If the estate freeze was not completed, this is what may have happened: your dad owned all the shares in the corporation. On his death, the shares of the corporation would be deemed to be sold, and tax would be owing on the gain. Then, when the investments in the corporation are sold, tax is owing on the gains. Then, when the shareholders draw the money in the form of a dividend, they get taxed. This is referred to as double or triple taxation.
The estate freeze froze the value of your parents’ shares, and all future growth of the corporation was attributed to you and your brother. This move eliminated or minimized the first layer of tax described above. There will still be capital gains tax, paid by the corporation, when the investments are sold, and tax when you draw the money as dividends, paid personally.
Insurance
Insurance is sometimes used within a corporation to compensate for the tax loss as the corporation is transferred from one generation to the next. The other use of insurance is to form part of the conservative piece of an investment portfolio on money that will never be spent. The idea is to have a little more of a tilt toward investments that generate capital gains, for tax efficiency in the corporation, and the insurance protects against negative markets at the time of death.
At your dad’s passing, the insurance is paid into the corporation and creates a nominal account (an accounting term for an imaginary account) called the CDA, capital dividend account. The value of the CDA will equal the value of the tax-free amount of the insurance proceeds, which should be most if not all of the $1 million. At that time, a tax-free CDA dividend can be paid out to the shareholders, you and your brother.
Should you move all the investments to cash?
You will first need to confirm with the financial institution holding the investments what its policies are. You will likely find that where probate is required, it must be completed before any changes to the investments can be made. This means no changes to the non-registered account; however, RRSP/RRIF and TFSA accounts with named beneficiaries are not subject to probate and can be traded.
Before making any trades, consider how the beneficiaries may react to your investment decisions, and their plans for the money they will receive. The best solution is likely to have the beneficiaries complete the necessary paperwork as soon as possible so they receive the proceeds or investments in kind within a few weeks.
What about trading investments in the holding company?
With your parents’ personal holdings, the beneficiaries receive the money tax-free, after the estate pays the tax, which may seem all one and the same. This is not the case with investments in the holding company, or holdco. You and your brother will receive taxable dividends unless they are tax-free CDA dividends. If you are collecting OAS now, you might find it all clawed back once you draw dividends from the holdco.
Also, capital losses within the holdco reduce the value of the CDA, and capital gains increase the value of the CDA. It may be best to pay out all your tax-free CDA dividends before selling an investment that is down in value, which would reduce the amount you can pay out tax-free.
