2004

Buy/Sell Arrangements

2004

• XYZ Inc.• Fair Market Value (FMV) = $2,000,000• Owners:

John owns 50% of sharesJohn owns 50% of shares• ACB of John’s shares $10,000• PUC of John’s shares $10,000

Mary owns 50% of sharesMary owns 50% of shares• ACB of Mary’s shares $10,000• PUC of Mary’s shares $10,000

Company ProfileCompany Profile

2004

Company ProfileCompany Profile

• Growth rate of company2%

• Personal marginal tax rate on income 50%• Personal marginal tax rate on dividends

33%• Capital gains inclusion rate

50%

• Assume John died last night• Assume Mary sells the business in 10 years

2004

Alternative 1.Alternative 1.Criss-cross with personally owned insurance

• John buys $1,000,000 of insurance on Mary’s life• Mary buys $1,000,000 of insurance on John’s life

Ag

reem

ent

Premiums

Premiums

50%

50%

XYZ Inc.

2004

Alternative 1.Alternative 1.Criss-cross with personally owned insurance

$1,000,000To purchase shares

2

John’s estate

As per Buy-Sellreturns shares to Mary

3

$1,000,000Death Benefit

1

Mary

2004

Alternative 1.Alternative 1.Criss-cross with personally owned insurance

TaxationTaxation1. Premiums paid with after-tax dollars by owners

2. Any capital gains on “sold” shares belong to deceased’s estate

AdvantagesAdvantages1. The simplest of all alternatives

2. Surviving owner(s) have an increased ACB

3. Insurance proceeds protected from corporate creditors’ claims

DisadvantagesDisadvantages1. Large number of policies to maintain if there are multiple owners

2. Dealing with policies could be a problem in the event of disagreement

3. Premiums are paid with individual after-tax dollars.

2004

Alternative 2.Alternative 2.Criss cross with corporate owned insurance

• XYZ Inc. buys $1,000,000 of life insurance on John’s life and

$1,000,000 of life insurance on Mary’s life

Ag

reem

ent

Premiums

50%

50%

XYZ Inc.

2004

Alternative 2.Alternative 2.Criss cross with corporate owned insurance

As per Buy-SellReturns shares to Mary

Mary Now owns 100% of XYZ Inc.

3

5$1,000,000

$1,000,000Death Benefit

1

XYZ Inc.

$1,000,000Promissory note

To purchase shares

2

John’s estateMary

XYZ Inc. declares a capital dividend of $1,000,000

4

2004

Alternative 2.Alternative 2.Criss cross with corporate owned insurance

TaxationTaxation1. Premiums paid by corporation are a non-deductible expense

2. Proceeds received by the company are tax-free

3. Proceeds in excess of ACB are credited to the CDA

4. Any capital gains on “sold” shares belong to Estate of the deceased

AdvantagesAdvantages1. After-tax premium cheaper if the company is in a lower tax bracket

2. Fewer policies are required (one per shareholder)

3. Premium disparities are not an issue

4. Surviving owner(s) have an increased ACB equal to the purchase price of the newly acquired shares

DisadvantagesDisadvantages1. Insurance proceeds subject to claims from company’s creditors

2004

Alternative 3.Alternative 3.Share redemption with corporate owned insurance

• XYZ Inc. buys $1,000,000 of life insurance on John’s life and

$1,000,000 of life insurance on Mary’s life

Ag

reem

ent

Premiums

50%

50%

XYZ Inc.

2004

Alternative 3.Alternative 3.Share redemption with corporate owned insurance

As per Buy-Sellreturns shares XYZ Inc.

For cancellation

3

$1,000,000Death Benefit

1

XYZ Inc.$1,000,000

To purchase shares

2

John’s estate

2004

Alternative 3.Alternative 3.Share redemption with corporate owned insurance

TaxationTaxation1. Premiums paid by corporation are a non-deductible expense

2. Proceeds received by the company are tax-free

3. Proceeds in excess of ACB are credited to the CDA

4. Proceeds received by the shareholder’s estate in excess of the PUC deemed a dividend. The dividend could be elected as a capital dividend

AdvantagesAdvantages1. After-tax premium cheaper if the company is in a lower tax bracket

2. Fewer policies are required (one per shareholder)

3. Premium disparities are not an issue

DisadvantagesDisadvantages1. No increase in the ACB for the surviving shareholder

2. Insurance proceeds subject to claims from the company’s creditors

2004

Alternative 4. Hybrid method with corporate owned insurance

• The insurance would be corporately owned but the agreement would allow flexibility in determining at death how many shares would be purchased by the surviving shareholders and how many shares will be redeemed by the corporation.

2004

Alternative 4.Hybrid method with corporate owned insurance

• XYZ Inc. buys $1,000,000 of life insurance on John’s life and

$1,000,000 of life insurance on Mary’s life

Agr

eem

ent

Premiums

50%

50%

XYZ Inc.

2004

$500,000Promissory note

To purchase shares

Mary

4

As per Buy/Sell returns 50% of shares XYZ Inc.

For cancellation

3

Mary Now owns 100% of

XYZ Inc.

As per Buy/Sellreturns 50% of shares to Mary

5

7

Hybrid Method with corporate owned insurance

$500,000To purchase shares

2

John’s estate$1,000,000Death Benefit

1

XYZ Inc.

XYZ Inc. declares a capital dividend of $500,000

6

2004

Alternative 4.Hybrid method with corporate owned insurance

TaxationTaxation1. Premiums paid by corporation are a non-deductible expense

2. Proceeds received by the company are tax-free

3. Proceeds in excess of ACB are credited to the CDA

4. Proceeds received by shareholder’s estate in excess of PUC deemed to be a dividend. The dividend could be elected as a capital dividend

AdvantagesAdvantages1. After-tax premium expense cheaper if company is in a lower tax bracket

2. Fewer policies are required (one per shareholder)

3. Premium disparities are not an issue

4. Surviving shareholder gets an ACB step up

DisadvantagesDisadvantages1. Insurance proceeds could be subject to claims from the company’s

creditors

2. Somewhat complicated arrangement