Entrepreneurs: Do you have a proper share structure??

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

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


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


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


- Family Trusts - The use of family trusts and the issuing of the appropriate shares to beneficiaries of the family trust can be an effective tax and succession planning device.


- Succession Planning - With the appropriate share structure in place it is possible to establish a cost effective and tax effective succession regime.


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


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

Business owners: How can you take out $32,000 Tax Free from your business??

Several clients asked me to blog about the different ways of extracting money from their companies - Today I will only explain you one technique to take out cash from your business:

Let's take John, a consultant, incorporated under the name John Doe Inc. The company is making aobut 200k of net profit per year - the Corporation will then pay roughly about 17% of corporate tax (CCPC - Ontario, fiscal year 2010)- Hence the retained earning (money who can be distributed to shareholder(s) is about $166,000 (200k - 17%of taxes). Let's say that John is the sole shareholder of is corporation, John will then have 3 options - he will either take a salary, declare a dividend to himself, a mix of both or he will let a portion of the profit in it's company as retained earnings....

Let’s make it a little bit more complicated, John got married last year with Julie and they are planning to have a baby next year. Then Julie will stop working for 3-4 year to raise the kid.

Did you know that while staying home, Julie could receive up to $32,000 TAX FREE…

How is that possible? Well, trough a series of legal and accountant transactions (namely an estate freeze - S.86 Income Tax Act) Julie would then acquire shares in John’s company and John would be able to issue her a dividend … The first $32,000 would be non-taxable for Julie if she qualify under the different conditions of the Act - (email me to know more about these conditions...)

The important part to know is that If an individual does not have any other source of revenues, a shareholder can receive up to $32,000 Tax Free.

As usual, I strongly suggest you consult your own professional advisor before proceeding with an estate freeze.Too good to be true ?? Contact me and I will explain how we can change your corporate structure to ensure that you save taxes!!

Exemption from the Audit requirement under the CBCA and BCA (Ontario)

As you might be aware, Under the Canadian Business Corporations Act ("CBCA") and the Business Corporations Act it is possible to waive the audit requirements. For SME's (small & medium entreprises) it can be costly to have audited financial statements (minimum $5000- $7,500 up to $100,000 and more...) Therefore, it's possible to pass a annual resolutation to waive the obligation of appointing an auditor. The resolution MUST be signed by ALL the shareholders of the corporation (please see below for the listed conditions). Further, Please ensure that you review your minute book and that you have a resolution for EACH year since the incorporation date of your business. Once you have your annual resolution signed by all the shareholders, it will give you the options of getting notice to reader statements or engagement review, these 2 options are cheaper.

Here are the proper sections of each Act (federal and provincial):


Canada Business Corporations Act ( R.S., 1985, c. C-44 )

Dispensing with auditor
163. (1) The shareholders of a corporation that is not a distributing corporation may resolve not to appoint an auditor.

Limitation
(2) A resolution under subsection (1) is valid only until the next succeeding annual meeting of shareholders.

Unanimous consent
(3) A resolution under subsection (1) is not valid unless it is consented to by all the shareholders, including shareholders not otherwise entitled to vote.

Business Corporations Act

148 . In respect of a financial year of a corporation, the corporation is exempt from the requirements of this Part regarding the appointment and duties of an auditor if,

(a) the corporation is not an offering corporation; and

(b) all of the shareholders consent in writing to the exemption in respect of that year. 1998, c. 18, Sched. E, s. 23.

Top 10 reasons why your company needs a Shareholders’ Agreement

As mentioned before, a shareholders’ agreement is an important and very helpful document when setting up a business, or when acquiring partial interest in a business. It sets out the privileges and responsibilities of the shareholders, and provides a means for setting out the principles upon which the shareholders intend to run the business and deal with unforeseen circumstance and contingencies. In other words, a shareholders’ agreement defines the way in which the company should be governed and managed so as to avoid messy and expensive disputes in the future. Therefore, companies should have a shareholders’ agreement for ten main reasons.

Top 10 reasons why your company needs a Shareholders’ Agreement

Reason #1: Provides a customized relationship between shareholders and directors

Corporations often want to customize their relationship to create an arrangement which differs from the applicable corporate legislation, including shareholder voting entitlements, imposing share-transfer requirements, and providing for a dispute-settlement mechanism.

Reason #2: Voting entitlements

Shareholders in a corporation may want to exercise their power to vote on a basis different from the votes they have according to their share ownership. For example, it may be essential to provide for how the shareholders are to nominate and elect the directors.

Reason #3: The possibility of imposing share-transfers

The general rule is that no shares may be transferred without prior approval of the directors. This rule protects the shareholders from ending up in a business relationship with parties who are different from those initially agreed upon. Consequently, if not supplemented by other provisions, a shareholder that wishes to exit needs to obtain prior approval from the other shareholders and there is no assurance that such approval will be imminent. It is therefore vital to provide a predetermined method for transferring shares.

Reason #4: Preventing conflict between the shareholders by providing conflict-resolution methods.

Different forms of dispute-settlement methods, such as mediation or arbitration, are often included in shareholders’ agreements to avoid going to court to resolve such disputes.

Reason #5: Transferring of power

Shareholders’ agreements permit altering the distribution of power between directors and shareholders. Basically, it can restrict in whole or in part the powers of the directors to manage or supervise the management of the business and affairs for the corporation, and provide a greater degree of power to the shareholders.
Reason #6: Future shareholders

It is common in shareholders’ agreements to stipulate that all transfers and share issuances are conditional upon any new shareholder signing the agreement. Please note: this is not required if there is a unanimous shareholders agreement.

Reason #7: Addressing the quorum and other minimum requirements for director and shareholder meetings

It is important to address the minimum number of members necessary to carry out the business of the corporation.

Reason #8: Issues relating to the finances of the company

Shareholders may wish to regulate the distribution of the corporation’s profits in some manner. It may also be imperative to set out the relevant terms of debt financing in the shareholders’ agreement.

Reason #9: Potential inconvenience

A corporation can anticipate future situations and therefore a shareholders’ agreement can lay out possible solutions for potential problems such as deadlocks.

Reason #10: Impact of other agreements

Some shareholders are party to other agreements with respect to the corporation. The shareholders’ agreement may provide information on what to do if a shareholder breaches that other agreement.

The lawyer’s role in preparing this agreement requires him/her to learn as much as possible about the client’s objectives, needs, and fears. This information mentioned above is incorporated into the agreement in order to ensure that each agreement is designed to fit the unique needs and circumstances of each client.

TAX PLANNING CHECKLIST FOR THE OWNER - MANAGER

Today I would like to share an excellent article written by Tom Zaks - the above will give you some tax planning tips.

The following represents a tax-planning checklist for individuals that have their own incorporated private Canadian active business. Due to the complexity of tax laws related to private Canadian corporations as well as every corporation and owner-manager having different facts and circumstances, it is imperative that qualified tax and/or legal advisors be consulted with before taking any action based on the strategies below. Note that this is not an exhaustive list. Tax season is upon us and there are certain considerations every business owner should keep in mind from a tax perspective.

1) Ensure a legally binding shareholder's agreement is in place. Among other things a shareholder agreement can help to ensure an orderly manner for settling shareholder disputes; can set restrictions on selling shares to third parties; can provide a framework for the purchase of the shares of a deceased shareholder; competition clauses, etc.;

2) Consider employing lower income family members and pay them a salary that is reasonable based on the services they are performing (the salary will create RSP contribution room and generate CPP/QPP pensionable earnings);

3) Consider paying dividends from corporate earnings to spouses and adult children shareholders. Canadian dividends are taxed lower than salary (however, dividends will not create RSP contribution room or CPP/ QPP pensionable earnings). Also, unlike salary, dividend payments do not have to be tied to the amount of services performed in the business. Dividends paid out to benefit related minor children are taxed at the highest marginal tax rate under the "kiddie tax" rules;

4) Consider the pros and cons of an estate freeze so that the capital gain on the future growth of the business is deferred and attributed to the next generation, but the control of the business can remain with the parents. This may also allow for use of the $750,000 capital gains exemption by other family members;

5) In certain circumstances, consider setting up an RCA or IPP to increase the retirement savings of the ownermanager and lower the tax burden of the corporation;
Consider corporate owned life insurance as a low cost solution for funding buy-sell agreements, funding tax liabilities, key person protection, sheltering tax on surplus investment income, etc;

6) Use corporate funds to make the RSP contribution for the owner-manager. The cash used to make the RSP contribution will be considered employment income (reported on the T4 and thus will create future RSP contribution room) but the offsetting RSP deduction will avoid taxation on the increased salary;

7) If possible, pay bonuses to employees to reduce the company's taxable income to $500,000, since the first $500,000 of small business active income is taxed at low tax rates (17% - 22%);

8) Consider deferring employee bonuses up to 179 days after the corporate year-end. The company will get a tax deduction in the current corporate tax year but does not have to pay the bonus in the current year. The employee though will declare the bonus in the year of receipt, which in certain cases may lower the tax liability for the employee on the bonus (however, withholding tax will continue to apply on the bonus);

8) As an alternative to large bonus payments, consider making the payments to an Employee Profit Sharing Plan (EPSP). The corporation receives a tax deduction for EPSP contributions.


*** Tom Zaks, B.Comm,CFP is the author of the books "The Business Owner's Guide to Wealth Management" and "Financial Planning for the Canadian Business Owner". He is an Investment Advisor with RBC Dominion Securities in Mississauga, Ontario