if you follow my blog, you know that I enjoy reading Tim Cesnick's article published in the Globe & Mail. Once again, Tim's article is a MUST read for all of you. As usual, please do not hesitate to contact me should you wish to discuss some personal tax strategies.
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The Concept
Income splitting is one of the pillars of tax planning. It involves moving income from the hands of one family member who will pay tax at a higher rate to the hands of someone else in the family who will pay tax at a lower rate. By taking advantage of the lower tax brackets of family members, the overall tax burden for the family can be reduced.
How much tax can be saved? It varies by province, but the average across Canada is $17,000 in potential tax savings annually per family member. Your actual savings will depend on your level of income, your family member’s level of income, and your province of residence. The provinces where the greatest annual tax savings are possible are Nova Scotia ($21,000), Ontario ($19,565) and B.C. ($18,908). Alberta offers the smallest opportunity for annual savings at $13,196.
The Challenge
Here’s the problem: The attribution rules in our tax law are designed to prevent you from simply moving income to someone else’s hands. If you’re caught under these rules, the income earned by your family member will be attributed back to you to be taxed in your hands. The most common situations where these nasty rules will apply are where you give or lend money (at no or low interest) to your spouse or minor children.
The good news? There are quite a few strategies that can be implemented to split income that will sidestep the attribution rules.
The Strategies
Set yourself up for tax savings next year with one of these ideas:
1. Lend money to your spouse or child. You can simply lend money to your spouse or a child for them to invest. In the case of your spouse, all income and capital gains will be attributed back to you, and in the case of minor children, all income (but not capital gains) will face tax in your hands. But second generation income (that is, income on the income) will not be attributed back to you. It makes sense to move the income annually into a separate account so that its growth can be tracked separately from the original loan amount.
2. Lend money to family at interest. This idea is much the same as the one above, except that you can charge interest on the loan to avoid the attribution rules. By charging the prescribed rate of interest (currently just 1 per cent) your family member, not you, will face tax on any income earned. Your family member will have to pay you the interest every year by Jan. 30 for the prior year’s interest charge (if this is overlooked even once, the attribution rules will apply every year going forward). And get this: The current prescribed rate can be locked in indefinitely. So, if you set this loan up before Dec. 31 of this year, the 1-per-cent rate can apply forever. To the extent your family member earns more than 1 per cent on the funds, you’ll effectively split income.
3. Lend or give money to acquire a principal residence. If you help a family member to purchase a home, this will free up the income of that family member for other purposes – such as investing – effectively moving investable assets from your hands to theirs. In addition, if the property appreciates in value, the capital gain could be sheltered using the principal residence exemption of your family member if they are older than 18 or married.
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Monday, August 29, 2011
Tuesday, August 23, 2011
Business owners: Lets talk about Family Trusts
In the past 3 years, I spent a considerable amount of time blogging about the use of Family Trust for business owners. Family Trusts are a great and effective way to save taxes. Today, I would like to have a closer look at the fine print on Family Trusts.
1. Establishing the trust. There will be a problem under our tax law if the settlor of the trust (the person who creates the trust by transferring assets to it) has the ability to take back the assets placed in the trust, has the right to name additional beneficiaries of the trust after its creation, or has the ability to control dispositions of the trust assets. If any of these conditions apply, the income, gains or losses of the trust will be reported on the settlor’s tax return. To avoid this outcome, it’s important to make sure that the settlor is not also the sole trustee (or a trustee with veto power over what is done with the trust assets) or sole beneficiary. The best approach is to have another family member – perhaps a parent or grandparent – be the settlor of the trust. This family member can “settle” the trust with a small asset such as a silver coin or $20 bill. The trust can then acquire other assets by, for example, borrowing money from you or others to acquire investments, shares in a private company, a vacation home, or other assets.
2. Transfers to the trust. If you transfer assets other than cash to a trust you’ll be deemed to have sold those assets at fair market value, so if they’ve appreciated in value, you could trigger a taxable capital gain. Be sure to count this cost first. You may be able to shelter from tax a capital gain on transferring assets to a trust if you have, for example, capital losses to use up, or some other tax deductions or credits available. And if you transfer a principal residence to a trust, you might be able to use your principal residence exemption on the transfer to avoid a tax hit.
3. Income of the trust. The income of the trust can be taxed in the hands of the trust, or one or more of the beneficiaries. Where the beneficiaries are minors, or your spouse, the attribution rules in our tax law could apply to cause the income to be taxed in your hands – that is, the hands of the settlor or someone who may have transferred assets to the trust. You can avoid this problem by lending money to the trust instead and charging the prescribed rate of interest (currently 1 per cent). You should also know that where a trust receives certain types of income, such as dividends from private companies, or rent or business income earned from a property or business carried on by a person related to minor beneficiaries, and an attempt is made to have that trust income taxed in the hands of minor beneficiaries, the “kiddie tax” rules can apply to cause the child to pay tax at the highest marginal tax rate. The kiddie tax won’t apply to second-generation income (that is, income on income), so it’s still possible for the trust to receive income subject to this tax, and use the cash to build up investments over time, and avoid the kiddie tax on any second-generation income.
4. Distributions from the trust. The assets, or capital of the trust, can generally be distributed from the trust on a tax-free basis to the beneficiaries of the trust who have a right to the capital. In this case, the beneficiaries inherit the adjusted cost base of the trust and may pay tax later on any income or gains on those assets they receive.
5. Twenty-one years later. Be aware that on every 21st anniversary of the trust there will be a deemed disposition of the assets of the trust, which could trigger taxable capital gains. There are various ways to plan for this tax hit (a topic for another day).
6. Asset protection benefits. Finally, assets can often be protected from potential creditors when placed in a trust where the trustee has discretion to distribute the assets to beneficiaries as the trustee sees fit. However, there are laws in place to protect the rights of creditors, so speak to a lawyer about these.
And be sure to speak to a tax lawyer before setting up a trust.
1. Establishing the trust. There will be a problem under our tax law if the settlor of the trust (the person who creates the trust by transferring assets to it) has the ability to take back the assets placed in the trust, has the right to name additional beneficiaries of the trust after its creation, or has the ability to control dispositions of the trust assets. If any of these conditions apply, the income, gains or losses of the trust will be reported on the settlor’s tax return. To avoid this outcome, it’s important to make sure that the settlor is not also the sole trustee (or a trustee with veto power over what is done with the trust assets) or sole beneficiary. The best approach is to have another family member – perhaps a parent or grandparent – be the settlor of the trust. This family member can “settle” the trust with a small asset such as a silver coin or $20 bill. The trust can then acquire other assets by, for example, borrowing money from you or others to acquire investments, shares in a private company, a vacation home, or other assets.
2. Transfers to the trust. If you transfer assets other than cash to a trust you’ll be deemed to have sold those assets at fair market value, so if they’ve appreciated in value, you could trigger a taxable capital gain. Be sure to count this cost first. You may be able to shelter from tax a capital gain on transferring assets to a trust if you have, for example, capital losses to use up, or some other tax deductions or credits available. And if you transfer a principal residence to a trust, you might be able to use your principal residence exemption on the transfer to avoid a tax hit.
3. Income of the trust. The income of the trust can be taxed in the hands of the trust, or one or more of the beneficiaries. Where the beneficiaries are minors, or your spouse, the attribution rules in our tax law could apply to cause the income to be taxed in your hands – that is, the hands of the settlor or someone who may have transferred assets to the trust. You can avoid this problem by lending money to the trust instead and charging the prescribed rate of interest (currently 1 per cent). You should also know that where a trust receives certain types of income, such as dividends from private companies, or rent or business income earned from a property or business carried on by a person related to minor beneficiaries, and an attempt is made to have that trust income taxed in the hands of minor beneficiaries, the “kiddie tax” rules can apply to cause the child to pay tax at the highest marginal tax rate. The kiddie tax won’t apply to second-generation income (that is, income on income), so it’s still possible for the trust to receive income subject to this tax, and use the cash to build up investments over time, and avoid the kiddie tax on any second-generation income.
4. Distributions from the trust. The assets, or capital of the trust, can generally be distributed from the trust on a tax-free basis to the beneficiaries of the trust who have a right to the capital. In this case, the beneficiaries inherit the adjusted cost base of the trust and may pay tax later on any income or gains on those assets they receive.
5. Twenty-one years later. Be aware that on every 21st anniversary of the trust there will be a deemed disposition of the assets of the trust, which could trigger taxable capital gains. There are various ways to plan for this tax hit (a topic for another day).
6. Asset protection benefits. Finally, assets can often be protected from potential creditors when placed in a trust where the trustee has discretion to distribute the assets to beneficiaries as the trustee sees fit. However, there are laws in place to protect the rights of creditors, so speak to a lawyer about these.
And be sure to speak to a tax lawyer before setting up a trust.
Tax Matters: In estate planning, know the hazards of joint ownership
Today, I would like to share an interesting article written by Tim Cesnick published in The Globe and Mail.
Tax Matters: In estate planning, know the hazards of joint ownership
I recall a number of years ago that the New Haven (Conn.) Register newspaper reported a story about a local woman, Joanne Kamerling, who had decided to change the ownership on two acres of land that she owned in Weber County, Utah. She placed the property into the joint names of a group of people that included a physical therapist, a prominent local attorney, the former Louisiana Ku Klux Klan leader David Duke, and O.J. Simpson. She didn’t know these people personally, none of them knew each other, and they weren’t looking to become owners. Ms. Kamerling continued to pay the property taxes. Weird.
Yet when it comes to tax planning, Canadians often do something similar: They regularly place assets into joint names with right of survivorship. Okay, so there aren’t many of us adding O.J. Simpson to the title on our homes, but the end result is often about as effective. You see, while joint ownership can reduce probate fees and make for an efficient transfer of assets at the time of death, there can be drawbacks. Consider these 10:
1. A tax liability might be triggered. When you add another individual as a joint owner, you will often be creating a change in beneficial ownership. The result? When adding anyone other than your spouse as a joint owner, you may be deemed to have disposed of that ownership interest at fair market value, which could trigger a tax hit.
2. Your estate distribution might be inappropriate. If you’re hoping to leave an asset to, say, all of your children equally when you die, but have perhaps named just one as a joint owner to avoid probate fees, there is no requirement for your joint-owner child to share the asset with the others. This may not be your intention.
3. Family or legal disputes could result. Continuing with the scenario in number 2 above, those children who are effectively disinherited may dispute the unequal distribution of your estate, and there is no shortage of court cases dealing with these types of battles. Make your intentions clear, in writing, if you do choose to put assets in joint names.
4. You may not save tax. If you think you’ll save tax by placing assets into joint names, perhaps with your spouse, think again. Any income earned by your spouse on his or her half of the assets will generally be attributed back to you unless you charge interest at the prescribed rate. Further, owning assets jointly with a child will not allow you to escape tax on your share of the asset when you die.
5. Exclusive control over assets will be lost. If you add another person as a joint owner on an asset, you’ll no longer have sole control over the asset.
6. Assets could be attacked by creditors. If the individual who jointly owns an asset with you faces the attack of creditors, the full value of the asset you jointly own could be subject to the claim of those creditors.
7. Testamentary trusts will be impossible. It is possible, when you die, to leave income-producing assets to a trust established in your will for your heirs. This trust can pay the tax on the income earned annually after you’re gone. This can save your heirs tax. Any assets held jointly, with right of survivorship, will pass directly to the surviving owner or owners and there will be no opportunity for those assets to be place in a trust upon your death.
8. Portfolio risk profile may not be appropriate. If two or more people jointly own an investment account or portfolio it may be difficult to invest the capital in a manner that meets the risk profile of all owners on the account, particularly when there are large age differences between the owners.
9. A principal residence could become taxable. If you decide to place your principal residence into joint names with, say, a child, it may be necessary for both you and your child to designate that property as your respective principal residences in order to avoid tax on a disposition of the property later. This could be a problem if your child has, or will have, another property that he or she owns; it may expose your child’s other home to tax.
10. Joint tenancy may be permanent. Forget about undoing the joint ownership unless the other owner or owners agree to change things.
Be sure to ask yourself whether you should be concerned about each one of these potential drawbacks. This will help you to evaluate whether joint ownership is right for you.
Tax Matters: In estate planning, know the hazards of joint ownership
I recall a number of years ago that the New Haven (Conn.) Register newspaper reported a story about a local woman, Joanne Kamerling, who had decided to change the ownership on two acres of land that she owned in Weber County, Utah. She placed the property into the joint names of a group of people that included a physical therapist, a prominent local attorney, the former Louisiana Ku Klux Klan leader David Duke, and O.J. Simpson. She didn’t know these people personally, none of them knew each other, and they weren’t looking to become owners. Ms. Kamerling continued to pay the property taxes. Weird.
Yet when it comes to tax planning, Canadians often do something similar: They regularly place assets into joint names with right of survivorship. Okay, so there aren’t many of us adding O.J. Simpson to the title on our homes, but the end result is often about as effective. You see, while joint ownership can reduce probate fees and make for an efficient transfer of assets at the time of death, there can be drawbacks. Consider these 10:
1. A tax liability might be triggered. When you add another individual as a joint owner, you will often be creating a change in beneficial ownership. The result? When adding anyone other than your spouse as a joint owner, you may be deemed to have disposed of that ownership interest at fair market value, which could trigger a tax hit.
2. Your estate distribution might be inappropriate. If you’re hoping to leave an asset to, say, all of your children equally when you die, but have perhaps named just one as a joint owner to avoid probate fees, there is no requirement for your joint-owner child to share the asset with the others. This may not be your intention.
3. Family or legal disputes could result. Continuing with the scenario in number 2 above, those children who are effectively disinherited may dispute the unequal distribution of your estate, and there is no shortage of court cases dealing with these types of battles. Make your intentions clear, in writing, if you do choose to put assets in joint names.
4. You may not save tax. If you think you’ll save tax by placing assets into joint names, perhaps with your spouse, think again. Any income earned by your spouse on his or her half of the assets will generally be attributed back to you unless you charge interest at the prescribed rate. Further, owning assets jointly with a child will not allow you to escape tax on your share of the asset when you die.
5. Exclusive control over assets will be lost. If you add another person as a joint owner on an asset, you’ll no longer have sole control over the asset.
6. Assets could be attacked by creditors. If the individual who jointly owns an asset with you faces the attack of creditors, the full value of the asset you jointly own could be subject to the claim of those creditors.
7. Testamentary trusts will be impossible. It is possible, when you die, to leave income-producing assets to a trust established in your will for your heirs. This trust can pay the tax on the income earned annually after you’re gone. This can save your heirs tax. Any assets held jointly, with right of survivorship, will pass directly to the surviving owner or owners and there will be no opportunity for those assets to be place in a trust upon your death.
8. Portfolio risk profile may not be appropriate. If two or more people jointly own an investment account or portfolio it may be difficult to invest the capital in a manner that meets the risk profile of all owners on the account, particularly when there are large age differences between the owners.
9. A principal residence could become taxable. If you decide to place your principal residence into joint names with, say, a child, it may be necessary for both you and your child to designate that property as your respective principal residences in order to avoid tax on a disposition of the property later. This could be a problem if your child has, or will have, another property that he or she owns; it may expose your child’s other home to tax.
10. Joint tenancy may be permanent. Forget about undoing the joint ownership unless the other owner or owners agree to change things.
Be sure to ask yourself whether you should be concerned about each one of these potential drawbacks. This will help you to evaluate whether joint ownership is right for you.
Entrepreneurs: 25 conseils pour réduire vos impôts
Cet article, signé Dominique Froment, est paru sur www.lesaffaires.com » le 18 mars 2011.
Pour vous aider à vous retrouver dans les dédales de l'impôt, nous avons passé au crible les recueils des grands cabinets d'experts-comptables Raymond Chabot Grant Thornton, Deloitte et RSM Richter Chamberland, en plus de consulter des fiscalistes. S'il y a peu de nouveautés pour l'année fiscale 2010, de vieux oublis peuvent encore vous coûter cher. Suivis à la lettre, ces 25 conseils pourraient vous procurer des économies de quelques milliers de dollars... et des cheveux blancs en moins !
1) Bureau à domicile : vous pouvez déduire de nombreuses dépenses
Fatigué d'être pris dans la circulation deux heures par jour ? Songez à travailler à votre domicile. Ce choix est d'autant plus attrayant que vous pourrez déduire certaines dépenses comme l'électricité, le chauffage, l'entretien, les impôts fonciers, l'assurance et les intérêts hypothécaires. La répartition des dépenses doit être établie en fonction du nombre de pieds carrés utilisés aux fins du travail. " Si vous habitez une maison de cinq pièces comprenant trois chambres et que l'une d'elles vous sert de bureau, vous pourrez ainsi déduire 20 % des dépenses admissibles ", explique Luc Lacombe, associé fiscaliste chez Raymond Chabot Grant Thornton. Cette mesure est valable au Québec et au fédéral.
2) Déduisez vos dépenses de démarchage
Les dépenses engagées pour recruter ou conserver vos clients, comme les dépenses de nourriture et de boisson, de même que les dépenses de divertissement comme des billets pour un événement sportif, peuvent être déduites. Au fédéral et au Québec, 50 % des dépenses peuvent être déduites; cependant, le Québec ajoute une seconde limite qui se situe entre 1,25 % et 2 % de votre chiffre d'affaires.
3) Ne déclarez pas l'allocation pour votre voiture
Si votre employeur vous verse une allocation pour l'utilisation de votre voiture, celle-ci n'est pas imposable à condition qu'elle soit " raisonnable " et calculée seulement en fonction du nombre de kilomètres parcourus pour le travail. Par " raisonnable ", les autorités fiscales entendent généralement une allocation n'excédant pas 0,52 $ du kilomètre pour les premiers 5 000 kilomètres et 0,46 $ pour les autres kilomètres. Il est essentiel de tenir un registre des déplacements réels.
4) Faites-vous rembourser la TPS et la TVQ
Si, comme employé, vous déduisez des dépenses de votre revenu d'emploi, vous pouvez réclamer le remboursement de la TPS et de la TVQ que vous avez payées sur ces dépenses. On parle notamment des taxes sur les cotisations obligatoires à des ordres professionnels comme le Barreau du Québec, sur l'entretien du véhicule utilisé pour le travail, sur l'essence et l'amortissement (qui représente une partie du prix d'achat du véhicule).
5) Vente de votre entreprise : réduisez votre gain en capital
Vous avez réalisé un gain en capital à la vente d'actions d'une petite entreprise, de biens agricoles ou de biens de pêche ? Réclamez la déduction, qui peut atteindre 750 000 $ (limite à vie), soit 375 000 $ de gain en capital imposable. En fin de compte, ça fera 90 000 $ de plus dans vos poches.
6) Déduisez les dépenses de votre immeuble locatif
Un immeuble locatif peut constituer une bonne source de revenus pour vos vieux jours. D'autant plus que vous pouvez déduire toutes les dépenses raisonnables engagées pour gagner un revenu de location, comme les impôts fonciers, l'électricité, les assurances, les commissions payées pour trouver de nouveaux locataires, l'aménagement paysager, l'entretien et les services publics, les frais comptables, d'emprunt, d'intérêt et de publicité, etc.
7) Minimisez vos revenus de location aux États-Unis
Vous possédez en Floride un condo que vous louez de temps à autre ? Sachez que le revenu versé à un résident canadien pour la location d'un bien immobilier situé aux États-Unis est assujetti aux fins fiscales américaines à un impôt de 30 % retenu à la source. Vous pouvez cependant choisir d'être imposé sur votre revenu net, c'est-à-dire le revenu de location moins les dépenses de location, si cette méthode est plus avantageuse pour vous.
Par ailleurs, lorsqu'un Canadien vend un immeuble aux États-Unis, une retenue de 10 % du prix de vente est effectuée, sauf si le prix de vente est inférieur à 300 000 $ US et que l'acheteur fera du bien sa résidence principale. " Cette dernière exigence semble bizarre étant donné que la maison n'appartient plus au vendeur, mais la loi américaine est ainsi faite ", dit M. Lacombe.
8) Profitez du boum minier !
Les actions accréditives, c'est-à-dire d'une société exploitant une entreprise de ressources (pétrole, gaz, produits miniers), procurent une déduction (de 100 % au fédéral et jusqu'à 150 % au Québec) de leur coût, à condition que les montants recueillis auprès des investisseurs servent à financer des dépenses à risque comme les frais d'exploration et d'aménagement. Et avec le boum minier, certaines de ces actions se sont révélées très rentables. Mais attention, il s'agit de placements hautement spéculatifs.
9) Donnez-en un peu à votre conjoint !
Le fractionnement du revenu peut faire économiser beaucoup d'argent à certains couples. Supposons que vous receviez une rente de retraite de 20 000 $ de votre employeur et que votre conjointe ait un revenu inférieur à 10 000 $. Vous pourriez lui transférer jusqu'à 10 000 $. Votre conjointe paierait environ 3 000 $ d'impôt de plus (10 000 $ au taux d'imposition de 30 %), alors que vous en économiseriez 4 800 $ (10 000 $ au taux de 48 %), soit une économie totale de 1 800 $ pour le couple.
De plus, étant donné le très bas niveau des taux d'intérêt actuels, vous pourriez envisager d'avancer des fonds à votre époux ou conjoint de fait qui gagne moins que vous. Votre compagnon pourrait investir les sommes qui lui ont été prêtées et ajouter les revenus ou les gains en capital réalisés à ses revenus. L'emprunt doit toutefois porter intérêt au taux prescrit en vigueur à la date où il a été consenti, c'est-à-dire 1 % au premier trimestre de 2011. Ce taux reste en vigueur tant que le prêt est en cours.
10) Transférez vos revenus de dividendes
Si vous avez touché des dividendes d'actions de sociétés ouvertes (inscrites en Bourse) en 2010 et que votre revenu est faible (moins de 10 000 $), vous pouvez transférer vos revenus de dividendes à votre conjoint. Si son revenu est plus élevé que le vôtre, il pourra profiter d'un crédit d'impôt pour dividendes (qui varie selon le taux d'imposition). Ce qui, en fin de compte, réduira votre revenu et augmentera les déductions de votre conjoint. " Ce choix ne peut porter que sur les dividendes imposables de sociétés canadiennes imposables ", précise M. Lacombe.
11) Regroupez vos dons avec ceux de votre conjoint
Lorsque les dons d'un couple excèdent 200 $, il est avantageux de les combiner sur une seule déclaration de revenu. Les premiers 200 $ de dons donnent droit à un crédit de 15 % au fédéral (sujet à l'abattement de 83,5 % du Québec) et de 20 % au provincial, alors que tout excédent donne droit à un crédit de 29 % au fédéral (sujet à l'abattement de 83,5 %) et de 24 % au provincial. Sachez aussi que le don d'actions de sociétés inscrites en Bourse représente une stratégie intéressante, puisqu'elle permet d'éviter l'impôt de 50 % (multiplié par votre taux d'imposition) sur le gain en capital de ces actions.
12) Réclamez le crédit pour votre première maison
Vous avez acheté une habitation après le 27 janvier 2009 et vous ne possédiez aucun bien immobilier au cours de l'année ni au cours des quatre années civiles précédentes. Vous avez alors droit à un crédit d'impôt non remboursable de 15 % (sujet à l'abattement du Québec de 83,5 %) sur un montant de 5 000 $. Ce qui peut vous faire économiser jusqu'à 626 $.
13) Profitez d'une éventuelle baisse de revenu
Vous devez rembourser une portion de votre Régime d'accession à la propriété (RAP) à même votre contribution REER sans quoi, la portion non remboursée sera ajoutée à votre revenu imposable. Cependant, si vous prévoyez des fluctuations de revenu, il peut être intéressant de ne pas rembourser la portion minimum du RAP dans l'année où ses revenus sont plus bas ; cela vous permettra de conserver votre contribution REER afin de l'utiliser au cours d'une année où vos revenus seront plus élevés.
14) Vous pouvez retirer des sommes du REER pour financer vos études
Comme avec le RAP (Régime d'accession à la propriété), vous pouvez effectuer des retraits de votre REER sans pénalité pour défrayer le coût de vos études à plein temps ou celles de votre conjoint. Le montant retiré ne peut excéder 10 000 $ par année et 20 000 $ sur une période de quatre ans. Ces retraits sont remboursables, sans intérêt, sur une période de 10 ans.
15) Récupérez les droits au REER de votre conjoint décédé
Lorsqu'une personne décède avec des droits de cotisation au REER inutilisés, il est possible de cotiser au REER de son conjoint au nom de la personne décédée et de déduire ces cotisations additionnelles dans la déclaration finale du défunt.
16) N'oubliez pas les nombreux frais médicaux déductibles !
Au Québec, si vous payez des primes d'assurance médicament à votre travail dans le cadre d'un régime privé, elles sont considérées comme des frais médicaux au même titre que les franchises ou les dépenses qui ne sont pas couvertes par votre plan.
Au fédéral, vous pouvez réclamer l'excédent des frais médicaux payés sur le moindre de 3 % de votre revenu net ou 2 024 $. Au Québec, ces frais sont déductibles en excédent de 3 % du revenu net familial. Le crédit d'impôt équivaut au fédéral à 15 % des dépenses admissibles, multiplié par 83,5 % (pour l'abattement du Québec) et à 20 % au Québec. " Par contre, souligne M. Lacombe, au fédéral, les dépenses engagées à des fins purement esthétiques après le 4 mars 2010 ne sont plus admissibles au crédit d'impôt pour frais médicaux (elles ne l'étaient plus au Québec depuis quelques années). " Parmi les dépenses qui ne sont plus admissibles, mentionnons l'augmentation des seins et des lèvres, l'injection de botox, le lifting, les soins épilatoires, la liposuccion, etc.
17) Déduisez vos frais de garde à 7 $ au fédéral
Tous les frais de garde, y compris les garderies à 7 $, sont déductibles du revenu au fédéral. Au Québec, les frais de garderie à 7 $ ne sont pas admissibles, mais les frais en garderie privée ou à la maison sont admissibles à un crédit d'impôt remboursable variant de 75 % à 26 %, selon que le revenu familial se situe entre 31 670 $ et 141 125 $.
Au fédéral, tous les frais de garde sont des dépenses admissibles pour l'un ou l'autre des conjoints. Au fédéral comme au Québec, le maximum admissible est de 7 000 $ pour chaque enfant de 6 ans ou moins et de 4 000 $ pour chaque enfant de 7 à 16 ans.
" Depuis cette année, au fédéral, un chef de famille monoparentale peut désigner les montants reçus au titre de la prestation universelle pour la garde d'enfants (100 $ par mois) comme étant le revenu d'un enfant mineur ", nous apprend M. Lacombe. À condition de ne pas avoir d'époux ou de conjoint de fait à la fin de 2010.
18) Traitez votre enfant (fiscalement !) comme votre conjoint
Si vous avez un enfant et que vous n'êtes pas admissible au crédit de personne mariée ou vivant en union de fait, vous pouvez réclamer, à certaines conditions, un crédit d'impôt qui peut vous faire économiser jusqu'à 1 300 $ pour une personne entièrement à charge. Autrement dit, si vous vivez seul, votre enfant peut être considéré comme un conjoint et ainsi bénéficier de ce crédit. Par ailleurs, n'oubliez pas que si vos parents de plus de 65 ans, au fédéral, et de 70 ans, au Québec, vivent avec vous et ont un revenu relativement bas, vous pourriez aussi bénéficier d'un crédit pour aidant naturel.
19) Conseillez à vos enfants de produire leur déclaration fiscale
Si vous avez des enfants de moins de 18 ans travaillant à temps partiel ou à temps plein pendant les mois d'été, ils peuvent avoir droit à un remboursement d'impôt si leur revenu demeure sous le montant personnel de base (10 382 $ au fédéral et 10 505 $ au Québec). " Même si aucun impôt n'a été retenu, les parents devraient conseiller à leurs enfants de produire une déclaration fiscale pour augmenter leur limite de cotisation au REER pour les années futures ", précise M. Lacombe.
En outre, une personne de 19 ans ou plus qui gagne au moins 2 400 $ a droit à un crédit d'impôt non remboursable pouvant atteindre 1 552 $ au fédéral et 533 $ au Québec.
20) Faites bouger vos enfants !
Un crédit d'impôt fédéral non remboursable de 15 % est offert aux particuliers ayant engagé des dépenses admissibles (jusqu'à 500 $ par enfant) pour la condition physique de leurs enfants de moins de 16 ans. Au taux d'imposition maximum, cela représente 62 $ de plus dans vos poches. C'est mieux que rien !
21) Devenez parent à moindre coût
Vous avez toujours rêvé d'avoir un bambin, mais vous ou votre conjoint éprouvez des problèmes de fertilité ? Québec accorde un crédit d'impôt remboursable égal à 50 % des dépenses payées dans le but de devenir parent. Le plafond annuel des dépenses est de 20 000 $, pour un crédit maximum de 10 000 $. Parmi les dépenses admissibles, mentionnons les frais d'insémination ou de fécondation in vitro, des sommes payées à un médecin, à un centre hospitalier privé ou pour des médicaments. " Au fédéral, ces dépenses peuvent donner droit au crédit pour frais médicaux ", ajoute M. Lacombe.
22) Si vous avez 70 ans, réduisez le coût de certaines dépenses
Un contribuable de 70 ans et plus peut bénéficier d'un crédit sur ses dépenses engagées pour obtenir des services liés à son bien-être ou à son maintien à domicile, comme les services d'entretien. Le crédit peut atteindre 4 680 $ par année et 6 480 $ pour une personne non autonome. " Le domicile peut aussi être une résidence pour personnes âgées ", souligne M. Lacombe. Pour profiter au maximum de ce crédit, vos dépenses doivent atteindre au moins 15 600 $. N'oubliez pas de conserver vos factures.
23) Profitez de votre conscience environnementale
Si vous avez fait l'acquisition d'un véhicule écoénergétique admissible, Québec vous fait bénéficier d'un crédit d'impôt remboursable pouvant atteindre 8 000 $. Le taux du crédit est établi en fonction de la performance du véhicule sur le plan environnemental (au plus 5,27 litres au 100 km). Ce crédit est applicable aux véhicules neufs acquis ou loués à long terme entre le 1er janvier 2009 et le 31 décembre 2015.
24) Prenez les transports en commun et épargnez
Compte tenu de la hausse importante du carburant, il peut être encore plus avantageux d'emprunter les transports en commun pour vous rendre au bureau. N'oubliez pas que vous pouvez réclamer un crédit d'impôt fédéral non remboursable de 15 % sur le coût de laissez-passer de transport en commun mensuels ou d'au moins quatre laissez-passer hebdomadaires consécutifs. Ce crédit concerne les déplacements en métro, en autobus ou en train.
25 ) Vous pouvez déduire des frais de déménagement
Vous pouvez déduire de votre revenu des frais de déménagement si vous vous êtes rapproché d'au moins 40 km de votre nouveau lieu de travail ou d'études postsecondaires. Ces frais peuvent inclure le transport, l'entreposage, les frais liés à la vente de l'ancien domicile, les droits de mutation et les frais de notaire liés à l'achat de la nouvelle maison.
Pour vous aider à vous retrouver dans les dédales de l'impôt, nous avons passé au crible les recueils des grands cabinets d'experts-comptables Raymond Chabot Grant Thornton, Deloitte et RSM Richter Chamberland, en plus de consulter des fiscalistes. S'il y a peu de nouveautés pour l'année fiscale 2010, de vieux oublis peuvent encore vous coûter cher. Suivis à la lettre, ces 25 conseils pourraient vous procurer des économies de quelques milliers de dollars... et des cheveux blancs en moins !
1) Bureau à domicile : vous pouvez déduire de nombreuses dépenses
Fatigué d'être pris dans la circulation deux heures par jour ? Songez à travailler à votre domicile. Ce choix est d'autant plus attrayant que vous pourrez déduire certaines dépenses comme l'électricité, le chauffage, l'entretien, les impôts fonciers, l'assurance et les intérêts hypothécaires. La répartition des dépenses doit être établie en fonction du nombre de pieds carrés utilisés aux fins du travail. " Si vous habitez une maison de cinq pièces comprenant trois chambres et que l'une d'elles vous sert de bureau, vous pourrez ainsi déduire 20 % des dépenses admissibles ", explique Luc Lacombe, associé fiscaliste chez Raymond Chabot Grant Thornton. Cette mesure est valable au Québec et au fédéral.
2) Déduisez vos dépenses de démarchage
Les dépenses engagées pour recruter ou conserver vos clients, comme les dépenses de nourriture et de boisson, de même que les dépenses de divertissement comme des billets pour un événement sportif, peuvent être déduites. Au fédéral et au Québec, 50 % des dépenses peuvent être déduites; cependant, le Québec ajoute une seconde limite qui se situe entre 1,25 % et 2 % de votre chiffre d'affaires.
3) Ne déclarez pas l'allocation pour votre voiture
Si votre employeur vous verse une allocation pour l'utilisation de votre voiture, celle-ci n'est pas imposable à condition qu'elle soit " raisonnable " et calculée seulement en fonction du nombre de kilomètres parcourus pour le travail. Par " raisonnable ", les autorités fiscales entendent généralement une allocation n'excédant pas 0,52 $ du kilomètre pour les premiers 5 000 kilomètres et 0,46 $ pour les autres kilomètres. Il est essentiel de tenir un registre des déplacements réels.
4) Faites-vous rembourser la TPS et la TVQ
Si, comme employé, vous déduisez des dépenses de votre revenu d'emploi, vous pouvez réclamer le remboursement de la TPS et de la TVQ que vous avez payées sur ces dépenses. On parle notamment des taxes sur les cotisations obligatoires à des ordres professionnels comme le Barreau du Québec, sur l'entretien du véhicule utilisé pour le travail, sur l'essence et l'amortissement (qui représente une partie du prix d'achat du véhicule).
5) Vente de votre entreprise : réduisez votre gain en capital
Vous avez réalisé un gain en capital à la vente d'actions d'une petite entreprise, de biens agricoles ou de biens de pêche ? Réclamez la déduction, qui peut atteindre 750 000 $ (limite à vie), soit 375 000 $ de gain en capital imposable. En fin de compte, ça fera 90 000 $ de plus dans vos poches.
6) Déduisez les dépenses de votre immeuble locatif
Un immeuble locatif peut constituer une bonne source de revenus pour vos vieux jours. D'autant plus que vous pouvez déduire toutes les dépenses raisonnables engagées pour gagner un revenu de location, comme les impôts fonciers, l'électricité, les assurances, les commissions payées pour trouver de nouveaux locataires, l'aménagement paysager, l'entretien et les services publics, les frais comptables, d'emprunt, d'intérêt et de publicité, etc.
7) Minimisez vos revenus de location aux États-Unis
Vous possédez en Floride un condo que vous louez de temps à autre ? Sachez que le revenu versé à un résident canadien pour la location d'un bien immobilier situé aux États-Unis est assujetti aux fins fiscales américaines à un impôt de 30 % retenu à la source. Vous pouvez cependant choisir d'être imposé sur votre revenu net, c'est-à-dire le revenu de location moins les dépenses de location, si cette méthode est plus avantageuse pour vous.
Par ailleurs, lorsqu'un Canadien vend un immeuble aux États-Unis, une retenue de 10 % du prix de vente est effectuée, sauf si le prix de vente est inférieur à 300 000 $ US et que l'acheteur fera du bien sa résidence principale. " Cette dernière exigence semble bizarre étant donné que la maison n'appartient plus au vendeur, mais la loi américaine est ainsi faite ", dit M. Lacombe.
8) Profitez du boum minier !
Les actions accréditives, c'est-à-dire d'une société exploitant une entreprise de ressources (pétrole, gaz, produits miniers), procurent une déduction (de 100 % au fédéral et jusqu'à 150 % au Québec) de leur coût, à condition que les montants recueillis auprès des investisseurs servent à financer des dépenses à risque comme les frais d'exploration et d'aménagement. Et avec le boum minier, certaines de ces actions se sont révélées très rentables. Mais attention, il s'agit de placements hautement spéculatifs.
9) Donnez-en un peu à votre conjoint !
Le fractionnement du revenu peut faire économiser beaucoup d'argent à certains couples. Supposons que vous receviez une rente de retraite de 20 000 $ de votre employeur et que votre conjointe ait un revenu inférieur à 10 000 $. Vous pourriez lui transférer jusqu'à 10 000 $. Votre conjointe paierait environ 3 000 $ d'impôt de plus (10 000 $ au taux d'imposition de 30 %), alors que vous en économiseriez 4 800 $ (10 000 $ au taux de 48 %), soit une économie totale de 1 800 $ pour le couple.
De plus, étant donné le très bas niveau des taux d'intérêt actuels, vous pourriez envisager d'avancer des fonds à votre époux ou conjoint de fait qui gagne moins que vous. Votre compagnon pourrait investir les sommes qui lui ont été prêtées et ajouter les revenus ou les gains en capital réalisés à ses revenus. L'emprunt doit toutefois porter intérêt au taux prescrit en vigueur à la date où il a été consenti, c'est-à-dire 1 % au premier trimestre de 2011. Ce taux reste en vigueur tant que le prêt est en cours.
10) Transférez vos revenus de dividendes
Si vous avez touché des dividendes d'actions de sociétés ouvertes (inscrites en Bourse) en 2010 et que votre revenu est faible (moins de 10 000 $), vous pouvez transférer vos revenus de dividendes à votre conjoint. Si son revenu est plus élevé que le vôtre, il pourra profiter d'un crédit d'impôt pour dividendes (qui varie selon le taux d'imposition). Ce qui, en fin de compte, réduira votre revenu et augmentera les déductions de votre conjoint. " Ce choix ne peut porter que sur les dividendes imposables de sociétés canadiennes imposables ", précise M. Lacombe.
11) Regroupez vos dons avec ceux de votre conjoint
Lorsque les dons d'un couple excèdent 200 $, il est avantageux de les combiner sur une seule déclaration de revenu. Les premiers 200 $ de dons donnent droit à un crédit de 15 % au fédéral (sujet à l'abattement de 83,5 % du Québec) et de 20 % au provincial, alors que tout excédent donne droit à un crédit de 29 % au fédéral (sujet à l'abattement de 83,5 %) et de 24 % au provincial. Sachez aussi que le don d'actions de sociétés inscrites en Bourse représente une stratégie intéressante, puisqu'elle permet d'éviter l'impôt de 50 % (multiplié par votre taux d'imposition) sur le gain en capital de ces actions.
12) Réclamez le crédit pour votre première maison
Vous avez acheté une habitation après le 27 janvier 2009 et vous ne possédiez aucun bien immobilier au cours de l'année ni au cours des quatre années civiles précédentes. Vous avez alors droit à un crédit d'impôt non remboursable de 15 % (sujet à l'abattement du Québec de 83,5 %) sur un montant de 5 000 $. Ce qui peut vous faire économiser jusqu'à 626 $.
13) Profitez d'une éventuelle baisse de revenu
Vous devez rembourser une portion de votre Régime d'accession à la propriété (RAP) à même votre contribution REER sans quoi, la portion non remboursée sera ajoutée à votre revenu imposable. Cependant, si vous prévoyez des fluctuations de revenu, il peut être intéressant de ne pas rembourser la portion minimum du RAP dans l'année où ses revenus sont plus bas ; cela vous permettra de conserver votre contribution REER afin de l'utiliser au cours d'une année où vos revenus seront plus élevés.
14) Vous pouvez retirer des sommes du REER pour financer vos études
Comme avec le RAP (Régime d'accession à la propriété), vous pouvez effectuer des retraits de votre REER sans pénalité pour défrayer le coût de vos études à plein temps ou celles de votre conjoint. Le montant retiré ne peut excéder 10 000 $ par année et 20 000 $ sur une période de quatre ans. Ces retraits sont remboursables, sans intérêt, sur une période de 10 ans.
15) Récupérez les droits au REER de votre conjoint décédé
Lorsqu'une personne décède avec des droits de cotisation au REER inutilisés, il est possible de cotiser au REER de son conjoint au nom de la personne décédée et de déduire ces cotisations additionnelles dans la déclaration finale du défunt.
16) N'oubliez pas les nombreux frais médicaux déductibles !
Au Québec, si vous payez des primes d'assurance médicament à votre travail dans le cadre d'un régime privé, elles sont considérées comme des frais médicaux au même titre que les franchises ou les dépenses qui ne sont pas couvertes par votre plan.
Au fédéral, vous pouvez réclamer l'excédent des frais médicaux payés sur le moindre de 3 % de votre revenu net ou 2 024 $. Au Québec, ces frais sont déductibles en excédent de 3 % du revenu net familial. Le crédit d'impôt équivaut au fédéral à 15 % des dépenses admissibles, multiplié par 83,5 % (pour l'abattement du Québec) et à 20 % au Québec. " Par contre, souligne M. Lacombe, au fédéral, les dépenses engagées à des fins purement esthétiques après le 4 mars 2010 ne sont plus admissibles au crédit d'impôt pour frais médicaux (elles ne l'étaient plus au Québec depuis quelques années). " Parmi les dépenses qui ne sont plus admissibles, mentionnons l'augmentation des seins et des lèvres, l'injection de botox, le lifting, les soins épilatoires, la liposuccion, etc.
17) Déduisez vos frais de garde à 7 $ au fédéral
Tous les frais de garde, y compris les garderies à 7 $, sont déductibles du revenu au fédéral. Au Québec, les frais de garderie à 7 $ ne sont pas admissibles, mais les frais en garderie privée ou à la maison sont admissibles à un crédit d'impôt remboursable variant de 75 % à 26 %, selon que le revenu familial se situe entre 31 670 $ et 141 125 $.
Au fédéral, tous les frais de garde sont des dépenses admissibles pour l'un ou l'autre des conjoints. Au fédéral comme au Québec, le maximum admissible est de 7 000 $ pour chaque enfant de 6 ans ou moins et de 4 000 $ pour chaque enfant de 7 à 16 ans.
" Depuis cette année, au fédéral, un chef de famille monoparentale peut désigner les montants reçus au titre de la prestation universelle pour la garde d'enfants (100 $ par mois) comme étant le revenu d'un enfant mineur ", nous apprend M. Lacombe. À condition de ne pas avoir d'époux ou de conjoint de fait à la fin de 2010.
18) Traitez votre enfant (fiscalement !) comme votre conjoint
Si vous avez un enfant et que vous n'êtes pas admissible au crédit de personne mariée ou vivant en union de fait, vous pouvez réclamer, à certaines conditions, un crédit d'impôt qui peut vous faire économiser jusqu'à 1 300 $ pour une personne entièrement à charge. Autrement dit, si vous vivez seul, votre enfant peut être considéré comme un conjoint et ainsi bénéficier de ce crédit. Par ailleurs, n'oubliez pas que si vos parents de plus de 65 ans, au fédéral, et de 70 ans, au Québec, vivent avec vous et ont un revenu relativement bas, vous pourriez aussi bénéficier d'un crédit pour aidant naturel.
19) Conseillez à vos enfants de produire leur déclaration fiscale
Si vous avez des enfants de moins de 18 ans travaillant à temps partiel ou à temps plein pendant les mois d'été, ils peuvent avoir droit à un remboursement d'impôt si leur revenu demeure sous le montant personnel de base (10 382 $ au fédéral et 10 505 $ au Québec). " Même si aucun impôt n'a été retenu, les parents devraient conseiller à leurs enfants de produire une déclaration fiscale pour augmenter leur limite de cotisation au REER pour les années futures ", précise M. Lacombe.
En outre, une personne de 19 ans ou plus qui gagne au moins 2 400 $ a droit à un crédit d'impôt non remboursable pouvant atteindre 1 552 $ au fédéral et 533 $ au Québec.
20) Faites bouger vos enfants !
Un crédit d'impôt fédéral non remboursable de 15 % est offert aux particuliers ayant engagé des dépenses admissibles (jusqu'à 500 $ par enfant) pour la condition physique de leurs enfants de moins de 16 ans. Au taux d'imposition maximum, cela représente 62 $ de plus dans vos poches. C'est mieux que rien !
21) Devenez parent à moindre coût
Vous avez toujours rêvé d'avoir un bambin, mais vous ou votre conjoint éprouvez des problèmes de fertilité ? Québec accorde un crédit d'impôt remboursable égal à 50 % des dépenses payées dans le but de devenir parent. Le plafond annuel des dépenses est de 20 000 $, pour un crédit maximum de 10 000 $. Parmi les dépenses admissibles, mentionnons les frais d'insémination ou de fécondation in vitro, des sommes payées à un médecin, à un centre hospitalier privé ou pour des médicaments. " Au fédéral, ces dépenses peuvent donner droit au crédit pour frais médicaux ", ajoute M. Lacombe.
22) Si vous avez 70 ans, réduisez le coût de certaines dépenses
Un contribuable de 70 ans et plus peut bénéficier d'un crédit sur ses dépenses engagées pour obtenir des services liés à son bien-être ou à son maintien à domicile, comme les services d'entretien. Le crédit peut atteindre 4 680 $ par année et 6 480 $ pour une personne non autonome. " Le domicile peut aussi être une résidence pour personnes âgées ", souligne M. Lacombe. Pour profiter au maximum de ce crédit, vos dépenses doivent atteindre au moins 15 600 $. N'oubliez pas de conserver vos factures.
23) Profitez de votre conscience environnementale
Si vous avez fait l'acquisition d'un véhicule écoénergétique admissible, Québec vous fait bénéficier d'un crédit d'impôt remboursable pouvant atteindre 8 000 $. Le taux du crédit est établi en fonction de la performance du véhicule sur le plan environnemental (au plus 5,27 litres au 100 km). Ce crédit est applicable aux véhicules neufs acquis ou loués à long terme entre le 1er janvier 2009 et le 31 décembre 2015.
24) Prenez les transports en commun et épargnez
Compte tenu de la hausse importante du carburant, il peut être encore plus avantageux d'emprunter les transports en commun pour vous rendre au bureau. N'oubliez pas que vous pouvez réclamer un crédit d'impôt fédéral non remboursable de 15 % sur le coût de laissez-passer de transport en commun mensuels ou d'au moins quatre laissez-passer hebdomadaires consécutifs. Ce crédit concerne les déplacements en métro, en autobus ou en train.
25 ) Vous pouvez déduire des frais de déménagement
Vous pouvez déduire de votre revenu des frais de déménagement si vous vous êtes rapproché d'au moins 40 km de votre nouveau lieu de travail ou d'études postsecondaires. Ces frais peuvent inclure le transport, l'entreposage, les frais liés à la vente de l'ancien domicile, les droits de mutation et les frais de notaire liés à l'achat de la nouvelle maison.
Sunday, August 21, 2011
Business Owners: Why you MUST have a Shareholders Agreement. *
You’re in business with other individuals. They may even be members of your family. The company is growing and all of you are working hard. You all agree with the direction in which the business is heading.
Does this sound like your company? But have you given any thought to how you and your fellow shareholders will resolve disputes should they arise? What will happen if one shareholder dies or becomes disabled?
A shareholders’ agreement is a contract between shareholders of an incorporated business that puts mechanisms in place to deal with important issues before they become problems. For business owners who are carrying on business with others in an unincorporated partnership, the issues discussed in this article are dealt with through the use of a partnership agreement. Both agreements are an invaluable tool you can use to help ensure that your business grows and prospers.
Let’s look at an example where a shareholders’ agreement could have helped to prevent a major problem. Two sisters, Jane and Mary, started an incorporated catering business in the mid-1970s. They had always been close. In fact, their families live in the same town and they vacation together. As issues arose, Jane and Mary were able to discuss them and reach a mutually satisfactory agreement. Due to this, the sisters didn’t think it was necessary to anticipate problems and therefore they didn’t consider a shareholders’ agreement.
You might also be thinking that the sisters don’t need a shareholders’ agreement. They have always been able to resolve differences, so what’s the point of spending the money to document their business relationship in writing?
It turns out that there was one issue that they never could agree to deal with—who would take over the business when they couldn’t run it anymore? Although they realized that a solution would eventually have to be found, they believed that they could deal with it later, once they were closer to retirement.
Then two events occurred which turned the lack of a shareholders’ agreement (and a succession plan) into a major issue. First, children of each sister became actively involved in the business. However, no thought was given to how those children would interact with each other once the two sisters were no longer in the picture.
Then Jane (now in her mid-sixties) suffered a heart attack. After a fairly lengthy recovery, she realized that working long hours in the business was not something she wanted anymore. So, she thought the time had come to pass on the business to the next generation. However, Mary was still in good health and didn’t share her sister’s desire to begin the succession process.
What follows in such a situation varies. In the case of the McCain family, the end result was a public conflict in which lawsuits were filed and the matter was eventually settled out of court by a New Brunswick judge who was hired as an arbitrator. For smaller businesses (as is the case for Jane and Mary), the business itself may not survive such an event.
How could a shareholders’ agreement have helped?
A shareholders’ agreement would have provided two benefits. First, an executed agreement would obviously set rules that would be followed to resolve business disputes and events such as Jane’s illness. But more importantly, the process of working through an agreement would help the sisters identify possible business risks and let them discuss in advance how they would resolve each issue if it arose and perhaps even set aside resources in advance (such as life, disability or critical illness insurance).
This could have been accomplished when they were getting along, in good health and in a good position to be objective over who should take over the business. In particular, the agreement could have provided for a couple of options—a mandated succession plan where each sister would pass on their interests to the next generation or a buy-sell agreement which would allow one sister to buy the other’s shares at a time when she became unable to carry on in the business due to poor health. Although the sisters could try to negotiate such an arrangement now, the point really is that their interests have already diverged and the issue is causing disharmony in their relationship. An added problem is that Jane is potentially at a disadvantage in any negotiations as she is unable to continue in the business.
In addition to buy-sell rules on disability or death and rules for succession, a shareholders’ agreement will usually include mechanisms to help shareholders deal with important issues such as:
Major business decisions such as a merger;
Rules for employing family members;
Rules for disposing of major assets or a business line;
Remuneration of shareholders and setting work expectations;
Corporate financing decisions;
Rules for determining a price of a shareholder’s interest and the conditions under which the interest can be transferred (in addition to illness or death);
Liquidation of a shareholder’s interest in the event of disagreement, disability or death (this would include buy-sell agreements for shares); and
Rules for resolving deadlocks (such as arbitration, mediation or appointing additional directors).
This list is not exhaustive—any issue of mutual concern to the shareholders of a company can and should be covered in the agreement.
The moral
You should put mechanisms in place now to help you deal with major issues at a time when you and your fellow shareholders are enjoying a good relationship, good health and can be objective. This is usually accomplished through the use of a shareholders’ agreement for an incorporated business or a partnership agreement for unincorporated partners.
* article published in BDO tax series -
Does this sound like your company? But have you given any thought to how you and your fellow shareholders will resolve disputes should they arise? What will happen if one shareholder dies or becomes disabled?
A shareholders’ agreement is a contract between shareholders of an incorporated business that puts mechanisms in place to deal with important issues before they become problems. For business owners who are carrying on business with others in an unincorporated partnership, the issues discussed in this article are dealt with through the use of a partnership agreement. Both agreements are an invaluable tool you can use to help ensure that your business grows and prospers.
Let’s look at an example where a shareholders’ agreement could have helped to prevent a major problem. Two sisters, Jane and Mary, started an incorporated catering business in the mid-1970s. They had always been close. In fact, their families live in the same town and they vacation together. As issues arose, Jane and Mary were able to discuss them and reach a mutually satisfactory agreement. Due to this, the sisters didn’t think it was necessary to anticipate problems and therefore they didn’t consider a shareholders’ agreement.
You might also be thinking that the sisters don’t need a shareholders’ agreement. They have always been able to resolve differences, so what’s the point of spending the money to document their business relationship in writing?
It turns out that there was one issue that they never could agree to deal with—who would take over the business when they couldn’t run it anymore? Although they realized that a solution would eventually have to be found, they believed that they could deal with it later, once they were closer to retirement.
Then two events occurred which turned the lack of a shareholders’ agreement (and a succession plan) into a major issue. First, children of each sister became actively involved in the business. However, no thought was given to how those children would interact with each other once the two sisters were no longer in the picture.
Then Jane (now in her mid-sixties) suffered a heart attack. After a fairly lengthy recovery, she realized that working long hours in the business was not something she wanted anymore. So, she thought the time had come to pass on the business to the next generation. However, Mary was still in good health and didn’t share her sister’s desire to begin the succession process.
What follows in such a situation varies. In the case of the McCain family, the end result was a public conflict in which lawsuits were filed and the matter was eventually settled out of court by a New Brunswick judge who was hired as an arbitrator. For smaller businesses (as is the case for Jane and Mary), the business itself may not survive such an event.
How could a shareholders’ agreement have helped?
A shareholders’ agreement would have provided two benefits. First, an executed agreement would obviously set rules that would be followed to resolve business disputes and events such as Jane’s illness. But more importantly, the process of working through an agreement would help the sisters identify possible business risks and let them discuss in advance how they would resolve each issue if it arose and perhaps even set aside resources in advance (such as life, disability or critical illness insurance).
This could have been accomplished when they were getting along, in good health and in a good position to be objective over who should take over the business. In particular, the agreement could have provided for a couple of options—a mandated succession plan where each sister would pass on their interests to the next generation or a buy-sell agreement which would allow one sister to buy the other’s shares at a time when she became unable to carry on in the business due to poor health. Although the sisters could try to negotiate such an arrangement now, the point really is that their interests have already diverged and the issue is causing disharmony in their relationship. An added problem is that Jane is potentially at a disadvantage in any negotiations as she is unable to continue in the business.
In addition to buy-sell rules on disability or death and rules for succession, a shareholders’ agreement will usually include mechanisms to help shareholders deal with important issues such as:
Major business decisions such as a merger;
Rules for employing family members;
Rules for disposing of major assets or a business line;
Remuneration of shareholders and setting work expectations;
Corporate financing decisions;
Rules for determining a price of a shareholder’s interest and the conditions under which the interest can be transferred (in addition to illness or death);
Liquidation of a shareholder’s interest in the event of disagreement, disability or death (this would include buy-sell agreements for shares); and
Rules for resolving deadlocks (such as arbitration, mediation or appointing additional directors).
This list is not exhaustive—any issue of mutual concern to the shareholders of a company can and should be covered in the agreement.
The moral
You should put mechanisms in place now to help you deal with major issues at a time when you and your fellow shareholders are enjoying a good relationship, good health and can be objective. This is usually accomplished through the use of a shareholders’ agreement for an incorporated business or a partnership agreement for unincorporated partners.
* article published in BDO tax series -
Business owners: What You Need to Know When Your CRA Tax Bill Is Wrong
The Canada Revenue Agency (CRA) doesn't always get it right. If you're a small business owner who has received a Notice of Reassessment stating that you owe a significant amount of tax, interest and penalties, that's the first thing to remember, says Peter V. Aprile.
Writing in The Globe and Mail, he offers eight pieces of advice for small business owners caught in this situation. Two that I found most interesting;
1) The CRA is not interested in making deals.
"...the CRA will not agree to settle a dispute unless persuaded that the taxpayer's position is correct in fact and/or law," writes Mr. Aprile. So trying to get a "knockdown" on the amount owed by whatever bargaining techniques have worked for you in business deals is a waste of time.
2) Save the begging for last and then only if you have to.
Mr. Aprile says that taxpayers with tax bills on their assessments often just ask the CRA to waive or cancel interest and penalties under the taxpayer relief provisions rather than challenging the merits of the assessment. This, he says, "is the tax equivalent to approaching the Minister of National Revenue on bended knee... In most cases, if a taxpayer has an arguable case the better route is to dispute the reassessment".
My main takeaway from this article, though is that dealing with the Canada Revenue Agency about a tax dispute is not a suitable do-it-yourself project. Sometimes you need to spend money to protect money. Connecting with a tax lawyer with tax dispute resolution experience would be the best first step.
For any questions, please contact me.
Writing in The Globe and Mail, he offers eight pieces of advice for small business owners caught in this situation. Two that I found most interesting;
1) The CRA is not interested in making deals.
"...the CRA will not agree to settle a dispute unless persuaded that the taxpayer's position is correct in fact and/or law," writes Mr. Aprile. So trying to get a "knockdown" on the amount owed by whatever bargaining techniques have worked for you in business deals is a waste of time.
2) Save the begging for last and then only if you have to.
Mr. Aprile says that taxpayers with tax bills on their assessments often just ask the CRA to waive or cancel interest and penalties under the taxpayer relief provisions rather than challenging the merits of the assessment. This, he says, "is the tax equivalent to approaching the Minister of National Revenue on bended knee... In most cases, if a taxpayer has an arguable case the better route is to dispute the reassessment".
My main takeaway from this article, though is that dealing with the Canada Revenue Agency about a tax dispute is not a suitable do-it-yourself project. Sometimes you need to spend money to protect money. Connecting with a tax lawyer with tax dispute resolution experience would be the best first step.
For any questions, please contact me.
Business Owners: Don't forget the Tax-Free Car Allowance
As a business owner, you may receive a tax-free car allowance if you use your own car when performing your business duties. The Canada Revenue Agency (CRA) will consider the allowance non-taxable if it is based on a per kilometre rate that they consider reasonable. The CRA normally considers the allowance reasonable, if it does not exceed the rate set annually by the government. For 2011, the rate is 52 cents/km for the first 5,000 km of business travel and 46 cents/km for business travel over 5,000 km. For the Yukon, the Northwest Territories and Nunavut, the rate is 56 cents/km for the first 5,000 km of business travel and 50 cents for each additional kilometre. The allowance is beneficial because you only have to track the distance travelled on business, not all of the related car expenses.
If the allowance exceeds these amounts, or could otherwise be viewed as being unreasonably high, it may be wise to track actual expenses and kilometres driven, in order to substantiate this higher amount, should the CRA ever challenge it.
Also, note that any allowance not calculated wholly on a reasonable "per kilometre" basis, is in most cases automatically considered taxable by the CRA. This would be the case, for instance, if you received a flat dollar amount per month.
If the allowance exceeds these amounts, or could otherwise be viewed as being unreasonably high, it may be wise to track actual expenses and kilometres driven, in order to substantiate this higher amount, should the CRA ever challenge it.
Also, note that any allowance not calculated wholly on a reasonable "per kilometre" basis, is in most cases automatically considered taxable by the CRA. This would be the case, for instance, if you received a flat dollar amount per month.
Change of career and back to school? Consider the Lifelong Learning Plan (LLP)
Lifelong Learning Plan (LLP)
The Lifelong Learning Plan allows you to withdraw up to $10,000 in a calendar year from your registered retirement savings plans (RRSPs) to finance full-time training or education for you, your spouse or common-law partner. You cannot participate in the LLP to finance your children’s training or education, or the training or education of your spouse’s or common-law partner’s children. As long as you meet the LLP conditions every year, you can withdraw amounts from your RRSPs until January of the fourth year after the year you make yourfirst LLP withdrawal. You cannot withdraw more than $20,000 in total.
Eligibility Information
Participants must meet the following criteria:
•complete and send an income tax return every year until they have repaid all of their LLP withdrawals or included them in their income
•enrol in a qualifying educational program at a designated educational institution
OR
•be a person with a disability enrolled in part-time training or education
Other criteria may apply.
Dates and Deadlines
•Participants must start to make repayments two years after their last eligible withdrawal, or five years after the first withdrawal, depending on which due date comes first.
•Amounts withdrawn must be repaid within 10 years.
The Lifelong Learning Plan allows you to withdraw up to $10,000 in a calendar year from your registered retirement savings plans (RRSPs) to finance full-time training or education for you, your spouse or common-law partner. You cannot participate in the LLP to finance your children’s training or education, or the training or education of your spouse’s or common-law partner’s children. As long as you meet the LLP conditions every year, you can withdraw amounts from your RRSPs until January of the fourth year after the year you make yourfirst LLP withdrawal. You cannot withdraw more than $20,000 in total.
Eligibility Information
Participants must meet the following criteria:
•complete and send an income tax return every year until they have repaid all of their LLP withdrawals or included them in their income
•enrol in a qualifying educational program at a designated educational institution
OR
•be a person with a disability enrolled in part-time training or education
Other criteria may apply.
Dates and Deadlines
•Participants must start to make repayments two years after their last eligible withdrawal, or five years after the first withdrawal, depending on which due date comes first.
•Amounts withdrawn must be repaid within 10 years.
Wednesday, August 17, 2011
Business Owners: Don't forget to file your Trust tax return on time...
To avoid paying penalties, trustees must ensure that they file a trust's tax return by the filing deadline. If you fail to file on time, a penalty of 5% of the unpaid tax is due. A further penalty of 1% of the unpaid tax times the number of months the return is not filed (to a maximum of 12 months) will also be due if the return remains unfiled. Even if the trust does not have a balance owing, the trust return is also an information return. That means that if the trust return is not filed on time or any of the information slips are not distributed on time, a penalty for each failure to comply with this requirement can be charged.
The filing deadline for trust returns with a December 31, 2011 year-end (which includes all inter-vivos trusts) will be March 31, 2012.
The filing deadline for trust returns with a December 31, 2011 year-end (which includes all inter-vivos trusts) will be March 31, 2012.
Tax Tip Management Fees and Salaries for Business Owners
Below is an excellent article written by Andrews & Co, Chartered Accountants, they are located in Ottawa, Canada:
Tax Tip Management Fees and Salaries
It is important to remember that management fees and salaries paid by taxpayers, usually corporations, must be reasonable to be deductible.
Companies will often “bonus down” profits to the limit of the Small Business Deduction, $500,000, to avoid paying higher rate tax on excess profits.
The Canada Revenue Agency can challenge such bonuses or management fees if in their opinion, the fees are not reasonable. It has been CRA’s assessing practice to allow bonuses or management fees where it is a corporations general practice to distribute profits in this manner AND the recipient of the income is active in the business and has special knowledge, skills etc that helped to earn the income.
In the Neilson Development Company case decision, the Court provided the criteria required to successfully bonus down and the fees to be considered reasonable. In this case, management fees of $300,000 per year were disallowed when paid to a corporation controlled by a spouse. The taxpayer successfully appealed but only because they could prove that the taxpayer met the criteria. The facts won the case, not legal arguments. The circumstances included:
- The management fees included services for budgeting, planning, marketing and being involved in the "hands on" operation
- Management was on site
- How the company operations compared to similar companies
- The effort to earn the fees
- The profitability of the company
- The presence or absence of a contract
It is important that when declaring material or substantial bonuses or management fees, that the facts be documented, there is a contract and the decision is recorded in the corporate Minutes.
Tax Tip Management Fees and Salaries
It is important to remember that management fees and salaries paid by taxpayers, usually corporations, must be reasonable to be deductible.
Companies will often “bonus down” profits to the limit of the Small Business Deduction, $500,000, to avoid paying higher rate tax on excess profits.
The Canada Revenue Agency can challenge such bonuses or management fees if in their opinion, the fees are not reasonable. It has been CRA’s assessing practice to allow bonuses or management fees where it is a corporations general practice to distribute profits in this manner AND the recipient of the income is active in the business and has special knowledge, skills etc that helped to earn the income.
In the Neilson Development Company case decision, the Court provided the criteria required to successfully bonus down and the fees to be considered reasonable. In this case, management fees of $300,000 per year were disallowed when paid to a corporation controlled by a spouse. The taxpayer successfully appealed but only because they could prove that the taxpayer met the criteria. The facts won the case, not legal arguments. The circumstances included:
- The management fees included services for budgeting, planning, marketing and being involved in the "hands on" operation
- Management was on site
- How the company operations compared to similar companies
- The effort to earn the fees
- The profitability of the company
- The presence or absence of a contract
It is important that when declaring material or substantial bonuses or management fees, that the facts be documented, there is a contract and the decision is recorded in the corporate Minutes.
Tuesday, August 9, 2011
Careful estate planning can stave off legal battles!
below is a good article written by Thane Stenner and published in the Globe and Mail.
Last week I had a working lunch with “Bill,” a client who had sold a significant portion of his family-held business about two years ago.
Over the course of our discussion, Bill told me a close friend from his university days had called him last month. The friend's father passed away back in March, leaving a sizable estate. Unfortunately, that estate was now in the process of an extensive legal battle, as four siblings (from two different marriages), a widow, and an ex-spouse bickered and fought over their share of the pie.
•Why you need an estate plan
•It's time to have 'the talk' with mom and dad
•Planning for your estate
“What a mess,” Bill said, shaking his head as he waited for his grilled salmon. “When I go, I want things to be well-organized – easy to deal with.” Bill paused for a moment before looking at me and adding: “And I want everybody to know exactly what I want done with my money.”
Bill's concern is well founded. In my experience, there's a direct relationship between the size of one's estate and the potential for conflict. The higher the stakes, the higher the chances for litigation.
Unfortunately, as I told Bill, there is no such thing as a litigation-free estate. Even the most well-organized, well-constructed estate may be challenged by disgruntled heirs or creditors. That said, there are things high-net-worth individuals can do to discourage litigation, and diffuse inter-family conflict before it leads to courtroom drama.
Start the process early
Estate planning can be detailed, complicated work. By starting early, high-net-worth individuals have the time to seek professional counsel and consider options carefully. This in turn clarifies intentions, and makes ambiguities and disagreements less likely, which should help deter claims against the estate.
For business owners like Bill, an early start is even more critical. Succession plans need put in place well in advance of the owner's retirement date, particularly if the intention is to groom a particular family member to take over the business.
Avoid ‘surprises’
Most estate litigation is born from what I call the “awful surprise”: an heir discovers they've been left much less than they thought they would, or have not been recognized as an owner of certain assets (the family business, for example). The news generates shock, alienation and anger. The desire to see justice done leads the heir to challenge the will, regardless of the ultimate chance of success.
Most high-net-worth individuals work hard to avoid this kind of dynamic. They communicate their estate intentions to heirs, and, if appropriate, to business partners and associates. If they know their family situation is explosive, they set up a family meeting or formal conference – using a professional mediator, if necessary –to let heirs know what their estate intentions actually are.
Use trusts
Trusts are an extremely flexible, extremely effective tool for organizing high-net-worth estates. Properly written, trusts can accomplish a number of important estate planning goals: They can reduce taxes, increase privacy, protect assets from creditors, protect family assets from future divorces, and structure an ongoing charitable contribution.
Trusts can also be an excellent way to avoid estate litigation. By putting a portion of your assets/estate into a trust, you can ensure an inheritance passes to specific people (adult children from a first marriage, for example). Another possibility is to put a family asset (the family cottage) into a trust instead of bequeathing it to a specific individual. That way all family members can enjoy it without bickering about who owns it. Ultimate ownership should still be completed though.
Assign a professional trustee
As the “manager” of an estate, the trustee wields a tremendous amount of financial power. While appointing a family member has its advantages, it’s unlikely the average person has the time, the knowledge, or even the inclination to properly administer a multi-million dollar estate at the same time they’re grieving for a loved one.
One way to get the best of both worlds is to appoint two estate trustees: (a) a family member, and (b) a financially competent professional (typically a CA, lawyer, or a trustee from a respected financial institution) who knows the family well. By appointing a trustee from outside the family who is legally bound to act in the interests of all beneficiaries, you can eliminate claims of bias or conflict of interest before they happen.
Update your will
Changes in business or family relationships can create friction among heirs. By regularly updating their wills, high-net-worth individuals can avoid making that friction boil over into legal challenges and/or inter-family disputes.
Reviewing a will every two years is usually a good rule of thumb. Such a review needn’t take more than an hour – the idea is to check to see whether everything is still in order. If a significant life or financial change takes place earlier than that (a marriage, a divorce, a liquidity event, etc.), a more frequent update may be warranted
Last week I had a working lunch with “Bill,” a client who had sold a significant portion of his family-held business about two years ago.
Over the course of our discussion, Bill told me a close friend from his university days had called him last month. The friend's father passed away back in March, leaving a sizable estate. Unfortunately, that estate was now in the process of an extensive legal battle, as four siblings (from two different marriages), a widow, and an ex-spouse bickered and fought over their share of the pie.
•Why you need an estate plan
•It's time to have 'the talk' with mom and dad
•Planning for your estate
“What a mess,” Bill said, shaking his head as he waited for his grilled salmon. “When I go, I want things to be well-organized – easy to deal with.” Bill paused for a moment before looking at me and adding: “And I want everybody to know exactly what I want done with my money.”
Bill's concern is well founded. In my experience, there's a direct relationship between the size of one's estate and the potential for conflict. The higher the stakes, the higher the chances for litigation.
Unfortunately, as I told Bill, there is no such thing as a litigation-free estate. Even the most well-organized, well-constructed estate may be challenged by disgruntled heirs or creditors. That said, there are things high-net-worth individuals can do to discourage litigation, and diffuse inter-family conflict before it leads to courtroom drama.
Start the process early
Estate planning can be detailed, complicated work. By starting early, high-net-worth individuals have the time to seek professional counsel and consider options carefully. This in turn clarifies intentions, and makes ambiguities and disagreements less likely, which should help deter claims against the estate.
For business owners like Bill, an early start is even more critical. Succession plans need put in place well in advance of the owner's retirement date, particularly if the intention is to groom a particular family member to take over the business.
Avoid ‘surprises’
Most estate litigation is born from what I call the “awful surprise”: an heir discovers they've been left much less than they thought they would, or have not been recognized as an owner of certain assets (the family business, for example). The news generates shock, alienation and anger. The desire to see justice done leads the heir to challenge the will, regardless of the ultimate chance of success.
Most high-net-worth individuals work hard to avoid this kind of dynamic. They communicate their estate intentions to heirs, and, if appropriate, to business partners and associates. If they know their family situation is explosive, they set up a family meeting or formal conference – using a professional mediator, if necessary –to let heirs know what their estate intentions actually are.
Use trusts
Trusts are an extremely flexible, extremely effective tool for organizing high-net-worth estates. Properly written, trusts can accomplish a number of important estate planning goals: They can reduce taxes, increase privacy, protect assets from creditors, protect family assets from future divorces, and structure an ongoing charitable contribution.
Trusts can also be an excellent way to avoid estate litigation. By putting a portion of your assets/estate into a trust, you can ensure an inheritance passes to specific people (adult children from a first marriage, for example). Another possibility is to put a family asset (the family cottage) into a trust instead of bequeathing it to a specific individual. That way all family members can enjoy it without bickering about who owns it. Ultimate ownership should still be completed though.
Assign a professional trustee
As the “manager” of an estate, the trustee wields a tremendous amount of financial power. While appointing a family member has its advantages, it’s unlikely the average person has the time, the knowledge, or even the inclination to properly administer a multi-million dollar estate at the same time they’re grieving for a loved one.
One way to get the best of both worlds is to appoint two estate trustees: (a) a family member, and (b) a financially competent professional (typically a CA, lawyer, or a trustee from a respected financial institution) who knows the family well. By appointing a trustee from outside the family who is legally bound to act in the interests of all beneficiaries, you can eliminate claims of bias or conflict of interest before they happen.
Update your will
Changes in business or family relationships can create friction among heirs. By regularly updating their wills, high-net-worth individuals can avoid making that friction boil over into legal challenges and/or inter-family disputes.
Reviewing a will every two years is usually a good rule of thumb. Such a review needn’t take more than an hour – the idea is to check to see whether everything is still in order. If a significant life or financial change takes place earlier than that (a marriage, a divorce, a liquidity event, etc.), a more frequent update may be warranted
Business owners: In trusts you can trust to find tax savings...
Trusts are wonderful tools for the wealthy, but business owners should use them, too. They can be worthwhile for amounts of money or assets of $150,000 – even less in some circumstances. The cost of setting up a simple testamentary trust – a trust set out in a will that takes effect when you die – can be an initial $2,000 to $3,000, mainly for legal fees.
The classic family trust is a form of living, or inter-vivos, trust, one that takes effect while you’re still alive. A testamentary trust forms part of a will and so takes effect only after you are gone. Which one you choose depends on how willing and able you are to give up ownership of some of your assets now.
“If you have enough, you might be okay with giving it up today,” says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. But if think you might need your savings, you’ll take the prudent approach and pass on whatever is left in a will, she says.
Perhaps the simplest trust is one you set up during your lifetime for the education of your children or grandchildren. Often people will put enough money into a registered education savings plan to take advantage of the federal government grants, and then put money into a trust with the children as beneficiary.
An education trust is more flexible than an RESP, Ms. Marshall says. One of the children or grandchildren might decide to go to a technical school or theatre school that is not approved by the Canada Revenue Agency; an education trust will allow them to. The trust money can be used to pay for the child’s living expenses or even to buy a car.
Given the large number of people in second or third marriages, spousal trusts are growing in popularity as a way to protect the interests of the children from a first marriage, experts say.
Often in a second marriage, a person will naturally want to provide for the new spouse but will worry about disinheriting children from a first marriage, says Keith Masterman, associate vice-president, trusts, at TD Waterhouse in Toronto. Rather than leaving everything to a second spouse, who may in turn leave it to his or her own family, Mr. Masterman advises clients set up a spousal trust as long as he or she lives. When the second spouse dies, the assets will go to the client’s children from the first marriage.
In this case, the choice of trustee becomes complicated, Mr. Masterman points out, because choosing either a child or the second spouse would put either in a conflict of interest. This can be resolved by hiring a professional trustee.
But trusts have other advantages.
For example, spousal trusts, like family trusts, can be used to split income, thereby lowering income taxes. By setting up a spousal trust, you are creating a second taxpayer because trusts are a separate legal entity. So, if you split your income with your spouse now, you can continue to do so after you are gone by setting up a trust and having the trust foot part of the tax bill.
You can spread your largesse around, using “sprinkler” trusts to split your income with your spouse, your children and their children, giving the trustee the discretion to allocate income from the trust however he or she sees fit – that is, to best tax advantage.
Naturally, the Canada Revenue Agency will scrutinize such arrangements closely, so the trust has to be set up properly, Ms. Marshall cautions. While parents retain control of the monies lent to the trust, “you have to look at whose money is generating the income.” It must belong to the children.
Keep it private
If privacy or probate is an issue, consider a trust.
When you die and your will is probated, your assets and your beneficiaries are on the public record. Anyone can see your will by paying a small fee. The details of a trust, in contrast, are confidential.
“Anyone” might include family members with an axe to grind or even charities hoping to approach your beneficiaries.
“Certain charities look at the affluent,” says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. “They want to follow up with the beneficiaries looking for donations.”
Another reason some people choose trusts is to avoid probate fees, which vary from province to province and are comparatively high in Ontario.
The classic family trust is a form of living, or inter-vivos, trust, one that takes effect while you’re still alive. A testamentary trust forms part of a will and so takes effect only after you are gone. Which one you choose depends on how willing and able you are to give up ownership of some of your assets now.
“If you have enough, you might be okay with giving it up today,” says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. But if think you might need your savings, you’ll take the prudent approach and pass on whatever is left in a will, she says.
Perhaps the simplest trust is one you set up during your lifetime for the education of your children or grandchildren. Often people will put enough money into a registered education savings plan to take advantage of the federal government grants, and then put money into a trust with the children as beneficiary.
An education trust is more flexible than an RESP, Ms. Marshall says. One of the children or grandchildren might decide to go to a technical school or theatre school that is not approved by the Canada Revenue Agency; an education trust will allow them to. The trust money can be used to pay for the child’s living expenses or even to buy a car.
Given the large number of people in second or third marriages, spousal trusts are growing in popularity as a way to protect the interests of the children from a first marriage, experts say.
Often in a second marriage, a person will naturally want to provide for the new spouse but will worry about disinheriting children from a first marriage, says Keith Masterman, associate vice-president, trusts, at TD Waterhouse in Toronto. Rather than leaving everything to a second spouse, who may in turn leave it to his or her own family, Mr. Masterman advises clients set up a spousal trust as long as he or she lives. When the second spouse dies, the assets will go to the client’s children from the first marriage.
In this case, the choice of trustee becomes complicated, Mr. Masterman points out, because choosing either a child or the second spouse would put either in a conflict of interest. This can be resolved by hiring a professional trustee.
But trusts have other advantages.
For example, spousal trusts, like family trusts, can be used to split income, thereby lowering income taxes. By setting up a spousal trust, you are creating a second taxpayer because trusts are a separate legal entity. So, if you split your income with your spouse now, you can continue to do so after you are gone by setting up a trust and having the trust foot part of the tax bill.
You can spread your largesse around, using “sprinkler” trusts to split your income with your spouse, your children and their children, giving the trustee the discretion to allocate income from the trust however he or she sees fit – that is, to best tax advantage.
Naturally, the Canada Revenue Agency will scrutinize such arrangements closely, so the trust has to be set up properly, Ms. Marshall cautions. While parents retain control of the monies lent to the trust, “you have to look at whose money is generating the income.” It must belong to the children.
Keep it private
If privacy or probate is an issue, consider a trust.
When you die and your will is probated, your assets and your beneficiaries are on the public record. Anyone can see your will by paying a small fee. The details of a trust, in contrast, are confidential.
“Anyone” might include family members with an axe to grind or even charities hoping to approach your beneficiaries.
“Certain charities look at the affluent,” says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. “They want to follow up with the beneficiaries looking for donations.”
Another reason some people choose trusts is to avoid probate fees, which vary from province to province and are comparatively high in Ontario.
Monday, August 8, 2011
Entrepreneurs: How do you handle leadership transfer?
How do you transfer leadership of an organization to the next generation?
Leadership succession requires workers and managers to struggle with uncertainty and the other emotions that come with change. Sometimes that change is managed so badly that the organization or business fails.
Therefore, many organizations take a "whole business" approach to leadership transfer in which they view the change's impact on the entire business, not just on the current leader and the successor. Usually this is a sustained process that exists over many years and involves all stakeholders, including workers, customers, suppliers, governors (or boards of directors) and other interested parties.
The first step in this process is persuading the leader to prepare for an exit. For many organizations, this is an automatic process instituted by governing boards as part of proper management. However, for many family firms, the founders do not want to consider the possibility. Perhaps they fear the business may not continue without them, or they cannot identify a proper successor, or they do not want to face the future or they are simply too busy.
But succession planning is more important today than ever. Generally it involves a seven-step process:
1.The leader identifies and understands his or her personal dream and vision
2.Those involved in the organization must identify their own visions
3.There must be a strategic plan for leadership transfer
4.Designated successors must be identified, prepared and trained
5.There should be a gradual transition to new leadership
6.Leadership or ownership must be transferred
7.The leader or owner must have a well-thought-out estate plan
Leadership succession requires workers and managers to struggle with uncertainty and the other emotions that come with change. Sometimes that change is managed so badly that the organization or business fails.
Therefore, many organizations take a "whole business" approach to leadership transfer in which they view the change's impact on the entire business, not just on the current leader and the successor. Usually this is a sustained process that exists over many years and involves all stakeholders, including workers, customers, suppliers, governors (or boards of directors) and other interested parties.
The first step in this process is persuading the leader to prepare for an exit. For many organizations, this is an automatic process instituted by governing boards as part of proper management. However, for many family firms, the founders do not want to consider the possibility. Perhaps they fear the business may not continue without them, or they cannot identify a proper successor, or they do not want to face the future or they are simply too busy.
But succession planning is more important today than ever. Generally it involves a seven-step process:
1.The leader identifies and understands his or her personal dream and vision
2.Those involved in the organization must identify their own visions
3.There must be a strategic plan for leadership transfer
4.Designated successors must be identified, prepared and trained
5.There should be a gradual transition to new leadership
6.Leadership or ownership must be transferred
7.The leader or owner must have a well-thought-out estate plan
Business Owners: requirements to export to the U.S.
What permits or other licenses are required before shipping products to the U.S.?
The answer to this question depends on what product is being shipped. Some products can be exported to the United States as easily as they can be shipped within Canada, while the export process for other products may involve all sorts of red tape. Generally, products that might damage health (such as pharmaceuticals and foods) or security (such as explosives and radioactive isotopes) are more likely to require permits and other licenses than more innocuous products. Similarly, products that are the subject of trade disputes (softwood lumber), protectionist measures by the United States (Buy American requirements) or quota systems (cheese) are more likely to be subject to regulatory constraints.
The Canada Border Service Agency offers Exporting Goods from Canada - A Handy Customs Guide for Exporters, which provides helpful information for exporters and would-be exporters, and which includes links to other sources of export information. A good general overview of exporting is Canada Business's online resource for exporting. Western Economic Diversification Canada has links to information on exporting for small businesses, and BDC's site has many useful articles as well as information on BDC programs such as financing and consulting.
The answer to this question depends on what product is being shipped. Some products can be exported to the United States as easily as they can be shipped within Canada, while the export process for other products may involve all sorts of red tape. Generally, products that might damage health (such as pharmaceuticals and foods) or security (such as explosives and radioactive isotopes) are more likely to require permits and other licenses than more innocuous products. Similarly, products that are the subject of trade disputes (softwood lumber), protectionist measures by the United States (Buy American requirements) or quota systems (cheese) are more likely to be subject to regulatory constraints.
The Canada Border Service Agency offers Exporting Goods from Canada - A Handy Customs Guide for Exporters, which provides helpful information for exporters and would-be exporters, and which includes links to other sources of export information. A good general overview of exporting is Canada Business's online resource for exporting. Western Economic Diversification Canada has links to information on exporting for small businesses, and BDC's site has many useful articles as well as information on BDC programs such as financing and consulting.
Monday, August 1, 2011
Acquiring a franchise business...
We're looking to acquire a franchised business. Any tips or due diligence processes that may vary from acquiring a non-franchised business?
The due diligence is the same for any other comparable business; however, the following are some franchise-specific issues.
You will want to thoroughly review the franchise agreement, and you should also have it reviewed by a good commercial lawyer who specializes in franchises.
Before signing a franchising contract, you should be able to answer the following questions:
•Does the franchisee have an exclusive territory?
•Is the franchise transferable? How long is left on the existing franchise agreement?
•Is the franchise renewable? For how long?
•Is it renewable at the franchisor's or the franchisee's option?
•What am I getting for the franchise fee? Accounting systems? Operating systems? Lower prices on supplies?
•What exactly am I buying? Am I buying the right to use the name? Is the building part of the deal, and do I own the real estate? Will I be paying rent?
Confirm that the current franchisee is in good standing with the franchisor, and talk to other franchisees within the group to ensure that there are no hidden issues with the franchisor. For any other question, please do not hesitate to contact me.
The due diligence is the same for any other comparable business; however, the following are some franchise-specific issues.
You will want to thoroughly review the franchise agreement, and you should also have it reviewed by a good commercial lawyer who specializes in franchises.
Before signing a franchising contract, you should be able to answer the following questions:
•Does the franchisee have an exclusive territory?
•Is the franchise transferable? How long is left on the existing franchise agreement?
•Is the franchise renewable? For how long?
•Is it renewable at the franchisor's or the franchisee's option?
•What am I getting for the franchise fee? Accounting systems? Operating systems? Lower prices on supplies?
•What exactly am I buying? Am I buying the right to use the name? Is the building part of the deal, and do I own the real estate? Will I be paying rent?
Confirm that the current franchisee is in good standing with the franchisor, and talk to other franchisees within the group to ensure that there are no hidden issues with the franchisor. For any other question, please do not hesitate to contact me.
Business owners: What’s your business worth?
Whether you're passing on the company to a family member or selling to outside interests, you will require a business valuation that establishes a realistic and fair price. This value will be an important focal point of your transition plan.
Valuating a business is not a simple task. The number you have in mind may differ from that of your family successors, potential buyers or tax assessors. It's probably best to call in a specialist who can look at your assets, liabilities and goodwill with clear-eyed detachment.
Different methods can be used to arrive at your business valuation, and they can be used alone or in combination.
Asset-based approach
This method totals up all investments made in the business to date. It does not account for the depreciation in the value of machinery that may be several years old, or other assets that have declined in value.
Business comparison
This approach determines a company’s market value by comparing it to similar companies in the field and transactions that have occurred in the recent past. For a highly specialized business, it may be difficult to research comparable transactions.
Company's past earnings
This method calculates a company’s value by its past earnings and profits. Those earnings and profits, however, are not a guarantee of future growth.
Doing it yourself
If you are intent on determining the market value of your company yourself, here are some pointers. First, determine just what it is that will be sold — or passed on — to your successor(s) or buyer(s).
•Do you have significant physical assets, or are you selling goodwill and client lists? How valuable is that client list, and does it include quality clients? Can you charge a premium for your client list, business name or logo?
•If you have equipment, how much equity do you have in it? If it's not leased, consider asking a machinery dealer for an appraisal.
•How about receivables? What state are they in? What percent are at 60, 90 or more days?
Once the assets have been added up, look at your liabilities. These include all outstanding company debts, of course, as well as variables such as unresolved lawsuits.
Some industry groups publish business valuation data based on sales and net cash flow. This data can be used to estimate the value of your business. Research firms that are similar to your own to see how much they sold for. Your company, however, may be a model of efficiency and profitability that outstrips all the rest, so those numbers are not necessarily the best basis of valuation.
Getting professional help
Business valuation requires some legwork and a lot of research. Do you have the time, the proper tools and the inclination to do it? If not, you might consider using a business valuator, who may be an accountant or a lawyer and should be experienced enough to determine the best method or combination of methods for the task at hand.
Your present lawyer or accountant may be able to recommend someone. Be sure to ask for references of similar business valuations that he or she has done.
Improving that number
Whether you’ve done the valuation yourself or had it done by a professional, once you've arrived at a realistic number, it's only reasonable to wonder how that number can be improved. BDC Consulting has the resources to provide you with succession planning and customized management solutions to make your company more valuable.
•One way of enhancing value is to increase sales — the "top line" — and reduce expenses such as owner perks to improve the "bottom line."
•Do you have variable liabilities such as outstanding lawsuits? If so, these should be settled before you begin the transition process.
•If you are the business — that is, if you are closely identified with the company — consider giving more responsibility to employees. They can make the transition to ownership and thereby render your company more valuable.
•Finally, your business may be more valuable in pieces than as a whole. A buyer may find your real estate holdings more attractive as an asset than as part of a potentially risky business.
There are many ways to estimate and enhance the value of your company prior to your business succession, and it pays to do your research and find a qualified business valuator. A professionally derived valuation will contribute to a smooth transition and continued harmony among family members.
Valuating a business is not a simple task. The number you have in mind may differ from that of your family successors, potential buyers or tax assessors. It's probably best to call in a specialist who can look at your assets, liabilities and goodwill with clear-eyed detachment.
Different methods can be used to arrive at your business valuation, and they can be used alone or in combination.
Asset-based approach
This method totals up all investments made in the business to date. It does not account for the depreciation in the value of machinery that may be several years old, or other assets that have declined in value.
Business comparison
This approach determines a company’s market value by comparing it to similar companies in the field and transactions that have occurred in the recent past. For a highly specialized business, it may be difficult to research comparable transactions.
Company's past earnings
This method calculates a company’s value by its past earnings and profits. Those earnings and profits, however, are not a guarantee of future growth.
Doing it yourself
If you are intent on determining the market value of your company yourself, here are some pointers. First, determine just what it is that will be sold — or passed on — to your successor(s) or buyer(s).
•Do you have significant physical assets, or are you selling goodwill and client lists? How valuable is that client list, and does it include quality clients? Can you charge a premium for your client list, business name or logo?
•If you have equipment, how much equity do you have in it? If it's not leased, consider asking a machinery dealer for an appraisal.
•How about receivables? What state are they in? What percent are at 60, 90 or more days?
Once the assets have been added up, look at your liabilities. These include all outstanding company debts, of course, as well as variables such as unresolved lawsuits.
Some industry groups publish business valuation data based on sales and net cash flow. This data can be used to estimate the value of your business. Research firms that are similar to your own to see how much they sold for. Your company, however, may be a model of efficiency and profitability that outstrips all the rest, so those numbers are not necessarily the best basis of valuation.
Getting professional help
Business valuation requires some legwork and a lot of research. Do you have the time, the proper tools and the inclination to do it? If not, you might consider using a business valuator, who may be an accountant or a lawyer and should be experienced enough to determine the best method or combination of methods for the task at hand.
Your present lawyer or accountant may be able to recommend someone. Be sure to ask for references of similar business valuations that he or she has done.
Improving that number
Whether you’ve done the valuation yourself or had it done by a professional, once you've arrived at a realistic number, it's only reasonable to wonder how that number can be improved. BDC Consulting has the resources to provide you with succession planning and customized management solutions to make your company more valuable.
•One way of enhancing value is to increase sales — the "top line" — and reduce expenses such as owner perks to improve the "bottom line."
•Do you have variable liabilities such as outstanding lawsuits? If so, these should be settled before you begin the transition process.
•If you are the business — that is, if you are closely identified with the company — consider giving more responsibility to employees. They can make the transition to ownership and thereby render your company more valuable.
•Finally, your business may be more valuable in pieces than as a whole. A buyer may find your real estate holdings more attractive as an asset than as part of a potentially risky business.
There are many ways to estimate and enhance the value of your company prior to your business succession, and it pays to do your research and find a qualified business valuator. A professionally derived valuation will contribute to a smooth transition and continued harmony among family members.
Family successions: managing the emotions.....
You’re about to retire, and the ambitious daughter you hoped would be an ideal successor announces she wants out of the business. Your brother jumps at the opportunity to run the company, but you don’t feel he’s got what it takes. Resentment boils over, and family turmoil threatens to sink your firm.
This is a typical scenario at many family-owned companies, according to Theodore Homa, Senior Partner, BDC International Consulting Services.
“Emotional issues can create a volatile dynamic in family businesses,” Homa says. “These entrepreneurs often have made personal sacrifices to keep their companies afloat, so it’s hard for them to separate business and personal relationships,” he says. “In the end, those emotions can get in the way of making decisions that are good for the business.”
Unresolved family issues, such as sibling rivalry, put a strain on business successions. According to the Canadian Federation of Independent Business, 33% of family businesses survive in the first generation and only 15% survive the second.
Homa provides these pointers to help business owners proactively manage emotional issues in family successions:
•Give yourself a lot of lead time to plan and execute – realistically at least 2 years. Family business transitions take much longer than one realizes.
•Formalize your family succession plan to avoid disagreements down the road. Maintain an open dialogue with family members about your plans and get them involved. Keeping them out of the loop can simply sow family discord.
•Create trust in your decisions, especially when it comes to the transfer of leadership. When you choose who will take over the helm, communicate a clear action plan to family members and employees. Reassure them that you have the mentoring and training in place to develop your successor in all aspects of the business.
•Define roles and responsibilities and even put them in writing. For instance, a family member might be a stakeholder in the business, but that doesn’t mean that he or she automatically has the right to be involved in daily operations. By clarifying these roles, especially in areas such as what is the purview of management in running the business on a daily basis versus what is required for governance of the business, you can avoid unnecessary misunderstandings.
•To address potential conflicts in the hiring of relatives, be sure you have clearly defined job profiles that outline exactly what you need in terms of experience, skills and education. After all, you don’t want to feel obliged to hire family members to do a job if you believe they are ill-equipped. At the same time, you don’t want to pressure family members to accept jobs that they aren’t suited to or interested in.
Seek external advice to resolve issues objectively. Experienced consultants can give you a third-party perspective that is invaluable. You can also turn to an advisory board, or even a formal board of directors, to provide a neutral point of view and help you through the various steps of the transition.
This is a typical scenario at many family-owned companies, according to Theodore Homa, Senior Partner, BDC International Consulting Services.
“Emotional issues can create a volatile dynamic in family businesses,” Homa says. “These entrepreneurs often have made personal sacrifices to keep their companies afloat, so it’s hard for them to separate business and personal relationships,” he says. “In the end, those emotions can get in the way of making decisions that are good for the business.”
Unresolved family issues, such as sibling rivalry, put a strain on business successions. According to the Canadian Federation of Independent Business, 33% of family businesses survive in the first generation and only 15% survive the second.
Homa provides these pointers to help business owners proactively manage emotional issues in family successions:
•Give yourself a lot of lead time to plan and execute – realistically at least 2 years. Family business transitions take much longer than one realizes.
•Formalize your family succession plan to avoid disagreements down the road. Maintain an open dialogue with family members about your plans and get them involved. Keeping them out of the loop can simply sow family discord.
•Create trust in your decisions, especially when it comes to the transfer of leadership. When you choose who will take over the helm, communicate a clear action plan to family members and employees. Reassure them that you have the mentoring and training in place to develop your successor in all aspects of the business.
•Define roles and responsibilities and even put them in writing. For instance, a family member might be a stakeholder in the business, but that doesn’t mean that he or she automatically has the right to be involved in daily operations. By clarifying these roles, especially in areas such as what is the purview of management in running the business on a daily basis versus what is required for governance of the business, you can avoid unnecessary misunderstandings.
•To address potential conflicts in the hiring of relatives, be sure you have clearly defined job profiles that outline exactly what you need in terms of experience, skills and education. After all, you don’t want to feel obliged to hire family members to do a job if you believe they are ill-equipped. At the same time, you don’t want to pressure family members to accept jobs that they aren’t suited to or interested in.
Seek external advice to resolve issues objectively. Experienced consultants can give you a third-party perspective that is invaluable. You can also turn to an advisory board, or even a formal board of directors, to provide a neutral point of view and help you through the various steps of the transition.
When buying a business, is the new owner liable for any outstanding liabilities??
QUESTION:
When buying a business, is the new owner liable for any outstanding liabilities such as debt and lawsuits from the previous owner?
ANSWER:
Acquisitions are very common today: one business - usually a corporation - takes over or buys out another business and takes its place in the market. An acquisition is when one business, usually called the "successor," buys either another company's stock or assets.
Asset Purchase
Generally, in an asset purchase, the buyer-company is not liable for the seller-company's debts and liabilities. However, there are exceptions, such as: when the buyer agrees to assume the debts or liabilities; that is, as the buyer, you could assume some or all of the seller's debts in exchange for a lower sales price.
The asset acquisition does not require the approval of the buyer's stockholders, but the seller's stockholders do have to approve the sale of all or most of the assets. Stockholders who oppose the sale usually have the right to the "appraisal value" of their stock, which is determined by an independent third party.
Stock Purchases
If you acquire a business through a stock purchase, that is, buying all or substantially all of the company's stock from its shareholders, your company "steps into the shoes" of the other company, and business continues as usual. The buyer takes on all of the seller's debts and obligations, whether they're known or unknown at the time of the sale.
A known liability might be a bank loan that is recorded in the company's books and records. An unknown liability might be money owed to employees or contractors that has not been properly recorded and has been overlooked by both the seller and the buyer. But, the most dangerous unknown liability often arises from the seller's pre-sale activities.
For example, if the seller had been making and selling paint for 15 years before the buyer acquired it through a stock purchase, the buyer can be liable for the injuries sustained by a painter who claims that the seller's paint contained toxic chemicals, even if the painter's injuries did not show up several years after the stock purchase.
A stock purchase requires stockholder approval, and stockholders have the right to oppose the sale and to have the value of their stock appraised by an independent party.
In both cases, it is highly recommended to contact a lawyer in order to define your best purchase option
When buying a business, is the new owner liable for any outstanding liabilities such as debt and lawsuits from the previous owner?
ANSWER:
Acquisitions are very common today: one business - usually a corporation - takes over or buys out another business and takes its place in the market. An acquisition is when one business, usually called the "successor," buys either another company's stock or assets.
Asset Purchase
Generally, in an asset purchase, the buyer-company is not liable for the seller-company's debts and liabilities. However, there are exceptions, such as: when the buyer agrees to assume the debts or liabilities; that is, as the buyer, you could assume some or all of the seller's debts in exchange for a lower sales price.
The asset acquisition does not require the approval of the buyer's stockholders, but the seller's stockholders do have to approve the sale of all or most of the assets. Stockholders who oppose the sale usually have the right to the "appraisal value" of their stock, which is determined by an independent third party.
Stock Purchases
If you acquire a business through a stock purchase, that is, buying all or substantially all of the company's stock from its shareholders, your company "steps into the shoes" of the other company, and business continues as usual. The buyer takes on all of the seller's debts and obligations, whether they're known or unknown at the time of the sale.
A known liability might be a bank loan that is recorded in the company's books and records. An unknown liability might be money owed to employees or contractors that has not been properly recorded and has been overlooked by both the seller and the buyer. But, the most dangerous unknown liability often arises from the seller's pre-sale activities.
For example, if the seller had been making and selling paint for 15 years before the buyer acquired it through a stock purchase, the buyer can be liable for the injuries sustained by a painter who claims that the seller's paint contained toxic chemicals, even if the painter's injuries did not show up several years after the stock purchase.
A stock purchase requires stockholder approval, and stockholders have the right to oppose the sale and to have the value of their stock appraised by an independent party.
In both cases, it is highly recommended to contact a lawyer in order to define your best purchase option
Factors to consider when requesting financing for a start-up
QUESTION:
What are the most important factors to consider when asking a financial institution for financing to start a business?
ANSWER:
Most bankers look at four factors:
Your professional profile
Bankers try to evaluate your ability to manage the project. You must show that you have the experience, skills, determination and self-confidence necessary to successfully carry out your project.
Your project's viability
You should have a business plan that is clear, structured and short, but also covers all the elements of your business idea. You need to present at least two years of financial projections as well as an analysis of market size, market potential and positioning.
Your financial strength
You will have to reveal your personal and business net worth (assets minus liabilities) so a banker can judge your ability to meet your financial obligations. A banker will also look at your past credit history to gauge the future.
Your collateral
Bankers often also look for assets to secure a loan. They invariably ask for some investment on your part as proof of commitment. This investment might have been raised by you privately.
Of all these factors, perhaps the most important is that you have planned out your idea beyond the idea stage. Before approaching a bank for financing, you should be able to predict, and answer in detail, all possible questions about your business, such as how you are going to do it and what its potential is.
You should also have a clear concept of where you want to be in five years, and have a list of steps required to get you there. If you can convince a banker of this, many of the other factors can be negotiated.
What are the most important factors to consider when asking a financial institution for financing to start a business?
ANSWER:
Most bankers look at four factors:
Your professional profile
Bankers try to evaluate your ability to manage the project. You must show that you have the experience, skills, determination and self-confidence necessary to successfully carry out your project.
Your project's viability
You should have a business plan that is clear, structured and short, but also covers all the elements of your business idea. You need to present at least two years of financial projections as well as an analysis of market size, market potential and positioning.
Your financial strength
You will have to reveal your personal and business net worth (assets minus liabilities) so a banker can judge your ability to meet your financial obligations. A banker will also look at your past credit history to gauge the future.
Your collateral
Bankers often also look for assets to secure a loan. They invariably ask for some investment on your part as proof of commitment. This investment might have been raised by you privately.
Of all these factors, perhaps the most important is that you have planned out your idea beyond the idea stage. Before approaching a bank for financing, you should be able to predict, and answer in detail, all possible questions about your business, such as how you are going to do it and what its potential is.
You should also have a clear concept of where you want to be in five years, and have a list of steps required to get you there. If you can convince a banker of this, many of the other factors can be negotiated.
Entrepreneurs: The different business structures available in Canada....
Now that you have decided on starting your own business, you will have to determine what business structure or form of organization suits your needs.
The structure of your business will depend on whether you want to run your business yourself or with a partner or associates. There are four types of business structures: sole proprietorship, partnerships, corporations and cooperatives.
Sole proprietorship
With this type of business organization, you would be fully responsible for all debts and obligations related to your business and all profits would be yours alone to keep. As a sole owner of the business, a creditor can make a claim against your personal or business assets to pay off any debt.
Advantages:
•Easy and inexpensive to form a sole proprietorship (you will only need to register your business name provincially, except in Newfoundland and Labrador)
•Relatively low cost to start your business
•Lowest amount of regulatory burden
•Direct control of decision making
•Minimal working capital required to start-up
•Tax advantages if your business is not doing well, for example, deducting your losses from your personal income, lower tax bracket when profits are low, and so on
•All profits will go to you directly
Disadvantages:
•Unlimited liability (if you have business debts, personal assets would be used to pay off the debt)
•Income would be taxable at your personal rate and, if your business is profitable, this may put you in a higher tax bracket
•Lack of continuity for your business, if you need to be absent
•Difficulty raising capital on your own
Partnerships
A partnership would be a good business structure if you want to carry on a business with a partner and you do not wish to incorporate your business. With a partnership, you would combine your financial resources with your partner into the business. You can establish the terms of your business with your partner and protect yourself in case of a disagreement or dissolution by drawing up a specific business agreement. As a partner, you would share in the profits of your business according to the terms of your agreement.
You may also be interested in a limited liability partnership in the business. This means that you would not take part in the control or management of the business, but would be liable for debts to a specified extent only.
When establishing a partnership, you should have a partnership agreement drawn up with the assistance of a lawyer, to ensure that:
•You are protecting your interests
•That you have clearly established the terms of the partnership with regards to issues like profit sharing, dissolving the partnership, and more
•That you meet the legal requirements for a limited partnership (if applicable)
Advantages:
•Easy to start-up a partnership
•Start-up costs would be shared equally with you and your partner
•Equal share in the management, profits and assets
•Tax advantage, if income from the partnership is low or loses money (you and your partner include your share of the partnership in your individual tax return)
Disadvantages:
•Similar to sole proprietorship, as there is no legal difference between you and your business
•Unlimited liability (if you have business debts, personal assets would be used to pay off the debt)
•Hard to find a suitable partner
•Possible development of conflict between you and your partner
•You are held financially responsible for business decisions made by your partner (for example, contracts that are broken)
Corporations
Another business structure is to incorporate your business. This can be done at the federal or provincial level. When you incorporate your business, it is considered to be a legal entity that is separate from the owners and shareholders. As a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation.
Advantages:
•Limited liability
•Ownership is transferable
•Continuous existence
•Separate legal entity
•Easier to raise capital
•Possible tax advantage as taxes may be lower for an incorporated business
Disadvantages:
•A corporation is closely regulated
•More expensive to incorporate than a partnership or sole proprietorship
•Extensive corporate records required, including shareholder and director meetings, and documentation filed annually with the government
•Possible conflict between shareholders and directors
•Possible problem with residency of directors, if they are in another province or the majority are not Canadian
The structure of your business will depend on whether you want to run your business yourself or with a partner or associates. There are four types of business structures: sole proprietorship, partnerships, corporations and cooperatives.
Sole proprietorship
With this type of business organization, you would be fully responsible for all debts and obligations related to your business and all profits would be yours alone to keep. As a sole owner of the business, a creditor can make a claim against your personal or business assets to pay off any debt.
Advantages:
•Easy and inexpensive to form a sole proprietorship (you will only need to register your business name provincially, except in Newfoundland and Labrador)
•Relatively low cost to start your business
•Lowest amount of regulatory burden
•Direct control of decision making
•Minimal working capital required to start-up
•Tax advantages if your business is not doing well, for example, deducting your losses from your personal income, lower tax bracket when profits are low, and so on
•All profits will go to you directly
Disadvantages:
•Unlimited liability (if you have business debts, personal assets would be used to pay off the debt)
•Income would be taxable at your personal rate and, if your business is profitable, this may put you in a higher tax bracket
•Lack of continuity for your business, if you need to be absent
•Difficulty raising capital on your own
Partnerships
A partnership would be a good business structure if you want to carry on a business with a partner and you do not wish to incorporate your business. With a partnership, you would combine your financial resources with your partner into the business. You can establish the terms of your business with your partner and protect yourself in case of a disagreement or dissolution by drawing up a specific business agreement. As a partner, you would share in the profits of your business according to the terms of your agreement.
You may also be interested in a limited liability partnership in the business. This means that you would not take part in the control or management of the business, but would be liable for debts to a specified extent only.
When establishing a partnership, you should have a partnership agreement drawn up with the assistance of a lawyer, to ensure that:
•You are protecting your interests
•That you have clearly established the terms of the partnership with regards to issues like profit sharing, dissolving the partnership, and more
•That you meet the legal requirements for a limited partnership (if applicable)
Advantages:
•Easy to start-up a partnership
•Start-up costs would be shared equally with you and your partner
•Equal share in the management, profits and assets
•Tax advantage, if income from the partnership is low or loses money (you and your partner include your share of the partnership in your individual tax return)
Disadvantages:
•Similar to sole proprietorship, as there is no legal difference between you and your business
•Unlimited liability (if you have business debts, personal assets would be used to pay off the debt)
•Hard to find a suitable partner
•Possible development of conflict between you and your partner
•You are held financially responsible for business decisions made by your partner (for example, contracts that are broken)
Corporations
Another business structure is to incorporate your business. This can be done at the federal or provincial level. When you incorporate your business, it is considered to be a legal entity that is separate from the owners and shareholders. As a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation.
Advantages:
•Limited liability
•Ownership is transferable
•Continuous existence
•Separate legal entity
•Easier to raise capital
•Possible tax advantage as taxes may be lower for an incorporated business
Disadvantages:
•A corporation is closely regulated
•More expensive to incorporate than a partnership or sole proprietorship
•Extensive corporate records required, including shareholder and director meetings, and documentation filed annually with the government
•Possible conflict between shareholders and directors
•Possible problem with residency of directors, if they are in another province or the majority are not Canadian
Entrepreneurs: taking care of your business transition via Employee Share Ownership Plans (ESOPs)
QUESTION:
I would like information on Employee Share Ownership Plans (ESOPs) as a means of business succession. I am especially interested in ESOPs from a tax perspective.
ANSWER:
Generally an ESOP allows qualifying employees to purchase shares in their employer's company, with or without monetary assistance from the company. Many companies are using ESOPs as a form of succession when there is no other successor apparent.
Whether an ESOP plan is created for succession or employee loyalty purposes, the plan must have a high participation rate to be effective. The type of business is also relevant. If it involves manufacturing and physical assets, valuations are easier to determine. The plan must be administered, which requires some work. That is why many ESOPs involve union structures that can help with administration.
ESOPS also have many tax and legal implications for companies and their owners, so anyone considering them should seek professional help. Lawyers, accountants and some BDC consultants can help companies navigate the tricky route to establishing an ESOP.
I would like information on Employee Share Ownership Plans (ESOPs) as a means of business succession. I am especially interested in ESOPs from a tax perspective.
ANSWER:
Generally an ESOP allows qualifying employees to purchase shares in their employer's company, with or without monetary assistance from the company. Many companies are using ESOPs as a form of succession when there is no other successor apparent.
Whether an ESOP plan is created for succession or employee loyalty purposes, the plan must have a high participation rate to be effective. The type of business is also relevant. If it involves manufacturing and physical assets, valuations are easier to determine. The plan must be administered, which requires some work. That is why many ESOPs involve union structures that can help with administration.
ESOPS also have many tax and legal implications for companies and their owners, so anyone considering them should seek professional help. Lawyers, accountants and some BDC consultants can help companies navigate the tricky route to establishing an ESOP.
Q & A: Minimizing taxes due to share transfers
QUESTION:
I want to gradually transfer my shares to my 18-year-old son. How can I transfer these shares to minimize personal and corporate income tax?
ANSWER:
You should ask a tax expert such as an accountant, but I can provide a general overview of the tax system. In this case, your corporation will likely be unaffected from a tax point of view by any transfer of shares if you hold all the shares. The transfer becomes largely a personal tax issue for you and your son.
Transferring shares to your son can be done in two ways – as gifts or as sales. In both cases the shares must be assigned a value, which can be determined by an accountant or lawyer who specializes in this field. This value will be affected by the earnings of your company and whether the shares have been paying you dividends, among other issues.
If you give the shares to your son, there may be tax implications for you. If the shares are deemed as having been "sold" at the time, you may be taxed on your capital gains. However, for any income incurred by these shares, your son will be taxed.
If you sell the shares to your son, the effects would be roughly the same, but the numbers may change for each of you. Your personal capital gains tax may be lower, and your son's capital cost base will be higher, so this may be a way of deferring his tax owed to the future.
You plan to transfer shares gradually, but there will be a point where your son has a sizeable financial interest in the company. If you hope that he will one day take over management of the company, ensure you've taken the standard steps involved in succession planning. Is he competent or willing to take over, and do you have a proper training program to ensure the company will not be damaged by the succession?
Also, there may be a need for an interim manager to run the company until your son is ready. If that is the case, this manager may also want some financial stake in the company, such as a percentage of shares.
I want to gradually transfer my shares to my 18-year-old son. How can I transfer these shares to minimize personal and corporate income tax?
ANSWER:
You should ask a tax expert such as an accountant, but I can provide a general overview of the tax system. In this case, your corporation will likely be unaffected from a tax point of view by any transfer of shares if you hold all the shares. The transfer becomes largely a personal tax issue for you and your son.
Transferring shares to your son can be done in two ways – as gifts or as sales. In both cases the shares must be assigned a value, which can be determined by an accountant or lawyer who specializes in this field. This value will be affected by the earnings of your company and whether the shares have been paying you dividends, among other issues.
If you give the shares to your son, there may be tax implications for you. If the shares are deemed as having been "sold" at the time, you may be taxed on your capital gains. However, for any income incurred by these shares, your son will be taxed.
If you sell the shares to your son, the effects would be roughly the same, but the numbers may change for each of you. Your personal capital gains tax may be lower, and your son's capital cost base will be higher, so this may be a way of deferring his tax owed to the future.
You plan to transfer shares gradually, but there will be a point where your son has a sizeable financial interest in the company. If you hope that he will one day take over management of the company, ensure you've taken the standard steps involved in succession planning. Is he competent or willing to take over, and do you have a proper training program to ensure the company will not be damaged by the succession?
Also, there may be a need for an interim manager to run the company until your son is ready. If that is the case, this manager may also want some financial stake in the company, such as a percentage of shares.
General aspects to consider before acquiring a business
What are some of the most important aspects to look for in buying a business?
The guiding principles of acquisition are called synergies, value and equilibrium. Synergies must occur between the 2 companies that are merging or between the buyer and the company being acquired. Ideally the companies that are merging should have similar or complementary product or service lines, and their marketing and sales methods should be in harmony.
There are 3 areas where synergies should occur:
•Marketing and sales (new products and services, new clients or new markets should create more revenues)
•Operations (there should be volume discounts or better ways and means to create and deliver products and services, or both)
•Finance and administration (the merger or acquisition should improve cash flow and fuel additional business projects)
If there are no synergies, there should be no acquisition. Value, meanwhile, is the capacity to generate profits and cash flow. Profits and cash flow create value and support growth: profits generate equity that increases value, and cash flow builds working capital and strengthens the day-to-day operations.
A business that cannot create value should not be acquired.
Equilibrium is striking the right balance. With regard to synergies, the acquisition should be feasible operationally and financially. In other words, a very small company should not acquire a very large company, and a company that manufactures widgets should probably not acquire a company that manufactures clothing. Another kind of equilibrium is in the potential to create value: the investor should be able to add value to the company being acquired and vice versa.
An acquisition that is not in equilibrium with positive synergies and value should not be made.
The guiding principles of acquisition are called synergies, value and equilibrium. Synergies must occur between the 2 companies that are merging or between the buyer and the company being acquired. Ideally the companies that are merging should have similar or complementary product or service lines, and their marketing and sales methods should be in harmony.
There are 3 areas where synergies should occur:
•Marketing and sales (new products and services, new clients or new markets should create more revenues)
•Operations (there should be volume discounts or better ways and means to create and deliver products and services, or both)
•Finance and administration (the merger or acquisition should improve cash flow and fuel additional business projects)
If there are no synergies, there should be no acquisition. Value, meanwhile, is the capacity to generate profits and cash flow. Profits and cash flow create value and support growth: profits generate equity that increases value, and cash flow builds working capital and strengthens the day-to-day operations.
A business that cannot create value should not be acquired.
Equilibrium is striking the right balance. With regard to synergies, the acquisition should be feasible operationally and financially. In other words, a very small company should not acquire a very large company, and a company that manufactures widgets should probably not acquire a company that manufactures clothing. Another kind of equilibrium is in the potential to create value: the investor should be able to add value to the company being acquired and vice versa.
An acquisition that is not in equilibrium with positive synergies and value should not be made.
Management buyout demystified ...
As a business lawyer, I structure complex transactions on a weekly basis, today I would like to take the time to explain you what is a MBO :)
As a generation of baby boomers approach retirement, buyouts can be expected to grow in popularity as a way for senior managers to acquire the firms where they work.
In their simplest form, management buyouts, or MBOs, see a management team pool resources to acquire all or part of the business they manage. Leveraged management buyouts, or LMBOs, are similar, except the buyers use company assets as collateral to secure financing.
Transactions of this sort typically see management teams take full ownership of a firm, using their expertise to grow the business afterward. Funding usually comes from a mix of personal resources, external financiers and the seller. Internal processes and transfers of responsibilities remain confidential and are often handled quickly.
Risk is reduced by the fact that continuity of the company's business is better assured when the people who have managed it are its buyers. Since the purchasers are an experienced management team who understand the business and its needs, existing clients and business partners often feel reassured, improving the prospects for a solid return on investment.
Such buyouts are not to be confused with MBIs, or management buy-ins, in which a team of outside managers buys a business, often with financing from private equity investors. Another variation on this theme is the so-called Buy-In-Management-Buyout, or BIMBO, a combined MBO and MBI, in which an external group of managers buys into the business and joins forces with an internal management team.
A number of issues need to be considered when contemplating a management buyout.
Be transparent
Approach the company owner with your proposal, and ask for permission before disclosing confidential information to financiers.
Check the feasibility of the initiative
Be sure the venture is profitable. Keep in mind that management buyouts, whether leveraged or not, require substantial financing that can typically reduce a company's cash flow. Cost cutting, improved productivity or increased revenues may be needed to cover these financing costs.
Any thorough financial analysis will uncover figures on cash flow, sales volume, debt capacity and growth potential. These in turn will provide valuable information on the fair market value of the business you are eyeing.
Choose your management team well
You will need to put in place people with the right combination of skills to take the company through a transition period and run the business profitably.
Establish a fair way to share equity
There should be reasonable incentives for everyone involved in the process.
Remain low-key
Keep a low profile until the paperwork is signed. You don't want to reveal your interests to too many potential competitors and instigate an auction that causes the price to rise.
Retain good relationships
If your buyout bid fails, you may end up working with the same colleagues in the future.
When power transfers within a company from seller to buyer, both must first agree on a sale price, which is confirmed by a valuation. Managers then assess how many shares they are in a position to purchase immediately, and draft a shareholder agreement. Financial institutions are approached, a transition plan is developed that incorporates tax and succession planning, and managers buy out the owner's stake in the business with assistance from the lender. The full transfer of decision-making and ownership powers to the successors can take place gradually, over a period of months or even years. Managers then pay back the financial institution at a time and pace that will not unduly slow the growth of the business.
How to finance an MBO/LMBO
It's critical to develop a strong business plan before making an acquisition of this type. Forecasts should be credible so you and your partners know what you're getting into. Personal and business referrals can help you secure the confidence of bankers. A single institution is usually involved in smaller buyouts, while in larger transactions, several institutions may handle the financing.
In leveraged buyouts, business assets must be evaluated to determine how much equity is available for financing. The lender will then use the assets as collateral, adjusting the interest rate charged based on the risks associated with the transaction.
In some occasions, the financer will ask the sellers to finance a portion of the sale as a way of demonstrating their commitment to the venture and confidence in the management team. It's always worth shopping around for the best terms.
The following are the most common types of financing used, often in combination, in such ventures:
Personal funds
Can help secure the confidence of a financial institution, add equity to a transaction and share risk. Managers often have no choice but to invest a substantial amount of their own wealth in such ventures, even refinancing their personal assets, as a way of demonstrating their commitment.
Loan or credit notes
When they come from banks, they are often used to purchase shares from an owner. This appeal of this type of financing is in its simplicity: assets are used as collateral, and interest rates are lower as a result.
Seller financing
Can set a schedule for payment over period of years and involve credit notes, loans or preferred shares. This reduces demands on cash flow when the transaction occurs. Likewise, an instalment purchase of stock allows sellers to maintain some control over the business until they have been completely paid off.
Stock sales to employees
Can help reduce the cost of financing a management buyout while giving employees new productivity incentives as full control over the business shifts to the management team.
Subordinate financing can complement a management team's investment by bringing together features of both debt and equity financing without diluting ownership. If a profitable business maximizes financing for its assets but managers' personal funds are still insufficient for a transaction, subordinate financing can fill the gap. Repayment terms are established at time of transaction.
Venture capital can provide long-term, unsecured equity financing. This inevitably involves a partnership in which the venture capital group purchases shares in a business in exchange for ownership rights. There is no fixed repayment schedule since capital gains, or increases in the firm's share value, determine when the financing can be paid down. Venture capital investments can provide the new owners with great insight and expertise, but buy-back costs are undetermined at the outset.
As a generation of baby boomers approach retirement, buyouts can be expected to grow in popularity as a way for senior managers to acquire the firms where they work.
In their simplest form, management buyouts, or MBOs, see a management team pool resources to acquire all or part of the business they manage. Leveraged management buyouts, or LMBOs, are similar, except the buyers use company assets as collateral to secure financing.
Transactions of this sort typically see management teams take full ownership of a firm, using their expertise to grow the business afterward. Funding usually comes from a mix of personal resources, external financiers and the seller. Internal processes and transfers of responsibilities remain confidential and are often handled quickly.
Risk is reduced by the fact that continuity of the company's business is better assured when the people who have managed it are its buyers. Since the purchasers are an experienced management team who understand the business and its needs, existing clients and business partners often feel reassured, improving the prospects for a solid return on investment.
Such buyouts are not to be confused with MBIs, or management buy-ins, in which a team of outside managers buys a business, often with financing from private equity investors. Another variation on this theme is the so-called Buy-In-Management-Buyout, or BIMBO, a combined MBO and MBI, in which an external group of managers buys into the business and joins forces with an internal management team.
A number of issues need to be considered when contemplating a management buyout.
Be transparent
Approach the company owner with your proposal, and ask for permission before disclosing confidential information to financiers.
Check the feasibility of the initiative
Be sure the venture is profitable. Keep in mind that management buyouts, whether leveraged or not, require substantial financing that can typically reduce a company's cash flow. Cost cutting, improved productivity or increased revenues may be needed to cover these financing costs.
Any thorough financial analysis will uncover figures on cash flow, sales volume, debt capacity and growth potential. These in turn will provide valuable information on the fair market value of the business you are eyeing.
Choose your management team well
You will need to put in place people with the right combination of skills to take the company through a transition period and run the business profitably.
Establish a fair way to share equity
There should be reasonable incentives for everyone involved in the process.
Remain low-key
Keep a low profile until the paperwork is signed. You don't want to reveal your interests to too many potential competitors and instigate an auction that causes the price to rise.
Retain good relationships
If your buyout bid fails, you may end up working with the same colleagues in the future.
When power transfers within a company from seller to buyer, both must first agree on a sale price, which is confirmed by a valuation. Managers then assess how many shares they are in a position to purchase immediately, and draft a shareholder agreement. Financial institutions are approached, a transition plan is developed that incorporates tax and succession planning, and managers buy out the owner's stake in the business with assistance from the lender. The full transfer of decision-making and ownership powers to the successors can take place gradually, over a period of months or even years. Managers then pay back the financial institution at a time and pace that will not unduly slow the growth of the business.
How to finance an MBO/LMBO
It's critical to develop a strong business plan before making an acquisition of this type. Forecasts should be credible so you and your partners know what you're getting into. Personal and business referrals can help you secure the confidence of bankers. A single institution is usually involved in smaller buyouts, while in larger transactions, several institutions may handle the financing.
In leveraged buyouts, business assets must be evaluated to determine how much equity is available for financing. The lender will then use the assets as collateral, adjusting the interest rate charged based on the risks associated with the transaction.
In some occasions, the financer will ask the sellers to finance a portion of the sale as a way of demonstrating their commitment to the venture and confidence in the management team. It's always worth shopping around for the best terms.
The following are the most common types of financing used, often in combination, in such ventures:
Personal funds
Can help secure the confidence of a financial institution, add equity to a transaction and share risk. Managers often have no choice but to invest a substantial amount of their own wealth in such ventures, even refinancing their personal assets, as a way of demonstrating their commitment.
Loan or credit notes
When they come from banks, they are often used to purchase shares from an owner. This appeal of this type of financing is in its simplicity: assets are used as collateral, and interest rates are lower as a result.
Seller financing
Can set a schedule for payment over period of years and involve credit notes, loans or preferred shares. This reduces demands on cash flow when the transaction occurs. Likewise, an instalment purchase of stock allows sellers to maintain some control over the business until they have been completely paid off.
Stock sales to employees
Can help reduce the cost of financing a management buyout while giving employees new productivity incentives as full control over the business shifts to the management team.
Subordinate financing can complement a management team's investment by bringing together features of both debt and equity financing without diluting ownership. If a profitable business maximizes financing for its assets but managers' personal funds are still insufficient for a transaction, subordinate financing can fill the gap. Repayment terms are established at time of transaction.
Venture capital can provide long-term, unsecured equity financing. This inevitably involves a partnership in which the venture capital group purchases shares in a business in exchange for ownership rights. There is no fixed repayment schedule since capital gains, or increases in the firm's share value, determine when the financing can be paid down. Venture capital investments can provide the new owners with great insight and expertise, but buy-back costs are undetermined at the outset.
Canadian business owners: 4 ways of custom financing an acquisition
Acquiring a business often requires multiple sources of financing. This can be a complex undertaking, especially in cases when more than $500,000 is needed. In most cases, there are four types of lenders and investors willing to finance an acquisition.
Lenders interested in fixed assets
Acquiring a business often involves the purchase of buildings or equipment. Your tax advisor might suggest you take out a separate bank loan for this part of the project, either from your bank or jointly with other financial institutions.
The Canada Small Business Financing Program makes it easier for small businesses to obtain financing from banks up to a maximum value of $500,000, of which $350,000 can be used to finance the purchase or improvement of equipment and the purchase of leasehold improvements.
Lenders interested in the whole package
BDC often supports expansion projects with term financing. Unlike conventional bank loans, this formula allows flexible repayment terms. Another advantage is that a BDC loan will not be called without a valid reason.
Companies that have a competitive advantage in a fast-growing industry should consider Subordinate financing. Under this formula, financial institutions lend higher amounts than they would under other circumstances and accept subordinate security in return. But such arrangements will always require a higher return for the lender, who may also ask for royalties on future sales or stock options.
Equity investors
Depending on your situation and the amount you need to raise, you can seek out Venture capital from investment banks, institutional investors and mutual or labour-sponsored funds. Your new financier will become a major financial partner, taking an ownership stake in your company and the right to name some members of your board in exchange for a significant injection of capital. Industry Canada's web site has more information on this subject.
Venture capital firms invest across all sectors of the economy but target only businesses with excellent growth potential. Sometimes technology-oriented venture capital companies also consider outright acquisitions. For example, they will look favourably on buying a leading-edge business with products almost ready to put to market that would complement a more mature company's product line.
Strategic investors
These investors focus on certain types of businesses and are often faster than others to grasp developments within a particular industry. These are often groups of professionals from the same industry who keep close tabs on their market and are therefore quicker to recognize risks and opportunities. Major corporations also sometimes acquire equity in companies whose growth they believe it is in their interest to support. The goal can be to exploit a promising niche in their industry, for example, or to improve their firms' technological know-how. Regardless of the type of financing you have in mind, management consulting companies and accounting firms specializing in acquisitions can provide invaluable outside advice. Their contacts with investors and financial institutions often help them quickly identify people who are interested playing a role in an acquisition. Getting specialists involved at the outset also greatly simplifies tax reporting.
Lenders interested in fixed assets
Acquiring a business often involves the purchase of buildings or equipment. Your tax advisor might suggest you take out a separate bank loan for this part of the project, either from your bank or jointly with other financial institutions.
The Canada Small Business Financing Program makes it easier for small businesses to obtain financing from banks up to a maximum value of $500,000, of which $350,000 can be used to finance the purchase or improvement of equipment and the purchase of leasehold improvements.
Lenders interested in the whole package
BDC often supports expansion projects with term financing. Unlike conventional bank loans, this formula allows flexible repayment terms. Another advantage is that a BDC loan will not be called without a valid reason.
Companies that have a competitive advantage in a fast-growing industry should consider Subordinate financing. Under this formula, financial institutions lend higher amounts than they would under other circumstances and accept subordinate security in return. But such arrangements will always require a higher return for the lender, who may also ask for royalties on future sales or stock options.
Equity investors
Depending on your situation and the amount you need to raise, you can seek out Venture capital from investment banks, institutional investors and mutual or labour-sponsored funds. Your new financier will become a major financial partner, taking an ownership stake in your company and the right to name some members of your board in exchange for a significant injection of capital. Industry Canada's web site has more information on this subject.
Venture capital firms invest across all sectors of the economy but target only businesses with excellent growth potential. Sometimes technology-oriented venture capital companies also consider outright acquisitions. For example, they will look favourably on buying a leading-edge business with products almost ready to put to market that would complement a more mature company's product line.
Strategic investors
These investors focus on certain types of businesses and are often faster than others to grasp developments within a particular industry. These are often groups of professionals from the same industry who keep close tabs on their market and are therefore quicker to recognize risks and opportunities. Major corporations also sometimes acquire equity in companies whose growth they believe it is in their interest to support. The goal can be to exploit a promising niche in their industry, for example, or to improve their firms' technological know-how. Regardless of the type of financing you have in mind, management consulting companies and accounting firms specializing in acquisitions can provide invaluable outside advice. Their contacts with investors and financial institutions often help them quickly identify people who are interested playing a role in an acquisition. Getting specialists involved at the outset also greatly simplifies tax reporting.
How to evaluate a proposed business acquisition...
below is a great article prepared by the BDC.
There's nothing simple about estimating the value of a business you want to acquire. Valuating a business is not a simple exercise, nor is it an exact science. It simply provides a theoretical value that will give you an idea of the fair price to pay for a business.
You mustn't rely only on the judgement of your accountant or of the seller. It is recommended that you have an expert, who specializes in business valuations, produce an independent report. While this is an unregulated field, the Canadian Institute of Chartered Business Valuators (CICBV) does provide guidelines and a code of ethics.
In general, you will rarely be able to compare your potential acquisition with a similar transaction. There is little information available on such transactions and they may not even apply to your specific conditions. Also, the terms may be too closely related to a particular sector to be useful.
3 degrees of assurance
According to the CICBV, there are three types of reports, they vary from the most general to the most detailed:
•Calculation report: provides an approximate valuation for initial planning
•Estimate report: ideal for preliminary negotiations, succession planning, and situations involving important issues that are subject to budgetary constraints
•Comprehensive report: appropriate in situations that involve high risks, important issues, or when there are legal proceedings
•To prepare their reports, evaluators look at the facts and financial data, formulate a conclusion, and the possible impacts on the estimated value. They will also add a disclaimer regarding the scope of the mandate, which varies with the quality of the report provided.
Work required
To produce a calculation report, the valuator reviews and analyzes the financial information and may meet with management.
The estimate report takes the same approach but is more exhaustive.
In the comprehensive report, the valuator provides an opinion. It is a more in depth analysis of the business and it reviews:
•Patents, bylaws, and shareholder agreements
•Business' economic situation and sector
•Market conditions and the competition
•Clientele and any contracts, backlog of orders
•Suppliers contracts and commitments
•Visit to the business
•Financial and forecast data
•Rationale for the choice of discount and capitalization rates using accepted financial models
Basic valuation principles
The first step in the process of establishing a price consists of determining the fair market value of the business. The three main valuation principles are:
•Value is dependent on expectations
•Value is dependent on future cash flows
•Value is dependent on tangible capital assets
Valuation methods and techniques
There are two basic ways of determining the value of a business:
Asset-based
•Book value: company's net worth, which is equal to assets minus liabilities. What is shown in the financial statements
•Liquidation value: assumes that the business sells all its assets, pays off all its debts, including taxes, and distributes the surplus to its shareholders
Earnings and Cash flow
•Discounted cash flow: value is based on the future cash flows of a business
•Going concern value: assumes that the business will continue operating and compares the current cash flows with future inflows to make projections
Some of the most common techniques used to calculate a business value include:
Capitalization of typical net earnings
A value can be attributed to future earnings resulting from the acquisition. To obtain the going concern value, a capitalization multiple is applied to these earnings and non-operating assets are added.
Capitalization of typical cash flows
The same as above with the exception that cash flows, rather than earnings, are capitalized.
Discounting of expected future cash flows
Consists of determining the most likely future cash flows and discounting them at the valuation date.
Determination of adjusted net assets
Liabilities are subtracted from the determined fair-market value of the assets. It is used for businesses, such as those in the real estate sector, whose value is asset-related rather than operations-related
For more information, consult the Steps to Capital Growth guide included on Canada Business website.
Other rules
In some sectors of the service industry the value of a business is based on a multiple of revenues. For example, an insurance brokerage firm can be worth 1 to 1.5 times the commissions received over a period determined by negotiation.
In the final analysis, purchase conditions and the final price paid will be determined in your negotiations with the vendor.
for more information about this article, please visit www.bdc.ca
There's nothing simple about estimating the value of a business you want to acquire. Valuating a business is not a simple exercise, nor is it an exact science. It simply provides a theoretical value that will give you an idea of the fair price to pay for a business.
You mustn't rely only on the judgement of your accountant or of the seller. It is recommended that you have an expert, who specializes in business valuations, produce an independent report. While this is an unregulated field, the Canadian Institute of Chartered Business Valuators (CICBV) does provide guidelines and a code of ethics.
In general, you will rarely be able to compare your potential acquisition with a similar transaction. There is little information available on such transactions and they may not even apply to your specific conditions. Also, the terms may be too closely related to a particular sector to be useful.
3 degrees of assurance
According to the CICBV, there are three types of reports, they vary from the most general to the most detailed:
•Calculation report: provides an approximate valuation for initial planning
•Estimate report: ideal for preliminary negotiations, succession planning, and situations involving important issues that are subject to budgetary constraints
•Comprehensive report: appropriate in situations that involve high risks, important issues, or when there are legal proceedings
•To prepare their reports, evaluators look at the facts and financial data, formulate a conclusion, and the possible impacts on the estimated value. They will also add a disclaimer regarding the scope of the mandate, which varies with the quality of the report provided.
Work required
To produce a calculation report, the valuator reviews and analyzes the financial information and may meet with management.
The estimate report takes the same approach but is more exhaustive.
In the comprehensive report, the valuator provides an opinion. It is a more in depth analysis of the business and it reviews:
•Patents, bylaws, and shareholder agreements
•Business' economic situation and sector
•Market conditions and the competition
•Clientele and any contracts, backlog of orders
•Suppliers contracts and commitments
•Visit to the business
•Financial and forecast data
•Rationale for the choice of discount and capitalization rates using accepted financial models
Basic valuation principles
The first step in the process of establishing a price consists of determining the fair market value of the business. The three main valuation principles are:
•Value is dependent on expectations
•Value is dependent on future cash flows
•Value is dependent on tangible capital assets
Valuation methods and techniques
There are two basic ways of determining the value of a business:
Asset-based
•Book value: company's net worth, which is equal to assets minus liabilities. What is shown in the financial statements
•Liquidation value: assumes that the business sells all its assets, pays off all its debts, including taxes, and distributes the surplus to its shareholders
Earnings and Cash flow
•Discounted cash flow: value is based on the future cash flows of a business
•Going concern value: assumes that the business will continue operating and compares the current cash flows with future inflows to make projections
Some of the most common techniques used to calculate a business value include:
Capitalization of typical net earnings
A value can be attributed to future earnings resulting from the acquisition. To obtain the going concern value, a capitalization multiple is applied to these earnings and non-operating assets are added.
Capitalization of typical cash flows
The same as above with the exception that cash flows, rather than earnings, are capitalized.
Discounting of expected future cash flows
Consists of determining the most likely future cash flows and discounting them at the valuation date.
Determination of adjusted net assets
Liabilities are subtracted from the determined fair-market value of the assets. It is used for businesses, such as those in the real estate sector, whose value is asset-related rather than operations-related
For more information, consult the Steps to Capital Growth guide included on Canada Business website.
Other rules
In some sectors of the service industry the value of a business is based on a multiple of revenues. For example, an insurance brokerage firm can be worth 1 to 1.5 times the commissions received over a period determined by negotiation.
In the final analysis, purchase conditions and the final price paid will be determined in your negotiations with the vendor.
for more information about this article, please visit www.bdc.ca
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