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Private Client Law Publications

At Smutylo Sigler, we believe in educating our clients so that they know what to expect in their business transactions. Below are resources and information on private client law including professional corporations, and wills & estates.

PROFESSIONAL CORPORATIONS – TAX IMPLICATIONS

The following is a brief summary of the tax savings and other tax implications of using a professional corporation. Since tax laws are complex and change from time to time, if you are considering incorporating your medical practice or other professional practice we recommend you work with a tax accountant.

Eligible for Small Business Deduction

•   Corporations pay lower tax rate on income eligible for small business deduction
•   The small business deduction must be shared between associated corporations
•   Ontario small business deduction benefit may be lost if associated corporation has taxable income
•   Claw-back applies even if associated corporation does not earn active business income (e.g. owns rental assets)

Tax Deferral vs Tax Savings

•   Professional may choose to be compensated by salaries or dividends or a combination thereof

–   Ask your accountant to provide you with a comparison of extracting income as salary vs dividend

•   Tax deferral available if professional leaves income to be taxed in corporation at small business rates
•   Tax savings available if professional leaves income eligible for federal small business deduction to be taxed in corporation, and receive after tax amount as dividends
•   Tax savings disappear if higher income retained in corporation, but can still defer personal tax on dividends
•   The decision as to whether higher income should be retained in the corporation will depend on the cash flow requirements of the professional. The longer the professional plans to leave earnings in the corporation, the more valuable the potential deferral may be
•   Over time, the benefit of tax deferral may far exceed the ultimate tax cost

Capital Gains Exemption

•   Professionals can claim capital gains exemption if shares of professional corporation sold
•   Surplus assets should be removed to ensure corporation qualifies as small business corporation at all times
•   Ability to claim the capital gains exemption may be restricted if professional has claimed investment expenses in excess of investment income (i.e. has a CNIL account), or has claimed certain types of losses (capital loss, allowable business investment loss) in the past
•   Corporation may pay dividends to professional to neutralize CNIL account

Work In Progress

•   Professionals are allowed to elect not to include any amount in respect of work-in-progress of the year into income
•   WIP has no cost for tax purposes
•   On the transfer of assets to the professional corporation, the professional will be able to elect to transfer the WIP at its cost amount
•   Professional corporation receives same tax treatment for WIP

Income Splitting

•   Income-splitting with family members possible for Doctors and Dentists
•   Unknown whether family trust will be permitted to be shareholders
•   Family members who are shareholders may receive dividends from corporation
•   Family members who are not active in the business may receive dividends
•   Family members who are active in the business may receive a combination of salaries and dividends
•   Family members may realize capital gains on sale of shares of corporation
•   Family members may be eligible to claim capital gains exemption on capital gain realized on the sale of shares
•   Corporate attribution rules may apply if practice transferred to a corporation that spouse or family trust (if permitted) is a shareholder, and corporation is not a small business corporation
•   Professional will be deemed to have received interest on value of assets transferred to corporation
•   Corporation will not be able to deduct deemed interest payment
•   Spouse/family trust also taxed on any dividends received from corporation
•   Double taxation may result
•   Corporate attribution not applicable if both spouses are active in business (i.e. transfer of assets to corporation by one spouse not done to benefit the other spouse)
•   Corporate attribution rules may be avoided if corporation is a small business
corporation at all times
•   Surplus assets should be removed to ensure corporation is a small business
corporation at all times
•   Consistent with requirement that professional corporation can only have temporary surplus assets
•   May continue to use the following income splitting techniques:

– Reasonable salary to spouse/other family members

– Management corporation/partnership owned by spouse

• Separate small business deduction available to management corporation

• Use of trust with minor beneficiaries as shareholder of management corporation may cause corporations to be associated

PROFESSIONAL CORPORATIONS – INCORPORATION CONSIDERATIONS

Commercial liability is limited but professional liability is not limited

•   Incorporating protects you from normal commercial liability against creditors but not from professional (i.e. malpractice) liability. Each act of the professional corporation is deemed to be an act of the professional and the professional is jointly and severally liable with the professional corporation in respect of any liability which may flow from errors and omissions of the professional.
•   Professional governing bodies are able to look through corporations and hold the individual professional accountable for their actions.

Ownership by professionals and family members

•   One or more members of the same profession may, directly or indirectly, be shareholders of the professional corporation.
•   Family members that are members of the same profession may hold voting shares. However, many Ontario medical practice partnerships and associations require that all voting shares of the corporation be held by the partner or associate of such medical practice partnership or association.
•   Family members that are not members of the of the same profession (doctors and dentists only) may hold non-voting shares of the corporation.
•   Non-professionals cannot control corporation through voting or other types of agreements.
•   Holding companies may not own shares in medicine professional corporations, and (doctors and dentists only) trusts may not own shares for any family member other than for children who are minors.

Even if both spouses are professionals, one professional corporation may not be an option

•   Most medical practice partnership and association agreements require all voting shares of the medical professional corporation to be owned by partners or associates, as applicable. Spouses may use the same professional corporation only if they are both members of the same partnership or association or if one the professionals practices outside of a partnership or association. The professional spouse that is not a member of the partnership or association will only be able to hold non-voting shares of the corporation and such spouse may not be a director of the corporation.

Management of the the corporation

•   All officers and directors of the professional corporation are required to be shareholders of the corporation.

Business activities of the professional corporation

•   The business of the corporation is restricted to the practice of the profession and activities that are related to, or ancillary to, the practice of the profession, including the temporary investment of surplus funds earned by the corporation.

MERGERS AND ACQUISITIONS

Why do you need a Will?

Having a will allows you to speak for yourself in deciding what happens to your property and your remains. If you have underage children, elderly parents or other dependents, in your will you will choose a guardian for them, as well as instructions on their care.

A will allows you to benefit family members and other organizations or charities which may not be possible if you die without a will. In addition, by having a will you will likely save those involved in dealing with your affairs time and money.

What happens if you don’t have a Will?

•   The provincial government will get involved because no one has a legal right to your estate. Your estate will be distributed according to the Succession Law.
•  Reform Act and according to your wishes.
•   You cannot leave your estate to the people you want.
•   You may cause your family conflict over who gets what part of your estate.
•   Your relatives will have more costs to settle your affairs and the process will take longer.
•   You cannot choose the guardian who will take care of your dependents (i.e. children) who are under the age of 18, if you have any.

What is “probate”? What are “probate fees”?

Probate is the process whereby the courts verify that there exists a valid will and the executors appointed under the will have authority to act. In Ontario, “probate” is called Certificate of Appointment of Estate Trustee and the process involves the personal representative making an application to the court to approve the will and confirm the executors.

The Estate Administration Tax has replaced probate fees. The tax must be paid when the personal representative files the application for a Certificate of Appointment of Estate Trustee with the Superior Court of Justice. In Ontario, the tax is calculated as $5 per $1000 of the first $50,000 of the estate and $15 per 1000 for the value of an estate over $50,000. It works out to approximately 1.5%; for an estate of a value of one million dollars, the probate fees would be $14,500 using that formula.

Is probate always necessary?

Your particular circumstances will determine whether application to a court for a Certificate of Appointment of Estate Trustee is necessary. For example, if all assets are held jointly, probate may not be necessary because assets held jointly automatically pass to the survivor. Similarly, probate is not necessary for shares in private companies, RRSPs, RRIFs and insurance policies where beneficiaries are named in the plan or policy, as applicable, documents. However, some banks may insist on probate. Because these rules are not legislated, they vary from bank to bank and even from branch to branch. For smaller estates, the banks may not require the will to be formally probated, but if the value goes beyond their guidelines, they are going to need that will probated or they are just not going to recognize it.

Even if a bank doesn’t require probate, they still may want the executors to sign a personal indemnification in case it turns out there was a problem. If an executor is not comfortable with giving that personal indemnification or guarantee, he or she may want to pay for the probate fees and have the will probated.

You are an executor administering an estate of two million dollars. After six months, you have distributed a million dollars. Then someone shows up and challenges the Will and claims that the Will you are administering is not really the Last Will and Testament or is not valid for some other reason. Because the Will was probated, you, as executor, have protection under the Trustee Act and have no personal liability. If you are dealing with an estate without probate and have distributed funds and then find out that the document isn’t valid, you could be personally responsible to pay that money back to the estate.

What is “estate planning”?

Generally, estate planning involves organizing your affairs such that you have assurances that your wishes will be carried out and that you minimize taxes assessed on your estate. Some well-known strategies for minimizing probate fees include:
•   Joint ownership of assets with right of survivorship;
•   Naming beneficiaries for RRSPs and insurance policies; and
•   Transferring assets out of the estate.

Some equally well-known but more sophisticated estate planning strategies are as follows:

•   Dual wills
•   Spousal trusts
•   Family trusts
•   Estate freezes

How can you find out more information?

To find out more information on estate planning strategies to reduce probate and other taxes, read our Estate Planning Strategies document. For more general information on estate planning, including wills and powers of attorneys, at the Ontario’s Ministry of the Attorney General’s Wills, Powers of Attorney and Trusts website or by contacting us for a free consultation at 613-869-5440 or info@smutylosigler.com.

ESTATE PLANNING STRATEGIES

Estate planning involves organizing your affairs to minimize and, where possible, defer the taxes payable on your death. Some strategies are relatively easy to implement, while others are more complex and are best undertaken with the assistance of a lawyer and tax accountant.

Some well-known estate planning strategies are as follows:

•   Creating dual wills;
•   Implementing an estate freeze;
•   Organizing your affairs such that assets are jointly owned with your spouse or Other close family member;
•   Naming beneficiaries for RRSPs and insurance policies; and
•   Transferring assets out of the estate.

Dual wills

Certain assets, such as personal property and shares and loans receivable in private corporations do not require probate to transfer them to your beneficiaries. Other assets, such as real estate and funds held in a financial institution, typically do require probate. The assets that do require probate can be dealt with in one will and probate fees paid only on the value of those assets. The assets not requiring probate can be dealt with in a separate will. As no probate of this separate will is required, no probate fees are payable on the assets dealt with under that will.

In Ontario, the use of dual wills to reduce probate fees is an acceptable practice and is worthwhile considering, particularly if you own shares in a private company.

Estate Freeze

An estate freeze is a series of transactions undertaken today, with the result that any future increase in the value of such assets is not taxed in the hands of the estate, but in the hands of the beneficiaries at such time as they dispose of the assets. In this way, the estate freeze saves taxes by postponing them.

For example, assume that X owns shares of Holdco, which have a total fair market value of $1,000,000. X decides this value and the value of his other assets are sufficient for his needs until he dies. Assume also that the value of Holdco will increase by $200,000 between now and the time X will die. X will pay tax of about $46,000 on the $200,000 growth, and yet he does not need it (i.e. he has enough with the current value of his Holdco shares).

Using an estate freeze X can avoid this unnecessary tax. To do so so, X exchanges his Common Shares for Special Shares in the capital of Holdco with a total redemption amount of $1,000,000. X can make this exchange without paying taxes. X’s son will then subscribe for new Common Shares of Holdco. As a result of this “freeze”, X at death will own Holdco Special Shares with a total redemption amount and fair market value of $1,000,000 (the value of his shares will not increase from now until he dies). The $200,000 of growth, which X does not need, will accrue to the Common Shares owned by the son. The gain in the son’s Common Shares will not be realized (and tax need not be paid on it) until he dies or sells the shares.

The Canada Revenue Agency has issued several rulings on estate freezes, and the maneuver is an accepted estate planning technique.

Spousal Trusts

Spousal Trusts are used for a variety of reasons, including

•   Avoiding duplicate probate fees,
•   Reducing taxes otherwise payable,
•   Providing the deceased spouse with some control or direction of how their assets are dealt with by the surviving spouse.

Avoiding Duplicate Probate Fees. When assets are held in sole ownership and then left to a surviving spouse, probate fees are paid on the first death. Then when the surviving spouse dies, probate fees are paid again on the same asset when it is left to the children. Creating a spousal trust and transferring assets to the trust will avoid payment of probate fees twice on the same assets. Also effective for this purpose are holding assets jointly or designating the surviving spouse as beneficiary.

Reducing Taxes. Spousal Trusts create a second taxable entity, the Estate, that has an income flow that is taxed at the graduated tax rates, separate from the income of the surviving spouse. Depending upon your circumstances, this technique can save up to $8,000 to $10,000 per year. However, to determine if a Spousal Trust makes sense, the taxes paid on the two income streams must be compared to the tax which would have been paid by the surviving spouse had all the assets been left outright and tax been paid on the combined income in that spouse’s hands. Note, for this strategy to be effective the surviving spouse must receive all of the income from the Trust and no one else can take from the Trust during the spouse’s lifetime.

Control Post-Death. Spousal Trusts are often used to give the deceased spouse some additional control over the assets they have left in their Estate. Many people like the idea that the property is somewhat protected from the remarriage of the surviving spouse. If assets are left outright to the surviving spouse, they can remarry, revoking their existing will or making a new will which leaves a new spouse as primary beneficiary to the exclusion of the children. You can make provision in your will for the distribution of the monies remaining in the Trust on the death of your surviving spouse.

How can you find out more information?

Whether any of the above discussed or other estate planning tools makes sense for you will largely depend on your circumstances and the nature of your estate. The tax savings derived from the implementation of the strategies must exceed the increased legal, accounting and administration costs of implementing the strategy. As well, poor estate planning may lead to costly litigation.

If you have questions or would like to discuss your estate planning options, contact us for a free consultation at 613-869-5440 or info@smutylosigler.com.

EXECUTOR DUTIES

Where the deceased made a will, the personal representative of the estate will be the person appointed in the will as the deceased’s executor – now referred to as an “estate trustee with a will”. Where the deceased died without a will the person who serves this role is the administrator of the estate – now referred to as an “estate trustee without a will”. The role of the estate trustee is to wind up the affairs of the deceased, pay off any debts and distribute the estate to the beneficiaries of the estate.

The Executor is a fiduciary and, in general, must

•   Act in the best interest of the beneficiaries;
•   Avoid conflicts of interest, for example, by refraining from transactions involving estate assets that result in a profit to the executor personally;
•   Exercise all discretion granted to them in a reasonable manner;
•   Invest trust assets in a prudent and cautious manner;
•   Act impartially and objectively with all beneficiaries.

The following is a summary of the typical activity performed by the estate executor, all of which activities must be performed by the executor as a fiduciary:

Immediate Actions

•   Make appropriate funeral arrangements.
•   Locate the will of the deceased, determine that the will is the last will of the deceased, or that the deceased had no will.
•   Retain a solicitor.
•   Determine the names and addresses of the beneficiaries/next of kin and notify them of their interest.
•   Search for cash, securities, jewellery, etc. and arrange for safekeeping.
•   Review will for any interpretation problems.
•   Dispose of all perishable assets.
•   Open an estate bank account.
•   Review insurance coverage and insure estate assets against fire and other perils.
•   Make provision for the immediate needs of spouse and any other dependants.
•   Collect income generated by the estate assets or payable to the deceased.
•   Pay bills, mortgage payments, insurance premiums, credit cards.
•   Re-direct mail and cancel health insurance coverage, driver’s license, cable, telephone, club memberships, subscriptions, credit cards and obtain any refunds which are applicable.

Interim Actions

•   Prepare inventory of original assets including safety deposit box listing, real estate, moneys on deposit at financial institutions, personalty, life insurance, any interest in an estate or trust and any other investments such as a mortgage.
•   Arrange valuation of assets where necessary.
•   Advertise for creditors and prepare inventory of debts.
•   Ascertain any debts to family members and locate evidence regarding loan balance.
•   Instruct solicitor to apply for the appropriate grant or certificate.
•   Supply solicitor with information required to make the application.
•   Prepare and file income tax returns for year of death and for all prior years due but not filed at the date of death.
•   Make reasonable inquiries for next-of-kin if required.
•   Consider any claims or potential claims against estate and obtain legal advice if necessary.
•   Set aside reserve funds for estimated debts, taxes (including potential taxable capital gains on property such as a cottage) and estate trustee’s compensation.
•   Make interim distribution to beneficiaries if appropriate.

Final Actions

•   Convert investments and other assets to cash and deposit to estate account or invest estate balance in interest-earning investments pending final distribution to beneficiaries.
•   Re-register assets in estate’s name, if applicable.
•   Prepare transfer/deed for conveyance of real property, if required by the will.
•   Arrange rollover of RRSP or RRIF to spouse if required.
•   Settle and pay all legitimate claims against the estate.
•   Apply for any benefits payable on death including C.P.P. death benefit, life insurance proceeds, death benefits from pension plans or annuities, and deposit to estate account.
•   File T-3 income tax return.
•   Obtain tax clearance from Revenue Canada, where appropriate.
•   Prepare and maintain estate accounts for approval by the beneficiaries or examination by the court, where applicable.
•   Prepare final releases.
•   If no will, distribute assets according to rules for intestate succession.
•   Dispose of or distribute personalty according to instructions in will.
•   Prepare cheques and pay legacies and transfer bequests as provided in will.
•   Invest assets for establishment of trusts, if the will so directs.
•   Send releases to beneficiaries and request signatures, where applicable.
•   Prepare cheques and pay balances to residuary beneficiaries.
•   Advise beneficiaries regarding inclusion of income from estate in income tax if appropriate.
•   Close estate account.


The content on this website is provided for informational purposes only and does not constitute legal advice or opinion of any kind. Should you require legal advice or have any questions regarding the content, please call 613-744-8025 or send us an email at info@smutylosigler.com.