Tax planning following the Covid-19 pandemic - How to take advantage of it!

The current crisis caused by the Covid-19 pandemic has had a severe impact on our society and businesses. The loss of income and value for companies caused by the sudden stop of the economy could take months or years to resolve itself. The situation should eventually return to normal, but it is possible to take advantage of the crisis to fine tune or finally put in place a long-term tax plan.

For example, an estate freeze is the basis of every good tax planning for an entrepreneur. Pursuant to the federal (“ITA”) and provincial income tax acts, taxpayers are generally deemed to have disposed of all of their assets at their fair market value (“FMV”) upon their death. For an entrepreneur who owns shares of a company with an FMV of over a million dollars, the resulting tax bill can be prohibitive.

In a typical estate freeze, an entrepreneur “freezes” the FMV of his shares with preferred shares with a fixed redemption value and issues the common growth shares to his children or a family trust created for the benefit of his children. This “freezes” the tax bill that will be due upon his or her death.

If you are thinking of putting in place or have put in place a tax plan a few years ago, now is a good time to ask yourself the following questions:

1. Is this a good time to implement an estate freeze? Since the current crisis can bring about a severe, but likely temporary reduction of the value of your business, this can be a good time to freeze the value of your company and lower the income taxes which will become due upon your death.
 
2. Is this a good time to refreeze your shares? If you have put in place an estate freeze a few years ago at a higher value, you could proceed with a refreeze which would lower the redemption value of your preferred shares to the current value and again lower your tax bill.
 
3. Is this a good time to reset the clock on your family trust? In an estate freeze, the common shares are often issued to a family trust created for the benefit of the children of the entrepreneur. This allows the entrepreneur to keep control of his or her business while benefiting from the tax advantages. However, a trust has a major disadvantage since it is deemed to have disposed of all of its assets at their FMV every 21 years, which can force a premature distribution of the assets to avoid a substantial tax bill. If your business has lost enough value such that the common shares held by the trust now have a value of zero, this can be a good time to put in place a new trust to hold the common shares and restart the 21-year clock.

To know more, you can contact one of our professionals to discuss and find out if this can apply to your personal situation.

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