Estate Planning 101: Freezing Your Tax Bill (But Not Your Assets)

Givens LLP | MAR 21 2024

Building a thriving business is no small feat, and protecting your hard-earned wealth is just as important. That's where estate planning comes in – it's not just about fancy wills and cryptic legal jargon (although there might be a bit of that, too). It's about safeguarding your financial legacy and ensuring your loved ones are taken care of, both now and after you're gone.

But it’s not always that easy, is it? Just the term, “estate planning” conjures images of dusty wills, suffocating lawyer’s offices, complex legalese, and the ever-looming CRA. Estate planning isn’t something to be afraid of, though, and we’re here to demystify the process and introduce you to a powerful weapon in your financial arsenal: estate freezing.

Let’s Talk Taxes

We all know the Canada Revenue Agency loves a good tax bite, and estate taxes are no exception. However, there are ways to mitigate the tax burden on your loved ones, and estate freezing is one of those strategies.

What you need to know – Estate freezing offers more than just tax advantages, such as:

Preservation of Control: While you transfer ownership rights to future growth, estate freezing allows you to retain control over the business through special voting rights often attached to preferred shares. This ensures you can guide the company's direction while setting your heirs up for future success.
Income Splitting: By issuing new common shares to your beneficiaries, estate freezing introduces them as shareholders. This can be particularly useful if your beneficiaries are in lower tax brackets. As the company prospers, any future dividends they receive could be taxed at a lower rate, effectively splitting the income tax burden within the family.

Think of it like this: You've built this amazing business, and its value is steadily increasing. Estate freezing helps you lock in the current value of your shares. This means any future share growth in the business is passed on to your new shareholders – your beneficiaries – and when you pass away, there will be a lower capital gain on the deemed disposition of those shares. By using the capital gain of these shares, you can also determine what the tax liability will be in advance to establish a payment strategy.

Here's how it works: Section 86 of the Income Tax Act allows for a specific type of estate freeze called a preferred share exchange. This allows you to swap your common shares for preferred shares. By converting those common shares, you lock in their value.

Think of it as cryogenically preserving your wealth. Your business grows? Fantastic! But CRA won’t touch that growth until you thaw those shares. The key here is that the preferred shares represent the business's current value, including the right to receive dividends. Any future growth in the business's value rests with the new common shares, typically held by your beneficiaries.

Now, don't worry—this isn't some financial magic trick. It's a legitimate and well-established strategy. Think of estate planning like making a gourmet pizza—you need the right ingredients AND the know-how to put it all together. That's where we at Givens LLP come in. We're a team of experienced professionals who can help you navigate the complexities of estate planning, including creating a tailored strategy that incorporates estate freezing and other tax-saving techniques.

So, don't let the CRA get their hands on your legacy and unnecessarily diminish the wealth you wish to pass on to your beneficiaries. Contact Givens today, and let's work together to ensure your business thrives not just in your lifetime, but for generations to come. Remember, a little planning now can save your loved ones a big headache (and tax bill) later!