Case Study 2 - Richard and Sandra
Solutions covered:
- Tax planning
- Corporate planning
- Investments
- Philanthropic planning
Finding clarity and calm amidst complexity: Richard and Sandra’s story
Our team is blessed to have developed long-term relationships with our clients.
For example, our relationship with Richard and Sandra* has spanned over 20 years. Richard is a respected surgeon and was one of the first medical professionals our firm supported. His wife Sandra is also an accomplished medical professional, and we’ve supported them both individually and as a family over the years.
As their careers and lives have progressed, they have often relied on our team to find clarity and calm in complex situations.
*Names have been changed to protect confidentiality.
Solution #1: Planning for their future generations
First, we need to rewind 20 years to when Richard was first starting his career.
The couple were strategic in their tax planning, so one of the first things they did was incorporate Richard’s medical practice. This enabled a much lower tax rate on any money left in the company, in addition to a lower marginal tax rate on his salary.
Richard typically grossed $500,000 per year in the company, with very low overhead. So even with a $200,000 salary, there was still ample earnings retained in the company.
Setting up a family trust to hold the corporation
We recommended that Richard and Sandra set up a Family Trust. This type of trust is set up during the lifetime of the business owner. Richard and Sandra would make decisions on its behalf, while all four family members were listed as beneficiaries.
The trust became a basket for holding the company’s shares and accumulated wealth. It allowed this family to benefit from decades of significant tax deferral and income splitting between the family members.
The only downside of this type of trust is that there’s a rule in Canada that stipulates a 21-year time limit on the ability to defer tax. At that point, a decision needs to be made regarding the tax liability.
Over time, with investment prudence, the retained earnings had grown to over $4 million. The couple were delighted but had questions about optimizing their wealth to pass it down to their sons, who were now adults. They wondered, how do we give less money to the government, and more to our sons?
Richard and Sandra had to choose between taking back the shares into their own name on a tax deferred basis—and relinquishing this opportunity to plan for their future generations—or to start the trust over again but pay tax on the accumulated value. Well, who wants to pay tax on $4 million at once?
They could’ve distributed shares to their sons, who were in their early twenties, but this didn’t seem prudent. Moreover, Richard still had years to go before retirement, so it felt too early to shut the trust down.
Deferring tax obligations through a corporate freeze
To navigate the couple’s tax liability, we suggested leveraging a mechanism called a corporate freeze.
This meant creating preferred shares for Richard and Sandra, which allowed them to take the company’s value into their own hands—half for Richard, and half for Sandra. The $4 million of embedded value would stay inside the company, but now the CRA would recognize that the couple will be personally responsible for paying the tax on $2 million each at some point in the future.
Richard and Sandra then created new shares for the company—and a new trust—and started the 21-year cycle over again. Thus, any new value that accumulates would go to their sons and any future grandchildren.
So, if the company’s value grew to $7 million, which was easily achievable given Richard’s income, they would only have to pay tax on the $4 million they froze, and all future growth could be attributed to their future generations.
Making the estate tax problem disappear
But what about the taxes Richard and Sandra needed to pay on the $4 million basket?
The couple planned on living off $200,000/year of retirement income for the next 20 years. Unsurprisingly, this totaled exactly $4 million.
Through the mechanism of a Wasting Estate Freeze, we advised the couple to relinquish $200,000 of preferred shares back to the company, which went against the taxes they would otherwise have had to pay on this income.
They would do the same thing the next year, and the year after that. So, the longer they live and the more shares they relinquish, the more their $4 million estate tax problem ‘wastes away.’ And after 20 years, it disappears altogether.
Through close collaboration with their accountant, lawyer, and other professionals, we were able to save the couple $1.2 million in taxes. We also helped demonstrate to the couple that they had more wealth to pass on then they’d realized, which made them incredibly happy. This clarity and confidence empowered them to explore charitable giving, which we discuss below.
Solution #2: Amplifying their impact through philanthropic planning
Given that Richard and Sandra are generous with the causes they support, our team engaged them in a philanthropic planning discussion. Until then, they had typically managed their own donations on an ad hoc basis.
Optimizing charitable giving through a Donor-Advised Fund
Richard regularly flies to developing countries, donating weeks of his time annually to teach local physicians about medicine and surgery. He and Sandra also make a sizable annual donation to Doctors Without Borders and have done so without any consideration of their own benefit.
We were able to identify opportunities for them to continue giving back while also reducing their family tax burden.
By creating a Donor-Advised Fund (DAF), Richard and Sandra could donate any sum of money and receive a charitable tax credit in the present—but decide how to allocate the funds over time.
For example, if they transferred a $100,000 sum to this fund, they would receive the full tax benefit in the current year, but only be required to advance a minimum of 5% per year. The initial amount would be invested so that their gift would continue to grow, enhancing the impact of their charitable giving.
They loved the idea, so we created a DAF for Richard and Sandra to optimize their charitable giving, which led to their next philanthropic project…
Setting up a foundation in memory of his brother
When one of Richard’s brothers passed away and named Richard executor of the estate, one of his wishes was to have a foundation set up in his memory.
Since Richard had already worked with us on philanthropic planning, he knew we could be trusted to help.
We set up the account for the foundation, in addition to managing millions in funds and advising on investment decisions between Richard and the foundation’s other board members.
In light of capital gains rules, we collaborated closely with Richard’s accountant to help the board make important and time-sensitive decisions while minimizing the amount of tax payable by the brother’s estate. We also leveraged other professionals from our network—including a top estate lawyer and our go-to tax specialist—to ensure no stone was left unturned.
The result? Richard had all the professional backing needed for him and his family to confidently run the foundation for generations to come.
Heart and soul advisors
Your family capital goes so much deeper than dollars and cents. It’s about legacy, shared values, and a compelling vision for the present and future.
We’re honoured to provide caring, attentive service to generations of families. We take the time to meet with your family and get on the same page about what wealth means to you.
If you’d like to learn more about how our team might help your family achieve its goals for wealth and life, feel free to get in touch.