Impact of economic Downturn and Opportunities

As we are currently in the midst of a global pandemic, we have seen significant impact on a variety of industries. While some businesses have benefited from the current climate more businesses are feeling the negative effects. Many organizations were faced with cash flow concerns until government relief programs were introduced. Real estate is currently taking a hit, and corporations could see shares impacted as well.

With any recession or economic downturn there are often opportunities to adapt to the situation. Lower values in certain areas in assets (like real estate and business values). For some this may create the opportunity to purchase a business or more assets if they have the cash or are in a position to lend. Some financial advisors have suggested to invest in the financial market if they have the patience and ability to do so especially for long term investors.

For Canadians, our future plans have changes. Some vendors are forced to speed up retirement or forced/choose to sell their business which may create an opportunity for buying new business. We can set up favorable structures out in place for both parties. There are options such as vendor take back mortgage where the buyer can spread out payments to allow passive income, or earnout clauses. This may very well be the perfect invitation to make business decisions you may not have initially planned for in 2020 and the coming years.

Debt Write-Offs & Forgiveness

Some clients could be facing Accounts Receivable that may or may not be collected. These are referred to as Doubtful Debts and there are a few ways to handle this specific issue. If it is presumed that they will likely not be collected, we have the option to take a deduction in this current fiscal year with that reserve included in our income next year. The alternative is that the business takes a deduction next year when we reevaluate those doubtful debts. If we know a debt will not be collected (ie a business has closed) we can get an immediate deduction from that being a bad debt. Your options for dealing with questionable payments are not entirely limited at this point.

Regarding outstanding loans from a lender perspective, if we know a loan will be extinguished due to a closure of a business there is the potential for capital loss treatment in writing off this debt. There are some key requirements such as capital property, and CRA has strict guidelines for what can and cannot be disposed.

Estate & Succession Planning

As business owners begin to plan their retirement and their business succession, many are looking at freezing the value and limiting their future estate tax value. For example, this is ideal if a parent owns a corporation and wishes to pass the corporation onto the next generation. This is a great opportunity in times like these if fair market value decreases, you may hold onto the current fair market value and pass it along to your children.

With estates, there is often a question of whether we should transfer assets (personal or business wise) now or leave them to be handed out in the will. With the global pandemic, some clients are looking to speed up their retirement or begin the process earlier. Some may be looking to speed up the sale of the business in addition to their retirement plans. These situations are common in times like these and should be carefully weighed with all parties involved.

Loss Utilization

It is highly likely that some corporations have faced business losses due to the currently economic climate. There are 2 main strategies to consider in this situation. You could opt for Amalgamation or Wind-Up. This could be an opportunity to combine 2 separate businesses and offset the total losses with gains. This path does not come without risk. You could expose assets to liabilities, and there are also legal costs involved. Taking the assets and liabilities of both companies into account and truly weighing the options is vital in this situation.  

Capital Gain/Loss Planning

In the event of a loss you may consider looking at a capital dividend account. This is a notional tax pool used by corporations and is often used to increase tax flow in times like now. This will allow access to cash on a cheaper basis and make it easier to gain access the cash in a general sense.

Capital gains are an opportunity to utilize capital strips. Again, this option is not without risk either. There are various rules and regulation put out by CRA. There is also a cost involved as there is often a company that needs to be set up, and these practices should be reserved for larger transactions. If we are comfortable with the risk of the transaction, we are able to get cash out to the shareholders with a lesser tax burden.

Other Tax Planning Considerations

Another option to consider in any climate is income splitting. Rather than the higher income earner of the family earning all the income you can to split it with other family members with lower incomes within the household thus relieving some of the tax burden.

Some of your investments may have changed this year and this may be an opportunity to make changes to your investments. You could take a lower gain and transfer to a different type of investment such as a TFSA or RSP and make plans for your future in this manner.

 

For a more in-depth conversation about these topics, we invite you to watch the webinar in its entirety here.