The COVID-19 pandemic has wreaked havoc on the global economy. Asset values have dropped precipitously in recent weeks. This temporary reduction in your overall wealth may present an opportune time to incorporate strategies to reduce taxes as part of your wealth and/or estate plan. Below, we have highlighted some potential strategies we have identified.
Please contact your client service partner or firstname.lastname@example.org if you would like to discuss any of them in further detail.
Split investment income with your spouse, children, or grandchildren (even minors) to reduce your taxes on a go-forward basis—yes, this is still possible even after Minister Morneau’s tax changes in 2018, and is expected to become even easier in the next few months.
Realize investment losses personally or corporately now to offset income and gains realized by you or a related person or entity. These losses can be carried back three years to recoup taxes paid or carried forward to future years.
Capital Gains Strips
Taxes on dividends are significantly higher than on capital gains. In some situations, we can extract corporate assets at capital gains rates. Generally, the income from those assets will be taxed more favourably once they are outside of the corporation.
Reduce or eliminate taxes resulting from the deemed disposition of your assets on death by “freezing” the value of your estate now while values are reduced—any tax liability from the growth in the value of your assets from the time of the freeze is implemented would then be passed on to the next generation. If an estate freeze already in place, consider “thawing” and “re-freezing” existing freeze to reduce estate value.
Capital Gains Crystallizations
There has been concern in recent years that the federal government will increase the capital gains inclusion rate (currently only 50 percent of a capital gain is included in income). This concern continues to be valid in light of the government spending occurring as a result of the COVID-19 pandemic. Consider a transaction providing optionality to realize a gain before the capital gains rate increases.
Dividends paid out of a corporation’s “capital dividend account” (CDA) can be received tax-free by Canadian-resident shareholders. Consider paying out CDA prior to realizing losses which would reduce available CDA.
If you are concerned about creditor protection for assets, now might be an opportune time to transfer assets to a trust (onshore or offshore). Reduced asset values should mean reduced taxes payable on a transfer if the transfer does not qualify for tax-deferred treatment.
In order for a corporation’s shares to qualify for the capital gains exemption, 90 percent or more of the corporation’s assets must be used in an active business carried on in Canada at the time of the sale. Now might be a good time to “purify” the corporation by removing passive investments and excess cash to qualify for the capital gains exemption.
There are numerous reasons one may wish to implement a corporate reorganization, including to consolidate losses, achieve better organizational efficiency, creditor protection, tax efficiency, eliminate intercorporate debts, and to “package” certain assets for sale. Reduced asset values make corporate reorganizations more attractive.
For taxpayers considering emigrating from Canada, now may be an opportune time to do so to reduce or eliminate Canadian taxes upon emigration
Maximizing Cash Flow
In order to maximize your cash flow develop loss utilization strategies in corporate groups.
Use Realized Capital Losses to Extract Cash from a Corporation
Plan to use realized capital losses by individual shareholders to remove cash from a corporate structure.