Our epidemiologists and public heath officers are warning us gently that the dreaded virus will be with us for awhile. Nevertheless, we are all hoping that our economy will recover soon (and to some extent our financial markets have), but it appears asset values in general may be depressed for some time to come. In this context, there may some some opportunities to free up some cash flow and/or reduce taxes in the long run. A little bit of a consolation in rather depressing times.
Time to Freeze (or Refreeze)
The freezing of current share value in a business enterprise and/or other significant business interests so that your chosen successors can easily participate in the future growth of your enterprise and/or interests is a common estate planning technique. For many business enterprises, there maybe never a better time to execute an estate freeze, for valuation reasons alone.
Awhile ago, I wrote about revisiting prior estate freezes in Time to Refreeze: Redux (link: https://www.allaboutestates.ca/time-refreeze-redux/). If you have reason to believe the value of your business enterprise (and/or assets) have reduced in value due to this crisis for instance that is a value less than what they were “frozen at, it might be a good time to “refreeze” your assets.
Small business Capital Gains Exemption Purification
The small business capital gains exemption exempts from tax almost $900,000 of a capital gain from the sale of a small business corporation, subject to some conditions and qualifications. One of them is that 90% or more the enterprise’s assets must be used in an active Canadian business at the time of the sale. To meet this qualification, enterprises may need to be “purified”.
What does purification mean?: It means removing offending non-active business assets from the corporation. Those non-active business assets may include excess cash, investments, securities and real estate in some cases. And these assets need to go somewhere. Sometimes, those assets will be transferred out directly to the shareholders or corporations owned by the shareholders, sometimes with direct and/or indirect tax consequences.
In the current economic conditions, it might be a good time to consult with your pros to effect a purification while asset values are depressed in general, thus reducing the tax burden.
This may seem a bit obvious but this may be a very good time to crystallize the losses in your portfolio, particularly if you can use them to recover taxes from capital gains claimed in previous years. You can sell them outright or you can sell them in a way that it stays within the family (make sure you consult with your pros in doing so to avoid some traps). If you have losses inside a corporation, there are techniques to crystallizing for potential tax savings but be careful there as well (consult with your pros).
Happy Reading and be safe.