D&A
TAX CONSIDERATIONS FOR
THE GRÉGOIRE FAMILY
Desharnais & Associates
Marc-André Benoit
Marianne Boiteau
Patrick Lorange
January 10th, 2016
AGENDA
D&A
• Executive summary
• Acquisition of PFM
–
–
–
–
Valuation
Assets v. Shares
Optimal Structure
Financing
• Corporate taxes
• Personal taxes
• Q&A
EXECUTIVE SUMMARY
D&A
• 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
BUSINESS VALUATION
COME Method
$'000
EBIT
+ Depreciation
+ Amortization
EBITDA, as reported
Multiples
Conservative - 4x
Base case - 5x
Aggressive - 6x
FINANCING
PFM DEAL
D&A
FY15
1,021
967
393
2,381
9,524
11,905
14,286
CORPORATE TAX
PERSONAL TAX
BUSINESS VALUATION
D&A
Net Asset Method - PFM
$'000
Current assets
Non-current assets
- Intangible assets
- Investments (in HoldCo)
FMV
3,883
10,549
- 2,854
- 1,843
- Liabilities
Net asset value
- 2,417
7,318
Base case COME
Average
Valuation of PFM
11,905
9,612
9,500
• Conclusion: Equity value of PFM is $9,500,000
FINANCING
PFM DEAL
CORPORATE TAX
PERSONAL TAX
SALE OF ASSETS v. SHARES
SALE OF ASSETS
D&A
SALE OF SHARES
Choice 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
CAPITAL GAIN DEDUCTION
D&A
• 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
PURIFYING THE ASSETS
• Incorporate a HoldCo
• Use S85.1 to rollover
assets until 90% rule
met
D&A
Mr. McShane
– Investments: $1,843K
• Before: 84%
• After: 96%
• 90% rule met, PFM is
a QSBC.
• Can use CGE
FINANCING
PFM DEAL
PFM
McShane
HoldCo
S85.1 Rollover
CORPORATE TAX
PERSONAL TAX
SALE OF ASSETS
D&A
Scenario 1 - Sale of assets
$'000
Cash for distribution
- ACB
Dividend under S54
FY15
8,787
10
8,777
- CDA dividend
Deemed taxable dividend
2,261
6,515
Grossed up (1.25x)
DTC
Net dividend
8,144
896
7,248
Tax payable (45%)
-
3,262
Details on this calculation available
FINANCING
PFM DEAL
CORPORATE TAX
PERSONAL TAX
SALE OF SHARES
D&A
Scenario 2: Sale of shares
$'000
FY15
FMV of 100%
9,500
90% of FMV
8,550
ACB
Capital gain
9
8,541
CGD
Net capital gain
Taxable capital gain
Potential tax impact (45%)
813
7,728
3,864
1,739
McSHANE: PREFER SALE OF SHARES
FINANCING
PFM DEAL
CORPORATE TAX
PERSONAL TAX
FINANCING THE ACQUISITION
D&A
• 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
SOURCES OF FINANCING
D&A
• 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
SOURCES OF FINANCING
D&A
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
STRUCTURE
D&A
Mr. McShane
Jessy Grégoire
McShane HoldCo
BuyCo
PFM
FINANCING
PFM DEAL
CORPORATE TAX
PERSONAL TAX
STRUCTURE
D&A
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 $1
3. Using S85.1, McShane transfers remaining
assets to HoldCo
4. HoldCo sells assets to BuyCo for the following:
1. 10% of common shares of BuyCo
2. BOOT of $10K = ACB = Elected Amount
3. Convertible Preferred shares for the remaining
FINANCING
PFM DEAL
CORPORATE TAX
PERSONAL TAX
CONSEQUENCES OF STRUCTURE
D&A
• 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
RECAP OF OPTIMAL STRUCTURE
Mr. McShane
D&A
Jessy Grégoire
Owns 100%
10% CS
Pref Shares
McShane HoldCo
Incorporates
BuyCo,
Owns 90%
BuyCo
PFM
FINANCING
PFM DEAL
CORPORATE TAX
PERSONAL TAX
ACQUISITION OF CONTROL
D&A
• 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 on
2. Same or similar line of business
3. 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
–
FINANCING
On non-depreciable assets first to avoid recapture
PFM DEAL
CORPORATE TAX
PERSONAL TAX
INCLUSIONS & DEDUCTIONS
D&A
• 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
INCLUSIONS & DEDUCTIONS
D&A
• 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
INCLUSIONS & DEDUCTIONS
D&A
• 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
INCLUSIONS & DEDUCTIONS
D&A
• 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
INCLUSIONS & DEDUCTIONS
D&A
• 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
JESSY AND NICK PERSONAL TAX
D&A
• 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
INCOME SPLITTING
D&A
• 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
CHILD CARE EXPENSES
D&A
• 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
RESP
D&A
• 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
MCSHANE’S PERSONAL TAXES
D&A
• Tax opportunities:
1. Invest in another QSBC in the prescribed time in
order to defer a portion of the CG
2. CG Reserve available if Jessy makes payments
within 5 years (one fifth deductible every year)
FINANCING
PFM DEAL
CORPORATE TAX
PERSONAL TAX
EXECUTIVE SUMMARY
D&A
• 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 FOR
THE GRÉGOIRE FAMILY
Période de questions
January 10th, 2016
APPENDIX A: CASH AVAILABLE
D&A
Scenario 1: Sale of Assets
Consideration Business Investment
$'000
received
income income
CDA
Opening balances
Inventory
Accounts receivable
Prepaid expenses
Intangible assets
Tangible assets
Assets transferred
Net liabilities
Accounts payable
Short-term debt
Long-term debt
Cash
Net liabilities
2,089
711
541
2,854
5,853
12,047
-
1,388
Cash for distribution
8,787
PFM DEAL
72
-
-
1,427
762
2,189
1,427
762
2,261
15
-
15
407
760
1,250
544
1,873
Tax payable
FINANCING
2,089
711
541
3,341
RDTOH
CORPORATE TAX
PERSONAL TAX
APPENDIX B: MCSHANE’S TAXES
D&A
• 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.
FINANCING
PFM DEAL
CORPORATE TAX
PERSONAL TAX