d&a tax considerations for the grÉgoire family desharnais & associates marc-andré benoit...
DESCRIPTION
D&A EXECUTIVE SUMMARY It is possible to save $183,000 in taxes using the capital gains deduction on the transaction While there is an acquisition of control, you can transfer most assets tax free Net impact of $66,000 on corporate net income for tax purposes Pay Nick in salary up to $123,000; many tax credits available to NickTRANSCRIPT
D&A
TAX CONSIDERATIONS FORTHE GRÉGOIRE FAMILY
Desharnais & AssociatesMarc-André BenoitMarianne BoiteauPatrick Lorange
January 10th, 2016
D&AAGENDA
• Executive summary• Acquisition of PFM
– Valuation– Assets v. Shares– Optimal Structure– Financing
• Corporate taxes• Personal taxes• Q&A
D&AEXECUTIVE SUMMARY
• It is possible to save $183,000 in taxes using the capital gains deduction on the transaction
• While there is an acquisition of control, you can transfer most assets tax free
• Net impact of $66,000 on corporate net income for tax purposes
• Pay Nick in salary up to $123,000; many tax credits available to Nick
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ABUSINESS VALUATION
COME Method$'000 FY15EBIT 1,021 + Depreciation 967 + Amortization 393 EBITDA, as reported 2,381
MultiplesConservative - 4x 9,524 Base case - 5x 11,905 Aggressive - 6x 14,286
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ABUSINESS VALUATION
• Conclusion: Equity value of PFM is $9,500,000
Net Asset Method - PFM$'000 FMVCurrent assets 3,883 Non-current assets 10,549 - Intangible assets 2,854- - Investments (in HoldCo) 1,843-
- Liabilities 2,417- Net asset value 7,318
Base case COME 11,905 Average 9,612 Valuation of PFM 9,500
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ASALE OF ASSETS v. SHARES
SALE OF ASSETS SALE OF SHARESChoice of which assets to purchase Potential hidden liabilities
Deemed taxable dividend taxed at higher rate
Capital gain deduction available
Increase UCC balance, more CCA available in future
Only purchase 51% to have control
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ACAPITAL GAIN DEDUCTION
• Up to $813,600 available in tax savings• To be eligible, PFM must be a Qualifying Small
Business Corporation:– Canadian Controlled Private Corporation– 90% of assets used to generate active business
income• 50% of these assets located in Canada
• Currently, 90% rule not met
KEY TAKEAWAY: PURIFY THE ASSETS
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&APURIFYING THE ASSETS
• Incorporate a HoldCo• Use S85.1 to rollover
assets until 90% rule met– Investments: $1,843K
• Before: 84%• After: 96%• 90% rule met, PFM is
a QSBC.• Can use CGE
PFM McShane HoldCo
Mr. McShane
S85.1 Rollover
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ASALE OF ASSETS
Details on this calculation available
Scenario 1 - Sale of assets$'000 FY15Cash for distribution 8,787 - ACB 10 Dividend under S54 8,777
- CDA dividend 2,261 Deemed taxable dividend 6,515
Grossed up (1.25x) 8,144 DTC 896- Net dividend 7,248
Tax payable (45%) 3,262
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ASALE OF SHARES
Scenario 2: Sale of shares$'000 FY15FMV of 100% 9,500 90% of FMV 8,550
ACB 9 Capital gain 8,541
CGD 813 Net capital gain 7,728 Taxable capital gain 3,864 Potential tax impact (45%) 1,739
McSHANE: PREFER SALE OF SHARES
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&AFINANCING THE ACQUISITION
• Price of the company 100%: $9,500• 90%: $8,550• Possible arrangement with McShane to defer
payment over 5 years (capital gains deferral)• Immediate necessary outflow: $1,710,000• Remainder TBD, potential for future
salary/dividends
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ASOURCES OF FINANCING
• Arrangement with Catalina (mother):– Estimated cash available: $450,000
• Share of capital dividend: $375,000 tax free• Share of current year earnings: $75,000 (Part IV tax applies)• Potential to securitize a loan using Beauty assets
• Still requires $1,260,000• Home equity: $230,000• Shareholder loan (at prescribed rate)• Bank loan• Investment partner
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ASOURCES OF FINANCING
Conclusion:• Even if remaining financing is obtained, high
financial risk to meet obligation in five years.• Further consideration required:
– Could buy a portion of assets?– Buy less than 90%– Find a business partner?
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ASTRUCTURE
PFM
BuyCo
McShane HoldCo
Jessy GrégoireMr. McShane
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ASTRUCTURE
1. Jessy purchases $813,000 of common shares from McShane, using financing previously discussed (Allow McShane to use Capital Gain Deduction)
2. Jessy incorporates BuyCo for $13. Using S85.1, McShane transfers remaining assets
to HoldCo4. HoldCo sells assets to BuyCo for the following:
1. 10% of common shares of BuyCo2. BOOT of $10K = ACB = Elected Amount3. Convertible Preferred shares for the remaining
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ACONSEQUENCES OF STRUCTURE
• Allows McShane to use entire Capital Gain Deduction
• In the future, redeem preferred shares for debt/cash
• If Jessy needs cash, can manage dividend payments because of the HoldCo (interco dividends not taxable under S112)
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ARECAP OF OPTIMAL STRUCTURE
PFM
BuyCo
McShane HoldCo
Jessy GrégoireMr. McShane
Incorporates BuyCo, Owns 90%
10% CSPref Shares
Owns 100%
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&AACQUISITION OF CONTROL
• Acquisition of control consequences:1. Deemed year-end the day before
• 1 year C/F lost for Net Capital Losses• CCA will be prorated
2. Cannot C/F non-capital losses except if:1. Business is carried on2. Same or similar line of business3. Expectation of profit
3. Net Capital Losses (C/Y & C/F) will expire• Election available: Deemed disposition of capital assets at
FMV in order to use the CL that would otherwise be lost – On non-depreciable assets first to avoid recapture
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&AINCLUSIONS & DEDUCTIONS
• Travel expenses:– Can deduct 50% of Meals & Entertainment for Sales
Employees– Travelling salesmen (S8(1)(h.1)) can deduct their
travel expenses up to commission income
TRAVEL EXPENSES < COMMISSIONS
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&AINCLUSIONS & DEDUCTIONS
• Monthly meals for employees:– 50% deductible if:
• Benefit conferred to all employees • Employment related
– Make sure amount is reasonable• Assuming reasonable, depends on number of employees
• $5,000 x 12 mths x 50% = $30,000
INCLUDE $30K BACK IN TAX INCOME
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&AINCLUSIONS & DEDUCTIONS
• Tuition expense: Taxable benefit if not primarily for the benefit of PFM– Income inclusion for employees– Deduction not available for PFM
• « University classes of their choice »• Make sure that classes are related to the
business (e.g.: management, manufacturing…)– Keep transcripts/university invoices as proof
INCOME INCLUSION OF $42,322?
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&AINCLUSIONS & DEDUCTIONS
• Company car:– CCA Class 10.1, 30%, UCC capped at $30,000– In the future, consider buying vehicles of max $30K
• Standby charge: 2% x (45,000 + GST) x #mths• But, potential for Reduced Standby Charge:
– Less than 1,667km per month for personal use: MET– More than 50% used for business: MET
• S.C. x 500/1,667 x #mths income inclusion
INCOME INCLUSION REDUCED BY 67%
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&AINCLUSIONS & DEDUCTIONS
• Company car (cont.):– Operating charge benefit, lesser of:
• $0.27 x 500km x #mths; or• 50% x Reduced Standby Charge
– Recommendation: Keep a detailed travel log
• Conclusion:– Income inclusions protect you from bad taxes– Helped reduce your tax liability to minimum allowed
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&AJESSY AND NICK PERSONAL TAX
• Salary vs Dividends for Nick– Advantages of salary:
• Increases room for RRSP contribution (CV of RRSP: $42k)• Allows CPP/QPP income at retirement
– Disadvantages of salary:• Taxed at higher rate
*Salary must be reasonable in order to be deductible
PAY SALARY OF $123,000
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&AINCOME SPLITTING
• Nick manages Jessy’s investments. Could potentially earn commission income
• Spousal RRSP– Jessy may contribute up to 50% of RRSP (keeping in
mind her personal contribution limit)– Money needs to remain 3 years in the plan to avoid
attribution rules– Can contribute additional $2,000 without penalties
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ACHILD CARE EXPENSES
• Deductible in the hands of the lower income spouse– If incurred to earn income; therefore Nick would have
to earn income to get the deduction– Expenses such as day care (need the receipts)
• Up to $7,000 for child under 6• Up to $4,000 for child between 7 – 16
DEDUCTION OF $15,000
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&ARESP
• One of Jessy’s priorities is her children’s education
• Can set up 3 RESP accounts for her children– Plan allows for income deferral– Money invested in the plan is not deductible– Government puts money into the plan– Money taxed in the hands of the children when
withdrawn– Lifetime maximum of $50,000 per child
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&AMCSHANE’S PERSONAL TAXES
• Tax opportunities:1. Invest in another QSBC in the prescribed time in
order to defer a portion of the CG2. CG Reserve available if Jessy makes payments
within 5 years (one fifth deductible every year)
D&AEXECUTIVE SUMMARY
• It is possible to save $183,000 in taxes using the capital gains deduction on the transaction
• While there is an acquisition of control, you can transfer most assets tax free
• Net impact of $66,000 on corporate net income for tax purposes
• Pay Nick in salary up to $123,000; many tax credits available to Nick
D&A
TAX CONSIDERATIONS FORTHE GRÉGOIRE FAMILY
Période de questions
January 10th, 2016
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&AAPPENDIX A: CASH AVAILABLE
Scenario 1: Sale of Assets
$'000Consideration received
Business income
Investment income CDA RDTOH
Opening balances 72 15
Inventory 2,089 2,089 - - - Accounts receivable 711 711 Prepaid expenses 541 541 Intangible assets 2,854 - 1,427 1,427 Tangible assets 5,853 - 762 762 Assets transferred 12,047 3,341 2,189 2,261 15
Net liabilitiesAccounts payable 407 Short-term debt 760 Long-term debt 1,250 Cash 544- Net liabilities 1,873
Tax payable 1,388
Cash for distribution 8,787
FINANCING PFM DEAL CORPORATE TAX PERSONAL TAX
D&AAPPENDIX B: MCSHANE’S TAXES
• He wants to remain involved into the business– Keep 10% of his shares
• Should set up a holding company. Inter-co dividends are paid out tax-free
• McShane will be able to pay himself dividends whenever he wants. Ensures more flexibility.