I have a father and son that are shareholders in an operating company that makes good money providing renovations with various types of stone. Pathways, walls, kitchen counters etc. The father retired 8 years ago and in an undocumented deal with the son, it was agreed that he would continue to get paid his base salary of $90,000/year for 10 years at which point the company would be the son’s alone. The father now has dementia and is not expected to last much longer - a matter of months only probably. I have been doing some research about this and have thoroughly confused myself. Can anybody help me out with clear CRA literature that relates to this?
I always thought that family members could only be paid a reasonable salary for the work that they do in that year. The father was still puttering around helping his son up until a year or so ago and he is the one that started the company and built it up to where it is now basically. Over the last year or so his involvement has definitely dropped below a reasonable $90k/yr so this would tend to imply that the CRA if they started asking questions would not want to allow salary payments to the father.
Today I was reading about salary continuation plans which would seem to be similar to what is actually going on but I am not sure if 10 years would be considered unreasonable or if shareholders in the company are allowed to take advantage of this. The father is 78 as of Dec 31, 2023 so he started collecting this at about age 70 - well past the standard retirement age.
When the father dies in 2024 or possibly 2025 how does this arrangement affect the shares? The son has paid for them over 8 or 9 years of these salary payments from the profits of the company deducting the salary payments each year. There will be substantial capital gains on the father’s shares if the son inherits them via the will I would think unless he sells the shares to the son for $1 or whatever the PUC is before he dies as part of this undocumented agreement that they originally made 8 years or so ago. I am not sure what the valuation of the company would have been 8 years ago when they made the deal but the retained earnings is in the 3.5 million range. I would have thought that a crystalization should have been done 8 years ago (long before I took over doing the tax returns) to split the values between the father and son but that was not done. The father can’t enter into any new contracts since he has bad dementia and the son has signing authority over everything… Can anything be done to minimize what would seem to be nasty taxes looming?
The father was entitled to the money - no question about that. But, it should have been paid out as dividends rather than salary. He is not taking advantage of anything - if anything it would have been to his advantage to have taken dividends instead of salary. However, this can’t be changed - there was poor or no tax planning. Do you know, was the payment treated as salary all along with source deductions remitted?
Does anyone have financial power of attorney for the father - someone other than the son? There would still be opportunity to do something at this point.
With 3.5 million in RE, the son should move surplus out of the operating company into a holdco, I would think.
I am not a CPA, so if this were my client, I would probably advise the client that it is outside of the scope of what I can do. The corporation, as well as father and son, would probably benefit from an expert tax planner. @laurie, I am not suggesting that you are not competent, but there would be too much at stake for me to tackle this alone. Oops, I did google your company and I apologize for even trying to give you advice.
Not a problem. Your insight is helpful. I primarily do personal taxes not corporate taxes which is why I am trying to figure this out through research and asking questions here. What little corporate tax I do is very straightforward usually and not end of life estate planning.
It was treated as salary with all related source deductions made.
I can ask if it would be possible for someone else to get signing authority - looking for ways to mitigate this after the fact if anybody has any ideas although the father has not died yet so a small window of time available there if that would help. If you (or anybody else reading this) are an expert in this area I would love to hear from you and possibly get you involved in the corporate reorganization that is going to happen on the father’s death.
That may or may not be possible at this stage as it may have to happen very quickly. I will check on this as there are some possibilities already set up but the problem I think is that the father is also a shareholder in the holding companies that were set up years ago. I think in order to make this work the holdco would have to be in the son’s name alone. There is definitely excess cash right now but it’s fairly recent - they finally had a banner year after it being fairly dead over covid.
Someone has to have POA for the father if he has serious dementia. It should still be possible to change the salary to dividends for 2022 and 2023 and definitely for 2024. There should not have been any EI or CPP deductions taken so it should only be the income tax which can be switched to instalments. There should be no more salary - only dividends to the father.
It should be possible even at this late date to move funds into a holdco owned by the son. You and the son definitely need to involve a lawyer that can make the change to the old holdco or create a new one for the son only. The son should also probably be taking some dividends, not just salary.
I think I know enough to be dangerous. When corporations get too complicated or too rich, I leave it up to the experts. Looking back it is easy to see what should have been done differently, but to deal with it now is above my pay grade.
It would be easy to say like one tax lawyer says in his tax articles “Please refer to your Toronto Tax Lawyer.” Even though these people are expensive, it may still be cost effective for the clients in this case.
I have a client who willed his company to his son. However, the company has done nothing but hold investments for the last several years (at least five years, looking at the history), and the son only found out about it in reading the will. I haven’t dealt with this kind of thing before, so any advise on how to proceed would be appreciated. This looks like a tax nightmare to me right now.
@Laurie You might like to read this thread and see if any of this applies
I did have a read through and there are a lot of differences. No brokerage account so no double taxation as pointed out by snoplowguy. This is an active company so whatever the dad pays tax on would become the PUC for the son. We are possibly going to have issues valuing the company since it is a going concern. I am trying to minimize the taxes to the father which could be several hundred thousand dollars. I am thinking perhaps a crystallization of some sort to take the father out as a shareholder before he dies and insert the son as a direct shareholder.
I have a call into a corporate tax lawyer for exactly this reason. I can change the salary to dividends easily enough as of Jan 1, 2023 but earlier than that would require amending all sorts of things. Which we might have to do anyway. The son has the power of attorney over everything. I know just enough to be really dangerous myself so lawyers will be involved.
Need to be very careful there. If the father and son own the same class of shares it is not possible to pay dividends to only one of them. When dividends are declared they are declared on a particular class of shares. All shareholders of that particular class receive a pro-rata share of the dividend. You can’t have the father take dividends but not the son unless they own separate classes of shares.
