Family Succession Jack Bernstein Aird & Berlis LLP Toronto, Ontario 416.865.7766 [email protected].

Family Succession Family Succession Jack Bernstein

Aird & Berlis LLPToronto, Ontario

[email protected]

Aird & Berlis LLP

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Family Succession

OBJECTIVES

• Minimize family disputes

• Preserve business and facilitate growth

• Smooth transition

• Retention of employees

• Confidence of bankers, suppliers

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Non-Tax Considerations

• Maturity

• Business acumen

• Family relationship

• Creditors of children

• Family Advisory Committee

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Methods of Transferring Business

1. Gift

2. Sale

3. Freeze

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GIFT SALE

Family Law Protection No Family Law Protection

Facilitates Equalization

Provides Parents With Capital

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Consider

• $500,000 exemption if qualified small business corporation

• 10 year reserve

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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

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Hotchpot Clause

Previously gave $500,000 of shares to 1 childAssume 2 children:

value of estate $ 1,500,000

gift to child during lifetime $ 500,000

will deems estate $ 2,000,000

each child to receive $ 1,000,000

child who receives prior gift gets $ 500,000

other child receives from estate $ 1,000,000

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TRAP84.1

• Deemed dividend, not capital gain

OPCO

HOLDCO

Child

Parent

Common

Sale

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Estate Freeze

• Transfer future growth

• Retain right to current value

• Control possible

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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

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• 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

Parent Children or Trust

Opco

C/SP/S

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Holdco

Parent

P/S

Opco

Beneficiary = children and

Holdco

• Objective to prevent build up of redundant cash in OPCO

C/S

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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

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Parent Children or Trust

Holdco

C/SP/S

Opco

C/S

• 85 rollover to Holdco

• Age 18 restriction?

• Should Parent transfer to a Trust?

• Family Law considerations

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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

ChildrenOpco

C/S

Newco

P/Sother assets

(eg. real estate)

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Parent

ChildrenHoldco

C/S

C/S

Opco

P/S

• Useful if Holdco to make other investments and children to benefit from capital gains exemption

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Control

• Unanimous shareholders agreement

• Retractable shares

• Voting preferred shares

• Issue common shares to trust for children

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Trust

• Choice of settlor

• Choice of trustees

• Choice of beneficiaries

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Reversing the Freeze

1. Use of discretionary trust with parents and children (association)

2. Convertible shares

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Use of Trust to Reverse Freeze

• If exclude child, potential action for breach of trust

Parent

Opco

P/S C/S

Discretionary Trust for

Parent and Children

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Convertible Shares

Parent

Opco

FreezeP/S C/S

Trust for Children and

possibly Parent

Trust for Parent

Voting shares and convertible P/S (1:1 for common)

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Partnership

• 97(2) rollover for frozen partnership interest

• What value is contributed by children

• No rulings ever issued

• Beware 103(1.1)

Parent Children

Partnership

97(2)

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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

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Protect Business

1. Terms on shareholders loans

2. Restrict retraction of shares - becomes redeemable

3. Long term lease of building

4. Piggyback clause for inactive children

5. Life insurance for children

6. Wills for children

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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?

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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

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Shareholder Agreements (cont’d)

• Buy-out provisions after death of parent

Right of first refusal

Shotgun clause

Auction clause

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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

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Doc. # 1837203