A family trust for small business pays dividends for tuition *
In previous entries, I mentionned several times the use of family trust for business owners. For almost every clients, I suggest the use of said Family trust, it is a great way of saving taxes.
Today, I would like to share with you an excellent article from Tim Cestnick from the Globe and Mail, explaining clairly the advantages of using different trusts. If you have any questions regarding the same, please do not hesitate to email me. A family trust for small business pays dividends for tuition.
Every few months my extended family gets together to visit. It's a chance to get caught up with my aunts, uncles and cousins. My cousin Erik didn't make it to our last get-together. Erik is something of a permanent student. He's got more degrees than the thermometer outside our kitchen window."Uncle Ron, how's Erik doing?" I ask."He's just fine, Tim. He's back at university this month.""Still?" I reply. "I thought he finished last year. What's Erik going to be when he graduates?""A very old man," he replies. At this point, Erik is paying for his own education. But if you're looking to help your kids with the cost of postsecondary education, and you're a business owner, consider a family trust. Let me explain.
The trust
This idea is best understood by an example. Consider Scott. Scott has three children, all in their teens. University is just around the corner for them and it won't be cheap -- about $16,000 each year, everything included.Scott runs a business that has sufficient cash flow to help pay for the education of his kids. One option for Scott is to pay himself additional salary from his company to help cover the cost of university when that time comes. Since Scott is in the highest marginal tax bracket, he'll pay tax of about 46 per cent (varies by province) on those dollars. So, a $10,000 payment from his company in this case will leave just $5,400 to help cover the costs of education.
There may be a better option. Scott could structure the ownership of his company so that some of the common shares of the company are owned by a family trust. Then, the company could pay dividends to the trust annually for each child once they're 18 and are attending university or college. The dividends could then be paid out of the trust to each child to help pay for school.
The results? Scott's company will pay tax of about 17 per cent (again, varies by province) on its active business income below $400,000.The dividends paid to the trust and then out to Scott's kids will not be taxed in the trust, and will face little or no tax in the kids' hands if they have little or no other income. In fact, each child could receive about $32,000 (varies by province) in cash dividends annually and pay little or no tax if he or she had no other income. This total tax cost of about 18 per cent is much less than the 46-per-cent tax cost of paying additional salary to Scott.
Other thoughts
Now, there are rules in Canadian tax law that will make this strategy less effective if you pay dividends directly or indirectly through a trust to a child under 18. These "kiddie tax" rules will cause tax at the highest marginal tax rate on those dividends. But the idea works well for kids 18 or older.In addition, there are some other benefits to the trust strategy. If you expect the value of your business to grow in the future, you may be able to shelter part of that growth from tax using the $750,000 capital gains exemption of each of your children who is a beneficiary of the trust. The trust will also protect the assets in the trust from any creditors or future spouses of your kids. Finally, those dividends paid out of the trust could be used for any purpose -- not just education.
* written by Tim Cestnick - Tim is a principal with WaterStreet Group Inc. and author of Winning the Tax Game, among other titles. This article was published in the Globe and Mail on September 28, 2006 and was slighty edited to reflect accurate numbers.
Thursday, May 28, 2009
Tuesday, May 26, 2009
Hidden Assets: Helping your clients UNLOCK THE VALUE OF THE INTELLECTUAL PROPERTY
Hidden Assets: Helping your clients UNLOCK THE VALUE OF THE INTELLECTUAL PROPERTY
The value of intellectual property in the modern marketplace can be very significant – it is estimated that Microsoft’s intellectual property including the trade-mark in its brand, copyright in its software, and its patent portfolio is responsible for 99.5% of its $263-billion value, and that Coca-Cola’s combined brands alone are worth an astounding $67-billion, more than half of its $133-billion value. IBM receives an annual revenue stream of approximately $1-billion from the 40,000 patents it owns worldwide. Intellectual property no longer merely protects the assets such as the brand or patented products, but holds tremendous value and can be leveraged to produce considerable revenues.
Intellectual property can be described as covering many of the intangible assets of a business, and includes trade-marks, patents, industrial designs and copyright. Briefly, a trade-mark gives the owner exclusive rights (which can be extended into a permanent monopoly) in a name or sign which identifies the source of a particular product or service. A patent gives an exclusive government-granted monopoly on the production and sale of an invention in exchange for disclosure of its operation to the public. Industrial designs protect the aesthetic features of a product from imitation by others. Lastly, copyright protects creative literary, dramatic, musical and artistic works from being copied for an extended period of time after their creation, and includes computer programs.
A trade-mark is an integral part of a branding strategy, and consists of a name or sign which is used by a company to uniquely identify the source of its wares or services, and distinguish them from those of other companies. Because trade-marks can come to represent not only certain goods and services, but the reputation of the producer, if properly used and protected they can become very valuable. A trade-mark’s value can be measured, at a minimum, by a company’s repeat business, and it may also be responsible for new business resulting from advertising. A trade-mark can also be licensed to allow others here or abroad to produce a company’s wares under its supervision, in exchange for additional revenues in the form of royalties. This is the equivalent of a highly cost-effective, paid-for advertising/branding initiative for the trade-mark owner.
A patent protects new inventions, and new and useful improvements of an existing invention, and allows the patent holder to stop others from exploiting its technology for 20 years. A patent can be valued, at a minimum, as the net sales of the patented item. A patent can also be licensed to others in exchange for royalties, or may be sold as an asset. Patents can be very valuable, for example, the patent for the Pfizer drug Lipitor protects $12.2-billion in annual sales.
Industrial design protects aesthetic features, such as the shape, pattern or ornament of a product that is manufactured by hand, tool or machine from being copied for ten years, and like a patent, it can be licensed or sold, and can also be very valuable. The shape of the iPod helps it to control upwards of 80% of the portable MP3 player market, and this is protected by an industrial design registration.
Copyright applies to all original literary (text and computer programs), dramatic (films, television and theatre), musical and artistic (painting, sculpture and architecture) works, and allows only the copyright owner to reproduce the work, and to prevent others from doing the same. Copyright in Canada endures for the life of the creator plus fifty years after his or her death. Copyright includes software and is a large part of the intellectual property protection of software companies. Design trade-marks and advertising can be protected by copyright in certain circumstances as well. Copyright can be assigned or licensed, and license revenues form a significant stream of income for Hollywood and music producers, like Sony music, for example. The Star Wars franchise was recently estimated to be worth $20-billion by Forbes magazine.
Trade-marks, patents, industrial designs and copyrights are recognized and legitimate property rights that can be exploited, assigned or licensed to another entity to produce a revenue stream. Intellectual property also holds tremendous value as an asset, and can be used for financing, or be sold with the company. Properly implemented, an effective intellectual property strategy can leverage the intellectual property to produce profits in the form of income, royalties and capital gains rather than merely costs, while protecting the company’s brands or patented products from imitation or theft.
The value of intellectual property in the modern marketplace can be very significant – it is estimated that Microsoft’s intellectual property including the trade-mark in its brand, copyright in its software, and its patent portfolio is responsible for 99.5% of its $263-billion value, and that Coca-Cola’s combined brands alone are worth an astounding $67-billion, more than half of its $133-billion value. IBM receives an annual revenue stream of approximately $1-billion from the 40,000 patents it owns worldwide. Intellectual property no longer merely protects the assets such as the brand or patented products, but holds tremendous value and can be leveraged to produce considerable revenues.
Intellectual property can be described as covering many of the intangible assets of a business, and includes trade-marks, patents, industrial designs and copyright. Briefly, a trade-mark gives the owner exclusive rights (which can be extended into a permanent monopoly) in a name or sign which identifies the source of a particular product or service. A patent gives an exclusive government-granted monopoly on the production and sale of an invention in exchange for disclosure of its operation to the public. Industrial designs protect the aesthetic features of a product from imitation by others. Lastly, copyright protects creative literary, dramatic, musical and artistic works from being copied for an extended period of time after their creation, and includes computer programs.
A trade-mark is an integral part of a branding strategy, and consists of a name or sign which is used by a company to uniquely identify the source of its wares or services, and distinguish them from those of other companies. Because trade-marks can come to represent not only certain goods and services, but the reputation of the producer, if properly used and protected they can become very valuable. A trade-mark’s value can be measured, at a minimum, by a company’s repeat business, and it may also be responsible for new business resulting from advertising. A trade-mark can also be licensed to allow others here or abroad to produce a company’s wares under its supervision, in exchange for additional revenues in the form of royalties. This is the equivalent of a highly cost-effective, paid-for advertising/branding initiative for the trade-mark owner.
A patent protects new inventions, and new and useful improvements of an existing invention, and allows the patent holder to stop others from exploiting its technology for 20 years. A patent can be valued, at a minimum, as the net sales of the patented item. A patent can also be licensed to others in exchange for royalties, or may be sold as an asset. Patents can be very valuable, for example, the patent for the Pfizer drug Lipitor protects $12.2-billion in annual sales.
Industrial design protects aesthetic features, such as the shape, pattern or ornament of a product that is manufactured by hand, tool or machine from being copied for ten years, and like a patent, it can be licensed or sold, and can also be very valuable. The shape of the iPod helps it to control upwards of 80% of the portable MP3 player market, and this is protected by an industrial design registration.
Copyright applies to all original literary (text and computer programs), dramatic (films, television and theatre), musical and artistic (painting, sculpture and architecture) works, and allows only the copyright owner to reproduce the work, and to prevent others from doing the same. Copyright in Canada endures for the life of the creator plus fifty years after his or her death. Copyright includes software and is a large part of the intellectual property protection of software companies. Design trade-marks and advertising can be protected by copyright in certain circumstances as well. Copyright can be assigned or licensed, and license revenues form a significant stream of income for Hollywood and music producers, like Sony music, for example. The Star Wars franchise was recently estimated to be worth $20-billion by Forbes magazine.
Trade-marks, patents, industrial designs and copyrights are recognized and legitimate property rights that can be exploited, assigned or licensed to another entity to produce a revenue stream. Intellectual property also holds tremendous value as an asset, and can be used for financing, or be sold with the company. Properly implemented, an effective intellectual property strategy can leverage the intellectual property to produce profits in the form of income, royalties and capital gains rather than merely costs, while protecting the company’s brands or patented products from imitation or theft.
Tuesday, May 19, 2009
Succession Planning: Taming your tax liability
Further to my previous entries on succession planning, family trust, estate freeze here is a great article written by Alexandra Lopez-Pacheco from the Financial Post.
As usual, If you have any questions, please do not hesitate to contact me.
&&&&&&
Taming your tax liability
To ensure the best possible conditions when a business owner is ready to pass the helm to the next generation, succession planning can maximize the company's value from the start. That's why it's never too early to begin the process, although typically many wait until three to five years before they plan to retire - and even more wait until it's too late. Developing a long-term strategy that will ensure a company's sustainability, independent of the owner, and over years enrich the skills, abilities and experience of those chosen to be the next leaders makes the company more valuable, as well as provide more retirement funds for the owner.
Part of this process is a solid tax strategy. The longer a company engages in astute tax planning to minimize its tax bill, the more money will stay in the business, as well as in the owner and his family's pockets, leaving more funds available for the next generation to buyout the owner.
According to tax specialist Paul Woolford, partner with KPMG's enterprise services, most small businesses are doing a pretty good job with accounting, but a large percentage of them are not taking advantage of all the tax-minimizing strategies available to them. And no wonder, every time there's a new federal or provincial government budget, the rules seem to change. This is where, of course, a good tax accountant comes in. They not only know the current tax rules but also keep up with new ones. "There are ways to achieve what you want in minimizing the tax bill, but you also have to be very careful to abide by the appropriate rules, and that's something that comes into play when you're looking at estate planning and succession planning," Mr. Woolford says.
When putting together a business tax plan, keep in mind it is necessary to review all possible variations and combinations available to tailor a strategy that will meet the specific needs of the company, its owners and often, his or her family. Many accountants contend business owners should put together their succession plan before the tax plan. What's more, small businesses are often about close interconnections between the owner, his family and the company. From effective use of tax exemptions and deductions, including the $750,000 capital gains allowance, to income-splitting and family trusts - there are many options available to considerably shave down the tax bill if an accountant can see all the pieces of the puzzle.
"I look at the corporation and the shareholders, and look to minimize and defer tax on both levels, and that's often one way of keeping the tax liability down or keeping more money in the company or in the individual's bank account," Mr. Woolford says.
As profit increases and the business becomes more complex, so too can the tax planning. "There are always levels of planning, from the basic planning to the complex planning to the high net-worth situation," Mr. Woolford says. "The idea is to put in a structure. It could be a family trust with beneficiaries that may include your spouse and adult children, for example. There are ways you can pay dividends to that family trust and have that trust allocate those dividends to individuals who may be in a lower tax bracket."
A good plan will cut the tax bill and, if incorporated into the succession planning process, it will also address specific needs related to ownership transfer. For example, if an owner knows he wants to sell the company to his adult child, he might prefer to keep the company's value down to lower the tax liability at the time of transfer. On the other hand, if he is planning to sell to a third party, achieving the highest possible valuation might be a better strategy.
When Bill and Bev Wostradowski were ready to turn over the company they established in in 1978 - Lake Country Building Centre, a building supply business in Lake Country, B.C. - to their son and daughter, they solicited help from their lawyer and their accountant, Bill Corbett, tax and succession planning partner at KPMG in Kelowna, B.C. "We had very good advice from Bill and our lawyer, and we put faith in them that they were going to steer us in the right direction," says Mr. Wostradowski, who is a member of the Canadian Association of Family Enterprise. He used the organization's resources and links to educate himself on the process.
The Wostradowskis chose an estate freeze - literally freezing the value of the shares the couple owned, and issuing common shares to the two adult children who had chosen to carry on with the business, Sherri Williams and Kevin Wostradowski. "That way, the growth and value accrues to the next generation," Mr. Corbett says. It also reduced the senior Wostradowskis' tax liability. Step two was to set up voting shares for the retiring couple.
"My wife and I sold our equity shares in the building supply business to our children and they were to pay us over a period of time, but we still retained voting shares. Then over five years, we gave out a few of the voting shares each year to the point that the children now own them all," Mr. Wostradowski notes. This ensured the couple had enough control should any conflict arise between their son and daughter during the transition.
They also set up holding companies for each of their successors names. By making the holding companies the shareholders, the main business can pay Sherri and Kevin through lower-taxed dividends to their holding companies rather than to them individually. And, in an example of how tax and succession planning can be integrated, this structure also allowed Sherri and Kevin to manage their own share of the profits as they wished. "One could be a saver, the other a spender, and since each had their own holding company, there would be no conflict," Mr. Corbett says.
Another component of succession planning is estate planning, which involves strategies to minimize or defer tax. Not very many people think of consulting their accountant before writing their will - but that's exactly what they should be doing. "An area that sometimes is overlooked is having two wills: a separate will that would hold the shares of your private corporation and then a normal will that contains everything other than your private shares," Mr. Woolford says. "If they only have a single will, then the shares of the private corporation could be subject to probate fees."
Another way of minimizing probate fees is to name beneficiaries wherever possible - for everything from RRSPs to life insurance - or make the intended beneficiary a joint tenant, which would simply mean that upon the death of the owner, the assets would immediately become theirs.
"It is pretty good idea to name your company as a life insurance policy beneficiary," Mr. Woolford says. That ensures there will be tax-free money available to protect a business's sustainability in the case of the owner's untimely death.
These days, the senior Wostradowskis are enjoying the fruit of their five-year-long investment in their succession planning. "The kids are all in a position that they can look out for their families and have their turn at the business, and my wife and I have enough money to travel and enjoy our life. That's all we were interested in," Mr. Wostradowski says.
As usual, If you have any questions, please do not hesitate to contact me.
&&&&&&
Taming your tax liability
To ensure the best possible conditions when a business owner is ready to pass the helm to the next generation, succession planning can maximize the company's value from the start. That's why it's never too early to begin the process, although typically many wait until three to five years before they plan to retire - and even more wait until it's too late. Developing a long-term strategy that will ensure a company's sustainability, independent of the owner, and over years enrich the skills, abilities and experience of those chosen to be the next leaders makes the company more valuable, as well as provide more retirement funds for the owner.
Part of this process is a solid tax strategy. The longer a company engages in astute tax planning to minimize its tax bill, the more money will stay in the business, as well as in the owner and his family's pockets, leaving more funds available for the next generation to buyout the owner.
According to tax specialist Paul Woolford, partner with KPMG's enterprise services, most small businesses are doing a pretty good job with accounting, but a large percentage of them are not taking advantage of all the tax-minimizing strategies available to them. And no wonder, every time there's a new federal or provincial government budget, the rules seem to change. This is where, of course, a good tax accountant comes in. They not only know the current tax rules but also keep up with new ones. "There are ways to achieve what you want in minimizing the tax bill, but you also have to be very careful to abide by the appropriate rules, and that's something that comes into play when you're looking at estate planning and succession planning," Mr. Woolford says.
When putting together a business tax plan, keep in mind it is necessary to review all possible variations and combinations available to tailor a strategy that will meet the specific needs of the company, its owners and often, his or her family. Many accountants contend business owners should put together their succession plan before the tax plan. What's more, small businesses are often about close interconnections between the owner, his family and the company. From effective use of tax exemptions and deductions, including the $750,000 capital gains allowance, to income-splitting and family trusts - there are many options available to considerably shave down the tax bill if an accountant can see all the pieces of the puzzle.
"I look at the corporation and the shareholders, and look to minimize and defer tax on both levels, and that's often one way of keeping the tax liability down or keeping more money in the company or in the individual's bank account," Mr. Woolford says.
As profit increases and the business becomes more complex, so too can the tax planning. "There are always levels of planning, from the basic planning to the complex planning to the high net-worth situation," Mr. Woolford says. "The idea is to put in a structure. It could be a family trust with beneficiaries that may include your spouse and adult children, for example. There are ways you can pay dividends to that family trust and have that trust allocate those dividends to individuals who may be in a lower tax bracket."
A good plan will cut the tax bill and, if incorporated into the succession planning process, it will also address specific needs related to ownership transfer. For example, if an owner knows he wants to sell the company to his adult child, he might prefer to keep the company's value down to lower the tax liability at the time of transfer. On the other hand, if he is planning to sell to a third party, achieving the highest possible valuation might be a better strategy.
When Bill and Bev Wostradowski were ready to turn over the company they established in in 1978 - Lake Country Building Centre, a building supply business in Lake Country, B.C. - to their son and daughter, they solicited help from their lawyer and their accountant, Bill Corbett, tax and succession planning partner at KPMG in Kelowna, B.C. "We had very good advice from Bill and our lawyer, and we put faith in them that they were going to steer us in the right direction," says Mr. Wostradowski, who is a member of the Canadian Association of Family Enterprise. He used the organization's resources and links to educate himself on the process.
The Wostradowskis chose an estate freeze - literally freezing the value of the shares the couple owned, and issuing common shares to the two adult children who had chosen to carry on with the business, Sherri Williams and Kevin Wostradowski. "That way, the growth and value accrues to the next generation," Mr. Corbett says. It also reduced the senior Wostradowskis' tax liability. Step two was to set up voting shares for the retiring couple.
"My wife and I sold our equity shares in the building supply business to our children and they were to pay us over a period of time, but we still retained voting shares. Then over five years, we gave out a few of the voting shares each year to the point that the children now own them all," Mr. Wostradowski notes. This ensured the couple had enough control should any conflict arise between their son and daughter during the transition.
They also set up holding companies for each of their successors names. By making the holding companies the shareholders, the main business can pay Sherri and Kevin through lower-taxed dividends to their holding companies rather than to them individually. And, in an example of how tax and succession planning can be integrated, this structure also allowed Sherri and Kevin to manage their own share of the profits as they wished. "One could be a saver, the other a spender, and since each had their own holding company, there would be no conflict," Mr. Corbett says.
Another component of succession planning is estate planning, which involves strategies to minimize or defer tax. Not very many people think of consulting their accountant before writing their will - but that's exactly what they should be doing. "An area that sometimes is overlooked is having two wills: a separate will that would hold the shares of your private corporation and then a normal will that contains everything other than your private shares," Mr. Woolford says. "If they only have a single will, then the shares of the private corporation could be subject to probate fees."
Another way of minimizing probate fees is to name beneficiaries wherever possible - for everything from RRSPs to life insurance - or make the intended beneficiary a joint tenant, which would simply mean that upon the death of the owner, the assets would immediately become theirs.
"It is pretty good idea to name your company as a life insurance policy beneficiary," Mr. Woolford says. That ensures there will be tax-free money available to protect a business's sustainability in the case of the owner's untimely death.
These days, the senior Wostradowskis are enjoying the fruit of their five-year-long investment in their succession planning. "The kids are all in a position that they can look out for their families and have their turn at the business, and my wife and I have enough money to travel and enjoy our life. That's all we were interested in," Mr. Wostradowski says.
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