Rick and Debbie:
The Corporate Investment Shelter

The Family

Rick and Debbie are in their early 50s. Their business has been getting stronger and stronger after many years of hard work and sacrifice. They have three children, James (age 20), David (age 19) and Hannah (age 17). All three children are in college or high school. At this age, it is hard to determine if any or all of the kids will make their future in the family business.

The Challenge

Until they get a better idea of how the business will evolve from a succession planning perspective, Rick and Debbie want to run the business on the assumption that it will be sold 10 to 15 years from now. In the meantime, they want to invest the company’s profit in growth, but they also want to build some reserves for retirement. In doing so, they do not want to tie up the company’s retained earnings in such a way that they cannot be redeployed, should some other business opportunity come along suddenly.

With these things in mind, over the past five years, they have allowed a considerable amount of cash to build up in the company. At this point, they estimate their cash to be several hundred thousand dollars. That cash is sitting in a high-interest savings account, earning very little return.

When a company earns interest from accounts like this, the interest is taxed at close to 50% in most provinces. the net effect to the company, after taking inflation into account, is that the cash is actually losing value. Another problem with the company holding lots of cash is that it can throw its shares offside for the capital gains exemption, should someone come along and offer Rick and Debbie an acceptable price for the business. In fact, their accountant has been recommending they restructure the company to alleviate this issue. The good thing, though, is that the cash is 100% liquid and available for any business opportunity that comes along.

The Strategy

We sat down with Rick and Debbie over a period of six months. We got to understand them better by asking alot of discovery questions – questions about them and their business. We met with their accountant several times, gained a strong understanding of his ideas for the business and went deep into the company’s financial statements.

After about a year, the company was fully reorganized. The main operating company is still running strong and there is a new holding company linked in – with all the cash held there. This brought the main company back onside for the capital gains exemption. Inside the holding company, we were able to set up a tax exempt investment shelter that allows Rick and Debbie to maintain high liquidity and eliminate the high corporate investment income tax they had been paying.

By working with Rick and Debbie, we helped them understand the value of the advice they were already getting from their accountant. We then built on top of that advice to take advantage of maximum tax deferral opportunities, while providing high liquidity and some risk management.

If you would like to learn more about this strategy, feel free to contact us.