David A. Altro and Jonah Z. Spiegelman recently co-authored an article which appeared on Advisor.ca and is scheduled to appear in the March or April 2014 edition of Advisor’s Edge magazine. In the article, David and Jonah explain the tax benefits of an estate freeze, which is a follow up piece on David’s recent article titled The complicated landscape of US estate tax, already published in Advisor’s Edge. Click here to view the article online or scroll down to read and excerpt of the piece.

Tax benefits of an estate freeze

February 2014

Corporate reorganizations and estate freezes are essential strategies for owners of closely held businesses with substantial retained earnings and low adjusted cost bases.

Canada imposes a capital gains tax at death. Section 70(5) of the Income Tax Act (ITA) says a person who dies is deemed to have sold all capital assets at fair market value immediately prior to dying. The proceeds are taxed as capital gains in the deceased person’s terminal tax return.

Without proper planning, shares of closely held corporations are exposed to significant tax liability in the owner’s estate.

Estate freeze basics

This strategy freezes the amount of corporate capital gain that’s taxable in a business owner’s estate. After a properly structured freeze, any further growth in the company’s value will accrue not to the principal shareholder, but to his or her successors or (more commonly) to a discretionary trust set up as part of the freeze. Please click here to view the rest of the article.