Case: The Dentons$-$The Family

Minda & Connor Denton, both age $57,$ have been married for $35$ years, & together have two children: Nosh age $32$ & Paco $28.$ The family resides in Abbotsford, BC$.$

Minda & Connor are entrepreneurs. The couple$$s oldest child Nosh is following in their footsteps, while their youngest child Paco, is an artist who loves to travel. Paco recently returned from Paris, after having completed his Masters degree in Art History. The children get along well, but it is unlikely they will ever be in business together as Paco much prefers the world of art.

Paco & Nosh are very close to their parents, as they all spend weekends & holidays at the family cottage & live in the same neighbourhood. Business chatter is common at family gatherings.

Clear View Inc: Minda & her best friend Santika are equal shareholders of an advertising company, Clear View Inc $($CVI$).$ Established $20$ years ago, CVI is currently valued at $$12$M$,$ which includes the cash value of the corporate$-$owned life insurance policies. This valuation approach for CVI reflects the terms of Minda & Santika$$s shareholder agreement. All assets owned by CVI are used in its active business that take place throughout Canada. The company is debt$-$free.

CVI common shares # of shares $($ACB$)$$ Paid$-$up capital $($PUC$)$$

Minda $1$k $100$k $100$k

Santika $1$k $100$k $100$k

Minda & Santika put a shareholder agreement in place five years ago when Santika was undergoing a health issue. The agreement incorporates a promissory style buy$-$sell arrangement.

Minda & Santika used insurance already owned by CVI to fund the buy$-$sell agreement. These policies were purchased $10$ years ago, prior to the sale of CVI$$s magazine division.

Life Insurance Policies owned by CVI Minda $($$$)$ Santika $($$$)$

Death Benefit $7$M $7$M

Cash Value $350$K $300$K

Adjusted Cost Basis $300$K $325$K

Fair Market Value $350$K $3$M

The fair market value of Santika$$s life insurance policy was established through a recent valuation & reflects her fragile health.

D

Cottage$-$Minda & Connor together own a family vacation property on Lake Joseph in B$.$C$.$ They have asked their lawyer to draw up the documents that would move the cottage into a family trust $($C$-$Trust$)$ with Nosh & Paco as equal beneficiaries of the trust $(50\%$ each$).$ If either Nosh or Paco should die, the children of deceased would become beneficiaries through the assumption of their deceased parent$$s role in the trust.

The trust document is designed to have the cottage pass down through the generations. Minda & Connor plan to settle the trust with a silver wafer. The family lawyer, accountant & financial advisor will be the trustees, with the ability to appoint arm$$s length replacement trustees, if the need arises. Minda & Connor will continue to pay all expenses associated with the cottage$.$

Current Asset & Liability Summary

Minda$($$$)$ Connor$($$$)$ Jointly$-$owned$($$$)$ Cost$($$$)$

Cheq. Acct $100$k n$/$a

RRSP $2$M $1,5$M n$/$a

Non$-$registered inv. $7$M $5\mathrm{.}8$M

TFSA $100$k $95$k N$/$A

CVI com. Shares $6$M $100$k

DII common shares $18$M $10$k

Home$13$M $2\mathrm{.}5$M

Mortgage on home $(500$k$)$

Cottage $4$M $2$M

Notes $1-$Home was purchased in $2022,$ following the sale of their prior home.

Family Trust$-$Earlier this year, Connor settled a discretionary family trust $($F$-$Trust$)$ for the benefit of Nosh & Paco by contributing $$1$M of cash. Connor, the sole trustee, used the cash to purchase a portfolio of public securities$.$

Estate Plan$-$Minda & Connor$$s will leave everything to each other upon the first death of the couple. They want to utilize all available spousal rollovers at the time of the first death to defer any immediate tax, unless the executors identify tax$-$savings opportunities that would be beneficial to the overall estate. On the second death of the couple, they want to treat their children equally although they would like Nosh to become the sole shareholder of DII, as much as possible.

Facts & Assumptions$-$Please assume the following:

$$ Lifetime capital gains exemption is $$1$M$.$

$$ Marginal tax rate for individuals is $50\%$ for everything except ineligible dividends.

$$ Marginal tax rate for ineligible dividends is $45\%.$

$$ Capital gain inclusion rate is $50\%$ in all circumstances. Disregard any proposed tax changes.

$$ Assume all individuals listed have never utilized any capital gains exemption.

$$ Assume all individuals listed have never utilized any capital gains exemption.

$$ Assume all reference to tax are in respect of Canadian income tax only & that all parties are Canadian residents & not US persons, unless otherwise stated in the facts.

Question$-$ Describe each step that will take place as it relates to executing the buy$-$sell arrangement from Minda$$s death forward until the final step of the execution is complete. $(7$ marks$)$

Be sure to include amounts of money associated with each step, explain who receives the money & explain any income tax consequences that may apply for each step.