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Many factors can influence the success of your business — not least of which is the legal structure of the business itself. Using the wrong structure for your situation can have far-reaching tax consequences, so it becomes increasingly important to update the structure as your enterprise grows and becomes more successful.
Very often the business has come through a period of rapid change and growth and has started to generate excess funds, accumulate significant business assets or acquire additional business lines. While these are all good things, they can actually start to cause problems if the business is not structured correctly. Your corporate structure not only impacts the amount of funds that can be extracted from the sale of a business, but it can impact asset protection, income splitting opportunities and estate planning concerns. In addition, it is not uncommon to see only one shareholder, which results in lost tax planning opportunities.
Let’s discuss some challenges which may come into play depending on the structure of your forestry business:
If an individual is able to utilize their CGE, they can realize an $824,176 capital gain and pay no income tax on the sale. This would equate to approximately $195,000 in tax savings to a resident of B.C.
To qualify for the CGE, one requirement is that an individual must sell shares of a private company. The rules related to the CGE can be extremely complex, but generally speaking, at the time of the sale, all or substantially all of the assets held by the company being sold must be used in an active business carried on in Canada. In addition, for the 24 months leading up to the sale, at least 50% of the assets must be used in an active business carried on in Canada.
To remain eligible for the capital gains exemption, it is imperative that offside assets be removed from the corporation on an ongoing basis. There are a number of different ways to achieve this, although one will want to do this in a tax efficient manner. A fairly common tool that that can be utilized to achieve this in the right situation is a family trust. In addition to providing a means to remove offside assets from the corporation, a trust can also allow for the multiplication of the CGE.
Given the nature of some businesses, there is significant exposure to creditors. Should an accident or event occur, creditors would have the ability to make a claim against any of the assets of the company. This would include the equipment, investment portfolio, shares and any other significant assets of the organization.
Some structures only allow for the splitting of income with family members through the payment of a salary. The payment of a salary has some significant risks associated with it as the salaries must be reasonable for the services that are being provided. The Canada Revenue Agency (CRA) has the ability to challenge salaries paid to related persons and if successful, the challenge can result in double taxation. If your structure does not allow you the ability to split income with your children, you may be foregoing significant tax savings by paying personal tax at the highest marginal rate, rather than accessing your children’s low marginal tax rates.
Has any estate planning work been done in an attempt to minimize your estate tax should you pass away? If not, all of the value in the corporate group might currently to you as the business owner and as the value of the group grows, the estate tax liability to you will also grow. This may be particularly concerning if you have children who wish to continue the family business. If there are insufficient passive assets in the group to cover the estate tax liability, business assets would have to be sold to cover the estate tax liability. This could impact the ability to operate the business.
Clearly there can be significant tax and business issues resulting from an inappropriate business structure.
The structure you choose for your business is a key component to your success and it becomes even more important if you are nearing the exit from your businesses. It is never too early to start thinking about your business structure and whether it aligns with your objectives and exit plan. Once you are in the process of exiting a business, it is often too late to change the structure, so it is best to plan in advance.
Corporate tax reorganizations are not something to be done on the back of a paper napkin. There are ways to undertake a reorganization, but there are also traps in taxation that need to be carefully navigated and dealt with several years in advance. The ideal structure for your business will depend on the unique aspects of your situation: your family, your business and your goals. Generally speaking, there is no single “right” structure for your business, but there is a “best” structure for every situation.
For more information on how structural decisions directly apply the forestry industry, download our insightful whitepaper with an in-depth look as to how you can effectively structure your forestry business for success.
For more information, contact:
Chris Duncan, CPA, CA Business Advisor, Forestry & Forest Products T: 250.856.2443 E:[email protected]
Jamie Kungel, CPA, CA Regional Tax Leader T: 250.734.4303 E:
Related Topics:Business Structures
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