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The following article will appear in an upcoming edition of the HLA Journal.
One wouldn’t think that entering into a shareholder agreement should have anything to do with the availability of the $500,000 small business deduction for a corporation, but in fact such an agreement could require the corporation to share the deduction with another that is otherwise unrelated.
In my article on multiple classes of shares, I described the difficulties that can arise where shareholders subscribe for shares of a class in the capital of a corporation at different times and at different prices per share. How does one solve the problems that can arise where shareholders own shares with tax costs that differ from the paid-up capital (“PUC”) of their shares for the purposes of the Income Tax Act (Canada) (the “Act”)?
The following article appeared in a recent edition of the Hamilton Law Association Law Journal.
Why have separate classes of shares in the capital of a corporation for new investors? Creating separate classes of shares creates its own problems both from a tax and non-tax perspective. Nonetheless, for tax purposes it is sometimes desirable to have different groups of investors subscribe for different classes of shares in the capital of a corporation.
You need to purify a corporation of its bad assets so that the corporation’s shares will be qualified small business corporation shares for the purposes of the $750,000 capital gains exemption. Let’s assume that you are confident about the values of the assets involved, so that you can leave bad assets with a value equal to exactly 10% of the total gross value of all assets of the corporation. How do you calculate the amount to remove, given that what you remove reduces both the gross value of the bad assets and the gross value of all of the assets of the corporation? The following formula seems to work:
In Exida.Com Limited Liability Company v. The Queen, 2010 FCA 159, the Federal Court of Appeal dismissed the appeal of the taxpayer from the decision of Justice Woods (see “Contradiction“). The Federal Court of Appeal’s reasoning is surprising and, perhaps, disturbing.
Assume that A and B, who deal at arms length, own 55 and 20 common shares in the capital of Opco respectively. A and B also own 95 and 5 common shares in the capital of Holdco respectively. Assume that B’s tax adviser suggests to her that she can sell her common shares in the capital of Opco to Holdco for a purchase price equal to $400,000 cash. What could possibly go wrong? See Emory v. The Queen, 2010 TCC 71, for the answer to that question.
I’ve seen a number of cases where a family member consents to be a director of a corporation—exactly why nobody seems to know after the fact—and then ends up being assessed for unremitted source deductions. The family member might be uneducated and barely able to speak English, but that won’t stop the assessments. The CRA and the Ministry of Revenue are unsympathetic. The courts are less cold-blooded it seems.
Don’t forget the triangular amalgamation. While these types of amalgamations are more typical in the public company context, they can be a useful tool for private company deals too.