succession planning appraisal institute of canada conference delta hotel st. john’s, nl

Succession PlanningSuccession PlanningAppraisal Institute of Canada ConferenceAppraisal Institute of Canada Conference

Delta HotelDelta HotelSt. John’s, NLSt. John’s, NLJune 7June 7thth, 2007, 2007

Greg LondonTax 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

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 LondonTax Senior ManagerFort William Building10 Factory LaneSt. John’s, NLA1C 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 corporationsOwners of private companiesSenior executives of large private and public

companies

Strategy

To provide, within a government approved approach, structures to entrepreneurs that will:Clarify retirement planningProvide tax relief now and in the futureReduce risk to capitalEnhance 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 $20,00045 $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 65Unreduced 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 Options

Opportunity 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 coveredWhat is coveredCan amend coverages over time

HAWP – Example

Based on this example, savings are $607

Costs: $2,000

Tax Deduction (37.5%) $ 750Net Cost $1,250

Costs: $ 2,000Deduct (3%) $ 1,350Balance: $ 650Tax Credit (22%) $ 143Net 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 ownershiptax implications of disposing of the businessthe financing of the successorthe division of future profits under the transition.

2007

8

9

12

1332%

39

4246 %Financing for the successor

Finding a buyer/suitable leaderToo much dependence on my involvement

Valuing the businessConflicting vision with family

Access to cost-effective adviceOther

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

2439%

44 %Financing the purchase/transferValuing the business

Getting the owner to “let go”

Access to cost-effective adviceOther

Conflicting vision of familyDependence on previous owner

Conflicting vision of key employees

For successors

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 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 approachto financial planningdesigned to help youprosper 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

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Coupled with a product shelfdesigned for diversity

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Insurance*

LifeDisabilityCritical IllnessLong Term CarePersonal Health Care

Strategic Investment PlanningSymphonyTM

LendingLendingMortgagesLoans, Lines of Credit**

BankingBanking****

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* 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