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This article was originally published in the Summer 2017 issue of Truck Logger BC Magazine. 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.
We have seen many situations where the corporate structure for a business or a group of companies has become extremely messy and puts the business owner at a distinct disadvantage. This is especially common for businesses that are in the growth or maturity phase. 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 on the surface, they can start to cause problems if the business is not structured correctly.
Fortunately, it is possible to reorganize your corporation to fix some of the common problems and take maximum advantage of tax planning opportunities. However, there is no one-size-fits-all solution; you must consider the specifics of your situation before determining the optimal business structure. Over the next four parts of this series we will look at an example.
Case Scenario Example: Introducing Jim
Jim is the sole shareholder of HoldCo, and Holdco is the sole shareholder of JimCo. In addition to the shares of JimCo, HoldCo holds shares of RealCo that holds rental properties.
Through Jim’s hard work, JimCo has been extremely successful over the past number of years. JimCo now holds significant equipment and has paid off most of the equipment financing. JimCo also holds an investment portfolio of $1,000,000 and shares of (TruckCo) a trucking business. It is expected that JimCo and TruckCo will continue to accumulate excess cash of $500,000 a year for the next few years.
Jim is married to Sarah, and they have two children who are in university. Sarah does administrative work for JimCo one day a week and is paid a small salary from JimCo. Sarah has no other source of income. Jim and Sarah’s children have no sources of income and at this point neither have expressed an interest to become involved in the JimCo or TruckCo’s business. Jim currently has no plans to retire or the sell the business, but realizes at some point he will need to step away from the business.
Using a diagram, Jim's corporate structure looks like this:
Are there concerns with Jim’s group of companies? Absolutely. It appears that as Jim’s businesses have grown, various updates were made to business structure that make little sense when you look at the big picture. Some of the issues are as follows:
Jim has no means of utilizing his Capital Gains Exemption (CGE) should someone offer to buy either of his operating companies (JimCo or TruckCo).
Both JimCo and TruckCo are generating excess cash, yet there is no method of removing the funds from the corporate group without subjecting them to personal tax.
Given that JimCo holds the shares of TruckCo, there are complications that will arise should Jim want Holdco to sell the shares of JimCo.
Given the nature of Jim’s businesses, there is significant exposure to creditors. Should an accident occur in JimCo, creditors can make a claim against any of the assets of JimCo.
Under the current structure, there is no means of splitting income with Jim’s family members other than through the payment of a salary.
If Jim’s children decide that they would like to be involved in any of Jim’s businesses, there is currently no means of allowing them to share in the future growth of JimCo.
Currently no estate planning work has been done to attempt to minimize Jim and Sarah’s estate tax should they both die. All the value in the corporate group currently attributes to Jim and as the value of the group grows, the estate tax liability to Jim and Sarah grows.
As you can see from the above case scenario, inappropriately structuring the business can result in significant tax and business issues. It’s important to discuss your individual circumstances with a professional who can guide you and help you effectively plan for a business structure than ensures you minimize your tax exposure and maximizes your returns.
Stay tuned for Part Two: Tax Based Structures where we will talk about ways Jim can update his structure to be more tax friendly.
Chris Duncan, CPA, CA, is a Business Advisor with MNP’s Private Enterprise group who specializes in real estate, construction and forestry businesses. Working out of the Duncan office and serving clients across Vancouver Island, Chris draws on his unique background to deliver industry-specific advice to help business owners stay in compliance, make informed decisions and achieve their goals. Chris can be reached at 250.748.3761 or
Related Topics:Small Business; Corporate Tax; Capital Gains; Estate Planning; Business Structures; Performance Series
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