assets could be lost to taxes when both you and your spouse have passed away.
CLICK TO REVIEW YOUR INSURANCE AND DISCUSS ADVANCED PLANNING
Elliott Levine, MBA, CFP at Levine Financial Group in Toronto
416-222-1311 I info@levinefinancialgroup.com
The above article is intended as conceptual planning for you to consider with your tax accountant and lawyer and not intended as tax or legal advice.