Tax Reorganizations for Tax Planning –Discussion by Toronto Tax Lawyer
We have discussed section 85 rollovers in a previous article, here . Many business reorganizations will be initiated for income tax planning reasons, often by the company’s Toronto tax lawyer or accountant. These tax planning reorganizations will often utilize the provisions of section 85 of the Tax Act. To recap, a section 85 rollover is a tax deferred transaction where the transferor, either an individual or a corporation, transfers assets or shares to a corporation in exchange for consideration that includes shares of the transferee corporation and the parties elect to defer the capital gain by choosing an elected proceeds of disposition amount that is equal to the cost base of the assets transferred. This is a complex transaction and requires the expertise of our Toronto Tax lawyers.
Income tax planning reasons for tax reorganizations can include the following:
- Accessing corporate losses
- Crystallizing the capital gains exemption
- Purifying the corporation to retain its eligibility as a qualifying small business corporation for capital gains exemption purposes
- Departure of one of several shareholders
- Break up of the corporation among several shareholders
- Simplifying the corporate structure
As stated above, the income tax planning reorganizations outlined above will, for the most part, involve the utilization of one or more section 85 rollover agreements.
Tax Reorganizations by Toronto Tax Lawyers for Tax and Estate Planning
Tax reorganizations are often suggested and carried out by our Toronto Tax lawyers for will and estate planning. Estate planning in this context is therefore a specialized form of tax planning reorganization, usually involving either a section 85 rollover or a section 86 internal reorganization. The topic of estate planning and tax reorganizations is discussed here.
Tax Reorganizations by Vancouver Tax Lawyers for Creditor Proofing
A tax planning reorganization of a corporate group may also be undertaken by our experienced Vancouver Tax Lawyers with a view to protecting assets from future potential creditors. It is, of course, important to ensure that all relevant creditor protection statutes are complied with since transactions done to defeat existing creditors can be challenged under various provincial statutes.
Reorganization for future creditor proofing purposes will usually take one of the following forms:
- Rolling certain operating assets (such as a separate division) into a sister company
- Setting up a holding company, declaring and paying a dividend equal to all of the equity of the operating company and then lending these funds back to the operating company secured by a general security agreement registered under the PPSA
- Setting up a new corporation for a new division
- Using a separate corporation to hold real property or intellectual property
This is another case where tax planning reorganizations will typically be carried out by our Vancouver Tax Lawyers utilizing rollovers under section 85. Accordingly such reorganizations will normally have no immediate adverse tax consequences to any of the parties involved in the transactions.
Tax Reorganizations by Edmonton Tax Lawyer for Equity to Employees
Another income tax planning reorganization often carried out by our Edmonton Tax Lawyers is to allow employees to participate in the corporation though share equity ownership. Employees who are being given minor amounts of equity will usually obtain it by way of stock options. See our employee stock option article here.
When an employee, usually a senior employee, is being provided with a significant percentage of the company, a tax reorganization of the capital of the corporation may be undertaken by one of our Edmonton Tax Lawyers. The reason for the tax reorganization is to allow the employee to invest in the corporation’s future growth at a lower cost than buying into the existing corporate equity.
This tax reorganization is similar in principle to that undertaken in an estate freeze utilizing section 86 of the Tax Act. Typically the existing shareholder will convert his or her shares into a class of special shares with the same value as the existing common shares. Thereafter the owner and the employee will be able to subscribe for new common shares of the corporation for a nominal amount or a larger agreed to amount.
A tax reorganization under section 86 has no immediate adverse tax consequences to the entrepreneur if carried out properly. One class of shares with an existing adjusted cost base and paid up capital will be converted into one or more other classes of shares of the same corporation with a total cost base and paid up capital equal to that of the shares being given up. The employee is then free to subscribe for new common shares of the corporation for a nominal amount with no tax implications.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."