Estate freeze or refreeze
If you find that the value of your business has declined because of the current economic turmoil, it might be an ideal time to consider an estate freeze. If you have already done an estate freeze in the past when your business had a higher value, it is a good time to revisit this plan to see if it needs to change.
An estate freeze is a process where you take steps to ensure that the future growth of your estate accumulates in the hands of your intended beneficiaries in a tax effective manner. You will effectively lock-in the tax that will arise on your death (subject to changes in future tax rates) by freezing the value of your estate. An effective estate freeze will allow you to pre-determine the taxes that will arise on your death so that you can ensure that cash will be available to pay that tax (for example, by taking out sufficient life insurance). An estate freeze completed when the value of the business is depressed will minimize the tax that will arise on the death of the business owner, with future increases in value accumulating in the hands of your beneficiaries.
If you have already undertaken an estate freeze, but the value of your business has declined in the current environment, it is worth considering whether the freeze should be undone, and you should re-freeze your business at the current value of your business. This could make sense if the value of your business is less than its value at the time the original freeze was undertaken, and therefore the fixed value shares you took back on the original freeze are worth more than the value of the business. A re-freeze would allow you to reset the freeze at the value of your business today and further reduce the amount of taxes your estate would have to pay on your death. Keep in mind that a complete freeze will also limit the extent to which you can take advantage of future increases in value on an economic rebound.
You may also decide that you want to undo an estate freeze done in the past due to the decline in value. Known as an estate thaw, this would be possible if you and/or your spouse are beneficiaries of the family trust that own the common shares of your business. Implementing a thaw would mean that you would transfer the common shares out of the trust to you and/or your spouse. Whether this makes sense depends on your situation, and the interests of the other intended beneficiaries.
Capital loss planning and the capital dividend account
As is the case for individuals, corporations can also trigger capital losses and where those losses exceed current year gains, the resulting net capital loss can be carried back to the previous three taxation years to apply against capital gains realized in those years or carried forward to apply against future capital gains. Careful planning is required to ensure the superficial loss rules don’t apply and that interest on borrowed money to make the investment continues to be deductible.
However, specific to corporations, you should speak to your BDO tax advisor before triggering any capital losses to determine if your company has a capital dividend account (CDA). A CDA is a complex calculation based on the history of the corporation and its activities. The CDA can be paid out to you as a tax-free dividend if the proper tax elections are filed. There may be a reduction of the CDA balance for your company based on realized capital losses and therefore, it usually is prudent to pay out any CDA as a capital dividend before triggering any capital losses.
Corporate group loss utilization
Where you have more than one corporation, you may find that you have income in one corporation and losses in another (or property with an accrued gain in one corporation and property with an accrued loss in another). If this is the case, there are a number of strategies to consider, including:
Consider a holding company
The use of a holding company can provide several benefits, such as asset protection and ensuring eligibility for the lifetime capital gains exemption (LCGE) in an eventual sale. These benefits can be especially valuable when there has been a decline in asset values. Some tax effective planning ideas involving a holding company include:
Review your corporation’s instalment obligations
A corporation can pay instalments based on an estimate if you believe that its corporate income tax for the current year will be lower. However, interest and penalties will arise if tax is underestimated.
Review your remuneration strategies
If corporate income falls, you should revisit your owner-manager remuneration planning to determine an optimal mix of dividends and salary. Although the tax on split income (TOSI) rules restrict the use of a private corporation to split income with family members, there are situations where you can still split income in a tax-efficient manner with family members. The TOSI are complex, so it's important to work with your BDO tax advisor to determine an optimal remuneration strategy.
Have your HST, GST, and PST status reviewed
When cash is tight, it is more important than ever to ensure that you are not overpaying HST, GST, and PST. In addition, you may be charging tax in situations where it is not required and addressing this will be beneficial if it means your customers will have more money to spend on your products or services.
Ensure research and development (R&D) costs and investments in clean energy are identified and claimed
Many Canadian corporations are engaged in R&D and they don’t know it. Most people associate R&D with work done in a laboratory by skilled scientists. However, R&D activities for small and mid-sized businesses are often integrated with daily business activities.
In addition, the government introduced a suite of clean economy investment tax credits (ITCs) to encourage businesses to adopt sustainable technologies. These new ITCs can offer significant benefits for many businesses. Investments can range from solar panels and heat pumps to larger investments by manufacturers and other ways to make industrial processes greener. To get an idea of how these new ITCs can benefit your business, refer to our dedicated webpage on SR&ED and Government Incentives. Your BDO advisor can help you ensure that all R&D and clean economy activities are identified so ITC claims are maximized.
How BDO can help
Contact your BDO advisor to discuss which plan will be beneficial for you. Keep in mind that the strategies discussed are not exhaustive. Your BDO advisor can review your situation to help identify any additional tax planning solutions that can help you through difficult economic times.