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22 lacible | Mai 2016 FEATURE ARTICLE For estate planning, it is always wise to look into the tax impact of assets that will be sold after the death. If the decision to sell will be made during the settlement of the estate, you can examine whether it might be better to renounce the rollover between the spouses and tax the deceased on the deemed disposition. This could be beneficial, for example, if the person dies at the beginning of the year, when little income has been earned, to take advantage of the lower tax brackets. Capital losses that are unused at the time of death can also be a reason to renounce a rollover. Entrepreneurs are another good example, as they are often subject to a shareholder agreement that obliges them to sell their shares to their partners. Generally, the shareholders agree to an irrevocable buy-sell clause that is suspended until the death of one of the shareholders. At the time of death, the surviving shareholders are obliged to acquire the shares of the deceased at a price determined in the agreement, and the heirs and assigns of the deceased shareholder are obliged to sell at that price. In this situation, the spouse of the deceased shareholder does not irrevocably acquire the shares. You could say that the spouse does not inherit the shares at all but, rather, the obligation to sell them at the price set in the agreement binding the estate. As such, the lack of rollover means that the capital gain on the shares is assumed by the deceased in the final tax return. Of course, if the private corporate shares meet the conditions to be "qualified small business corporation" shares (QSBC), the liquidator of the estate will be able to claim the unused portion of the capital gains deduction. The lifetime deduction is currently $813,600, and if all the conditions are met, it will reduce the capital gain by that amount. But will the transaction carried out under the terms of the agreement necessarily be a sale? Sometimes shareholder agreements recommend a share redemption, which triggers a taxable dividend, in which case the capital gain deduction (CGD) is not available. Not to mention that dividends are taxed at a higher rate than capital gains. For the sale of shares under the terms of a shareholder agreement, it is possible to set up a plan that makes use of the capital gains deduction of both the deceased and the surviving spouse. This arrangement is only possible if there is a spouse, if the spouse has not used their capital SPOUSAL ROLLOVER: NATURALLY, BUT… In estate planning, we often take it for granted that assets can be transferred between spouses with no tax impact (commonly called "rollover"), and we forget that there may be restrictions. But if we examine all the rules, it is clear that this kind of rollover only applies if a particular asset passes from one spouse to the other in kind and the second spouse acquires it irrevocably. Spousal rollover may be automatic, but it is not always the best option. And sometimes spousal rollover is actually impossible, due to agreements binding the estate. Even if the rollover is carried out at the time of death, later on the surviving spouse may be unable or unwilling to keep the asset, for all sorts of reasons. The disposition of that asset will lead to a series of tax consequences that need to be assessed. Imagine an unmortgaged income property evaluated at $3,000,000 that brings in $150,000 a year after operating expenses. What would be the tax consequences if the surviving spouse no longer felt capable of managing the property and wanted to get rid of it? From a tax point of view, the adjusted cost base (ACB) is $500,000 ($400,000 for the building and $100,000 for the land) and the undepreciated capital cost (UCC) is $100,000. The disposition of the property would lead to a capital gain on the increase in value ($3,000,000 – $500,000), half of which will be taxable, and a recapture of depreciation ($400,000 – $100,000), which is fully taxable. At the maximum marginal rate in 2015, the transaction would entail a tax burden of $775,465. The balance available for investment would be $2,225,465. This amount, reinvested at a rate of 3%, would provide income of $66,764, and at 4%, just over $89,000. The final result is a significant drop in income. Robert Laniel Notary, DESS Comm., F.Pl., DESS Fisc., TEP Will and Estate Consultant Wealth Management Services RBC Dominion Securities Inc.

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