Rbc fall seminar business succession planning

Succession Planning

Assumption: Company A — Balance SheetASSETS

Current assets 10,000,000$

Long-term assets 15,000,000 25,000,000$

LIABILITIES AND SHAREHOLDER'S EQUITY

Liabilities

Current liabilities 6,000,000$

Long-term liabilities 9,000,000

15,000,000

Shareholder's' equity

Common shares 1,000

Retained earnings 9,999,000

10,000,000 25,000,000$

Book value of equity 10,000,000$

Fair value of equity 18,000,000$

Succession PlanningFamily Assumptions

Bill (father) – sole owner 60

Mary (spouse) – part-time in business 56

Kim (active in business) 32

Todd (active in business) 30

Emily (not interested in business) 26

All (except Emily) remains employed in Company.

Where do I Start?

• Establish balance in your goals in business and personal

Business – management, employment, succession, family participation

Personal – need for funds, risk, estate, emotional

• Timing

• What is a business freeze?

Assignment of 100% of current value into fixed value (preferred) shares and re-issuing new common shares for future growth

Available tool to facilitate discussion

• Establish a co-ordinated team

Estate Freeze

$18M in common shares

BillBill

COMPANY A

BEFORE

$18M in Preferred shares

BillBill

COMPANY A

Common – nominal value

AFTER

?

Considerations in an Estate Freeze

• Valuation

• Receipt of new common or growth shares

• Terms and conditions of preferred shares

• Taxation

• Review of corporate documents/assets

Further benefits of an Estate freeze

• Multiply capital gains election

• Income splitting potential

• Removal of cash - financing

• Multiple freeze transactions

Potential Example

Common shares

BillBill

COMPANY A

Mary, Kim, Todd, Emily or Family Trust

Mary, Kim, Todd, Emily or Family Trust

$18MPreferred Shares

(Voting)

Common shares

► Capital Gains Exemption

► Voting Shares

► Family Trust

►Holding Companies

• WHAT ARE YOUR GOALS AND OBJECTIVES?

• IF WE DO A FREEZE, WILL THE VALUE OF THE FROZEN SHARES AND YOUR OTHER ASSETS RESULT IN YOU HAVING THE AMOUNT OF MONEY YOU NEED TO

MAINTAIN THE LIFESTYLE YOU WANT?

• TRANSFER AGREEMENT

• SHAREHOLDERS’ AGREEMENT

• I AM CONCERNED I WILL GIVE MY SON/DAUGHTER SHARES, THEY WILL GET DIVORCED AND THE FAMILY BUSINESS WILL BE LOST. WHAT CAN I DO?

Key Legal Considerations

“Its not the gift, it’s how you structure it”

other net

family

property 100

100value of

Shares

0

400

1,000

Son

Marital

BreakdownMarriage

Gift

other net

family

property 50500

Marriage

What is the equalization payment?

Wife

Marital

Breakdown

“Its not the gift, it’s how you structure it”

other net

family

property100

0value of

Shares

400

800

Son

Marital

Breakdown

GiftMarria

ge

other net

family

property 50 500

Marriage

What is the equalization payment?

Wife

Marital

Breakdown

• YOU MUST START WITH YOUR OBJECTIVES

• RETIREMENT, DISABILITY AND DEATH

WILL YOUR PLANS BE THE SAME FOR ALL?

• FOR RETIREMENT, ESTATE FREEZE STRUCTURE COULD BE THE MAJOR FACTOR IN DETERMINING YOUR INCOME AND PAYMENTS OVER TIME

THE EMPLOYMENT AGREEMENT TRANSFER AGREEMENT

SHAREHOLDER AGREEMENT

Succession Planning

• POWER OF ATTORNEY

CAN LIMIT THE SCOPE TO DEAL WITH BUSINESS

For Disability

WHO YOUR DECISION MAKER IS WILL BE CRITICAL

CLEAR DIRECTION TO ATTORNEY AS TO INTENTIONS

• WILLS MUST BE IN PLACE

• DUAL WILLS

ONE FOR BUSINESS SHARES

ONE FOR OTHER ASSETS

• FAMILY TRUSTS ALSO HAVE TO BE CONSIDERED

For Death

• EXECUTORS ARE KEY ELEMENT

• CLEAR PLAN FOR BUSINESS SHOULD BE SET OUT

Succession Planning - The Financial Plan

Appropriate income tax and estate planning advice can help in validly minimizing or deferring income tax that may arise on ownership succession

Our subjects:

Bill Age 60Mary Age 56

Children:

Kim (32);Todd (30);Emily (26).

Succession Planning - The Financial Plan – Step 1

Succession Planning - The Financial Plan – Step 2

Succession Planning - The Financial Plan – Step 3

Succession Planning - The Financial Plan – Step 4

Succession Planning - The Financial Plan – Step 5

Succession Planning - The Financial Plan – Step 6

Succession Planning - The Financial Plan – Step 7

Succession Planning - The Financial Plan – Outcomes

Possible Solutions:

• Reduce taxes by transferring capital losses;

• Boost an RRSP with a retiring allowance;

• Reduce US Estate Tax exposure with a Non-Recourse Mortgage or other solution;

• Select the correct pension plan ~ consider an Individual Pension Plan (IPP);

• Assess income splitting opportunities with Spousal Loans, Family Trusts;

• Implement Charitable Gift strategically to reduce taxation and create a legacy;

• Reduce taxes by re-structuring debt;

• Testamentary Trusts and Alter Ego Trusts;

• Insurance to equalize estate gifts or pay taxes;

• Investment allocation suggestions to achieve retirement goals.

Succession Planning - The Financial Plan – US Estate Tax

Succession Planning - The Financial Plan Reveals

Appropriate income tax and estate planning advice can help in validly minimizing or deferring income tax that may arise on ownership succession

Plan Outcomes and Goals:

•Bill and Mary have significant non-RRSP assets;•Prefer security of guaranteed investment income;•Will be looking for enhanced after-tax cash flow at retirement;•Capital generated cash flow not needed to fund lifestyle requirements;•Wants to generate more income with less tax at death and through annual erosion;•Wants to leave as much estate to beneficiaries as possible;•Risk averse

Succession Planning – HoldCo Insurance Planning

Succession Planning – HoldCo Insurance Planning

Succession Planning – HoldCo Insurance Planning

Succession Planning – HoldCo Insurance Planning

Succession Planning - Resources

Warren GrangerPartnerErnst & YoungT: 519-646-5534F: 519-438-5785warren.h.granger@ca.ey.com

Ian D. ShewanPartnerLerners LLPT: 519-640-6334F: 519-932-3334ishewan@lerners.ca

Graham C. PorterPartnerLerners LLPT: 519-640-6388F: 519-932-3388gporter@lerners.ca

Chris DelaneyVice-President, High Net Worth Planning ServicesRBC Dominion SecuritiesT: 519-675-6902F: 519-675-2020chris.delaney@rbc.com

Contact Details