Post Mortem Planning with Trevor Parry | E009
Reducing the tax implications of passing away.
Summary:
In this episode of Financial Planning for Canadian Business Owners, Jason Pereira, award-winning financial planner, university lecturer, writer, and host interviews Trevor Parry, President of TRP Strategy Group and Tax and Estate Expert. Trevor Parry discusses the ins and outs of post-mortem planning to prepare for what happens to the investments in your holding company after you pass away.
Episode Highlights:
● 00:47 – Jason Pereira introduces Trevor Parry.
● 01:35 – Trevor Parry describes who he is and what he does.
● 02:16 – They talk about what happens to investments when the owner of a holdings company passes away.
● 06:22 – What is a loss carry-back and pipeline transactions?
● 09:28 – How could a corporation essentially be double taxed?
● 13:44 – Capital dividends have no relevance in a pipeline.
● 16:24 – What is a spousal role and redeem?
● 18:31 – How can you reduce the cost of insurance through leverage?
● 22:38 – They aren’t going to get rid of capital dividend credits.
● 23:50 – Post mortem planning can be made understandable but not simple.
● 25:01 – United States rules regarding permanent life insurance are very different from Canada’s.
3 Key Points
1. Deemed dividends will be taxed as an ineligible dividend, a non-eligible dividend, or a little of both.
2. Post-mortem planning options include loss carry backs, share redemptions, pipeline transactions, and also a mixture that involves life insurance.
3. What is your gut sense of risk?
Tweetable Quotes:
● “I am the self-described tax mercenary. So, I am a lawyer by training, collecting a few tax degrees over the past few years and I have a religious devotion to helping entrepreneurs prudently and safely save money.” – Trevor Parry
● “Corporations are legal persons. They survive you. So, though the value of your shares now has been counted in your terminal return, assuming no roll-over, you still have to do with, or your estate has to do with that corporation.” – Trevor Parry
● “Canada, without a doubt, has the positive rules and regulations in the G7 when it comes to permanent life insurance.” – Trevor Parry
Resources Mentioned:
● Facebook – Jason Pereira’s Facebook
● LinkedIn – Jason Pereira’s LinkedIn
● FintechImpact.co – Website for Fintech Impact
● jasonpereira.ca – Jason Pereira’s
● trevorparry.com – TRP Strategy Group
● Trevor@trevorparry.com - Trevor Parry’s Email
Full Transcript:
Announcer: Welcome to the Financial Planning for Canadian Business Owners podcast. You will hear about industry insights with award-winning financial planner and entrepreneur, Jason Pereira. Through the interviews with different experts with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success and make the most of your business and life. Now your host, Jason Pereira.
Jason Pereira: Hello and welcome to Financial Planning for Canadian Business Owners. I'm your host, Jason Pereira. Before we get started today, just a quick reminder to sign up for my newsletter at jasonpereira.ca where you receive notifications of all my various podcasts and television appearances.
Jason Pereira: Now, on to today's show. Today I brought on Trevor Parry, president of TRP Strategy Group. Trevor's one of the more respected tax and estate planning experts in the country. I brought him on to discuss something called post-mortem planning. This is basically planning for what happens to your investments within your holding company when you pass away.
Jason Pereira: It sounds pretty dull, but quite honestly if you don't do it right, the tax rates are extortionate and planning correctly does involve complexity. I'm going to warn you, we get pretty deep on this. There's a lot of tax talk and it's a lot of heavy lifting. But if nothing else, take away the fact that if you're in this situation, you should be seeking out the right advice. With that, here's my interview with Trevor.
Jason Pereira: Welcome, Trevor.
Trevor Parry: Good morning.
Jason Pereira: Thanks for taking the time.
Trevor Parry: Thanks, wonderful to be here.
Jason Pereira: Yes, well it is morning, I offered you scotch and you declined because you're not that kind of guy.
Trevor Parry: It's only a problem if you admit you have one.
Jason Pereira: Exactly. Trevor Perry, tell us about who you are and what it is you do.
Trevor Parry: I am the self-described tax mercenary. I am a lawyer by training, collected a couple of tax degrees over the last few years. I have a religious devotion to helping entrepreneurs prudently and safely save money from our dear friends in Ottawa who have different intentions regarding tax rates.
Jason Pereira: I think they've demonstrated that different intention on multiple occasions. It keeps coming up on the podcast. The reason I brought you on is to discuss something called post-mortem planning. I've already talked about basically business owners, corporations, capital gains exemption, and basically why you need to have shareholder agreements and what happens when you die if you're a business owner.
Jason Pereira: That's an active corporation, let's talk about what happens when I'm a successful business owner and I've got a holding company that I've amassed a bunch of money into it. Let's use some simple numbers. We'll use, I basically managed to amass $2 million in there. I grew it to be $3 million. I've got a large gain there. I pass away and there are actually multiple levels of tax at play here that people don't stop to think about. Tell me what happens if I pass away and nothing gets done.
Trevor Parry: Just as an aside, it's not just business owners. The vast majority of physicians in Canada are incorporated. When they cease practicing, those medical professional corporations basically become passive holding companies. It's pervasive where this threat can be realized.
Trevor Parry: We have no estate tax in Canada, unlike the United States. But we do have the peril of double taxation. Very simply, you are deemed to have disposed of or sold all of your assets the moment before death. The spouse can elect a rollover, but if there's no spouse to roll things over, there is a tax bill due in your terminal return. Basically, it's a capital gain.
Trevor Parry: Currently in this province 26.7 and there are of course rumors of inclusion rate increases, which if the government goes to a 75% inclusion rate, your capital gains rate is 40%. Which is, I mean, in the investment business is terrifying enough because you're going to be triggering substantial sums. But at death it's quite large. I mean, this is the point people miss because the much maligned 1%, we try to identify those folks who are in it. Well, any individual who's truly middle-class at the point of death is absolutely part of the 1% and the government knows it.
Trevor Parry: The first hurdle is the deemed disposition. That's a capital gain.
Jason Pereira: That's some of the shares that I own the corporation and in all likelihood, I started that corporate with next to nothing. I've probably got a cost base of zero or what's called one, a nominal amount per share. I've got a cost base of one, whatever the company's worth, again, $3 million. Now those shares are worth $3 million.
Trevor Parry: That's right.
Jason Pereira: Right? I've got a $2.999999 million gain.
Trevor Parry: Yeah, at capital gains rate, let's say between 27% and 40%. That's just the first leg of tax. Remember, corporations are legal persons. They survive you. Though the value of your shares has now been counted in your terminal return assuming no rollover, you still have to deal with or your estate has to deal with that corporation. We assume that the estate has done the proper filing so that it's a graduated rate of state, which is critical. You need to look at all key documents to make sure that's done.
Trevor Parry: But what will happen is that if the intention and wish of the now deceased entrepreneur or physician was to pass their life's work on to their next generation, then in order to do it, we have to dispose of the company. We've got to wind it up or wait to wind up their shares in it. That's another leg of tax. That's a deemed dividend. The deemed dividend will be taxed in one of two ways, either an eligible dividend or a noneligible dividend or a bit of both. Most of the time I see a sprinkling of both. I use in Ontario roughly an estimated rate of 45%.
Trevor Parry: Now there are people in our industry unfortunately they like to terrify people by saying, "If you don't do anything, it's very likely you're going to pay double tax." I would argue that's negligence. People don't act without planning. What happens is very simple. You have a choice. With prudent, tried and true planning that's been around for decades, you can really elect what tax liability you want to pay. Is it capital gains or is it dividends? It's a bit like Monty Hall in Let's Make a Deal. Do you want door number one, door number two? In fact there is a door number three.
Jason Pereira: I was just going to stop for a sec. The big issue as we said, the corporation is a separate entity. What people have a hard time wrapping their heads around sometimes is that that $3 million investment I had in the corporation, which had a $2 million capital gain, that gain does not get realized when I die. What you're talking about is getting that passed on the next generation. It's about taking that $3 million and passing it onto the kids.
Jason Pereira: Well, I just paid on my shares tax-
Trevor Parry: About $800,000.
Jason Pereira: Exactly, then the corporation hasn't even realized the capital gain on the investment it's got. There's your double taxation. Nevermind the fact that you have to flow that through as a taxable dividend to that to the kids.
Trevor Parry: That's going to be if we're at 45% or something like that, there's $1.4 million of your three gone. The trick here is that if you're going to wind up the company and you do this within the first year since the creation of the estate, so let's say within a year of death, you can do what's called a loss carryback. That's complex, but it's common planning. Again, you need the right experts to put it together.
Trevor Parry: But what in essence happens is that when the shares are bought back from your estate by the corporation for the purposes of winding up the company, that's called a share redemption. That triggers a capital loss. That capital loss can be carried back. You have to refile your-
Jason Pereira: Talk about where does a capital loss come from at this point. I [crosstalk 00:06:58]-
Trevor Parry: The capital loss has been suffered by the estate. You're $3 million of shares have been redeemed creating in essence a $3 million loss or something to that effect, a substantial loss, usually equivalent to the capital gain that you paid upon death. Well, then it's logical. It's section 164 subsection six of the act. We within a year, trigger the redemption, carry the loss back. If everything goes perfectly and it will, we've eliminated at least the first leg. We've eliminated the capital gain, but we're left with the dividend.
Jason Pereira: The triggered capital gain that happens when you die on the value of the shares essentially, you pay it when you die, but the estate gets the loss. It all wipes out and that's net zero.
Trevor Parry: Exactly. That is share carry back ... or sorry, loss carry back share redemption strategies. Those we see all the time. That is by the way the default strategy that if our wonderful government decides to muck around with capital gains rates, we always have that. Because there is another strategy as I said, there's three doors. If you would prefer to pay capital gains, what we want to do is eliminate the dividend. That's done by something called a pipeline transaction or a bump transaction.
Trevor Parry: Pipeline transactions have been around for years. The government has provided a wonderful substantial guidance on how to do it. It basically involves creating a new corporation, issuing debt, and having the estate take shares and debt in return for absorbing or amalgamating the original corporation into the new co. As you know, what will happen is it bumps up the value of the shares.
Jason Pereira: My kids set up a new corporation, they basically acquire the shares of my corporation from the estate in exchange for a loan payable. Then they basically amalgamate both corps into one new corp.
Trevor Parry: Right.
Jason Pereira: Then they repay the loan.
Trevor Parry: Yeah, yeah. It takes between 36 and 48 months to properly execute, but that will result in capital gains. If you're sitting here saying today, "Well, we have four years and we'd rather pay 26 and change rather than 48," you're going to do pipeline. There are some issues with pipeline. I mean, in the wonderful [more no 00:00:08:59] proposals of a couple of years ago it would have wiped out pipeline. There are forces inside of CRA and finance, although I believe them to be in a minority that don't like pipeline. They characterize it as surplus stripping and things like that.
Trevor Parry: But for at least two decades they have given us very clear guidance. These transactions, as long as they're not abusive, if executed correctly are fine. You really have two options. There are ways to enhance those further. It usually involves the use of life insurance, particularly when you look at loss carry back.
Jason Pereira: Let's talk about this step. If I do nothing, I don't know about this, I don't even know about carry back. I'm going to pay 26% on the value of the share's growth. Then I'm going to basically trigger the gain within the corporation to get the money out and then pay 48 on the way out.
Trevor Parry: Right.
Jason Pereira: Essentially we're looking at when you add this all up, you seen numbers that exceed 70% of the amount.
Trevor Parry: That's where if you did it outside of-
Jason Pereira: If you knew nothing about what was going on.
Trevor Parry: Let's say the individual passes and they don't go to a competent professional until 18 months after. Now you're paying double tax.
Jason Pereira: But that happens, I mean, it happens all the time, right? In that worst case scenario, you're paying double tax your tax rate. That $3 million, 70% of it just disappears. Door number one as we said was the carryback in which case the first level task gets wiped out. The second level of tax is dividends, in which case now we're at 48, which still is pretty substantial.
Trevor Parry: It can be.
Jason Pereira: We're looking at almost $1.5 million there.
Trevor Parry: Again, you'll get some eligible dividends. I usually use 45.
Jason Pereira: Plus the capital dividend account, but nevertheless.
Trevor Parry: You'll get your refundable dividend tax on hand back. There are some benefits.
Jason Pereira: Then we just established number three, which was the capital gains scenario with the pipeline. Tell us about door number four.
Trevor Parry: Door number three is where we are at.
Jason Pereira: Door number three, yes.
Trevor Parry: Door number three, it's a hybrid. We use a bit of both.
Jason Pereira: That's right, yeah.
Trevor Parry: We put on our wizard's hats and showed people the secrets of the temple. But it usually involves the use of life insurance. The reason is, as you know, life insurance will pay based on the age of the individual, the cost of the insurance, the adjusted cost based on the policy. It creates as we know capital dividend credits.
Jason Pereira: Yes. After we talked about that briefly on other shows, but the good thing about capital dividend credits is those can come out to the shareholders tax free at any time. Normally that's the portion of taxable capital gains that are not taxable, so 50%. But when it comes to insurance, that number is way higher and can eventually reach the entirety of the policy.
Trevor Parry: Canada without a doubt, has the most positive rules and regulations in the G7 when it comes to permanent life insurance. If you read between the lines in the Income Tax Act, anybody with wherewithal with wealth should be putting this stuff in place.
Jason Pereira: Interesting given the fact that our first prime minister both was also prime minister and ran Canada Life at the same time. There's conflicts of interest. We've wrote the book on that. Continue.
Trevor Parry: What happens is that when particularly we look at the share redemption strategy, you have to be aware of some very technical rules called the stop loss rules. It would not make sense out of any sense of fairness that you could take a whole of money you receive now tax-free and use that whole bunch of tax-free money to redeem all of your shares. They created these rules to equalize.
Trevor Parry: In this scenario where we have no ability to roll over the shares, so it's the estate of the deceased. We have a payment to the corporation of insurance proceeds, which has created a credit to capital dividend, we can redeem up to half of the shares or half of the loss created by redemption through capital dividend. If we go more than that, we're going to start to lose, stop loss rules will be triggered. We're going to start to disallow or eliminate our capital loss.
Trevor Parry: It allows you effectively, if the redemption was $3 million bucks and you have a million and a half of capital dividend, well logically your dividend tax rate just went from my use 45 down to 22 and a half. That's better than capital gains rates. For the people who are worried about an inclusion rate increase, there is hope, but you have to be prepared. You've got to be able to look at the numbers and understand how things are being created.
Trevor Parry: Now the true door number three is where we start using elements of both. In that instance, we are looking at a reorganization of the company, a very small one at the time. You're putting the insurance in place often to issue what we call special class insurance shares or skinny shares or whatever you want. But these track the cash value of the policy. They will be entitled to receive, subject to directors, the capital dividend credit. They will also prevent the cash value from being added back into the proceeds of deemed disposition at death.
Trevor Parry: If you had a $5 million cash value in a policy that you put in place with good conscience and good planning to cover off tax liabilities, guess what? $5 million bucks gets added into your deemed disposition.
Jason Pereira: It's gets paid into the corporation. It increases the value. But in this case, that cash value is being attributable solely to those shares-
Trevor Parry: Who are going to be owned by your beneficiaries.
Jason Pereira: Exactly.
Trevor Parry: Then if we're doing a pipeline, capital dividends have no relevance in a pipeline. You simply pay out the capital dividend credit through the special shares. You've now effectively been able to reduce or somewhat slow the growth of the company because you're not adding this money back in. That's great because we've now reduced our deemed disposition.
Trevor Parry: Now we want to deal with the deemed dividend factors. We still want that because if you have enough passive investment holding company, as you know, you're most likely giving rise to the creation of a refundable dividend tax on hand credit. You don't want to give that to the government. If you do it pure pipeline, in fact you do.
Jason Pereira: For those of you who want a refresher on that, there was my episode with Kim Moody where we talked about those notional accounts. Pay close attention because those are very important.
Trevor Parry: He's a snappier dresser than I am.
Jason Pereira: It's a pretty close race. He wears more bright colors.
Trevor Parry: Yes, he does. The key is to get your RDTOH balances back in. By starting with perhaps we'll do some share redemption to reduce our already reduced deemed disposition that will further reduce our effective first leg of tax. Then we will execute pipeline to take out the remaining dividends. Again, each case is different. The older you are, the numbers aren't as powerful in certain instances. I've seen them where folks are in their 80s and it just doesn't work. You're left with really the share redemption loss carryback or pipeline and you don't mix the two.
Trevor Parry: But the key is really to be able to whiteboard it. Because tax at the end of the day is connect the dots-
Jason Pereira: Exactly.
Trevor Parry: ... and checklist.
Jason Pereira: There's no one silver bullet here. We're combining a bunch of strategies, comparing different strategies to fit the situation and determining what works best for the client.
Trevor Parry: The ability to pivot and the ability to provide-
Jason Pereira: Absolutely.
Trevor Parry: ... prudent and flexible planning because if our dear friends eliminate the ability to pipeline, then we are left with sharing redemption and certain facets of the hybrid will not become manifest. We always want to be able to not lock a client into planning rigidity.
Jason Pereira: Yep. No, it makes sense. I mean, you're talking about pretty big disparities. We're talking about rates that with no knowledge and no proper advice, you're looking at losing in the 70s of that $3 million.
Trevor Parry: In the 80s if they gave 40% tax rate.
Jason Pereira: In the 80s if it goes to the 40%. I mean, that's God that's-
Trevor Parry: Marxist is what it is.
Jason Pereira: Well, yeah, I mean, even the former head of the NDP said anything North of 50% is confiscation. That came from the NDP.
Trevor Parry: I'm sure they've thrown him out of the party.
Jason Pereira: Yeah. He's no longer running it. Anyway, there's that, all the way down to basically the 20s we're talking about, the low 20s.
Trevor Parry: You get teens, you can get teens.
Jason Pereira: Exactly right. We've seen these cases where they'd get below 20%. When you think about first of all, it's unfair to the average consumer. The tax code is so complex that literally-
Trevor Parry: Jason, you can actually in certain instances, again, if you get the client, if they're good savers and they're younger, you can get to zero. That's a modification of our share redemption. It's called a spousal rule and redeem. I do this a lot with younger doctors or particularly dentists because dentists tend to get saving faster than doctors, but just to paint with a wide brush.
Jason Pereira: Well, their debt typically is less when they get out of school.
Trevor Parry: What happens is that rather than the estate acquiring the shares upon death, the spouse receives them pursuant to a spousal rollover. In this instance again, life insurance is critical. You will create that capital dividend credit upon the death of the insured, but because you're redeeming the shares from an individual, a corporeal being rather than an estate, a trust-
Jason Pereira: You haven't triggered that first level of tax.
Trevor Parry: You don't have a deemed disposition and there is no stop-loss rules. It is theoretically possible. I illustrated it many a time where zero is a potential tax rate on corporate redemption in these instances. When you get into the very, very high-net worth folks, your insurance costs can be quite astronomical or very high, in which case we probably have a true conversation [crosstalk 00:17:31]-
Jason Pereira: Well, astronomical compared to what is the issue, right? We're talking about losing 70% or something. I mean, that's the advantage that we often spell out. End of the day, you got to pay something for insurance, but that number is going to be a heck of a lower of a tax burden in these cases.
Trevor Parry: Again, there's prudent use of leverage in financing insurance-
Jason Pereira: Absolutely.
Trevor Parry: ... too. You can really mitigate the impact to cashflow.
Jason Pereira: Let's talk about that. We've talked about different strategies for how we basically deal with this and with massive impact differences. I mean, we're talking more than four X differences in taxation. Which again, it was as I was starting out with earlier, the fact that the tax code is this convoluted doesn't really service the Canadian consumer, but it does mean that business owners need to take the time to get the right professionals in place to make sure that their families are going to definitely benefit from what it is that they've built.
Jason Pereira: Now, we'll go back to the insurance piece. One of the pushbacks is always quite simply like, "Oh, basically I could do a better return in my business," or, "Why would I pay this?" Well, the trade offs are, as I said, one, you're going to have a tax bill one way or another. Would you rather pay pennies to the insurance company or dollars to the government? Your choice, depending on the math of it. Let's talk about how we can reduce the cost of insurance through leverage. How's that work?
Trevor Parry: We've already started down the road. I have four questions that I pose to the client. Usually resulting in a 15 to 20-page treatise. The first thing I ask is do you need the coverage? We go through intensive financial planning and rip the corporation apart and try to get a good sense of realistic tax liabilities. The answer will come back, yes. In most cases you need the coverage because you're funding your liability at a discounted rate. That's all insurance does. That and it's a big accordion folder.
Trevor Parry: The second is, "Can you afford it?" Which is an understanding of cashflow because you cannot impair their cashflow. Unfortunately there are charlatans in our industry who will use financial alchemy to do just that. Being cognizant of that and of course the psychology of insurance and of cashflow. Nobody wants to buy life insurance other than insurance agents.
Jason Pereira: No one ever wakes up and says, "Today's my day. I'm going to make it happen and buy life insurance."
Trevor Parry: "Honey, it's Patrick. He bought life insurance." I remember that ad.
Jason Pereira: Great commercial, because it had never actually happened.
Trevor Parry: No one wants to buy it, but if you focus on the tax liability, on the tax planning, on the creating an asset from day one, creating significant cashflow or cash value as possible, these things mitigate against the psychology of it. The second question is an understanding of cashflow. "Can they afford it? Are they ready to afford it?"
Trevor Parry: The third question is, "Can you do better with this money that we're going to put into a policy?" Invariably because of course, real estate never goes down in this fair city.
Jason Pereira: Let's not go there. But nevertheless, the real estate bugs believe that and will believe nothing else.
Trevor Parry: And some of the investment people too. But what will happen is that they'll always come back and say, yes. Usually the smart ones are the entrepreneurs. They say, "Listen, I've got a 20% IRR in my company, I can do better."
Jason Pereira: Absolutely.
Trevor Parry: This is where the fourth question comes on and I put on my lawyer's hat. I say, "Okay, what's your gut sense of risk?" Then we nuclear test the transaction. We show stress-tested numbers, lower performance in the policy, what increase in borrowing costs, what happens if an unforeseen event happens and we have to take this down? What are the tax consequences? Because it's a complex transaction.
Jason Pereira: The steps pretty much our policy is established, and I think I talked about this in the show before, you can put additional funds into a policy depending on the type. That creates a cash value. What we're doing here is we're cutting the check to the insurance company and then turning around and borrowing back cash that's within that policy right back [crosstalk 00:21:00].
Trevor Parry: You're collateralizing the policy and securing against that. It gives rise to interest rate deductions and a deduction of something called-
Jason Pereira: So does the cost.
Trevor Parry: ... net cost of your insurance. The impact of cashflow is extremely, it's attractive in the sense that you can keep most of your money. This is how most of the large-case planning-driven insurance cases are being done in the country, overwhelmingly.
Jason Pereira: But it works. I mean, first of all it reduces the out-of-pocket outlay because now I'm getting back a lot of what I put in, most of what I put in. Yeah, I got to pay interest now, but I'm getting a deduction on that. I'm getting a deduction on CPI. That reduces that. Frankly, I can wipe out the loan anytime I choose as long as I haven't blown up the investment.
Trevor Parry: Exactly, and you need to have proper advice. There are riskier versions or more aggressive versions of that transaction, but the client has to first have a fundamental understanding of the DNA level, comfort level of dealing with debt. I usually tell the client, "You're not going to have this paid off at death. This is an intermediate strategy that at some point you're going to sell an asset, the business, who knows, take the loan out because then the policy just becomes an absolute war chest of tax free money."
Jason Pereira: When you decide to retire and you want to stop playing this game, you can wipe out the loan, but if you die between now and then, then yeah, the loan will be taken care of by the insurance policy.
Trevor Parry: Exactly. It can work in the right scenario with the right parties, it works very well. Again, there is some aggressive use out there. Our friends at CRA are, I believe, starting to police this stuff.
Jason Pereira: We've seen that. There's been a lot of change to insurance law in the last four to six years.
Trevor Parry: Yeah. I mean, and most of it's just been updating. Not so much like the 2016 exempt changes. We're just updating for interest rates and mortality.
Jason Pereira: That's fine.
Trevor Parry: Not a real problem. Competent folks like yourself and myself in the industry are able to deal with that.
Jason Pereira: And realize it was necessary.
Trevor Parry: Yeah, sure.
Jason Pereira: People were living longer. It just didn't make sense to give them the same kind of [crosstalk 00:22:41]-
Trevor Parry: But, there's always the Chicken Little, the sky is falling mentality that they're going to get rid of capital dividend credits. Of course, they're not.
Jason Pereira: Whoa, if they did that.
Trevor Parry: No, it's not happening. I think you're more likely to see further policing and further attention to what they determined to be aggressive use. But if you go into it with eyes open and you're properly advised and you don't undertake financial alchemy, and then remember the golden rule in tax, "Pigs get fat and hogs get slaughtered," I think you're fine. I mean, I've undertaken many of these transactions. I'm very comfortable with it. We engage a team of folks like yourself with lots of letters beside their names to make sure that it works.
Jason Pereira: At the end of the day, what it comes down to is the business owner and their choice. I mean their choice is quite simple. They can either do nothing and hope that people left behind know enough to basically get something taken care of within the timeframe allotted. Otherwise, they're going to leave behind an unbelievable minority of what was left behind for them, which doesn't make much sense. Or take it upon themselves to do a little bit of planning ahead of time.
Jason Pereira: You know what? Everything we talked about is complex. The average business owner is not going to follow along with everything we said today. But frankly, putting together the right team with the accountant, the lawyer, not the lawyer, [pitch the lawyer 00:23:53].
Trevor Parry: One of my mantras is that, because I get people saying this is complex and hey, it is. Just look at the size of the Income Tax Act. My job, your job, very straightforward. We can make this understandable. We can not make this simple. Simple is a sales pitch.
Jason Pereira: As I say to clients all the time who basically come to me and they're like, "I lead a simple life."
Jason Pereira: "You're an American citizen. You have a corporation, an operating corporation. You have property in other countries. No, you don't."
Trevor Parry: Yeah, it's not simple.
Jason Pereira: "Well, I want a simple plan."
Jason Pereira: "Well, then sell everything and renounce your citizenship because frankly we can't make a complex situation easy and simple on the estate planning route. It's just not the case."
Trevor Parry: I would tell them never to renounce because if they renounce for tax purposes they will be barred entry into the US, et cetera, et cetera.
Jason Pereira: Renouncing is not as hard as people think it is, but for tax-
Trevor Parry: Avoid it.
Jason Pereira: It's not necessarily what you want to do because it really isn't that big of a pain in butt. But again, if you're a US citizen, there's certain degrees of planning you got to do. There's complexity to that. You can't escape it. You either take the chances on not letting be back in the country or you basically plan around it.
Trevor Parry: The other thing just as you're talking about US citizenship, insurance planning is wonderful stuff. You should know as you do that the US rules governing permanent life insurance are very different than ours. If you are a US citizen or a US person and you want to buy a robust Canadian policy for purposes of funding your tax liabilities as we talked about today, arguably you can't.
Trevor Parry: You need to have actuarial eyes on what you're looking at to make sure that you're compliant with the IRS because they will tax you on the growth of the policy when the Canadians won't. Death benefits are not necessarily received tax-free. Estate tax perils and all kinds of stuff subject of a whole different talk.
Jason Pereira: Yeah, I mean besides having the cross border expert in there who understands the tax situation, you also need to make sure that the company that you're dealing with and the policy you're dealing with it can play within those rules. Not every Canadian policy does, that's for sure.
Trevor Parry: Most don't. I mean, most whole life policies don't fit. It's good. Coming from the actuarial world, I know a number of folks who are very good at cross border compliance. If your listeners need help, they can contact you and we can gladly pass along those names.
Jason Pereira: Great. Well Trevor, this has been a heavy lifting topic, but one that's very important because when we start talking about tax rates that are north of 70-
Trevor Parry: They're not morally defensible.
Jason Pereira: Yeah, exactly. I mean, this is big money, right? I mean, we're not talking about this for key people who have holding companies that are sitting on $20,000 right? These are people who use these things.
Trevor Parry: Remember, our dear friends in government want you to do nothing.
Jason Pereira: Exactly. Well, I mean the choice is you educate yourself, get the right people in place, you basically you do the right planning. It's going to cost a little bit. It's going to cost you a fraction of what they would otherwise receive if you did nothing. They win every time someone doesn't plan. Thanks for coming in. This was again a heavy-lifting topic, but an important one.
Jason Pereira: Where can people find you?
Trevor Parry: Trevor at trevorparry.com. That's Parry with an A.
Jason Pereira: Excellent, thanks again.
Jason Pereira: That was my interview with Trevor Parry. As I warned you, this got pretty heavy and the tax rates got extortionate. Hopefully this resonated with many of you and has made you realize that you need to do some planning around the assets within your holding company to make sure that those assets go primarily to your family and not to the government.
Jason Pereira: As always, this has been the Financial Planning for Business Owners podcast. I'm your host,
Jason Pereira. If you enjoy this podcast, please leave a review. Until next time, take care.
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