use of a holding company

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Protecting Your Business, Securing Your Future

Emcee: Giac Gelmo, Certified Retirement Specialist

Agenda

Welcome and Introductions • The Looming Problem – Giac Gelmo • The Fundamentals of Business Succession Planning – Jeff Halpern • Estate Planning – Use of Holding Company and Estate Freeze in Your Planning – Nick Ierfino • Shareholder’s Agreements, Buy/Sell Agreements and the Use of Insurance in Your Planning – Jay Hershfield • The Economic and Real Estate Landscape in the GTA - Derek Burleton

The Fundamentals of Business Succession Planning

“What Every Business Owner Needs to Know”

Jeff Halpern

, CPA, CA, TEP Business Succession Advisor Wealth Advisory Services

Why is TD Talking About this Now?

According to a recent study*: • A wave of retirements among SME business owners in the coming few years could pose a significant risk for the Canadian economy •

The owners of half of all SMEs in Canada are set to retire in the next decade

• 310,000 SME owners plan to transfer control within the next 5 years • An estimated $1.9 trillion in business assets are poised to change hands in 5 years —

the biggest transfer of Canadian business control on record

• And by 2022, this will grow to $3.7 trillion, as 550,000 business owners exit • These SMEs employ close to 2 million workers and account for 15% of GDP * The Canadian Press, Nov 13/12

What is a Business Succession Plan?

• “a plan to establish the framework for the future transfer of

ownership and management

of your business to a chosen successor” – be it family, business partner/shareholder, management or outside third party • A plan that seeks to

maximize shareholder value, family harmony, and overall security to all interested parties

(shareholders, family, management, employees, customers, bankers) • Can involve business planning, management and ownership transition planning, tax planning, estate planning, and personal financial planning

Importance of Business Succession Planning

75% of businesses are owner managed

Only 15% transition it to the second generation But fewer than 3% transition it beyond second generation

Source: CAFE (Canadian Association of Family Enterprises) 6

Benefits of Business Succession Planning May Include:

• Smooth transition and continuity of your business • Maximize value at exit • Minimize taxes • Financial security for you/your family • Preserve family harmony • Clarify future roles and responsibilities • Inspire confidence in key stakeholders, including family, management, employees, customers and suppliers 7

Are You Prepared?

We can

help …

TD Wealth 5 Step Business Succession Planning Process

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Topics Covered in our Review

• Review and analysis of facts • Identification of your long term vision • Validation of your succession plan • Examination of tax, retirement and estate planning solutions • Examination of risks and risk mitigation solutions • Observations and recommendations •

No fee charged for our review

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Estate Planning – Use of Holding Company and Estate Freeze in Your Planning Nick Ierfino

, CA, CPA Ierfino & Associates

WHAT IS AN ESTATE FREEZE?

• An estate freeze refers to the transfer of future growth in the value of a business, real asset, or investments into the hands of the younger family members • Original owner will be deprived of growth while still continuing to control asset • An estate freeze typically limits the value of your estate to the FMV at the date the freeze is implemented • Consequently transferring that growth to the younger generation who will benefit from higher life expectancy rates and probably lower marginal tax rates

WHY SHOULD YOU USE A FREEZE?

• MAJOR REASON IS TO

SAVE TAX!!

• • • • •

Other Reasons:

Creditor Protection Multiplying The $800K Capital Gains Exemption Income Splitting Probate Planning Family Law Protection

SOFT ISSUES TO CONSIDER?

• • • • • • Objectives of freezor Family relationships Nature of assets Income needs of freezor What assets to be frozen Who will participate in future growth?

METHODS USED TO IMPLEMENT A FREEZE

• Typical freeze has freezor exchanging common shares(growth) for fixed value preferred shares • Family members subscribe for new growth shares directly or indirectly via a family trust • Freezor usually retains voting control • Several different methods can be used depending on facts

USE OF A HOLDING COMPANY

• Shares are rolled into holding company via 85 election • New shares are issued to family trust (growth shares)

USE OF A HOLDING COMPANY FOR CAPITAL GAINS EXEMPTION CURRENT STRUCTURE PROPOSED STRUCTURE

Mr. A $800K CGE TRUST

100% Common shares

OPCO Beneficiaries

100% Common shares

HOLD CO Mr. A

100% Preferred shares (V, NP) 100% Common shares

TRUST

100% Common shares (NV, P)

HOLD CO

V = voting NV = non-voting P = participating NP = non-participating

OPCO

ADVANTAGES OF USING A HOLDING COMPANY Creditor Proofing

• GSA on loans to OPCO • Ability to protect investments (i.e. marketable securities and real estate) held in company

USE OF A HOLDING COMPANY FOR TAX FREE DIVIDEND

HOLD CO

Tax free dividend

TRUST HOLD CO

Connected Corporations through control or > 10% of votes and value of shares

OPCO

Tax free dividend

OTHER ADVANTAGES OF USING A HOLDING COMPANY

• ACCUMULATE WEALTH OUTSIDE OPCO • SEPARATE TAX PLANNING • CAPITAL GAINS EXEMPTION • TAX FREE INTERCOMPANY DIVIDEND

ADVANTAGES OF USING A HOLDING COMPANY Uninterrupted Operations

• Allow existing beneficiary to manage holding company assets without involvement of OPCO shareholders

ADVANTAGES OF USING A HOLDING COMPANY Insurance

• BENEFICIARY OF POLICY • CAPITAL DIVIDEND ACCOUNT • DIVIDEND PAID TO SHAREHOLDERS- SPOUSE & CHILDREN

Shareholder’s Agreements, Buy/Sell Agreements and the Use of Insurance in Your Planning Jay Hershfield

, B.A., LLB., CLU, TEP TD Wealth Advisory Services Vice President and Estate Planning Advisor: Shareholder's Agreements, Buy/Sell Issues and Using Insurance

Buy-Sell Tragedies

• • • • • Death creates adversaries Interested parties not the ones you think Family intervention Share transfers and cash flow terms differing from funding provisions Share valuations not at FMV

12 13 14 15 16 17 18 1 2 3 4 5 9 10 11 6 7 8

Immediate Finance Arrangement

Year Age 62 63 64 65 66 67 68 51 52 53 54 55 56 57 58 59 60 61 Deposits 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 Death Benefit 3,117,002 3,244,084 3,380,969 3,527,502 3,683,549 3,849,983 4,026,848 4,196,973 4,363,557 4,531,483 4,687,202 4,852,676 5,010,910 5,172,752 5,337,981 5,516,884 5,702,100 5,892,921 CDA Credit 2,991,064 2,993,094 3,006,031 3,029,950 3,064,983 3,112,281 3,172,022 3,227,185 3,281,117 3,339,025 3,387,556 3,449,200 3,507,450 3,573,749 3,648,220 3,746,508 3,855,866 3,975,481 Annual Loan Amount Outstanding Loan Balance Net Cash Outlay Net to Estate on Death 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 130,850 261,700 392,550 523,400 654,250 785,100 915,950 1,046,800 1,177,650 1,308,500 1,439,350 1,570,200 1,701,050 1,831,900 1,962,750 2,093,600 2,224,450 2,355,300 6,543 9,846 13,122 16,364 19,564 22,714 25,808 28,859 31,857 34,804 37,676 40,478 43,171 45,740 48,170 50,498 51,826 54,081 2,986,152 2,982,384 2,988,419 3,004,102 3,029,299 3,064,883 3,110,898 3,150,173 3,185,907 3,222,983 3,247,852 3,282,476 3,309,860 3,340,852 3,375,231 3,423,284 3,477,650 3,537,621

Immediate Finance Arrangement Continued

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6,457,976 6,629,742 6,804,430 6,981,895 7,161,845 7,343,828 7,527,788 7,713,937 7,902,512 8,093,718 8,287,723 8,484,900 8,685,377 8,889,376 9,096,934 9,307,906 9,521,871 9,738,343 4,488,065 4,743,464 5,009,858 5,287,262 5,575,327 5,873,123 6,180,661 6,498,778 6,828,531 7,170,784 7,526,247 7,895,811 8,280,074 8,679,828 9,094,836 9,307,906 9,521,871 9,738,343 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 2,617,000 54,264 68,042 68,042 68,042 68,042 68,042 68,042 68,042 68,042 68,042 68,042 68,042 68,042 68,042 68,042 68,042 68,042 68,042 3,840,976 4,012,742 4,187,430 4,364,895 4,544,845 4,726,828 4,910,788 5,096,937 5,285,512 5,476,718 5,670,723 5,867,900 6,068,377 6,272,376 6,479,934 6,690,906 6,904,871 7,121,343

Result

• 15% pre-tax return on the insurance investment to the corporation at year 38 • Tax free removal through the Capital Dividend Account further enhances estate and provides liquidity for heirs • No tax at all if shares left to a spouse through spousal roll-over • 100% of original capital available for reinvestment

Questions? and Answers

The Economic and Real Estate Landscape in the GTA Derek Burleton

Vice President and Deputy Chief Economist

Disclaimers

The information contained herein has been provided by TD Wealth and is for information purposes only. The information has been drawn from sources believed to be reliable. Where such statements are based in whole or in part on information provided by third parties, they are not guaranteed to be accurate or complete. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax, or investment advice. Particular investment, trading, or tax strategies should be evaluated relative to each individual’s objectives and risk tolerance. TD Wealth, The Toronto-Dominion Bank and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered. TD Wealth and Wealth Advisory Services represents the products and services offered by TD Waterhouse Canada Inc. (Member – Canadian Investor Protection Fund), TD Waterhouse Private Investment Counsel Inc., The Toronto-Dominion Bank and The Canada Trust Company.

®/ The TD logo and other trade-marks are the property of The Toronto-Dominion Bank or a wholly-owned subsidiary, in Canada and/or other countries.

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