I’ve been writing this newsletter for almost a decade now. Sometimes the stories flow quickly, sometimes not so much. This month, the story walked into my office and told itself!

One of the lovely things about having moved our office in the last few months is the number of great clients and friends who’ve taken the time to come visit us. It has been particularly nice to catch up with a few folks that we’ve not seen very often since the onset of work-from-home and lockdowns.

One of my oldest and dearest colleagues Giselle dropped by recently. Giselle’s been a long time friend, and was one of the very first professionals I networked with when I first became a Financial Planner. We bonded early on over a similar background with our parents growing up in the same part of the world (For those who may not know, my mom was born in northern Quebec). Our lives have run in weirdly parallel ways almost from the moment that we first met, despite working in different sectors of the financial and estate industry.

Giselle’s dad Thibeau spent a number of years requiring extensive health care due to a dementia-related condition. He spent the last couple of years of his life in a long-term care home, and passed away a little while ago. Over the years, we’ve shared many caregiving stories with one another, learning from each other’s experiences.

One of the very first things we did was talk about how her dad’s estate was coming along. “Boy, do I have a newsletter story for you”, she said….albeit with a few more colourful Quebecois phrases that I won’t put in print!

Giselle’s dad was a successful business owner, prior to the downturn in his health. As his health began to fail, he sold off his business, and the day-to-day care of his financial affairs began to switch over to Giselle and her siblings who were his power of attorneys. Giselle had spent years suggesting to her dad that he should be looking at some detailed estate planning work, as in her line of work, she had seen many situations similar to her dad’s structure become heavily taxed. Unfortunately, he had not acted on her advice prior to losing his capacity to manage his finances.

One of the main limitations of a Power of Attorney here in Ontario (and most other jurisdictions), is that the POA is not allowed to undertake changes to the estate of the incapacitated person. This severely hampers any tax-efficient planning that can be done after someone no longer has mental capacity. Giselle’s dad was no exception.

Some ugly tax surprises.

Recently, his estate trustees began to prepare his final tax return. After selling his business, most of the funds were channeled into a Holding Company (HoldCo). This is a very tax-smart move in one’s lifetime, but without proper planning in the estate, HoldCos can end up with multiple levels of tax as they are wound down at the death of the owner. There’s three ways that Thibeau’s Holdco can be subject to tax in this scenario:

  1. Thibeau’s estate has to report the gain on the fair market value of the shares at his death. For most HoldCos, this is going to be a 100% capital gain, as there’s little if any cost to starting a HoldCo.
  2. If Thibeau’s HoldCo is being wound up to distribute to his heirs – then any assets going to be owned by the HoldCo have to be sold and converted to cash. This creates tax owed by the HoldCo itself, which can be quite significant.
  3. Finally, once the company is wound up, CRA takes the position that the payout to the estate is a deemed dividend. This results in a third level of tax, which is in the vicinity of 40% of the majority of the value of the holding company.

Its not unusual to be in a situation where 60-75% of the assets of the HoldCo could disappear in taxes. There are certain strategies that can be used by an accountant to minimize the costs, but these take some time, effort, and a lot of accounting fees to implement.

From bad to worse…

Thibeau also owned some rental properties, on which his accountant depreciated the value each year to keep his taxes low. Selling these properties is now going to cause the depreciated value to be added back into his income. Even worse, the value added back in is the full value, as its considered a recapture of deductions, not a capital gain (where only 50% of the gain is included). Given Thibeau’s estate’s substantial marginal tax rate of 53.5%, this is going to be an enormous sum of money.

When the dust settles, Thibeau’s $2.7 Million dollar estate is going to pay $1M in taxes, or about 37% of his assets. That’s a massive amount for someone who didn’t even have very much in his RRIF, which is often the biggest contributor to taxes at death.

But wait….there’s even more bad news!

Just to add fuel to the fire in the estate, before Thibeau went into the care home, he was involved in an automobile accident. Since he has now passed away, the other party has amended their lawsuit to include the estate. This may hold up the estate for years to come. This can be a huge issue for any estate, as the window for an estate to be taxed the same as a person is 36 months. If the estate stays open longer than 3 years, taxes on any interest earned by the estate jump to the highest rate possible, with few avenues for relief – which may result in less funds available to distribute to beneficiaries once everything settles with the lawsuit.

What could Thibeau have done?

There’s a variety of ways that Thibeau could have tackled these issues before his health declined that might have made a significant impact.

Firstly, in the long term it probably wasn’t tremendously advantageous for his accountant to be writing down the value of the rental properties. Most of the time, a properly maintained building will increase in value over time, not decrease. While you are allowed to depreciate a rental property, it doesn’t always mean that you should.

Secondly, Thibeau could have worked out with his advisors a plan to drain the Holdco over time in a more tax-efficient manner. There are a few common ways to address this. One option (if health permits), is to have the HoldCo own a life insurance policy. The majority of the policy value can then pay out tax-free at the shareholder’s death via a capital dividend. This strategy works well if the plan is to keep the Holdco until death. Alternatively, there is a strategy called a Wasting Freeze, where some of the shares are frozen in value and redeemed each year.

You can get even more creative by combining both strategies, and adding in a charitable beneficiary, in something known as a Charitable Wasting Freeze. This works particularly well for people who want to leave a fixed amount to charity at their death. In this situation, you set up a corporate owned insurance policy for a set amount, and freeze the same value of shares. Then, instead of redeeming the shares annually, you hold onto them, but in your will designate these shares as a gift to charity. When you pass away, the charity gets the shares, which are then immediately redeemed for cash using the liquidity of the insurance payout. However, since the charity is a non-taxable entity, the HoldCo redeems the shares as a taxable dividend, and retains the tax-free capital dividend generated by the Insurance payout to redeem the other shares owned by the estate. The net result is a tax credit for the donation, which is usable by the estate, and a tax-free payout from the HoldCo to wind up the shares. This can be an incredibly efficient estate-planning strategy.

Finally, if Thibeau had any personally owned life insurance or segregated funds that named his immediate family as beneficiaries, then the insurance payouts would have bypassed his estate, and would most likely not be accessible by creditors – including the party currently suing his estate after the automobile accident.

Don’t put your head in the sand.

For those of us who own corporations, its vitally important that we spend some time today thinking about what happens tomorrow with our businesses. Its tough though, as while our businesses are operational, we spend much of our time thinking about little else than keeping the shop going.

Still, Thibeau’s story is a great reminder about focusing on vitally important, but less urgent item, like estate planning. As Thibeau’s family has found out, the cost to our loved ones later can be atrociously high, both in money, but also in time and stress.

My thanks to my dear friend Giselle for letting us share her family’s story, who offers these words of hard-earned wisdom:

“Talk to your family in advance. talk to your kids, and have your kids talk to each other. Tell them what you want to do, because it makes a lot of the decisions easier if your estate trustees completely understand what you want to happen when you pass. In our case, we were able to come to a fair and equitable solution in our interpretation of our father’s will because my siblings and I were able to communicate effectively, despite the many challenges we are facing.”

At the end of the day, the settling of an estate can make or break family relationships, especially when the estate is complex and costly. I’m proud of Giselle and her siblings for navigating the stresses of being co-executors, and maintaining their relationships with one another at the same time. That is, in my experience, an all too rare and wonderful accomplishment.


Looking to make an impact? Contact us today for a free consultation or check out Driven by Purpose, a book written by Ryan Fraser, which shows you the possibilities for growing your wealth and making a real impact through the legacy you plan to leave. The book features real, personal stories and offers dozens of strategies for leaving a lasting legacy.

The information provided is accurate to the best of our knowledge as of the date of publication, but rules and interpretations may change. This information is general in nature, and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor.