Management Buyout and Taxes in Canada
- Author Allan Madan
- Published January 31, 2011
- Word count 596
Management Buyout and Taxes in Canada
What is a management buyout? A management buyout is where an employee or group of employees of a business buys the business from their employer who is also the owner of the business. This video discusses the three most common ways that a management buyout is carried-out.
Buy Shares - Management Buyout and Taxes in Canada
The most common way to implement a management buy in Canada is for the employee or group of employees to buy the shares from the owner of the business.
The major advantage of this strategy is that the owner can claim the capital gains exemption on the sale of his shares. This means that the owner can receive up to $750,000 of profit on the sale of his shares without paying any tax whatsoever.
The major disadvantage of purchasing shares is that the employee or group of employees may not have sufficient cash or the financing available to purchase the owner’s shares.
Additionally, the employment income that the employees receive may not be sufficient to buy the shares directly from the owner, because of the high rate of tax levied on employment income. For example, in the province of Ontario the highest marginal tax rate is 46.4%.
Repurchase the Shares from Owner - Management Buyout and Taxes in Canada
The second way that a management buyout can take place is by having the corporation directly repurchase the shares from the owner. If the corporation has sufficient cash on hand, then the corporation can buy all of the shares at once. Otherwise, the corporation an repurchases the owner’s shares over a period of time.
In this management buyout strategy, the employees of the company agree to lower their salaries, in order to provide the company with sufficient cash to buy the shares from the existing owner.
The cash paid from the corporation to the owner on the repurchase of his shares is treated as a taxable dividend to the owner. Once the shares are repurchased, new shares for a nominal amount are issued to the employees.
Create Newly Formed Corporation - Management Buyout and Taxes in Canada
The third and final way to implement a management buyout is to have the owner sell his shares to a newly formed corporation, which is owned by the employees.
The management buy-out is accomplished in three steps. Let’s take the example of ABC Corporation, which is presently owned by Mr. X. Mr. X wishes to sell his corporation. The employees have formed a new corporation, called Newco.
• Step 1: Newco acquires the shares of ABC Corporation from Mr. X in exchange for a promissory note payable to Mr. X. The amount of the promissory note payable is equal to the fair market value of the shares at the date of the sale.
• Step 2: ABC Corporation pays a dividend from its cash-on-hand to Newco. Newco is not required to pay tax on the dividend received.
• Step 3: Newco uses the cash received from the dividend to repay the promissory note payable to Mr. X.
Both parties, Mr. X and the employees, win in this example. Mr. X does not have to pay any tax whatsoever on the first $750,000 of profit on the sale of his shares by claiming the capital gains exemptions. Furthermore, the employees were able to use the profits of ABC Corporation to repay the owner.
Contrast this to the previous management buy-out strategy, where employees had to use the after tax cash from their salaries to purchase the shares directly from the owner, which is not tax-efficient.
Allan Madan is a Chartered Accountant and a Tax Expert in the Toronto, Mississauga and Oakville regions of Ontario, Canada.
If you found this article useful, Allan Madan encourages you to visit his website http://madanca.com for additional tax tips and more information on this topic. You can also call Allan Madan at 905-268-0150.
Watch the video http://madanca.com/blog/management-buyout-and-taxes-in-canada/
Article source: https://articlebiz.comRate article
Article comments
There are no posted comments.
Related articles
- 10 essential tax-saving strategies for landlords: Maximise your rental income
- A Comprehensive Guide to Navigating the Process and the Role of Customs Brokers in the UK
- Outsourced Accounting Services for UK Businesses: A Cost-Effective Solution for Financial Management
- Top 8 Self Assessment tax return software
- How to Close a Limited Company in the UK
- Maximizing Your Finances: Unleashing the Power of CPA Services
- VAT penalties – New rules
- TAX-FREE STRATEGIES IN AN UNCERTAIN ECONOMY
- 2022 Energy crisis and failure to connect Reality.
- When Are Corporate and Personal Taxes Due in Canada in 2021?
- You Would Never Have Thought That Having Accounting Internship Could Be So Beneficial
- ACTIVATION OF UAN
- Focal motivations behind getting a Tax direct for Small Business Firms
- Avoiding the flood — tax issues with water rights in agribusiness
- Social security benefits for a family (COVID-19)
- How to use QuickBooks Component Repair Tool?
- Do you want to reduce your taxes for next year?
- Will you be responsible with your tax refund?
- Getting started with QuickBooks Enhanced Payroll in Brief
- Are DSTs Right For Your 1031 Exchange
- Tax Return Makeovers By Kenya Woodard
- Why have all crypto tax attempts failed?
- Are You a Corporation? Know Why Consulting a Tax Accountant Is Vital
- Share capital or share premium for your Dutch company?
- Everything investors should know about 1031 sponsors
- Why is the income tax so high in UK?
- Should I do my own tax return?
- Get More Money Back on Your Tax Return with help from the Tax Cuts and Jobs Act
- Don’t Fall Victim to these 3 Tax Scams in 2018
- Find Out If 72(T) Penalty Free Income Is a Solution for You