Estate Planning in a Business Context

It can be easy to delay estate planning, including the preparation of a Will, Personal Directive and Power of Attorney. Given the complexities of business assets, Albertans with private businesses can face greater challenges to put their estate affairs in order.

What are the key estate planning documents?

The main estate planning documents are the Will, Personal Directive and Power of Attorney, which are described in greater detail below:

Will – a testamentary document appointing a “personal representative” to pay off debts and distribute property on death. It can include the appointment of guardians for minor children and testamentary trusts for children, dependent adults, or beneficiaries.

Personal Directive – an incapacity document appointing an “agent” to make decisions about matters related to health care, living arrangements, social involvement, and end-of-life matters.

Power of Attorney – an incapacity document appointing an “attorney” to make decisions about matters related to personal and real property, including dealing with Alberta Land Titles, investment decisions, tax filings, and funding for family or personal care.

What happens if I pass with a business?

If you could die while owning a business, a number of questions should be answered when preparing your estate planning documents:

1. What is my transition plan?

Owners may or may not have a detailed transition plan for their business on death. You may wish to transition to a key employee, family member or conduct a third-party sale. Having properly drafted estate and corporate documents are a must.

If you pass with a business in your estate, your Will should address bequests of business assets, including depreciable property, inventory, real property, partnership interests or corporate shares. If you have a family member involved in the business, you may contemplate a specific distribution of assets to your successor.

If the plan involves a corporation with multiple shareholders, a properly drafted unanimous shareholder agreement (“USA”) with detailed buy-sell provisions can ensure a smooth transition between current and future owners. An “estate freeze” can also be a useful tool to bring in a key employee or family member, providing fixed value equity for existing shareholders and growth to new entrants.

Family circumstances like maintenance and support (or property) obligations to a spouse, adult interdependent partner (AIP), or dependent child should be clearly identified and fit within the broader plan.

2. Should the business be sold?

In some cases, business owners will not have a transition plan for an employee or family member. In these situations, a sale of the business to a third party can be a prudent option. Alternatively, a reorganization of the business to isolate “active” operating assets from “passive” investment assets to enhance flexibility can be useful. Proper planning is required in both contexts.

Given the complexities of a business sale or reorganization, it may be advisable to arrange a transaction(s) during the lifetime of the owner to allow the owner to maintain control over the process. If an estate sale or reorganization is contemplated, appointing an institution (trust company) or sophisticated personal representative to handle the transaction(s) can ease the administrative burden on family members.

3. What are the tax implications?

There are many tax considerations to keep in mind when Albertans pass with a business.

Firstly, all capital property (including depreciable capital property) of the taxpayer is deemed to be disposed of at death at fair market value (subject to certain exceptions).[1] In the case of Albertans owning private corporations, capital gains and dividend taxation can create the potential for double tax (see our article on this topic, here).

Other rules related to business assets include, but are not limited to:

• Application of capital gains “rollovers”, including the spousal (and spousal trust) rollover and family farm rollover to defer any capital gains tax.[2]
• Rollover of class 14.1 depreciable property (goodwill) to defer capital gains on business with “going concern” value.[3]
• Use of “rights or things” election on certain items (which if realized or disposed of would have been included in income of the taxpayer) including declared but unpaid dividends, unpaid salary or commission, and cash basis farming inventory.[4]
• If a partnership is involved, review any tax implications including potential wind-up of the partnership, allocation of income, and disposition of interests on the death of a partner.
• Tax planning opportunities involving corporate USA buy-sell provisions, including the use of corporate owned life insurance to fund the buyout of the deceased partner.

Finally, certain tax exemptions or credits can be applied in an estate context. Eligibility for the lifetime capital gains exemption on qualified small business corporation shares or shares in a family farm corporation or an interest in family farm partnership should be considered.[5] Further, the use of donation tax credits can be considered to defray income and capital gains in the estate.[6]

In all cases, advice should be sought to determine tax implications and to develop a proactive contingency plan.

Conclusion

Owning a business is complex and multifaceted. When planning for your estate with business assets, proper planning should be contemplated and advice sought. You’ve spent years building your business; spending the requisite time to plan your transition and estate plan will be well worth the time. 

For more information, please contact Eric Dalke at edalke@walshlaw.ca / 403-267-8454 or any member of our Walsh Tax & Estates team and we would be happy to answer your questions.

Note: This article is of a general nature only. Laws may change over time and should be interpreted only in the context of particular circumstances. These materials are not intended to be relied upon or taken as legal advice or opinion.

[1] Subsection 70(5), Income Tax Act, RSC 1985, c 1 (5th Supp) (“ITA”).

[2] Subsection 70(6); Subsection 70(9) and (9.2), ITA.

[3] Subsection 70(5.1), ITA.

[4] Subsection 70(2), ITA. See s. 70(3) for transfer of “rights or things” to a beneficiary.

[5] Subsection 110.6, ITA.

[6] Subsection 118.1, ITA; See s. 110.1 for donations by a corporation.