Your Silent Business Partner

Written By: John Wesley, CLU, CH.F.C.
Sun Alliance Insurance Co.
Originally Published in the August 1992
issue of The Outfitter Magazine.


I am sure, whether you have acted upon it or not, you have considered how or whom you are going to sell or pass your business to, in the event of retirement or death. No matter how you dispose of your interests in your business, you have a silent partner, the tax man.

Since 1972, all tax payers have been required to include a portion of their realized capital gains (with certain limits) in income. In turn, you are also entitled to deduct a portion of realized capital losses.

A Capital Gain occurs when a capital property (including a business) is sold and the proceeds exceed the cost of the property. The amount of the gain is the excess over the cost of the property. This gain is exposed to the Capital Gains tax which can grow to be quite substantial over time. A sale of your business is deemed to have taken place last night if you die today and the tax is also applicable at that time, unless the shares of the business are rolled over to your spouse. Once your spouse transfers ownership either by sale or death, the tax is payable.

Taxation has never been a very simple subject to explain, however we all understand that when we owe it, we must pay it. The actual amount of tax payable is different for every situation depending upon, the value in 1972, when the business was purchased, the amount invested in the business over time and it’s fair market value today. As you can see your accountant or competent financial planner may be the people to calculate your potential tax liability.

For the purpose of the following illustration I have simplified the calculations; these however, are not far from the truth in this scenario:

1972 property/business value
Present fair market value
Investment in business

Lifetime capital gains exemption
($500,000 if incorporated)
Minus 1972 value
Capital Gain
Taxable capital gain (maximum 75% of gain)
If taxable at personal rate of 35%
tax due

This amount is an amount you cannot pay by VISA. You don’t want to be put in a position where you must sell the business to save it. In that case, no one wins except the government.

There are a few ways to solve this problem ahead of time, short of winning a lottery. One is to save the money yourself, but you must save with after-tax dollars, pay tax on the growth of the fund, inflation continues to erode the value and you can’t dip into the fund at any time because it will never reach the goal. Of course, if you die during this time the funds will not have grown to a value large enough to pay the tax. If you have excess dollars and the time, it can work, but patience and restraint are the most difficult factors.

Your second choice is to insure in the event of death and have the cash you need, when you need it, tax-free for as low as 3% of the required funds per year to age 100. This method ensures the smooth transition of the business to the intended parties and is especially simple in a family business.

A third option is an estate freeze and both lawyers and accountants must be consulted when this option is considered because it is virtually a final decision and very difficult, costly and time consuming to undo. This is one way to defer the capital gains tax until the death of the owner and can be useful in the family situation under the right circumstances.

Spending time to plan in advance can save thousands from going to the government. Please call the NOTO office if you would like further information.

John is the Marketing Director, Ontario Region for Sun Alliance, with over 20 years experience in life insurance, planning, sales and marketing. He has been a moderator for the Life Underwriters Association of Canada Training Course for over 10 years. 


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