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Tax planning in uncertain times

Wow!  What a bizarre time we have been living through recently.  The stock markets have been extremely volatile.  Bank failures.  Large business failures.  The price of oil has come down by two-thirds.  Real estate values have declined.  What next?  If I only had the answer…

It is during these tough economic times that it is tempting to put all tax planning on hold.  However, this can provide an opportune time – never a better time – to tax effectively plan your affairs.  For example, one of the most common succession planning tools that is utilized in the private client scenario is the undertaking of an “estate freeze”.  An estate freeze involves “freezing” the value of a shareholder’s interest in a private corporation so as to allow future growth to accrue to a target group of new shareholders (such as family members or employees or perhaps both).  This routine estate planning/succession planning can be very tax effective to the extent that the freeze is undertaken at a lower value.  This is true given that a typical estate freeze will involve the existing shareholder(s) exchanging their currently held common shares of a private corporation (on a tax deferred basis) for a class of shares known as preferred shares.  The preferred shares must have an aggregate redemption value equal to the underlying value of the currently held common shares.  To the extent that the currently held common shares are low in value then the tax consequences on a future disposition of the preferred shares will be less than what it could have been to the extent that the fair market value was higher.  The preferred shares will eventually be disposed of – either by an actual disposition or by a “deemed disposition” pursuant to death (since Canadian tax law requires that a disposition occur immediately prior to the death of a shareholder subject to certain tax deferrals that are available).  Accordingly, given the unprecedented decline in valuations, this may be the perfect time to revisit whether an estate freeze today makes sense or not.

During recessionary or downward times, loss utilization can be an important tool in tax planning.  It is often inevitable during downward economic times that losses will result.  It is important that such losses are not trapped so that they may be utilized to either reduce taxable income into the future or, better yet, explore tax recoveries by carrying back the losses to prior taxation years.  As many readers know, losses may only be carried back to the three prior taxation years and therefore careful planning must be done.

It is also during these uncertain times that one should take a sober look at their existing wealth and look to protect a base amount of wealth.  Such protection may involve utilization of various investment products, utilization of trusts, exploration of offshore vehicles, etc.  However, such wealth preservation and planning is usually only as good as the ongoing maintenance of such plans.  One key aspect of the review is to ensure that the individual’s wills are up to date and reflect current intentions (and have a proper “flow” to ensure that the desired result upon death does occur).  Accordingly, it is usually during these downward economic times that a thorough will review should be completed.

I could go on and on about other effective planning that should occur during a downward economic time.  Suffice to say though that putting tax planning on hold is not the right answer.  While it is definitely understandable that cost reductions must usually occur during difficult economic times, tax planning is almost always an investment and not a cost.  Consider the cost to the extent that planning does not occur.  The mathematics will always make sense to continue planning.