Opportunities for Business Owners during Recessionary Periods
Recessions need not be all doom and gloom for business owners. In times of economic downturn, some opportunities open for business owners, and in some cases their families as well, that provide long-term solutions to situations and offer strategic tax planning advantages. In the face of rising prices and costs almost everywhere else, here are some ways to save on taxes.
Selling, Succession, and Ownership Structure
Selling may not sound like the right thing to do when prices are down unless you have been considering introducing new family members into the ownership of a business or thinking about succession planning. Adding family members or transferring/increasing ownership shares to family members during a recessionary period is beneficial because ultimately you are shifting some of the future growth of the business to a family member who can take advantage of tax benefits. For the business owner, as of 2023, each Canadian resident taxpayer is entitled to a $971,190 lifetime capital gains exemption (LCGE) to shelter gross capital gains from the sale.
Example: In 2023, a business owner incurring a $971,190 gross capital gain from the sale of qualifying shares would incur $0 personal income taxes. However, the sale might be subject to alternative minimum taxes (AMT) which is a pre-paid tax and could be recovered over a seven year period.
Where a business is highly leveraged, and the only option is a sale, selling to an employee or third-party are other options. Of course, the sale might be occurring at a reduced value, but this may be a preferable option if bankruptcy is the only other alternative. On the other hand, you may have the option to sell a portion of the business and use the proceeds to pay down debt and reduce interest payments.
Freeze the Value of a Business
An estate freeze is a tax planning strategy that allows the business owner to retain the current value of the business and transfer the future value growth to future generations. An estate freeze can be accomplished by shifting future value growth directly to family members or to a family trust.
This strategy limits the business owner’s tax liability on death or sale of the business.
If the business value has declined in the current economic condition, it may be a good time to implement an estate freeze. This is especially valuable if the value of the business will significantly increase as economic conditions improve.
If your company is in the advantageous position of having a lot of cash, there are certainly some sales to be had! To extract cash in a tax-efficient manner, look for opportunities to leverage excess cash by purchasing property or investing. Both of which may offer discounted prices and a reduction on related taxes.
For example, an Ontario resident business owner can generally extract cash from a business by way of salary (taxed at 53.53%) or dividends (taxed between 39.34% and 47.74%). However, undergoing a corporate reorganization would allow the business owner to extract cash at capital gains rates (taxed at 26.76%) and being able to extract cash from the business at a favorable tax rate.
Faced with higher interest rates, energy costs, expenses, and the effects of global crises, reaching out to an accounting professional is a great way to evaluate and leverage opportunities over things you can control. Whether planning for a sale, succession planning, investment opportunity, or extracting cash from a business, owners may be surprised to learn there are several ways to improve their current situation, plan for the future, all in a tax-efficient way.