Succession and Estate Planning Considerations

1. Succession and Estate Planning Considerations Private Company Webcast Series: Part 3 of 4 July 30, 2013

2. Meet our presenter David Steinberg, CPA, CA Tax Partner & Co-Leader, Private Mid-Market Practice Contact Information: David.A.Steinberg@ca.ey.com 416.932.6206 Succession and Estate Planning Considerations

3. Succession and Estate Planning - What is it? • Arrangement of Financial affairs to accomplish the following: • Provide income for the individual throughout their lifetime • Provide for tax efficient wealth transfer • Provide for seamless transfer of business including management • Asset protection Succession and Estate Planning Considerations 30 July 2013

4. Succession and Estate Planning - Other • Requires flexibility • Things change • Rules change • Family law considerations Succession and Estate Planning Considerations 30 July 2013

5. Estate Planning vs. Succession Planning • Estate Planning • Usually involves a tax driven estate freeze • Succession Planning • Involves internal reorganization and recognition of “who” will take over business Succession and Estate Planning Considerations 30 July 2013

6. Succession and Estate Planning • Important to be proactive and develop a plan early • Common reasons for not starting the process • “Business is nothing without me” • “Without the business, I am nothing” • “Tough to break the routine of going to the office everyday ” • “The kids want to change the way the business is run” • “Nobody can run the business as well as I can” Succession and Estate Planning Considerations 30 July 2013

7. Estate Planning - Tax Considerations • Objective is to reduce tax by way of an estate freeze • Defer tax as long as possible • Provide certainty of tax to allow for funding (life insurance) Succession and Estate Planning Considerations 30 July 2013

8. Estate Planning - Taxes to Consider • On death there is a “deemed disposition” of all assets, including shares of private businesses • Tax rate is approximately 25% (Ontario) of gain • Ontario probate is 1½% of fair market value of assets (including shares of private businesses) Succession and Estate Planning Considerations 30 July 2013

9. Estate Planning - Things to Consider • Shareholders agreements • Family & spousal trusts • Wills • Primary • Secondary • Insurance • Share ownership Succession and Estate Planning Considerations 30 July 2013

10. Estate Planning - Estate Freeze • Allows for the current value of business to be “frozen” at today's value and passes future growth on to the children • Effective for “crystallizing” tax liability today • Allows for certainty of future tax liability and planning for funding (insurance) Succession and Estate Planning Considerations 30 July 2013

11. Estate Planning - Estate Freeze • Voting control continues with original shareholder • Allows for access to multiple capital gains exemptions for children ($800,000 (2014) tax free CGE) • Allows for possible income splitting • Can be structured to be “reversible” • Allows for creditor proofing at same time Succession and Estate Planning Considerations 30 July 2013

12. Estate Planning - Estate Freeze Typical Example Before Mr. A 100% Opco FMV of business = $20 million Succession and Estate Planning Considerations 30 July 2013

13. Estate Planning - Estate Freeze Typical Estate Freeze Beneficiaries = Children After S86 Type Freeze Family Trust Mr. A • Fixed value “frozen • shares” $20 million • Voting control 100% common “future growth” Opco FMV of business = $20 million Succession and Estate Planning Considerations 30 July 2013

14. Estate Planning - Estate Freeze Typical Estate Freeze Beneficiaries = Children After Using Holdco Family Trust Mr. A • Fixed value “frozen • shares” $20 million • Voting control 100% common “future growth” Holdco 100% Tax Free Dividend $20 million Loan back $20 million secured Opco FMV of business = $20 million Succession and Estate Planning Considerations 30 July 2013

15. Estate Planning - Estate FreezeTypical Estate Freeze • “Future Growth” of Opco above $20 million to children (via Trust) • Mr. A value at death “frozen” at $20 million • Tax liability frozen at $5 million • “Creditor proofed” $20 million Succession and Estate Planning Considerations 30 July 2013

16. Estate Planning - Estate FreezeOther Issues • The use of investments (of Mr. A) held by Holdco can help reduce the tax liability over time at no cost • Tax liability can be deferred if shares “willed” to spouse • Children, through trust, have access to enhanced capital gains deduction • Valuation of business is needed to support “freeze value” Succession and Estate Planning Considerations 30 July 2013

17. Estate Planning - Other Issues • Family Trust can be discretionary to provide flexibility on distribution to children • Family law considerations are important if children get married • Control of company held through voting special shares • Control of trust by Trustees 30 July 2013 Succession and Estate Planning Considerations

18. Estate Planning - Other Issues (cont.) • Liquidity to parent via redemption of preferred shares • If intent is that business will be sold, consider no freeze • Freeze can be structured to be “reversible” Succession and Estate Planning Considerations

19. Estate Planning- Refreeze • Shares have declined in value after original freeze • Common shares held by children / trust have no value • Reorganize shares and convert parent’s freeze shares into new freeze shares with a new lower value Succession and Estate Planning Considerations 30 July 2013

20. Estate Planning - Wills • Wills should always form part of the estate plan • Use of spousal trust and testamentary trusts • Use of primary & secondary wills to avoid Ontario probate (1.5%) • Powers of Attorney 30 July 2013 Succession and Estate Planning Considerations

21. Estate Planning - Succession Issues • Identifying the “right” successor to run the business • Should involve discussions with all children • May require other assets used to equalize “non“ active children (i.e. real estate / cash) • The time to startthis planning is before retirement Succession and Estate Planning Considerations 30 July 2013

22. Estate Planning - Succession Issues • If no clear successor, consider exit strategy • Possible sale or partial equity investment by others • Take money “off the table” • Tax planning on exit Succession and Estate Planning Considerations 30 July 2013

23. Estate Planning - Other Planning • Low interest (1%) loans should be currently used for income splitting with children/spouse with little or no income • TFSA’s • RRPS’s • RESP’s Succession and Estate Planning Considerations 30 July 2013

24. Estate Planning - Use of Investment Holdco’s • Maximum personal tax rate on investment income in Ontario in 2013 is 49.53% • Maximum corporate tax rate in Ontario on investment income is 46.2% • Deferral opportunity of 3.3% by use of investment company Succession and Estate Planning Considerations 30 July 2013

25. Estate Planning 2013 Personal/Corporate Investment Income Tax Rates 1 1. Going up to 38.6% in 2014 Succession and Estate Planning Considerations 30 July 2013

26. Estate Planning - Use of Investment Companies Before Mr. A 100% Portfolio Holdco 100% Opco Succession and Estate Planning Considerations 30 July 2013

27. Estate Planning - Use of Investment Companies After Mr. A Tax free transfer of portfolio Holdco • Portfolio 100% Opco Succession and Estate Planning Considerations 30 July 2013

28. Questions? Presentation title