BUSINESS SUCCESSION PLANNING -...

Frostiak & Leslie Chartered Accountants Inc.

BUSINESS SUCCESSION PLANNING

June 20, 2012

Larry Frostiak, FCA, CFP, TEP

Presented to:

Succession PlanningInvolving FamilyEstate FreezePlanning for a sale?

Involving FamilyThe “Soft” IssuesSale vs. GiftTax Implications

The “Soft” IssuesEqualization Between Siblings –SIBLING RIVALRY!What About “KEY” Employees?Are They Ready?Ownership vs. RemunerationClaims by Family / Creditors

Sale vs. GiftCash Needs of Founder?Loss of Control?Deemed DispositionFinancing

Sale vs. Gift - Example

Implications:No cash received on giftLoss of controlGift occurs at FMV / deemed capital gainGAIN Taxable in year of Gift

Conclusion: generally not recommended

Founder Children

OPCO OPCO

GIFT100% 100%

Sale vs. Gift - Example

Implications:Cash funding back to founderControl exercised over security taken backSale occurs at FMV / deemed capital gainGain can be spread out over 5 years

Founder Children

OPCO OPCOSALE

100% 100%

Note Payable

(securitized)

Sale of Shares to ChildrenPros

Founder gets cashDegree of control retainedPossible use of $750K LCGE

ConsFinancing issues for childrenTax payable by vendor “front-ended”

Tax ImplicationsDisposition occurs whether sale or giftUse of $750K LCGE will restrict financing by childrenBy wary of Sec 84.1 surplus-stripping rules

Sale of Shares

Founder Children

OPCOHOLDCO

SALE100%

Note Payable

CORPORATELY FINANCE ACQUISITION?

Founder Claims $750K LCGE

Sale of Shares and Sec 84.1Proceeds to Founder deemed to be a taxable dividendNon-arm’s length sale creates special restrictions on use of LCGE

Succession PlanningSo… What can be done?

The Estate FreezeWhat is an “estate freeze”?

Exchange common “growth” shares for

Fixed Value Preference sharesFMV equal to FMV of ‘old’ commonRedeemableRetractable at option of holderVOTING (control)

The Estate FreezeCompany files “Articles of Reorganization”Election under Sec 86(1) of the ITATax deferred treatmentPermits successors to subscribe for new common shares (nominal value)

Example 1 – Estate Freeze

Founder

Founder Children

OPCOFMV = $3.0 million

BEFORE AFTER

New common shares

(growth)

3.0 Million

fixed value pref shares

(freeze shares)

Estate FreezePros

Control retained by founderChildren acquire future growthBuyout funded with future earnings / profitsNo immediate tax on transfer

ConsNo immediate cash payable to founderAs shares redeemed – tax on deemed dividend

Example 2 – “Downstream” Estate Freeze

Founder

FounderChildren

FMV = $3.0 million

BEFORE AFTER

85(1) transfer of assets

New common shares

(growth)

OPCO(now HOLDCO)

Pref shares

Downstream Estate FreezePros

Control retained by founderCan move specific assets to NEWCOCreditor proofing at NEW HOLDCO levelTax deferred share redemptions

ConsNo immediate cash payable to founder

Example 3 – Using a “Family Trust”

Deals with claims from outside creditorsRelationships of childrenSeparate ownership from involvement / work in the business

Founder

Freeze Share

FamilyTrust

Common

Children

(beneficiaries)

Planning for a Sale?Who? Employees? Competitor?Getting ReadyTax StrategiesShares vs. Assets

Getting Ready?Separate Business Assets / Real EstateFinancial Statements / ProfitsPurifying Corp for $750K LCGE

Separate Business and Real Estate – Example 1

Sale of OPCO onlyFounder retains REALCOOPCO qualifies for $750K LCGE

Founder

REALCO

Leases property

Separate Business and Real Estate – Example 2

Founder retains REALCONo $750K LCGE available on saleSale of OPCO corporately taxed

Founder

REALCO

Leases property

Purchaser

Sale of OPCO by REALCO

Tax StrategiesKeep OPCO onside as a SBCUse of $750 LCGEMultiply through use of family trust

Tax Strategies - Example

Remove redundant “tainting” assets within OPCOUse of trust to keep OPCO pureUse of trust multiplies access to $750K LCGE

Founder

Preference

Freeze ShareFamilyTrust

Dividend

Beneficiaries

CORPORATEBENEFICIARY

Dividend

Shares vs. AssetsShares

Capital gains treatment to vendorPossible use of $750K LCGEReserve claimable where vendor take-backSprinkling through family ownership (trust)

Sale of AssetsCorporately taxed / No LCGESecond level of tax to remove surplusPotential GST / PST implicationsUse of RCA’s, IPP’s, bonuses etc. to defer or reduce tax

Example – Sale of Shares

Founder Purchaser

OPCO OPCO

Sale of Shares100%

FMV = $3.0 million (Goodwill)

ACB = NIL

Example – Sale of Shares($000’s)

Proceeds to Founder $ 3,000ACB -Capital Gain 3,000Capital Gain Exemption (750)Taxable Capital Gain $ 2,250Tax Thereon $ 518NET CASH Retained $ 2,482

Example – Sale of Assets

Founder Purchaser

OPCOPurchaser CORP

SALE of Assets100%

Wind up dividend

FMV = $3.0 million (Goodwill)

ACB = NIL

OPCOAssets

Example – Sale of Assets($000’s)

Proceeds to OPCO $ 3,000Corporate tax thereon (approx) (465)

2,535Dividend to Founder (2,535)

NILDividend to Founder 2,535Tax Thereon (248)NET CASH Retained $ 2,287

Succession PlanningTOP TEN TIPS1. Start planning early2. Assess Family capabilities / readiness3. Balance cash needs with succession goals4. Make the business financable (financial

reporting)5. Transition family ownership over time6. Separate business / investment assets7. Monitor SBC / QSBCS Status8. Multiply $750K LCGE with a trust9. Sell shares if possible10. Start planning early

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