Corporate Disposition Before Death

For any corporation in Snap, you can illustrate a client liquidating/disposing of it before the end of the projection. Snap provides flexibility to customize the assumptions and calculations used to determine the proceeds and tax implications of the most common use cases.

For information regarding corporate disposition settings and assumptions for the final estate at the end of your projection, please see the article Corporate Disposition on Death.

On the Scenario Setup -> Corporation page, you can select the Disposition Time to use in your plan.

By default, corporations in Snap are assumed to exist for the length of the projection with the Disposition Time set to Post Mortem and the final liquidation occurring through the estate calculations in Snap. If you'd prefer to liquidate a corporation before death, you can select any earlier year in the projection.

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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 (including the Cash Surrender Value of life insurance policies) and then taxes and any Debts are paid. Then the remaining cash is distributed to the client through a combination of Return of Capital, Capital Dividends, Eligible Dividends, and Non-Eligible Dividends. The taxable dividends are added to the client's Taxable Income in the disposition year.

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

The second Disposition Method is Share sale. This method assumes that the client sells the corporate shares for the Net Worth of the corporation at the end of the disposition year. Any capital gain based on the Net Worth of the corporation less the ACB of the corporate shares will be added to the client's Taxable Income in the disposition year.

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The following assumptions and key terms are used in the calculations when liquidating/disposing of a corporation before death.

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 table and the Estate Value table each year of the projection. Click the Net Worth or the After-Tax Estate/Market Value in any given year to open these tables. (Note that for Corporations with a Share-Sale Disposition method, the Estate Value table is not available.)

The following inputs can be found on the Scenario Setup - > Corporation page.

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 personally held by shareholders (e.g., your client). This reduces the capital gain calculated and charged to the client in the year of disposition. 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 client in the year of disposition.

Refundable Dividend Tax on Hand (RDTOH) - Taxable Dividends can be used to distribute cash from the corporation to the client in the year of disposition. These dividends will also trigger refunds to the corporation based on the RDTOH balances.

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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 Financial 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 liquidated and taxed before being added to the MV and used in the distribution calculation to calculate any expected refunds from RDTOH.

2. Dividend distributions are paid from corporate cash to the shareholders based on the percentages indicated on the Scenario Setup -> Corporations page.

For example, if the corporation above pays a Non-Eligible Dividend of $1.05MM, then the following would occur. If the client is a 100% shareholder, they would pay taxes on the $1.05MM of Non-Eligible Dividends personally in the year of the disposition. 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 Financial Assets, which is how it's able to distribute the full $1.05MM.

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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 year of disposition.

For example, if the corporate shares had an ACB of $200K and the client is a 100% shareholder, then the client would have a capital gain of $600K (calculated as the $800K MV less the $200K ACB) in the year of disposition.

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.

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