Let’s say that you are the sole owner of the business where the common shares are worth $8,000,000 today. You want to implement a plan to save tax on the capital gains when you sell the business a number of years down the road. This can be accomplished by changing your common (growth) shares into new preference shares that have a “frozen value” of $8,000,000. These preference shares can be voting shares, so that you still have voting control of the company. New common shares can now be issued to your spouse and (let’s assume) two children, or to a trust for either or both of these parties.
Initially, these new common shares will have no value. However, over time, as the value of the business continues to increase, all of the growth in value will go to these new common shares, as you “froze” the value of your shares when you exchanged them for preference shares. If, for example, the business grows to a value of $32,000,000 prior to sale, then the value of the shares of all four parties is $8,000,000 each – your “frozen” preference shares, and the growth of the common shares to a value of $24,000,000, which is then split between your spouse and two children.
Tax planning is complicated; let our team of professionals help you through the process of establishing appropriate tax structures so you only pay once on that income – and the minimal amount necessary at that.
Stay tuned for new posts in our succession planning series every Thursday. Missed a post? Read on here:
Post 1: Planning for success[ion]
Post 2: There's selling and then there's everything else...
Post 3: Keeping it all in the family ...or branching out from the family tree
Post 4: When 'What If' Becomes 'What Now?'
Post 5: Should I stay or should I go?
Post 6: Beware of the tax man
Post 7: Freezing value = saving long-term
Post 8: What it's worth now, and how
Post 9: There's value and then there's worth
Post 10: Visualize, then plan
Post 11: The key is transparency
Post 12: Keeping up with the paperwork
Post 13: Consider all options
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