Family Succession

Jack Bernstein Aird & Berlis LLP Toronto, Ontario 416.865.7766 jbernstein@airdberlis.com

Family Succession
OBJECTIVES

Minimize family disputes Preserve business and facilitate growth Smooth transition Retention of employees Confidence of bankers, suppliers
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Non-Tax Considerations

Maturity Business acumen Family relationship Creditors of children Family Advisory Committee

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Methods of Transferring Business

1. Gift 2. Sale 3. Freeze

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GIFT Family Law Protection

SALE No Family Law Protection Facilitates Equalization Provides Parents With Capital

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Consider

$500,000 exemption if qualified small business

corporation

10 year reserve

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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

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Hotchpot Clause
Previously gave $500,000 of shares to 1 child Assume 2 children: value of estate gift to child during lifetime will deems estate each child to receive child who receives prior gift gets other child receives from estate
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$ 1,500,000 $ 500,000 $ 2,000,000 $ 1,000,000 $ 500,000 $ 1,000,000

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TRAP
84.1

Deemed dividend, not capital gain

Child Parent Sale Common OPCO
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HOLDCO

Estate Freeze

Transfer future growth Retain right to current value Control possible

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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
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Parent
P/S

Children or Trust
C/S

Opco

P/S

Beware

Redeemable at fair market value of exchanged shares Price adjustment clause 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
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Parent

Holdco
P/S C/S

Beneficiary = children and Holdco

Opco

Objective to prevent build up of redundant cash in

OPCO
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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

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Parent

Children or Trust
C/S

P/S

Holdco
C/S

Opco

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85 rollover to Holdco Age 18 restriction? Should Parent transfer to a Trust? Family Law considerations

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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

Parent Children
C/S
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Avoids corporate attribution

Opco
other assets (eg. real estate)
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P/S

Newco

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
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Control

Unanimous shareholders agreement Retractable shares Voting preferred shares Issue common shares to trust for children

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Trust

Choice of settlor Choice of trustees Choice of beneficiaries

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Reversing the Freeze

1. Use of discretionary trust with parents and children (association) 2. Convertible shares

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Use of Trust to Reverse Freeze

If exclude child, potential action for breach of trust

Discretionary Trust for Parent and Children
P/S C/S

Parent

Opco

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Convertible Shares
Trust for Parent
Voting shares and convertible P/S (1:1 for common)

Parent

Trust for Children and possibly Parent

Freeze P/S

C/S

Opco

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Partnership
Parent
97(2)

Children

Partnership

97(2) rollover for frozen partnership interest What value is contributed by children No rulings ever issued Beware 103(1.1)
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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
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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
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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?

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Shareholder Agreements (contd)

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
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Shareholder Agreements (contd)

Buy-out provisions after death of parent

Right of first refusal Shotgun clause Auction clause

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Shareholder Agreements (contd)

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

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Doc. # 1837203

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