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Estates & Wills & Trusts, Tax

Corporation can be effective wealth preservation tool

For some individuals, a corporation can play a key role in personal wealth management — but it is crucial to undertake a cost-benefit analysis before pursuing this strategy, Calgary tax and fiduciary services lawyer Dennis Nerland tells

As Nerland, a founding partner of Shea Nerland Law and leader of the firm's tax and estate planning practice, explains, corporations are able to own property and carry on business — and the income they generate is usually taxed at a much lower rate than income generated by an individual.

“If the tax savings are reinvested in the business, producing more business income which in turn is taxed favourably, and so on, the result is a geometric progression of after-tax savings which outstrips rival strategies,” he says.

A corporation can also be used for wealth preservation as it has a distinct liability profile from its shareholders.

“The corporation alone is liable for its obligations, and the liability of its shareholders is limited to the amount of their investment in the corporation,” says Nerland.

A private corporation’s shares may also not be required to be probated at death, which Nerland says may provide advantages to the survivors.

Another hidden benefit, he says, is that a corporation is a familiar legal structure which lends itself to a well-understood governance platform. This, says Nerland, can be easily used to grow the character of the next generation by including them in the meetings. 

“This has been shown time and again by the empirical studies to be a superior way to facilitate the successful intergenerational transfer of assets,” he says.

At the same time, corporations are not an appropriate estate planning tool for everyone. The ideal candidate is any Canadian directly or indirectly holding in excess of $500,000 of tangible or intangible asset value, says Nerland.

“This is the break point where the value of the planning exceeds the direct costs and opportunity costs by a wide enough margin to be of value to the client,” he adds.

Nerland says there are also a number of disadvantages to using a corporation, which should be fully accounted for in a cost-benefit analysis. These include the additional professional costs, such as accounting and legal, increased complexity and an incremental compliance burden.

Ultimately, a lawyer can help individuals decide whether a corporation is a proper fit for their situation by undertaking and explaining the cost-benefit calculations, says Nerland.

If appropriate, a lawyer will then assist with the incorporation of the corporate vehicle, transferring the assets into the vehicle and constructing the governance plan.

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