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Estate Freeze Strategy for Taxes

An estate freeze is a technique used to minimize future income taxes of a business owner by having them exchange their common shares for fixed value preferred shares. The exchange of common to preferred shares is done without triggering any immediate tax. New common shares are issued to a family trust or directly to adult family members at a nominal value. Therefore, the future growth in value is effectively passed on to the beneficiaries of the freeze, and the original business owner has fixed the tax liability on the preferred shares since no future growth will accumulate on them.

Maintain Value due to COVID

Some businesses have experienced a decline in value due to the economic effects of Covid19. It may be beneficial to “refreeze” the shares to lock in the new lower value of the business into new fixed value preferred shares. Redoing the freeze at a lower value can reduce the tax liability upon a future sale or at death when there will be a deemed disposition of all the deceased’s assets.

Professional advice is required before implementing a “refreeze” because there are various tax measures such as attribution rules, tax benefit, and other anti-avoidance rules that could apply. For example, these measures could apply if the decline in value is because of excess dividends or remuneration that have been paid out of the corporation. Finally, an accredited business valuator will need to adequately document and support the new lower valuation.

Taking Advantage of an Estate Freeze

If you’re interested in redoing your estate freeze contact your local tax experts to review your unique situation. Since there are many factors that can influence your ability to “refreeze”, it’s best to avoid dealing with the CRA by doing your due diligence. Contact us if you have questions regarding this tactic, or want to learn more.