Do you have a proper Share Structure??

For those who are about to incorporate and have yet to do so, it is important you give appropriate consideration to establishing a proper share structure. In doing so you will likely save time, money and administrative difficulties as your business grows. While you are only required, in law, to have one class of shares (common), it is best to provide additional classes of shares so that you will have the needed flexibility in the future to attract new investors; to afford an opportunity of income splitting between family members; and possibly to make use of a family trust. Ultimately, if truly successful, you will also be in a position to take advantage of significant tax savings if the appropriate classes of shares have been in existence and have been held by the shareholders for a sufficient period of time (2 years / capital gain exemption).

Putting in place the correct share structure provides a number of advantages:

- Income Splitting - This can be an effective tax saving device if you and your spouse hold different classes of shares. This affords you an opportunity to issue dividends and/or bonuses in a tax efficient manner.

- Key Employees - Issuing shares to key employees can promote and maintain loyalty to ensure ongoing involvement of top level employees. The shares to be offered to key employees can either be voting or non-voting common shares or voting or non-voting special shares so long as such shares are part of the share structure.

- Family Trusts - The use of family trusts and the issuing of the appropriate shares to beneficiaries of the family trust can be an effective tax and succession planning device.- Succession Planning - With the appropriate share structure in place it is possible to establish a cost effective and tax effective succession regime.

- Raising Investment Capital - While it is common that an investor will have certain requirements concerning the share structure, it is possible to envisage many, if not all such requirement in advance and this may facilitate a successful due diligence process.

- Administrative and Legal Fees - Establishing an appropriate share structure at the outset can avoid the time and expense of preparing needed Articles of Amendment in the future.

Compensation / Issuance of tax receipt from Not for Profit organization.

Q: If a consultant or supplier provides their time/services to a not-for-profit, can the organization issue a tax receipt to the provider for what the time or services would have been worth in the business world?

A: Yes. You get the benefit of the charitable donation based on FMV of work/services you perform, provided that the organization is registered as a charity and is able to give out donation receipts. Having said that, there are two sides to the transaction and you would also be required to recognize the same amount in income. You would also have to charge them GST on the value of the services. And to make things just a little more complicated, you can only deduct the donation to the extent of 75% of your net income.

Let's put some hypothetical numbers to this. Suppose you do work which you would normally charge $10,000. You would recognize $10,000 of gross revenue, and would need to remit $600 of GST. To preserve your cashflow, you would probably want to make sure you at least collect $600 of cash from the charity. You would have $10,000 or gross revenues, and a $10,000 donation expense. Provided your net income after all expenses for they year is at least $13,333, you would be able to deduct the entire charitable donation and there would be no net effect on your taxable income --- making it a wash.

Q & A written by Rolland Vaive, CA, TEP, CPA - For more information, visit Rolly at http://www.taxadvice.ca/

Business Owners: Are you aware that you can save a lot of money with an Estate Freeze!!

Taking care of business with estate freezes *

I previously wrote about an estate freeze happening during the course of a corporate reorganization.

Today, I would like to share a great article written by Tim Cestnick from the Globe and Mail:

Estate Freeze

THE CONCEPT

What in the world is an estate freeze?

It's the process of taking certain assets you own today and freezing them at their current values. The idea is that the future growth of those assets will accrue to anyone you choose – your children or other heirs, for example. So, why would anyone consider a freeze? There are a few potential benefits.Cutting the tax bill on death. When a freeze is completed, all future growth between the date of the freeze and your death will accrue in the hands of your heirs. That future growth will otherwise be taxed in your hands at the time of your death, if not sooner, if the freeze isn't done. Deferring the ultimate tax bill. By passing the future growth in the asset's value to your heirs, you can defer income tax on that growth until a much later time. Although your heirs will eventually pay tax, these taxes may not be due, for example, until your heirs pass away. Establishing the tax bill on death. By freezing the value of an asset today, you'll be able to establish, pretty accurately, what your tax bill will be upon death. This makes planning for those taxes much easier. You could, for example, consider buying life insurance to cover the tax liability.Utilizing the capital gains exemption. A freeze may allow you to take advantage of the lifetime capital gains exemption where you own shares of a qualified small business corporation or qualified farm or fishing property. This exemption could shelter up to $750,000 of capital gains on these types of assets.

Splitting income with family members. In the process of completing a freeze, you'll be placing certain assets (often private company shares) in the hands of your heirs, either directly or indirectly through a trust. These assets can provide regular income to your heirs that will be taxed in their hands – not yours.

Protecting assets from creditors. It may be possible to protect certain assets from creditors by transferring their ownership to your heirs or, better still, a family trust, as part of a freeze.Protecting assets from spouses. If your kids (or you) own valuable and growing assets prior to marriage, it may be possible to use a freeze to minimize the claims of future spouses or ex-spouses through planning that can be done prior to marriage.

Reducing probate fees. A freeze will restrict the growth of the frozen assets in your hands. This means that you'll generally own less in your hands at the time of your death than you would have without the freeze, which will minimize probate fees.Minimizing annual taxes.

Freezing assets typically requires a corporation to be set up. Corporations that carry on an active business are entitled to very low rates of tax (about 18 per cent) on the first $400,000 of active business income. It may be possible to take advantage of these rates, depending on the assets you're freezing.Maintaining control over the property. You can enjoy the first nine benefits without having to give up control over or use of the assets during your lifetime.

THE CANDIDATES

An estate freeze is most commonly undertaken by those who own active businesses. The shares of a growing private company can give rise to a substantial tax bill at the time of death, and where there's a desire to pass the business to the kids or other heirs, a freeze can facilitate this nicely since you'll be able to issue new growth shares (common shares) to anyone you'd like. Other assets can be frozen as well, but it's not as commonly done.

Before undertaking an estate freeze, you should be confident in a couple of things:

(1) That you're happy with the amount of growth you've received to date, and you're happy to see the future growth accrue to someone else;

(2) That there will be sizable growth in the assets in the future.If there isn't going to be much future growth in the assets you're freezing, then there won't be much growth to have taxed in the hands of your heirs; it may not be worthwhile freezing in this case.

* Published in the Globe and Mail, July 3rd, 2008

As business lawyer, I suggest this option to a lot of my clients - with an estate freeze and a corporate reorganization they can save a substantial amount of money. As usual, if you have any questions, please do not hesitate to contact me.