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 will mean the loss of certain tax advantages, it also opens 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 would not have had to consider. At the same time, there are specific practices that 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 tax-saving opportunities or in more serious cases, face risk penalties.

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, the personal tax situation of individual stakeholders. This will enable you to pinpoint areas where you can enhance 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, GRIP (general rate income pool) and/or RDTOH (refundable dividend tax on hand) accounts should consider using the account balances prior to going public in order to fully realize the tax benefits associated with them.

As part of the restructuring, it may be necessary to reorganize share capital or combine subsidiaries to remove certain assets prior to the public offering. It’s also important to do a thorough analysis of any potential impacts associated with 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 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?
  • Should I pay out the balance in the company’s CDA (capital dividend account) as a tax-free dividend before going public?
  • Can we use the lifetime capital gains exemption with respect to shares? (While this can be dealt with after the fact, it can be much more difficult and complex)

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
  • The company’s taxation year end will differ, which may mean accelerating the time to pay taxes to meet compliance requirements
  • 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

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

© 2017 KPMG LLP, a Canada limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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