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Weathering the storm: Island tax professionals weigh in on business planning around uncertainty

Jennifer Dunn, a tax partner with BDO Canada, says the current economic downturn is an opportunity to review estate planning.
Jennifer Dunn, a tax partner with BDO Canada, says the current economic downturn is an opportunity to review estate planning. Terrence McEachern/The Guardian

As the financial impact of COVID-19 continues to hit P.E.I. businesses, planning for an uncertain future can be a daunting task for owners. Recently, the province and federal government have introduced funding programs to help businesses and self-employed Islanders during the current economic downturn.

The federal government has also extended the deadline to file taxes to June 1 as well as the deadline to pay any amount of taxes owed to Aug. 31. 

This week, The Guardian spoke with two well-known Charlottetown tax professionals – Jennifer Dunn with BDO Canada and Paul Deighan with Grant Thornton LLP – to offer some strategies and insights for business owners to help weather the economic storm.

Jennifer Dunn (BDO Canada)

Jennifer Dunn, a tax partner and board member with BDO Canada, said that one area that the current economic downturn may provide an opportunity for is estate planning. 

For example, an estate freeze allows someone to lock-in the tax that will be payable on an investment portfolio that is passed onto others. 

"Under an estate freeze, the current value of the portfolio is frozen in a corporation for your benefit while allowing future growth to accrue to others, such as your children," she said.

If an estate freeze has been done in the past, the economic downturn also provides an opportunity to re-freeze the estate, especially if the value of the corporation has declined.

You may be able to re-freeze the preferred shares at a lower value and thereby reduce the amount that is taxed.  

In terms of whether to invest in an expansion or open a new location, Dunn said businesses should pause on those plans, closely monitor cash flow and attempt to cut or defray costs as much as possible. 

"Cash flow will be challenged with the downturn in the economy. Large businesses will be able to weather the storm more effectively because they have contingency plans in place. However, we anticipate that small-to-medium sized businesses will struggle," she said.

"The real-time experience in China and Italy is that SMEs are getting hit hard.

All of the sudden, their revenue dries up.

They are struggling to meet payroll. They are struggling to keep the business going with employees off sick. And, suppliers are refusing to supply them because they are concerned the SME will go under and won't be able to pay." 

A main concern she's hearing from clients involves the health and safety of their employees. With so many employees working from home, it follows that businesses need to review and make sure their IT infrastructure can accommodate that new working situation. 

Businesses also need to review their supply chain and make arrangements to use alternative sources if their regular supply chain is disrupted, she said. 

Dunn said a positive move recently by the federal government was extending the April 30 tax filing deadline to June 1.

"While this is a welcome change, we encourage taxpayers that are in a refund position to file as soon as possible so that they have access to this cash when other cash flow sources may become restricted," she said.

Paul Deighan, a tax partner with Grant Thornton LLP, says one strategy for businesses is trying to convert fixed costs into variable costs. Terrence McEachern/The Guardian
Paul Deighan, a tax partner with Grant Thornton LLP, says one strategy for businesses is trying to convert fixed costs into variable costs. Terrence McEachern/The Guardian

Paul Deighan (Grant Thornton LLP)

Paul Deighan, a tax partner with Grant Thornton LLP, agrees that businesses should be looking at ways to maximize their cash flow and cut costs.

One area that business owners should be looking into is tax payment installments that are based on last year's business.

Given that the current business climate has changed, Deighan said business should speak with their tax adviser about having those payments reduced if revenues and profitability have been negatively affected.
Another strategy to maximixe cash flow is to try and turn fixed costs into variable costs when possible, he said. 

"If you have an asset today that you own, what you can do is sell that asset, get the cash for that, and then lease that very asset back, whether it's a building or a vehicle or a piece of equipment, or whatever.

Therefore, you get an upfront influx of cash into your business and then a slower drain on that cash to the lease operation."

In terms of cash flow management, Deighan says that even though everyone is struggling, now is the time for businesses to start trying to collect their accounts receivable (an amount owed by customers who purchased goods or services on credit) or inquire about writing them off and getting an HST refund. 

"Those kinds of numbers can add up. Every little dollar is going to count," he said.

Businesses should also be reaching out to their suppliers and let them know if their business is going to struggle for the next while. Similar to communicating with customers and suppliers, it's a good idea for businesses to reach out to their loan lenders about payment options, such as deferring payments during our financial situation, Deighan said.

Even with all the challenges facing businesses, Deighan also sees opportunities, such as possibly refinancing loans as interest rates drop and inquiring about whether a company has a capital dividend account, which could provide a shareholder with a tax-free dividend. 

In general, he said business owners should try and remain calm during these trying times. But even that has its challenges.

"It's pretty hard to do when you see your sources of revenue drying up right before your eyes," he said.

"It's bad, there's no question it's not great. But within the badness there lies some opportunities for the future in terms of saving taxes." 

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