Wine Industry Articles
Take Advantage of the Downturn: Revisit Your Estate Plan
2009 Vintage Issue of Canadian Grapes to Wine
Canadian winery owners are facing challenges including low grape prices, the expectation of declining high quality wine sales, and declining real estate values due to the recession. In these difficult times, winery owners and operators may have seen a slow-down in business and a decline in the value of their corporations. Despite these conditions, however, the current environment can be a positive one for establishing or revisiting an estate plan, utilizing a key tax planning idea: the “estate freeze”.
What is an estate freeze?
When an individual dies, they are deemed to dispose of most of their assets for tax purposes at fair market value (subject to a rollover to a spouse or, in the case of farm property, to a child). For many business owners, the tax arising on these deemed dispositions will represent a significant tax cost on death. Consequently, one of the main goals of estate planning is to minimize these taxes where possible. Also, once you’ve minimized the tax bill, the next step is to try to defer the tax payment for as long as possible. An estate freeze can help on both fronts.
In its most basic form, an estate freeze locks the current value of your wine business into new preferred shares issued to you in exchange for your existing common shares. Your family members (or a trust for them) can then subscribe for new common shares. As a result, your capital gain on death will be “capped” and the future growth of your winery will accrue to your family members. A tax deferral will be achieved provided your beneficiaries continue to hold the common shares after your death.
What are the benefits of an estate freeze?
Peace of Mind – Subject to future tax rate changes, by freezing the value of your estate you can effectively pre-determine the tax that will arise on your death, which allows you to ensure that cash is available to pay that tax (for example, by taking out sufficient life insurance).
Income splitting – Having other members of your family as shareholders provides the opportunity to determine the most tax efficient method of paying dividends. Dividends can be paid to lower income individuals, utilizing the benefit of their graduated tax rates.
Capital gains deduction – An estate freeze can allow you to multiply a key tax reduction tool — the capital gains deduction. If the shares of your corporation are shares of a qualified small business corporation or are qualified farm property, you can shelter up to $750,000 of capital gains from tax by claiming the deduction. Each member of your family may be eligible provided that they realize appreciation as a shareholder, effectively eliminating much of the tax normally owing on death or disposition.
I have already frozen my estate; however, the value of my winery is now lower. Is there anything I can do?
If you have already done an estate freeze, and the value of your wine business has since decreased, there may be some benefit to considering a “refreeze”. Depending on your circumstance, the tax liability on death may be able to be locked-in again at a lower amount. There may also be other benefits, such as the ability to increase/accelerate access to the capital gains exemption when the value of the company recovers in the future.
Although tax planning may not be at the top of your mind under the current economic conditions, this is an excellent time to set up or update your estate plan.
Please keep in mind that we have discussed the issues involved in general terms. Please consult an advisor to see if an estate freeze makes sense for your wine business. BDO’s Winery Services Team may be reached at 250-763-6700 or 1-800-928-3307, or by email at: wineries@bdo.ca. www.bdo.ca/wineries
