succession planning for the business owner - breakfast for the mind seminar 18.03.2015
TRANSCRIPT
Breakfast for the mind An ounce of prevention: Succession planning for the business owner
19 March 2015 1
Welcome Breakfast for the mind – Succession planning
19 March 2015
Heather Barnhouse, Partner
2
Today’s speakers
19 March 2015
Heather Barnhouse Partner
Keith Hennel Associate
Doris Bonora Partner
Sarat Maharaj Partner
3
Carman McNary Managing Partner
Estate planning for the business owner
19 March 2015
Doris Bonora, Partner
4
If you have a stroke tomorrow, does someone:
• Have a key to open your business?
• Know the password to your computer?
• Know your accounts receivable list?
• Have signing authority?
• Know what contracts are lined up or what inventory needs to be ordered?
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If you have a stroke tomorrow or die:
• Who will run your business? • Will your spouse be able to continue operating the business? • If your business is shut down or slowed significantly for a couple of weeks, how
does that affect its value?
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Planning for sickness or incapacity
• Enduring Power of Attorney • Deal with financial affairs • Important to choose business manager to be attorney: must be someone who
can manage the business or who will find someone to manage the business • No assumptions that spouse or child will have power • Gives access to information • Be specific • Name an alternate • Have a dispute resolution mechanism such as an arbitration clause
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Enduring Power of Attorney
• If there are agreements in place to sell the business or give it to a child this should be reflected in the Power of Attorney. Direct Attorney to review the will for any instructions.
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Personal directive
• Need a personal directive to manage health care
• Need a good health care advocate
• Powers include: • Donating organs for transplant • Removal from life support
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Death: Take the right road
• Don’t leave your family in a mess
• Questions to ask yourself: • Does your spouse need the income from your business to live on but he/she
can’t run the business? • Will your children take over?
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Will
• Make specific decisions about business
• Don’t leave all the decisions up to the executor and the beneficiaries
• Consider trusts for tax reasons or for dealing with problems, such as disabled children or addictions
• Set deadlines on when the business will be sold or transferred
• Distribute personal items (jewellery, china, etc.). Have a set of directions
• Leave a legacy
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All of this is to say:
• Planning is important • You save your family grief • Protect your business and family • You can save taxes
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Tax
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Keith Hennel, Associate
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Introduction
• Succession planning: transferring your business to the next generation
• Planning to minimize tax on the sale of your business
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Transferring your business to the next generation: Goals and objectives
• Financial plan
• Strategic plan
• Estate plan
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The traditional estate freeze
• Simple freeze • What if I don’t?
• Tax-effective way to transition a family business
• Shareholders exchange existing common shares for fixed value preferred shares and new shareholders (such as family members) subscribe for new common shares for nominal value
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Estate freeze (cont’d)
CANCO Value=
$1,000,000
Dad Mom
50 common shares
50 common shares
common share subscription price = $10,000/share
FREEZE
CANCO Value = nominal
50 preferred shares
CANCO value frozen: preferred share redemption price = $10,000/share [$1,000,000 aggregate redemption price]
Dad Mom
50 preferred shares
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Estate freeze (cont’d)
SUBSCRIBE
Dad Mom
CANCO
Son
50 preferred shares
50 preferred shares
100 common shares
preferred share redemption price = $10,000/ share [$1,000,000 aggregate redemption price] common share subscription price = nominal Future growth - accrues to the newly issued common shares
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Variations: Parents retain some participation
Dad Mom
CANCO
Son
50 preferred shares
50 preferred shares
50 common shares
preferred share redemption price = $10,000/share [$1,000,000 aggregate redemption price] common share subscription price = nominal Future Growth - accrues to the newly issued common shares (1/3, 1/3, 1/3) Family (Dad, Mom and Son) share new growth with income splitting opportunities if different classes of common share issued to each
50 common shares
50 common shares
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Variations: Parents retain voting control
Dad Mom
CANCO
Son
50 preferred shares
50 preferred shares
50 non-voting common shares
preferred share redemption price = $10,000/share [$1,000,000 aggregate redemption price] common share subscription price = nominal Future growth - accrues to the newly issued common shares Voting control - parents retain voting control
50 voting common shares
50 voting common shares
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Advantages
• Financial plan
• Strategic plan
• Estate plan
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Family trust
• A trust can be utilized in an estate freeze to subscribe for growth shares of a corporation
• Control and flexibility
• Tax efficient
• Asset protection
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Issues to consider
• What issues? • Control • Retirement • Successor • Estate plan • Life insurance • Third party risks • Conflict resolution mechanisms
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Sale of the business to a third party: Sale of assets, shares or both?
• Decision incorporates tax and non-tax considerations
• Planning must start well in advance of a sale so that various options remain available
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Sale of shares, assets, both?
• Sale of shares may allow an individual shareholder (or shareholders) to claim the lifetime capital gains deduction
• Sale of assets may permit shareholder to access “friendly” tax pools to minimize income taxes payable
• A “hybrid” transaction involves the sale of some shares and all of the “target” assets – best of both worlds?
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Planning to Use the Capital Gains Deduction
• Only available to an individual
• Lifetime maximum of approx. $400,000 per individual • ($800,000 capital gain = $400,000 taxable capital gain)
• Can only be claimed to reduce the taxable capital gain after the sale of “qualified small business corporation shares”
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Capital Gains Deduction (cont’d)
• Individual must be resident in Canada, have not exceeded maximum lifetime deduction to date, and deduction is limited by the use of certain losses
• Shares of corporation must meet three criteria to qualify
• Remove redundant assets prior to sale?
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Final Freeze Thoughts
• Growth shares can be issued to family members, a family trust or key employees via a “freeze” to multiply the number of capital gains deductions available
• “Freeze” planning assists intergenerational succession planning and a sale
• A “freeze” can accomplish most if not all of your business succession planning goals and objectives
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5 minute coffee break Breakfast for the mind – Succession planning
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Breakfast for the mind An ounce of prevention: Succession planning for the business owner
19 March 2015 30
Welcome back Breakfast for the mind – Succession planning
19 March 2015
Heather Barnhouse, Partner
31
Unanimous Shareholder Agreements and Exit Strategies
19 March 2015
Sarat Maharaj, Partner
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Succession/ Exit
• How is your business set up? • Corporation, partnership, sole proprietor, etc.
• How do you own your business? • 100% Yourself • Others
• How will you sell your business (what is your plan)? • Sell.. and walk away • Sell…but stick around (staggered sales, relatives, etc.)
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Walking away
• Own 100% and selling it all
… No problems?
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Unanimous Shareholder Agreement
• Owning less than 100% of the business
• Selling, but sticking around • Unanimous Shareholder Agreement - dealing with your rights and obligations
as a shareholder (or similar agreement in relation to partnerships, trusts, etc.)
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Unanimous Shareholder Agreement
• Shareholder Approvals (veto power) • Changes to the business • Sale of assets / properties of the business • Borrowing funds / lending funds • Hiring or firing of employees or officers • Others
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Unanimous Shareholder Agreement
• Appointing Directors • Do you wish to be (continue to be) a director – even after a partial sale?
• Appointing Officers • Do you wish to be (continue to be) an officer– even after a partial sale?
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Unanimous Shareholder Agreement
• Drag-Along Rights • Can you make others sell – when you
want to sell?
• Tag-Along Rights • Can you join the sale of others?
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Unanimous Shareholder Agreement
• Mandatory buyouts • Death
• Disability
• Competency
• Ceasing to be an employee or officer
• Divorce
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Unanimous Shareholder Agreement
• Shotguns-Buyout
• You vs. them
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Team bios
19 March 2015
Heather Barnhouse Partner 1-780-423-7215 [email protected]
Keith Hennel Associate 1-780-423-7326 [email protected]
Doris Bonora Partner 1-780-423-7188 [email protected]
Sarat Maharaj Partner 1-780-423-7176 [email protected]
41
Carman McNary Managing Partner 1-780-423-2736 [email protected]
Dentons Canada LLP 2900 Manulife Place 10180 - 101 Street Edmonton, Alberta T5J 3V5 Canada
Thank you
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