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.