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Canadian Association of Movers December 2007 . Tax Structuring – A Primer. Jason Safar Jill Blanchard. Key Point. Plan in Advance Produces best tax results. Provides most flexibility. Tax Plan Overview. No two tax plans are alike. Each plan is unique to the individual and their family.
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Canadian Association of Movers December 2007 Tax Structuring – A Primer • Jason Safar • Jill Blanchard
Key Point • Plan in Advance • Produces best tax results. • Provides most flexibility.
Tax Plan Overview • No two tax plans are alike. • Each plan is unique to the individual and their family. • The starting point for the tax plan is defined and clear objectives.
Tax Plan – Internal vs. External • Are we planning for succession? • Are we planning for sale?
Common Components of the Tax Plan Freeze Trusts Holding Companies
Basic Estate Freeze Mrs. X (Kids) Mr. X (Owner) Preferred Common Opco
What is a Freeze? • Fixes the value of the current shareholders interest in the business. • Allows for future increases in the value of the business to be transferred to new shareholders.
Why Freeze? • Multiply the $750,000 lifetime capital gains exemption • Additional $3 million of tax-free proceeds ($750,000 x 4). • Potential tax savings of $700K. • Fix your death tax liability • Incentive for the next generation • Income splitting opportunities
Freezes • Partial Freezes • What percentage of future growth do you want? • Real Estate & Business – freeze one, not the other. • Flexible Freezes • Use a trust structure and be a beneficiary.
Basics About Trusts • Separate legal entity treated for tax as an individual • Discretionary versus non-discretionary. • Trustees control (discretionary). • Beneficiaries benefit.
Family Trust Trust - Basic Structure Mr. X, Mrs. X, Kids, Others Mr. X Common Preferred Opco
Give without giving. Enhanced flexibility. Income splitting opportunities. Why Trusts?
Structure allows for income splitting between family members. Dividends can be split between the owner and the trust. The trust distributes income to the various beneficiaries. A spouse or adult child in university with no other income could receive up to $48,000 in dividends each year tax free. Income Splitting Opportunities
Holding Companies • Ability to receive tax free inter-corporate dividends. • Creditor Proofing. • Sale Planning.
Holding Companies – Corporate Structure Mr. X Shares Cost = $0 FMV = $1M Opco
Holding Company – Corporate Structure Mr. X Shares Cost = $0 FMV = $1M Holdco Shares Cost = $0 FMV = $1M Opco Insert a holding company on a tax deferred basis.
Holding Company – Corporate Structure Shares Cost = $0 FMV = $1M Mr. X Holdco Shares Cost= $0 FMV = $0 Debt Cost = $1M FMV = $1M Opco Pay a dividend equal to FMV and loan it back to the corporation.
Holding Company – Corporate Structure • Complications: • Safe Income. • $750 Capital Gains Exemption.
Discretionary Trust Holding Company - Over Trust Structure Mr. X (Owner) Holdco Mr. X, Mrs. X, Kids, Others Common Shares Mr. X (Owner) Opco Preferred Shares
Holding Company – Over Trust Structure • The benefits of this structure will allow: • QSBC status to be maintained for capital gains exemption. • Excess cash can be given as a dividend up the organizational chart. • Eligible dividends qualify for lower tax rates • RDTOH planning with respect to investment income.
Dividend/Bonus Planning • Consider cash needs. • Deferral advantage increases as corporate tax rates decline.
Dividend/Bonus Planning • New Dividend Legislation • Dividends more advantageous than bonus
Dividend/Bonus Planning New Dividend Legislation • Designation must be made. • Based on available “GRIP” balance. • Penalties for excess designations.
Other Considerations • Corporate owned life insurance • Attribution rules. • U.S. citizens.
Summary • All planning requires advanced planning. • Can significantly increase after-tax proceeds.
