family succession jack bernstein aird & berlis llp toronto, ontario 416.865.7766...
TRANSCRIPT
Family Succession Family Succession Jack Bernstein
Aird & Berlis LLPToronto, Ontario
Aird & Berlis LLP
2
Family Succession
OBJECTIVES
• Minimize family disputes
• Preserve business and facilitate growth
• Smooth transition
• Retention of employees
• Confidence of bankers, suppliers
Aird & Berlis LLP
3
Non-Tax Considerations
• Maturity
• Business acumen
• Family relationship
• Creditors of children
• Family Advisory Committee
Aird & Berlis LLP
5
GIFT SALE
Family Law Protection No Family Law Protection
Facilitates Equalization
Provides Parents With Capital
Aird & Berlis LLP
6
Consider
• $500,000 exemption if qualified small business corporation
• 10 year reserve
Aird & Berlis LLP
7
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
8
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
Aird & Berlis LLP
9
TRAP84.1
• Deemed dividend, not capital gain
OPCO
HOLDCO
Child
Parent
Common
Sale
Aird & Berlis LLP
10
Estate Freeze
• Transfer future growth
• Retain right to current value
• Control possible
Aird & Berlis LLP
11
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
12
• 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
Aird & Berlis LLP
13
Holdco
Parent
P/S
Opco
Beneficiary = children and
Holdco
• Objective to prevent build up of redundant cash in OPCO
C/S
Aird & Berlis LLP
14
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
Aird & Berlis LLP
15
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
Aird & Berlis LLP
16
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)
Aird & Berlis LLP
17
Parent
ChildrenHoldco
C/S
C/S
Opco
P/S
• Useful if Holdco to make other investments and children to benefit from capital gains exemption
Aird & Berlis LLP
18
Control
• Unanimous shareholders agreement
• Retractable shares
• Voting preferred shares
• Issue common shares to trust for children
Aird & Berlis LLP
20
Reversing the Freeze
1. Use of discretionary trust with parents and children (association)
2. Convertible shares
Aird & Berlis LLP
21
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
Aird & Berlis LLP
22
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)
Aird & Berlis LLP
23
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)
Aird & Berlis LLP
24
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
Aird & Berlis LLP
25
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
26
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?
Aird & Berlis LLP
27
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
Aird & Berlis LLP
28
Shareholder Agreements (cont’d)
• Buy-out provisions after death of parent
Right of first refusal
Shotgun clause
Auction clause
Aird & Berlis LLP
29
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