We have previously written about how the COVID-19 pandemic has had a significant impact on global trade and the world's economies, and the potential significance of these market changes for trustees who hold and invest assets on behalf of beneficiaries of trusts or estates. However, it is not all bad news: depressed market conditions can present opportunities for estate and tax planning.
The current pandemic has resulted in a significant decrease in the value of many assets, including investments, private businesses and real estate. While that is difficult and unexpected news for all of us, it does mean that now may be a good time to implement several different estate and tax planning strategies.
- Estate Freeze. Under the Canadian tax system, an individual is generally deemed to dispose of his or her assets on death for their fair market value. An estate freeze allows you to cap the value of your private company shares at a certain point in time, so that the tax liability that arises on death can be managed, and the future value of the shares can be shifted to other shareholders (typically children, either directly or through a family trust). Implementing an estate freeze when values are lower allows you to minimize the taxes that will be payable on death, and shift more value to other family members. One challenge with implementing an estate freeze in such uncertain times is determining the current fair market value of private company shares. This may not be a difficult exercise where the assets owned by the private company consist mainly of marketable securities or real estate. But where a private company operates an active business, current fair market value may be more difficult to establish, especially where the company's industry has been more significantly impacted by the pandemic, or where the company has changed its business model and product offerings in an effort to adapt to the market. In these cases, a qualified business valuator can assist in determining an appropriate value to use in the estate freeze transaction.
- Estate Refreeze. For individuals who have previously implemented an estate freeze, if the value of the shares issued as part of the freeze has dropped significantly, it may be advantageous to implement a refreeze at a lower value.
- Using Losses. Many investors are reviewing their portfolio and wondering whether it makes sense to liquidate any investments (whether due to cash flow concerns, a desire to diversify, or an attempt to get out before values drop further). While this is a complicated investing question we will leave to you and your investment advisor, if you do decide to sell and realize a loss, it may be possible to use the loss to offset capital gains realized in a prior year, which may result in a tax refund and cash flow at a critical time. Unused capital losses can generally be carried back 3 years and carried forward indefinitely, but there are a number of rules in the Income Tax Act that restrict if and when a loss may be used, and these would need to be considered as part of this planning.
With luck, the markets will not remain depressed for long, and so you (hopefully) have a limited period of time within which to take advantage of any opportunities that make sense for you. Members of Clark Wilson's Tax and Estate Planning group are available to help you implement any of these strategies.