Is it always a good idea to take full advantage of the capital gain exemption (CGE) by crystallizing? Assume Ms X crystallizes her Opco shares, but Opco morphs into an investment holding company by the time of her death. In that case, her heirs might pay more tax. Use of the CGE will preclude taking advantage of a pipeline (per 84.1(2)(a.1)(ii)), which, given dividend tax rates these days, could result in $120,000 of additional taxes on an $800,000 gain ($200,000, on $800,000 of capital gains, vs $320,000 on an $800,000 deemed dividend, assuming a 40% rate on the dividend).
What if Ms X claims only half of her CGE in respect of her Opco shares? The total tax liability could be reduced below even that payable on a capital gain only. After Ms X’s death, the estate would transfer her Opco shares to holdco for a $400,000 note and $400,000 of Special Shares with a high ACB and low PUC. The Special Shares would be redeemed (with $160,000 of tax being paid on the redemption) and the resulting capital loss would be carried back against the gain arising on Ms X’s death. The total tax ($160,000) is less than either of the two possibilities described in the previous paragraph.
David Wilkenfeld, “Crystallization Planning: Less May Be More” <em>Tax for the Owner-Manager</em> 16:2 (April 2016)
