The pandemic has created a very challenging business environment; however, it has also created some estate and tax planning opportunities that can assist individuals and business owners. The Estates Group at Loopstra Nixon LLP can guide you through these challenging times using some of the strategies listed below:
- Crystallizing losses: In these times where asset values are depressed, and some businesses are temporarily shut down, triggering losses can help recover tax paid on any capital gains and business profits from the three prior taxation years creating liquidity. Unrealized capital losses in the current taxation year can also be carried forward indefinitely.
- Accessing Lifetime Capital Gains Exemptions (LCGE): Business owners contemplating a sale of shares should ensure they meet the criteria for a Qualifying Small Business Corporation (QSBC) to access and utilize the LCGE. By purifying the assets of the corporation ahead of the sale, capital gains tax of up to approximately $860,000 can be sheltered by accessing the LCGE, assuming the seller has not already exhausted the LCGE.
- Estate freezes: Business valuations have decreased by 20 to 50% on average. There is an opportunity to lock in lowered valuations through an estate freeze and generate a substantial deferral of tax. In an estate freeze (which applies to shares of privately held corporations), the current shareholder exchanges existing common shares in the corporation for fixed-value preferred shares, followed by issue of new common shares. The current value of the corporation is locked in through the fixed-value preferred shares and the future growth of the corporation is shifted from the present-day owners on a tax-deferred basis. As part of a freeze, a trust can be settled to multiply access to the LCGE.
- Re-Freeze: Where an estate freeze is already in place, consider a reversal of the freeze and re-freezing the assets, particularly if the current value of the assets have depreciated since implementing the freeze. A refreeze can reset the value of the freezer’s fixed-value shares to reflect the new, reduced value of the corporation and allow the common shares to grow at a new, lower starting point.
- Prescribed rate loans: With the Bank of Canada lowering their benchmark interest rate, it is expected that CRA’s prescribed rates can drop to 1% at the start of Q3. This is an opportunity to lock in loans at historically low rates. The use of family trusts with prescribed rate loans is a commonly used planning tool to achieve income splitting amongst family members.
Our Estates Group, working in collaboration with tax and accounting advisors, will be happy to discuss and develop a customized strategy for you. Contact us now to learn more about these opportunities.
The foregoing has been prepared for clients of Loopstra Nixon LLP. While every effort has been made to ensure accuracy, the information contained herein should not be relied on as legal advice; specific advice should be obtained in each individual case. No responsibility for any loss occasioned to any person acting or refraining from action as a result of material herein is accepted by the authors or Loopstra Nixon LLP. If advice concerning specific circumstances is required, we would be pleased to be of assistance.
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