Tax Effective Angel Investing Strategies – Proper Structuring for Angels / Early Stage Companies and Maximizing SR&ED Bene...
Three terms to remember: Introduction <ul><li>Canadian-controlled private corporation (CCPC) </li></ul><ul><li>Small busin...
CCPC <ul><li>Canadian </li></ul><ul><li>private </li></ul><ul><li>not controlled  directly or indirectly  by: </li></ul><u...
CCPC <ul><li>small business deduction </li></ul><ul><li>investment tax credits (ITCs) </li></ul><ul><li>employee stock opt...
<ul><li>CCPC </li></ul><ul><li>90% of the assets used principally in an active business </li></ul><ul><ul><ul><li>Gross as...
<ul><ul><li>Three tests must be satisfied: </li></ul></ul><ul><ul><ul><li>SBC (at time of sale) </li></ul></ul></ul><ul><u...
<ul><ul><li>For two years prior to the sale, the shares must not be owned by anyone other than: </li></ul></ul><ul><ul><ul...
<ul><ul><li>For the two years prior to sale: </li></ul></ul><ul><ul><ul><li>50% of the assets must be used </li></ul></ul>...
What is a family trust? <ul><li>settlor </li></ul><ul><li>trustee(s) </li></ul><ul><li>beneficiaries </li></ul>Family trusts
Why use a family trust? <ul><li>flexibility </li></ul><ul><li>multiplication of the capital gains exemption </li></ul><ul>...
Why use a family trust? <ul><li>flexibility </li></ul><ul><li>multiplication of the capital gains exemption </li></ul><ul>...
Ways of investing: <ul><li>debt </li></ul><ul><li>equity </li></ul><ul><li>combination </li></ul>Method of Investment
Debt Characteristics <ul><li>secured vs. unsecured </li></ul><ul><li>term </li></ul><ul><li>convertible (e.g. warrants) </...
Share Attributes <ul><li>common vs. preferred </li></ul><ul><li>voting vs. non-voting </li></ul><ul><li>dividends </li></u...
US Investors US Venture Capital <ul><li>require US vehicle </li></ul><ul><li>section 116 woes: LPs, paper burden </li></ul...
US Investors US Venture Capital: A Solution <ul><li>create Delaware company </li></ul><ul><li>separate votes and value of ...
US Investors Exchangeable Shares: Day 1 Company Delaware votes & value Canadian Shareholders votes value US VC US Canada v...
US Investors Exchangeable Shares: On Exit Company Delaware votes & value Canadian Shareholders votes value US VC US Canada...
US Investors Exchangeable Shares: Benefits <ul><li>CCPC status maintained </li></ul><ul><ul><li>SR&ED; ITCs </li></ul></ul...
<ul><ul><li>SR&ED  means “ S cientific  R esearch and  E xperimental  D evelopment” </li></ul></ul><ul><ul><li>An Incentiv...
SR&ED: Benefit rates No refund available 20% Others 40% 40% 20% Individuals 40% 100% 35% Canadian Controlled Private Corps...
<ul><li>Carrying on a business in Canada </li></ul><ul><li>Expenditures incurred </li></ul><ul><li>Work performed in Canad...
SR&ED: Common areas that companies overlook <ul><li>- work is commensurate and in support </li></ul><ul><li>the link to th...
SR&ED: Common areas that companies overlook <ul><li>that >90% of capacity is used for SR&ED </li></ul><ul><li>consider sha...
<ul><li>When can you expect to get access to your refund: </li></ul><ul><ul><li>120 days for refundable – original claims ...
<ul><li>Income limits </li></ul><ul><ul><li>Income in the preceding year in excess of limit ($300K for 2005) </li></ul></u...
<ul><li>Concepts </li></ul><ul><ul><li>Salary must be paid within 180 days of year-end </li></ul></ul><ul><ul><li>Bonuses ...
<ul><li>Contact information </li></ul><ul><li>Lawrence Weinstein (613) 599-9600 </li></ul><ul><li>Jim McConnery (613) 755-...
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Summit 05 Cd Session 14 Presentation

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Summit 05 Cd Session 14 Presentation

  1. 1. Tax Effective Angel Investing Strategies – Proper Structuring for Angels / Early Stage Companies and Maximizing SR&ED Benefits Lawrence Weinstein, LaBarge Weinstein Jim McConnery, PricewaterhouseCoopers
  2. 2. Three terms to remember: Introduction <ul><li>Canadian-controlled private corporation (CCPC) </li></ul><ul><li>Small business corporation (SBC) </li></ul><ul><li>Capital gains exemption (CGE) </li></ul>
  3. 3. CCPC <ul><li>Canadian </li></ul><ul><li>private </li></ul><ul><li>not controlled directly or indirectly by: </li></ul><ul><ul><li>non-residents, and/or </li></ul></ul><ul><ul><li>public companies </li></ul></ul>a corporation that is CCPC definition:
  4. 4. CCPC <ul><li>small business deduction </li></ul><ul><li>investment tax credits (ITCs) </li></ul><ul><li>employee stock options </li></ul><ul><li>capital gains exemption </li></ul>Advantages of being a CCPC:
  5. 5. <ul><li>CCPC </li></ul><ul><li>90% of the assets used principally in an active business </li></ul><ul><ul><ul><li>Gross asset test / liabilities are ignored </li></ul></ul></ul><ul><ul><ul><li>Fair market value </li></ul></ul></ul><ul><ul><ul><li>All assets including goodwill </li></ul></ul></ul><ul><ul><ul><li>Balance sheet of corporation not always reliable </li></ul></ul></ul><ul><li>Business carried on primarily in Canada </li></ul>SBC
  6. 6. <ul><ul><li>Three tests must be satisfied: </li></ul></ul><ul><ul><ul><li>SBC (at time of sale) </li></ul></ul></ul><ul><ul><ul><li>Ownership Test (over two years) </li></ul></ul></ul><ul><ul><ul><li>Asset Test (over two years) </li></ul></ul></ul>CGE: Qualified SBC (QSBC) share
  7. 7. <ul><ul><li>For two years prior to the sale, the shares must not be owned by anyone other than: </li></ul></ul><ul><ul><ul><li>Individual </li></ul></ul></ul><ul><ul><ul><li>Related person or partnership </li></ul></ul></ul><ul><ul><li>Shares issued from Treasury qualify only after 2 years </li></ul></ul><ul><ul><ul><li>Exception where shares issued for other shares </li></ul></ul></ul>QSBC: Ownership test
  8. 8. <ul><ul><li>For the two years prior to sale: </li></ul></ul><ul><ul><ul><li>50% of the assets must be used </li></ul></ul></ul><ul><ul><ul><li>principally in an active business </li></ul></ul></ul><ul><ul><ul><li>carried on primarily in Canada </li></ul></ul></ul>QSBC: Asset test
  9. 9. What is a family trust? <ul><li>settlor </li></ul><ul><li>trustee(s) </li></ul><ul><li>beneficiaries </li></ul>Family trusts
  10. 10. Why use a family trust? <ul><li>flexibility </li></ul><ul><li>multiplication of the capital gains exemption </li></ul><ul><li>income splitting </li></ul>Family trusts
  11. 11. Why use a family trust? <ul><li>flexibility </li></ul><ul><li>multiplication of the capital gains exemption </li></ul><ul><li>income splitting </li></ul>Family trusts losses trapped attribution kiddie tax 21-year deemed disposition ALERT!
  12. 12. Ways of investing: <ul><li>debt </li></ul><ul><li>equity </li></ul><ul><li>combination </li></ul>Method of Investment
  13. 13. Debt Characteristics <ul><li>secured vs. unsecured </li></ul><ul><li>term </li></ul><ul><li>convertible (e.g. warrants) </li></ul><ul><li>use of milestones </li></ul>Method of Investment: Debt
  14. 14. Share Attributes <ul><li>common vs. preferred </li></ul><ul><li>voting vs. non-voting </li></ul><ul><li>dividends </li></ul><ul><li>conversion rights </li></ul><ul><li>rights on liquidation or redemption </li></ul>Method of Investment: Shares <ul><li>priority </li></ul><ul><li>calculation of entitlement </li></ul>
  15. 15. US Investors US Venture Capital <ul><li>require US vehicle </li></ul><ul><li>section 116 woes: LPs, paper burden </li></ul><ul><li>balance with CCPC status </li></ul>
  16. 16. US Investors US Venture Capital: A Solution <ul><li>create Delaware company </li></ul><ul><li>separate votes and value of shares </li></ul><ul><li>exchangeable shares of Canadian company </li></ul>
  17. 17. US Investors Exchangeable Shares: Day 1 Company Delaware votes & value Canadian Shareholders votes value US VC US Canada value votes
  18. 18. US Investors Exchangeable Shares: On Exit Company Delaware votes & value Canadian Shareholders votes value US VC US Canada value votes
  19. 19. US Investors Exchangeable Shares: Benefits <ul><li>CCPC status maintained </li></ul><ul><ul><li>SR&ED; ITCs </li></ul></ul><ul><li>US VCs protected by US vehicle </li></ul><ul><li>capital gains exemption preserved </li></ul>
  20. 20. <ul><ul><li>SR&ED means “ S cientific R esearch and E xperimental D evelopment” </li></ul></ul><ul><ul><li>An Incentive Program to foster: </li></ul></ul><ul><li>SR&ED done in Canada </li></ul><ul><li>Technology new and improved products and processes </li></ul><ul><li>Cost competitiveness </li></ul><ul><li>Expanded markets </li></ul>SR&ED: What is it?
  21. 21. SR&ED: Benefit rates No refund available 20% Others 40% 40% 20% Individuals 40% 100% 35% Canadian Controlled Private Corps. Rate of Refund Current Capital Investment Tax Credit (ITC) Rates
  22. 22. <ul><li>Carrying on a business in Canada </li></ul><ul><li>Expenditures incurred </li></ul><ul><li>Work performed in Canada </li></ul><ul><li>Related to the business </li></ul><ul><li>Complete claim filed within 18 months (corporations) </li></ul>SR&ED: Requirements
  23. 23. SR&ED: Common areas that companies overlook <ul><li>- work is commensurate and in support </li></ul><ul><li>the link to the project </li></ul>Specifically denied under the Act Quality control and testing <ul><li>that the installation is outside the norm </li></ul><ul><li>show a feedback loop for new knowledge or further engineering </li></ul>Using standard approaches to customize Application or field engineering <ul><li>that work is in support of an SR&ED project </li></ul><ul><li>that the production is experimental </li></ul>Work relates to commercial activities not SR&ED SR&ED on the shop floor Need to Demonstrate Challenge Missed Areas
  24. 24. SR&ED: Common areas that companies overlook <ul><li>that >90% of capacity is used for SR&ED </li></ul><ul><li>consider shared use if >50% </li></ul>Not used all or substantially all for SR&ED Servers, data storage - need to show link to current projects Relates to future projects and therefore not eligible Technological planning <ul><li>the company structure/ size is such that everyone is contributing </li></ul><ul><li>- through examples of management’s input </li></ul>CEOs and Presidents do not do SR&ED Management Contribution to direct supervision and technological planning Need to Demonstrate Challenge Missed Areas
  25. 25. <ul><li>When can you expect to get access to your refund: </li></ul><ul><ul><li>120 days for refundable – original claims </li></ul></ul><ul><ul><li>240 days for refundable (35% tax credit) – amended claims </li></ul></ul><ul><ul><li>365 days for all other claims </li></ul></ul><ul><li>If you qualify for a refund in Ontario but not federally you will likely wait over a year for a refund </li></ul>SR&ED: Understand the service standards
  26. 26. <ul><li>Income limits </li></ul><ul><ul><li>Income in the preceding year in excess of limit ($300K for 2005) </li></ul></ul><ul><ul><ul><li>reduces $2M expenditure limit by $10 for every $1 of income </li></ul></ul></ul><ul><ul><ul><li>where income exceeds threshold, expenditures over limit not refundable – otherwise 40% refundable </li></ul></ul></ul><ul><li>Capital limits </li></ul><ul><ul><li>$2M expenditure limit also reduced by taxable capital in excess of $10M </li></ul></ul>SR&ED: Watch the size thresholds
  27. 27. <ul><li>Concepts </li></ul><ul><ul><li>Salary must be paid within 180 days of year-end </li></ul></ul><ul><ul><li>Bonuses paid to individuals who own > 10% of the company do not qualify </li></ul></ul><ul><ul><li>Investment tax credits can be earned on salaries plus notional (proxy) amount for overhead which is 65% </li></ul></ul><ul><ul><li>The proxy amount can’t exceed total non-SR&ED expenditures of the company </li></ul></ul>SR&ED: Remuneration of owner manager
  28. 28. <ul><li>Contact information </li></ul><ul><li>Lawrence Weinstein (613) 599-9600 </li></ul><ul><li>Jim McConnery (613) 755-5984 </li></ul>© 2005 PricewaterhouseCoopers LLP, Canada. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, Canada, an Ontario limited liability partnership, or, as the context requires, the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. Thank you © 2005 LaBarge Weinstein Professional Corporation

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