Securing Your Business Investments
posted in: Commercial
Business owners in the Peace Region and throughout face uncertain economic times. The COVID-19 pandemic and historically low energy prices will continue to present challenges to businesses as we move forward. KMSC Law has been working with our clients and their professional advisors to proactively protect our client’s interests by providing practical and economical solutions to help our clients secure their business investments.
Proactive planning involves two key components:
- identifying risks to investments and assets and implementing strategies to protect those investments and assets from creditors, and
- identifying planning opportunities to improve tax efficiencies, cash extraction and business value.
One proactive measure that may be beneficial to many business owners is securing any outstanding shareholder or intercompany loans with appropriate loan and security agreements and registering them at the Alberta Personal Property Registry.
The benefit of securing outstanding loans is establishing and maintaining priority against other creditors. Priority is essential should creditors wish to enforce their claims against your corporation, particularly if at the time of enforcement, your corporation has limited cash and capital assets.
Several planning options allow business owners to engage in effective tax and financial planning during this economic downturn. Each business owner’s opportunities will be fact-specific to them as to what options are available for consideration. Options that may be available include:
The 2018 federal budget brought significant changes to the rules affecting tax on split income (TOSI rules). Despite these changes, strategies can still be implemented to split investment income with your spouse, children and potentially your grandchildren when specific criteria are met.
There may be opportunities to utilize investment losses against income and gains that were realized by you or a person or entity related to you.
The current pandemic and downturn will cause the value of many businesses to decrease. There may be opportunities to freeze the existing value minimizing the tax liability to your estate while passing on future growth to the next generation. If you previously implemented an estate freeze, you should consult with your tax advisors to consider whether there are any tax advantages from implementing a refreeze to reduce tax liability.
Crystallizing Capital Gains
There are concerns that the federal government’s fiscal challenges may lead to a change in the capital gains include rate in the future. In some circumstances, there will be opportunities to realize a gain at the current rate, thus crystallizing the capital gain, thereby reducing future tax liability if the capital gains inclusion rate changes.
Capital Dividends can be received tax-free to a resident Canadian shareholder. We recommend discussing with your tax advisor, whether capital dividend opportunities can be utilized.
Purification transactions typically involve removing passive investments (e.g., real estate holdings) and excess cash from a corporation to allow it to qualify for the capital gains exemption. We recommend that you review your corporation’s asset mix with your tax advisors to help identify whether you may be able to take advantage of a purification transaction. A purification transaction is a valuable tool to consider if you wish to sell your business and take advantage of capital gains exemption opportunities for shareholders.
While this list is not exhaustive, it does highlight that there are many planning opportunities that allow shareholders to reorganize their corporations to achieve tax efficiency, liability and asset protection, improve exit options and to implement future growth strategies. It is important to consult with your professional advisors in a timely fashion as the availability of some options may be time-sensitive based on your situation.
Our team is following legal and commercial developments concerning COVID-19 and the economic downturn. We are here to assist with practical and up to date advice during this period of uncertainty. If you have questions related to your business, please contact us to discuss potential strategies and solutions.