All About Estates

TIME FOR A REFREEZE – PART 2

In my last blog, I wrote about how you might consider refreezing your existing freeze shares if the enterprise has recently declined in value, so that your chosen successors can participate sooner in the future growth of your enterprise and in the meantime your tax liability can be reduced on the disposition of those shares by you or your estate. Today I would like to write about how you might accomplish a refreeze and provide you with a few words of caution.

Let’s go back to our case scenario: Assume you completed an estate freeze several years ago when your enterprise was valued at $13 million. Due to recent economic and business conditions, the value of your enterprise has declined such that you believe the enterprise is now worth $8 million; yet you have reason to believe the value will rise again before long.

Carefully planned, you could undertake to refreeze your shares. A refreeze is a tax planning technique that involves converting your existing freeze shares in your case valued at $13 million into new freeze shares revalued at $8 million.

You can complete the refreeze using a number of techniques:
1. You can enter into a tax deferred rollover of the existing freeze shares valued at $13 million for new freeze shares valued at $8 million.
2. You can exchange the existing freeze shares for new freeze shares in a tax-deferred re-organization
3. Depending on the characteristics of the existing freeze shares, you can convert the exisitng freeze shares into new freeze shares assuming this exercise is not characterized as a disposition.

It would be best to consult with professionals to make sure no unintended taxable event arises from any of these plans.

Considering a refreeze means you have determined that the enterprise has declined in value. Given the tax implications of a refreeze, it is advisable if not necessary that you obtain an independent written valuation of the enterprise by a valuator who can carefully document all the analyses, assumptions, research and methodologies to support the re-valuation of your enterprise. This document will be particularly helpful in the event that CRA takes an interest in your plan by way of an enquiry or an audit subsequent to the tax rollovers filed.

In the act of refreezing your shares, you will have diluted the immediate wealth available to you on your retirement. It may be more than you can afford.

Therefore as you refreeze the shares consider reframing your plans so that you participate perhaps in some of the future growth of the enterprise as you pass it along to your successors or change your compensation to retirement so you can make up what you lost in a measured way.

Thanks for reading.

About Steven Frye
CW LLP is a firm of professional advisors providing a comprehensive suite of services to a diverse client base. Our experienced and skilled team can provide personal and corporate solutions to maximize growth potential, wealth and value. Email: sfrye@cwcagroup.com