Canadian Lawyer

October 2019

The most widely read magazine for Canadian lawyers

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FEATURE 20 www.lawtimesnews.com Should estates freezes be put on ice? There's a debate among tax and estates professionals about whether estates freezes efficiently transition a business or simply avoid tax ON AUG. 20, the prominent accountant Allan Lanthier — a retired Ernst & Young partner and former chairman of the Canadian Tax Foundation — wrote an op-ed in the Financial Post calling for the elimin- ation of estate freezes. The article elicited a chorus of opposition from tax professionals. Against the backdrop of widening economic inequality, with Canada's richest 25 families holding nearly $200 billion, Lanthier introduces the tax-planning method called an estate freeze. The tactic is endorsed by the Canada Revenue Agency — as "garden-variety tax planning," a state of affairs he says is "baffling." The following is an example of an estate freeze, according to Lanthier. A man has built a company, currently worth $10 million and a sufficient nest egg. Though it will grow significantly in value by the time of his death, if he gives the company to his children at that time, they' ll have a steep tax bill. One-half of capital gains are taxable when capital properties are left to the next-in-line and Lanthier writes that "more than 25 per cent" of accrued capital gains would be owed on the death of a taxpayer in the top income bracket. So, the man freezes the estate. First, he exchanges his $10 million in common shares for $10 million in preferred shares with a fixed redemption amount of $10 million, meaning the value of the preferred shares cannot eclipse $10 million. In exchanging the common shares for preferred shares, the man secures $10 million but denies himself the gains produced as the company grows. The man's children then purchase common shares — initially with zero value — in which that growth is captured. The man continues to control the company and lives off the $10 million, while the company grows to $100 million and the common shares owned by the successors balloon in value. Without the freeze, that capital transfer would include a $25-million tax bill, but because of the freeze, no common shares are transferred when he dies and, according to Lanthier, that's a tax savings of $20 million. The successors will pay capital gains tax but not until they dispose of their shares, which could be 40 years later, he says. In an article for Canadian Accountant, tax specialist Kim Moody, director of Moodys Gartner Tax Law LLP, disagreed firmly. He writes: "Estate freezes should NOT be legislated out of existence. They are a very valuable tool to assist in legitimate succes- sion planning." Despite Lanthier's "click- bait" headline, freezes are "not reserved for the rich" but used by the "average business owner," writes Moody. Estate freezes facilitate the transition of businesses from owner to owner in an "orderly" and "tax-neutral" way, says Wendi Crowe, a Miller Thomson LLP partner in Edmonton who practises primarily in tax, M&A, business succession planning and trusts and estates. The mechanics of the estate freeze vary widely, but they usually involve an owner who has enough value in their business to retire on FOCUS ON ESTATES

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