Hello all. I am looking for an expert in the small business capital gains exemption and estate windup for a file of mine where the principal shareholder has just died. The widow and son who are still very involved in the operational company and will keep it running are willing to hire help as this is outside my area of expertise. The company and principals involved are all in the south end of Calgary so I need someone familiar with Alberta rules in particular and federal rules in general.
An overview of the situation and my immediate problems in case no one can take over so perhaps I can get some pointers in the right direction for research. Apologies - this is long and complicated but I am not certain which points are important and which are not.
The deceased shareholder started the company decades ago and has built it up into a thriving business that does exterior renovations/building for a couple major house builders and regular home owners - siding, soffets etc. Usually their profits are low enough to be covered by the small business rates although I think for the Jan 31, 2024 year end it might be over that as they did very well last year. They have a whole stable of guys that work contract (some are officially employees and full time or close to it but mostly the guys are contractors that work by the job and come and go as needed) and the deceased shareholder and the son (now age 38) were essentially the foremen supervising and running the whole thing. The son has worked in the company since he was a teenager and did/does a lot of the construction work too. The widow (now age 65) ran the office and supervised all the admin side of things including accounting. A brother and niece are involved as employees. Originally the deceased shareholder was the sole shareholder but about 10 years ago he had a similar health scare where the docs told him had months to live and I managed to accomplish an estate freeze that brought in his wife as a 35% shareholder and created a holding company to strip excess cash out to as a 20% shareholder (which is 50% each) leaving the original shareholder with 45% of the shares directly. I transferred all the value in the company into preferred shares payable to the now deceased shareholder that he could gradually redeem over time so that there was no tax consequences at the time and the new shares were issued at $1/share. Most of the preferred shares are still there (value $770k as of Jan 31, 2024 year end) but I could not factor in the small business exemption at that time as the cash in the company was too high. The holding company currently still has a half million or so sitting in the company in either the chequing account or money market funds.
I don’t know how much the operating company is worth but I am guessing several million and possibly as much as 4 or 5 million based on sales, assets and how much it was worth when they did an official valuation 10 years ago. It has a corporate year end of January 31st and I am just working on the Jan 31, 2024 year end now. We need to bring the son into the shareholdings somehow and access as much small business exemption as possible if that can be done now that the main shareholder has died. I was trying to get that sorted out ahead of him dying and thought I had more time but apparently he went down hill very quick and died in the last day or so. I am not certain what the will says in terms of what was supposed to happen as I think they were in the process of updating it given that the doctor said three months ago to wind up his affairs. I don’t know how far they got in that process at this point. It could be quite messy which is why I need someone that is very familiar with estate rules and small business exemptions to minimize the tax hit over all and right now if possible.
If no one steps up to take over this (I can provide records and knowledge of client going back 20 years and answer as many questions as I can) I see my next steps as
- get the Jan 31, 2024 tax return completed and filed. This is going to be messy to complete as they changed accounting systems mid year without asking me what sort of problems it would cause… It does however have to be done by July 31st so this is currently my highest priority now that I have everything done that had to be done by June 30th.
- figure out what the will says in regards to what happens to the deceased shareholder’s shares. I assume if they are transferred to the wife there is no immediate tax consequences with a tax deferred rollover to her but can I factor in a small business exemption to bump up the cost of those shares without having to pay capital gains tax on the rest of the gains related to his shares? If they transfer to the son I assume there is also a possibility of somehow factoring in the small business exemption to bump the cost to the son and then tax on the rest in the final tax return(s) (which I am also not clear on how to file when there are massive tax considerations to take into account). Anyway to spread out or defer this tax hit? I am fairly certain there are no trusts or ongoing estate T3’s needed but I could be wrong and I know absolutely nothing about trusts as I haven’t filed them in the last 25 or so years. The major asset of this shareholder is the company and the principal residence that the widow and 2 dependent disabled adult children live in (both get disability payments and do not work). I am not certain whether the house that the adult son that runs the business now is his or his parents real estate and I a fairly sure there was a condo bought at some point that is either the place the son is living in and/or a place the parents used to stay in overnight when working hard as it is much closer to their office than their principal residence which is in Priddis. A third possibility is that the shares are redeemed by the company if neither the widow nor son received the shares directly in the will although I am not certain how likely this is.
- depending on what happened to the shares I then need to figure out if the operating company needs a year end as of the date of death due to change in control issues and if yes get started on doing that year end.
- Get a valuation done once the tax returns for Jan 31, 2024 and possibly the date of death are done for the purposes of figuring out how much tax is going to be payable on the personal returns in 2024 and hopefully getting small business deductions made to reduce taxes paid.
Am I missing anything else that needs to be done immediately? I don’t really want to do this all by myself as it suddenly got way more complicated than I know what to do with so if this sounds like something you have the expertise to either advise on or take over please contact me with your rates at laurie@expatax.ca or by phone 778-755-0754 (not a cell so no texts please). Someone in the south end of Calgary or area would be best to deal with the grieving widow and son in person but it can all be done remotely. I am in West Kelowna in BC. I will of course be grateful for any comments anyone has on this situation. I know I should have moved faster on this but I have been overwhelmed with tax season and thought I had more time. But I didn’t as he was in worse shape than he and I thought.