Background Information

On retiring from teaching at age 60, Hugh incorporated a small business to provide construction services. The business employs his wife, Karen, for administrative functions. It also contracts out work to Hugh's two friends who renovate kitchens and bathrooms. From the start Hugh exceeded his revenue targets. From a $10,000 start-up cost (ACB), he estimates that his business would be worth $485,000 (FMV) today. Not bad over 10 years!

Hopes and Dreams

Hugh is now 70 and retiring for good. He owns 100% of his business. His children have their own careers and have no interest in the business so he plans to sell it to his two friends for $485,000. In addition to the business, Hugh owns the following assets:

• RRSP 1 valued at $100,000 (Karen beneficiary); ACB $54,000
• RRSP 2 valued at $43,000 (son Todd beneficiary); ACB $21,000
• RRIF valued at $100,000 (estate beneficiary); ACB $60,000
• universal life insurance policy with death benefit of $1,000,000 (Karen as beneficiary)
• segregated funds valued at $30,000 (Karen beneficiary); ACB $21,000
• cottage valued at $225,000; ACB $63,000
• bond portfolio (non-registered) valued at $60,000; ACB $43,000
• stock portfolio (non-registered) valued at $90,000; ACB $45,000

Hugh and Karen own the following assets jointly with right of survivorship:

• principal residence valued at $280,000; ACB $150,000
• segregated funds (non-registered) valued at $100,000; ACB $80,000

In his will, Karen is the beneficiary for the residue of Hugh`s estate. His two adult sons are co-executors.

1) For each of Hugh's assets listed above, indicate if they are subject to tax or not. If not, why? (3 marks)

2) For each of Hugh's assets listed above, indicate if they are subject to Estate Administration tax. If not, why? (3 marks)

3) Provide Hugh with four specific recommendations to improve his estate plan by lowering tax and EAT? Explain the benefits and drawbacks of each recommendation. (