Frostiak & Leslie Chartered Accountants Inc.
BUSINESS SUCCESSION PLANNING
June 20, 2012
Larry Frostiak, FCA, CFP, TEP
Presented to:
Frostiak & Leslie Chartered Accountants Inc.
Succession PlanningInvolving FamilyEstate FreezePlanning for a sale?
Frostiak & Leslie Chartered Accountants Inc.
Involving FamilyThe “Soft” IssuesSale vs. GiftTax Implications
Frostiak & Leslie Chartered Accountants Inc.
The “Soft” IssuesEqualization Between Siblings –SIBLING RIVALRY!What About “KEY” Employees?Are They Ready?Ownership vs. RemunerationClaims by Family / Creditors
Frostiak & Leslie Chartered Accountants Inc.
Sale vs. GiftCash Needs of Founder?Loss of Control?Deemed DispositionFinancing
Frostiak & Leslie Chartered Accountants Inc.
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%
Frostiak & Leslie Chartered Accountants Inc.
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)
Frostiak & Leslie Chartered Accountants Inc.
Sale of Shares to ChildrenPros
Founder gets cashDegree of control retainedPossible use of $750K LCGE
ConsFinancing issues for childrenTax payable by vendor “front-ended”
Frostiak & Leslie Chartered Accountants Inc.
Tax ImplicationsDisposition occurs whether sale or giftUse of $750K LCGE will restrict financing by childrenBy wary of Sec 84.1 surplus-stripping rules
Frostiak & Leslie Chartered Accountants Inc.
Sale of Shares
Founder Children
OPCOHOLDCO
SALE100%
100%
Note Payable
OPCO
CORPORATELY FINANCE ACQUISITION?
Founder Claims $750K LCGE
Frostiak & Leslie Chartered Accountants Inc.
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
Frostiak & Leslie Chartered Accountants Inc.
Succession PlanningSo… What can be done?
Frostiak & Leslie Chartered Accountants Inc.
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)
Frostiak & Leslie Chartered Accountants Inc.
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)
Frostiak & Leslie Chartered Accountants Inc.
Example 1 – Estate Freeze
Founder
OPCO
100%
Founder Children
OPCOFMV = $3.0 million
BEFORE AFTER
New common shares
(growth)
3.0 Million
fixed value pref shares
(freeze shares)
Frostiak & Leslie Chartered Accountants Inc.
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
Frostiak & Leslie Chartered Accountants Inc.
Example 2 – “Downstream” Estate Freeze
Founder
OPCO
100%
FounderChildren
NEWCO
FMV = $3.0 million
BEFORE AFTER
85(1) transfer of assets
New common shares
(growth)
OPCO(now HOLDCO)
Pref shares
100%
Frostiak & Leslie Chartered Accountants Inc.
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
Frostiak & Leslie Chartered Accountants Inc.
Example 3 – Using a “Family Trust”
Deals with claims from outside creditorsRelationships of childrenSeparate ownership from involvement / work in the business
Founder
OPCO
Freeze Share
FamilyTrust
Common
Children
(beneficiaries)
Frostiak & Leslie Chartered Accountants Inc.
Planning for a Sale?Who? Employees? Competitor?Getting ReadyTax StrategiesShares vs. Assets
Frostiak & Leslie Chartered Accountants Inc.
Getting Ready?Separate Business Assets / Real EstateFinancial Statements / ProfitsPurifying Corp for $750K LCGE
Frostiak & Leslie Chartered Accountants Inc.
Separate Business and Real Estate – Example 1
Sale of OPCO onlyFounder retains REALCOOPCO qualifies for $750K LCGE
Founder
REALCO
Leases property
OPCO
Frostiak & Leslie Chartered Accountants Inc.
Separate Business and Real Estate – Example 2
Founder retains REALCONo $750K LCGE available on saleSale of OPCO corporately taxed
Founder
REALCO
Leases property
OPCO
Purchaser
Sale of OPCO by REALCO
Frostiak & Leslie Chartered Accountants Inc.
Tax StrategiesKeep OPCO onside as a SBCUse of $750 LCGEMultiply through use of family trust
Frostiak & Leslie Chartered Accountants Inc.
Tax Strategies - Example
Remove redundant “tainting” assets within OPCOUse of trust to keep OPCO pureUse of trust multiplies access to $750K LCGE
Founder
OPCO
Preference
Freeze ShareFamilyTrust
Dividend
Beneficiaries
CORPORATEBENEFICIARY
Dividend
Frostiak & Leslie Chartered Accountants Inc.
Shares vs. AssetsShares
Capital gains treatment to vendorPossible use of $750K LCGEReserve claimable where vendor take-backSprinkling through family ownership (trust)
Frostiak & Leslie Chartered Accountants Inc.
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
Frostiak & Leslie Chartered Accountants Inc.
Example – Sale of Shares
Founder Purchaser
OPCO OPCO
Sale of Shares100%
FMV = $3.0 million (Goodwill)
ACB = NIL
Frostiak & Leslie Chartered Accountants Inc.
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
Frostiak & Leslie Chartered Accountants Inc.
Example – Sale of Assets
Founder Purchaser
OPCOPurchaser CORP
SALE of Assets100%
Cash
Wind up dividend
FMV = $3.0 million (Goodwill)
ACB = NIL
OPCOAssets
Frostiak & Leslie Chartered Accountants Inc.
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
Frostiak & Leslie Chartered Accountants Inc.
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