Businesses may benefit from estate freeze in uncertain times, says lawyer
Many businesses have suffered a decline in value since the COVID-19 pandemic knocked the world off course in March, so tax obligations are a growing concern for business owners and in-house lawyers.
“Given the sudden change in the market and the world around it, there is a lot of uncertainty around current tax positions,” says Darren Hueppelsheuser, a Calgary-based partner at Norton Rose Fulbright LLP. “Any time you’re doing any tax planning or any transaction that requires a value component, there is a challenge with respect to knowing you are in compliance and filing correctly from a tax perspective.” With many advisors working remotely, access to information is more limited so more lead time is required in any transaction.
Planning for all possible outcomes is key for in-house counsel, according to Hueppelsheuser.
“Try to keep ahead of forecasting where you think your tax position will be,” he says. “Have the various scenarios laid out rather than waiting to see how things evolve as the pandemic develops. The more planning you do in advance and the more consistent communication you have with your advisors, the better the position you will be in to respond at a very uncertain time.”
The Canada Emergency Wage Subsidy is the most significant new tax program implemented by the government to ease pandemic-related financial strain. Implemented under the Tax Act, the benefit, which was introduced in March to prevent further job losses following the pandemic, has now been extended to the end of the year.
“Everything is not so much tax planning related but survival related so the wage subsidy is something that a lot of companies are looking at in terms of weathering these times,” says Ryan Morris, a partner and co-chairman of the tax group at WeirFoulds LLP.
Morris advises in-house counsel to make themselves aware of policies and programs that have been put in place by the CRA and the Department of Finance, including those related to collections and remittances and objections and appeals.
The CRA extended tax filing deadlines for businesses from June to September, which was helpful to many businesses.
“It was nice to have that flexibility, but it wasn’t something we fully utilized or benefited from,” says Scott Jeffers, managing director, legal, sustainability and corporate secretary at TransAlta. The electrical power generating company was able to complete most significant filings by May, Jeffers says. Staying abreast of developments in tax law is a priority for the legal team at TransAlta.
“We are always mindful of the tax laws generally and we keep our audit committee and the board informed of any material changes to tax law,” says Jeffers. He and his team also monitor recommendations from the Organization for Economic Co-operation and Development around foreign jurisdictions to determine whether the deduction of interest in one jurisdiction is treated as income in another.
Jeffers is also keeping an eye on reforms such as accelerated depreciation under the Tax Cuts and Jobs Act, which allows businesses to claim 100 per cent deduction on expenses on clean energy projects in Canada after commercial operation is achieved. TransAlta can benefit from that incentive as well as a tax equity regime in the U.S. that supports renewable energy projects, so some corporate planning decisions are made around those regimes. The team actively monitors carbon costs, another factor that has significant impact on business decisions.
“Typically, we don’t pursue aggressive tax planning strategies, which I think makes it easier for us to manage that risk,” says Jeffers.
Despite government support, many businesses continue to struggle. In some cases, carrying out an estate freeze at times of economic weakness can offer a huge opportunity to business owners, according to Morris.
“The value of an estate freeze is often heightened during a pandemic because valuations for most businesses are lower,” he says. “Under Canadian tax law, when someone dies, they are generally deemed to dispose of all their assets at fair market value. If they froze the value of their business during their lifetime, the growth can accrue to new common shares held by a family trust or younger family members, so the lower the value at the time of the freeze, the more that can potentially be deferred and taxed in the hands of someone who has a longer life expectancy.”
The recovered value will, therefore, accrue to the new common shares, positioning the parties to more fully benefit from an estate freeze.
An estate freeze can reap positive rewards, providing there is an expectation of growth, Morris says. In addition to deferring capital gains, it can facilitate multiple family members utilizing their lifetime capital gains exemption of $883,384 per person. Where a value recovery is not anticipated, an estate freeze would not be advisable, however.