Tax considerations for going public | KPMG | CA

Take the time to put your taxation planning in order before going public

Take the time to put your taxation planning..

Taxation is an important consideration for any company on the IPO path.

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 Tax considerations for going public

Taxation is an important consideration for any company on the IPO path. While going public may mean the loss of certain tax advantages, it may also open the doors to certain tax planning opportunities.

In making the transition to a public company, there are a number of tax requirements and rules that a private company may not have had to consider previously. At the same time, there are specific practices that should no longer apply once your company goes public. It’s essential that a company do the preparation work well ahead of the public offering. Those that don’t prepare thoroughly for the transition could lose out on opportunities or in more serious cases, face costs.

On an ongoing basis, the company will need to have the internal capabilities to address its tax risks, as well as the resources to prepare quarterly and annual tax provisions. It will be important to have an effective tax reporting function to monitor on-going legislation and compliance matters.

The pre-IPO time frame represents the ideal opportunity to crystallize a number of tax-related issues. The first step is to conduct a complete review of your company’s tax position and the personal tax situation of individual stakeholders. This will enable you to pinpoint areas where you can enhance or crystallize tax benefits prior to going public, as well as ensure that your company is structured in a tax efficient manner. For example, a private company with capital dividend accounts, GRIP (general rate income pool), RDTOH (refundable dividend tax on hand) or safe income should consider using the account balances prior to going public in order to fully realize any tax benefits associated with them.

Prior to the IPO, it may be necessary to reorganize share capital, consolidate or restructure the corporate group, or divest or contribute assets. It’s important to do a thorough tax analysis of any potential impacts associated with any such restructuring, including the various commodity taxes, such as GST/HST, excise tax, retail sales tax and land transfer tax.

Some questions you should be asking include:

  • How does going public affect the availability of any R&D credits?
  • How can we efficiently utilize and structure equity-based compensation going forward? 
  • What should be done about existing stock options and other rights? 
  • How can we offer the most favorable tax treatments for our employees? 
  • How should IPO expenses be treated for tax purposes? 
  • Should we conduct an internal tax due diligence? (If so, do we have the internal resources with specialized skills and experience?) 
  • Are the back-end systems and processes properly established, or are enhancements needed?
  • What tax planning should I consider pre-IPO such as utilizing tax accounts such as CDA, RDTOH, GRIP, safe income?
  • Can we use the lifetime capital gains exemption with respect to any shares divested in the IPO?

As a public company, there are also a number of fundamentals that change significantly. For example:

  • Public companies must make eligible dividend designations in order for shareholders to receive a preferred tax rate
  • Shares and debt are now qualified investments for deferred income plans 
  • Public companies are not entitled to the reduced corporate tax rate available to a private company
  • Public companies cannot pay out tax-free dividends from a CDA or return capital to shareholders without triggering a dividend.

The importance of tax planning cannot be underestimated. In fact, some tax plans need to be implemented months before a public offering in order to optimize their inherent benefits. Advance planning not only helps to smooth the bumps along the way but also helps uncover important opportunities that could otherwise be lost.

Related Resources

KPMG in Canada released, "A Guide to Going Public", which outlines the challenges a company may face when going public, including the complex accounting rules and reporting requirements, pressures on time and resources, and managing new stakeholders (i.e., board, shareholders, and new management).

In particular, the section on tax considerations discusses:

  • Corporate tax issues
  • Shareholder tax issues
  • Deductibility of IPO-related costs

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