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SUCCESSion: Tax & Estate Matters

Apr 23, 2020

FAQ - Tax Planning Opportunities in a Down Market?

As we are all aware, a consequence of the covid-19 pandemic is the current "down market" in which we find ourselves.  In light of these times, we have been receiving a number of questions relating to tax planning opportunities to take advantage of the current markets.  We wanted to address some of your questions and will continue to send these updates as they arise.

Estate Freeze or Re-Freeze

What is an estate freeze?

A freeze is a common tax planning strategy whereby the owner of an asset can "freeze" the value of that asset at its current value (thereby limiting the tax liability on that asset at death) and shift the future growth (and future taxation on that growth) to other family members. A trust is often used to control access to the asset and to provide flexibility in distributions of the future growth of the asset and any income earned thereon. An estate freeze is most commonly used to freeze the value of shares of a business or real estate, but can also be implemented in respect of other asset classes. An estate freeze is particularly attractive in a down market because it provides the opportunity to limit the tax liability of an asset on death at a low value, and to shift more of the future growth of an asset to future generations.

If I did an estate freeze already, can I take advantage of the current lower values?

For estate freezes that have already occurred, it may be possible to conduct a "re-freeze" to take advantage of the opportunity to freeze at a lower value and to further shift future growth to your family members.

Crystallize Losses

My assets have lost value - are there ways that I can take advantage of these losses?

There may be opportunities to use the decline in value of certain assets to offset capital gains. For example, public securities that have declined in value can be sold on the open market, or assets that have gone down in value may be sold to family members. The resulting loss may be applied against capital gains realized in the past 3 years (and potentially net you a refund of tax previously paid), or applied against future capital gains to reduce your tax owing.

If your loss is in a corporation, you may wish to pay out previously realized capital gains as tax-free capital dividends before you trigger a loss.

If you intend to gift or sell your assets to your spouse or common-law partner, or repurchase the assets yourself, be aware that there are complex tax rules that may apply to deny or delay your realization of the capital loss (known as the "stop-loss" rules). These stop-loss rules may also apply if you are selling the asset to a corporation.

There may also be planning opportunities if you have losses in one corporation in your corporate group and gains in another.

If you would like to further discuss planning opportunities, please do not hesitate to contact one of our tax and estate planning lawyers.

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