Canadian Auto Dealer - It's a good time to think about tax planning | Features

The automobile dealership environment has almost literally been turned upside down in the past year. For many, you’ve had to deal with a host of changes and adjustments on a near-daily basis just to keep the doors open. With all the other urgencies, chances are that tax planning wasn’t high on your list of priorities. But with all the changes that have taken place, there’s also a good chance that the tax-planning measures you took when times were much better may not be the most appropriate for today’s environment.

That’s not necessarily a bad thing. In fact, now may be the opportunity to make some further changes that could ultimately save you a significant amount of money.

Franchise valuation

A widespread issue for auto dealers in general has been the incredible run-up in franchise values over the past 15 years or so. Some dealers will have carried out estate freezes to lock in the value of the company at a given point in time, which allows any future growth in value to accrue to the next generation of ownership. With the recent decline in the economy, however, many franchises now have estate freeze valuations that are far above their current worth.

This situation does not carry any immediate tax implications, but it does represent a rare opportunity to “re-set” the value of the dealership company at currently depressed levels, thereby making any future increases in value tax-deferred until the next generation of owners die. The monetary implications can be considerable because dealer valuations are generally based upon multiples of EBITDA (earnings before interest, taxes, depreciation, and amortization). With earnings for many down dramatically over the past few years, in a weak auto sales environment, the potential for tax savings is in the millions.

Potential for insurance savings

A dramatic refreeze may often have another implication. Generally, a franchise value freeze produces an estimate for tax liability on death that has been insured against. Re-setting the franchise value may mean savings by reducing the amount of insurance needed to fund the tax on death, or alternatively, that insurance can be left as it is to enhance the value of the estate that will be left to heirs.

While applicable to many of the approximately 3500 auto dealers across the country, the “refreeze” tax maneuver may be especially valuable to surviving GM Canada dealers who stand to profit from the disappearance of nearby sister franchisees. Many of those survivors are currently attempting to buy up inventory and capture market share. Now is the time to refreeze the dealership value before the value of the franchise begins to increase as a result of GM Canada’s much smaller dealer network.

For all dealers, regardless of which OEM you represent, the bottom line is that it there’s likely a great tax opportunity waiting for you.

KPMG Enterprise, which is devoted exclusively to serving the needs of private companies in Canada, serves both auto dealers and OEMs amomng its clients. With over 50 years of combined experience, KPMG Partners Tom Kostopoulos and Ted Spevick are trusted advisers to the auto dealer industry.

Further information is available from Tom Kostopoulos at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .