Brief of the project
Why the client reached out to KAD
The Shareholders of “Harvest” corporate group came to KAD concerned about whether the current corporate structure supported proper personal and corporate taxation; maximized future investment opportunities, growth and cash flow; and allowed for expansion and intergenerational wealth transfer.
Action taken by KAD team
Extensive meetings were held between KAD team members and all of the stakeholders – existing shareholders, company founders, future corporate participants, and various legal and banking / lender consultants. The relationships between the various stakeholders and family members were analyzed including their 5-to-15-year plans, their current and future earning potential and their desire in being active or passively involved in the group’s business interests.
The KAD team reviewed the existing corporate structure – confirming with legal, registry and tax authorities. Additionally, analyses were made of all corporate and personal returns.
Successes realized by client
Cross-shareholding between spouses and other family members, that triggered corporate association rules and reduced the ability to claim the Small Business Deduction (“SBD”) [as outlined in the Canadian Income Tax Act], were reduced or eliminated. To further enhance the $500,000 SBD, groups of shareholders that previously controlled certain companies had also triggered corporate association rules, were segregated – newly incorporated companies created the potential for an additional $500,000 SBD.
The KAD team used the internal tax, registry and legal resources to bring these changes about.
For corporations where the corporate shareholders were individuals, the KAD team evaluated their shares, triggered tax-free capital gains on their personal returns using the Canadian Income Tax provision for the sale of QSBC (“Qualified Small Business Corporate”) shares and reported the shares as an investment in a newly formed Holding company. Further, the value of these share created a shareholder loan within the Holding company, that the original owner of the shares can draw out tax-free.
The Holding company in future will receive tax-free incorporate dividends and the cash-flow from these dividends, in future can finance the cash needs of other corporation in the Harvest group – including a separate corporation created for passive income only – such a real estate rental, portfolio investments or hold large amounts of money.
The segregation of passive income into separate, newly created corporations also ensured that an operating company’s low taxation status is not tainted by the accumulation of passive assets.
Lastly, in order to facilitate inter generational wealth transfer, the KAD team determined which family members were interested in active participation in the running of businesses within the Harvest group, and those wanting a passive role. As well, knowing each stakeholder’s effective personal tax rates, not only were the corporate shareholding’s determined, but also the type of remuneration distributed.
To safeguard the intent of the founding and future participating family members a family trust was established. This ensured that the family wealth, and the security thereof, was allocated as per the direction of the founder(s) of the trust.