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Succession PlanningSuccession Planning
Appraisal Institute of Canada ConferenceAppraisal Institute of Canada ConferenceDelta HotelDelta Hotel
St. John’s, NLSt. John’s, NLJune 7June 7thth, 2007, 2007
Greg London
Tax Senior Manager – Deloitte
What to Consider when Planning Your Business
Succession
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
Systematic Approach to Succession Planning
When properly designed, it lets you:
Benefit now+
Be the architect of your success plan for the future
Benefit now+
Be the architect of your success plan for the future
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 meetyour retirement cash flow needs?
• Is your successor identified, ready & in place?What degree of family involvement do you seeyour family playing in the leadership/ownershipof 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
Systematic Approach to Succession Planning
• Are you currently using techniques to reducecurrent income taxes and capital gains taxesarising on death?
• Do you have enough liquidity to avoid a forcedsale 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
Systematic Approach to Succession Planning
• Have you had your business valued recently?
• Have you considered alternative corporatestructures 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
Exit Strategies
• 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
Estate Planning Tools
• Current Will – “Living Will”• Trusts
– Inter-vivos– Testamentary
• Estate freezing• Buy/sell and Shareholder agreements• Power of attorney
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
Trusts
• Benefits– Flexibility– Control
• Uses– Income splitting– Estate freeze
Estate Freeze
• Limits capital gains on death – Reversing the Freeze
• Shifts future growth to next generation – Tax Deferral
• Provides Income Splitting Opportunities
Estate FreezeObjective:
• 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.
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?
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 MembersTrust
Opco
You
Family Succession
Tax Issues / Opportunities – Double Taxation– Capital Gains Exemption– 21 Year Disposition / Trust – Reversionary Trust– Income Splitting / Attribution– Financing– Insurance Issues
– Corporate Reorganization
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!
Contact Information
Greg London
Tax Senior Manager
Fort William Building
10 Factory Lane
St. John’s, NL
A1C 6H5
(709) 758-5210
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 2002. “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.
Product Presentation
Date: 2008
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)
Gordon B. Lang & Assoc. Inc.
Main offices:Toronto, Calgary, and Vancouver
Branches:Ottawa, Montreal, Halifax, Edmonton, and Prince
George
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
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
Specialty Products Developed For:
Individual Pension Plan (IPP)
Retirement Compensation Arrangement (RCA)
Employee Profit Sharing Plan (EPSP)
Health & Welfare Plan (HAWP)
Individual Pension Plans
(IPP)
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
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
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
Contributions
Contributions by employer (and employee) are tax deductible
Benefits are taxed when received
Investment income is tax exempt
Not subject to payroll tax
IPP Maximum Allowable Contributions
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
Amounts certified by actuary to fund defined benefits. Samples of maximum year 2008 tax deductibility:
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)
IPP vs RRSP Asset Accumulation
Age 52 year old with full past service back to 1.1.1991 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
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 retirementCPP/OAS bridging benefit to age 65
Unreduced pension @ 60 with 3%/yr reduction to age 50 (age 55 in N.B.)
Full CPI indexing
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
Concerns
Assets locked-in
Contributions schedule inflexible
Contribution amounts inflexible
PA reduces RRSP room
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
Benefits
Multigenerational Plans
Beneficiary Options
Multiple Retirement OptionsOpportunity to terminally fund to offset inflation
Insured Annuities
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
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
Multiple Options at Retirement
Pension from the pension plan
Purchase an annuity
Transfer to a LIRA
Asset Value Chart
AssetValue
•IPP Allows for Additional Funding at RetirementComparison between RRSP and IPP assets for a 52 year old to age 71
IPPOver and above an RRSP
RRSP
Ages
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
Health andWelfare
Plan(HAWP)
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.
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
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.
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
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……………
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
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
HAWP – Example
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: $ 650
Tax Credit (22%) $ 143
Net Cost $ 1,857
With HAWP Without HAWP
EXAMPLE: earnings $45,000, med expenses $2,000
HAWP - Establishment
Directors’ Resolution
HAWT Trust:3 individuals (1 independent of company)
Memorandum of Agreement
Employee Letter sets out entitlements
HAWP - Payments
Trustee receives the cheque & issues a
cheque for 100% of the expense from the HAWP
to the employee
Employee submits claim
form & receipts
Employer Receives claim form & issues a cheque for 100% of the expense to the trustee (HAWP)
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
Implementation
GBL is a full service firm with specialists in the field to work with you
No participation in commissions or investment/insurance fees
WWW.GBLINC.CA
2007
BDC and Business Transition
2007
Transition in this presentation is discussed in terms of exit strategies and change of ownership
What does "TransitionTransition" 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”.
Introduction to Transition
2007
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
Introduction to Transition
2007
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
Introduction to Transition
2007
Demographic Snowball
BIRTHS PER YEAR % IncPre WW I Pre 1914 201,000 births/yr
WW I 1914-18 244,000 births/yr 21%
“Roaring 20’s” 1920-29 249,000 births/yr 2%
Depression years 1930-39 236,000 births/yr ( 5%)
WW II 1940-45 280,000 births/yr 19%
Baby Boomers1946-65 426,000 births/yr 52%
Bust Generation 1966-79 362,000 births/yr (15%)
Echo Generation 1980-95 382,000 births/yr 6%
Children of the bust 1996-on 344,000 births/yr (10%)
2007
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: 1,150
This compares to the number per day of the previous generation (born during WW II) when they reached 65 starting in 2005: 750
2007
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 anew 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.
Studies conducted by the Canadian Federation of Independent Business with SME owners, June 2005
41 %30 %
14 % 10 % 6 %0
10
20
30
40
50
0 to 5 6 to 10 11 to 15 16 to 20 20 or more
41% = about 400,000 businesses
CFIB Study – Employment
%
Years
2007
Transition Planning
Technical Elements:
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
8
9
12
13
32%39
42
46 %Financing for the successorFinding 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
Studies conducted by the Canadian Federation of Independent Business with SME owners, June 2005
For the current owner
7
11
11
16
19
24
39%44 %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
For successors
In both cases, financing represents the main
obstacle
In both cases, financing represents the main
obstacle
The Main Obstacles
Next to financing, the valuation of the business
is a significant barrier
2007
2007
This could be you !!!!!
Pot of gold at the end of the rainbow with CRA agent"
2007
Or even worse with no succession planning?
2007
The Transition Financing Program
2007
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
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
Financing Example
2007
Transition Program – Financing Example
BDC Solution at workBDC Solution at work
Project Amount Financing Amount
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 Total $2,215,000
Business Overview: Manufacturing Company established in 1996 4 shareholders 20 employees $6 million in annual sales
Need: Business BuyoutFinancing to buyout 40% of the business of 2 shareholders and consulting services to plan the strategic vision of the business.
Benefit: Full control of the company.
2007
A personalized approach
to financial planning
designed to help you
prosper now and over time.
Almost 80 years experience serving investors
Comprehensive investmentmanagement expertise
$60 billion in assets under management
More than 90 officesfrom coast to coast
A member of the PowerFinancial Corporation Group of Companies
Investors Group: A wealth of experience and expertise
POWER FINANCIAL CORPORATION
GREAT-WEST LIFECO INC.
IGM FINANCIAL INC.
LONDONLIFE
MACKENZIE INC.
GREAT-WESTLIFE
IPC FINANCIAL NETWORK INC.
CANADA LIFE
INVESTORS GROUP
INC.
INVESTORS GROUP
FINANCIAL SERVICES
IG SECURITIES INC.
Coupled with a product shelfdesigned for diversity
InvestmentsInvestmentsMutual FundsSegregated Funds*Managed Asset ProgramTax Advantaged FundsRRSPs, RRIFsRESPsGICs, AnnuitiesBrokerage Servicesthrough Investors Group Securities Inc.
Insurance*
LifeDisabilityCritical IllnessLong Term CarePersonal Health Care
Strategic Investment PlanningSymphonyTM
LendingLendingMortgagesLoans, Lines of Credit**
BankingBanking****
Chequing, SavingsCredit Cards
* 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.
World-Class Choices - As at January 2006
C3198 (01/2006-W)
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. Tax planning2. Estate planning3. Insurance planning4. Cash Management5. Retirement planning6. Investment planning
1. 2.
3.
4.5.
6.
Business Succession PlanningBusiness Succession Planning Key Person ProtectionKey Person Protection
Buy-Sell Agreement (valuation & triggering events)Buy-Sell Agreement (valuation & triggering events) Premature deathPremature death RetirementRetirement DisabilityDisability Critical IllnessCritical Illness
Ownership TransitionOwnership Transition SellSell LiquidateLiquidate Retain in familyRetain in family Successor trainingSuccessor training Buy-Sell agreement among successorsBuy-Sell agreement among successors
Management TransitionManagement Transition
Retirement Income PlanningRetirement Income Planning
Thank YouThank You
Questions and AnswersQuestions and Answers