Advisors to some of the country’s wealthiest business families joined the Financial Confidence team on November 20th for an in-depth discussion on the tax optimization and wealth preservation opportunities made possible by the proposed tax law changes.
Tax expert Hemal Balsara, Assistant Vice-President of Tax & Estate Planning at Manulife Financial addressed the challenges and strategies associated with managing surplus funds in corporations, particularly in the context of tax planning, estate planning, and corporate insurance.
While managing surplus funds in a corporation might sound like a good problem to have, it’s one that comes with its own set of challenges—especially when it comes to taxes and estate planning. Hemal’s presentation examined this tricky issue and offered actionable solutions for business owners, estate planners, and financial advisors.
What’s the Deal with Trapped Surplus?
Picture this: You’ve built a successful business, saved a chunk of money within your corporation, and now you want to access those funds. The catch? The taxman’s cut can be eye-watering. Over the years, changing tax policies—like higher personal tax rates and lower corporate ones—have made it tempting to leave money in a corporation. But doing nothing creates a problem: a “trapped surplus” that’s hard to access without hefty tax penalties.
The Double-Tax Trap and What’s Changing
Here’s where things get sticky. When a business owner passes away, their estate can face double taxation: first on capital gains and then on dividends. Thankfully, there are strategies to soften the blow. For instance, pipelines (no, not the oil kind) can help transfer assets while avoiding some taxes, and redemption/loss carrybacks are another handy tool. Even better? Recent rule changes extend the timeframe for claiming losses, giving estates more breathing room to sort things out.
But it’s not all sunshine. The government’s bumping up the inclusion rate for capital gains, so a bigger slice of the pie is now taxable. Translation: Post-mortem planning just got a bit trickier.
Why Life Insurance is a Game-Changer
Now, here’s the good news: Corporate-owned life insurance can work wonders when it comes to trapped surplus. By properly structuring who owns, pays for, and benefits from the policy, business owners can access surplus funds while minimizing taxes. Mess it up, though, and you could end up in court (just ask the Hardings, who learned this lesson the hard way).
Rules, Tips, and Hybrid Hacks
Some quick takeaways:
- • Use the Capital Dividend Account (CDA) and refundable taxes (RDTOH) wisely—they’re your best friends.
- • Pipelines can work, but they’re complex and take years.
- • For a best-of-both-worlds approach, try hybrid planning—it blends redemption and pipeline strategies to maximize flexibility.
The key? Don’t go it alone. With CRA tightening its grip, having a solid team of advisors is more important than ever.
So, What’s Next?
Whether you’re planning your estate or just looking to keep more of your hard-earned money, the message is clear: Plan early, stay flexible, and consider life insurance as part of your toolkit. The right strategy can mean the difference between a smooth transfer of wealth and a tax nightmare.
Have questions? Don’t be shy—reach out to the Financial Confidence team. The sooner you start, the more options you’ll have to get it right.
And, if you want to dig a little deeper into Hermal’s presentation, here is an abridged version of his slide deck.