Joshua Welch 20121. Solve the Trust Crisis Joshua Welch 20122.
Selling a Business Chartered Professional Accountants … · Tax Efficient Strategies for Selling a...
-
Upload
phungtuyen -
Category
Documents
-
view
217 -
download
0
Transcript of Selling a Business Chartered Professional Accountants … · Tax Efficient Strategies for Selling a...
Tax Efficient Strategies for Selling a Business
Zoran Vranjkovic, CPA, CA, CFP, TEP
Senior Tax Manager – Welch LLP
Welch LLPChartered Professional Accountants
Agenda
1. Asset sales
2. Share sales/Capital gains exemption
3. Section 84.1 planning
4. Hybrid sale transactions
5. Earnout payments
Asset SalesPurchaser
• Bump in cost of assets
• ½ year CCA
• Goodwill
• Allocation of purchase price
• No risk of hidden liabilities
Asset SalesVendor
• Recapture
• No CCA
• Goodwill
• Allocation of purchase price
• Personal tax to extract funds from corporation
• Greater tax liability
Share SalesPurchaser
• No bump in cost of assets (other than non-depreciable capital assets)
• Acquisition of control issues
• Risk of hidden liabilities
Share SalesVendor
• Capital gain
• Capital gains exemption
• Tax minimization
• Tax deferral
Capital Gains Exemption (CGE)
• $400,000 deduction (offsets $800,000 capital gain)
• Deduction available to individuals resident in Canada throughout the year
• Disposition of shares
• Qualified small business corporation (QSBC) shares at time of disposition
• Potential tax savings – up to $185k - $198k per exemption
CGE Limiting Factors
• Previous use of deduction
• Cumulative net investment loss (CNIL)
• Allowable business investment loss (ABIL)
• Other capital losses in year
QSBC Shares Basic Conditions
• Determination Time Test (90% rule)
• 24 Month Ownership Test
• Holding Period Asset Test (50% rule)
QSBC SharesDetermination Time Test
• Must be a Canadian-controlled private corporation (CCPC)
• All or substantially all (90%) of the FMV of the assets at that time attributable to assets that are:a) Used principally (50%) in an active business carried on primarily
(50%) in Canada by the particular corporation or a corporation related to it;
b) Shares in or indebtedness of one or more small business corporations that are connected with the particular corporation; or
c) Assets described in (a) or (b).
QSBC SharesOwnership Period Test
• Throughout 24 months immediately preceding disposal, share must not have been owned by an unrelated party.– Individuals– Partnerships– Corporations– Trusts
• Exceptions:– Shares issued in exchange for other shares– Shares issued in exchange for assets of a business– Shares issued in exchange for partnership interest (where assets used in
business)– Shares issued as a stock dividend (provided shares on which dividend
declared meet test)
QSBC SharesHolding Period Test
• Throughout 24 months preceding disposal, at least 50% of corporation’s assets must be used in active business
• Intercorporate shares and debt subject to similar rules
• Watch for unusual transactions/assets
QSBC SharesTiming Issues
• 24 month Holding Period Test– Watch for new shareholders (Trust/Spouse/Children)
• Accrual of value– Value to date of reorganization can’t be shifted– Allow time for value to accumulate
• Consider structure up front– Age of children?– Cost?
Capital Gains ExemptionAlternative Minimum Tax (AMT)
• Capital gains are a tax preference item
• Maximum AMT on CGE claim – approx. $40k
• Salary of $265,000 – no AMT on full CGE claim
• AMT credits – 7 year carry-forward
Capital Gains ExemptionAlternative Minimum Tax (AMT)
• Annual income required to recover AMT (over 7 years):
– Salary - $43,500
– Interest - $40,000
– Capital gains - $355,000
– Dividends (eligible) - $193,500
– Dividends (non-eligible) - $207,000
Capital Gains ExemptionAlternative Minimum Tax (AMT)
• Plan for recovery of AMT
• Consider mitigating steps:– Crystallize portion of gain prior to sale (straddling December 31)– Stagger sale to straddle December 31– Consider OAS clawback impact
• Worst case – portion of capital gain taxed at 5%
Share Sales – Sample Scenario
• X is married
• 3 minor children
• Opco value = $4 million
CGEProblematic Structure #1 – Sole Shareholder
Opco
X
Common shares (FMV - $4M)
• CGE only available to X
•No tax efficient mechanism to purify
CGEProblematic Structure #1 – Solution
1. Establish discretionary family trust
2. X freezes value of Common shares ($4 million)
3. Trust subscribes for new Common shares (nominal value)
• Watch for:– 24 month holding period (trust)– Enough time for value to accrue to trust?
CGEProblematic Structure #1 – Solution
•Trust may sell Opco shares
•X and family may access CGE
•Surplus funds may accumulate in Holdco
Opco
Family Trust
HoldcoXX
Family
Common shares (nominal)
Common shares
Preferred shares ($4M)
CGEProblematic Structure #2 – Purification
•Trust may sell Holdco/Amalco shares
•X and family may access CGE
•No tax efficient purification of Holdco or Opco
Opco
Family Trust
#1
Holdco
XX Family
Common shares ($4M)
Common shares ($4M)
CGEProblematic Structure #2 – Solution
1. Establish new discretionary family trust
2. Holdco & Opco amalgamated
3. Old trust freezes value of Common shares ($4 million)
4. New trust subscribes for new Common shares (nominal value)
• Watch for:– 24 month holding period (new trust)– Enough time for value to accrue to new trust?
CGEProblematic Structure #2 – Solution
•Trusts may sell New Opco shares
•X and family may access CGE
•Surplus funds may accumulate in Holdco
New Opco
Family Trust
#2
HoldcoX and X Family
Common shares (nominal)
Common shares
Preferred shares ($4M)
Family Trust
#1
CGEProblematic Structure #3 – Business Real Estate
Opco
Family Trust
XX Family
Business
•Purchaser may not want real estate
•Vendor may not want to sell real estate
•Difficult to spin out real estate prior to sale of Opco
•May preclude use of CGE
Real Estate
Holdco
CGEProblematic Structure #3 – Solution
1. Create a new corporation to purchase real estate in first place; or
2. Take steps to spin out real estate into separate corporation:➢ Can’t be in contemplation of sale➢ Valuation➢ Cost➢ Land transfer tax
CGEProblematic Structure #3 – Solution
Opco
Family Trust
XX Family
Business
•May sell Opco and/or Business Realco
•May sell one corporation and retain other
•Both corporations’ shares may qualify for CGE
•May facilitate succession planning Real Estate
BusinessRealco
Holdco
CGEProblematic Structure #4 – Foreign Activity
Opco
Family Trust
XX Family
Canadian Business
•Is Opco’s business primarily (50%) carried on in Canada?
•Same issue if use a foreign subsidiary
•May preclude use of CGE
Foreign Business
Holdco
CGEProblematic Structure #4 – Solution
Opco
Family Trust
XX Family
Canadian Business
•May sell Opco and/or Foreign Opco
•Shares of Opco may qualify for CGE
•Shares of Foreign Opco will not qualify for CGE
•Best to set up initially
Foreign Business
ForeignOpco
Holdco
Section 84.1 Planning
• Provision of Income Tax Act
• Anti-surplus stripping rules
• Planning combines section 84.1, RDTOH and CDA to provide tax deferral
• No advance planning required
• Consider where CGE not available and/or large capital gain
Section 84.1 PlanningExample
• Assume:- $10 million capital gain on sale- No capital gains exemption
• Without planning:- $7,500,000 after-tax funds- All held personally
• With planning:- $8,750,000 after-tax funds (½ personally; ½ in holding company)- Tax deferral of $1.25 million
Section 84.1 PlanningExample
Opco
Holdco
VendorPurchaser
Common shares
Common shares
Cash
($4.375 million)
Cash
($4.375 million)
Hybrid Sale Transactions
• Combination of asset and share sale
• Purchaser – advantages of asset purchase
• Vendor – advantages of share sale
• Many variations depending on specific circumstances
• Common characteristics:➢ Vendor sells shares of Target corporation to purchaser➢ Target corporation sells assets to purchaser
Earnout PaymentsShare Sale
• Option #1 – Determine value of earnout at time of sale➢ How to determine?➢ Additional amounts received – fully taxable➢ Capital loss – only carry back up to three years
• Option #2 – Cost recovery method➢ Capital gains treatment➢ Amounts received reduce ACB of shares➢ Amounts received in excess of ACB of shares – capital gain➢ Based on amounts determinable
Earnout PaymentsShare Sale – Conditions for Cost Recovery Method
• Arm’s length capital transaction
• Due to difficulty in valuing underlying goodwill
• Ends no later than 5 years after end of corporation’s tax year in which disposition occurred
• Notify CRA
• Vendor is Canadian resident
Earnout PaymentsGoodwill
• Purchase price adjustments – fully taxable per s. 12(1)(g)
• Guaranteed minimum:➢ Cumulative eligible capital treatment
➢ Consider limiting upside in exchange for higher minimum?
• Consider reverse earnout:➢ Sets maximum
➢ Repayment by vendor if targets not met
➢ Issue of determining FMV up front
Thank you!