Deferring Tax to the Next Generation

No doubt many independent business owners have seen their company's worth decline in the last year. However, chances are very good that the value will rise again. If the company owner thinks that the rise will be substantial over the next few years, there is a wonderful opportunity to take advantage of a unique tax savings and defer the capital gains tax on the projected growth to the next generation.

The method is known as an "estate freeze." Essentially, the "freeze” caps the share price of the owner. Any future growth in the share price is passed on to the next generation of shareholders.

The method is as follows: the owner of the business gives his common shares to the company and takes back an equal amount of preferred shares. These preferred shares can issue dividends to the owner, thus allowing him livable income. Meanwhile, the common shares are issued at nominal value to the future owners, whether it may be family members, employees, etc. From that point forward, growth in the company is accrued to the new shareholders. Should the owner die, calculation of the capital gains tax is based on the value at the time of the freeze, not the accrued, increased value. This can provide a substantial savings on capital gains. Numerous companies have become financially strapped having to pay large capital gains taxes. The estate freeze can greatly reduce that tax bite.

Some companies have already done "re-freeze" while others have added trusts that name beneficiaries who will own the common shares in the future. All these moves are intended to reduce capital gains taxes, now and in the future, as much as possible.

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Annual Requirements of your Canadian Corporation

When your corporation was first established, you were obligated to file certain documents including the Articles of Incorporation. However, in order to maintain your status whereby your corporation benefits from the Canada Business Corporations Act (CBCA), there are certain necessary requirements that must be fulfilled on an annual or periodic basis.

Every registered corporation is responsible for filing an Annual Return. The information contained in this return confirms that your corporation is complying with certain requirements, as outlined when you filed for incorporation. Within 60 days of the corporation's anniversary, the annual date must be filed. The anniversary date appears on the corporation's Certificate of Incorporation. Any of the company's directors, or an agent authorized by the directors, may sign and file the Annual Return.

It is imperative to maintain the good standing of your corporation. Failure to file your Annual Return may result in the company's dissolve by legal order.

If your corporation should move to a new address within the same province or territory, this address change must be registered with the governing agencies within 15 days of the move. Similarly, a change of mailing address of the corporation (not necessarily a physical move of the company) must also be registered. If your corporation moves to a different province or territory, you must amend your Articles of Incorporation.

Changes to the Directors of the corporation must also be registered. These changes include:

• Appointment of new directors;
• End of term of a director;
• Change of address of a director.

It is important to know that the names of a corporation's directors are public information and, therefore, the information must remain current. If the number of directors changes from the original Articles of Incorporation, this change must be registered.

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