It may not become a household name, but this financial strategy could help your clients leave more behind for their loved ones
These days, it seems every financial maneuver needs a catchy name to stick. Take the "RRSP Meltdown Strategy," for instance—it’s simply a way to withdraw money from registered accounts under lower tax brackets. Then there’s the “Smith Maneuver,” which involves repositioning loaned money to attach it to investments, making the interest tax-deductible.
About a decade ago, I developed my own financial strategy. I’m not claiming to be the first to use it, but it’s certainly underutilized despite its significant benefits—especially with the new capital gain inclusion rates. For fun, let’s call it the “Connon Capital Gain Collapse,” or perhaps just “The Connon Collapse.” (Yes, I’ll admit it’s my ego wanting something named after me.)
How it all started
The idea came to me about 10 years ago, after my mother passed away. She and my father owned a property in Florida with roughly $400,000 in capital gains. My mother had very little income, but my parents jointly held an investment portfolio with significant unrealized gains. When reviewing my mom’s final tax return with an accountant, he explained that we wouldn’t need to pay any taxes because everything could simply roll over to my dad.
Curious, I asked, “Do we have to go this route?” He said no, but most people prefer it to avoid immediate taxes. Then I asked, “What if we transferred her portion of the property to my dad at market value rather than cost and paid the tax now?” My thinking was simple: take advantage of my mom’s lower tax rate since we were planning to sell the property soon anyway.
That’s exactly what we did, splitting the gain between two taxpayers. When we sold the condo the following year, this decision saved us a significant amount in taxes.
A broader application
While this worked well in my personal situation, it also has broader applications for other scenarios. Many of my senior clients, particularly those in their late 80s or 90s, have a primary goal of maximizing the inheritance they pass on to their children.
Shortly after my experience with my mom, we had a client whose husband passed away at 91, leaving behind his 90-year-old wife. They had a $1,000,000 open account with a $500,000 adjusted cost base (ACB) and $500,000 in RRIFs. Typically, we would transfer the open account at cost. However, I proposed a different approach to the family: transferring 50% of the joint account at market value rather than cost, realizing the gains on the first spouse’s final tax return.
Yes, this would mean paying some tax upfront. But the long-term savings could be substantial. Let’s break it down:
- Without this strategy, the surviving spouse’s final tax return could result in $358,000 of taxes in Ontario, based on $750,000 of taxable income.
- By realizing 50% of the gains now, the first spouse would pay $31,525 in taxes, and the survivor would pay $291,000. Total taxes: $322,525—a savings of $35,475.
- With the new capital gain inclusion rate, the savings grow to $57,475, reducing total taxes from $380,000 to $322,525.
That’s nearly $60,000 more going to the children instead of the government.
Key considerations
This strategy isn’t for everyone. It’s best suited for older clients where the second spouse may not outlive the tax-deferral period. Additionally, paying taxes earlier means losing the compounding benefit of those funds. Accountants often push back, aiming to minimize this year’s taxes. However, once families understand the long-term benefits, it’s a powerful way to maximize estate value.
The “Connon Collapse” may not become a household name, but it’s a strategy worth considering for clients looking to leave more behind for their loved ones.
Michael Connon is a Senior Financial Advisor, The McClelland Financial Group of Assante Capital Management Ltd.
