Corporate Restructuring
Business expansion and growth will generally require some form of restructuring that differs from your initial incorporation.
Our tax department is well versed in the mechanics of corporate restructuring while working with your legal counsel to ensure there will be a cost-effective transition.
Family Members as New Shareholders
Often owner managers wish to add family members or key employees as shareholders. In order to avoid adverse income tax consequences to new or existing shareholders, the issuance of such shares has to be implemented in a correct manner.
Where family members are involved, we generally would first freeze the value of the present shareholders interest before issuing shares to new shareholders in order avoid any conferral of benefits to the present shareholders. New family shareholders may either hold voting or non-voting, participating or non-participating shares. The opportunity to income-split dividend income to lower income bracket individuals as opposed to the high tax bracket present shareholder may result in years of benefits, especially if the funds are to be used to fund post-secondary education.
Family Trust
We often utilize a family trust to own non-voting common shares while the parent continues to hold voting shares. The family trust if structured properly will provide the trustees with the discretion to pay dividends or capital from the trust to select beneficiaries of the trust, thereby accomplishing an optimal income splitting strategy among family members.
If there is a share sale, the capital gain may be allocated among numerous beneficiaries. If the shares are qualified small business corporation shares (“QSBC”) each beneficiary may be entitled to their capital gains exemption, as opposed to having only one $750K exemption for the existing shareholder. Effectively the capital gains exemption is multiplied by the number of beneficiaries. Depending on the manner in which the shares held by trust were originally issued, the trust may not have to own the shares for 24 months for the beneficiary to be eligible for the capital gains exemption.
Key Employees as New Shareholders
In some situations, a stock option agreement may be put in place for the key employee to have the right to purchase common shares at a predetermined purchase price over a 3 to 5 year period. This is generally done where the employee can not afford buy-out the existing shareholders at the current fair market value.
The alternative is to freeze the company and issue new shares for a nominal amount to the employee with the present shareholder holding both (i) fixed value shares equal to the value at the time of the freeze and (ii) controlling voting shares. At some latter date, the employee may acquire the funding to purchase the fixed value shares and the voting control shares held by the present shareholder.
Creditor Proofing and the Third Party Sale
Corporations that accumulate excess cash not needed for working capital requirements or other investments may not entitle individual shareholders to their $750K maximum available capital gains exemption because 90% of the fair market value of the company’s asset is not used in an active business. In this regard, we advise the owners to transfer those assets in a tax-deferred transaction to a new sister corporation which also protects those assets from the business operations of the operating corporation.
Often we see clients with an offer to sell their shares, but the company holds these passive assets. The foregoing tax-deferred transaction to purify the company may not be accomplished successfully because the mechanism of the tax deferral rests on the premise that we do not have an unrelated person acquiring the shares of the operating company. Therefore it is imperative that the company have a mechanism on hand to purify the company on a timely basis or at a minimum to ensure that the shares of the company are QSBC shares for a period up to 2 years prior to a sale to an unrelated third party.
