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Achieving More Together
Business Succession Planning & Legacy Philanthropy
Achieving More Together
Whenever money changes hands….
Achieving More Together
Business Succession Planning
l Keep the business – Transfer to next generation during lifetime – Transfer to next generation on death
l Sell the business – To employees / management group – To third party
l Wind up the business
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Legacy Planning
l Keep the business – Gift during lifetime – Gift on death
l Sell the business – Cash gift using sale proceeds – Gift of shares to private foundation – Gift of shares to public foundation
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Gift During Lifetime
Opco
Shareholder
Corporate Portfolio
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Gift During Lifetime – Opco shares
l Donor has a Canadian controlled private corporation engaged in active business in Canada
l They have done an estate freeze and received preferred shares
l They used their capital gains exemption when the preferred shares were issued
l $800,000 preferred shares with ACB and FMV = $800K
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Private Company Shares
l Gift private company shares – No personal cash required – Donation receipt = FMV – Tax credit offsets gain on transfer, if any, then
balance offsets salary or other income – If CGE shares, no capital gain (ACB=FMV) – s. 38(a.1) zero inclusion rate does not apply to
gift of private company shares
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Private Company Shares
l Company redeems shares over time – Cash flow to charity – Company may get RDTOH tax refund
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Private Company Shares
l Benefits – Donation credit available personally – Funded with corporate dollars – Tax savings available immediately – Tax recovery available as shares redeemed – Reduces value of Opco for estate tax
purposes
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Private Company Shares
l 60 year old couple l $500,000 gift of preferred shares l Utilize the donation receipt over 5 years -
$100,000 per year l Personal tax refund $43,700 each year
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Insurance Replaces the Asset
l What will $43,700 for 5 years buy?
l $720,000 – Universal Life Limited 10 pay – 60 male, 60 female, joint last to die coverage,
standard risk, non-smokers
l Charitable Wasting Freeze
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Gift During Lifetime
Opco
Shareholder
Corporate Portfolio
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Gift During Lifetime – from Opco’s portfolio
l Corporation makes gift of publicly traded securities l Capital gain inclusion rate = 0% l Full donation receipt
l Donation creates capital dividend account so company can pay a tax free dividend to shareholder
l Donation receipt offsets taxable income years 1-6 l Donation and dividend reduce corporate value so capital
gain tax at death is lower
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Tax Impact of a Private Corporation Gift
Reduces Capital
Gain At Death
Tax savings can potentially recover the entire amount donated
Offsets Taxable Income
Tax Free Distribution
From Capital Dividend Account
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Gift on Death
l Transfer to next generation is taxable – Estate freezes help – Family trusts help – Gifts help – Insurance helps – All of the above together really really help!!
l Who should make the gift? l Who has the tax liability? l Who has the assets?
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Gift on Death – Putting it all Together
l Shareholder has a $1M taxable gain on death l Shareholder leaves $1M gift in will
l Corporation owns $1M insurance on shareholder’s life l Corporation receives insurance proceeds and pays a tax
free insurance dividend to the estate l Estate is now whole – insurance replaced the assets
donated
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Sale of Private Company
l Need – Offset tax liability
l Ability – Sale proceeds
l Desire – Philanthropic intent
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Sale of Private Company
l Traditional Gift Planning – Make a cash gift after closing, within same taxation
year, to offset a portion of the capital gain
l Creative Gift Planning #1 – Gift a portion of shares prior to closing
l Creative Gift Planning #2 – Gift special preferred shares after closing
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Gift After Sale – Current Rules
l $813,000 Enhanced Capital Gain Exemption l $1,000,000 ECGE farms and fishers
l s.38(1) 0% inclusion rate for gifts of: – Publicly traded securites – Ecological property – Cultural property
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Gift After Sale – 2015 Federal Budget
l Disposition of real property or private shares to an arm’s length purchaser
l Exempt gain = (donated proceeds/total proceeds) x total gain
l Gift of cash proceeds made within 30 days l Vendor can be individual or corporation l Donation amount limited only by sale proceeds
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Gift After Sale – 2015 Federal Budget
l Holdco sells Opco for $4 million l Holdco donates $1 million within 30 days l ACB negligible l Exempt gain is $1M {($1M/$4M) x $4M} l $3 million net gain l $1.5 million taxable gain l $1 million donation deduction l $500,000 Net Taxable gain l $228,000 Tax payable (45.7% tax rate)
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Gift Prior to Sale
l Gift before sale closes, within 5 years of closing, to public or private foundation
l Purchaser buys shares from both donor and foundation
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Opco
Shareholder
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Opco
Shareholder Foundation
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Opco
Shareholder $$$
Foundation $$$
Purchaser
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Gift Prior to Sale
l Public foundation - receipt available at time of donation l Private foundation – receipt available at time of sale
l Donation receipt offsets donor’s capital gain l Eliminates capital gain on foundation’s shareholding l Foundation now has liquidity
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Gift Prior to Sale
Gift After Gift Prior Gift 0 4,167,000 Fair Market Value 25,000,000 20,833,000 Adjusted Cost Base 15,000,000 12,400,000 Gain 10,000,000 8,334,000 Taxable Gain 5,000,000 4,167,000 Gift 4,167,000 0 Tax Payable 375,000 0
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Gift After Sale - Preferred Shares
l Corp A and Corp B are “sister” companies l Corp A has sold assets or shares l Corp A has a capital gain and wants an offsetting
deduction l Corp A has full sale proceeds available for
planning
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Corp A
Shareholder
Corp B
$$$
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Gift Preferred Shares
l Corp B creates special preferred shares – Retractible, redeemable, fixed cumulative dividend
l Corp A buys preferred shares from Corp B – High ACB
l Corp A donates shares to public foundation – No capital gain because ACB = FMV
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Corp A
Shareholder
Corp B
$$$
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Corp A
Shareholder
Corp B
$$$
Preferred shares
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Corp A
Shareholder
Corp B
Foundation
Preferred shares
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Gift Preferred Shares
l Corp B pays annual dividend to foundation
l Corp B insures shareholder to have funding to redeem preferred shares on death
l Corp B has full sale proceeds for investing, less – Annual dividend paid to charity – Annual insurance premium
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Gift Preferred Shares
l Full (subject to valuation) and immediate receipt generated by the gift of shares
l All cash remains in the corporate group l No gain triggered on the donation l Annual dividend paid recovers RDTOH balances l Ultimate redemption funded with insurance
rather than investment assets. l CDA balance available for family
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Conclusion
l Be creative l Think beyond cash l Private company shares are worth considering l Use tax efficiencies to maximize donor intent
Achieving More Together
Thank you!
