1. Succession and Estate Planning Considerations Private Company Webcast Series: Part 3 of 4 July 30, 2013

2. Page 2 Meet our presenter David Steinberg, CPA, CA Tax Partner & Co-Leader, Private Mid-Market Practice Contact Information: David.A.Steinberg@ca.ey.com 416.932.6206 Succession and Estate Planning Considerations

3. Page 3 Succession and Estate Planning - What is it? ► Arrangement of Financial affairs to accomplish the following: ► Provide income for the individual throughout their lifetime ► Provide for tax efficient wealth transfer ► Provide for seamless transfer of business including management ► Asset protection Succession and Estate Planning Considerations30 July 2013

4. Page 4 Succession and Estate Planning - Other ► Requires flexibility ► Things change ► Rules change ► Family law considerations Succession and Estate Planning Considerations30 July 2013

5. Page 5 Estate Planning vs. Succession Planning ► Estate Planning ► Usually involves a tax driven estate freeze ► Succession Planning ► Involves internal reorganization and recognition of “who” will take over business Succession and Estate Planning Considerations30 July 2013

6. Page 6 Succession and Estate Planning ► Important to be proactive and develop a plan early ► Common reasons for not starting the process ► “Business is nothing without me” ► “Without the business, I am nothing” ► “Tough to break the routine of going to the office everyday ” ► “The kids want to change the way the business is run” ► “Nobody can run the business as well as I can” Succession and Estate Planning Considerations30 July 2013

7. Page 7 Estate Planning - Tax Considerations ► Objective is to reduce tax by way of an estate freeze ► Defer tax as long as possible ► Provide certainty of tax to allow for funding (life insurance) Succession and Estate Planning Considerations30 July 2013

8. Page 8 Estate Planning - Taxes to Consider ► On death there is a “deemed disposition” of all assets, including shares of private businesses ► Tax rate is approximately 25% (Ontario) of gain ► Ontario probate is 1½% of fair market value of assets (including shares of private businesses) Succession and Estate Planning Considerations30 July 2013

9. Page 9 Estate Planning - Things to Consider ► Shareholders agreements ► Family & spousal trusts ► Wills ► Primary ► Secondary ► Insurance ► Share ownership Succession and Estate Planning Considerations30 July 2013

10. Page 10 Estate Planning - Estate Freeze ► Allows for the current value of business to be “frozen” at today's value and passes future growth on to the children ► Effective for “crystallizing” tax liability today ► Allows for certainty of future tax liability and planning for funding (insurance) Succession and Estate Planning Considerations30 July 2013

11. Page 11 Estate Planning - Estate Freeze ► Voting control continues with original shareholder ► Allows for access to multiple capital gains exemptions for children ($800,000 (2014) tax free CGE) ► Allows for possible income splitting ► Can be structured to be “reversible” ► Allows for creditor proofing at same time Succession and Estate Planning Considerations30 July 2013

12. Page 12 Estate Planning - Estate Freeze Typical Example Before Mr. A Opco 100% FMV of business = $20 million Succession and Estate Planning Considerations30 July 2013

13. Page 13 Estate Planning - Estate Freeze Typical Estate Freeze After S86 Type Freeze Mr. A Opco 100% common “future growth” Family Trust Fixed value “frozen shares” $20 million Voting control Succession and Estate Planning Considerations30 July 2013 Beneficiaries = Children FMV of business = $20 million

14. Page 14 Estate Planning - Estate Freeze After Using Holdco Mr. A Opco 100% FMV of business = $20 million Holdco Fixed value “frozen shares” $20 million Voting control Family Trust Beneficiaries = Children 100% common “future growth” Loan back $20 million securedTax Free Dividend $20 million Typical Estate Freeze Succession and Estate Planning Considerations30 July 2013

15. Page 15 Estate Planning - Estate Freeze Typical Estate Freeze ► “Future Growth” of Opco above $20 million to children (via Trust) ► Mr. A value at death “frozen” at $20 million ► Tax liability frozen at $5 million ► “Creditor proofed” $20 million Succession and Estate Planning Considerations30 July 2013

16. Page 16 Estate Planning - Estate Freeze Other Issues ► The use of investments (of Mr. A) held by Holdco can help reduce the tax liability over time at no cost ► Tax liability can be deferred if shares “willed” to spouse ► Children, through trust, have access to enhanced capital gains deduction ► Valuation of business is needed to support “freeze value” Succession and Estate Planning Considerations30 July 2013

17. Page 17 Estate Planning - Other Issues ► Family Trust can be discretionary to provide flexibility on distribution to children ► Family law considerations are important if children get married ► Control of company held through voting special shares ► Control of trust by Trustees Succession and Estate Planning Considerations 30 July 2013

18. Page 18 Estate Planning - Other Issues (cont.) ► Liquidity to parent via redemption of preferred shares ► If intent is that business will be sold, consider no freeze ► Freeze can be structured to be “reversible” Succession and Estate Planning Considerations

19. Page 19 Estate Planning - Refreeze ► Shares have declined in value after original freeze ► Common shares held by children / trust have no value ► Reorganize shares and convert parent’s freeze shares into new freeze shares with a new lower value Succession and Estate Planning Considerations30 July 2013

20. Page 20 Estate Planning - Wills ► Wills should always form part of the estate plan ► Use of spousal trust and testamentary trusts ► Use of primary & secondary wills to avoid Ontario probate (1.5%) ► Powers of Attorney Succession and Estate Planning Considerations 30 July 2013

21. Page 21 Estate Planning - Succession Issues ► Identifying the “right” successor to run the business ► Should involve discussions with all children ► May require other assets used to equalize “non“ active children (i.e. real estate / cash) ► The time to start this planning is before retirement Succession and Estate Planning Considerations30 July 2013

22. Page 22 Estate Planning - Succession Issues ► If no clear successor, consider exit strategy ► Possible sale or partial equity investment by others ► Take money “off the table” ► Tax planning on exit Succession and Estate Planning Considerations30 July 2013

23. Page 23 Estate Planning - Other Planning ► Low interest (1%) loans should be currently used for income splitting with children/spouse with little or no income ► TFSA’s ► RRPS’s ► RESP’s Succession and Estate Planning Considerations30 July 2013

24. Page 24 Estate Planning - Use of Investment Holdco’s ► Maximum personal tax rate on investment income in Ontario in 2013 is 49.53% ► Maximum corporate tax rate in Ontario on investment income is 46.2% ► Deferral opportunity of 3.3% by use of investment company Succession and Estate Planning Considerations30 July 2013

25. Page 25 Estate Planning 2013 Personal/Corporate Investment Income Tax Rates 1. Going up to 38.6% in 2014 1 Succession and Estate Planning Considerations30 July 2013

26. Page 26 Estate Planning - Use of Investment Companies Before Mr. A Opco 100% Holdco Portfolio 100% Succession and Estate Planning Considerations30 July 2013

27. Page 27 Estate Planning - Use of Investment Companies After Mr. A Opco 100% Holdco Portfolio Tax free transfer of portfolio Succession and Estate Planning Considerations30 July 2013

28. Page 28 Questions? Presentation title