I previously wrote about an estate freeze happening during the course of a corporate reorganization. Today, I would like to share a great article written by Tim Cestnick from the Globe and Mail:
SECTION 86, Income Tax Act - Estate Freeze
THE CONCEPT
What in the world is an estate freeze?
It's the process of taking certain assets you own today and freezing them at their current values. The idea is that the future growth of those assets will accrue to anyone you choose – your children or other heirs, for example. So, why would anyone consider a freeze? There are a few potential benefits.
Cutting the tax bill on death. When a freeze is completed, all future growth between the date of the freeze and your death will accrue in the hands of your heirs. That future growth will otherwise be taxed in your hands at the time of your death, if not sooner, if the freeze isn't done.
Deferring the ultimate tax bill. By passing the future growth in the asset's value to your heirs, you can defer income tax on that growth until a much later time. Although your heirs will eventually pay tax, these taxes may not be due, for example, until your heirs pass away. Establishing the tax bill on death. By freezing the value of an asset today, you'll be able to establish, pretty accurately, what your tax bill will be upon death. This makes planning for those taxes much easier. You could, for example, consider buying life insurance to cover the tax liability.
Utilizing the capital gains exemption. A freeze may allow you to take advantage of the lifetime capital gains exemption where you own shares of a qualified small business corporation or qualified farm or fishing property. This exemption could shelter up to $750,000 of capital gains on these types of assets.
Splitting income with family members. In the process of completing a freeze, you'll be placing certain assets (often private company shares) in the hands of your heirs, either directly or indirectly through a trust. These assets can provide regular income to your heirs that will be taxed in their hands – not yours.
Protecting assets from creditors. It may be possible to protect certain assets from creditors by transferring their ownership to your heirs or, better still, a family trust, as part of a freeze.Protecting assets from spouses. If your kids (or you) own valuable and growing assets prior to marriage, it may be possible to use a freeze to minimize the claims of future spouses or ex-spouses through planning that can be done prior to marriage. Reducing probate fees. A freeze will restrict the growth of the frozen assets in your hands. This means that you'll generally own less in your hands at the time of your death than you would have without the freeze, which will minimize probate fees.
Minimizing annual taxes. Freezing assets typically requires a corporation to be set up. Corporations that carry on an active business are entitled to very low rates of tax (about 18 per cent) on the first $400,000 of active business income. It may be possible to take advantage of these rates, depending on the assets you're freezing.
Maintaining control over the property. You can enjoy the first nine benefits without having to give up control over or use of the assets during your lifetime.
THE CANDIDATES
An estate freeze is most commonly undertaken by those who own active businesses. The shares of a growing private company can give rise to a substantial tax bill at the time of death, and where there's a desire to pass the business to the kids or other heirs, a freeze can facilitate this nicely since you'll be able to issue new growth shares (common shares) to anyone you'd like. Other assets can be frozen as well, but it's not as commonly done.
Before undertaking an estate freeze, you should be confident in a couple of things: (1) That you're happy with the amount of growth you've received to date, and you're happy to see the future growth accrue to someone else; (2) That there will be sizable growth in the assets in the future.
If there isn't going to be much future growth in the assets you're freezing, then there won't be much growth to have taxed in the hands of your heirs; it may not be worthwhile freezing in this case.
* Published in the Globe and Mail, July 3rd, 2008
As business lawyer, I suggest this option to a lot of my clients - with an estate freeze and a corporate reorganization they can save a substantial amount of money. As usual, if you have any questions, please do not hesitate to contact me.
Thursday, June 11, 2009
Monday, June 1, 2009
SHAREHOLDERS AGREEMENT - What is a “Piggyback” Rights ?-
“Piggyback” Rights – designed to apply where a shareholder proposes to sell shares to a third party; if invoked by other shareholder, piggyback rights clause will prohibit the share transfer unless third party offers to purchase their shares at the same price and on the same terms as offered to the selling shareholder. Primary purpose is to protect minority shareholders.
SHAREHOLDERS AGREEMENT - What is a “Carry-Along” Rights ?
“Carry-Along” Rights – permits majority shareholder(s) to force minority shareholder to sell their shares where a bona fide offer has been received from an arm’s length party to purchase all of the shares of the corporation. Purpose is to increase majority shareholder’s flexibility to sell the business.
Thursday, May 28, 2009
Uses of Family Trust to pay for kids educations
A family trust for small business pays dividends for tuition *
In previous entries, I mentionned several times the use of family trust for business owners. For almost every clients, I suggest the use of said Family trust, it is a great way of saving taxes.
Today, I would like to share with you an excellent article from Tim Cestnick from the Globe and Mail, explaining clairly the advantages of using different trusts. If you have any questions regarding the same, please do not hesitate to email me. A family trust for small business pays dividends for tuition.
Every few months my extended family gets together to visit. It's a chance to get caught up with my aunts, uncles and cousins. My cousin Erik didn't make it to our last get-together. Erik is something of a permanent student. He's got more degrees than the thermometer outside our kitchen window."Uncle Ron, how's Erik doing?" I ask."He's just fine, Tim. He's back at university this month.""Still?" I reply. "I thought he finished last year. What's Erik going to be when he graduates?""A very old man," he replies. At this point, Erik is paying for his own education. But if you're looking to help your kids with the cost of postsecondary education, and you're a business owner, consider a family trust. Let me explain.
The trust
This idea is best understood by an example. Consider Scott. Scott has three children, all in their teens. University is just around the corner for them and it won't be cheap -- about $16,000 each year, everything included.Scott runs a business that has sufficient cash flow to help pay for the education of his kids. One option for Scott is to pay himself additional salary from his company to help cover the cost of university when that time comes. Since Scott is in the highest marginal tax bracket, he'll pay tax of about 46 per cent (varies by province) on those dollars. So, a $10,000 payment from his company in this case will leave just $5,400 to help cover the costs of education.
There may be a better option. Scott could structure the ownership of his company so that some of the common shares of the company are owned by a family trust. Then, the company could pay dividends to the trust annually for each child once they're 18 and are attending university or college. The dividends could then be paid out of the trust to each child to help pay for school.
The results? Scott's company will pay tax of about 17 per cent (again, varies by province) on its active business income below $400,000.The dividends paid to the trust and then out to Scott's kids will not be taxed in the trust, and will face little or no tax in the kids' hands if they have little or no other income. In fact, each child could receive about $32,000 (varies by province) in cash dividends annually and pay little or no tax if he or she had no other income. This total tax cost of about 18 per cent is much less than the 46-per-cent tax cost of paying additional salary to Scott.
Other thoughts
Now, there are rules in Canadian tax law that will make this strategy less effective if you pay dividends directly or indirectly through a trust to a child under 18. These "kiddie tax" rules will cause tax at the highest marginal tax rate on those dividends. But the idea works well for kids 18 or older.In addition, there are some other benefits to the trust strategy. If you expect the value of your business to grow in the future, you may be able to shelter part of that growth from tax using the $750,000 capital gains exemption of each of your children who is a beneficiary of the trust. The trust will also protect the assets in the trust from any creditors or future spouses of your kids. Finally, those dividends paid out of the trust could be used for any purpose -- not just education.
* written by Tim Cestnick - Tim is a principal with WaterStreet Group Inc. and author of Winning the Tax Game, among other titles. This article was published in the Globe and Mail on September 28, 2006 and was slighty edited to reflect accurate numbers.
In previous entries, I mentionned several times the use of family trust for business owners. For almost every clients, I suggest the use of said Family trust, it is a great way of saving taxes.
Today, I would like to share with you an excellent article from Tim Cestnick from the Globe and Mail, explaining clairly the advantages of using different trusts. If you have any questions regarding the same, please do not hesitate to email me. A family trust for small business pays dividends for tuition.
Every few months my extended family gets together to visit. It's a chance to get caught up with my aunts, uncles and cousins. My cousin Erik didn't make it to our last get-together. Erik is something of a permanent student. He's got more degrees than the thermometer outside our kitchen window."Uncle Ron, how's Erik doing?" I ask."He's just fine, Tim. He's back at university this month.""Still?" I reply. "I thought he finished last year. What's Erik going to be when he graduates?""A very old man," he replies. At this point, Erik is paying for his own education. But if you're looking to help your kids with the cost of postsecondary education, and you're a business owner, consider a family trust. Let me explain.
The trust
This idea is best understood by an example. Consider Scott. Scott has three children, all in their teens. University is just around the corner for them and it won't be cheap -- about $16,000 each year, everything included.Scott runs a business that has sufficient cash flow to help pay for the education of his kids. One option for Scott is to pay himself additional salary from his company to help cover the cost of university when that time comes. Since Scott is in the highest marginal tax bracket, he'll pay tax of about 46 per cent (varies by province) on those dollars. So, a $10,000 payment from his company in this case will leave just $5,400 to help cover the costs of education.
There may be a better option. Scott could structure the ownership of his company so that some of the common shares of the company are owned by a family trust. Then, the company could pay dividends to the trust annually for each child once they're 18 and are attending university or college. The dividends could then be paid out of the trust to each child to help pay for school.
The results? Scott's company will pay tax of about 17 per cent (again, varies by province) on its active business income below $400,000.The dividends paid to the trust and then out to Scott's kids will not be taxed in the trust, and will face little or no tax in the kids' hands if they have little or no other income. In fact, each child could receive about $32,000 (varies by province) in cash dividends annually and pay little or no tax if he or she had no other income. This total tax cost of about 18 per cent is much less than the 46-per-cent tax cost of paying additional salary to Scott.
Other thoughts
Now, there are rules in Canadian tax law that will make this strategy less effective if you pay dividends directly or indirectly through a trust to a child under 18. These "kiddie tax" rules will cause tax at the highest marginal tax rate on those dividends. But the idea works well for kids 18 or older.In addition, there are some other benefits to the trust strategy. If you expect the value of your business to grow in the future, you may be able to shelter part of that growth from tax using the $750,000 capital gains exemption of each of your children who is a beneficiary of the trust. The trust will also protect the assets in the trust from any creditors or future spouses of your kids. Finally, those dividends paid out of the trust could be used for any purpose -- not just education.
* written by Tim Cestnick - Tim is a principal with WaterStreet Group Inc. and author of Winning the Tax Game, among other titles. This article was published in the Globe and Mail on September 28, 2006 and was slighty edited to reflect accurate numbers.
Tuesday, May 26, 2009
Hidden Assets: Helping your clients UNLOCK THE VALUE OF THE INTELLECTUAL PROPERTY
Hidden Assets: Helping your clients UNLOCK THE VALUE OF THE INTELLECTUAL PROPERTY
The value of intellectual property in the modern marketplace can be very significant – it is estimated that Microsoft’s intellectual property including the trade-mark in its brand, copyright in its software, and its patent portfolio is responsible for 99.5% of its $263-billion value, and that Coca-Cola’s combined brands alone are worth an astounding $67-billion, more than half of its $133-billion value. IBM receives an annual revenue stream of approximately $1-billion from the 40,000 patents it owns worldwide. Intellectual property no longer merely protects the assets such as the brand or patented products, but holds tremendous value and can be leveraged to produce considerable revenues.
Intellectual property can be described as covering many of the intangible assets of a business, and includes trade-marks, patents, industrial designs and copyright. Briefly, a trade-mark gives the owner exclusive rights (which can be extended into a permanent monopoly) in a name or sign which identifies the source of a particular product or service. A patent gives an exclusive government-granted monopoly on the production and sale of an invention in exchange for disclosure of its operation to the public. Industrial designs protect the aesthetic features of a product from imitation by others. Lastly, copyright protects creative literary, dramatic, musical and artistic works from being copied for an extended period of time after their creation, and includes computer programs.
A trade-mark is an integral part of a branding strategy, and consists of a name or sign which is used by a company to uniquely identify the source of its wares or services, and distinguish them from those of other companies. Because trade-marks can come to represent not only certain goods and services, but the reputation of the producer, if properly used and protected they can become very valuable. A trade-mark’s value can be measured, at a minimum, by a company’s repeat business, and it may also be responsible for new business resulting from advertising. A trade-mark can also be licensed to allow others here or abroad to produce a company’s wares under its supervision, in exchange for additional revenues in the form of royalties. This is the equivalent of a highly cost-effective, paid-for advertising/branding initiative for the trade-mark owner.
A patent protects new inventions, and new and useful improvements of an existing invention, and allows the patent holder to stop others from exploiting its technology for 20 years. A patent can be valued, at a minimum, as the net sales of the patented item. A patent can also be licensed to others in exchange for royalties, or may be sold as an asset. Patents can be very valuable, for example, the patent for the Pfizer drug Lipitor protects $12.2-billion in annual sales.
Industrial design protects aesthetic features, such as the shape, pattern or ornament of a product that is manufactured by hand, tool or machine from being copied for ten years, and like a patent, it can be licensed or sold, and can also be very valuable. The shape of the iPod helps it to control upwards of 80% of the portable MP3 player market, and this is protected by an industrial design registration.
Copyright applies to all original literary (text and computer programs), dramatic (films, television and theatre), musical and artistic (painting, sculpture and architecture) works, and allows only the copyright owner to reproduce the work, and to prevent others from doing the same. Copyright in Canada endures for the life of the creator plus fifty years after his or her death. Copyright includes software and is a large part of the intellectual property protection of software companies. Design trade-marks and advertising can be protected by copyright in certain circumstances as well. Copyright can be assigned or licensed, and license revenues form a significant stream of income for Hollywood and music producers, like Sony music, for example. The Star Wars franchise was recently estimated to be worth $20-billion by Forbes magazine.
Trade-marks, patents, industrial designs and copyrights are recognized and legitimate property rights that can be exploited, assigned or licensed to another entity to produce a revenue stream. Intellectual property also holds tremendous value as an asset, and can be used for financing, or be sold with the company. Properly implemented, an effective intellectual property strategy can leverage the intellectual property to produce profits in the form of income, royalties and capital gains rather than merely costs, while protecting the company’s brands or patented products from imitation or theft.
The value of intellectual property in the modern marketplace can be very significant – it is estimated that Microsoft’s intellectual property including the trade-mark in its brand, copyright in its software, and its patent portfolio is responsible for 99.5% of its $263-billion value, and that Coca-Cola’s combined brands alone are worth an astounding $67-billion, more than half of its $133-billion value. IBM receives an annual revenue stream of approximately $1-billion from the 40,000 patents it owns worldwide. Intellectual property no longer merely protects the assets such as the brand or patented products, but holds tremendous value and can be leveraged to produce considerable revenues.
Intellectual property can be described as covering many of the intangible assets of a business, and includes trade-marks, patents, industrial designs and copyright. Briefly, a trade-mark gives the owner exclusive rights (which can be extended into a permanent monopoly) in a name or sign which identifies the source of a particular product or service. A patent gives an exclusive government-granted monopoly on the production and sale of an invention in exchange for disclosure of its operation to the public. Industrial designs protect the aesthetic features of a product from imitation by others. Lastly, copyright protects creative literary, dramatic, musical and artistic works from being copied for an extended period of time after their creation, and includes computer programs.
A trade-mark is an integral part of a branding strategy, and consists of a name or sign which is used by a company to uniquely identify the source of its wares or services, and distinguish them from those of other companies. Because trade-marks can come to represent not only certain goods and services, but the reputation of the producer, if properly used and protected they can become very valuable. A trade-mark’s value can be measured, at a minimum, by a company’s repeat business, and it may also be responsible for new business resulting from advertising. A trade-mark can also be licensed to allow others here or abroad to produce a company’s wares under its supervision, in exchange for additional revenues in the form of royalties. This is the equivalent of a highly cost-effective, paid-for advertising/branding initiative for the trade-mark owner.
A patent protects new inventions, and new and useful improvements of an existing invention, and allows the patent holder to stop others from exploiting its technology for 20 years. A patent can be valued, at a minimum, as the net sales of the patented item. A patent can also be licensed to others in exchange for royalties, or may be sold as an asset. Patents can be very valuable, for example, the patent for the Pfizer drug Lipitor protects $12.2-billion in annual sales.
Industrial design protects aesthetic features, such as the shape, pattern or ornament of a product that is manufactured by hand, tool or machine from being copied for ten years, and like a patent, it can be licensed or sold, and can also be very valuable. The shape of the iPod helps it to control upwards of 80% of the portable MP3 player market, and this is protected by an industrial design registration.
Copyright applies to all original literary (text and computer programs), dramatic (films, television and theatre), musical and artistic (painting, sculpture and architecture) works, and allows only the copyright owner to reproduce the work, and to prevent others from doing the same. Copyright in Canada endures for the life of the creator plus fifty years after his or her death. Copyright includes software and is a large part of the intellectual property protection of software companies. Design trade-marks and advertising can be protected by copyright in certain circumstances as well. Copyright can be assigned or licensed, and license revenues form a significant stream of income for Hollywood and music producers, like Sony music, for example. The Star Wars franchise was recently estimated to be worth $20-billion by Forbes magazine.
Trade-marks, patents, industrial designs and copyrights are recognized and legitimate property rights that can be exploited, assigned or licensed to another entity to produce a revenue stream. Intellectual property also holds tremendous value as an asset, and can be used for financing, or be sold with the company. Properly implemented, an effective intellectual property strategy can leverage the intellectual property to produce profits in the form of income, royalties and capital gains rather than merely costs, while protecting the company’s brands or patented products from imitation or theft.
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