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Succession planning

The most common form of succession planning involves utilizing section 86 of the Income Tax Act to effectively “freeze” the value of an individual’s estate for estate tax purposes while facilitating the transfer of future growth to the next generation or other beneficiaries using shares of a corporation. This is typically achieved by exchanging the individual’s common shares or other assets, which have appreciated in value over time, for preferred shares or other fixed-value assets which no longer appreciate.

By exchanging common shares for preferred shares, the individual effectively transfers any future growth or appreciation in the value of the business or assets to the next generation or other beneficiaries. The preferred shares held by the individual have a fixed value, shielding them from future increases in the value of the underlying assets.

A Section 86 estate freeze provides several succession planning benefits, including:

  • Preservation of Wealth: By freezing the value of the estate, the individual has drawn a line in the sand for the appreciating asset (which is typically the shares of a corporation) and can now preserve the value of their assets for future generations by minimizing the impact of estate taxes. As a result of the freeze, the individual can properly plan and insure over the capital gains tax which will inevitably arise on one’s death. If no freeze had occurred, the appreciating asset would continue to accrue value until the date of death of the taxpayer and may amount to an enormous amount of capital gains tax.
  • Succession Planning: The estate freeze facilitates the orderly transfer of ownership and control of the business or assets to the next generation, ensuring continuity and stability in family businesses or other enterprises. Without a freeze, a new generation would have to buy-in at fair market value which would require them to come up with the funds to purchase. An estate freeze allows the present generation to freeze the current value of an operating company which value will always accrue to that generation, and then allow a new generation to come in and acquire shares at no cost which will then accrue value and create wealth over the new generations’ lifetime. A corollary benefit here is that the retiring generation does not continue to pay tax on any increase in value of the company that will accrue to its successors.

Succession planning is a critical process for businesses to ensure continuity and long-term success. Succession planning goes beyond simply filling vacant positions; it entails strategically grooming and preparing individuals to take on leadership roles, ensuring a smooth transition and minimizing disruptions to business operations as well as minimizing tax implications. Speak with one of our business lawyers as to whether your family business is in need of succession and estate planning.

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