Business Owners: Are you a candidate for a Corporate Reorganization and, in the process, eligible to save thousand of dollars in taxes?

As a business lawyer, I work with entrepreneurs and business owners on a daily basis. For the vast majority of them, their most valuable asset is their corporation. For obvious reasons, their number one priority is on income earning activities, such as generating sales. Attention to such activities is, of course, a practical necessity and a hallmark of success. However, the utilization of a proper corporate structure to reduce tax exposure is, unfortunately, often overlooked. Remember, as the old saying goes, “It is not what you make, but what you keep.” Business owners must realize that a proper structure can save a substantial amount of taxes, which will greatly benefit themselves, their family and their business. Further, the costs of implementing these types of structures are usually easily justified by the annual tax savings. The purpose of this article is to explain to you the benefits of a corporate reorganization and to help you determine if you are a good candidate for implementing such structure.

What is a Corporate Reorganization?

A Corporate Reorganization is a legal way to reorganize and restructure your company so that you can reap the rewards of the existing tax regulations - often resulting in annual tax savings in amounts upwards of tens of thousands of dollars. Why do I need a Corporate Reorganization? As a business lawyer, I sometime see situations where businesses are set up with a certain structure to take advantage of particular circumstances that were relevant at the time they were set up. But as we all know, situations change over time. It is common that the conditions which resulted in a particular corporate structure no longer reflect what is best for the corporation or its owners, resulting in a somewhat cumbersome and inefficient structure, particularly from a tax point of view. Every day, I work with companies, who are in this situation and help them to reorganize and restructure their affairs, which, in turn, allows them to save a substantial amount of money.

There are many situations where a corporate reorganization is recommended, such as, corporate tax planning, creditor proofing or in order to reach other organizational goals. Sometimes this process will even involve the transfer of assets on a tax-deferred basis from one entity to another, or from one corporation to another. Every person and corporation is different. Accordingly, when analyzing whether or not a corporate reorganization is appropriate, it is important to investigate all relevant options thoroughly. Given the complexities and technicalities of such an undertaking, it is highly recommend one obtains qualified profession help. This ensures the business owner obtains proper advice and implements the best possible plan to meet the their objectives.

 Based on my experience, there are many reasons companies may need to be reorganized. Some of the common reasons, which may apply to you, are as follows:

 (1) To implement a proper share structure; Having the right structure allows flexibility in terms of tax planning. While you are only required, by law, to have one class of shares (common), it is always best to provide for the possibility of additional classes of shares. This allows a corporation the flexibility to modify its ownership structure, should the need arise. For example, in order to save on taxes, you might want to take advantage of income splitting available to eligible family members. Or you might need to issue a new class of shares in order to attract new investors. Or you might want to make use of a family trust, discussed further below.

 (2) To establish and implement a Family Trust; If you have children and/or are married, serious consideration should be given to owning the shares of your business through a discretionary Family Trust. The benefits of a family trust include: (a) Income splitting: A well-structured family trust allows for the splitting of income earned by the trust among the various beneficiaries; (b) Funding of children’s education at a potential tax rate of 15.5% instead of 48% (a savings of up to $34,500 per $100,000 of profit); and, (c) Multiply uses of the one-time capital gains exemption, should you sell your company, allowing the $750,000 capital gains exemption to be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.

 (3) To create holding companies for tax and creditor-proofing reasons; Generally, a “holding company” is a corporation which is placed between a business, the “operating company”, and the individual shareholder. One of the foremost principles of Canadian taxation is that dividends are allowed to flow on a tax-free basis from one corporation to another. Accordingly, after-tax profits accumulated in the operating company can be distributed to the holding company as tax-free dividends. Funds transferred to the holding company in this manner are better protected from claims made by any of the operating company’s creditors. No one ever expects to face such a claim; however, the reality is that, for a variety of different reasons, creditor claims are made on a daily basis. As a result of these claims, many unprepared business owners have seen a lifetime of accumulated profits vanish, often due to a single claim. It is for this reason that use of a holding company is especially attractive to companies where the risk of lawsuits or litigation is significant. Additionally, if necessary, funds held in a holding company can be lent back to the operating company on a secured basis in order to retain protection from creditors.

 (4) To carry out and implement a succession plan through an estate freeze (by using Section 86 of the Income Tax Act). For business owners, tax minimization is central to any plan. One popular tool is an estate freeze. An estate freeze is part of a corporate reorganization that allows business owners to freeze the value of the company at today's value. As a result, future increases in the value of the company can be transferred to the benefit of children, key employees or a trust. Such a freeze allows business owners to minimize capital gains tax due under the deemed disposition rules upon their death and provides a deferral mechanism of taxes. A freeze in combination with the creation of a discretionary trust can provide a flexible framework that can lead to further tax minimization.

If you think you are a candidate for a corporate reorganization or would like to know more, please feel free to contact me. I can advise on whether a corporate reorganization is required and the benefits of such reorganization, as well as manage its implementation and execution. As you can imagine, a corporate reorganization has many tax and legal implications for companies and their owners, so anyone considering it should seek professional help.

 For more information on the above, call and/or email our Founder & CEO and Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304

Family trusts and life insurance options are often overlooked when thinking of how to pay for a post-secondary education

Below is a great article written by Tim Cesnick and published in The Globe and Mail.

Family trusts and life insurance options are often overlooked when thinking of how to pay for a post-secondary education

Now that my kids have decided they want to be brain surgeons, I’ve been thinking about how to pay for their post-secondary education. Two methods of saving for a child’s education are often overlooked. The first is a family trust, and the second is life insurance.

FAMILY TRUST

A trust is simply a legal relationship between three parties: The settlor (the person creating the trust), the trustee (the person who holds and controls the property of trust) and the beneficiary (the person for whom the property of the trust is being held). The nice thing about a trust is that it’s possible to have the income of the trust taxed in the hands of the beneficiaries, who may pay little or no tax if they are minors and have little or no other income.

Setting up a trust does come with a cost, so it’s not generally going to make sense unless you’re willing and able to commit a sustantial sum to the trust over a short period of time. You can make this a loan to the trust if you want, so that you can take back your capital again later, as a repayment of the loan.

Once the money is in the trust, any interest and dividend income earned in the trust will be attributed back to you to be taxed in your hands while the beneficiaries of the trust are minors (unless you charge the taxman’s prescribed rate of interest on a loan to the trust), but capital gains can be taxed in the hands of the beneficiaries. Also, any second generation income (that is, income on the income, even if it’s interest or dividends) can be taxed in the hands of your children.

You can pay for all or part of your child’s education costs out of the income or capital of the trust. The taxman will consider payments to third parties, including reimbursements to you, as being paid to the beneficiary as long as those payments were clearly for the benefit of your child. To the extent that little or no tax has been paid on the income of the trust over the years (by having income taxed in your child’s hands), you’ll effectively be using pre-tax dollars to pay for the child’s education.

The benefits of the trust include: protection of the assets of the trust from creditors, splitting income with your children, maintaining control over the assets, and flexibility to use the trust funds for things other than education. There’s a lot to consider when setting up a trust. 

LIFE INSURANCE

Life insurance is an interesting tool because you can accumulate investments inside a policy on a tax-sheltered basis. Further, if it is the life of your child that is insured, you’re able to transfer ownership of the policy, including the accumulated investments inside the policy, to your child free of tax once he or she reaches age 18. Your child can then make withdrawals of those investments from the policy to pay for education. While those withdrawals are generally going to be taxable to your child, he’ll likely pay little or no tax if he has little or no other income.

One of the benefits of choosing a whole life insurance policy is that the returns have been incredibly stable over the years, even throughout 2008. The reason for this is that the insurance companies are allowed to smooth, or average, the returns you receive over a period of years.

Consider some numbers. If you pay $2,750 annually into a whole life policy each year until your child is 18, there could be $70,000 to $75,000 in the accumulating fund to be accessed (varies by insurance company), assuming a 5 per cent annual return inside the policy. If you set aside the same $2,750 in a tax-free savings account (TFSA) you could end up with approximately $84,000 earning that same 5 per cent, but this would assume a portfolio that is largely in equities that is subject to the volatility of the markets. If you earned, say, 6 per cent in the TFSA, you’d have close to $92,000 in this case, with the volatility.

Life insurance also offers asset protection, flexibility to use the assets for any purpose, and a death benefit ($265,000 in my example) over and above the investment component of the policy if your child passes away prematurely. Insurance is just another tool to consider.

As usual, please do not hesitate to contact Hugues Boisvert should you have any questions. hboisvert@hazlolaw.com.com

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.

Business owners: Are you a candidate for a Corporate Reorganization and save tens of thousands of dollars of potential tax savings every year!!

what is a Corporate Reorganization??

A Corporate Reorganization is a way to reorganize and restructure your company so that you can reap the rewards of the existing tax regulations - often resulting in tens of thousands of dollars of potential tax savings every year into the future.

why do I need a Corporate Reoganization?>

As a Business Lawyer, I sometime see situations where businesses are set up with a certain structure to take advantage of particular circumstances that were relevant at the time they were set up, but as we all know, situations change over time.

It is therefore sometimes the case that the favourable conditions existing at the time your corporate structure was put in place are no longer there, and you might end up with a somewhat cumbersome of inefficient structure in today's business climate, particularly from a tax point of view.

On a daily basis, I work with companies in this situation to help them reorganize and restructure so that they can reap the rewards of the existing tax regulations - often resulting in tens of thousands of dollars of potential tax savings every year into the future.

In many situations, for example, I may recommend a corporate reorganization, whether for corporate tax planning, creditor proofing or other organization purposes. I can also assist you in the transfer of assets on a tax-deferred basis from one entity to another, or from one corporation to another. Alternatively, I could recommend amalgamating two corporations or winding up one into the other for tax planning purposes or to rationalize a corporate structure.

Often, I will investigate the options thoroughly and advise you of the best plan to meet with your objectives.

There are many reasons companies may need to be reorganized:

•to establish and implement a family trust in the course of corporate reorganization;
•to create holding companies for creditor-proofing reasons;
•to divide the assets of a corporation among the shareholders;
•to incorporate a business, so that it may be carried on in corporate form;
•to carry out an estate freeze in the most effective manner;
•to transfer a business from a corporation to a partnership to deduct losses, take in a partner, or eliminate capital tax

If you think you are a candidate and would like to know more, I can advise on whether a corporate reorganization is required, the benefits of such a reorganization, and the disadvantages, if any.

Finally, I can also develop a plan to implement the corporate reorganization, and work with your advisors (accountants, financial planners, insurance) to execute the plan.

Please contact me should you wish more information on the above.