Event 8 of the 12Event Planning Model
Corporate Reorganizations & Advanced Structuring
Getting Ready to Step Away
Reshape ownership early so the exit can go smoothly.
How TaxOnTax helps at this event
The tax planning and calculations for a reorganization, and the tax elections and filings. Your lawyer drafts the share terms and corporate records.
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Why this matters
Here is the cruel twist that caught Bridgette: most of what determines the tax outcome of a sale is locked in long before the sale happens. Whether your company qualifies for the most valuable tax break available to business owners, whether the ownership is arranged to spread the gain across a family, whether the business can be handed to a child without a punishing bill: all of these depend on a structure that usually has to be in place for years before the exit. By the time an offer lands on your desk, many of the best moves have quietly expired. Preparation isn’t a nice-to-have here. It is most of the game.
It can help to flip the usual mindset. Most owners pour their energy into trying to grow the value of the business by another ten percent. That is worthwhile, but on the day of the exit, keeping ten percent more of the value you already have, simply by preparing well, is worth exactly as much, and is often far more within your control. The last great act of building a business is arranging to keep what you built.
What most business owners get wrong
Because the exit happens only once, owners have no chance to learn from their own mistakes, which makes learning from others’ mistakes all the more valuable. The recurring ones:
- They start far too late. By the time an offer arrives, or retirement looms, the structure is set and the best moves (purification, a freeze, multiplying the exemption) needed years that no longer exist. Preparation that begins three to five years out captures what last-minute scrambling cannot.
- They’ve never heard of the exemption. Astonishingly often, owners reach the brink of a sale without knowing that a large part of their gain could be tax-free, or discover that their company doesn’t qualify, and that it’s now too late to fix.
- They let success disqualify them. The company that diligently piled up surplus may have disqualified itself from the exemption by becoming too much of an investment account. Good saving, never cleaned up, becomes an obstacle at the worst possible moment.
- They purify without checking the numbers. Moving investments to a holding company by dividend, without first confirming the amount is within what the rules treat as safe, can turn a routine cleanup into a taxable gain.
- They count on a multiplied exemption before testing it. A trust with several beneficiaries is a possibility, not a promise; each family member has to be tested first, and the answer can differ from one person to the next.
- They plan for tax savings alone. A reorganization with no business or family purpose written down before the first step invites a challenge under the broad anti-avoidance rule, and a penalty can follow.
Your simple checklist
- Have you begun planning your exit years, not months, before you expect it?
- Do you know whether your company qualifies for the lifetime exemption?
- If it’s carrying too many passive investments, have you begun purifying it?
- Is your ownership arranged so the exemption could be multiplied across the family, after each person is tested?
- If you hope to pass the business on, have you considered a freeze, early?
- Is the purpose of each reorganization step written down before it happens?
- Has each family member been tested before anyone counts on their exemption?
- If a family trust is involved, have you marked its twenty-one-year date and planned for it?
Questions to bring to your Discovery Meeting
- Do my shares qualify as qualified small business corporation (QSBC) shares for the lifetime capital gains exemption (LCGE), or does the company need purification first?
- Can our reorganization or estate freeze be done as a tax-deferred rollover under section 85 or section 86 of the Income Tax Act?
- Should a discretionary family trust hold growth shares so that more than one family member could claim their own LCGE on a future sale, and has each beneficiary been tested first for tax on split income (TOSI), alternative minimum tax (AMT), and corporate attribution?
- When will our family trust face a deemed disposition under the 21-year rule, and what is our plan for it?
- Would a purification dividend to a holding company stay within safe income, or could subsection 55(2) of the Income Tax Act turn it into a capital gain?
- Could any step of our plan be challenged under the general anti-avoidance rule (GAAR), and should we disclose it to avoid the penalty?
- Is our estate freeze supported by a formal valuation of fair market value, and do the share terms include a price adjustment clause?
The TaxOnTax™ Insight
An exit is won or lost in the quiet years before it, not in the room where the deal is signed.
Excerpted from Chapter Eight, “Getting Ready to Step Away”, of TaxOnTax™: The 12Event Planning Model, second edition, by Derik Godbout. Lightly trimmed for this page; the full chapter adds a worked example and the before-and-after steps.
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TaxOnTax™ Advisory Ltd. is a tax planning, accounting and executor advisory practice that also provides plain-language tax education. Derik Godbout is a PBA, CEA and DMA, Personal Tax Services Specialist™, not a CPA, lawyer, registered investment adviser, or licensed insurance professional. Nothing on this site constitutes personalized tax, legal, investment, or insurance advice. Always consult a qualified professional before acting on any information.