My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Thursday, February 17, 2011

Creditor Proofing Corporate Funds and Do You Eat to Live or Live to Eat?

Creditor Proofing Corporate Funds

Most owner-managers of private corporations are concerned about creditors potentially gaining access to their corporation’s cash and investments through real or frivolous lawsuits. The simplest method to protect surplus corporate funds is through the use of a holding company. 

The Income Tax Act permits an owner-manager to transfer the shares of their operating company (“Opco”) to a new holding company (“Holdco”) without incurring any tax.  Following this type of transfer, the owner-manager would own the shares of Holdco, which, in turn, would own the shares of Opco.  With that type of ownership structure in place, Opco and Holdco would be what is known as connected corporations. 

When corporations are connected, they can typically pay their retained earnings (excess cash and other assets net of liabilities) of the corporation , as a dividend from Opco to Holdco on a tax-free basis.  This has the effect of removing excess cash and other assets from Opco so that it would no longer be susceptible to future creditors’ claims. This can be repeated in the future as Opco accumulates additional retained earnings.

If Opco requires ongoing cash and working capital, the funds received by Holdco could be loaned back to Opco on a secured basis provided a General Security Agreement (“GSA”) is registered by a lawyer. It is important to note the dividend first paid by Opco must be physically paid by way of a cash or other asset transfer and then physically loaned back to Opco by Holdco to ensure that the GSA is valid. 

Opco’s banker should always be advised in advance that Opco is undertaking a creditor proofing transaction.  Where a bank loan or other debt is present, the GSA will secure the loan but Holdco generally would still rank behind the bank or other secured creditors as far as payment is concerned.

The structure noted above is simple and effective. However, where the owner-manager or other family members have access to the $750,000 capital gains exemption and may potentially sell shares of the company in the future, this type of creditor proofing transaction may not be appropriate and some variation may be required. Depending upon your family and personal financial situation, it may be possible to creditor proof Opco, maintain potential access to the capital gains exemption and provide a means to income split with family members in one fell swoop by utilizing a “freeze” transaction.

This “freeze” transaction will be discussed in my blog in two weeks.

Do You Eat to Live or Live to Eat 

I love good restaurants, but I also love burger shacks, Middle Eastern shawarma and falafel restaurants and sausages from street vendors.

I list among my favorite things to eat steaks, corned beef and hot dogs in the meat area, shrimp, crab, sushi and lobster in the fish area, fries and potato chips in the fried area and ice cream and crème brulee in the dessert arena.

The above is a who’s who of the worst foods to eat cholesterol-wise (some say shellfish are not that bad for cholesterol) so in retrospect, I guess I shouldn’t have been surprised when my latest medical revealed my cholesterol had gone up. Poor food choices in conjunction with a lack of exercise due to a couple of back to back hockey injuries, finally took its toll. My wife, a very healthy eater promptly brought me into the fold and suddenly things I never heard of, or conceived of eating, like bran buds, flax seed and quiona, replaced donuts and fries. I now realize how much I am a live-to-eat person.

On the positive side, I have discovered that I actually like some foods that I would not normally look at, but in general my current diet is by no means a culinary delight. Hopefully I can get my cholesterol down and I can go back to a more balanced diet while eating smarter, but boy do I miss my bad foods.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.