# Tax treatment of inheriting shares of a corporation .



## marina628 (Dec 14, 2010)

My husband and I are going to update our wills Monday and as it is now he owns 51% shares of our Business and I own 49% of the business which is incorporated.If either of us die we are leaving the shares to the other and then when we both die they pass on equally to our two children.Just wondering if you guys had any advise on this topic ,we have a plan which will keep the business running and capable employees who can do this so there will be no sale of business at time of our death.Our daughter who is 20 now has knowledge of day to day operations and the financial matters as last summer I taught her all about Quickbooks ,our invoicing practices , identities of our clients and many other processes.
I plan to go see a professional tax planner later in the year but just wondering if there are some obvious things I am missing.


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## OhGreatGuru (May 24, 2009)

Talk to your tax professional. But I think the surviving spouse can inherit with no tax liability. The shares are inherited by the survivor at the ACB, not the FMV. The government will collect its pound of flesh (in capital gains tax) whenever the survivor ultimately dispose of the asset (shares). 

Passing them on to anyone other than a spouse, such as adult children, is another kettle of fish. I think this would be treated like any other property transfer, and there would be a "deemed disposition" of the shares at Date of Death, with the "deemed Capital Gains/Loss" taxable to the estate of the deceased. You probably need both tax and legal advice on how to word your wills to fulfill your wishes without complications.


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## marina628 (Dec 14, 2010)

Lawyer already wrote our will and sent us copies to review prior to meeting Monday then a little light bulb went on today regard tax implications.So if the kids inherit the business ,they will pay tax on the value on the company balance sheets?


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## Ihatetaxes (May 5, 2010)

$500k in capital gains allowance allowed I believe.


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## humble_pie (Jun 7, 2009)

marina, reading your message gives me the feeling that you are imagining a future in which you & the Husband will both perish almost together - something like a common accident - while in the prime of life, with the carefully-selected & well-trained employees whom you now have still on board & ready to serve the young children of the suddenly deceased.

but the chances of this happening are actually very slim. The likelihood is that both of you will live on to a fine old age. The likelihood is that one or the other of you will continue to live years, or even many years, after the death of one mate.

i don't mean that your will should be written to a situation in which you or your husband shall be 80 years of age while the other spouse shall have perished many years before. What i do mean is that your wills should be flexible enough that they will both prepare for a sudden emergency accident & also serve as guidelines into a ripe old age.

please picture a surviving spouse - you or your husband - at age 80. Right now, you cannot say that any of your present businesses will have survived as they are today. None of your present employees will be around.

at that future date, your older daughter will then be something like 55. She might have long since moved far away, due to marriage or a career. In addition, there will probably be adult grandchildren & even great-grandchildren. All these individuals could be citizens of another country.

in circumstances like these, the nature of your businesses will have surely changed. The 80-year-spouse might still be managing everything. But the hand-picked employees, the office procedures, the software you have chosen - gone, not even a memory.

the way i see it, there are many complex issues in your case. You need to name a tutor or guardian for your minor child, until he or she turns 18 (the older daughter could be the guardian.) You need an exceptionally competent executor after the death of the survivor of yourself & your husband, because there will be a number of complex financial issues & the executor will have to be mindful at all times of the needs & wishes of your heirs, if the executor is also running a testamentary trust.

also, i think your wills should leave open the possibility that, following the death of the survivor etc, the businesses may have to be sold, to put it bluntly. I think it would be a mistake to try to lock the businesses onto the next generation, thus depriving them of any independence or any free choice in their lives.

see, marina, we know you too well by now & we know you are much too good of a parent to ever inflict a major decision onto your children, whether they are willing or not !

this would mean that the executor or executors would have considerable discretion, which is why that person or persons should be chosen so carefully.

i have other concerns (how do your wills provide for the issue, ie grandchild or grandchildren, of a child who would predecease the survivor of your husband & yourself, for example.)

but these other concerns can be lumped into one question, which is why your solicitor is providing you with wills that seem far too rudimentary & simple. Taxation of the estate upon the death of the survivor is & should be a compelling issue. But there are other important issues, i've attempted to raise a few.

could you not look for a chartered accountant whose practice includes a great deal of estate planning, so all these concerns can be studied & properly dealt with. In the end a lawyer will write the wills, but the taxation nuts & bolts should first be assembled by a CA imho.


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## marina628 (Dec 14, 2010)

HP I have a 10 year old daughter so this will is only mean to serve for the time she is still a minor child  I plan to live until I am 106


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## marina628 (Dec 14, 2010)

Humble I posted a rather quick reply because I was in a rush but I wanted to thank you for your well thought out post.My husband and I did our first will in 1995 and our second in 2003 when out youngest daughter was born.Now we feel it is time to update it again as many things have changed for us in 2003.Our plan is to do it again when the youngest turns 18 , as for Grand Children that will be something to consider in 2021 when we do the next will .
My daughter has a interest in the business but she will have her own career ,she has worked part time a couple years now for me and the staff I have now took me about 8 years to put together for my own retirement plan.In the summer I rarely work so they have done a good job for me so far and in October when I was in hospital they really stepped up to the plate when they were needed.They get a yearly bonus based on the net profits of the business so in many ways they treat the business as their own because at end of day it is in their interest as well.
The primary reason I would not recommend to sell the business and my daughter knows how I feel about this is that we have a very strong brand and relationship with key Partners .I expect in next 4-5 years my daughter will learn enough from me that she could Step in my roll if she were interested.My right hand is my 33 year old nephew that I have trained for 5 years now and I am comfortable that he will retire or die with the business too .
But having been through 2 very close calls already in my life dying is on my mind probably more than others and I have had time to think and reflect on every scenario I can think of.I have been the main provider for many people for a long time so just being extremely careful to have the details all in order.


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## kcowan (Jul 1, 2010)

The reason that HPs advice is worth pursuing is that it will flesh out some of the options so that rewriting the wills again may be simpler. We have updated our wills 3 times since 1995 and each one was major (also simpler). But the long range thinking originally is what made the subsequent revisions simpler.


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## marina628 (Dec 14, 2010)

I have one website that generates $720,000 a year but the value on books is very little since the website itself is depreciating asset.After expenses this website produces a net income of $360,000 a year ,it runs autopilot and the expenses are PPC advertising .So I don't feel it is much of a burden to leave this sort of business to my kids ,in reality I have servers a full time Server admin and my nephew runs a team of people from other countries that generates fresh content for us.But that one website takes about 4 hours a week to maintain and I have 6 other similar websites that are no stress that can easily provide my estate about $700,000 a year in revenue.
The other side of the business is a bit more demanding and we do live events as well,so probably in 10 or so years I will get rid of the more complicated stuff.For that reason I am fairly certain that my children and my grand kids (if we get any)will be extremely foolish to ever try to sell.I ran the numbers and i would need to get somewhere in are of 7-8 Million to generate the same cash flow.Excluding the cash on hand the business on paper is only worth $300,000 -$400,000 because the 8+ years of me working 100 hours a week to get it to this point has not been considered on paper.I sold off some websites that were a pain to me plus one high valued one in 2012 and took the hit on the taxes and elected not to use any of my capital gains exemption then.
I gave away one website for $2000 that i invested $11,000 into because it was taking too many resources and we cut our losses as it is tough to focus on a website of that level when you have others making $xxx,xxx for you.
But after all this talk I know even without the will I need to brush up on my tax knowledge.I believe the accountant we have now is doing good for us in terms of the business but she has always recommended we go see somebody specializing in estate and tax planning for our personal stuff.There is also the issue of our real estate portfolio too.
When I started my business I thought I will build something to generate $15,000 or so a year , I never dreamed it will get to this level so I have been just going along for the ride,Time to get serious about it now.


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## humble_pie (Jun 7, 2009)

marina628 said:


> ... I am fairly certain that my children and my grand kids (if we get any)will be extremely foolish to ever try to sell [our businesses.] I ran the numbers and i would need to get somewhere in are of 7-8 Million to generate the same cash flow


grad business schools are full of case studies showing the pitfalls when entrepreneurs try to imprint 2nd or 3rd generations with their exact business passion. AFAIK the averages show that inter-generation transmission of entrepreneurial talent plus hereditary business enterprises is one gigantic challenge that often fails. Fails screamingly, because there is so much emotional baggage.

kids need to make their own way in life. Marina, didn't you say recently your daughter wants to be a commercial artist ?

we were once chez a family counsellor & my oldest said she doesn't like gardening. 
when i'm dead, she'll start to love gardening, i said, on an impulse.
why would you say that, asked the counsellor, with unusual interest.
i don't know, maybe poetic justice, i replied.
we often see this in families when young people are in the process of individuation from their parents, said the counsellor. The last thing they will touch is what their parents do. Sometimes, it's only when the parent dies that the adult child can begin to feel the freedom to do what the parent excelled at.

please note: i didn't say your business *should* be sold. I said your executor & trustee should have the discretion - it'll be in the numerous broad powers listed at the end of the will - to sell any or all of the existing businesses if such a step would be in the best interests of your heirs & assigns ...




> I believe the accountant we have now is doing good for us in terms of the business but she has always recommended we go see somebody specializing in estate and tax planning for our personal stuff.There is also the issue of our real estate portfolio too


exactly. It occurs to me that you mentioned you are flying to england soon, for some reason people often want to review/update their wills before they board a plane. They don't get excited about automobile or train travel, but planes & ships do seem to set them up. Perhaps you could do a minor update now, then over the next year prepare new wills that will look out over the future in the wisest possible manner.

for example, since OD is already 20, is it truly practical or realistic to postpone treatment of grandchildren in wills until the year 2021.

solicitor should be coaxing u to think about these eventualities ... what if one spouse regretfully passes away in accident but surviving spouse is left comatose & cannot sign any new will ... meanwhile life goes on & descendents multiply ...

as kcowan says, each future modification of a well-planned existing will should arise seamlessly from its predecessor.


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## domelight (Oct 12, 2012)

marina628 said:


> My husband and I are going to update our wills Monday and as it is now he owns 51% shares of our Business and I own 49% of the business which is incorporated.If either of us die we are leaving the shares to the other and then when we both die they pass on equally to our two children.Just wondering if you guys had any advise on this topic ,we have a plan which will keep the business running and capable employees who can do this so there will be no sale of business at time of our death.Our daughter who is 20 now has knowledge of day to day operations and the financial matters as last summer I taught her all about Quickbooks ,our invoicing practices , identities of our clients and many other processes.
> I plan to go see a professional tax planner later in the year but just wondering if there are some obvious things I am missing.


 First off I agree with HP you need to speak to a knowledgable accountant in order to structure an effective estate plan.

However the one thing that stands out like a sore thumb that I have not heard anyone mention is a "Dual Will Structure" This is a no brainer for a corpoartion of your size. speak to your lawyer about it. Simply put you draft two wills. One for personal assets and one for corporate assets. This will avoid probate of the corporate assets, which could provide a significant savings to the estate. I am not a lawyer but yours should be familiar with the structure as it is becoming a fairly common practice.


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## OhGreatGuru (May 24, 2009)

_you are imagining a future in which you & the Husband will both perish almost together ... but the chances of this happening are actually very slim._

It is normal drafting practice in a will to specify what happens in case both die within 30 days of each other. It may be rare, but chaos results if it happens and there is no provision for it. Do you want the Provincial Trustee to decide what to do with your children, your business, and your estate if the two of you have a fatal car accident?


_HP I have a 10 year old daughter so this will is only mean to serve for the time she is still a minor child _ 

All the more reason why you need professional advice, as you have minor children. You may need to create testamentary trust(s)

_$500k in capital gains allowance allowed I believe._

I knew this was getting above my paygrade. I know little about special rules concerning inheritance of family-owned businesses.


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## humble_pie (Jun 7, 2009)

OhGreatGuru said:


> It is normal drafting practice in a will to specify what happens in case both die within 30 days of each other. It may be rare, but chaos results if it happens and there is no provision for it. Do you want the Provincial Trustee to decide what to do with your children, your business, and your estate if the two of you have a fatal car accident?



actually to finely split a hair, if i may, there are 2 separate aspects to treatment of common-accident situations in wills.

the first is standard & basic. It is simply a testator directing what is to happen to the residue of his or her estate if his or her spouse has already predeceased himself. Or herself.

i'm assuming here that the primary beneficiary was the other spouse; in this scenario we are dealing with a situation in which only one member of a couple has survived, therefore that survivor holds the entire estate, or what's left of it.

it doesn't matter whether the deaths occur precipitously by common accident when a couple is young or whether the deaths occur over a very long period of time such as 30 or 40 years. In the end, only one spouse is going to survive or will be deemed to have survived. So a very common will configuration for a couple looks like this:

section (A) bequeath to spouse;

section (B) failing spouse, bequeath to children;

section (C) (optional) failiing spouse & failing all children, bequeath to other parties.

secondly - & very much different - is a 30-day survivorship article that some lawyers insert in wills. The survivorship time period can be extended to 60 or even 90 days. 

this special article provides that, if a couple were to suffer a common accident but one spouse survives a few days (up to 30, or up to 60, or up to 90 days) longer than the other, then the longer-surviving spouse is deemed to have never inherited in the first place.

in such a case, assuming for example that children of the marriage would be the heirs, an estate is deemed to have passed straight from the spouse/parent who died first to the children.

the reason for the leapfrog is to avoid double estate or double personal income tax taxation.

obviously there could be some cases where doubled ownership of an estate might be beneficial. I can't think of any appropriate situations but these might exist. This is another good reason for combing through all details in will planning with a CA whose practice includes considerable estate planning.


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## marina628 (Dec 14, 2010)

We are setting things up for kids to own the business but not expecting any of them to work in the biz.My daughter spends a few hours a week doing work for me now,that is what you hire managers for and I have good managers.There are separate documents outside our personal assets for the business..We have living will and also trust for the minor child ,there are 43 pages to my will.I figure asking the questions here will help me cover the basis for my meeting tomorrow.Thanks for all your feedback .


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## financialnoob (Feb 26, 2011)

Would it make a difference if the kids were already part of the incorporated company as minority shareholders? Would the rest pass on by survivorship instead of inheritance?


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## atrp2biz (Sep 22, 2010)

Been a while since I've been on CMF, but there are other questions to ask as well. Is it your intention to pass on the business to you children in the most tax-efficient manner? Will the book value of the company continue to grow? If yes to both questions, you may also want to consider an estate freeze. The basics behind an estate freeze is that you would exchange your current common shares in the company for 'special' shares akin to preferreds. Note that the conversion of the current common shares to special shares is not a taxable event. The special shares would maintain its face value and you can issue new common shares to your children now (could be a different series - eg. non-voting). As a result, upon the demise of you and your husband, only the inheritance of the special shares would be taxable while the increase in the value of the new set of common shares would still be in the hands of your children.

You maintain control of the company since the new common shares are non-voting. Additionally, cash flow out of the company can also be controlled since the special shares are also a new series of shares whereby distributions can be made to those shares and those shares only.

I only have a superfical understanding of this as this is something we are pursuing in the near future.


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## marina628 (Dec 14, 2010)

Thanks everyone for input we got things all sorted out last week after we meet with a tax planner.Wills are all done and we are happy with the route we have to take .


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