The current Pandemic and ongoing economic crisis may have caused the value of your client’s company to decline. This may be an opportune time to consider an estate freeze to lock in the company’s current low value and reduce taxes ultimately payable on death by the client’s estate. Some of your clients may be faced with having to determine the value of their business during these times. This could be for tax/estate planning purposes, transaction purposes or dispute related purposes (e.g. commercial, shareholder or matrimonial disputes).
An estate freeze allows for the future growth in value of the business to accrue to the benefit of others (such as the children or grandchildren). Given the objectives of passing future growth on to the next generation, minimizing capital gains tax on death and reducing probate fees, the ability and opportunity to freeze or even to reduce the value of the previously frozen shares could be of great value. Canadian small and medium sized businesses should consider using estate freezes and refreezes as a tax deferral opportunity. However, don’t get burned and hit with a tax assessment in the process. This is an opportunity to solidify your position as the most trusted advisor by being proactive and bringing these issues to the table and rescuing your clients before they are faced with these unsettling consequences.
It is very important to understand that business valuations are becoming an increasingly integral part of an estate freeze. The extent to which the estate plan is successful is directly related to the independence, objectivity and the reasonableness of the business valuation report obtained to support the fair market value of the business used for purposes of the reorganization. Business owners and their professional advisors should ensure that the valuation meets CRA’s requirement for a reasonable attempt at determining value by involving an independent expert Chartered Business Valuator in the process.
Although valuing a business during times of uncertainty (such as the current Pandemic) can be extremely difficult, there are tax planning opportunities available to business owners. A business valuation expert help can help you navigate these complexities and provide you with the support needed to defend valuations required for these tax planning initiatives.
By Ankit Varma, CPA, CA Canada, FCA ICAI
The author can be contacted at Ankit@vspltd.ca or linkedin.com/in/icaiankitvarma/
Disclaimer: Although every effort has been taken to prepare this material, no organization or person involved with this material accepts any legal responsibility for its contents or any consequences from its use. This information presented is for educational purposes only and does not represent independent professional advice. The material has broad application. Accordingly, it is recommended to have a situation reviewed by a qualified professional.