Corporate Reorganizations and Business Valuations
Tax planning can involve a long-term strategy to structure investments and business assets in a way to defer or ultimately reduce the overall taxes that will need to be paid.
When working with an experienced tax specialist there are several options that can be considered depending on specific factors such as the availability and need for cash, family needs, life insurance, nature of the assets, transferring ownership to the next generation, charitable giving, and in some cases a family legacy.
Business owners often will need to address a larger number of tax considerations because their assets tend to be more complicated. In many cases, business assets are less marketable or less liquid than a portfolio of marketable securities traded in an active stock market. One of the more common tax deferral options is an estate freeze or corporate reorganization. An estate freeze fixes the value of the business at a point in time, and as a result, the capital gains tax payable on death. In a simple estate freeze, the tax payer exchanges an investment for fixed value preferred or special shares. This involves transferring certain assets (e.g., depreciable property, eligible capital property, inventory, etc.) into a corporation in exchange for non-growth shares worth equal value, or if the business is already incorporated it involves transferring or exchanging shares of the corporation at their fair market value.
There are various considerations under the Income Tax Act that need to be factored into a properly executed estate freeze and your tax advisor will guide you through the process. However, one of the key items that the Canada Revenue Agency (CRA) will potentially assess is whether the property was transferred at fair market value. This is because the tax payer/ parties involved are not considered to be acting at arm’s length. As a result, a business valuation prepared by a Chartered Business Valuator can be used to support the fair market value elected in the transaction. Chartered Business Valuators are also familiar with complex assets such as life insurance, embedded taxes, intangible assets, real estate, and holding companies, as well as industry specific considerations.
While the CRA does not specifically require that a business valuation be prepared by a Chartered Business Valuator, it does however, require that a reasonable attempt at valuation be performed. The CRA may also request a copy of the valuation that was performed to assess whether it properly supports the transaction.
If the transaction is not properly supported from a tax and valuation perspective, negative tax consequences and/or penalties may apply and the entire purpose of the corporate reorganization may be ineffective. As a result, a business valuation prepared by a Chartered Business Valuator can help to support your transaction to achieve your goals and long-term plan.
Based on the current economic environment and COVID-19 impact, some tax payers are now considering whether a “refreeze” of a previously undertaken estate freeze could be appropriate. This may be the case where preferred or special shares issued previously are now worth considerably less than their original value. Under a refreeze, these shares would be revalued at the current fair market value that reflects the corporate/industry outlook and market factors. In this case a careful review of corporation’s share structure would be required.
DJB has experienced Business Valuators and Tax professionals that can assist, if you are considering the above planning. Please contact us if you have any questions or would like to discuss how we may be able to assist.