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Estate Planning for a Family Business using the Tax Free Spousal Rollover

One topic that I’ve been thinking more about lately is estate planning.  It’s a pretty morbid topic and most would rather avoid the topic altogether.  However, poor estate planning can lead to a much higher tax bill than neccessary.  While I’ve written about preparing a will, testamentary trusts and even living trusts, I’ve never really touched on the topic on the sucession and tax planning of transferring a family business upon death.

For business owners, the succession of their business is something that can keep them up at night.   Besides the obvious challenge of finding a buyer and/or successor, there are tax implications for the immediate family such as capital gains tax. The good news is that if you are a business owner and you have a spouse or common law partner, the shares that your own can “rollover” to your spouse on a tax free basis.

Spousal Rollover

In this provision that is triggered in an established will,  when you leave your appreciating assets to your suriving spouse, no capital gains tax will result at the time of death.  However, this is tax deferral where capital gains tax would be owed when the surviving spouse either disposes of the assets or passes away.  As a refresher, capital gains tax is triggered when an appreciating asset is sold (outside of registered accounts).  Once sold, 50% of the capital gain or profit is added to your income for the year and taxed accordingly.  The other half is tax free, so in total, the maximum capital gains tax payable is 25% of the capital gain.

There are a number of rules to be followed to ensure that the spousal rollover is available to the estate.  You will need to consult a professional to set this up, but the rules basically state that the assets must be transferred, in its entirety, to the spouse.  If transferred to a trust, the spouse must control the trust and entitled to receive all income from the trust during their lifetime.  Another caveat is that the property must be transferred to the spouse within 36 months of death.

Spousal Trust

Now that your spouse has your company shares tax free, now what?  What about the situation where your spouse remarries but passes away prior to his/her new spouse?  If your spouse did not update his/her will, then the estate would go into intestate where the government decides where to allocate assets.

This also means that there is a possibility that your company shares can be transferred to someone you don’t know!  This is where a spousal trust can help. A spousal trust acts as a separate entity with a beneficiary, in this case, your spouse.  The upside of using a spousal trust is that your assets, or company in this case, stays in the family and not at risk if your spouse remarries.  Your spouse would receive all income generated from the trust but does not technically own the assets.

Estate planning where significant assets are involved can get quite complicated and consulting a professional is highly recommended. If you have any added tips, please add them to the comments.

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 5 comments… add one }
  • LifeInsuranceCanada.com April 22, 2014, 11:24 am

    Brief summary: Spouse gets everything when I die :).

    Seriously, my planning goes like this. My wife owns 50% now (and actively works in our business). When I die, everything rolls over to her. Since I don’t expect our business to last past my death (despite functioning as a business, it’s really more like a practice) I’ve simply padded things with enough life insurance that she can sell off assets at whatever fire sale price she can get at that time.

    I saw this happen in another business last year – I was approached to provide a replacement software service in the insurance industry. The provider had passed away. It seemed that his spouse had enough insurance, and the service was specialized enough, that they simply let the lawyers liquidate the business. I spoke to the estate lawyer, we were basically discussing the price of a customer list and a computer sitting in an office in New Jersey – effectively all the assets.

    The spouse was OK, the one staff member ended up out of a job, and customers were left in a lurch (thus the reason my phone started to ring). The customers could be a concern – so my wife has some contacts she can call in the event of my death who can likely take over servicing on my behalf.

  • Loonie Lover April 22, 2014, 11:25 am

    Just on the subject of dotting the “i”s and crossing the “t”s, don’t forget to ensure than your family will be able to find and access all of the various online accounts you have! This often get left out of these kinds of discussions.

  • James April 24, 2014, 2:59 am

    The most simple and overlooked tax strategy for business owners is the dual will. By having a secondary will for your private corp, you avoid probate…so if your private corp in ontario is worth 1mill then you save $14,500.

    As a Financial Planner its the simple things that clients overlook that drive me crazy.

    http://www.grrlaw.ca/1/post/2013/01/business-succession-planning-dual-wills-estate-freezes.html

  • FrugalTrader April 24, 2014, 9:48 am

    Wouldn’t assets transferred to a spouse via rollover be exempt from probate?

  • Actinica September 12, 2015, 12:39 am

    Hi FT,

    I recently found your blog and I am glad to discover other like minded people. One thing I noticed not mentioned in the estate related posts is the RESP. Below are a few links on the topic.

    http://www.advisor.ca/tax/tax-news/when-an-resp-subscriber-dies-does-the-resp-terminate-178426
    http://www.advisor.ca/tax/tax-news/when-an-resp-subscriber-dies-does-the-resp-terminate-178426#becareful
    http://www.theglobeandmail.com/life/parenting/dont-forget-your-resp-in-your-will/article623000/

    Acti

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