My client has a small residential rental building for years, and looking to sell it, expect to make couple millions in profit, she was asking me some best way to take out the profit to avoid being hit the highest tax. The building is owned by a company solely owned by her, so she should be able to get 3 of her adult children to become shareholders then in this case, the cost of the building was only couple hundred thousand, if it can be done, then it will even be better if she can wait for couple more years, and make it an active business, and sell the shares and everything will be tax free with the life time capital exemption.
I really think you need to run this by a tax accountant before pulling the trigger on this plan. For one, income from a single residential rental property in a company will likely not be ABI. Therefore, the company shares will likely never qualify for the capital gains deduction. Second, the tax on the shareholder benefit from splitting her current value with her kids will make her wish she had just paid the tax on her taxable capital gain.
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{This should be moved to a new topic.} << Thanks to whomever did so!
That is not a plan that will pass an audit.
Having the kids as shareholders doesn’t convert single-property income to Active Business Income. Nor will it pass the smell test if they “work” in the “business” to make it “Active”.
Suck it up. You made a tonne of money…pay the tax on the cap gain.
Minimize the tax hit by taking it out a bit at a time as it will give rise to CDA and offer the oppo for distribution via Capital Dividends for the tax-free portion of the gain.
The only other alternative is to reorg, do a Sec 85 rollover and bring the kids in, but it won’t change the ultimate result a lot if much of the gain is already in hand. Get a tax lawyer involved - this is not something to “just do”.
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I didn’t think it would be that easy, but looking at the other thread, didn’t it say common shares can be issued without looking at FMV because shares have no value.
And the small company, didn’t hire anybody, so everyone in the family are helping with renovating and repair, didn’t get pay for anything because income barely cover all the expenses, just the property value is increased. So I thought that’s something possible. And once there are more than 5 full time employees, then it’s ABI, is it not? So that’s possible if shares can be issued like that.
Owning shares doesn’t make you an employee, let alone a full-time employee. Common shares can be issued with “no value” but when there is existing value in the company, that value has to be allocated to another shareholder, such as in an “estate freeze” situation. You can’t bring in children as shareholders and just allocate them value that the parent already owns.
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That’s where we can’t draw the line? On balance sheet, the property is only $300,000, I always think we have to use the market value too, maybe like the assessment which would be in $5M, to do any planning, so I was actually surprised when I see private company doesn’t have to look at value, and for full time employee, I was referring to instead of hiring contractor, as security, as bookkeeper, as admin etc… the children can assume those position and becomes a full time, not just doing for the purpose of becoming active.
All those “full-time” employees for one building? If the purpose of hiring all these kids as employees is “not just doing for the purpose of becoming active” then what does your client gain by hiring all her kids? If operating the building truly required that many “employees”, wouldn’t your client already have those positions filled?
You should do what you want and ignore the advice you get here.
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Oh boy.
This so illustrates the problem when people who don’t actually read law (or the Income Tax Act more particularly) come up with “ideas”.
@arliss has it right LOL.
Been in tax for over 40 years now and it never fails to amaze me. You can’t just make crap up and do it because you read something somewhere. Well, you can…but you shouldn’t.
With a pregnant gain of $5M…hire a fricking TAX LAWYER. The $10-50K spent will be well-spent.
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LoL, I didn’t want to do that, that’s why it amazes me when I saw that post, thinking it would be possible, for company to do just that, we spent months looking into options.
As for the full time employees exception, that’s only if they are truly doing it, like, instead of hiring a contractor to repair their building every week, they will do it personally themselves, and instead of hiring an admin to collect rent and paper work, they do it themselves, and cleaning, etc… not just making up, I told them it has to be factual,
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Still GAAR and may other sections of actual law that would give a qualified professional accountant or a qualified professional tax lawyer reason to shake their heads in disbelief.
She’s going to make MILLIONS and yet wants to nickel and dime by carelessly appropriating schemes from unqualified internet sources?
Perhaps Donald Trump can give her some tax ideas - he’s usually full of them… 
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RR Accounting,
Even if your could show the rental operation as an active business (which IMO is not possible), to what end?? The gain is still inactive no matter what.
Like others have said if I could make 4-5M and pay only 35-40% overall tax I would be ecstatic.
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Thanks guys, it was an idea that was turned down by expert, and it wasn’t until I saw the previous thread where I see it seems everything would be perfect if that’s the case, so asked about it under that thread.
It was saying share can be issued for nothing, without having to worry about fmv, that’s where it shocked me if that’s possible, I thought I am missing something that never know