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Appraisal Institute of Canada Conference

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1 Appraisal Institute of Canada Conference
Succession Planning Appraisal Institute of Canada Conference Delta Hotel St. John’s, NL June 7th, 2007


3 What to Consider when Planning Your Business Succession
Greg London Tax Senior Manager – Deloitte

4 Systematic Approach to Succession Planning
Goals To ensure the orderly transition of your personal and business affairs in the event of your disability, retirement and/or death

5 Systematic Approach to Succession Planning
When properly designed, it lets you: Benefit now + Be the architect of your success plan for the future

6 Systematic Approach to Succession Planning
You need a plan if you answer “NO” to one or more of the following: Do you have a contingency plan should you become disabled? Are you dependent upon your business to meet your retirement cash flow needs? Is your successor identified, ready & in place? What degree of family involvement do you see your family playing in the leadership/ownership of your company? Disability Planning Business Strategy Assessment Will Planning and Power of Attorney Retirement Planning Compensation Planning Management Talent Assessment Business Strategy Assessment Family Issues and Communication

7 Systematic Approach to Succession Planning
Are you currently using techniques to reduce current income taxes and capital gains taxes arising on death? Do you have enough liquidity to avoid a forced sale of the business? Do you have a buy/sell agreement in place? Tax and Estate Planning Life Insurance Analysis Will Planning and Power of Attorney Tax and Estate Planning Life Insurance Analysis Will Planning and Power of Attorney Shareholder Agreement Current Business Valuation

8 Systematic Approach to Succession Planning
Have you had your business valued recently? Have you considered alternative corporate structures or share ownership strategies to help you achieve your succession goals? Shareholder Agreement Tax and Estate Planning Current Business Valuation Share Ownership Strategies Business Strategy Assessment Corporate Structuring If you answered “NO” to one or more of these questions, then you need to review your Succession Planning

9 Exit Strategies Leverage Buy Out Family Succession
Estate Planning – i.e. Estate Freeze Holding Companies Discretionary Family Trusts Leverage Buy Out Growing The Right People – Long Term Outlook Financing Sale Team, Planning and Clear Objectives

10 Estate Planning Tools Current Will – “Living Will” Trusts Inter-vivos
Testamentary Estate freezing Buy/sell and Shareholder agreements Power of attorney

11 Your Will Most flexible estate planning document
Seeks to establish plan whereby death taxes are minimized/deferred Testator must be mindful of: Family dynamics Quantum of estate Income tax implications Recommend Will be notarized and be drafted by legal counsel Particular bequests (e.g. specified amounts left outright to particular beneficiaries including charitable gifts) Residue left outright or through testamentary trusts

12 Trusts Benefits Uses Flexibility Control Income splitting
Estate freeze Spousal Trusts Spouse entitled to income during his/her lifetime No one other than spouse is entitled to capital during his/her lifetime Family Trusts Child Trusts

13 Estate Freeze Limits capital gains on death
Reversing the Freeze Shifts future growth to next generation Tax Deferral Provides Income Splitting Opportunities

14 Estate Freeze Objective: Techniques:
To cap the value of an estate so that any future growth accrues to the next generation Techniques: Corporate Reorganization Typically includes Introduction of a Family Trust Long term income tax deferral of the tax liability on the future growth in value that would otherwise be triggered on death. An “estate freeze” is the term used to describe steps taken to fix the value of an estate (or some particular asset) at its present value, so that future growth will be taxed in the hands of the taxpayer’s children or selected beneficiaries, and not until they sell their shares. It is a field of tax planning that is generally accepted as legitimate by the CCRA. By freezing the value of your estate, you will effectively lock-in the tax liability that will arise on your death (subject to future changes in tax rates). Thus, an effective estate freeze allows you to approximate the taxes that will arise on your death so that you can ensure that sufficient cash is available to satisfy the tax - eg, by purchasing life insurance.

15 Estate Freeze Three key questions which should be addressed before undertaking an estate freeze: 1. Will my children succeed me as owners of the business? 2. Will I have enough assets to live on after the estate freeze? 3. Is it reasonable to assume that the value of my shares will appreciate? For instance, if that appreciation does not occur (either because the taxpayer dies shortly after the freeze or because of poor financial performance of the corporation) then nothing will have been accomplished.

16 Estate Freeze / Family Trust
How it works Exchange your common shares of “Opco” for “frozen” preferred shares. A Family Trust is created that subscribes for new common shares Family Members Trust You Talk about control issues Talk about Kiddie Tax Talk about Income splitting and Multiple SBD Opco

17 Family Succession Tax Issues / Opportunities Double Taxation
Capital Gains Exemption 21 Year Disposition / Trust Reversionary Trust Income Splitting / Attribution Financing Insurance Issues Corporate Reorganization

18 Family Succession Other Issues / Opportunities
Knowing the value of your business to allow you to plan for succession. For example, a valuation helps determine: How much do I need to live on? Insurance – is it adequate Buy-sell and shareholder agreements – value for buyouts Plan for value enhancement – to know where you are going, you need to know where you are now!

19 Contact Information Greg London Tax Senior Manager Fort William Building 10 Factory Lane St. John’s, NL A1C 6H5 (709)

20 Deloitte, Canada’s leading professional services firm, provides audit, tax, financial advisory services and consulting through more than 6,600 people in more than 46 offices. Deloitte operates in Québec as Samson Bélair/Deloitte & Touche s.e.n.c.r.l. The firm is dedicated to helping its clients and its people excel.  Deloitte is the only professional services firm to be named to the Globe and Mail’s Report on Business magazine annual ranking of Canada’s top employers for two consecutive years: 35 Best Companies to Work for in Canada in 2001 and 50 Best Companies to Work for in Canada in “Deloitte” refers to Deloitte & Touche LLP and affiliated entities. Deloitte is the Canadian member firm of Deloitte Touche Tohmatsu. Deloitte Touche Tohmatsu is a Swiss Verein (association), and, as such, neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other’s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the name "Deloitte”, “Deloitte & Touche”, “Deloitte Touche Tohmatsu” or other related names. The services described herein are provided by the Canadian member firm and not by the Deloitte Touche Tohmatsu Verein.

21 Product Presentation Date: 2008

22 Gordon B. Lang & Assoc. Inc.
Founded in June of 1995 Gordon B. Lang, President & C.E.O. Fellow of the Faculty of Actuaries in Scotland (1967) Fellow of the Canadian Institute of Actuaries (1967) Associate of the Society of Actuaries (1976) Fellow of the Conference of Consulting Actuaries (2005) Who we are

23 Gordon B. Lang & Assoc. Inc.
Main offices: Toronto, Calgary, and Vancouver Branches: Ottawa, Montreal, Halifax, Edmonton, and Prince George Our Offices

24 Gordon B. Lang & Assoc. Inc.
Specialty products developed for: Professionals with professional corporations Owners of private companies Senior executives of large private and public companies

25 Strategy To provide, within a government approved approach, structures to entrepreneurs that will: Clarify retirement planning Provide tax relief now and in the future Reduce risk to capital Enhance retirement income

26 Specialty Products Developed For:
Individual Pension Plan (IPP) Retirement Compensation Arrangement (RCA) Employee Profit Sharing Plan (EPSP) Health & Welfare Plan (HAWP)

27 Individual Pension Plans (IPP)

28 Features Registered Pension Plan Limited to participant, spouse, and
adult children Same contribution limits as Defined Benefit Registered Pension Plans Designed to maximize contributions permitted by CRA

29 Ideal Candidate Age 45 to 69 Maximum T4 Income $116,111 for 2008
Reasonable business history Corporation or Professional Corporation in place to sponsor the plan Employment relationship (T4, T4A, T4PS) Wish to replace the shareholder bonus strategy

30 Recent Popularity Canadian business owners are approaching retirement in tremendous numbers Many retirement plans require greater discipline Meaningful tax relief is sought Cost and complexity not an issue with the right actuarial partner

31 Contributions Contributions by employer (and employee) are tax deductible Benefits are taxed when received Investment income is tax exempt Not subject to payroll tax

32 IPP Maximum Allowable Contributions
Amounts certified by actuary to fund defined benefits. Samples of maximum year 2008 tax deductibility: Age in 2008 Past Service** Current Service* 40 $39,800 $20,000 45 $73,800 $23,100 50 $111,100 $25,400 55 $152,200 $27,900 60 $197,200 $30,700 65 $250,600 $33,900 71 $552,600 $54,400 * Based on Maximum Earnings updated to 2007 of $116,667 per annum ** Subject to RRSP transfer of $305,400

33 Advantages Greater tax deductible contributions Creditor protection
Expenses tax deductible Plan Surplus belongs to participants Investment returns balanced by contributions Not subject to provincial payroll taxes (NF, PQ, ON, MB)

34 IPP vs RRSP Asset Accumulation
Age 52 year old with full past service back to and maximum earnings. Age IPP RRSP 60 $1,268,764 $891,947 65 $2,172,126 $1,494,112 71 $4,138,484 $2,662,683

35 Advantages, continued No need to wind up plan on retirement
Spouse and adult children may be participants if employed by sponsoring company Additional lump sum contributions available immediately before retirement CPP/OAS bridging benefit to age 65 Unreduced 60 with 3%/yr reduction to age 50 (age 55 in N.B.) Full CPI indexing

36 Advantages, continued Simplified financial planning due to known income on retirement Actuarial principles and strict government rules enhance safety of investments Growing and bona fide tax deductions

37 Concerns Assets locked-in Contributions schedule inflexible
Contribution amounts inflexible PA reduces RRSP room

38 Requirements Corporate sponsor
An employment relationship with the corporate sponsor Past corporate relationship, employees who previously received T4 or T4PS Consistent cash flow to fund annual payments

39 Benefits Multigenerational Plans Beneficiary Options
Multiple Retirement Options Opportunity to terminally fund to offset inflation Insured Annuities

40 Multigenerational Plans
Ideal for family business Future generations can join an existing plan Death benefit after survivor of first generation retires leaves assets in the IPP to fund the children’s pension benefit

41 Beneficiary Options Spouse is the main beneficiary
Adult children can be named to receive equal benefits Children under the age of 18 should not be elected as beneficiary of an IPP When youngest child attains age 18, the beneficiary designation can be changed Death Benefit Pre Retirement Spouse’s options included: Rolling the money into a LIRA or RRSP (depending on provincial legislation) Taking a taxable lump sum payment No Spouse: Beneficiary or estate (depending on beneficiary election) receives lump sum payment representing member’s IPP account Post Retirement Age Spouse’s options include: Immediate or deferred survival benefit payable as if the member was deemed to have died one day before death. Lump sum payment representing actuarial equivalent of member’s pension at time of death to a LIRA or RRSP (depending on provincial legislation) Commencement of Pension Spouse’s option: Election made at retirement, usually 66.67% including any guarantee period paid for the life of the surviving spouse No spouse at time of death: Beneficiary or estate receives a lump sum death benefit representing the account balance of the IPP

42 Multiple Options at Retirement
Pension from the pension plan Purchase an annuity Transfer to a LIRA

43 Asset Value Chart Comparison between RRSP and IPP assets for a 52 year old to age 71 IPP Allows for Additional Funding at Retirement IPP Over and above an RRSP Asset Value RRSP Ages

44 Insured Annuities Review retirement options when selling an IPP
Review the tax consequences when the client sells the business More beneficial if the participant is over 50 Determine if an annuity is an appropriate strategy Insurance can cover estate and legacy needs associated with annuity

45 Health and Welfare Plan (HAWP)

46 Features Enable all uninsured medical, dental, and vision expenses to be paid out of pre-tax expenses, as incurred Fund group critical illness and long term care insurance.

47 Benefits Coverage for uninsured medical, dental or vision care expenses Employer pays with pre-tax income Fully tax deductible to corporation Very flexible choice of expenses that can be covered – medical, vision, & dental procedures

48 Critical Illness Critical Illness coverage may be purchased by a HAWP, and the company may expense such coverage as long as: There are no return of premium benefits or riders contained in the policy purchased by the trustee. CI coverage should be provided for two or more HAWP members and not solely for an employee who is also a controlling shareholder. Point 2 includes…Return of Premium on death benefits imbedded in the Policy itself. A Split Dollar Agreement between the Company and Trust may be used to split out such Benefits and Riders from the pure insurance benefits

49 HAWP - Purpose Coverage for uninsured medical, dental or vision care expenses Employer pays with pre-tax income Fully tax deductible to corporation Very flexible choice of expenses that can be covered – medical, vision, & dental procedures

50 HAWP - Coverage Covers:
acupuncture, ambulance, artificial limbs, blood tests, braces, chiropractor, contact lenses, crowns, crutches, dental treatments, dentures, dermatologist, drugs, eyeglasses, guide dog, hearing aid & batteries, hospital bills, insulin treatments, naturopath, nursing, neurologist, obstetrician, O.R. costs, ophthalmologist, optician, oral surgery, organ transplant, orthodontics, orthopedic shoes, orthopedist, osteopath, oxygen, pediatrician, physician, physiotherapist, psychiatrist, psychoanalyst, psychologist, psychotherapy, radium therapy, massage therapy, sterilization, health care related transportation, vaccines, vasectomy, viagra, vitamins, wheelchair, X-rays, etc. etc. etc……………

51 HAWT - Beneficiaries Professionals or Business Owners including spouses, dependant children and parents who reside in same dwelling and are financially dependent on them Employee coverage may be made available but must be offered to all employees of a classification Benefit Limits established in advance

52 HAWP - Establishment Simple way to augment coverage
Pre-tax costs for medical benefits Very Flexible: Who is covered What is covered Can amend coverages over time

53 HAWP – Example With HAWP Without HAWP
Based on this example, savings are $607 Costs: $2,000 Tax Deduction (37.5%) $ 750 Net Cost $1,250 Costs: $ 2,000 Deduct (3%) $ 1,350 Balance: $ Tax Credit (22%) $ 143 Net Cost $ 1,857 With HAWP Without HAWP EXAMPLE: earnings $45,000, med expenses $2,000 Check these numbers with Dan as well.

54 HAWP - Establishment Directors’ Resolution HAWT Trust:
3 individuals (1 independent of company) Memorandum of Agreement Employee Letter sets out entitlements

55 Employee submits claim form & receipts
HAWP - Payments Employer Receives claim form & issues a cheque for 100% of the expense to the trustee (HAWP) Employee submits claim form & receipts Trustee receives the cheque & issues a cheque for 100% of the expense from the HAWP to the employee

56 HAWP - Summary Covers medical, dental, vision care and other treatment costs Flexibility of procedures covered Uninsured expenses paid from pre-tax income Contributions made as expenses incurred

57 Implementation GBL is a full service firm with specialists in the field to work with you No participation in commissions or investment/insurance fees

58 BDC and Business Transition

59 Introduction to Transition
Transition in this presentation is discussed in terms of exit strategies and change of ownership What does "Transition" mean “The passage from one place or state into another; change.” Transition is a process “over time”, not simply a transaction at a “point in time”. The name "Transition" was chosen as a result of discussions with entrepreneurs during focus groups. This term has the advantage that it can be used in both English and French. The idea is to make this a smooth transition vs. the kinds of chemical reactions that we experimented in school with…. You know the ones…. Vinegar and baking soda in a beaker… plug it with your thumb, shake it up and see how big the explosion can be!!! That’s not the preferred solution for the transition we are talking about today which is that of your businesses. 2007

60 Introduction to Transition
Why is an effective transition important to the business owner? Potential benefits to SME Owners: Financial stability/continuity Increase the value of their businesses Leaving a legacy – something living beyond their active involvement 2007

61 Introduction to Transition
Owners’ Objectives: Successfully pass a business to the new owners and ensure its continuing success while supporting personal and financial goals Optimize selling price, minimize tax implications, minimize risk and maximize return to current owners. Optimize the opportunity for continuity and success of the new leadership/ownership, including the training of successors to assume leadership 2007

62 Demographic Snowball BIRTHS PER YEAR % Inc
Pre WW I Pre ,000 births/yr WW I ,000 births/yr % “Roaring 20’s” ,000 births/yr % Depression years ,000 births/yr ( 5%) WW II ,000 births/yr % Baby Boomers ,000 births/yr % Bust Generation ,000 births/yr (15%) Echo Generation ,000 births/yr % Children of the bust 1996-on 344,000 births/yr (10%) 2007

63 Average number of Baby Boomers per day reaching the traditional
Demographic Snowball SO WHAT? What Is The Relevance Of This From A Business Point Of View? Average number of Baby Boomers per day reaching the traditional retirement age of 65 in 2011: ,150 This compares to the number per day of the previous generation (born during WW II) when they reached 65 starting in 2005: 2007

64 CFIB Study – Employment
SME transition and employment in the next 5 years Among the 41% of owners who will leave their business in the next 5 years, only 15% will create a new business. According to CFIB, the remaining 85% who will exit (about 340,000 owners) will affect 2 million jobs if nothing is done to facilitate the transfer of these Canadian businesses. 41% = about 400,000 businesses % Years CFIB – Succession Can Breed Success, June 2005: Since that SMEs employ the majority of Canadian workers (almost 60%) and they are the main drivers of job creation and economic growth, CFIB believes that when the remaining 85% (about 340,000 owners) will leave their business in the next 5 years, more than 2 million jobs in the market could be affected. According to Statistics Canada, 75% of all businesses, employ less than 5 people and 95% employ less than 50. Large businesses, which employ more than 500 people, represent less than 0.1% of all businesses in Canada. In addition, self-employed workers account for 2.35 million businesses throughout the country1. SMEs also employ the majority of Canadian workers – almost 60%. Moreover, SMEs are the driving force of job creation and economic growth; they create 70% of all new jobs2 and generate roughly 43% of Canada’s economic output.3 ______________________________ 1-2 Source: Statistics Canada, Change in employment (2002) 3 Source: Industry Canada estimate based on Statistics Canada National Accounts data. Studies conducted by the Canadian Federation of Independent Business with SME owners, June 2005 2007

65 Technical Elements: Transition Planning
legal transfer of the business ownership tax implications of disposing of the business the financing of the successor the division of future profits under the transition. 2007

66 In both cases, financing represents the main obstacle
The Main Obstacles For the current owner Financing for the successor Finding a buyer/suitable leader Too much dependence on my involvement Valuing the business Conflicting vision with family Access to cost-effective advice Other Conflicting vision of employees In both cases, financing represents the main obstacle For successors Financing the purchase/transfer Valuing the business Getting the owner to “let go” Access to cost-effective advice Other Conflicting vision of family Dependence on previous owner Conflicting vision of key employees Next to financing, the valuation of the business is a significant barrier According to current owners, the number one barrier to transition planning and execution (46%) is the financing of their successors. According to recent successors, (44%) the most commonly identified barrier to transition is the financing of the purchase or transfer. Only 29% of successors obtained business loans from any financial institution or bank. These figures are slightly higher than those for expected sources of financing identified by current owners. For the following reasons, small businesses often have difficulty obtaining traditional sources of financing for business transition purposes: Past performance is not necessarily an indicator of what the future will be (unsteadiness of results). Assets are often given as security to finance ongoing activities, which explains why many operations involve unsecured financing. Many transactions have involve replacing equity with debt, which sometimes increases debt/equity ratios. A Good Plan will make access to Capital Easier. Studies conducted by the Canadian Federation of Independent Business with SME owners, June 2005 2007

67 I am very pleased to be here today to talk to you about the importance of business ownership transition in Canada. Thank you to the Greater Victoria Chamber of Commerce for giving me this opportunity to address this issue. Business Ownership Transition is starting to get more and more attention and it will continue to be vitally important in the next few years and to the longer term future of our economy. 2007

68 This could be you !!!!! Pot of gold at the end of the rainbow with CRA agent" 2007

69 Or even worse with no succession planning?

70 The Transition Financing Program

71 New Financing Solution “Transition Financing”
Up to $500K under-secured term loan for purchase of assets or shares or payout vendor mtg. This is in addition to regular secured loans. Most industries covered including: retail, food service, manufacturing, wholesale, transportation etc. Excludes accommodations and Supplier of Premises. 2007

72 Transition Financing – Cont.
Financing can be used for professional fees (lawyer, accountant, consultant), working capital, goodwill, client lists or intellectual property. Max 8 yr repayment including 12 month “interest only” at beginning Criteria include strong management team, minimum 2 yrs operations, term debt to equity not exceeding 4:1 (<$150K) and 3:1 (>$150K) and respectable personal credit history. 2007

73 Financing Example 2007

74 Transition Program – Financing Example Business Overview:
Manufacturing Company established in 1996 4 shareholders 20 employees $6 million in annual sales BDC Solution at work Need: Business Buyout Financing to buyout 40% of the business of 2 shareholders and consulting services to plan the strategic vision of the business. Project Amount Financing Acquisition of 40% of shares $1,900,000 BDC Financing $500,000 Repayment of the advances $290,000 Other Bank $900,000 to the shareholders Working Capital $646,000 Professional Fees $25,000 Vendor Take-Back $169,000 Total $2,215,000 Benefit: Full control of the company. 2007

75 A fast approach that limits risks inherent in related to the business ownership transition process
TRANSITION PLANNING SOLUTION Transition planning represents a key option to successfully cope with the economic impact of the transfer. Facilitates transition Reduces risks Structures the transfer Ensures continuity Transition planning is a tool which reduces risks related to business transition. It is a methodology for structuring a transfer, so as to give to the business a better chance for survival while ensuring its continuity. 2007

76 A personalized approach to financial planning designed to help you prosper now and over time.

77 Investors Group: A wealth of experience and expertise
POWER FINANCIAL CORPORATION Almost 80 years experience serving investors Comprehensive investment management expertise $60 billion in assets under management More than 90 offices from coast to coast A member of the Power Financial Corporation Group of Companies GREAT-WEST LIFECO INC. IGM FINANCIAL INC. GREAT-WEST LIFE LONDON LIFE CANADA LIFE MACKENZIE INC. INVESTORS GROUP INC. IPC FINANCIAL NETWORK INC. INVESTORS GROUP FINANCIAL SERVICES IG SECURITIES INC.

78 Coupled with a product shelf designed for diversity
Investments Mutual Funds Segregated Funds* Managed Asset Program Tax Advantaged Funds RRSPs, RRIFs RESPs GICs, Annuities Brokerage Services through Investors Group Securities Inc. Insurance* Life Disability Critical Illness Long Term Care Personal Health Care Strategic Investment Planning SymphonyTM Lending Mortgages Loans, Lines of Credit** Banking** Chequing, Savings Credit Cards World-Class Choices - As at January 2006 * Insurance products and services are distributed by I.G. Insurance Services Inc. (a financial services firm in Quebec). Insurance License sponsored by the Great-West Life Assurance Company. ** Banking products and services provided by the National Bank of Canada. C3198 (01/2006-W)

79 The Six Disciplines of Financial Planning
Are your investments suitable for your goals? Can you pay less tax? Will you have the income you need to retire and do the things you want to do? Can you retire when you want to? Do you have the right amount and types of insurance? Will your estate transfer efficiently and tax-effectively? Do you have control over your income? 1. 2. 6. 3. 5. 4. 1. Tax planning 2. Estate planning 3. Insurance planning 4. Cash Management 5. Retirement planning 6. Investment planning

80 Business Succession Planning
Key Person Protection Buy-Sell Agreement (valuation & triggering events) Premature death Retirement Disability Critical Illness Ownership Transition Sell Liquidate Retain in family Successor training Buy-Sell agreement among successors Management Transition Retirement Income Planning

81 Thank You Questions and Answers

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