Succession Planning. Facilitating the Thinking. Davidd Lawley, BSc, CFP, CLU, CHFC, CPCA Director, Succession & Estate Planning January 25, 2017

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1 Succession Planning Facilitating the Thinking Davidd Lawley, BSc, CFP, CLU, CHFC, CPCA Director, Succession & Estate Planning January 25, 2017

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3 The Foundation

4 Source: Industry Canada & Stats Canada

5 What is a Small Business? A business includes: A profession A calling A trade A manufacture An undertaking of any kind Most of us know it by the tax definition paraphrased as having taxable income from active business carried on in Canada to a maximum of $500,000.

6 What is a Farm? No specific definition The following qualify: o o o o o o o o Soil tilling Livestock raising Poultry raising Dairy farming Tree farming Fruit growing Operating a chicken hatchery Operating a feedlot o Operating a wild game reserve o Fur farming o Racehorse maintenance o Beekeeping o Cultivating crops in water or hydroponics o Christmas tree growing In some circumstances the following may also qualify: o Raising fish o Market gardening o Operating a nursery or greenhouse o Operating a maple sugar bush

7 Why is it important? Tax Treatment of inter-generational rollovers Cash or accrual accounting Farm Losses and Restricted Farm Losses Capital Gains Exemption ($1,000,000) Farm property Shares of a farm corporation

8 Succession Planning Realities Business Succession Plan? Exit Date? 6% 17% 10% 40% 51% 29% 38% 9% No Yes - formal Yes - informal Don't know Within 1 yr. 1-5 yrs yrs. 10+ yrs Source: Canadian Federation of Independent Business

9 Small Business in Transition 30% 70% Transfer Intergenerationally Sell/Wind Up

10 Issues? 3 reasons why family businesses fail to transition o o o No qualified successor Lack of planning Picking one child and being fair to the others Farm land value inflation on equitable distribution

11 Business Owners Source: BMO survey of Business Owners October 2016

12 The Major Issues

13 Key Focus Areas Wealth Accumulation Equitable Distribution Taxation

14 Wealth Accumulation Wealth is more than money Saving Pay yourself first Non-business investments Diversification Understanding risk

15 Value of advice the Team approach You Financial Planner

16 Equal vs. Fair Sweat equity build up Economics of viability Lifestyle expectations Minimum size Income for multiple families Debt service Multiple owners Decision making Valuation Amount Timing

17 Equitable Distribution Family Values Listen Who manages? Valuation What s the formula? When? Missing Piece? Cash!

18 LIQUIDITY CREATION Sell Assets Borrow Save Life Insurance - Loss of the asset. - Loss of all future growth on the asset. - Fire sale of assets. - Who will lend? - Are earnings enough to service the debt? - Interest on a loan to pay taxes is not tax deductible. - How much needs to be saved annually? - Large amounts are rarely left in liquid accounts. - Will there be enough cash when it is needed? (Time?) - Estate assets retained for family. - Costs between 1% and 4% of the capital it protects. - Arrives at precisely the same time as the liability arises, tax free. Because no one really expects to rely on lottery tickets!!

19 Taxation Annual Salary Dividends Transactional Capital Gains Deemed disposition Capital Gains Recaptured Capital Cost Allowance Capital Dividend Account Rollovers

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21 Your Priorities

22 The Family Meeting Everyone needs to be heard Transparency Succession vs. Estate planning Skills and preparation for management Lifestyle & family home Clarity & peace of mind Formalize it in writing

23 Importance of Involvement

24 The Process

25 Planning Types Your Planning Succession Planning Estate Planning Emotional Financial Distribution

26 Emotional Planning Transition Timing Letting go Identity New goals Aging and health Advance care directives

27 Financial Planning Lifestyle expectation Income Expenses Regular Unexpected Current taxation Power of Attorney Tax strategies Estate freezing

28 Estate Freeze Beneficiaries Mom & Dad Mom & Dad Family Trust Trustees Common Shares Preferred Shares Common Shares Family Corp. Family Corp.

29 Why Estate Freeze? Fixes capital gains tax liability. Pass asset growth to heirs. Facilitate business succession to employees. Maximizing the Small Business Capital Gains Exemption (SBCGE). Dividend income for a retiring shareholder. Crystallization of the SBCGE.

30 Distribution Planning Will Estate taxation Deemed disposition Heirlooms Heart-string issues Charitable gifts Trusts Buy/sell agreements

31 Basic Trust Structure Settlor Transferor of property Trustee Trust Manages the property Beneficiaries Recipients of the benefits from the trust

32 Why do you need a Buy/Sell Agreement? Provides a framework for financing. Smoothes the ownership transition process. A legally binding contract, therefore, litigation is minimized. Provides fair and equitable treatment for the deceased s heirs and the surviving partner.

33 The Succession Process Analyze Develop Execute Coordinate Document Document Document

34 Your Legacy You ve worked a lifetime to build it Give it the attention it deserves Do it now be in control Leaving it to chance should not be an option

35 Thank you