Family Succession Jack Bernstein Aird Berlis LLP Toronto
Family Succession Jack Bernstein Aird & Berlis LLP Toronto, Ontario 416. 865. 7766 jbernstein@airdberlis. com Aird & Berlis LLP
Family Succession OBJECTIVES • Minimize family disputes • Preserve business and facilitate growth • Smooth transition • Retention of employees • Confidence of bankers, suppliers Aird & Berlis LLP 2
Non-Tax Considerations • Maturity • Business acumen • Family relationship • Creditors of children • Family Advisory Committee Aird & Berlis LLP 3
Methods of Transferring Business 1. Gift 2. Sale 3. Freeze Aird & Berlis LLP 4
GIFT SALE Family Law Protection No Family Law Protection Facilitates Equalization Provides Parents With Capital Aird & Berlis LLP 5
Consider • $500, 000 exemption if qualified small business corporation • 10 year reserve Aird & Berlis LLP 6
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 Aird & Berlis LLP 7
Hotchpot Clause Previously gave $500, 000 of shares to 1 child Assume 2 children: value of estate $ 1, 500, 000 gift to child during lifetime $ will deems estate $ 2, 000 each child to receive child who receives prior gift gets $ 1, 000 $ 500, 000 other child receives from estate $ 1, 000 Aird & Berlis LLP 500, 000 8
TRAP 84. 1 • Deemed dividend, not capital gain Child Parent Sale HOLDCO Common OPCO Aird & Berlis LLP 9
Estate Freeze • Transfer future growth • Retain right to current value • Control possible Aird & Berlis LLP 10
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 Aird & Berlis LLP 11
Children or Trust Parent P/S C/S Opco • P/S • Beware • • Should trust for children have age 18 restriction? Should parent transfer freeze shares to a trust? Family Law Issues Problem with US children Ø Redeemable at fair market value of exchanged shares Ø Price adjustment clause Ø Attribution Ø Kiddie tax Aird & Berlis LLP 12
Parent Holdco Beneficiary = children and Holdco P/S C/S Opco • Objective to prevent build up of redundant cash in OPCO Aird & Berlis LLP 13
Holding Company • Useful if only one shareholder to freeze • Facilitates tax free dividends (protect retained • earnings) P/S Ø Same PUC Ø Price adjustment clause • Must file election Aird & Berlis LLP 14
Children or Trust Parent P/S C/S Holdco C/S Opco • • 85 rollover to Holdco Age 18 restriction? Should Parent transfer to a Trust? Family Law considerations Aird & Berlis LLP 15
Inter-Corporate Transfer • • • Useful if client not transferring all assets or Opco not small business corporation P/S Ø Ø S. 85 election Same PUC Price adjustment If dividends > 10% votes Avoids corporate attribution Parent Opco other assets (eg. real estate) P/S Children C/S Newco Aird & Berlis LLP 16
Parent C/S Holdco P/S Children C/S Opco • Useful if Holdco to make other investments and children to benefit from capital gains exemption Aird & Berlis LLP 17
Control • Unanimous shareholders agreement • Retractable shares • Voting preferred shares • Issue common shares to trust for children Aird & Berlis LLP 18
Trust • Choice of settlor • Choice of trustees • Choice of beneficiaries Aird & Berlis LLP 19
Reversing the Freeze 1. Use of discretionary trust with parents and children (association) 2. Convertible shares Aird & Berlis LLP 20
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 Aird & Berlis LLP 21
Convertible Shares Trust for Parent Freeze P/S Voting shares and convertible P/S (1: 1 for common) Trust for Children and possibly Parent C/S Opco Aird & Berlis LLP 22
Partnership Parent Children 97(2) Partnership • • 97(2) rollover for frozen partnership interest What value is contributed by children No rulings ever issued Beware 103(1. 1) Aird & Berlis LLP 23
Refreeze • • • Original freeze at $5 million Company now worth $3 million Benefits of refreezing Ø 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 Aird & Berlis LLP 24
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 Aird & Berlis LLP 25
Shareholder Agreements • Imperative that children be required to enter into shareholder agreement which would include among other things: Ø Composition of the board of directors Ø Present and future officers of the corporation (who is to become the president on death of the parent - can have more than one president) Ø Salaries and bonuses - parent determines during lifetime and on death equal for the children in the business? Aird & Berlis LLP 26
Shareholder Agreements (cont’d) Ø 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 buyout 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 Aird & Berlis LLP 27
Shareholder Agreements (cont’d) • Buy-out provisions after death of parent Ø Right of first refusal Ø Shotgun clause Ø Auction clause Aird & Berlis LLP 28
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 Aird & Berlis LLP 29
Doc. # 1837203 Aird & Berlis LLP 30
- Slides: 30