Project Experience

Structuring

Trust 21st Anniversary Planning

A fully discretionary family trust had been set up for the benefit of Mr. and Mrs. A and their children 20 years ago. At that time, the trust acquired shares of Opco for a nominal amount. The value of those shares now was approximately 40 million. The 21st anniversary of the trust was rapidly approaching which would trigger a substantial income tax liability (approximately 10 million). Distributing the shares to be held directly by the beneficiaries presented other (non-tax) issues.

A structure was put in place to defer the 10 million tax liability to a point in time when a future disposition occurs without direct control of the shares by the beneficiaries. The key to this planning was starting early to determine what options fit the family situation and sufficiently research the implications of options in light of shifting tax legislation.

Winding up a Corporation

An individual owned an investment company, which she had inherited when her husband passed away 30 years earlier. On her passing, she bequeathed the shares of the Company to her children and reported the significant gain on her final tax return, resulting in a large tax liability which eroded the value of the remaining estate. After computing the tax cost of disposing of the investments by the company and winding up, several options were presented to the beneficiaries to help reduce the cost. The options all entailed several steps and incorporating new companies.

After discussion with the beneficiaries, the company was wound up within a year of the mother’s death. This helped minimize income taxes but there was still a substantial amount of income tax paid on the wind up.

The key to this engagement was to understand the objectives of the beneficiaries, which was to keep it simple (even if that meant income taxes would be payable). They understood some additional amount of income taxes would be payable on the wind up, but they had no appetite for complicated structures and felt better knowing the entire estate was wrapped up within one year. This is a good example of the “tax tail not wagging the dog”.

Loss Utilization

A company was struggling with economic conditions and experienced several years of tax losses after having been successful in the past. Company management felt that the company could be successful again but wondered if there could be any way to hasten the savings of the available tax losses.

Working with the Company’s parent company, a structure was put in place to utilize the losses by the Lossco and generate interest deductions in Parent Co (which it used to reduce its tax payable, saving cash tax). After several years and when Lossco began being profitable again, the structure was unwound.

Careful attention to setting up the structure was key to ensuring it fell within the parameters of acceptable planning from the perspective of the tax authorities and did not negatively impact either Lossco’s or Parentco’s existing debt covenants and financial statements. Tax planning in absence of the consideration of how the structure might impact other aspects of the Companies’ businesses could have lead to other, more significant issues, for the entities than using tax losses.

Reorganization

Splitting Up a Corporation on a Tax Deferred Basis

An individual owned an investment company for almost 40 years. When she died, she directed in her will that the company be wound up, but the executor had the option of determining how that would be accomplished. A calculation was prepared for the executor which revealed a substantial income tax liability would result if the company was wound up by selling all the investments it owned (some of which had six-figure capital gains) and distributing the cash to the beneficiaries as a dividend.

A series of steps was undertaken to distribute the assets held by the investment company to corporations incorporated by each beneficiary, on a tax deferred basis and wind up the company on a tax deferred basis. Because each beneficiary owned his/her own corporation, the individual had the choice of when to divest of investments. This resulted in full deferral of both corporate level and personal level income taxes of more than $1.5 million.

The key to this engagement was to navigate the very technical rules related to this type of split up and wind up of a company among its shareholders; including very detailed calculations related to the splitting and distribution of assets to the companies owned by the beneficiaries as well as advice to the beneficiary-shareholders as to what types of actions were and were not permitted post wind up in order to ensure the deferral would only end when cash was removed from the new corporations.

Exiting Shareholder

A company owned by 3 arm’s length shareholders was looking for a tax efficient way to buy out one of the shareholders on his retirement. Neither of the other shareholders had sufficient assets nor interest in increasing their ownership percentage, therefore the only method available was felt to be redemption of the retiring shareholder’s shares.

Working with the company’s existing trusted accounting firm, a corporate buyer acceptable to the other remaining shareholders was identified, enabling the retiring shareholder to sell his shares and use the capital gains exemption (the shares qualified). This was preferable to having the company purchase the departing shareholder’s shares, which would have resulted in substantially more income tax payable.

We also provided advice as to the tax impact of future dividend payments to the corporate shareholder and how to determine the impact of recently changed legislation on the quantum of dividends which may be paid between corporations, without Part I tax.

The key to this engagement was coordination with the company’s existing accountant and a good understanding of the goals of all parties.

Acquisition

First Nations Business Development Activities

A First Nation government was interested in substantial economic development, outside the geographic boundaries of its community. The projected taxable income of the venture would exceed $1 million annually, however, the provisions of the Indian Act did not shelter this income from taxation given that the activities took place off reserve.

A structure was put in place to take advantage of other Income Tax exemptions so that the income earned would be fully tax-exempt and available for further economic activity or support to the community.

The key to this planning was careful structuring of how the business activities were undertaken and governance related to the structure.

Divestiture

Selling Business

An individual was approached to sell his business for approximately $57 million. The shares were owned by he and his family (his family’s interest owned by a family trust). It was preferable to sell shares in order to take advantage of the available capital gains exemptions for the owner and his children. However, tax on the proceeds in excess of the available exemptions was substantial.

A structure was put in place to sell the shares but also defer tax on approximately $30million of the gain (approximately $7.5 million tax deferral). Tax was payable on the remainder of the gain which resulted in the ability to pay out approximately $11.5 million of tax-free amounts to the individual. The deferral will be indefinite if cash is left in the structure, which is likely given the significant amount of tax-free cash received by the owner.

Divesting of a business will, in many cases, provide cash for the owners to fund their exit from the business. Minimizing income taxes can result in much more cash available than otherwise.

The keys to this engagement were many. Starting early (it is never too early!) resulted in the vendor, purchaser, and all advisors to know ahead of time what pre-sale planning steps were necessary so there were no surprises to the purchaser that could result in costly delays in closing the transaction. Also, key to the engagement was the computation of the maximum amount of deferral possible and navigating the many complex areas of income tax law that arise during a sale.

Sale of Assets

A company was owned by several individuals, a number of non-taxable entities and a corporation. A foreign buyer was interested in purchasing the IP developed by the Company. Under no circumstances was the buyer willing to entertain a deal which resulted in the shareholders selling shares. The individuals had substantial gains and therefore not having the ability to shelter the gain with the capital gains exemption was a disadvantage.

An analysis was performed to determine the impact of selling the assets (mostly IP). Due to available tax losses, tax credits and preferential tax treatment for sales of IP-type assets, the corporate level of tax was managed. An analysis was performed to determine how the capital of the corporation could be redistributed among different classes of shares held by the shareholders, prior to the sale of the assets.

As a result, cash in the company was distributed in a tax-efficient manner to all shareholders by return of capital (rather than taxable dividends) which substantially reduced the income tax burden of the individuals.

Other

Cash Needs Planning

A shareholder of a private entity required additional cash personally in order to purchase a vacation home. The individual was not in the highest tax bracket and new legislation regarding dividends paid to family members not active in the business impacted the tax rate of dividends paid to the spouse.

Careful analysis of the company situation and tax attributes resulted in streaming tax-free (capital dividends) dividends to the spouse and regular dividends (without exceeding the top tax bracket) to the active shareholder.

Regular monitoring of shareholder income needs, company tax attributes and income tax law is important in minimizing income taxes when undertaking annual compensation planning for owners of private businesses.

Estate Planning

An elderly client was updating her will and wanted to minimize the income taxes that would erode her estate. She owned shares of a company holding a substantial amount of investments and also had significant charitable bequests.

After computing the amount of income taxes that would arise on her death based on the old will, several discussions with the client, her lawyer and executor lead to a plan to have many of the charitable bequests made by the company (in-kind donations of publicly traded securities) to address negative tax consequences of the deemed disposal of the private company shares and tax advantage of preferential tax treatment of donations of publicly traded securities.

Her updated will addressed all of her objectives and substantially reduced the amount of income taxes that would have otherwise been payable on her death, as a result of changing the manner in which bequests were made. This left more cash available in her estate to make even more charitable bequests.