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
9
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
10
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
$800K CGE
Mr. A
100%
Common
shares
Beneficiaries
100%
Common
shares
HOLD CO
Mr. A
OPCO
TRUST
TRUST
100% Common
shares (NV, P)
100% Preferred
shares (V, NP)
HOLD CO
100%
Common
shares
OPCO
V = voting
NV = non-voting
P = participating
NP = non-participating
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
Tax free
dividend
OPCO
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
Immediate Finance Arrangement
Year
Age
Deposits
Death Benefit
CDA Credit
Annual Loan
Amount
Outstanding Loan
Balance
Net Cash Outlay Net to Estate on Death
1
51
130,850
3,117,002
2,991,064
130,850
130,850
6,543
2,986,152
2
52
130,850
3,244,084
2,993,094
130,850
261,700
9,846
2,982,384
3
53
130,850
3,380,969
3,006,031
130,850
392,550
13,122
2,988,419
4
54
130,850
3,527,502
3,029,950
130,850
523,400
16,364
3,004,102
5
55
130,850
3,683,549
3,064,983
130,850
654,250
19,564
3,029,299
6
56
130,850
3,849,983
3,112,281
130,850
785,100
22,714
3,064,883
7
57
130,850
4,026,848
3,172,022
130,850
915,950
25,808
3,110,898
8
58
130,850
4,196,973
3,227,185
130,850
1,046,800
28,859
3,150,173
9
59
130,850
4,363,557
3,281,117
130,850
1,177,650
31,857
3,185,907
10
60
130,850
4,531,483
3,339,025
130,850
1,308,500
34,804
3,222,983
11
61
130,850
4,687,202
3,387,556
130,850
1,439,350
37,676
3,247,852
12
62
130,850
4,852,676
3,449,200
130,850
1,570,200
40,478
3,282,476
13
63
130,850
5,010,910
3,507,450
130,850
1,701,050
43,171
3,309,860
14
64
130,850
5,172,752
3,573,749
130,850
1,831,900
45,740
3,340,852
15
65
130,850
5,337,981
3,648,220
130,850
1,962,750
48,170
3,375,231
16
66
130,850
5,516,884
3,746,508
130,850
2,093,600
50,498
3,423,284
17
67
130,850
5,702,100
3,855,866
130,850
2,224,450
51,826
3,477,650
18
68
130,850
5,892,921
3,975,481
130,850
2,355,300
54,081
3,537,621
Immediate Finance Arrangement Continued
21
71
0
6,457,976
4,488,065
0
2,617,000
54,264
3,840,976
22
72
0
6,629,742
4,743,464
0
2,617,000
68,042
4,012,742
23
73
0
6,804,430
5,009,858
0
2,617,000
68,042
4,187,430
24
74
0
6,981,895
5,287,262
0
2,617,000
68,042
4,364,895
25
75
0
7,161,845
5,575,327
0
2,617,000
68,042
4,544,845
26
76
0
7,343,828
5,873,123
0
2,617,000
68,042
4,726,828
27
77
0
7,527,788
6,180,661
0
2,617,000
68,042
4,910,788
28
78
0
7,713,937
6,498,778
0
2,617,000
68,042
5,096,937
29
79
0
7,902,512
6,828,531
0
2,617,000
68,042
5,285,512
30
80
0
8,093,718
7,170,784
0
2,617,000
68,042
5,476,718
31
81
0
8,287,723
7,526,247
0
2,617,000
68,042
5,670,723
32
82
0
8,484,900
7,895,811
0
2,617,000
68,042
5,867,900
33
83
0
8,685,377
8,280,074
0
2,617,000
68,042
6,068,377
34
84
0
8,889,376
8,679,828
0
2,617,000
68,042
6,272,376
35
85
0
9,096,934
9,094,836
0
2,617,000
68,042
6,479,934
36
86
0
9,307,906
9,307,906
0
2,617,000
68,042
6,690,906
37
87
0
9,521,871
9,521,871
0
2,617,000
68,042
6,904,871
38
88
0
9,738,343
9,738,343
0
2,617,000
68,042
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.
30
Thank you!
Talk to a TD Wealth or Ierfino & Associates representative today!
We’re here to help!
31
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