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The following case studies demonstrate examples of how Friedlan Law has helped family businesses achieve their tax and financial goals.
CASE STUDY 1: Protecting Assets and Benefiting from the Capital Gains Exemption
A client had significant cash in the business that was not required to operate the business. The client’s goal was to purify the operating company so that when the company was sold, the vendor could claim the capital gains exemption.
The solution was to set up a new company owned by the client so that excess cash could be removed and placed in a new company on a tax deferred basis, carry out an estate freeze of the operating company, issue new nominal value common shares of the operating company to a newly created family trust. The beneficiaries of the trust would include the client, other family members and the new company The new company was also able to loan money back on a secured basis to the operating business at no interest.
As a result, the client was able to access the cash for investments in the new company while ensuring that shares in the operating company could qualify for the capital gains exemption on the sale of the company. This structure allowed cash to be moved tax- free to the new company as well as multiplication of the capital gains exemption and protection of the cash and investments from claims of creditors in the operating company.
CASE STUDY 2: Tax Effective Intergenerational Transfer of Wealth
An individual held a portfolio of securities, which generated a significant amount of investment income. The investor anticipated that the portfolio would increase in value over time and that the gains would be taxed on his death assuming that the securities were not sold. His goal was to implement a tax-saving strategy that would shift accrued gain in the portfolio along with future increases in its value to the next generation.
Friedlan Law recommended implementing a “wasting” estate freeze. The securities were transferred by the client to the new company on a rollover (tax-free) basis in exchange for a demand promissory note and voting preferred shares with an aggregate fair market value equal to the fair market value of the securities. A family trust was established for the individual’s children and other descendants acquired. nominal value common shares. Over time, the preferred shares would be redeemed by the new corporation.
As a result, the client will receive the investment income as taxable dividends, and the accrued gain in the preferred shares will be shifted to the common shares held by the trust. Future increases in value of the portfolio will be reflected in the common shares held by the trust. None of these gains will be realized on the client’s death. Friedlan Law also prepared two new wills for the individual in order to minimize the estate administration tax (probate fees) payable when a will is probated in Ontario- one will dealt with assets that required probate in order to be dealt with by the estate trustees and the second will dealt with assets that did not require probate. Substantial tax savings can be achieved with this arrangement.
CASE STUDY 3: Optimizing Tax Benefits of Buying and Selling a Business
When an individual minority shareholder in an existing company wanted to buy out his business partner, Friedlan Law incorporated a new company to acquire the shares of the business partner. On the advice of Friedlan Law, the new company borrowed funds from a financial institution and used those funds to buy the shares. Following the purchase, the new company and the operating company were amalgamated. This allowed the interest on the loan to be deducted from the amalgamated company’s business income.
Friedlan Law then implemented an estate freeze in which in the owner received on a tax-free basis redeemable, retractable voting preferred shares with a fair market value equal to the fair market value of the operating company at the time of the freeze. The common shares with a nominal value were then issued to a family trust whose beneficiaries included the business owner’s children and spouse. On a subsequent sale of the shares of the operating company, considerable tax was saved because he was able to use his capital gains exemption as well as the exemption of the children and spouse.
This structure generated multiple benefits for the client: The minority owner was able to borrow money to buyout his partner with the interest expense being deductible, and on the sale of the company the capital gains exemption of the owner-manager and family members was claimed resulting in considerable tax savings.