September 15, 2017

Using an “Estate Freeze” to Save You from Future Tax

The current business and investment environment in Alberta, while not conducive to making money, might be favourable in terms of saving tax in the future. An incorporated business owner will […]

The current business and investment environment in Alberta, while not conducive to making money, might be favourable in terms of saving tax in the future. An incorporated business owner will likely have seen the value of their business decline over the last 18 months. Similarly, the value of an investment holding corporation is probably also worth less today than it was in the past. However, both the business owner and the shareholder of an investment holding corporation are optimistic that a recovery or rebound will occur.

When we die, we are deemed to dispose of all our holdings at fair market value. Therefore, both the business owner and the shareholder of an investment holding corporation are deemed to dispose of their shares at fair market value. If the shareholder is married or in a common-law-relationship, the deemed disposition is deferred until the latter death of the couple.

The deemed disposition upon death is based on the fair market value of the property measured at the time of death. But what if you could lock in that value using today’s suppressed values? That’s where the estate freeze comes in.

Example:

In early 2014, John’s incorporated oil and gas services business (Serveco) was booming; so much so that John received an unsolicited offer of $8 million for the company. John declined the offer. If John would have sold Serveco he would have realized an approximately $8 million capital gain, and would have realized tax of approximately $1.56 million.

The tax result to John would have been the same if he had died (in 2014) holding the shares of Serveco, and assuming he was not married.

It is now the Spring of 2016 and Serveco’s business is a fraction of what it once was. Serveco is probably worth $2 million, if that. John is optimistic that the value of Serveco will rebound as the economy turns around.

John is advised to implement an estate freeze and exchanges his existing shares of Serveco for $2 million worth of “freeze shares”. John’s advisors coach John on the establishment of a family trust, where John, his children and other family members are named as beneficiaries.

The economy in Alberta rebounds and Serveco is once again making money. Unfortunately, John passes away in 2020. Serveco is valued at $7 million at the time of John’s death. However, because of the estate freeze implemented in 2016, John’s Serveco shares are only worth $2 million, with the family trust holding the other $5 million of value.

John’s estate tax liability is $480,000. If John wouldn’t have undertaken the estate freeze, his estate tax liability would have been $1,680,000.

This estate freeze concept applies equally to shares of an investment holding corporation. In fact, an investment holding corporation can be created to facilitate the estate freeze if one is not already set up.

For more information or to discuss how you can take advantage of an “Estate Freeze” opportunity, contact our Taxation Advisory team at Catalyst.