Family Succession

1. Family Succession Jack Bernstein Aird & Berlis LLP Toronto, Ontario 416.865.7766 jbernstein@airdberlis.com

2. Family Succession OBJECTIVES • Minimize family disputes • Preserve business and facilitate growth • Smooth transition • Retention of employees • Confidence of bankers, suppliers

3. Non-Tax Considerations • Maturity • Business acumen • Family relationship • Creditors of children • Family Advisory Committee

4. Methods of Transferring Business • Gift • Sale • Freeze

6. Consider • $500,000 exemption if qualified small business corporation • 10 year reserve

7. Capital Gains Exemption • Up to $500,000 for qualified farm property and small business corporations (SBC) • Taxpayer or related parties must own shares of SBC for 24 months and more than 50% of value of assets of SBC or holding company used in active business carried on primarily in Canada during that period • Consider qualifying company as small business corporation

8. Hotchpot Clause Previously gave $500,000 of shares to 1 child Assume 2 children:

9. TRAP84.1 • Deemed dividend, not capital gain Child Parent HOLDCO Sale Common OPCO

10. Estate Freeze • Transfer future growth • Retain right to current value • Control possible

11. 86 Reorganization • Need Articles of Amendment • No election if s. 86 • If elect under s. 85 can crystallize • Same PUC • Use price adjustment clause • Family law issues • Separate voting shares recommended • Advantage to redeeming parent

12. Parent Children or Trust • P/S • Redeemable at fair market value of exchanged shares • Price adjustment clause • Beware • Attribution • Kiddie tax • Should trust for children have age 18 restriction? • Should parent transfer freeze shares to a trust? • Family Law Issues • Problem with US children P/S C/S Opco

13. Parent • Objective to prevent build up of redundant cash in OPCO Holdco Beneficiary = children and Holdco P/S C/S Opco

14. Holding Company • Useful if only one shareholder to freeze • Facilitates tax free dividends (protect retained earnings) • P/S • Same PUC • Price adjustment clause • Must file election

15. Children or Trust Parent • 85 rollover to Holdco • Age 18 restriction? • Should Parent transfer to a Trust? • Family Law considerations P/S C/S Holdco C/S Opco

16. Inter-Corporate Transfer • Useful if client not transferring all assets or Opco not small business corporation • P/S • S. 85 election • Same PUC • Price adjustment • If dividends > 10% votes • Avoids corporate attribution Parent Children Opco other assets (eg. real estate) C/S P/S Newco

17. Parent • Useful if Holdco to make other investments and children to benefit from capital gains exemption C/S Holdco Children C/S P/S Opco

18. Control • Unanimous shareholders agreement • Retractable shares • Voting preferred shares • Issue common shares to trust for children

19. Trust • Choice of settlor • Choice of trustees • Choice of beneficiaries

20. Reversing the Freeze • Use of discretionary trust with parents and children (association) • Convertible shares

21. Use of Trust to Reverse Freeze • If exclude child, potential action for breach of trust Discretionary Trust for Parent and Children Parent P/S C/S Opco

22. Convertible Shares Trust for Children and possibly Parent Trust for Parent Parent Voting shares and convertible P/S (1:1 for common) Freeze P/S C/S Opco

23. Partnership • 97(2) rollover for frozen partnership interest • What value is contributed by children • No rulings ever issued • Beware 103(1.1) Parent Children 97(2) Partnership

24. Refreeze • Original freeze at $5 million • Company now worth $3 million • Benefits of refreezing • Reduce C/G on death • Technical interpretation June 3, 1997, document 9229905 • S. 86 of P/S to new P/S retractable for $3 million • Provided decrease in value of P/S not result of stripping corporate assets, no benefit on common shareholders

25. Protect Business • Terms on shareholders loans • Restrict retraction of shares - becomes redeemable • Long term lease of building • Piggyback clause for inactive children • Life insurance for children • Wills for children

26. Shareholder Agreements • Imperative that children be required to enter into shareholder agreement which would include among other things: • Composition of the board of directors • Present and future officers of the corporation (who is to become the president on death of the parent - can have more than one president) • Salaries and bonuses - parent determines during lifetime and on death equal for the children in the business?

27. Shareholder Agreements (cont’d) • Limited marriage contract to protect business by either having spouse agree that shares of business not family property or alternatively that any settlement under family law legislation will not be satisfied with the shares of the corporation • Life insurance on lives of children to fund buy-out on death • Life insurance on life of parent to ensure that surviving parent has assets after death and to provide for equalization with other children

28. Shareholder Agreements (cont’d) • Buy-out provisions after death of parent • Right of first refusal • Shotgun clause • Auction clause

29. Shareholder Agreements (cont’d) • Option to buy on insolvency, marital breakdown if son-in-law or daughter-in-law in business, disability, breach of contract, if Family Law Act application launched against company • Forced sale • Piggy-back clauses • Matched bid • Butterfly option

30. Doc. # 1837203