Bob Gauvreau walks through why companies restructure: to bring in new shareholders, move cash around, set up tax-efficient sales, or plan for succession. He shows how freezing equity lets a spouse join without claiming past growth, and how moving excess cash to a separate company avoids immediate taxes. These moves are complex and need a tax professional.
Chapters
Okay, so let's talk about what a corporate restructuring process looks like. So ultimately we've got an existing company and we want to change the structure. When would this happen? Well, a lot of times when, you know, if Bob is a shareholder of the company, but Bob wants to introduce other shareholders, or if we've started it out and we have a bunch of cash in our company and we want to get it out into another company to protect it, this is when a corporate restructure process needs to take place. Now what I want to talk about is the fact that it is not a simple process. If we start restructuring our corporation, there's likely going to be some transactions that happen at fair market value and likely some in depth tax strategies need to come into play to avoid any tax implications. I'll give you an example. If I own a share corporation by myself and I want to bring my wife in as a shareholder, it's not like I can just say, oh, add Jenny as a shareholder into my corporation. We actually have to take the value of the business. We have to do evaluation associated with it. Let's say it's worth $1 million. And at that point I have to freeze the value because that's my company. And when I want to introduce Jenny, we now have essentially new share classes that start from today because we can't backdate the historical fact that I have a million dollar business. We start with new share classes today so that she starts with a zero value and she starts building up any of the increased value of the company over a million dollars. So we're 50, 50 in the future then if it goes up to $2 million, she's adding half a million, I'm adding half a million, and I've got this million dollar initial piece. But you can see the complexity associated with it. We can't just add in a shareholder or family member in this situation. Now let me talk to you about why we maybe want to do a restructure. There's some businesses where, you know, again, I'll say I'm the shareholder of my company. I've been really successful. I've built up a million dollars of investments or even $200,000 of investments. But a million's easier for me. Million dollars of investments. In here, my company's only worth $2 million. If I sell it, I'm not going to qualify for my capital gains exemption because I have two too much cash in my business. So in fact I have to do a restructure in order to get the tax savings benefit of selling my corporation. And also if I'm selling my company, I don't want to give them my million dollars in cash either. That's my money. I've worked hard for it in the past. So what we want to do is we want to create another entity and get that money from one company to another. Now, it's not that easy either. So we get into a situation where we now have this asset saying we loaned money to another company versus it being in my company right here. So what we have to do is we have to do a restructure. I actually have to make this new company that's got all my money has to be a shareholder so that I can do a dividend distribution out to it. Now, there's a lot of circumstances that are going on in this situation where tax implications could happen. So that's why we need to do a restructure. It has to be done with tax professionals who can essentially roll assets from one company to another on a tax deferred basis. Sometimes it's using specific sections of the Income Tax act, but these sorts of corporate restructures are very sophisticated and require a lot of crossing T's and dotting I's to make sure there's no negative tax consequences. So if you've got a business situation, if there's too much cash in there, if you're looking to sell and it's not owned by you as an individual, if you've got other family members that you want to introduce to the company, if you're looking at doing a succession plan, this is some of the opportunities where you want to look at a corporate restructure because it will allow you to preserve some of your wealth, it will allow you to save taxes, protect some of your assets, and position yourself to create the greatest wealth for you and your family for the generations to come.
