Whether you plan on starting a new business or have been running your business for years, our lawyers can help you optimize your corporate structure, minimize your legal liability, protect your assets and increase your tax savings.
Meditax Consulting undertakes corporate restructuring in four steps:
An informal first meeting to gather basic facts;
An analysis of your current or desired corporate structure;
Implementation of our recommendations.
PURCHASE AND SALE OF A BUSINESS
The following are examples of tax planning strategies that are useful in purchase and sale transactions.
BUSINESS LOAN INTEREST DEDUCTIONS
The Income Tax Act allows for interest paid on a business loan to be tax deductible. Our lawyers will advise you to ensure that you take advantage of the maximum tax deduction for interest paid on your loans.
In addition, if the interest on your loan cannot be deducted, our lawyers will provide you with advice and methods to render it deductible.
CAPITAL GAINS EXEMPTION
How to benefit from the exemption
The Income Tax Act provides for a tax exemption on capital gains up to $800,000 (in 2014). To be eligible, a taxpayer must fulfill two criteria:
The taxpayer must sell shares of a corporation; and
The corporation must be considered a “small business corporation” according to the meaning set out in the Income Tax Act.
Our lawyers can help determine whether your business meets the legal requirements to benefit from the exemption or to make the necessary changes to qualify
Multiplying the exemption
If your business’ corporate structure includes a family trust, you may be able to access the capital gains exemption of the beneficiaries of your trust, including minor children.
For more information on family trusts, we invite you to consult our section on Income Splitting.
SALE OF SHARES VS. SALE OF ASSETS
Sellers usually prefer to sell shares of their business in order to take advantage of the capital gains exemption. Buyers, on the other hand generally prefer to purchase a business’s assets. Proceeding this way minimizes the buyer’s exposure to liabilities and obligations of the business that arose before the sale and to be able to take advantage of tax deductions on depreciable assets.
Inherits the “history” (liabilities and obligations) of the corporation;
Cannot amortize the cost of shares;
Shares are not subject to sales tax.
Can generate capital gains;
May take advantage of the $800,000 capital gains exemption;
No sales tax on the sale of shares.
Does not inherit the history of the corporation;
Can amortize the cost of depreciable assets;
Assets are subject to sales tax.
May generate capital gains or business income;
May not take advantage of the $800,000 capital gains exemption;
Sales tax applies on the sale of assets.
Transferring a business to one’s children or including a key employee in business management requires careful tax planning. Simply selling issued shares or issuing new shares in the corporation may entail disastrous tax implications, such as:
Rendering it impossible for the seller to take advantage of the capital gains exemption;
Rendering it impossible for the purchaser of the shares to take advantage of the business loan interest deduction on funds borrowed to purchase the shares;
Intensified scrutiny by taxation authorities on transactions between family members (non-arm’s length transactions) to assure that the shares are sold at their fair market value;
Deemed year end for the corporation when a majority of the shares are acquired (which may have negative effects on the availability of accumulated losses).
Our lawyers will support you in setting up a tax strategy allowing you to transfer your business to your children or include a key employee in the business management structure all the while reducing your tax burden by avoiding confrontation with taxation authorities.
In case of litigation or legal disputes, our lawyers can help protect your personal assets against seizure by a potential creditor.
A corporation possesses its own legal personality separate from that of its shareholders. By shielding personal assets from a corporation’s creditors, shareholders obtain asset protection and peace of mind while running a business.
This strategy allows for the separation of a corporation’s activities into two separate entities: the operating company and the holding company. The operating company handles day-to-day operations of the business while the holding company contains the business’ investments and excess cash. In case of a lawsuit, assets found in the holding company can be protected from court claims.
LOANS BETWEEN CORPORATIONS GUARANTEED BY A MOVABLE HYPOTHEC
This strategy allows for the operating company’s assets to be protected in case of a legal action. Instead of borrowing money from a bank, the operating company borrows working capital from the holding company. In exchange, the operating company grants a hypothec on the universality of its property (trucks, equipment etc.) in favor of the holding company.
Given that the holding company has a hypothec on the property of the operating company, the property of the latter is protected from seizure by creditors. This is because the hypothec held by the holding company would rank ahead of any other creditor’s rank.
ASSET PROTECTION TRUST (OR PRINCIPAL RESIDENCE TRUST)
This inter vivos trust is created by drafting a private document and then transferring valuable real real estate into it such as a principal residence. Since a trust has a separate legal personality distinct from the person who created it, should a lawsuit occur, creditors will not be able to seize property held in the trust.
This strategy is useful and often recommended for individuals with no mortgage on their home or who have at least $350,000 of equity in their residence.