A “business lawyer” or a “corporate lawyer” generally refers to a lawyer who primarily works for corporations and represents business entities of all types. These include sole proprietorships, corporations, associations, joint venture and partnerships. Typically business lawyers also represent individuals who act in a business capacity (owners-managers, entrepreneurs, directors, officers, controlling shareholders, etc.). Further, business lawyers also represent other individuals in their dealings with business entities (e.g. contractors, subcontractors, consultants, minority shareholders, employees). Generally, when we use the term “business lawyer” we think of all of the above.
On a daily basis, we represent start ups, family businesses, owners/managers and mid size companies at the regional, provincial, national and international level in a wide range of industries and we advise clients on their legal issue and their day-to-day business issues, including but not limited to: contracts, corporate structure, mergers & acquisitions, corporate reorganizations (family trust, holding company etc.), estate planning and any other corporate matters.
If you are a business owner and you are concerned with the legal protection of your business and your personal assets, the answer is YES.
- A business lawyer can advise you of the applicable laws and help you comply with them.
- A business lawyer can help steer you away from future disputes and lawsuits.
- A business lawyer can help protect your tangible and intangible assets.
- A business lawyer can help you negotiate more favourable business transactions.
What is a Family Trust?
In essence, a trust is not a legal entity like a corporation, but rather a relationship that exists whenever a person, called a Trustee, holds property for the benefit of other individuals. The trust arrangement permits the legal ownership of the property to be held by the trustee while the benefits of ownership (income, capital gains) accrue to the beneficiaries. It is common practice for an entrepreneur and his or her spouse to act as Trustees of their Family Trust. Hence, entrepreneurs can still maintain control over their companies, while benefiting from a trust arrangement (subject to their fiduciary duties to act in the best interest of the beneficiaries).
How do I determine if I’m a good candidate to setup a Family Trust?
Here are some key indicators that you should consider a Family Trust:
- You are shareholder in a private corporation.
- Your business is profitable and generating profits.
- You have children(s) and you are paying/will pay for their education(s).
- You may want to sell your company in the future.
Would it be beneficial for me and for my family?
Some of the benefits of using a Family Trust structure are:
- Funding of your children’s education. The first and immediate benefit is the funding of your children’s education. By having the trust own shares in the family company and having your children as beneficiaries of the trust, it is possible to fund as much as $32,000.00 per child over the age of 18 at a tax rate of approximately 14% through the trust as opposed to funding your child’s education from your personal funds which are usually taxed at a substantially higher rate. If you are a high income earner you will be paying tax at approximately 48%. Basically, you can save as much as 34% of taxes (i.e. a potential saving of $34,000 for each $100,000 earned). This is a substantial savings for each of your children for each year that he/she is in school with little or no other source of income.
- Income splitting. A well-structured family trust allows for splitting the income earned by the trust among the various beneficiaries. If you are a high income earner you may be able to split your revenue to a lower income earner. (subject to the potential application of the attribution rules and the “kiddie tax”).
- Capital gains exemption. Once in your life time, you may be eligible to claim the $750,000 capital gains exemption. Basically, what it means it that an individual selling his/her shares of a Canadian Private Corporation (subject to a set of specific rules) can receive the first $750,000 on a tax free basis. Hence, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.
- Reducing tax liability at death. Transferring assets to a trust may limit the size of the individual’s estate, such that tax liability at death is reduced. In addition, probate fees may be reduced.
As you can see, a Family Trust can offer business owners a great deal of flexibility and should be further explored. Any individual who is interested in setting up a corporate structure that involves a Family Trust should evaluate all the tax consequences and consult with a knowledgeable professional.
Acquisitions are very common today: one business – usually a corporation – takes over or buys out another business and takes its place in the market. An acquisition is when one business, usually called the “successor,” buys either another company’s stock or assets.
Generally, in an asset purchase, the buyer-company is not liable for the seller-company’s debts and liabilities. However, there are exceptions, such as: when the buyer agrees to assume the debts or liabilities; that is, as the buyer, you could assume some or all of the seller’s debts in exchange for a lower sales price.
The asset acquisition does not require the approval of the buyer’s stockholders, but the seller’s stockholders do have to approve the sale of all or most of the assets. Stockholders who oppose the sale usually have the right to the “appraisal value” of their stock, which is determined by an independent third party.
If you acquire a business through a share purchase, that is, buying all or substantially all of the company’s stock from its shareholders, your company “steps into the shoes” of the other company, and business continues as usual. The buyer takes on all of the seller’s debts and obligations, whether they’re known or unknown at the time of the sale.
A known liability might be a bank loan that is recorded in the company’s books and records. An unknown liability might be money owed to employees or contractors that has not been properly recorded and has been overlooked by both the seller and the buyer. But, the most dangerous unknown liability often arises from the seller’s pre-sale activities.
For example, if the seller had been making and selling paint for 15 years before the buyer acquired it through a stock purchase, the buyer can be liable for the injuries sustained by a painter who claims that the seller’s paint contained toxic chemicals, even if the painter’s injuries did not show up several years after the stock purchase.
A stock purchase requires stockholder approval, and stockholders have the right to oppose the sale and to have the value of their stock appraised by an independent party.
In both cases, it is highly recommended to contact a business lawyer in order to define your best purchase option.
It is a legal plan allowing you to protect your personal and business assets and benefits from various tax exemptions. You can achieve protection through the way you’re structuring your business, by changing who owns what. By consulting a business lawyer, you may be able to save Thousands of Dollars in taxes.
Every entrepreneur that I know is working extremely hard and are fully dedicated to their businesses. For most of them, they are so much busy running their businesses and keeping cash flow positive that they are sometimes loosing sight of extremely important issues. I mean protecting what they earned by working hard and taking risk. We all know that it is impossible to predict the future; in any event, what we can do is being diligent and proactive with our actions. The objective of creditor proofing plan is to highlight some easy ways to structure your businesses in order to protect yourself and your businesses against creditors and, in the process used at your advantage various tax exemptions.
As a professional, there are tax planning opportunities that become available when you incorporate. Before you decide to incorporate to take advantage of these opportunities, however, there are a number of important considerations to make. Unlike business people in general, you must consider the specific rules that govern your profession when determining whether incorporation makes sense for you. In particular, you need to determine the ownership rules that apply, as certain provinces restrict who can own shares of a professional corporation (PC). You also need to determine what activities your profession will allow your PC to engage in. Both can impact on the tax planning available.
In this article, we will outline the main tax planning opportunities available along with the key considerations to make when deciding whether or not to incorporate.
The ability to split income with a spouse or an adult child is one of the main benefits of incorporation for businesses. However, it is necessary for professionals to consider the ownership rules of their profession as this will determine whether income splitting benefits are available. In particular, you will need to consider who is allowed to hold shares of the PC. Certain provinces will allow shareholders of the PC to include the professional along with their family members, while other professions will allow only members of the profession to hold shares of the PC. Where family ownership is allowed, some provinces also restrict the use of trusts.
Where the rules allow, you can benefit from income splitting where your spouse and adult children are allowed to subscribe for shares of the corporation and receive dividends from the profits of the PC. The advantage here is the ability to have the dividends taxed in the hands of more than one person, which generally means that the overall tax on the dividends is lower. Note that due to the income-splitting tax (often referred to as the kiddie tax), the benefit of splitting dividend income with minor children is not available.
In the case of your spouse, you’ll also need to ensure you don’t run afoul of the corporate attribution rules. These rules may apply if you transfer property or make a low-interest loan to your PC where your spouse is or will become a shareholder. Where these rules apply, an imputed interest penalty will be included in your income and income splitting will not be achieved. Note, however, that the corporate attribution rules will not apply for any period that the corporation qualifies as a small business corporation (SBC). A corporation qualifies as an SBC if:
It’s a Canadian-controlled private corporation (CCPC); and
All or substantially all of its assets are used in an active business carried on primarily in Canada. The CRA interprets this to mean that assets representing at least 90% of the fair market value of all assets are used for business purposes.
The corporate attribution rules will be an issue for professionals who want to introduce a spouse as a shareholder to their PC and passive investments have already been built up in the PC. Also, keep in mind that even where a PC is currently an SBC, if passive assets accumulate in the PC, the corporate attribution rules can still become a problem.
The Small Business Deduction
The second main benefit of incorporation is the ability to access the small business deduction. A PC owned by a professional resident in Canada will be a CCPC, so that corporation may be able to obtain the benefit of the small business deduction. With this deduction, a CCPC’s federal and provincial tax on active business income is reduced, up to certain limits. Currently, a maximum of $500,000 of active business income qualifies for the federal small business deduction. The limit varies by province.
A benefit can be achieved where business income is instead retained in the corporation, and the additional personal tax that will be payable when dividends are paid is deferred. The lower corporate tax rate leaves greater after-tax dollars in the corporation to pay expenses and reinvest in assets. A smaller tax deferral will also be available for general rate business income (i.e. income not eligible for the small business deduction). In provinces that do not allow non-professionals to hold shares of a PC, the tax deferral will be the largest tax benefit.
When determining whether your PC can benefit from the small business deduction, you need to consider the following rules:
Partnerships – If you carry on business as a member of a partnership, the small business deduction rules will apply differently. The rules that will apply are known as the specified partnership income rules. Under these rules only one small business deduction will be available to reduce corporate tax on income from the partnership. In the case of a partnership of PCs, all of the PCs must share one small business deduction. For example, if your PC earns 1/4 of the income from a professional partnership, only $125,000 of the income (1/4 of $500,000) will be eligible for the federal small business deduction. Note that these rules effectively mean that partners of large partnerships do not get any significant small business deduction on their partnership income. Certain structures can be used to effectively allow PCs of partners in professional partnerships access to a full small business deduction limit, but they require careful planning to implement and generally require that non-competition clauses in partnership agreements be eliminated.
Personal Services Business – Generally, if you provide services through your corporation and if not for the corporation you could be considered an employee of the entity to which you provide the services, the corporation may be considered a personal services business (PSB) where certain exceptions do not apply. In other words, you would be considered an “incorporated employee”. Where the PSB rules apply, income from the PSB will not be eligible for the small business deduction. As well, deductions claimed by the PSB will be restricted. Consequently, to fully benefit from incorporation, you must ensure that you avoid the PSB rules. In most cases, this means that you have to be an independent contractor and not an incorporated employee. The PSB rules are not a concern for partners of a professional partnership who are generally not considered to be employees of the partnership.
Capital Gains Exemption for Qualifying Small Business Shares
The third significant tax advantage of incorporation that may be available is the capital gains exemption for qualifying small business corporation shares. Due to the nature of a PC as well as the restrictive ownership rules, selling shares and realizing a gain eligible for the exemption may be difficult. Purchasers may prefer to buy goodwill or client lists, rather than shares, and they may also have concerns about inheriting the professional liability of the vendor. An incorporated partner of a professional partnership will likely not be able to sell shares of his PC. However, if you or family members are able to sell shares of the PC, up to $750,000 of gross gains can be exempted (for each individual).
To qualify for the exemption, the following general conditions must be met: At the time of the disposition, at least 90% of the corporation’s assets (on the basis of fair market value) must be business assets; More than 50% of the corporation’s assets (on the basis of fair market value) must have been used in an active business carried on primarily in Canada throughout the 24-month period immediately before the sale; and The shares must not have been owned by anyone other than the vendor or someone related to the vendor during the 24-month period immediately before the sale.
In addition to claiming the capital gains exemption on an actual sale of your shares, it may be possible to trigger a capital gain, claim the exemption and step-up the tax cost of your shares in anticipation of a future sale. This planning will be especially useful if you believe your corporation will lose its status as an SBC in the future.
There are other benefits, as well as potential minor disadvantages, that you should consider if you want to incorporate.
Individual Pension Plan – Instead of contributing to an RRSP, another retirement savings option is available to you as a professional if you incorporate. Under the rules for defined benefit pension plans, an individual pension plan (IPP) can be set up for business owners who are employed and earning employment income. The benefits under an IPP are set by reference to your salary from your PC, and contributions are made to build sufficient funds to fund this defined pension benefit. For many individuals (generally, in their 50s or older), the use of an IPP can allow for greater contributions when compared to an RRSP. Additional benefits of an IPP include the ability to make up for poor investment performance and the possibility of making lump-sum contributions for past service.
Employment Benefits – If you incorporate, you may also be able to take advantage of employee benefits that have preferential tax treatment such as private health service plan benefits and benefits from the use of a leased company car. As a shareholder of your PC, it will be important to ensure that the benefit is received as an employment benefit and not as a shareholder benefit — otherwise preferential tax treatment will be lost.
Additional Compliance – One minor disadvantage of incorporation is that it does mean that you have additional paperwork. This will include preparing a corporate tax return and completing the appropriate tax filings for salaries or dividends paid by the corporation.
Payroll Taxes – Another potential disadvantage is that certain jurisdictions levy a payroll tax on remuneration paid to employees. Therefore, a payroll tax may apply to remuneration paid to employees of a PC.
There are many factors to consider when deciding whether or not incorporation makes sense for you as a professional. The provincial rules for your profession need to be balanced with the tax rules to ensure you benefit from the tax planning opportunities available from incorporation, given the additional costs you may incur. All factors considered, the decision can seem overwhelming, but your legal advisor can help you make the decision that is right for you