How an integrated approach to tax and investment planning can help business owners make the most of their corporate wealth.
When a privately held corporation sells a property or other significant asset, the resulting capital gain can create a substantial tax liability. For business owners, the challenge often extends beyond the immediate tax bill. They may also be thinking about retirement, accessing corporate funds personally, and preserving wealth for their family.
With the right planning, these objectives can be considered together rather than in isolation. In some circumstances, flow-through shares may be one tool worth evaluating as part of a broader corporate tax and wealth management strategy.
The situation: A significant capital gain
Jennifer’s corporation had recently sold a building, generating a substantial capital gain and an associated corporate tax liability. While the sale represented a significant financial milestone, it also created an important planning question: How could Jennifer manage the tax implications of the sale while making the most of her corporation’s wealth over the longer term?
Simply withdrawing funds from the corporation could trigger additional personal tax, depending on how the money was distributed. At the same time, the corporation’s tax position, including its Capital Dividend Account (CDA), could influence how much wealth Jennifer could ultimately access personally and how tax-efficiently she could do so.
We worked with Jennifer to evaluate the available options, including whether a flow-through share investment could form part of an appropriate solution.
Understanding the planning opportunities
Before considering any investment strategy, it was important to understand how the building sale affected the corporation’s overall tax position.
The Capital Dividend Account (CDA)
In Canada, generally 50% of a capital gain is included in taxable income, while the non-taxable portion may contribute to a private corporation’s Capital Dividend Account. The CDA is a notional tax account that tracks certain amounts a corporation may be able to distribute to its Canadian-resident shareholders as tax-free capital dividends. This can create an opportunity for business owners to access some corporate wealth without triggering additional personal tax on the capital dividend itself. However, the available balance must be calculated carefully, considering relevant capital gains and losses, previous distributions and other applicable adjustments. Approval from CRA is also required.
Understanding Jennifer’s CDA position was therefore an important part of assessing how the proceeds from the building sale could support her personal financial goals.
The potential role of flow-through shares
Flow-through shares are designed to encourage investment in eligible Canadian resource activities, such as mineral exploration and development. Under the applicable tax rules, resource companies can transfer certain qualifying expenditures to Canadian taxable entities, including Canadian Controlled Private Corporations, who may then be able to deduct those expenditures against taxable income.
For an eligible investor, these deductions may help reduce taxable income. Depending on the circumstances, a flow-through share investment may therefore be worth considering when evaluating the tax implications of a significant capital gain.
The tax benefits must also be weighed against the investment’s costs, risks and future tax consequences. Flow-through shares can be speculative and subject to commodity prices, exploration results, share price volatility and liquidity constraints. Their adjusted cost base (ACB) is generally reduced to nil under the applicable tax rules, which can result in a capital gain on their subsequent sale.
The objective is not simply to obtain a tax deduction, but to determine whether the overall after-tax outcome makes sense.
Evaluating a structured flow-through share strategy
As part of Jennifer’s planning, we evaluated a structured flow-through share arrangement.
These structured flow throughs involve a third-party purchaser that agrees to immediately acquire the shares from the initial investor. Depending on the structure and contractual terms, this can provide greater clarity around the anticipated timing of the sale and the potential proceeds than an investment without an established exit arrangement.
Her tax specialists assessed the proposed strategy alongside the capital gain from the building sale, the corporation’s tax attributes and we incorporated their work into Jennifer’s broader financial objectives. This allowed us to consider the potential tax savings in the context of the investment costs, risks and expected after-tax proceeds. Because the ACB is adjusted to zero, half of the immediate proceeds from the sale of the flow through shares are added to the companies CDA, providing additional amounts that can be removed tax free.
Connecting corporate tax planning with personal wealth
For business owners, corporate and personal finances are closely connected. Decisions made within a corporation can influence retirement income, personal tax liabilities and the amount of wealth ultimately available to pass on to the next generation.
Jennifer’s situation provided an opportunity to consider several objectives together:
Manage tax exposure: Evaluate strategies that may reduce the overall tax burden associated with the building sale.
Make corporate wealth more accessible: Assess how funds could be distributed personally, including the potential use of tax-free capital dividends where available.
Preserve long-term wealth: Consider investment costs, risks and the amount of wealth expected to remain after tax.
Support retirement planning: Coordinate corporate assets and future withdrawals with personal retirement income needs.
Plan for the next generation: Consider how corporate tax decisions and distributions may affect the eventual transfer of family wealth.
Looking at these objectives together helps ensure that a decision intended to address an immediate tax liability is also assessed against the client’s longer-term financial priorities.
The value of integrated advice
Jennifer’s situation illustrates why planning around a significant capital gain should extend beyond calculating the immediate tax bill. The corporation’s tax position, available CDA balance, potential flow-through share investment, personal tax implications, retirement plans and estate objectives all form part of the same financial picture. Our role is to bring these considerations together, assess the available alternatives and help clients understand the potential benefits, trade-offs and risks before making important financial decisions. For incorporated business owners facing a significant capital gain or considering how to access accumulated corporate wealth, a coordinated approach to corporate tax and personal wealth planning can help ensure that today’s decisions support tomorrow’s goals.
Individuals should consult their tax specialists to ascertain the tax benefits.
Jack Fournier B.Sc, FMA, CIM®
Portfolio Manager | iA Private Wealth
Insurance Advisor | iA Private Wealth Insurance Agency*
700-609 Granville St. Vancouver, BC
p: 604 895 3348
jack@beaconwealthpartners.ca
Travis Kidson, B.Sc, CFP®, CIM®
Portfolio Manager | iA Private Wealth
Insurance Advisor | iA Private Wealth Insurance Agency*
700-609 Granville St. Vancouver, BC
p: 604 895 3486
travis@beaconwealthpartners.ca
This information has been prepared by Travis Kidson and Jack Fournier who are Portfolio Managers for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Managers can open accounts only in the provinces in which they are registered.
This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax, legal or investment advice. Please obtain independent professional advice, in the context of your particular circumstances.
iA Private Wealth Inc. is a member o the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
*Insurance products are provided through iA Private Wealth Insurance Agency which is a trade name of PPI Management Inc. Only products and services offered through iA Private Wealth Inc. are covered by the Canadian Investors Protection Fund.
Beacon Wealth Partners is a personal trade name of Jack Fournier and Travis Kidson.