Welcome to Biz Hub /

It's particularly important to make sure that family members, especially those tasked with carrying out your wishes, are aware of your estate plans, especially in uncertain times.
Jamie Golembek, Debbie Pearl-Weinberg, Tess Francis Nov 20 2020 14 minute read

Tax-loss selling

Superficial losses

Gifting property

Use a prescribed rate loan to split investment income

Incorporated business owners

Tax-free dividends

Loss consolidation

Business transition planning

  • Gift of shares
    One of the common transition plans for a family business is to transfer it to the next generation. Your first inclination may be to simply gift the shares of your business in equal portions to all your children, or perhaps, only to the children involved in the business. Of course, you would only contemplate doing this if you don’t need the money from the potential sale of the shares to fund your personal lifestyle and retirement.

    As discussed above, making a gift has income tax consequences. Just as with any gift, if you believe the current value of your business is lower than the recent past, now may be a good time to consider the gift of shares to family members. Any capital gain realized on the gift of shares will be lower if the value of the business has fallen, and future growth will be taxed in the hands of the family member receiving the shares.
  • Sale of shares
    In most family transition plans, rather than an outright gift of the shares, it is more likely that the business will be sold to the next generation since the proceeds from the sale represent a lifetime of wealth accumulation for the owner manager, who generally needs those funds to live on after retiring from the business. If the value of your business has dropped recently, and you are comfortable retiring on the proceeds received from a sale at this lower value, this may be an opportune time to sell to family members. If you are tempted to sell the shares to family members at a price less than their FMV, double taxation may arise, as you will still be treated as if you received proceeds equal to the FMV. But, for the family members who receive the shares, their new ACB will be limited to the price they paid.
  • Estate freeze and refreeze
    An estate freeze is a corporate transaction that allows you to essentially "freeze" the value of your ownership in the corporation, and have the future growth in the value of the company accrue to someone else, such as your children, who will ultimately control the business. The result is that your tax liability can be fixed at today's FMV and the tax liability on any future growth can be transferred to the new owners (e.g. family members.). A freeze can generally be done on a tax-deferred basis, leaving your tax bill to a later date.3

    Doing a freeze when your company's value is lower can permit you to reduce the taxes that arise on your death, assuming the value of the shares appreciates over the remainder of your lifetime. You must, however, ensure that the value associated with your freeze shares today will be sufficient to support your future needs.

    But what if you've already implemented an estate freeze when your company’s value was higher? In this case, you may wish to consider a "refreeze." For example, if you froze the company when its value was $5 million, and today the company’s value has dropped by 20% to $4 million, you could refreeze by exchanging your old preferred shares redeemable at $5 million for new preferred shares redeemable at $4 million (assuming you are comfortable with this reduced entitlement.) Note that a shareholder benefit may arise with a refreeze, so care should be taken with this strategy. Should market conditions recover and the business go back up in value, any future gain can be taxed in the common shareholders' hands instead of yours (or, ultimately, your estate’s.)
  • The lifetime capital gains exemption
    The lifetime capital gains exemption (LCGE) may be available to shelter up to $883,3844 of capital gains on the disposition of qualified small business corporation (QSBC) shares in 2020. This includes gains realized on the sales and gifts of shares, as well as estate freezes, which may allow families to multiply the use of the LCGE.5

    Simply stated, QSBC shares are shares of a Canadian-controlled private corporation (CCPC) in which “all or substantially all” (interpreted to mean 90% or more) of the value of the corporation’s assets is used in an active business in Canada at the date of sale or transfer. In addition, either you or someone related to you must have owned the shares for at least two years prior to their disposition and, during that entire two-year period, more than 50% of the corporation’s assets must have been used in an active business in Canada.

    To meet this test, owners often “purify” their CCPC in advance of a disposition of the shares, to remove passive assets that could put the corporation offside of the active business tests. There are a number of ways to do this, including removing investments from the corporation. This may be an opportune time for such purification measures if the investments in the corporation have dropped in value. This strategy could be useful even if you are not considering the disposition of your business in the short term.

Estate planning

Wills

  • Who will manage your estate
  • Who will inherit your estate assets
  • When will estate assets be distributed
  • What steps could be taken to minimize estate taxes.

Powers of attorney

Tax and estate planning using inter vivos trusts

  • Control over the timing and amount of distributions to beneficiaries, which may be particularly useful for spendthrift or incapacitated beneficiaries, who may not have the responsibility or capacity to manage funds themselves.
  • Flexibility in structuring payments to beneficiaries to allow for changes in the amount and timing of distributions, or perhaps even for changes in the choice of beneficiaries, based on future circumstances.
  • Lower tax bills for the family, which may be achieved through income splitting or charitable gift planning.
  • Reduced probate fees in certain jurisdictions, since assets placed into some types of trusts pass outside the estate.
  • Maintaining privacy for your estate since, unlike a will, a trust agreement is not subject to a public probate process.
  • Reducing income that you realize from assets. When you transfer property to a trust, the tax treatment is the same as if you sold the property at its FMV and you may have a capital gain (or loss).8 Transferring assets when values have dropped may decrease your capital gain (or increase your capital loss.) The trust (or its beneficiaries) will generally pay tax on income earned in the future on the trust assets.9

jamie.golombek@cibc.com Opens your email app.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax and Estate Planning with CIBC Private Wealth Management in Toronto.

debbie.pearl-weinberg@cibc.com Opens your email app.

Debbie Pearl-Weinberg, LLB is the Executive Director, Tax and Estate Planning with CIBC Private Wealth Management in Toronto.

tess.francis@cibc.com Opens your email app.

Tess Francis, CFP, CPA, CA, CPA/PFS, TEP is the Director, Tax and Estate Planning with CIBC Private Wealth Management in Toronto.]

To create a tailored plan for your business needs and help you achieve your goals, meet with us Opens in a new window.. We’re here to help. Talk to a CIBC Business Advisor today by calling 1-866-992-7223 Opens your phone app..

Note: This report was initially published on May 2020.

Written By
Jamie Golombek

Jamie Golombek is the  Managing Director of Tax and Estate Planning with CIBC in Toronto. Jamie is quoted frequently in the Canadian media as an expert on taxation, writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and CBC’s The National and has been a regular personal finance guest on The Marilyn Denis Show.

Written By
Debbie Pearl-Weinberg

Debbie is an Executive Director of Tax & Estate Planning with CIBC Financial Planning and Advice.  She is a member of the Law Society of Upper Canada, the Canadian Bar Association and the Canadian Tax Foundation. She also works with the Investment Industry Association of Canada on tax matters concerning the investment industry.

Written By
Tess Francis

Tess is the Director of Tax and Estate Planning with CIBC Private Wealth Management. She has over 20 years of expertise in the Canadian, U.S. and international tax groups of accounting firms as well as global and Canadian wealth services groups at Canadian banks.