MANDATECORPORATEPERSONALRECOMMENDATIONSCONCLUSION Mandate 1 Plan&Save

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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION

Mandate

Plan&Save

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The Grégoire Family

Desharnais & Associates

TEAM FTahirah Massop – Amyn Damji – Lucie Wei


Mandate

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Address concerns with regards to acquiring Porte et Fenêtre McShane (PFM) and keeping tax consequences to a minimun

Corporate tax issues

Personal tax issues

Recommendations + Other considerattons

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Current Situation

Portes et Fenêtres McShane (PFM)

Mr. McShane

- Established in 1991- $10,000 for 10,000 common shares

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Desired Situation

Portes et Fenêtres McShane (PFM)

Mr. McShane

- Not an acquisition of control due to Jessy being a key employee in PFM

Jessy Grégoire

90% 10%

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Mandate

1| Corporate

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Qualified Small Business Corporation (QSBC) 110.6(1)

1- Canadian controlled private corporation (CCPC)

2- No unrelated party should have owned the shares in last 24 months

3- At the time of sale of shares at least 90% of fair market value (FMV) should be used to earn active business income (ABI)

4- At least 50% of FMV of assets are used to earn ABI in the last 2 years

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Qualified Small Business Corporation (QSBC) - Calculation

2015• $12,590,994 / 15,393,615 = 81.79 %• Do not meet 90% threshold

Solution: Purification Sell off investments and pay off liabilities

2014• $9,644,896 / $10,658,042 = 90.49%

Eligible for lifetime capital gains deduction $813,600

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Corporate Tax Implications 2: Investment Tax Credit (ITC)

First 3 million – Current expenditures • ITC : 35%• Refund: 100%

Excess of 3 million• ITC : 15%• Refund: 40%

Engage in research + development activities

Be careful 3 million may be reduced depending on taxable income earned in Canada

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Corporate Tax Implications 3: M&P Credits

13% tax rate reduction for company on M&P • Engage in manufacturing and processing activities

Better off claming GRR of 13%• Easier

Building Factory• Add cost renovations to ACB• Put in separate class• If greater than 90% use for manufacturing 10% CCA

Manufacturing & Processing Credits

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Administration

Capital Dividend Account (CDA)• Balance of $72,000• Pay out as tax free dividends

Refundable dividend tax on hand (RDTOH)• Pay out 3x RDTOH as dividends = $45,000 • Max dividend refund $15,000• GRIP balance : pay out as eligible gross up at 38%, DTC 6/11 of gross up

Instalments• Tax payable > $3,000• Several ways to calculate

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Notes to Financial Statements

Note 1: Tavel expenses of $42,887• 100% deductible due to employee travel

Note 2: Employee meals of $5,000 per meal• 50% deductible for tax purposes

Note 3: Employee education costs• Related to business• Deductible for corporation• Employees do not have to include in tax return

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Notes to Financial Statements

Note 4: Car benefit (Class 10.1) > $30,000• 500 km personal use – assuming 12 months• 2,500 km work related• Standby charge: 500/1667 x 2% x 45,000 x 12 = $3239• Operating cost benefit: Lesser of • 1- $0.27 x 500 = $135• 2- 50% of SC = 1649

Total income inclusion: $3,374

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Mandate

2| Jessy Grégoire

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Income Splitting

1- Employ Nick and pay a reasonable salary• Must be reasonable or cannot be deducted by Ms. Grégoire’s

company• Salary will allow for RRSP contributions

• Can contribute 18% of earned income or maximum of $24,930

2- Can also pay dividends up to $35,553 per year• CDA account tax free dividends can be paid out

Jessy makes $240,000Husband no longer works Consider Income Splitting

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Income Splitting

3- Jessy can contribute to Nick’s RRSP• Jessy can deduct contribution• Contribution belongs to Nick

4- Jessy can make a loan to her husband• Reasonable repayment terms, prescribed rate, paid within 30 days of

year end

5- Jessy pays all family expenses• Use Nick investment income taxed at lower tax rate

Pay out a mix of salary and dividend to husband

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Ms. Grégoire - Credits

1- Spousal amount• $11,327 – Nick’s Net income

2- Family tax cut• Currently eligible for $2,000• One spouse makes over $150,000, other makes $0• Couple is married with children under 18• With income splitting family tax cut may be reduced to 0.

3- Child care benefit – 3 year old child• Can receive additional funds for child should be given to Nick

Mr. Grégoire can use his personal tax credits with income splitting

Beware of income attribution to spouse when giving Nick money 74.1

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Ms. Grégoire

4- Registered Education Savings Plan• Can contribute to your children’s RESP• Maximum lifetime limit per child is $50,000• Can receive additional amounts from

• Canada $500• Quebec $250

• Contributions are not deductible, however, when the amounts are given to the children:• Will be taxed in the child’s hands• Method of income splitting

• Must distribute funds to children before age 31

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Ms. Grégoire

5- For post secondary education, can receive per child:• 118.5 Tuition maximum $5,000 x 15% = $750• 118.6 Textbook $65 x 8 x 15% = $78• 118.6 Education $400 x 8 x 15% = $480• 118.02 – Travel to school – Public transportation

for children under 19 15% of total paid

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Ms. Grégoire

Mortgage interest• Mortage interest is not deductible• Should use investments to pay off mortgage

• Use income for investments and then the interest will be deductible• Investments must have an expectation of profit

Allowable business investment loss• Investments that are sold at a loss

• If the company is a small CCPC that carries on active business in Canda• Then losses become an allowable business investment loss when the shares are

sold• Can be applied against any income

• If not a CCPC • Loss will be a capital loss – applied against capital gain.

• Will reduce future lifetime capital gain deduction

Investments – Interest & Broker fees = deductible

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Mandate

3| Recommendations

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Purchase of PFM - Funding

20% as a donation to her daughter is not deductible for Catalina Beauty• Will be considered a gift at FMV, will have immediate tax

consequenses

80% interest bearing loan

• Jessy will have to make interest payments within 30 days of year end

Not the best optionLet’s look at other options

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Can sell shares in Catalina Beauty to get the funds and make a personal loan

• Catalina indicated she does not want to sell her business

Not viable

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Can give a loan through the company• ITA 15(2) Shareholder loan as Jessy and Catalina are

related• Must have bonafide repayment terms ITA 251(2)• Loan must be used to:• 1) Buy a house X• 2) Buy a car for work X• 3) Buy shares in Catalina Beauty X

Not viable:Jessy will have to include the full amount in her income

Higher tax consequences

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Catalina can acquire the shares in PFM• Will be an acquisition of control• PFM will have a deemed year end• PFM will lose one year of loss carry overs• Will have to involve Mr. Moore

Not viable

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1- Outright Gift• Shares will deemed to be disposed of at fair market value• Will have immediate consequences for Mr. McShane• Not viable

2- Instalment Sales• Can defer tax consequences on capital gains• Cannot defer tax consequences on recapture• Jessy will require the funds

3- Can do an 85(1) Rollover to a Holdco• Will need to create another company = expensive• Can allow for crystalization of LTCGD

Beware of kiddie tax 120.4 84.1 Deemed dividend, 74.1 attribution, 74.4 attribution

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4- Trust• Will have immediate tax consequences• Normally created for estate planning

5- 86 Reorganization• Can bring Catalina into the company and defer any tax

consequences• Do not have to create another company• Will not have to sell investments to purify and crystallize

Recommendation = Combination of 86 Reorg + Trust

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How to Do 86 Reorganization

1- Mr. McShane exchanges 100% of his common shares for preferred shares in PFM

2- Mr. McShane will take consideration

• Boot = PUC of PFM shares = $10,000• This will prevent 84(3) redemption dividend when Mr. McShane is redeeming his common shares

3- Preferred shares will be

• Dividend bearing• Voting• Redeemable and retractable• Have a price adjustment clause• Non participating

Value of the preferred shares will be FROZEN at the LSC of the shares Important for estate planning as deemed to dispose assets at FMV upon

death

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How to Do 86 Reorganization

4- Open a new class of common shares

• Will have no value and can be transferred at a nominal value

5- Mr. McShane and Jessy should open an inter vivos discretionary trust• Both have children, can plan for their futures

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How to Do 86 ReorganizationMr. McShane can place 10% of common shares in trust and sell 90% to Jesse

• Make his children beneficiaries

Jessy can place 30% of her shares into the trust

• Make her 3 children beneficiaries• Growth attributed to them

Intervivos

• Still alive when created• Testamentary upon death

Discretionary

• Both Mr. McShane and Jessy can change the benefiaries of their respective trusts

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Trust

Taxed at 29%

Must file a T3 trust return

Deemed disposal at FMV every 21 years

All beneficiaries will be eligible for LTCGD of $813,600

Beware of 74.1 Attribution and 120.4 kiddie tax

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Trust

Trust

Beneficiaries:- Children- Grandchildren- Spouse- Holdco

Trustee:3rd party: accountant or lawyer

PFM

90% of growing common shares

Mr. McShane

100% Preferred Shares – Frozen Value

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Other Considerations 1- Mr. McShane can deduct any interest paid on investments made in the stock market and loan for building• If he has the intention of makin money• Will have to include any interest or dividends received

2- Mr. McShane should make timely payments on building for the loan as he pledged his patent

3- Bonus from McShane

• 0-180 days = include in income• 180 days – 3 years = cash basis• 3 year = deferred salary

4- Catalina’s mother should pay out CDA tax free and make use of the RDTOH balance of $483,325• Can pay up to $4,000,000 eligible• If CCPC wil pay 38% - 10% - 17% = 11% federal + 8% provincial = 19% total tax

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Mandate

4| Conclusion

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Summary

Addressed concerns with regards to acquiring Porte et Fenêtre McShane (PFM) and keeping tax consequences to a minimun

Corporate tax issues

Personal tax issues

Recommendations + Other considerattons

36


Mandate

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Desharnais & Associates

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MANDATECORPORATEPERSONALRECOMMENDATIONSCONCLUSION Mandate 1 Plan&Save