Estate freeze: The time is now

April 9, 2020 | Raymond G. Adlington, M. Elena Hoffstein

The COVID-19 pandemic is currently causing over half of the global population to be living under some form of self-isolation.  Provincial and territorial government directives are properly constricting business and social activity across Canada to protect our collective health and safety.  The resulting economic uncertainty is impacting consumer confidence and behaviour and causing businesses to rapidly shift their workforce planning and methods for delivery of goods and services to their customers.

Investors and business owners have unfortunately seen the value of their holdings drop precipitously since late February.  During March, the S&P / TSX composite index declined approximately 20%.  Small and medium-sized privately owned businesses in Canada are being disproportionately affected by the forced slowdown of economic activity.  Although uncertain how long these conditions will prevail, we all expect a new normal to eventually emerge for our businesses and our economy.

Worth remembering during these difficult times is the North American economic performance following the 1918 influenza pandemic.  Over the course of the following decade, North American stock market indexes multiplied several times.  The decade became known as the roaring 20s, featuring an incredible level of political and social change as mass market innovation drove the creation of value for entrepreneurs. If history comes even close to repeating itself then now the perfect time to implement an estate freeze.

An estate freeze is an accepted tax planning technique to reduce future capital gains tax payable by the individual implementing the freeze (the “freezor”) on, for example, the death of the individual.  The freezor transfers assets to a private corporation (or partnership) in exchange for an interest in the corporation (or partnership) having a fixed value equal to the value of the assets at the time of transfer.  The common shares of the corporation (or partnership common units) are owned, directly or indirectly (often through a trust )  as situations dictate, by related individuals or employees or prospective purchasers.  The freeze may be complete, with the freezor receiving a fixed-value interest, or partial, with the freezor receiving both a fixed-value interest and a common share interest.

Consider the present value of implementing an estate freeze now on an unregistered investment portfolio of publicly traded securities.  Let’s assume that the value of the portfolio at the beginning of March was $500,000 and has fallen to $400,000 now.  Let’s also assume that this amount, together with other sources of income such as registered investments and pensions, is sufficient to meet your anticipated financial needs.  Finally, let’s assume that the value of the portfolio doubles to $800,000 over the next decade.

Freezing now means avoiding capital gains tax on this future growth in value.  At current marginal income tax rates and at the current 50% inclusion rate for capital gains, the expected future tax saving after ten years is $89,000 – $108,000 depending upon the province or territory of residence.  The present value (using a 5% discount rate) of this future tax saving of approximately $55,000 – $66,000 wildly exceeds the implementation cost of the freeze, but waiting until the value of the portfolio rebounds to pre-pandemic levels sacrifices 25% of this value. The time to freeze is now and you’ll probably find that the return on this investment will be among the best of all the investments you make.  These principles apply equally to entrepreneurs operating active businesses as they do to those in or near retirement with the investment portfolio described above.

Those who have already implemented an estate freeze may consider a “refreeze” if the total value of the corporation is now less than the value at the time of the original freeze.  This is the subject of a separate article by our colleague William Fowlis.

With eight estate freeze techniques available and important compliance requirements to meet in the implementation of each, please seek advice on which technique is best for you.  We will also work with you to ensure you maintain a level of control and cash flow you desire after the freeze and that the shares related individuals acquire are protected from future claims.  Structured properly, we can also set up your freeze so it can be thawed if your future financial needs exceed your current expectations.

The time is now for you to consider an estate freeze. We’re happy and ready to set up a videoconference to learn about you, your family, your business and your future plans so we can recommend an estate freeze that works for you.


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