Buy/Sell Arrangements

1. Buy/Sell Arrangements

2. Company Profile • XYZ Inc. • Fair Market Value (FMV) = $2,000,000 • Owners: • John owns 50% of shares • ACB of John’s shares $10,000 • PUC of John’s shares $10,000 • Mary owns 50% of shares • ACB of Mary’s shares $10,000 • PUC of Mary’s shares $10,000

3. Company Profile • Growth rate of company 2% • Personal marginal tax rate on income 50% • Personal marginal tax rate on dividends 33% • Capital gains inclusion rate 50% • Assume John died last night • Assume Mary sells the business in 10 years

4. Premiums Agreement Premiums Alternative 1.Criss-cross with personally owned insurance • John buys $1,000,000 of insurance on Mary’s life • Mary buys $1,000,000 of insurance on John’s life 50% XYZ Inc. 50%

5. $1,000,000 To purchase shares Mary John’s estate $1,000,000 Death Benefit 2 1 3 As per Buy-Sell returns shares to Mary Alternative 1.Criss-cross with personally owned insurance

6. Alternative 1.Criss-cross with personally owned insurance Taxation • Premiums paid with after-tax dollars by owners • Any capital gains on “sold” shares belong to deceased’s estate Advantages • The simplest of all alternatives • Surviving owner(s) have an increased ACB • Insurance proceeds protected from corporate creditors’ claims Disadvantages • Large number of policies to maintain if there are multiple owners • Dealing with policies could be a problem in the event of disagreement • Premiums are paid with individual after-tax dollars.

7. Premiums Agreement Alternative 2.Criss cross with corporate owned insurance • XYZ Inc. buys $1,000,000 of life insurance on John’s life and$1,000,000 of life insurance on Mary’s life 50% XYZ Inc. 50%

8. XYZ Inc. $1,000,000 Death Benefit 1 XYZ Inc. declares a capital dividend of $1,000,000 $1,000,000 Promissory note To purchase shares Mary John’s estate 2 4 5 $1,000,000 Mary Now owns 100% of XYZ Inc. 3 As per Buy-Sell Returns shares to Mary Alternative 2.Criss cross with corporate owned insurance

9. Alternative 2.Criss cross with corporate owned insurance • Taxation • Premiums paid by corporation are a non-deductible expense • Proceeds received by the company are tax-free • Proceeds in excess of ACB are credited to the CDA • Any capital gains on “sold” shares belong to Estate of the deceased • Advantages • After-tax premium cheaper if the company is in a lower tax bracket • Fewer policies are required (one per shareholder) • Premium disparities are not an issue • Surviving owner(s) have an increased ACB equal to the purchase price of the newly acquired shares • Disadvantages • Insurance proceeds subject to claims from company’s creditors

10. Premiums Agreement Alternative 3.Share redemption with corporate owned insurance • XYZ Inc. buys $1,000,000 of life insurance on John’s life and$1,000,000 of life insurance on Mary’s life 50% XYZ Inc. 50%

11. $1,000,000 To purchase shares John’s estate XYZ Inc. $1,000,000 Death Benefit 2 1 3 As per Buy-Sell returns shares XYZ Inc. For cancellation Alternative 3.Share redemption with corporate owned insurance

12. Alternative 3.Share redemption with corporate owned insurance • Taxation • Premiums paid by corporation are a non-deductible expense • Proceeds received by the company are tax-free • Proceeds in excess of ACB are credited to the CDA • Proceeds received by the shareholder’s estate in excess of the PUC deemed a dividend. The dividend could be elected as a capital dividend • Advantages • After-tax premium cheaper if the company is in a lower tax bracket • Fewer policies are required (one per shareholder) • Premium disparities are not an issue • Disadvantages • No increase in the ACB for the surviving shareholder • Insurance proceeds subject to claims from the company’s creditors

13. Alternative 4. Hybrid method with corporate owned insurance • The insurance would be corporately owned but the agreement would allow flexibility in determining at death how many shares would be purchased by the surviving shareholders and how many shares will be redeemed by the corporation.

14. Premiums Agreement Alternative 4.Hybrid method with corporate owned insurance • XYZ Inc. buys $1,000,000 of life insurance on John’s life and$1,000,000 of life insurance on Mary’s life 50% XYZ Inc. 50%

15. $500,000 To purchase shares XYZ Inc. John’s estate $1,000,000 Death Benefit 2 1 3 As per Buy/Sell returns 50% of shares XYZ Inc. For cancellation 4 5 As per Buy/Sell returns 50% of shares to Mary 7 $500,000 Promissory note To purchase shares XYZ Inc. declares a capital dividend of $500,000 Mary Now owns 100% of XYZ Inc. 6 Mary Hybrid Methodwith corporate owned insurance

16. Alternative 4.Hybrid method with corporate owned insurance • Taxation • Premiums paid by corporation are a non-deductible expense • Proceeds received by the company are tax-free • Proceeds in excess of ACB are credited to the CDA • Proceeds received by shareholder’s estate in excess of PUC deemed to be a dividend. The dividend could be elected as a capital dividend • Advantages • After-tax premium expense cheaper if company is in a lower tax bracket • Fewer policies are required (one per shareholder) • Premium disparities are not an issue • Surviving shareholder gets an ACB step up • Disadvantages • Insurance proceeds could be subject to claims from the company’s creditors • Somewhat complicated arrangement