Tax Planning Tips During an Economic Slowdown

The COVID-19 pandemic has caused chaos and uncertainty for many business owners and sharp declines on stock exchanges around the world. Many people have seen a significant erosion of their retirement assets. It remains to be seen how long this will last and how the global economy will recover. 

We have heard from many clients who understandably have a lot of questions. These unprecedented events do present some opportunities so we have put together a few planning ideas that may apply to you and your business. We also offer some questions to get you thinking about what may or may not be beneficial given your specific circumstance.

Investment Portfolios

Do you personally own a portfolio that has suffered a large decline in value?

• Personal capital losses can be useful in specific circumstances.
• Certain transactions can be completed between spouses to take advantage of loss rules and prescribed rate loans.

Do you hold shares or debt of a small business corporation that will not recover their value or, in the case of debt, not be 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 which 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, there may be tax-free funds a shareholder can access first.
• Consider an estate freeze to introduce family members into the ownership structure.

Current Year Operating Losses

Are you expecting your corporation to report a large operating loss for the current taxation year?

• Non-capital loss carry-back planning should first consider dividend payments to individual or Holdco shareholders.
• Utilization of losses in other corporations within a corporate group can occur in various ways — amalgamations, wind-ups or different structures that contain partnerships.

Depressed Corporate Value

Has the value of the shares you hold in a private corporation decreased substantially? This could be due to a reduction in value of the underlying assets or operating losses.

• 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.
• Buying out other shareholders may be more attractive, given depressed corporate values.
• Transferring assets out of the corporate environment can be more cost effective if there has been a reduction in the value of those assets.
• If cash flows have been affected, but retaining key employees is critical, consider equity positions as compensation while values are lower to minimize future taxes on benefits.

Do you hold preferred shares of a private corporation that may no longer be worth their value?

• Consider a refreeze transaction to exchange the existing preferred shares for new preferred shares with a lower value.

Do you have a business with tangible assets?

• Consider corporate reorganization to separate assets from operations.

The planning solutions presented above are just some of many that are possible. Contact your MNP advisor to discuss how these may apply to you and your business. For additional insights to help you navigate the pandemic’s ongoing challenges, visit our Business Advice Centre