Corporate Disposition on Death

If you're looking for information regarding corporate disposition settings and assumptions when liquidating/disposing of a corporation prior to the final year of a projection, you can find those in the article Corporate Disposition Prior to Death.


At the end of a projection for a client that has ownership of a corporation, there is a taxable event for the final estate. There are multiple methods that can be used to transfer or dispose of corporate assets after the shareholder's death. Snap provides flexibility to customize the estate process to address the most common methods.

1

Assumptions used in the corporate disposition on death calculation

At the time of death, if the shares of a corporation are not rolling over on a tax-deferred basis, a taxable event occurs. This typically results in a capital gain being calculated and charged to the estate. Strategies can later be implemented to offset this capital gain. There are several key terms and inputs to determine the taxes payable and net of tax proceeds for an estate resulting from a corporation.

Net Worth - This is the value of all Assets of the corporation less any Debts. This value is calculated and displayed on the corporation Planning Page and available in the Net Worth & Estate Value table each year of the projection. Click the After-Tax Estate value in any given year to open this table. (Note that for Corporations with a Share-Sale Disposition method, this table is not available.)

Market Value (MV) - This is the assumed value of the corporation at the time of a client's death. The MV may differ from the Net Worth of the corporation if there are unrealized capital gains on Assets or expected future refunds payable (e.g., from RDTOH balances).

The following inputs can be found under  Scenario Setup - > Corporation.

Paid-Up Capital (PUC) - This is the amount of money received by the corporation from shareholders in exchange for shares issued by the corporation, less any Return of Capital distributed. 

Adjusted Cost Base (ACB) - This is the cost of the corporate shares that are held personally by the client. This reduces the capital gain calculated and charged to the estate. The ACB is typically the same value as the PUC. In cases where the corporate shares were purchased from another shareholder, the cost basis may differ.

Capital Dividend Account (CDA) - Capital Dividends can be used to distribute cash from the corporation tax-free to the estate. Capital Dividends paid to the estate reduce the calculated capital gain proportionally to the amount paid up to allowable limits.

Refundable Dividend Tax on Hand (RDTOH) - Taxable Dividends can be used to distribute cash from the corporation to the estate. Taxable Dividends paid to the estate reduce the calculated capital gain proportionally to the amount paid. Taxable Dividends paid to the estate also trigger refunds to the corporation based on the RDTOH balances.

2

Selecting your desired disposition method

On the Scenario Setup -> Corporation page, you can select the Disposition Method that you'd like to use in your plan.

The default method is Winding-up. This method assumes that the corporation's Assets are liquidated and taxes are paid, Debts are repaid, and any Insurance Proceeds are received. Then the cash is distributed to the estate through a combination of Capital Dividends, Eligible Dividends, Non-Eligible Dividends, and Return of Capital. The estate will pay a combination of capital gains taxes and taxes on dividends.

To add corporate-owned life insurance to your projection, the Winding-up method must be selected.

The second method is Share sale. This method assumes that the estate sells the corporate shares for the Net Worth of the corporation at the end of the final year of the projection. The estate will pay capital gains taxes based on the Net Worth of the corporation less the ACB of the corporate shares. This is the calculation that Snap has used since the corporate module was initially added. All plans with a corporation created prior to 2023 will have this method but it can be edited to Winding-up if desired.

3

Winding-up calculation

The following calculation occurs when the Winding-up method is selected:

1. The Market Value (MV) of the corporation is determined based on the liquidation and taxation of assets in the corporation and any expected dividend refunds.

For example, if a corporation has $1MM in Capital Assets with a Cost of $800K, then when the corporate holdings are liquidated, there are taxes payable of ~$50K. If the Corporation has an RDTOH balance of $100K, and the final winding-up is expected to pay enough taxable dividends to trigger a refund, then the refund value is added to the corporate MV. This results in an MV of $1.05MM (calculated as $1MM Net Worth, less $50K taxes payable, plus $100K refund receivable).

Additional notes: The same liquidation occurs for Real Assets. Debt in the corporation is repaid before distributions are calculated and refunds are estimated. If there is corporate-owned life insurance in the plan, the Cash Surrender Value (CSV) is added to the MV calculation and the expected Insurance Proceeds are used in the distribution calculation for the purpose of calculating any expected refunds from RDTOH.

2. The estate is taxed for a capital gain based on the MV calculated above less the ACB of the corporate shares.

For example, if the corporate shares had an ACB of $0, then the estate would have a capital gain of $1.05MM.

3. Dividend distributions are paid from corporate cash to the estate. This results in up to three things happening. The capital gain calculated in step 2 is offset. The estate pays taxes on the taxable dividends received. The corporation receives the expected refunds calculated in step 1 (which is included in the total distributions issued).

For example, if the corporation above pays a Non-Eligible dividend of $1.05MM, then the following would occur. The capital gain initially calculated in step 2 would be fully offset, resulting in no capital gains tax for the estate. The estate would pay taxes on the $1.05MM of Non-Eligible Dividends. The corporation would offset its $50K taxes payable from the liquidation and receive an additional $50K refund to add to the cash proceeds from the liquidation of $1MM in Capital Assets.

Additional notes: Capital Dividends can only be used to offset up to 50% of the capital gain calculated in step 2. If there aren't enough taxable dividends paid to offset the remaining 50% of the capital gain, then the estate may pay a combination of dividend taxes and capital gains taxes. The order of distributions from the corporation is Return of Capital, Capital Dividend, Eligible Dividend (up to the ERDTOH), Non-Eligible Dividend (up to the NERDTOH), Eligible Dividend (up to GRIP), Non-Eligible Dividend.

4. The after-tax proceeds to the estate are calculated as the sum of all distributions mentioned in Step 3 less all taxes payable (capital gains tax and/or those payable on taxable dividends).

For example, in the case above, the estate would receive $1.05MM of Non-Eligible Dividends. This would offset the original capital gain calculated in step 2, so the estate would pay no capital gains taxes. The taxes payable on the Non-Eligible Dividends would be ~$400K resulting in after-tax proceeds to the estate of ~$650K.

4

Share sale calculation

The following calculation occurs when the Share sale method is selected:

1. The Market Value (MV) of the corporation is assumed to be the Net Worth of the corporation at the end of the final year of the projection.

For example, if a corporation has $1MM in Assets and $200K in Debts, then the Net Worth and MV are assumed to be $800K. This calculation ignores any unrealized gains on the Assets within the corporation and any potential refunds from future taxable dividends paid since there's no way to know the likelihood or timing of these outcomes.
2. The estate is taxed for a capital gain based on the MV calculated above less the ACB of the corporate shares.

For example, if the corporate shares had an ACB of $200K, then the estate would have a capital gain of $600K (calculated as the $800K MV less the $200K ACB).

3. The after-tax proceeds to the estate are calculated as the MV less any capital gains taxes.
For example, in the case above, the estate would receive $800K from the share sale. The taxes payable on the capital gain of $600K would be ~$110K resulting in after-tax proceeds to the estate of ~$690K.

Notes:

  • The Lifetime Capital Gains Exemption (LCGE) is beyond the scope of automated calculations in Snap. There are ways to address LCGE depending on the circumstances of the case. Please reach out to our Customer Success team with any questions.
  • Capital/business losses are beyond the scope and calculations in Snap.
  • The calculations in Snap assume that the corporation is disposed of as part of the Client or Spouse's final estate. This may not be the case for your client's scenario. For instance, you may have plans to transition the corporation to a surviving beneficiary. Typically, Snap's assumptions can still be used to compare different strategies against one another as the assumptions within Snap will remain constant. If you have any questions please reach out to our Customer Success team.

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