Written by Jack Fallon
If you have a Canadian Controlled Private Corporation, (“CCPC”) you may be taking advantage of the Small Business Deduction when filing your corporate taxes. At time of writing, this deduction applies to $500,000 of corporate income taxes for eligible businesses — meaning you can pay less tax on the first $500,000 of your business income.
If you are taking advantage of this deduction, and the person you want to be the estate trustee (formerly, “executor”) of your estate is also a small business owner who takes advantage of this deduction, you may want to think twice before nominating them to be your estate trustee.
Subsection 125(2) of the Income Tax Act says that, by default, the small business deduction does not apply if you have more than one, “associated” businesses. The definition of “associated” businesses includes companies that are controlled by the same person, which prevents people from nominally creating multiple businesses to use this tax credit more than once.
If you do have “associated” businesses, you can still elect to get the small business deduction if you file correctly, but it would only apply to $500,000 of income split between the businesses.
How does this relate to estate planning? When you die, your estate trustee takes temporary control of all of your assets, including any businesses you might have. If you are a small business owner, and your estate trustee is also a small business owner, suddenly those businesses become “associated” – even if those businesses are completely unrelated. If that happens, the small business deduction that each business would have been eligible for would be split between them — because the same person would be controlling both businesses.
In this scenario, at current tax rates, the extra tax could be in the neighbourhood of $70,000, and your estate trustee would be in the unfortunate position of needing to allocate that loss between their own business, and yours. Since your estate trustee will have a legal obligation to act in your estate’s best interests, they may be duty-bound to sacrifice their own personal benefit for the benefit of your Estate.
Good estate planning for business owners requires careful consideration. This is just one example to illustrate why business-owners — whether you have a professional corporation, a partnership, or private business assets of any kind — would be well advised to consult an estate-planning lawyer when making business succession and other testamentary plans.
Disclaimer: This blog post should not be considered or relied upon as tax advice. We are not tax lawyers or qualified accountants. We aim to share information about the estate-related implications of appointing business owners as executors and trustees.