The recent oil price collapse has challenged many businesses,
particularly in Western Canada where general economic conditions
have slowed considerably or even declined as a result. In many
cases, business values have decreased. One of the many things
business owners may need to consider in this type of economic
environment is whether any estate planning that they may have done
before should be re-visited and possibly updated.
When someone passes away, there is a deemed disposition at fair
market value (FMV) of all capital property owned by that person on
the date of death (except where property passes to a spouse or
common-law partner). As such, any accrued gains in such properties
are deemed realized and taxable in the year of death. The tax
implications can be significant if no advance planning has been
One common planning strategy is an estate freeze, which is
possible when an individual owns shares of a private company and
the value of the company is expected to increase over time. An
estate freeze can be applied to "freeze" the shares at
their current market value by exchanging common shares for
preferred or "freeze" shares, so that the tax liability
triggered upon the shareholder's death is based on the value of
the shares when they were frozen.1 Any future growth in
the value of the shares will, instead, accrue to other individuals,
such as family members of the next generation, through the issue of
common or "growth" shares to them or a family trust
(i.e., with the family members as beneficiaries). Provided that
certain conditions are met, an estate freeze can also allow for
income splitting among family members, which can mean substantial
tax savings for a family.
Assume, for example, that Derek is the sole shareholder of a
small Alberta oil and gas exploration company and undertook an
estate freeze five years ago, when the value of the company was $5
million. As a result of that estate freeze, he now owns $5 million
of fixed value preferred shares, and the new common, or growth
shares, are held by a family trust. Derek passes away 15 years
later when his company is worth $15 million. The common shares held
by the trust will be worth $10 million, representing the growth in
the value of the company since the estate freeze was undertaken.
Assuming that the next generation are the beneficiaries of the
trust, this estate freeze will have effectively deferred and
redistributed the tax liability on that $10 million of new
What if the value of a company decreases following an estate
freeze? In this situation, the value of the outstanding
preferred/freeze shares could be less than the value of the company
as a whole. Using the same example, assume that the value of
Derek's company has declined from $5 million to $3 million by
2016, due to the collapse in the oil and gas market. This may
present a good tax planning opportunity as Derek could implement an
estate re-freeze in order to freeze the value of his shares at the
current, lower value. His preferred shares can be
"re-frozen" and exchanged for new preferred shares equal
to the current $3 million value, with new common shares issued to
the family trust. As the new preferred shares have an even lower
fixed value, Derek's tax liability upon his death will be lower
than it otherwise would have been without the re-freeze. Any future
recovery in the company's value (and the ultimate tax
liability) will, instead, accrue to the common shareholders.
Another benefit of doing an estate re-freeze is the ability to
continue income splitting with family members with no or limited
interruptions (again, provided that certain conditions are met).
Where income splitting has been achieved via the payment of
dividends on common shares held in a family trust and the value of
the company has declined below the freeze/preferred share value,
the ability to income split may be at risk. To preserve the value
of the preferred shares, the payment of dividends on common shares
is generally prevented under corporate law where the value of the
company would be reduced below the freeze value as a result of the
proposed dividend. Instead, a re-freeze at the current lower value
would allow the income splitting to continue or recommence sooner
than if the original higher freeze value were left in place.
1 Capital assets other than shares (i.e., rental
properties, investment portfolios) can be frozen as well, but they
must first be transferred to a company. This transfer can often be
achieved on a tax-deferred basis.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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