By Jeff Henkelman
One of the keys to emerging from the covid-19 crisis successfully has been for businesses to learn and adapt quickly. The same principle applies to tax planning – particularly during these uncertain times.
Although the economic picture continues to evolve, it is important to take an active role and sit down with your advisory team – accountant, lawyer, financial planner – before the door closes on existing opportunities. All levels of government are facing historic deficits as the country struggles to recuperate, suggesting that changes in personal and corporate tax regimes are in store.
Creating a strategy ahead of change will help position you to maximize opportunities and reduce your current and future tax burden. The following are some issues and options for you to consider when setting out your tax plan.
Expected operating losses
Should I carry operating losses forward to the next tax year, or back to a previous year?
The traditional method to deal with operating losses was to carry them back, as tax rates have tended to decrease over the past few decades.
But these are far from traditional times. If you anticipate that your corporation will see operating losses for the 2020 tax year, gain a better understanding of the implications of and options for carrying the loss forward or backward before acting. In Alberta, the government recently reduced the general business corporate tax rate by 2%; the possibility exists that our provincial and federal governments may follow this trend in the short term as they try to reboot our economy. But lower rates may not last long – there is a lot of speculation that corporate tax rates may need to go up to cover the deficits that have been created.
Business groups with multiple corporations may want to restructure to accommodate losses in one company and profits in others. Proper planning involves exploring various strategies, including wind-ups, amalgamations, or transferring certain assets from one corporation to another to use the losses to offset profits.
Where cash flow is a concern, using these losses can have a significant impact on your business’s ability to weather the storm and re-emerge successfully and thrive.
Corporate value decline
Has the value of the shares you hold in a private corporation decreased?
Declines in share value could be due to a reduction in the value of underlying assets or to operating losses – or both. Now may be the time to minimize future taxes on death by effecting an estate freeze and introducing family members or family trusts into the ownership structure.
If you have previously undertaken a freeze, you might even consider refreezing the value locked in the preferred shares if the value of the business is now lower than when it was first frozen. Refreezing your estate can reduce some of the value that could have been locked in the estate, transferring future value to the next generation.
Covid-19 has put estate planning top of mind for many business owners and taking steps now can significantly reduce the future tax burden on your heirs. In Saskatchewan, for example, a properly executed estate freeze can save your estate upwards of 23.75% in taxes.
- Buying out other shareholders in your business may be more attractive now, given the potential for softer corporate values.
- Transferring assets out of the corporate environment to your personal ownership can be more cost effective if the value of those assets has fallen.
- If cash flow has been negatively affected, but retaining key employees is critical, consider equity positions as compensation while values are lower to minimize future taxes on benefits. Many business owners are looking to retain key employees using forms of an employee stock option plan.
Protecting tangible assets
Do you have a business with tangible assets?
Now, more than ever, business owners are starting to take action to protect assets in their business from the risks they are exposed to as a result of business operations. For example, you could restructure your corporation by setting up a holding company for excess cash or other passive assets not being used in the operating entity, or you could set up a separate property company for your firm’s land and building.
It’s not too late to reorganize. Consider your options to protect the corporate assets you have worked hard to accumulate.
Has your portfolio suffered a large decline in value?
In specific circumstances, personal capital losses can be very useful – for example, if you have other gains to offset the loss. For couples, if one partner has, or may have, a capital loss, explore the options for ensuring the other spouse can use the loss.
Certain transactions can be completed between spouses to take advantage of prescribed rate loans. If one spouse has a higher income than the other, you can shift income to the lower-income partner using prescribed rate loans (down to 1% from 2%, as of July 1, 2020). It is critical that the proper steps be followed, including documentation of the loan, to avoid adverse tax consequences.
Do you hold shares of a small business corporation that will not recover their value, or debt that is not collectible?
Losses on shares and debt of small business corporations may be eligible for treatment as allowable business investment losses, which are deductible against other sources of income.
Do you own shares of a holding corporation that owns an investment portfolio that has previously reported capital gains, but has now declined in value?
Capital losses can be carried back to prior years to recover taxes paid – but timing is key. Shareholders may be able to access tax-free funds first via the capital dividend account.
The future is uncertain. Take action now and have conversations with your professional advisors about the different options to evaluate what they mean to you, both as a business owner and personally. Now is the time to re-evaluate how your affairs are structured, to set up your tax strategy, and to make sure you can take advantage of opportunities and not be caught unaware.
First published in the September 2020 edition of The Business Advisor.