So the restriction based on the assets is that the investment assets cannot exceed 10% of the fair market value of all assets at the time of the father’s death or 50% of the fair market value of all assets at any time in the past 24 months. That can be a real limitation in many cases. Based on what you’ve described previously, there’s an argument to say there isn’t much goodwill in the business since many trade businesses have “personal goodwill” that attaches to the owner as opposed to the business.
It’s certainly more than 10% of all assets at time of death. But what does this restriction mean?
What it means is if the value of the passive assets (investment portfolio) are too high in relation to the active business assets then the shares don’t qualify as Qualifying Small Business Corporation Shares and do not qualify for the lifetime Capital Gains Exemption.
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If the investments exceed the 10% (at the date of the share transfer) or 50% (over the past 24 months) thresholds, the shares of the company are not eligible for the capital gains deduction.
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Doh! I knew that. No idea why it confused me. The business was active for over 30 years… Then he did this for the last five years. What a mess!
One option is for the son to wind-up the company within the first tax-year (not necessarily the first “year”) after the date of death. Yes, the wind-up would likely result in tax on gains and income triggered in the company and a dividend to the Estate on the flow of net proceeds on the wind-up. However, there may also be a capital loss based on the bump in the ACB of the company shares now owned by the Estate. This capital loss could be carried back to the terminal tax return to recover some of the tax on capital gains realized from the deemed disposition at death. Also remember that any capital gains realized in the company would likely increase the CDA which could be paid out tax-free to the Estate. Also look at having the company pay out a tax-free $10,000 death benefit to the father’s estate (I assume Dad was an employee at some point, if not still at the date of death).
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If you mean the current tax year, there is no way I’m going to have everything done by December 31. I doubt we’d even be able to shut down the investments by then, even if the son were 100% co-operative (which he isn’t, as he tends to be really slow in responding. Otherwise, he’s fine. Given the circumstances, that’s understandable, especially as he’s still in his 20’s.).
No. I meant the first tax year after the date of death. Some people will file the first T3 with a December year end, for example, just for convenience. However, that would trigger the first tax year after the date of death which also has consequences for the wind up rules.
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Well, here’s another wrench…
I found out that the company corporate registration lapsed a couple of years ago… It was simply never renewed. How does that effect things? Would everything automatically roll over to the shareholder’s personal name once that happened? Or would the company have to be revived?
Technically, it should be revived before filing T2s or whatever, but I don’t know if CRA’s systems automatically check every provincial registry to see if a company has been struck off. You might be able to get a T2 filed without dealing with that.
But, if you are planning to assist the client with getting all filing up to date, they will need to revive the company in order to process the dissolution.
In my experience, CRA will not accept a Corp tax return for a dissolved corp. It may Efile but Notice of Assessment will not be issued.
Previously I had received a phone call from a Rep informing me of same.
You will have to revive it = paperwork and back fees.
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Correct. Provincial Registries notify CRA on two events: Dissolution and Incorporation.
THEY DO NOT NOTIFY for a Revival. You need to go via BRO and fax (maybe upload now) the Notice of Revival (names can be different in various provinces).
CRA will not assess on a dissolved company, whether voluntary or involuntary. They also won’t chase you if you don’t file unless they think there’s tax owing.
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