RESOURCES

Geransky Strategy

Vendors typically prefer to sell the shares of a business corporation rather than having the corporation sell its assets and buyers usually prefer to buy the assets rather than buy the shares. Consider the hybrid approach example as follows:
  1. Mr. A owns all the shares of Opco.  Opco is a qualified small business corporation (QSBC) under the capital gains deduction (CGD) rules.
  2. Opco is selling assets of $3,000,000.
  3. Opco undertakes a partial share freeze so that Mr. A gets preferred shares worth $800,000 and common shares worth $2,200,000.
  4. Mr. A causes Newco to be incorporated.
  5. Mr. A transfers Opco shares worth $800,000 to Newco and gets back Newco shares worth $800,000 with an adjusted cost base (ACB) of $800,000. He reports a gain on the Opco shares offset by the CGD.
  6. Opco redeems the shares held by Newco for $800,000 by issuing a promissory note. Opco is “connected” to Newco, therefore there should be no Part IV tax other than a share of the refundable dividend tax on hand (RDTOH) refunded to Opco. Consider having the redemption occur prior to the Opco taxation year end wherein they report the following transaction so that not as much RDTOH is available.
  7. Opco pays the note by transferring $800,000 value of target assets to Newco. Opco reports recapture or capital gain on the sale.
  8. Mr. A now owns $800,000 value of shares in Newco which owns $800,000 of target assets.
  9. Mr. A sells the shares of Newco for $800,000 and target assets in Opco for $2,200,000 to Purchaseco.
  10. Mr. A received $800,000 of the sale as a tax free capital gain versus receiving a dividend with tax rates up to 40%.
  11. Purchaseco has target assets worth $2,200,000 with full ACB, shares of Newco worth $800,000 with full ACB and Newco has target assets worth $800,000 with full ACB (other than a possible grind discussed below).  Purchaseco can merge with Newco and now all assets are within Purchaseco.

This does not reduce the income tax within Opco but does allow Mr. A to get his funds from Opco with a better tax result.

Income tax issues
  1. It is unlikely that the general anti-voidance rule (GAAR) will apply to this type of tax planning. The series of transactions described above is similar to transactions implemented in Geransky v. The Queen, where GAAR was found to not apply.  May be more of an issue if Purchaseco is a facilitator, i.e., does not keep the assets.
  2. Section 55 of the Income Tax Act (ITA) should not be a problem on the redemption as no gain is being avoided and the shares held by Newco have full ACB.
  3. ITA 13(7)(e) applies to grind the undepreciated capital cost to Newco for the non-taxable portion of the capital gain if there is a gain on sale of depreciables because of the related parties. This will cause some loss of tax shield for the purchaser.
  4. Subsection 1102(14) of the Income Tax Regulations requires the purchaser to keep the same capital cost allowance class as the vendor where the parties are non-arms’-length.
  5. ITA 14(3) and (5) apply to grind eligible capital expenditures (ECE) to Newco for the non-taxable portion if there is a gain on sale of goodwill and other ECE because of the related parties. This will cause some loss of tax shield for the purchaser.
  6. Watch ITA 84.1 for any non-arms’-length issues between Mr. A and Purchaseco as this could cause the share sale proceeds for Mr. A. to be characterized as dividends.
  7. Watch for RDTOH issues with the deemed dividend on redemption. Newco may have RDTOH to pay.
     
Complexity issues
  1. There can be PST or GST issues (vendor needs to keep Newco shares for 8 months to avoid PST in Newco).
  2. There would be some additional professional fees incurred by the purchaser for the amalgamation of Newco and Purchaseco and recording the various transactions.
Should you require additional information please contact your Chartered Professional Accountant.
 
This income tax advice is given as of January 22, 2016 reflecting current income tax legislation and Canada Revenue Agency administrative practices and interpretations. Subsequent changes in court interpretations or changes in administrative practices or legislation could affect the views expressed at the time.

For discussion purposes only.
 

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