Hi,
I have not had that much experience with corporate structures and wondered if anyone could provide some pointers or insight.
I have a client who has owned an operating company for seven years, which has been highly profitable for a small business; however, with some new changes to tax and revenue stipulations, they are looking at setting up a holding corporation to hold their assets so they want to transfer their building and land to the holding corp and rent the building and land back to the operating corp. Would you recommend having a separate holding corp or doing a reorganization share structure to have the holding corp own shares in the operating corp? I had one individual recommend separate, but that seems uncommon, so I wanted to get additional opinions.
Any advice would be much appreciated!
Thank you,
Kyle
This is called a sale and leaseback arrangement, and is very common among companies trying to raise new debt capital or improve their balance sheet.
Ideally, you wouldn’t connect the entities in this scenario (although they would be related for tax purposes anyways it sounds like), but this is just a surface level explanation for your sake. I have no other insight as to what your client plans to do otherwise, or what their tax situation looks like.
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Hi,
Thank you for your response.
The main goal of starting the Holdco is to provide asset protection, allocate some of the profits of the operating corp due to changes in their industry, and then use funds to reinvest into other real estate or investments. The operating corp owns the land and building outright.
I was not sure if it was better to connect the companies to provide the option to pay intercompany dividends to flow additional cash to Holdcorp or rely solely on rental income.
Thoughts?
Thank you,
Kyle
You’d better take your client to a tax accountant for advice. The money spent will be well worth it. I’d never consider doing something like this by myself. There are too many traps to fall into.
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Fortunately, I happen to be a tax accountant.
What your proposing is not a traditional sale and leaseback, but rather a purification of passive assets and associated cashflows. In a normal course sale and leaseback, you would sell the tangible property to the holding company at FV outright and subsequently turn around and lease the property for a set term.
In this case, you are stripping opco of passive assets and surplus, in which case you would need to connect the companies and perform a purification.
The above involves amending the articles of opco and performing a Section 85 rollover between the shareholder and the holdco (to connect the companies). Once that is accomplished, you would take the neccessary steps to redeem specified stock of opco (at a set redemption value per share) from the holdco for a promissory note and subsequently offset the note with the distribution of capital property (including associated debt, if any) and cash transfers.
I highly suggest your client also consult a lawyer to draft a sale and purchase agreement (which should outline the satisfaction of the p-note with the transfer of capital property).
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Hi,
With the purification, would you then say you must ensure the companies would be connected? If not, would the situation return to a sale and leaseback transaction?
I appreciate your help! I want to get more training in corporate reorganization, but I am unsure what a good place to get adequate training is.
Thank you,
Kyle
Yes, the companies need to be connected to perform a purification. If not, you are performing a simple sale and leaseback, correct.
Realistically speaking, you will not get the depth of understanding that you are looking for without having been exposed to this type of tax planning first hand either through a career in public accounting (with a firm that engages in this), or with a mentor(s). Dry theory won’t cut it.
As @jhd.hemeon mentioned, I would also recommend that you engage with another firm to handle this particular situation and do not attempt to tackle it all yourself… I would offer to engage with you on this, but my hands are all tied up and this is really the only downtime I get to provide support when I can.
Best of luck.
Thank you, and I appreciate your help and insight!
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