FIVE Magazine YB - VOL2 - Page 17

It is important to understand that an unincorporated business has no independent existence separate and apart from its owner meaning that when the owner dies in the case of a sole proprietorship or when the first partner dies in a partnership, the unincorporated business ceases to exist. During the owner’s lifetime, the income of the unincorporated business is reported as personal income, against which the business expenses are deducted. The owner faces unlimited liability for all business debts and enjoys all of the profits. Disposing of an unincorporated business in a Will necessitates that the debts of the business are property addressed and that the assets of the business being transferred are clearly defined. For example, the term “business” does not describe an unincorporated business with sufficient certainty to ensure the business assets will be distributed pursuant to the testator’s wishes. Generally speaking, the assets of the business will be distributed to the beneficiaries net of the liabilities unless the Will expresses a contrary intention. Unfortunately, it is not uncommon for families to litigate over the distribution of the assets and debts of an unincorporated business. Where proper estate planning has not been put in place, the assets of the sole proprietorship or partnership can pass to the beneficiary free of any encumbrances, while the remaining beneficiaries are left to bear the burden of the business’s debts. The Incorporated Business Passing on an incorporated business is more straightforward as the testator can gift his or her shares in the corporation. The corporation has a perpetual existence and its control and ownership is easily transferred via a Will. However, there are specific tax considerations to plan for, including income tax and estate administration or “probate” tax. The Income Tax Act provides for a deemed disposition of all capital assets immediately before death, which means that the estate of the deceased must pay any income tax liability assessed against any gain in those capital assets. This, of course, includes shares of a corporation. An attractive planning tool might be to utilize the rollover provisions found in subsection 70(6) of the Income Tax Act, available when the capital property is gifted directly to or exclusively for the use of a spouse, thereby deferring the payment of capital gains tax until the spouse dies or disposes of the property. It is also possible that, if the business owner has not taken full advantage of the lifetime capital gains exemption from the disposition of qualifying small business shares, some tax relief may be available to the estate. The Corporate Reorganization Another common option is a corporate reorganization or estate freeze during the life of the business owner. Because the future increase in value of the business assets will accrue to persons other than the business owner, this has the effect of quantifying the owner