Client profile

A successful business-owner couple has a happy, but taxing, problem: millions of dollars in gains from two thriving businesses, and a supersized tax liability to go with them. A health crisis reminds the couple that long-delayed estate planning can’t be put off any longer.

*These are hypothetical clients. Any resemblance to real persons, living or dead, is purely coincidental.

The situation

Rui Curto* never planned on being a real estate baron.

And he never thought of himself as one, even though he owned six houses on the side streets west of Dufferin St. and just north of Bloor St. in Toronto.

He picked his first house, a then 80-year-old six-bedroom, in 1979, because it was located in a grey area between residential and commercial zones, where neighbours wouldn’t complain about the three trucks he parked there for his contracting business. Plus, the house was large enough to accommodate his spouse, her parents and a planned family.

Today, two of his three children have joined the business, which now operates out of a commercial property leased through 2025. His daughter Sandra is a job site manager for the larger projects Curto Constructs takes on. And his eldest son, Ramone, leads the team of renovators who work on residential projects. His younger son, Paul, is an accountant who has his own practice but still maintains the firm’s books (taking over from his mom, who needed to slow down following a minor stroke in 2009).

Rui’s foray into being a landlord began when the owner of a house he was renovating got angry about the timeline for repairs, and offered to sell. Rui signed the papers in the summer of 1985, added two extra kitchens, tenanted the building with three young couples, and marveled at the consistency of the income.

Over the next decade, he repeated the process four more times. The five rental houses are managed by a numbered corporation that is separate from his construction company, but uses the same premises and address. The property management business and its assets have never been formally valuated, but the construction business was valued last year at $15 million, based on future contracts and the company’s excellent track record.

Rui and his wife, Rita, who co-owns the business, have drawn up a succession agreement that will see Sandra and Ramone take over, and Paul receive shares equaling 20% of the business’s value. Sandra and Ramone get 40% each to account for the sweat equity they’ve put into Curto Constructs during their years of service. At Sunday post-church meals, still a tradition even though the kids have moved out, Rui regales everyone with stories of his frugality and hard work; and how these qualities have made the family comfortable beyond the wildest expectations he had upon immigrating to Canada in 1970.

The couple owns no investments outside their construction and real estate businesses, but skyrocketing real estate values worry the couple. All of Rui’s purchases were large homes—five have substantial lots, and one is adjacent to existing retail on a lot that was rezoned commercial seven years ago.

Based on average single-family home prices in his neighbourhood, the couple conservatively estimate their real estate holdings to be worth $8.4 million. And values continue to rise.

The purchase price for all five rental properties was under $1 million, so the gains will be substantial. Annual rental income from the properties was $684,552 in 2014, and with the nearby commercial district gentrifying, it’s likely his children will want to hang onto them, as the revenue stream will increase as units turn over.

Rui began carrying key-person insurance when Sandra became involved with Curto Constructs. But he’d never bought personal coverage, figuring the family could sell properties (or the business itself) to pay their bills if he died. Now age 61, he had a serious heart attack three months ago. The kids have advised him to move out of his six-bedroom home, but Rui and Rita are attached to it.

At Ramone’s suggestion, Rui explored taking out an insurance policy to cover taxes for the family should his condition worsen.

A couple of hours of online research has convinced Rui that both he and Rita have medical conditions that will result in stiff premium ratings at best, or at worst cause them to be suited only to high-risk policies.

As a result, he doesn’t even want to start the conversation. How do you help them?

Looming liquidity crisis

MC: Rui and Rita own the common shares of Curto Constructs and the real estate company—we’ll call it RealCo. That’s their key asset from an estate-planning perspective. The number one issue they have to deal with is the looming liquidity crisis. If both of them died in a car accident tomorrow, they would have a deemed disposition of shares worth roughly $23 million. The ballpark tax bill would be $5.85 million. How do you get the liquidity to fund that? Remember, they have no other investments.

Rui and Rita have already settled on a 40%-40%-20% split between the children for the construction company. Is this written down on a napkin, or is there a formal agreement? Let’s assume they want to divide the RealCo shares and any other assets equally among the three children. They should ensure they have up-to-date wills, as well as secondary wills that cover off their private company shares. They also need powers of attorney over both health and property.

Assuming there are wills in place, there’s a provision in the tax act that says where children acquire shares in a Qualified Small Business Corporation, they can spread the capital gains over 10 years. Curto Constructs is an active business; it’s more than likely a Qualified Small Business Corporation. But RealCo is a specified investment business—its income is from rents, so it won’t qualify as a Qualified Small Business Corporation. That means its gains can’t be spread out, unless Rui expanded RealCo’s operations so that it met the Qualified Small Business Corporation definition.


MC: An estate freeze will help minimize Rui and Rita’s tax liability. The freeze will also allow them to project what their tax liability might be upon the death of the survivor spouse.

The freeze allows Rui and Rita to have future growth of the shares accrue in the children’s hands. Rui and Rita will probably want to maintain control over the assets, and that flexibility can be worked into the estate freeze. Depending on how elaborate the arrangement is, the freeze will cost between $15,000 and $25,000 from start to finish.

To do the freeze, Rui and Rita will hand in their common shares in both companies, and take preferred shares in exchange. It’s a tax-free rollover, provided the ACB and fair market value of the preferred shares are the same as the ACB and fair market value of the common shares they turned in. The children, or a family trust, then get newly issued common shares, which have a nominal ACB—a dollar, for example. Future increases in the companies’ values attach to those new common shares.

The redemption value of Rui and Rita’s preferred shares is $15 million for Curto Constructs, and $8.4 million for RealCo.

To provide retirement income, they could do what’s called a wasting freeze, which involves redeeming preferred shares to fund spending needs. By redeeming shares, they reduce the amount of the deemed disposition on death.

It’s not clear whether the children are married. If not, they should consult a family lawyer and have marriage contracts drawn up to ensure their assets are protected in the event of separation or divorce. Generally speaking, the value of the assets going into a relationship is shielded. Any growth or income earned during the relationship, up until the relationship dissolves, will be evenly split. The marriage contract should spell that out to minimize potential disputes.

Don’t sell

CF: Rui and Rita should retain ownership of the real estate, because the long-term trend for both residential and commercial real estate in the Greater Toronto Area (GTA) is very strong. So, the homes Rui owns are just going to increase in value over time.

They should consider funding the tax arising from the deemed disposition with a loan. It’s a great time to borrow money: you can get a five-year, fixed-rate mortgage for 2.5%, which is almost giving away money.

Vacancy rates in the GTA have been less than 2% over the last 40 years, which is uncharacteristic in Canada—more typical rates are 4% to 5%. And rents continue to go up year over year.

The value of multi-residential properties is at an all-time high, for two reasons. One is that you can borrow at such low rates. The second is the strength of the market: you’ve got the increase in population, and supply only coming from condominium buildings, so you have a continued low vacancy rate. This equates to a reliable cash flow that’s highly sought after by institutional, as well as individual, investors.

To give you a sense of how much rental properties are selling for right now, the capitalization rate is often 4%, which gives you 25× price to earnings.

MC: They have $684,552 in gross rent annually. We don’t have the net amount, but let’s say about half the gross goes to expenses and they clear $300,000; $300,000 × 25 gets us really close to the projected fair market value of $8.4 million.

CF: Conservatively, you can say both residential and multi-residential rentals will go up an average of 3% to 5% per year. Over 25 years, that $8.4 million can become $22 million on a compound basis. The estate freeze Michelle suggested makes a lot of sense because the gains will just continue over time.

Insurance options

TR: Rui and Rita seem confident they won’t get the insurance, or that it’ll be extremely expensive. Typically, what I do in that situation is bring in a regional underwriting consultant from one of the major insurers. We’ve had clients everyone thought wouldn’t be able to get insurance, but because of what the regional underwriting consultant did, we were able to get it for them. The consultant won’t come out for a $25 a month policy, but the numbers we’re looking at here—plus potential other business—justify their involvement.

If Rui and Rita just mail in standard applications that say, “Yes, I have a health issue and it was diagnosed by this doctor on this date,” without a whole lot of other detail, they would get declined. The consultant will get a lot more detail from Rui and Rita. The consultant will ask: How did your condition start? What are the symptoms? How have things changed over time? Are you golfing every day? He or she will also communicate with doctors, if they have permission. Then the consultant will write a story about the clients’ situation and give it to the head office underwriter.

Typically, you would use a joint-last-to-die policy to pay the tax bill that comes at the second spouse’s death. This option is normally cheaper than single-life policies.

But when you get into situations like Rui and Rita’s, it could make sense to go single life on one and not use the other life, which potentially gets declined. Even with joint-last-to-die, if one life is declined, you can still get them covered under the policy. Essentially, the pricing is close to the single-life price you would get on the healthier person.

In the worst case, they’re both declined, so insurance won’t enter into the picture. Rui is going to have a difficult time getting coverage because of the serious heart attack he had. The fact it was three months ago is a big problem. There are some golden thresholds with insurance. If there’s been a major health issue and less than a year or two have passed, they could run into problems getting coverage. But I would still bring in the underwriting consultant, who may recommend waiting until next year or the year after to apply.

TR: There may be opportunities to change or utilize Rui’s existing plan, depending on the plan type and the face amount. I would suggest key-person insurance for Sandra and Ramone. If Sandra dies or becomes disabled five years from now, is Rui really going to want to step back into the business? Probably not.

This insurance provides enough liquidity to the company to hire someone else. You usually have to pay a little more to woo someone away from another company. And typically, when you lose a key person, your accounts payable start wanting their money a little sooner, and your accounts receivable start taking a little longer to pay. So you have a bit of a liquidity crunch. Accounts payable will say, “Sandra was the brains behind the outfit and she’s gone. I now have concerns about the creditworthiness of the company, so I’m not going to give you 90 days anymore—I’m going to give you 60 or 30.” The people who owe money are thinking the opposite, so they’ll push the envelope with payment deadlines.

And banks may not lend as favourably if they’re not as confident in the folks who are left at the company. Finally, losing both Sandra and Ramone will likely impact profits for perhaps two, three or four years. Key- person insurance will normalize profit levels.

Combine Curto Constructs and RealCo?

Should the two companies be amalgamated, either on the operating level or via an overarching holding company?

“Absolutely not,” says Michelle Connolly, vice-president, Tax, Retirement and Estate Planning, at CI Investments.

“The two companies have separate business interests, risks and liabilities. Say one of RealCo’s tenants falls down the steps. Curto Constructs’ assets are then subject to that liability. Similarly, if one of the construction company’s employees gets hurt on the job, the real estate business’s assets could be subjected to a claim.”


Estate conversations for the family business

Jennifer Poon, Director, Advanced Planning – Wealth, and Jeffrey Waugh, Director – Tax, Wealth & Insurance Planning Group, Sun Life Financial, look at estate considerations for the family business.

When we looked at this case, what stood out to us is that Rui and his wife have experienced some serious health events, and yet Rui appears to be involved in the businesses still. Therefore, we have to ask: Have they had a retirement discussion? When do they want to retire? What are they looking for in retirement? Are they ready to pass the business on to their children?

They likely haven’t retired because, outside of their businesses, they have no liquid assets. And without other forms of income, how do they plan to fund the retirement they want?

Family businesses are common, and there’s a lot of planning that goes into passing them on to the next generation. For clients in a similar situation, we recommend discussing the following options:

  1. An estate freeze
  2. Succession planning and estate distributions
  3. Planning for probate


While this case doesn’t specify whether the companies are corporately owned, it does refer to separate operating companies. If you have clients in a similar situation, and if they own an incorporated business, you could discuss the option of freezing the estate.

How do you freeze an estate?

An estate freeze is a technique used to freeze the value of someone’s business interest — in this case the property management and construction company. The client would be able to pass the future growth of their business to their successors, yet still retain voting rights. In this case, Rui and his wife could use income from the new preferred shares for their retirement income and freeze the potential capital gains on the companies’ shares.

Here are some examples of how to implement an estate freeze:

  1. Section 86 reorganization – A client can exchange their common shares for preferred shares with a fixed dividend rate that has the same fair market value as the common shares. This is often known as a share exchange or reorganization because the owner is exchanging common shares for preferred shares. To prompt a tax-deferred rollover, the fair market value of the preferred shares received must be the same as the fair market value of the common shares given up, and the preferred shares should be redeemable. The fair market value of the existing common shares can be valued based on values of the properties or future value of the cash flow from the properties, while the fair market value of the preferred shares is based on the future dividend streams. This provides a client with a fixed income stream in consideration for the existing value of the company, and all future growth will be attributed to the new common shareholders.
  2. Section 85 share exchange – Rather than having the company redeem the shares, the owner creates a holding company and transfers the common shares to the newly created company. The holding company then issues preferred voting shares to the owner and common shares to the successors. A variation on this could involve transferring the original common shares to a trust rather than a holding company.
  3. Partial freeze – Another option is to freeze only some of the company’s shares so that the client can reserve the right to participate in the company’s future growth.

The benefit to discussing an estate freeze with clients in this type of situation, without other investable assets, is that they freeze the capital gain, and the amount the executor will include for tax purposes — helping the family plan for these expenses. Failing to properly plan for estate liabilities can prompt liquidity issues in the succession plans, and perhaps even a fire sale of assets to pay for the tax liabilities.


A succession plan is not the same as an estate plan because it doesn’t include personal assets. The succession plan simply helps the client understand how to transfer the business ownership and transition out of the company — or a management role — and maximize the financial benefit. With a family business, coordinating these plans allows the client to explore tax-deferral opportunities.

Another key consideration is that, although the two companies are estimated to be worth over $23 million, we have to ask if they have any debts, and if so, for how much? Without a formal valuation in place, it’s hard to tell what the actual value of the estate would be. Once a client has taken steps to understand the true worth of their business, one option would be to look at equalizing the estate.

Following an equalization strategy, two of Rui’s children would likely become successors of the construction company. The other child, Paul, owns his own accounting practice and isn’t interested in the family businesses — otherwise Paul would likely want the siblings involved in the company to buy him out. If they were unable or unwilling to do that, he wouldn’t have enough shares to out-vote them or get a choice in how the business is run, and his inheritance could be lost if his siblings make poor business decisions.

A joint last-to-die policy on Rui and Rita could provide funds to equalize the amount left to each child when they need them. The children involved in the businesses get the shares, and Paul receives an inheritance from the life insurance benefits or other non-business assets. But if Rui and Rita can’t obtain insurance (or can’t obtain insurance with an affordable premium due to high ratings), it will be more difficult to equalize the estate. Rui should have a closer look at his key person insurance to determine the policy type and death benefit amount. If it’s term insurance, he should consider converting to permanent coverage. They might still lack the necessary liquidity they will need to cover the inevitable capital gains tax liability at their deaths. So they may want to consider converting some of their assets into cash and investing the proceeds. Beginning to do so now may provide more opportunity to obtain the highest value possible, rather than potentially forcing their estate into a fire sale situation to fund the tax liability.


Rui and his wife don’t have liquid assets to cover their debts (if any), medical care, retirement or taxes. And their only option currently is to sell off part of their businesses or real estate holdings to cover these expenses.

Discussing an estate plan with clients is key, especially when their legacy plan involves leaving a business to children. The last thing a client wants to do is burden their children with a final tax bill so large they have to sell off the business that was intended to stay in the family.

With proper planning, an estate plan can also help to avoid or reduce probate fees. Since they live in Ontario, there may also be an opportunity to work with their legal advisors to implement a dual will strategy. The private company shares could be dealt with in a secondary will which wouldn’t be submitted for probate — saving a significant amount in probate fees.

Read: Becoming the trusted family advisor for wealth transfers and estate planning

Read: Come to terms with your business owner clients

Read: Retiring entrepreneurs and business succession plans: what you should know