Written by Dayna Holland with the help of Elizabeth Mah
There are many reasons why a company may consider restructuring its business. You may want to create a way for your employees to buy into your company or you may want to freeze your wealth and hand down your business to the next generation in your family. Perhaps you would like to protect some of the assets in the company from creditors1Keep in mind that transferring assets for the sole purpose of delaying, hindering or defrauding current creditors is illegal and, in most cases, your assets will not be protected., or you’re looking to sell a portion of your business.
Each of the ideas likely requires a bit of restructuring or reorganization of your corporate structure and will encompass its own tax implications. Sometimes the transaction will trigger some taxes that will be payable, and other times the transaction can allow the people involved to defer the taxes payable. The most important thing is to be aware that there is a taxable event that will occur. It is only the timing of the payment that will be impacted.
1 Keep in mind that transferring assets for the sole purpose of delaying, hindering, or defrauding current creditors is illegal and, in most cases, your assets will not be protected.
Important Documents for Corporate Restructuring
Before you meet with your tax and legal advisors, you will need to make sure that you have the following information ready and available for your advisors to properly advise you on what would be the best option for you:
- Company’s Articles
- Within this document, there is information on the types of shares that your company has created and the rights and restrictions of each class of share
- Current Shareholder’s Register
- This lists out the shareholders of each class of share and the number and value of each class of share by shareholders.
- It will provide this information from the date of incorporation.
- Providing a historic account of your company.
- The current set of Financial Statements and Valuation Report (highly recommended)
- A valuation report will provide an objective value for the company.
(NOTE: I know that it is common for small business owners in BC to self-incorporate. In many cases, I find that the first two items on this list are not available or have not been created. These documents are required for any corporation in BC and are necessary for any corporate tax planning. If you do not have these documents now, please work with a corporate lawyer to get those documents in place before moving forward with any sort of corporate restructuring.)
Consider These Questions When Planning Your Corporate Restructuring
Now that you have those documents ready to go, here are some questions that you should contemplate when considering reorganizing your company.
If you’re looking to increase the number of shareholders in your company (for example, offering shares to employees, or transferring ownership to your children), here are some things to take into account:
- Do you want your employees to be able to have voting rights and control over company decisions?
- Will they be entitled to dividends from the company?
- How long does the employee need to be working for your company to be able to earn these shares?
- Will the shares be subject to a vesting agreement or will your employee be entitled to the shares outright?
- When an employee leaves, will the shares automatically be returned to the company? Will they be purchased back by the company?
- What is the impact to your value of the company? Can you preserve the current value of the company for yourself and then any future value of the company is shared amongst all of the shareholders?
- What is the impact to your employees? How does this affect their total compensation from your company?
If you’re looking to protect assets that are in your current company (capital assets, intellectual property, cash, etc.), here are some things that I would recommend you examine before moving forward with a final decision:
- What is the present value of these assets? What was the original cost of those assets?
- If these assets are generating income, what is the best way to structure the relationship to streamline the income and expenses to avoid double-taxation?
- What are you planning on doing with these assets in the future?
- Should you create a structure that will allow you to sell the assets at a later date?
- Does transferring these assets affect your ability to use your Lifetime Capital Gains Exemption if the company is sold at a later date?
- There are certain rules that need to be met in order to utilize the exemption.
- Currently, the Lifetime Capital Gains Exemption limit is approximately $850,000 (or $425,000 taxable capital gain exemption).
Regardless of what you choose, my recommendation is that you take the time to look at all of the options available to you. Some may look better initially, but there may be future implications (or taxes owing) to consider.
Special thanks for this blog article goes out to Elizabeth Mah, Lawyer and Founder of Paperclip Law (www.papercliplaw.com; firstname.lastname@example.org). She contributed her time and words to make sure that my legal terminology was correct and to draw on her experience with her clients.
Dayna Holland, CPA, CA (she/her)
CEO of Dayna Holland Ltd.
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