This document discusses the evolution of tax structures for businesses from the start-up phase through expansion. It outlines the pros and cons of operating as an unincorporated business versus incorporating. Incorporating provides benefits like lower tax rates but also more compliance costs. As businesses grow, they may use holding companies which provide tax deferral, asset protection, and opportunities for income splitting. Holding companies allow for preserving tax attributes like paid-up capital and pushing debt down to the operating company level. The document also discusses considerations for expanding operations internationally through the use of holding companies and foreign subsidiaries.

1. Evolution of Tax Structure

2. Agenda
1. Start-up phase
2. Incorporation and Holding companies
3. Expansion phase
4. Legal issues to consider

3. 1-Development & Start-up
Pros
• Losses are used against other
sources of income
• Simpler to file
• Lower cost for filing
Cons
• Taxed at individual level
• No benefit of incorporated
rates
• Little or no opportunity for
SRED claim
Mr. A Mrs. Aor
Incorporated
business

4. 2- Benefits of incorporation
• Deferral of taxation
• Lower tax rate at corporate level
▫ CCPC status 19% in Quebec
▫ General rate 26.9% in Quebec
• Dividends are not taxable up to a certain
threshold
• Changes to expect in 2017

5. • Legal protection
• Additional incentives available such as SRED
Cost benefit to consider
2- Benefits of incorporation (cont’d)

6. 2- Growth
Pros
• Lower corporate tax rate
• Deferral of taxes
• Access to 800K capital gain
exemption (“CGE”)
• Access to SRED, if applicable
Mr. A Mrs. Aor
OPco
100%
Cons
• Distinct legal status
• Requires accounting process
in place
• More costly for compliance

7. 2 – Using a holding company
Benefits
• Deferral of taxation
• Legal protection
• Can be used as an investment vehicle
• Income splitting opportunities
• Meet objectives of different shareholders
• Protects redundant assets
• Distribution of dividends from Opco without immediate taxation
• Allows to reinvest in other ventures

8. OPco Holdco
OPco
Mr. A Mr. AMr. B Mr. B
2 – Using a holding company (cont’d)

9. Holdco
Mr. A Mrs. A
OPco
Voting Non-
voting
2 – Using a holding company (cont’d)
Can gather funds until timing is right for distribution

10. 2 – Using a holding company (cont’d)
OPco
Holdco
Trust
Mr. A
Mrs. A
Others

11. Drawbacks
• May contaminate access to capital gain exemption
• Must sell Holdco to access capital gain exemption
• Higher compliance cost
• Another separate accounting
2 – Using a holding company (cont’d)

12. 3- Expansion through Holdco
Not using a Holdco - Scenario 1
Mr. A Mr. B
OPco
PUC
100$

13. Not using a Holdco - Scenario 2
3- Expansion through Holdco
(cont’d)
Mr. A Mr. B
OPco
PUC
100$
Sells for
500K
No PUC to return to shareholder

14. 3- Expansion through Holdco
(cont’d)
Using a Holdco for PUC preservation
OPco
Mr. A Mr. B
Holdco
Sells for
500K
Injection
of 500K
PUC
500K
PUC
100$
PUC can be returned tax-free to shareholder

15. Using a Holdco for debt pushdown – Step 1
3- Expansion through Holdco
(cont’d)
OPco
Mr. A Bank
Holdco
Borrows
500KInterest
expenses

16. Using a Holdco for debt pushdown – Step 2
OPco
Mr. A Bank
Holdco
Borrows
500K
Interest
expenses
Possible
merger
3- Expansion through Holdco
(cont’d)

17. 3 - Expansion
Canada International
OPco
Holdco
ForeignCo
Shareholders

18. 3 – Expansion (cont’d)
• Consider impact in foreign jurisdiction
▫ Capital contribution
▫ Legal status (branch vs. subsidiary)
▫ Cash repatriation
• Impact on CGE

19. 3- Expansion (cont’d)
Canada International
OPco
Holdco 1
ForeignCo
Shareholders
Holdco 2
Holdco 1 Sold to use up to 800K CGE
Holdco 2 Sold without access to CGE

20. 4 – Legal issues
• Holdco allows protection of assets accumulated
against lawsuits at Opco level.
• In the case of a lawsuit, plaintiffs cannot access
assets in trust.

21. Questions?
Simon Davari, CPA, CA
Partner
514-865-9902
simon.davari@sdmaccounting.com