Tax Considerations in Shareholders Agreements. Evelyn R. Schusheim Cummings Cooper Schusheim Berliner LLP

Transcription

1 Tax Considerations in Shareholders Agreements Evelyn R. Schusheim Cummings Cooper Schusheim Berliner LLP

2 Tax Considerations in Shareholders Agreements Survivorship Arrangements Structuring the Buy-Sell on Death Dividend Stop Loss Rules Control of the Corporation Implications Traps to Avoid

3 Assumptions A has died FMV of A s shares $4,000,000 ACB of A s shares $1.00 PUC of A s shares $1.00 Proceeds of Insurance $3,000, income tax rates (Ontario with surtaxes) - capital gains 23.20% - dividends-non-eligible 32.57% - dividends eligible 26.57%

4 Cross Purchase by Survivor A s Tax Liability A s capital gain 3,999, ,000 Estate/BTax Liability ACB to Estate 4,000,000 B s Capital dividend 2,500,000 B s taxable dividend 1,500,000 B s tax - $488,550 Tax payable 928,000 $488,550

5 Purchase for Cancellation Grandfathering Applies A s Tax Liability A s capital gain 3,999,999. (23.20%) 928,000 Estate s Tax Liability ACB to Estate 4,000,000. Capital Dividend 2,500,000. Taxable dividend 1,500,000. (32.57%) 488,550 Return of PUC 1. Estate capital loss 3,999, (6) carry back 3,999,999. (928,000) Total to Estate 4,000,000. Tax payable

6 Dividend Stop Loss Rules The loss is reduced by the lesser of: (a) (b) capital dividends received by the estate; and loss otherwise determined minus taxable dividends received by the estate minus 50% of the lesser of the capital gain on death, and the estate s loss otherwise determined Loss not reduced if: (a) (b) 5% ownership test; owned at least 365 days before dividend paid

7 Dividend Stop Loss Rules Calculation The loss is reduced by the lesser of: (a) capital dividends - $2,500,000; and (b) loss ($3,999,999) minus taxable dividends ($1,500,000) (i.e. $2,500,000) minus 50% of the lesser of the capital gain on death ($3,999,999) and the estate s loss ($3,999,999) = $2,000,000 Loss reduced by $500,000

8 Grandfathering Rules Written Agreement Agreement in writing before April 27, 1995 Insurance can be acquired after that date No amendments to agreement possible Use supplementary agreements Can lose grandfathering status if corporate reorganization changes shares

9 Grandfathering Rules Insurance Shares must have been owned by the individual on April 26, 1995 Disposition must be to the corporation redemption or purchase for cancellation On April 26, 1995 the corporation was a beneficiary of a life insurance policy on the individual or spouse of the individual It is reasonable to conclude that a main purpose of the insurance was to fund the redemption in whole or in part Must show an intention to redeem/purchase the shares with the proceeds of insurance Shares received on ss. 51, 85, 86 and 87 reorganizations are same as old shares

10 Purchase for Cancellation Effect of Stop Loss Rules A s Tax Liability A s capital gain 3,999,999. (23.20%) 928,500 ACB to Estate 4,000,000. Capital Dividend 2,500,000 Estate s Tax Liability Taxable dividend 1,500,000 (32.57%) 488,550 Return of PUC 1. Estate capital loss 3,999, (6) carry back 3,500,000 (812,000) Total received by Estate 4,000,000. Tax payable 116, ,550

11 Shareholders Agreement No Grandfathering Considerations Will the rollover to the spouse apply? Is any capital gains exemption available? Did the deceased have capital losses? Can taxable income be spread over several lower tax-rate beneficiaries?

12 Shareholders Agreement No Grandfathering Must be flexible. Allow estate to benefit from rollover to spouse. Allow estate choice of purchase for cancellation or cross-purchase or combination. Clause permitting tax advice to be obtained.

13 Deductible Life Insurance Premiums Paragraph 20(1)(e.2) Where policy pledged as collateral to a financial institution As security for an amount borrowed for the purposes of gaining or producing income. Only for term portion of premium

14 Control of the Corporation Implications Private corporation and Canadian controlled private corporation Small business corporation shares capital gains exemption Arm s length Affiliated corporations and associated corporations Superficial losses Part IV tax Controlled foreign affiliate

15 Control of the Corporation Paragraph 251(5)(b) and ss. 256(1.4) a right under a contract, in equity or otherwise, immediately or in the future, absolutely or contingently to acquire, shares or control the voting rights of such shares to cause the shares to be redeemed To cause voting rights to be reduced shall, be deemed to have the same position in relation to control of the corporation as if that person owned the shares at that time

16 Control of the Corporation Paragraph 251(5)(b) and ss. 256(1.4) If apply parties in same position as if option had been exercised Exception for death, disability or bankruptcy Don t apply to Right of First Refusal or Shot-Gun arrangements Will apply to: Put/call options (except if arise on death) Unrestricted options to purchase or sell Sale triggered by termination of employment Default provisions e.g. failure to make loan or provide guarantee