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Cover Advisors


Insuring Your Estate For Capital Gains Tax

Most of us build our wealth with the intention of not losing it. We earn money, spend it, invest it, save it, and give it away with the intention that it provides us with its intended purpose.  It is a proven psychological behaviour that the fear of losing what we already have is a more powerful emotion than the desire to grow what we have.

Unfortunately, what we have worked so hard to create can be eroded upon death.  Estate erosion refers to the financial loss that occurs at death due to the estate’s need to pay liabilities that arise. Those liabilities need to be paid with estate assets before they can be distributed to heirs or simply paid to carry on as they are. An example of this is Capital Gains Tax on private company shares.

Capital Gains Tax

In Canada, upon the last death of two spouses, company shares are deemed to be disposed of at Fair Market Value. If the shares are worth more than what was paid for them, a capital gain will arise, resulting in taxes owing on the final return of the second person to die.

Currently, the amount of the capital gain that is subject to tax is 50%. This is referred to as the inclusion rate. The inclusion rate fluctuates, and changes, based on government tax policy. The inclusion rate, like the tax rates and economic conditions that are in play at the date of death, cannot be known ahead of time; however, advanced planning allows for the greatest level of flexibility to adjust to future tax regimes.

To illustrate the amount of tax, if the company shares are worth $10 million, under the current tax environment the maximum amount of tax payable in B.C. is approximately $2.5 million. If the inclusion rate increases to 75%, the tax payable is $3.7 million.

Value of Life Insurance

Life Insurance protects against many of the financial risks created upon death. It provides the financial assistance when your family needs it.  The insurance premiums can be funded by your company with the added benefit of the life Insurance proceeds being payable in tax-free dollars to your company, which could then be distributed tax-free to your estate to pay the taxes due.

This eliminates the tax erosion associated with some of the other alternatives such as selling an asset or borrowing which require capital at least equal to the amount of tax.  Life insurance requires premiums to be paid at a fraction of the insurance benefit creating a positive return to the estate versus a net reduction.  In the end, establishing life insurance to fund the need upon death is the simplest, most efficient and least expensive method. 

Insurance Strategies

There are hundreds of life insurance products available in the Canadian market place, and they fall into one of two categories: term or permanent. Term plans have a set expiry date and typically are not ideal for funding capital gains taxes.  Permanent insurance plans expire at death and come in many shapes and sizes.  With all the unique features and applications of permanent life insurance, time should be taken to review both the qualitative and quantitative benefits of your policy options.

A Customized Strategy for You

When someone with life insurance dies, the beneficiary doesn’t typically care what kind of special features the insurance policy had. It just doesn’t really matter as long the insurance money shows up when it is supposed to. This doesn’t mean that choosing any insurance policy will give the same result or that choosing the right permanent product with confidence is impossible—it just means it is easier to choose the right policy when you have knowledge and experience on your side.

That’s where we come in. We have developed tools to reduce the complexity into simple fundamentals we are confident you will understand.

With over 30 years of experience analyzing and testing products and applications, working with insurance company actuaries on product development and seeing firsthand what does and doesn’t work, we can guide you through the decision-making process, showing you the true impact of using life insurance so you feel confident about your decisions.

We encourage you to ask us to look at your situation so we can assess your tax liability, review all your options and help you make an informed decision for you, your business and your family for generations to come.

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270-2255 Dollarton Highway
North Vancouver BC
V7H 3B1

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