About 14 years after I joined RBC, I sat in a spacious corner office here in Prince George. It was an oversized room which I had aspired to for several years, and had a huge desk, a beautiful live plant in the corner, some artwork the bank and purchased from one of my former clients, and a view of Tabor Mountain. I must admit, it was difficult not to feel a little too much sense of my own worth to the firm.
I was a manager, but not of personnel, so it was most definitely not my job to boost and uplift, but to protect the bank by ensuring that we made good lending decisions. Each morning I received a stack of files and electronic loan requests from various bankers in the region and had to evaluate them, critique the lending skills of the officers involved, and try to find the right balance between risk and opportunity. In short. I was a financial historian and prognosticator on a regional scale. It was my specific daily job to criticize.
They say: "it's easy to criticize," and that's true. The job became routine after a while -- examining the same financial ratios, evaluating similar sets of criteria for industries our borrowers tended toward, dealing with similar sets of management strengths and weaknesses, and so on, day in a day out. We quickly got to know which lenders knew their jobs well and which were just throwing something at the wall to see if it would stick. Worst of all, we risk managers were deliberately cloistered those we viewed as the rosy-minded sales staff.
One day, when I was deeply entrenched in my world of being a financial critic, I received a phone call from a new guy at an outlying branch, querying me about a financial procedure. I was working a big file, and quickly became impatient with him - flat out rude actually. It was shop talk, and strictly internal, and the bantering was caustically humorous and arguably harmless, or so I thought.
As it turned out, after several caustic quips on my part, the voice on the other end of the phone was not a banker at all, but a client who had somehow received my phone number. Ahh... oops.
Once I realized I was using my inside voice for an outside client, I profusely apologized. I phoned him again the next day to reiterate my newfound humility. Complaint management on the receiving end is a whole 'nuther skill.
Two guys you want on your side are your lender and your taxman. Here is another installment of some tax planning strategies for people contemplating a business sale.
The Safe-Income Strip
As the Chief Justice of the Supreme Court of Canada once said "in the absence of a specific statutory bar to the contrary, taxpayers are entitled to structure their affairs in a manner that reduces the tax payable." The logic behind the Safe-income Strip is that you transfer assets on a tax-deferred basis from the company you are selling to a holding company. This reduces the value of the sale company and therefore reduces the capital gain that results on the sale of its shares. The portion of assets transferred to your holding company will not be taxed until those funds are removed from the holding company.
The portion of the proceeds that can be received tax-free into your holding company will depend on a complex tax calculation relating to the active corporation's prior year's retained earnings for tax purposes. This portion of the tax on the sale proceeds received in a holding company is deferred until either death or such time as they are withdrawn during your lifetime and taxed as a dividend. Although dividend tax rates are generally higher than capital gains tax rates, it is in the tax deferral on a portion of the capital gain where you find the main advantage. This can last as long as the funds are retained in the holding company.
You may also consider life insurance, using the funds in the holding company as a tax-effective vehicle to minimize the taxes on the holding company shares at death and withdraw monies from the holding company on a tax-free basis for beneficiaries.
Generally, the dividends paid between Opco and Holdco (connected corporations) are tax-free. However, if your corporation pays a dividend greater than safe income, that dividend would be re-characterized to be a capital gain resulting in an immediate tax liability. Therefore great care must be taken in calculating safe income and the exact amount of the dividend that can be paid tax-deferred. To be extra cautious, some tax professionals recommend breaking dividends up in to several.
Other Tax Minimization Strategies
If the capital gains on the sale are expected to be substantial, speak to your qualified tax advisor regarding other advanced tax strategies that can be considered to reduce and/or defer some of your capital gains tax.
This article is not meant to be used as individualized tax or legal advice. Readers should consult their own tax or legal professionals before implementing a strategy.
Mark Ryan is an investment advisor with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected] or 250-960-4927.
