Winding Down A Business

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There are 2 prominent initiatives driving consideration of winding down a corporation:

1. First, retirement/capitalization on investment; sale to third party; or
2. While still operating, a desire to reduce complexity and possibly to merge holding companies with operating companies to result in fewer tax filings and simplification of administration.

These types of initiatives frequently arise from family maturation, change in business plans or maybe even declining business.

But regardless, many enterprises have complex structures of “tiered” corporations frequently determined by estate planning or for the purpose of segregating potential liability. The relevance of these related corporations should be seriously considered before the desire to simplify prevails over better business structure planning.

It’s natural to think of simply “shutting down”. Simple as that may seem, that will not stop government filing requirements, costs to complete tax returns and continual notices from various levels of government, sometimes rather costly as the result of the failure to file.

So we’ve counseled clients to consider amalgamations between and among holding companies and operating entities to result in just one corporation and therefore just one set of filings. Continuing a corporate existence to take advantage of corporate tax rates/income splitting and banking relationships should be considered. It is not infrequent that corporate structures have been established in a multitude of jurisdictions necessitating the bringing of a corporation from one jurisdiction (say, for example, the federal jurisdiction) into the jurisdiction of another company (say, an Ontario company).

One must also assess the effect of an amalgamation relating to liabilities. Remember that whatever were the assets and liabilities of each pre-amalgamation corporation automatically become the assets and liabilities of the post-amalgamated corporation.

There are admittedly certain savings and tax benefits, but at the same time before simply proceeding, serious consideration should also be given to the liability component of the effect of amalgamation.
We’d be pleased to assist you in your consideration.

Application for “Probate” – Part II

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In a recent matter, the issue of an Application for Probate (technically, an “Application for the Appointment of an Estate Trustee with Will”) involved some extraordinary complications given that the Deceased died in the United States where he had resided for some lengthy period of time leaving only an asset in Ontario generating significant revenues for the Estate well into the future.  However, as the Deceased, in his Will, had designated his spouse (also in the U.S.) to be his Personal Representative, the complexity related to the appropriate Application for Probate in Ontario.

In Ontario law, Ontario assets are not subject to the authority of any foreign jurisdiction or any foreign Personal Representative or Executor.   Ontario assets requiring Probate, require that Probate to be in Ontario.  In this case, the desire of the Deceased’s family was to have the Ontario revenue-generating asset not subject to Canadian withholding taxes as would occur if the money were to be forwarded to the Widow in the United States.  Instead, the family sought to have one of the children, a Beneficiary and a resident of Canada, apply for the appointment Order which would result in a Canadian residency of the Estate for the purposes of the Ontario asset.

In the usual case, the Application to deal with the Ontario asset by the U.S.-resident Widow would be made by the same Personal Representative (Executrix) as was appointed in the foreign jurisdiction (called an “Ancillary Appointment”).

But not so fast in this case.  If the Widow were to make that Application in Ontario, the revenue stream to the Estate in the U.S. would be subject to the 25% Canadian withholding taxes.  In the case as presented, that was potentially $250,000 per year in taxes, enough of an incentive to consider alternatives.

An Application was filed on behalf of the Canadian resident Beneficiary after the Widow renounced in the U.S. (resigned, leaving no Personal Representative anywhere). The Application was rejected by the Court on the basis that there had been “Probate” in the U.S. and either the Widow should seek Probate in Ontario or if the Canadian Beneficiary Applicant were to be appointed, there would have to be good reason for that Court Order beyond simply the wishes of the Applicant or even the family.

The message:  each Estate has its own particular quirk yet all Probate Applications are fixed in forms prescribed by Court Rules.  Squeezing a “square box” particular Estate into the Court required “round hole” forms is never easy, extremely time consuming and not always successful.

We strongly recommend careful planning for the administration of an Estate before obtaining Court Orders, in any jurisdiction, which can be binding on other Courts.

Application for “Probate” – Part I

http://www.dreamstime.com/royalty-free-stock-image-estate-planning-attorney-law-office-wills-services-trusts-probate-image42426556At its simplest, “Probate” involves a Court Order appointing someone as the “Executor” (now called an “Estate Trustee”) of an Estate. Usually the Applicant is named in a Will, but if there is no Will, then the Applicant may be any person not disqualified under current jurisprudence. The objective of the appointment of an Executor (again, now, the Estate Trustee) is to carry out the wishes of the Deceased under his Will if he had one and to administer the Estate and its distribution.

Seems simple. But not always. The procedure for the Application is regulated under Court Rules and precision as well as completeness is mandatory. As in many other areas of Court processes, what is acceptable, however, in one Court office may not be acceptable in another.

The Application must also be accompanied by payment of the “Probate Fees”, now called “Estate Administration Tax” (“EAT”). This tax is calculated at $5 per thousand dollars of the value of the Estate up to $50,000 and $15 per thousand dollars of the value of the Estate above $50,000.

Now, the hard realities. The EAT is paid at the time of the Application by the Applicant before any of the Estate is distributed. Same for the legal fees arising from any legal assistance used to prepare and file the Application.

The Court Order may be delayed weeks or even longer for its delivery, making reimbursement of the Applicant’s payment of the EAT (and legals) relatively burdensome. Bank loans may be necessary but the Estate’s assets are not “security”, as they don’t belong to the Applicant/borrower.

Further, the Court may reject the Application or request either further information or a Court attendance – more time and money.

All of these issues (and most importantly, the amount of the EAT) are strong incentives for early planning, the use of effective Wills and, as much as possible, elimination or reduction of the value of the Estate that requires Probate before it occurs (and here it is worth pointing out that not all Estates require Probate).

There are several techniques available to legal counsel in estate planning. We would be pleased to share some of these with you.

Estate Freeze

Peter R Welsh Law Estate FreezeWhat is an Estate Freeze? In short, it is a technique to limit and defer capital gains tax on a shareholder. As we know, upon the sale of shares of a corporation giving rise to a capital gain ( which is the difference between the acquisition cost or the “Adjusted Cost Base” and the selling price), one half of the difference is added to the other income of the seller in the year of sale (there are some income tax provisions which soften the capital gains tax exposure, but for the purposes of this brief introduction, we are ignoring those alternatives).

Upon the death of a shareholder, there is a deemed disposition (or sale) of shares and the capital gains is then calculated and included in the terminal year income tax return of the deceased shareholder. It is advantageous to a shareholder to defer or delay the calculation and payment of that capital gains tax or, better still, to limit its potential growth.

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Family Business Succession Planning

Welsh Law Family Business Succession PlanningThe majority of all businesses in Canada are family owned.  Yet, surprisingly, according to the Canadian Association of Family Enterprises, 70% of family businesses do not make it to the 2nd generation and an astonishing 90% do not make it to the 3rd generation.

The largest asset of most families is their business and an appropriate succession plan to preserve that asset is self-evident.

Family business succession planning is not restricted to the preparation of Wills or Powers of Attorney.  On the contrary, while those are part of the process to successfully transfer a family business, a much more significant issue is the identification of the appropriate Senior Management to perpetuate the family business.

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Estate Planning

Welsh Law Estate Planning

The concept of Estate Planning involves the most tax effective and least cost manner for the passage upon death or, even before death, of the assets of a person to another person or persons selected to receive them.  The process involves an examination of what the assets are and to whom they should go at the choice of their owner.  An assessment or catalogue of what the assets are is the first step in the formulation of an Estate Plan.  Any real estate must be looked at rather specifically.  The manner by which title is held will determine even whether any real estate is part of an Estate.  Similarly, investments, bank accounts, life insurance, retirement plans and pensions may or may not (depending on the manner of registration and any designation of any beneficiary) form part of an Estate.

To help with this process, our office prepared an Estate Planning Guide you can download.  The Guide not only informs you of the issues you should consider, but also includes an outline to assist your solicitor in the preparation of the most advantageous distribution of your assets.

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