Corporate reorganization and business transfers

What is a corporate reorganization?

A corporate reorganization is a planned change to your company’s legal structure (creating a holding company, exchanging shares, implementing an estate freeze, amalgamating or winding up) carried out without immediate tax where rollover rules apply. It prepares a sale, a transfer to the next generation, the arrival of a partner, or the sheltering of accumulated surpluses.

Every reorganization blends corporate law and tax, articles of amendment, resolutions, shareholder agreements, valuations, and tax elections filed with the Canada Revenue Agency (CRA) and Revenu Québec. KB Fiscalité brings a tax lawyer and a tax accountant together, so the legal and tax sides of the same transaction are handled as one file rather than passed between advisors.

What is an estate freeze?

An estate freeze locks in the current value of your shares by exchanging them for preferred shares of a fixed value, while future growth flows to new common shares held by your successors or by a family trust. The latent tax on future growth shifts to the next generation, and the tax payable on your death becomes a known quantity instead of an open-ended one.

A freeze offers several levers, capping the tax bill at death at today’s value, bringing children into the shareholding without giving away the value already built, keeping control through voting shares, and funding retirement through the gradual redemption of the preferred shares. A freeze is also adjustable (full, partial, or even refrozen if circumstances change) depending on your income needs and how ready the next generation is.

How does a tax rollover work?

A tax rollover under section 85 allows you, in general terms, to transfer property (shares, business assets, certain real estate) to a taxable Canadian corporation without immediate tax, in exchange for shares of that corporation. A joint election filed with the CRA, together with its Quebec counterpart, sets the agreed transfer amount and defers the gain until a later disposition.

The rollover is the working mechanism behind most reorganizations, incorporating a sole proprietorship, creating a holding company, implementing a freeze, purifying a company before a sale. Its validity rests on elections filed on time, a defensible valuation of the transferred property and properly drafted share classes, three places where improvisation gets expensive.

How do you transfer a business to the next generation?

An intergenerational business transfer passes your company to your children or grandchildren on tax terms comparable to a sale to an arm’s-length buyer. For years, a parent who sold to a corporation controlled by their children was penalized. The proceeds were treated as a dividend rather than a capital gain.

The intent of Bill C-208 and the rules that followed it is to correct that unfairness. The selling parent can obtain capital gains treatment (and, where the shares qualify, the exemption on QSBC shares) when the transfer is genuine. That means a real handover of control and management, a phased withdrawal by the parent and rigorous documentation. A successful transfer is built over several years, with the successors’ training, the freeze, the financing of the buyout and the shareholder agreement all moving forward together.

What is purification for the capital gains exemption?

Purification removes from a company the assets that are not actively used in its business (excess cash, passive investments, rental properties) so that its shares remain qualified small business corporation (QSBC) shares and give access to the lifetime capital gains exemption on a sale.

Eligibility is tested both at the moment of sale and over the period leading up to it, which is why a last-minute purification is often impossible. The usual techniques involve inter-corporate dividends paid to a holding company, debt repayment or the redeployment of assets, each with its own tax consequences. Purification is ongoing maintenance, not a one-time fix, a company that accumulates surpluses every year needs to be reviewed regularly to stay onside.

When should you create a holding company?

A holding company owns the shares of your operating company and receives its surpluses, generally through inter-corporate dividends that flow tax-free between related corporations. It shelters cash from business risk, defers personal tax for as long as the funds stay inside the structure, and makes the ongoing purification of the operating company far easier.

A holding company also has a cost side, each additional corporation files its own federal T2 and Quebec CO-17 returns, maintains its own minute book and adds compliance work. The decision is made by weighing the surpluses being generated, your retirement objectives and the prospect of a sale, not by reflex.

Which transaction serves which objective?

Each reorganization technique answers a specific objective. Most engagements combine several of them in a single sequence.

Transaction	What it accomplishes	Typical timing
Estate freeze	Locks in today’s value and directs growth to successors	Successors identified, value expected to grow
Section 85 rollover	Moves property into a corporation without immediate tax	Incorporation, holding company setup, freeze
Purification	Keeps shares eligible for the QSBC exemption	Ongoing, and well before any planned sale
Holding company	Shelters surpluses and defers personal tax	Operating company generating excess cash
Intergenerational transfer	Passes the business to children with capital gains treatment	Several years before the owner steps back

Selling a business, shares or assets?

A share sale and an asset sale produce opposite tax results. Sellers generally favour shares, which alone can qualify for the QSBC exemption. Buyers often prefer assets, which give them a refreshed tax cost and insulate them from the company’s history.

The gap between the two is negotiated, and it is prepared long before the first offer. A purified company, a freeze already in place and an up-to-date minute book strengthen the seller’s position well ahead of the letter of intent. KB Fiscalité structures business purchases and sales on either side of the table, from the letter of intent through to the post-closing tax elections.

How does KB Fiscalité run a reorganization?

A reorganization led by KB Fiscalité follows an ordered sequence, under the joint responsibility of a tax lawyer and a tax accountant.

1. Diagnosis. Current structure, financial statements, minute book, existing agreements.
2. Scenarios. Compared options with their tax consequences, presented before any decision.
3. Valuation and documentation. Property values, articles, share classes, agreements.
4. Implementation. Resolutions, share exchanges, tax elections filed on time.
5. Follow-up. Returns, minute book updates and the ongoing upkeep of the structure.

The firm meets clients at 24 Saint-Jean-Baptiste Avenue in Vaudreuil-Dorion and serves Greater Montreal and clients across Quebec.