How two specialists manage estate plans for incorporated doctors, dentists

It might feel counter-intuitive to say, but for professionally incorporated clients, saving, investing, and accumulating assets in their professional corporations was the easy part. These clients, often physicians and dentists, have used their professional corporations as a means of investing and saving at a lower corporate tax rate and over the long term they’ve benefitted from compounding on those less-taxed assets. In Ontario professional corporations were allowed as of 2001, with most provinces following suit over that decade. This means that the first generation of professionals who took meaningful benefit of the ability to incorporate are approaching retirement, the end of their lives, and conversations around the disposal of their incorporated assets after they pass on.

Kyle Richie and Andrew Feindel specialize in serving incorporated clients, both the holders of professional corporations and business owners who have a different kind of corporate status. The Wealth Advisors at Richie Feindel Wealth Management of Richardson Wealth explained that upon death, there is a serious risk of the assets left in a corporation being subject to double taxation. As laid out by Tim Cestnik, these clients’ assets in the corporation can be taxed on their gains after death and the corporation’s growth in value can be taxed as well. Effectively, the same growth can be taxed twice. Richie and Feindel explained how advisors with incorporated clients can protect against these risks when building estate plans for professional corporations.

“Once we’ve identified where clients’ cash flows are coming from and their long-term lifestyle costs, at very conservative rates of returns, we see that for the vast majority of our clients there’s still a significant amount of wealth that will be in their corporation that will not be taken out for living,” Richie says. “That’s when we start talking about what will happen to those assets they don’t expect to spend.”

Those “bottom assets,” Richie and Feindel explain, are at risk of the double taxation that Cestnik highlights. Upon the death of the corporation holder, or the death of their surviving spouse, the CRA effectively looks at those bottom assets and treats them as though they were written as a full dividend for the value of the corporation. That dividend alone could be subject to a marginal tax rate as high as 47 per cent, with exposure to the gains taxation in the mix as well. While there are some straightforward mitigating strategies, they cannot effectively offset the scale of the taxation that an incorporated professional’s bottom assets might be subject to upon death.

Some of the trouble with bottom assets is that we cannot predict when we will pass away, so Feindel and Richie note the importance of estimating those assets conservatively. Nevertheless, for the assets that are at an extremely low risk of ever being needed, they say that permanent insurance solutions can help facilitate a more tax efficient transfer to the next generation. They’ll explain to clients that over the course of the next decade, for example, they will shift those assets in the form of premiums into a permanent, joint last to die life insurance policy that will pay out to a client’s heirs at a significantly lower tax rate.

Through that process, though, Richie emphasizes that the goal is not about tax minimization. That is rather the means to achieving the maximization of after-tax assets. He argues that this distinction is a crucial one for advisors to keep in mind as they work to build estate plans for their incorporated clients.

Building those estate plans takes a huge amount of work on Richie and Feindel’s parts. They incorporate planning into each client meeting and outline how these strategies can function in the context of a wider investment plan. This steady stream of planning and estate advice means that the hard conversations around death and taxes involved in this process become easier for clients to handle. The two advisors will have estate planning conversations with almost every client, regardless of age. Once there are assets to be protected, they believe that this is a topic that should be brought up.

“I don’t think we have a single client who we haven’t brought this up with,” Feindel says. “I’m not saying that every client has insurance, most do, but we believe it’s a mistake not to bring this subject up. I have clients whose former advisors didn’t even address this when they had money inside the corporation. The fact that this wasn’t addressed and these clients will die with money in their corporations is a mistake on the part of their former advisors.”