If you’re a business owner and you have carried out an estate freeze to fix the value of your shares in the business so that future growth accrues to the benefit of other family members, you may find your company’s cost of borrowing or access to debt is adversely affected by accounting changes proposed by Canada’s Accounting Standards Board. These changes could result in a significant increase in the liabilities that appear on your company’s financial statements as of January 1, 2016.
Is this déjà vu all over again? I seem to recall the standards folks making a similar proposal once before only to be met by similar prophecies of Doom that prompted changes or a retraction of the proposal. I don’t think I’ve ever seen a balance sheet that classifies freeze shares as a liability.
Update December 11, 2014 In response to the foregoing, David Bazar commented to me as follows:
The banks are most likely going to ask for a postponement of claim regarding the redemption rights and continue to include the amounts in equity for their ratio calculations. They do the same thing with shareholder advances now.
Sounds reasonable, except I wonder whether, if a freeze shareholder agrees with a bank not to retract shares, the CRA might take the position in some cases that the fair market value of the shares is not equal to their redemption amount. The CRA has taken something like that position when a freeze shareholder executed a shareholder agreement that impaired the retraction rights of the freeze shares.