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.