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Estate Freezes Reduce Tax Liability And Simplify Estate Planning

Sole owners of corporations who want to minimize their taxes or create make family succession plans for a thriving business should consider implementing an ‘estate freeze’. Owners can use estate freezes to restructure their company’s ownership by limiting the value of the owner’s assets and transferring future growth to the owner’s family. This allows owners to reduce the amount of taxes that they have to pay.

Objectives Of Estate Freezes

Consider implementing an estate freeze only if you have sufficient assets to support your retirement. Then use an estate freeze to achieve other objectives.

Minimize and defer tax. An estate freeze allows you to defer tax on accrued capital gains on your corporation’s shares by passing the future growth of your corporation to others. The amount of tax you pay when your shares are eventually disposed of will be reduced. The tax amount may be even less if your beneficiaries are in a lower tax bracket, so they will pay less tax on the accrued gains.

Family business succession. An estate freeze enables you to smooth a family member’s path to succeeding you as owner of the corporation. This is accomplished by freezing the value of your shares in the business as of a certain date and passing the future growth in value of your shares along to your family member. The family member can start working in the business while you use the frozen portion of your corporation’s assets to support you in retirement.

Income splitting with family members. In an estate freeze, you make your family members in lower tax brackets shareholders of your corporation. Your corporation then pays them dividends. They pay less tax as they are in lower tax brackets than you, reducing your family’s overall tax payment.

Multiplying the lifetime capital gains exemption (LCGE). Certain private corporation shares receive tax breaks on capital gains when their shares are sold. You may want to put an estate freeze in place if

  • your corporation qualifies for the LCGE and
  • the value of your corporation increases to an amount greater than your LCGE

The estate freeze transfers some of the growth in value to your family members who are also shareholders. Each shareholder can claim a LCGE individually. Your family members could use their LCGEs and reduce taxes payable on capital gains when you sell your business.

Probate fee reduction. Probate fees are high in certain provinces. An estate freeze limits the size of your estate and reduce the amount of probate fees payable upon your death.

How To Implement An Estate Freeze

Estate freezes are complex instruments. Improperly structured estate freezes may lead to greater tax liabilities because of the principle of attribution. This limits income splitting to certain people. Money you paid to your children and spouse may be attributed to you.

Owners of personal or family corporations who are nearing retirement should consider how estate freezes can help them. Freezes facilitate family business succession planning and can considerably reduce the amount of tax owing to the Canada Revenue Agency. Consult experienced legal counsel and knowledgeable tax advisers who can assist you in designing and implementing an estate freeze that will best serve your purposes.

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