Some quick but difficult questions for the tax experts and lawyers.
What are the implications of shareholders disproportinately injecting capital into a company (for the purpose of acquiring real estate)? The money can be presumably treated as:
1. Gift
- Implications are the shareholders have no claim to the money
- To the extent the shareholders borrowed the money from other sources, it would not be tax deductible
- Is this allowed?
- If one of the shareholders lending money is a company (Co B) with minority shareholders, can the minority shareholders of Co B claim oppression of minorities or breach of director duties?
2. Debt
- The company would owe the shareholders money
- The company would need to pay the shareholders a market interest rate (ie 5-6%)
- If the company does not pay the shareholders a market interest rate, is there a risk that the "debt" injection would be treated as an equity injection?
- If the company does not pay the shareholders a market interest rate (let's say it pays 0% interest), does that mean any money borrowed by the shareholders to make this investment is not tax deductible?
- If one of the shareholders was a company (Co B), would the minority shareholders in Co B have a claim to oppression of minority shareholders or breach of director duties, if a market interest rate was paid? Does this change if a sub-market interest rate or nil interest rate was paid?
3. Equity Investment
- This one seems relatively straight forward to me
- The money would be treated as consideration for shares
- What if the shareholders put in money disproportionate to their shareholding, does that create an issue? Would you treat part of it as debt, part of it as equity for the shareholder that put in more money?
What are the implications of shareholders disproportinately injecting capital into a company (for the purpose of acquiring real estate)? The money can be presumably treated as:
1. Gift
- Implications are the shareholders have no claim to the money
- To the extent the shareholders borrowed the money from other sources, it would not be tax deductible
- Is this allowed?
- If one of the shareholders lending money is a company (Co B) with minority shareholders, can the minority shareholders of Co B claim oppression of minorities or breach of director duties?
2. Debt
- The company would owe the shareholders money
- The company would need to pay the shareholders a market interest rate (ie 5-6%)
- If the company does not pay the shareholders a market interest rate, is there a risk that the "debt" injection would be treated as an equity injection?
- If the company does not pay the shareholders a market interest rate (let's say it pays 0% interest), does that mean any money borrowed by the shareholders to make this investment is not tax deductible?
- If one of the shareholders was a company (Co B), would the minority shareholders in Co B have a claim to oppression of minority shareholders or breach of director duties, if a market interest rate was paid? Does this change if a sub-market interest rate or nil interest rate was paid?
3. Equity Investment
- This one seems relatively straight forward to me
- The money would be treated as consideration for shares
- What if the shareholders put in money disproportionate to their shareholding, does that create an issue? Would you treat part of it as debt, part of it as equity for the shareholder that put in more money?