Could the wealth you’ve built within your incorporated practice be taxed twice, when you die?
The possibility of double taxation is an important issue that too many incorporated physicians neglect to address. It can diminish your legacy and leave beneficiaries with far less than you’d imagined.
Fortunately, with a good estate plan and a capable executor*, there’s no need to pay more than your fair share of taxes.
Here’s how your estate might be taxed twice
Let’s take the case of an incorporated physician who leaves corporate shares worth $2 million at the time of death. In a worst-case scenario, with no estate plan on how to wind down the corporation, the estate could be subject to taxes as high as about 72% — that’s about $1.45 million paid in taxes. Here’s how.
First tax hit: Upon death, you’re considered to have disposed of the shares you own in your corporation at their fair market value. This often results in a taxable capital gain to be reported on your final personal income tax return.
Second tax hit: Taxes may also be payable on distributions received by your estate from winding down the corporation; after the corporation’s sale of its assets, and the payment of any corporate tax liabilities, the net cash distributed to your estate may include taxable dividends.
Your executor is the key to help avoid a double tax hit
To be clear, you can reduce the tax impact by avoiding this double tax hit.
Namely, in this example, the estate plan could ensure that an executor steps in, in time, to wind up the corporation within a year of death and recover the original capital gains tax.
It’s especially important to count on a well-qualified executor. In this particular case, the estate plan, and a properly drafted will, would give the executor power and flexibility to determine the most tax-efficient course of action to deal with the assets, including the corporate shares.
Every physician’s situation is unique, and the complexities of any given example could require particular steps or strategies. That’s why MD Financial Management encourages incorporated physicians to provide their executors with broad discretion in their wills to implement post-mortem corporate and estate tax-planning strategies.
How much is at stake?
In our scenario, a well-executed estate plan could reduce taxes by $500,000:
| Corporate shares | No estate plan | Estate plan |
|---|---|---|
| Value at death | $2,000,000 | $2,000,000 |
| Taxes | ($1,450,000) | ($950,000) |
| After-tax value of shares | $550,000 | $1,050,000 |
It’s easy to see from this example that, by properly winding up the corporation within a year of death, an executor can significantly reduce the taxes associated with the value of your corporation.
A well-managed estate leaves more for your loved ones
You can preserve the value of your assets by empowering your executor to employ the right strategy at the right time. That’s one piece of an effective estate plan, which any financial plan should include.
An MD Advisor** can ensure you have the right tax and estate planning strategies in place to avoid pitfalls and leave the legacy you want for your family.
* In Quebec, an executor is referred to as a liquidator.
** MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
Estate and trust services are offered through MD Private Trust Company.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.
