Estate duty dead but capital gains live on
QUESTION: I AM a non-Canadian resident. I own shares of a private company in Canada which has significant growth potential and a small portfolio of Canadian publicly traded shares. If I die, will there be estate taxes to be paid in Canada? ANSWER: CANADA no longer levies an estate duty. Instead, a person is considered generally to have disposed of his assets at fair market value at the time of death.
As a result of this deemed disposition at fair market value, there will be capital gains tax payable in respect of the accrued gains to the date of death. Seventy-five per cent of the capital gains will be included in the deceased's income tax return for the year of death.
The amount of income taxes payable will depend on the taxable income of the deceased for that year.
The gains deemed to have been realised on the private Canadian company shares will be subject to Canadian tax.
However, the gains in respect of the portfolio of publicly traded shares will not be subject to Canadian tax.
There are a few methods which can be utilised to minimise the impact of capital gains tax insurance policy.
Hopefully, the amount of life insurance will be adequate to pay off the Canadian tax liability.
That will avoid the estate from having a liquidity crunch.
The other alternative is to implement an estate freeze.
In effect, the value of the estate will be frozen through a corporate re-organisation.
You will exchange your assets for preferred shares of the Canadian company which will not appreciate in value in future.
This exchange can take place on a tax-free basis.
The intended beneficiary will then subscribe for common shares which will continue to appreciate in value in the restructured entity.
Since your ownership in this company is frozen, the amount of capital gains that will be triggered on death will also not change.