This week we’re going step by step into a strategy that allows you to withdraw cash from your corporation essentially tax-free by using your children’s capital gains exemption.
All right, so here’s what you’ll need to pull this strategy off:
- Number 1 – a farm corporation. You know what scratch that – a successful farm corporation that has a bunch of cash in it
- Number 2 – Time, this strategy takes three years minimum to implement
- Number 3 – Farmland that you own personally
- And lastly Number 4 – you need adult children that you trust. You’ll be giving them millions of dollars in assets to hold on your behalf.
So here’s what you do. Let’s say you have four kids, and 4 quarters. You had paid $200,000 for each quarter and now they are each worth $1,200,000. Each piece has a $1,000,000 gain.
Step 1: Gift each child a parcel of land
When you gift qualified farm property to a child they inherit your adjusted cost base, also know as ACB. So the child will now own property with a $1,000,000 capital gain.
Step 2: Wait 3 years
During this time, the land will no longer be yours, hence you must trust your children.
Step 3: Buy your children’s land using your corporation
After 3 years have passed, your corporation can buy your children’s land and they’ll be able to use their capital gains exemption to offset the tax. So, getting back to our example, your corporation pays each of your children $1,200,000 for each piece of farmland that they own. They report a million gain on their tax returns, but they use their capital gains exemption to offset the income. They’re all square
Step 4 – Pay your children
Your corporation has just purchased $4.8 million dollars worth of land. It’s going to have to make a payment, hence why you’ll need a successful farm operation. Pay your children $1.2 million each
Step 5 – Pray your children don’t take the money and run
This last step is obviously crucial. In Canada, there is no gift tax, which means your children can then turn around and gift you the $4.8 million dollars back. You’ve just successfully withdrawn $4.8 million from your corporation tax-free.
Okay so let’s summarize what you’ve essentially done. You’ve moved personal farmland into your corporation and by doing so, you were able to withdraw a large amount of cash from your corporation tax-efficiently by using your children’s capital gains exemption.
I can’t let this video end without at least saying, I’ve simplified this. You’ll need to consider:
- Gift Timing
- OAS Clawback
Make sure you talk to a professional to see if this could make sense for you.