ESTATE AND TAX
PLANNING
THE PROBLEM
A married, aging couple with significant assets was looking for planning advice regarding their estate. These individuals had a mixed family, both having children from previous marriages. The couples’ assets had a value in excess of $5 million.
Adding to the complexity, these individuals also owned multiple business corporations – and some of the clients’ children were involved in the operations of the companies while other were not.
The individuals sought advice on how to structure their affairs from a legal and tax perspective in order to meet their estate planning objectives.
OUR APPROACH
We worked closely with the client’s lawyers to develop an estate and tax plan whereby we moved corporate assets into a family trust and various personal assets into an alter-ego trust. The plan allowed the clients flexibility in their current income and tax planning, and certainty around their future estate planning.
Once the planning had been implemented, the clients expressed that they had significantly better peace of mind, knowing that their affairs were properly structured so that their wishes would be met and that their beneficiaries would have a minimal and manageable tax burden after they passed.
CONSTRUCTION
PROJECT
THE PROBLEM
A corporate client operated a medical clinic with a sole shareholder. The client’s objectives in the short term were to construct a new building on a piece of vacant land and rent the building to the operating company. The client’s long-term objective was to eventually sell the practice and continue renting the building to the new owner of the practice.
The client sought our advice on how to properly structure the ownership of the practice and the real estate, as well as how to best finance the real estate construction and ensure that it would stay on budget.
OUR APPROACH
We developed a corporate structure plan which would meet the client’s short and long-term objectives. We worked with the client’s legal team to implement the corporate structure, and assisted the client in understanding how the relationships between the corporate entities would work on an ongoing basis from an operations and a tax perspective.
We assisted the client in applying for and receiving significant bank financing. We developed a construction budget with the client, and held regular meetings with the client and the contractor in order to assist with budget oversight as the project progressed.
At the conclusion of the project, the client had a beautiful new building, an appropriate corporate structure, and a well-documented plan to meet long-term tax and finance objectives.
Business and
Accounting Advisory
THE PROBLEM
We began working with a new corporate client who had previously been using a different accountant. The client was hoping to get a clearer understanding of personal and corporate tax planning, and to have deeper discussions about ongoing business planning.
We worked closely with this client to get an understanding of their business and an in-depth picture of their short and long-term business objectives. The client expressed to us that they had been searching for this type of relationship with a business advisor and accountant, and that they were grateful for the close attention we were able to pay to them as we helped them to develop a better understanding of the business and tax issues they had previously struggled with.
OUR APPROACH
Through our meetings with the client, we discovered that there were a number of issues existing from the previous year, including a large corporate tax balance that the client was unaware of, significant business expenses having been charged to the shareholders personally, and lack of corporate and personal tax planning. We were able to identify adjustments which eliminated the significant corporate tax balance and put more cash in their personal hands.
The client expressed gratitude that they now had a clear direction on business operations, as well as a well-documented corporate and personal tax plan for the near and long term. We are excited to continue our business relationship with this client and assist them with continually updating their business and tax planning.
Disability
Tax credit
THE PROBLEM
A new client had a child that qualified for the disability tax credit.
Through our client onboarding interview and review of the client’s prior filings, we discovered that the client had never claimed a disability tax credit as they were unaware a benefit was available.
The client requested our assistance to analyze their prior years’ tax returns and to apply for the tax credit for previous years. We helped the client gather the information they required, including specific forms they needed their family physician to complete.
OUR APPROACH
We worked with CRA to submit the required documentation and answer questions that arose during CRA’s review of the situation.
The result was that the CRA accepted the request and reassessed eight prior years’ tax returns which resulted in a tax refund of approximately $11,000 to the client.
We have worked with several other clients on this same issue. We find that many clients are not aware of the disability tax credit available for either themselves, their spouse, or their dependant child.
Incorporation
THE PROBLEM
An individual requested a meeting with one of our accounting practitioners. The individual has started a new business and had questions about how to manage their bookkeeping and taxes. They had been told by friends that they should incorporate their business. They were not entirely sure what incorporation involved and whether it was the best thing to do.
Through our discussions and analysis, we determined there was no benefit to the client to incorporate their business at that time as it would create an unreasonable financial and administrative burden on their new business. We referred them to a bookkeeper and provided them with advice about how to report their business as a proprietorship on their personal income tax return. We suggested that when the client reached a certain level of sales, they may want to consider incorporating at that time.
OUR APPROACH
Fast forward two years…the client has been very successful and has grown their business substantially. We met with them again and decided it would be appropriate for them to incorporate.
We worked with the client and their lawyer to determine the best corporate share structure for the new company. The client was interested in income splitting with her husband, who was also involved in the business.
We advised the client on the TOSI rules (Tax on Split Income) and, working with the company’s lawyers, helped develop an employment contract and compensation plan for both her and her husband. We assisted the client with the required registrations for the new company, including setting up GST and payroll accounts with CRA. We worked with the company’s bookkeeper to transition the bookkeeping from the old proprietorship to the new corporation.
The client owned several pieces of equipment that were required for operating the business. We worked with the client to establish values for the equipment and prepared the necessary tax elections to “roll” the assets into the new corporation.
The client decided to purchase a building from which to operate her business. She required some help with preparing projections for the bank to obtain financing. We worked closely with her to discuss her assumptions about the future of her business, and to build those into proforma statements that she could present to her banker to assist in the financing application for the new building.
We work with the client annually to decide on an appropriate compensation plan for her and her husband. The company is building up retained earnings (which have been taxed at the low small business rate) which will be drawn out in future years as part of an overall retirement plan for the owners of the company. All of the assets of the business, which include the equipment and building, are owned by the corporation, and the goal is to one day sell the shares of the corporation so the client can minimize tax on that sale by using her Lifetime Capital Gains Exemption.
Business
Restructuring
THE PROBLEM
Our client had purchased a recreational business a number of years earlier. The husband managed the operations and the wife managed the administration. Neither of them had much business experience prior to buying the operation.
But they worked hard to make the business work and expressed their gratitude for the counsel they received from our firm.
Over time, the business expanded into heavy equipment operation, land development and a convenience store/gas bar. All of the transactions were recorded in a single corporation with the clients doing their best to classify transactions to try to monitor the results from each business unit. But no one ever felt the operating reports were reliable. As long as the business was properly capitalized, was closely managed by the family and was making a profit, it didn’t really matter.
Until the business had a couple of bad years and needed to raise some operating and development capital.
OUR APPROACH
We helped the client by recommending they split the business units into separate corporations on a tax neutral basis with separate management responsibility and financial systems. A family trust was also created to help the owners with future intergenerational transfers to their growing family.
As a result of the reorganization:
- The business now has properly segregated financial records and reports for each business unit.
- Managers of the business units have reliable financial reports on their operating results.
- The owner is able to manage the businesses separately based on each unit’s strategic and operational requirements.
- The owners were able to raise operating credit from their bank for a specific business unit.
- The owners were able to raise capital for real estate development without recourse to the other aspects of the business.
- Future sales of business units will be facilitated by existence of experienced, dedicated managers and reliable historical financial reports.
Maximizing
Sale Value
THE PROBLEM
Our client had grown his business from zero to $10 million in sales over 25 hard working years but had decided it was time to start thinking about retiring. He set a target of five years to complete a sale and asked us to help.
We felt a potential drag on the value of the business was the involvement of owner in all aspects of the business. He had avoided delegating authority or, when he had delegated authority, had been disappointed with the results. Customers, suppliers and employees relied heavily on their relationship with the owner. The business was dependent on these relationships.
We needed to convert personal goodwill into commercial goodwill.
OUR APPROACH
We immediately identified strategic areas to increase the value of the business:
- Remove minority shareholders.
- Create a Business Plan.
- Improve the senior management team and delegate authority for day-to-day decisions to the senior team over time.
- Identify measurable Strategic and Operational goals, including Key Performance Indicators (KPIs), to hold the senior team accountable.
- Recruit a small independent Board of Directors to help the owner manage the senior team and develop a sense of accountability apart from the owner.
- Engage a business valuation expert to provide a value base line.
- Improve budgeting, reporting and human resources functions, including robust internal controls over purchases and inventory.
- Execute long-term fair market value commercial leases for the business locations owned by a related real estate holding company.
Each of the above initiatives was implemented knowing that the value of the business could be improved by decentralizing authority and providing a potential purchaser with a “turnkey” operation which could either stand alone or be easily integrated into a larger operation.
As a result of implementing these strategies
- The value of the business doubled in the 5 years to the date of sale with only a 40% increase in sales revenue
- A “special interest purchaser” was identified who would value the potential synergies they could achieve with the acquisition of a seasoned senior management team independent of the owner.
- The owner received a selling price of 10x EBITDA, which is a significant premium over a typical small privately-owned business.
- The owner was able to enjoy a relatively stress free earn out period after the sale thanks to the abilities of his senior team.
- The long-term leases on the commercial real estate still provide the owner with significant post-retirement cash flow.
- The purchaser implemented many of the purchased business’ operating methods.
Cleaning Up A
Systems Disaster
THE PROBLEM
A potential client approached us to assume their work from a previous accounting firm. The owner was frustrated with the amount of time it was taking to get her year end financial statements prepared.
In scoping the engagement, we discovered that the client had converted her accounting system a couple of years earlier from an “off the shelf” software to a system customized for her business. The conversion had not gone well. The bookkeeper was inexperienced and received insufficient support from the new software vendor. Data recording had slowed down, reconciliations were not being prepared and the resulting financial reports were unreliable. The business was incurring non-compliance penalties for late payroll deductions and GST reporting. Its suppliers were complaining about not getting paid and its average accounts receivable turnover had increased to almost 70 days.
All of these problems could be attributed to a failure to properly implement the new accounting software.
OUR APPROACH
We helped the client to assess the capabilities of her bookkeeper, documented the business processes and accounting system, and created procedures and checklists for the bookkeeper. We also helped to clean up the historical records, so the bookkeeper had a “fresh start”.
As a result of this engagement:
- The owner was able to retain the bookkeeper to whom she felt some personal loyalty.
- The bookkeeper increased her skills and confidence.
- Suppliers are being paid on a timely basis.
- The business reduced its uncollected accounts by 50%.
- The financial reports became more reliable and were available on a timely basis.
- The turnaround for the client’s year end work was reduced from 5 months to 21 days.
Team Development Work
THE PROBLEM
Our client’s business was growing at the rate of about 20% per year, which meant the team had grown from about 10 employees to 80 employees fairly quickly. The team was distributed geographically, and the owner recognized that the dynamic of the company was shifting away from a “mom and pop” feeling to a more “corporate” environment. Morale appeared to be slipping, accountability was uncertain and key performance indicators were moving in the wrong direction.
The owner felt overwhelmed by an inability to organize and manage the larger team.
OUR APPROACH
We organized and moderated a retreat for a representative sample of the team in order to perform an analysis of Strengths, Weakness, Opportunities and Threats (SWOT) related to the organization. Our goal was to use this retreat as a basis for helping the owner to develop a Business Plan from which Strategic and Operational goals could be established, measured and communicated to the organization. We believed the input of the team would maximize the likelihood that there would be buy in throughout the organization.
The owner was excluded from the process to provide an opportunity for the team members to speak frankly.
The process was successful:
- Employee satisfaction increased.
- Gaps in the organizational structure were identified and filled.
- An Executive Committee of senior staff was implemented to provide advice to the owner.
- Strategic and operational goals were identified and implemented with subsequent measurement, follow up and communication to the organization.
- The owner was able to delegate more authority and responsibility to other team members.
- The Business Plan added value to the company when it was eventually sold.
Help for Non-Profit
Society
THE PROBLEM
An arts-based non-profit society incorporated in the 1970s recently hired a new Executive Director and her success at building the society’s grants and scope of services meant that additional accounting support was required.
We discovered that some reporting to the tax department was lacking so we began the process of complying with the requirements of the CRA for non-profit societies.
OUR APPROACH
We assisted the ED along with the society’s treasurer and bookkeeper to better understand the appropriate accounting practices for societies, including presentation of the financial statements, both to the tax department and to its members.
After a careful review of the documentation from its numerous granting bodies, we assisted the society in avoiding a costly Review Engagement.
We attended the society’s Annual General Meeting in order to present the financial statements to the members and answer any questions they may have had. The ED was pleased with the presentation and several comments were made that the financial statements had never been presented more clearly.
