Paying taxes later and less of them is always a beneficial advantage to your financial situation. As a succession lawyer in Toronto, Matthias Duensing is informed of the provisions under the Canadian Income Tax Act, specifically section 86 which deals with conducting an estate freeze.
An estate freeze is one of the most complicated areas of tax preparation. At Duensing Law, we can help you sort out a number of sensitive matters relating to tax, corporate law and matrimonial circumstances that may affect your succession planning.
Canadian and Ontario tax regulations must be followed to the precise detail in order to ensure that it suffices your unique business and present and future family circumstances. While you do not have to know everything about conducting a section 86 estate freeze, knowing how it works and how it can benefit you can set you up for success in the future.
What is Section 86 of the Canadian Income Tax Act?
Section 86 of the Canadian Income Tax Act enables the shareholder of a company to undertake a capital reorganization. Through the exchanging of the class of shares for the common shares of the business, the freezor is able to freeze their value of shares for a fixed amount of money. With this specific provision of the Income Tax Act, there is no cost to exchange your common shares for the preferred shares, allowing you to ‘freeze’ your gains tax at the initial share value.
The Section 86 rollover will not apply in instances where:
(i) the disposition of shares do not constitute capital property of the shareholder(s);
(ii) the disposition of other shares, including past debs and bonds;
(iii) the disposition of a shareholder of less than all of the shares of a specific class of the company’s capital stock.
What are the tax planning considerations when employing the Section 86 rollover?
Due to the reclassification of the common shares of a corporation and the transfer of the shares of the organization on a tax-free basis to a holding corporation, there is an exchange for redeemable shares from the holding enterprise that is acceptable at the market value of the shares of the initial organization.
If the transferor has children over the age of 18 years old, they will be able to purchase common shares of the holding corporation for a lesser value. The value of these special shares does not increase after the date of the estate freeze, while the future growth of the holding corporation passes to the adult children through the common shares of the holding corporation. Due to this provision taking effect, the transferor’s liability for capital gains after their death will be considerably reduced.
What are the benefits of implementing Section 86 of an estate freeze?
This provision of the estate freeze allows the adult children to pay the gains tax on their portion of wealth or value they have inherited, allowing for a prudent approach to estate planning. If there is no estate freeze that has been implemented before the death of the business owner, the family of the deceased will have to pay the gains tax.
Implementing the Section 86 provision is especially important when the business is profitable, as the gains tax is a large financial burden. By undertaking an estate freeze, the freezor is able to calculate the right amount of future gains tax and freeze it, enabling their family to plan accordingly without going into a large financial deficit.
Always consult with an experienced succession planning lawyer when it comes to your tax preparation
Estate freezes are a complex undertaking, and that is why you need an experienced estate planning lawyer to help you avoid any technical traps and pitfalls of the Canadian Income Tax Act. At Duensing Law, we can help you explore all your options of protecting your estate from severe costs upon your death, and help your family remain profitable even after you have passed on.
Contact an experienced wills lawyer today to help structure your succession planning. Call Duensing Law at (416)-601-4769 or email firstname.lastname@example.org.