d&a tax considerations for the grÉgoire family desharnais & associates marc-andré benoit...

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


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


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


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


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


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


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


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


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


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?


D&ASTRUCTURE

PFM

BuyCo

McShane HoldCo

Jessy GrégoireMr. McShane


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


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)


D&ARECAP OF OPTIMAL STRUCTURE

PFM

BuyCo

McShane HoldCo

Jessy GrégoireMr. McShane

Incorporates BuyCo, Owns 90%

10% CSPref Shares

Owns 100%


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


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



• 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



• 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?



• 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%



• 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


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


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


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


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


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


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


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.

d&a tax considerations for the grÉgoire family desharnais & associates marc-andré benoit...

Documents