Planning for Private Businesses What’s Left After Recent Announcements? Nathan Wright, LL.B., MTAX, TEP Founding Principal Ph: (416) 203-8338 E-mail: nwright@spectrumlawyers.ca DRAFT- FOR DISCUSSION PURPOSES ONLY SUBJECT TO SOLICITOR CLIENT PRIVILEGE

Disclaimer This document is for general information purposes only and does not represent legal or tax advice. Please take caution that the concepts presented in this document are very complex and fact specific. Professional advice should be sought before any implementation is undertaken. DRAFT- FOR DISCUSSION PURPOSES ONLY SUBJECT TO SOLICITOR CLIENT PRIVILEGE

1. Dividend Sprinkling in 2017 Beneficiaries > 18 Mr. X Allocate Trust Freeze Common Dividend OPCO New TOSI rules would be effective January 1, 2018. Maximize dividends paid in 2017 to eligible shareholders or beneficiaries. Revised draft legislation meant to be delivered in Fall of 2017 DRAFT- FOR DISCUSSION PURPOSES ONLY SUBJECT TO SOLICITOR CLIENT PRIVILEGE

2. Dividend Sprinkling in 2018 Beneficiaries > 18 and “meaningful contribution” based on: Labour Capital Financial Risks Past contributions in respect of above Allocate Mr. X Trust Freeze Common Dividend OPCO If a beneficiary or shareholder “meaningfully” contributes to the business then “reasonable” dividends, can be paid. Generally, an argument may be able to be made that a spouse should be entitled to dividends based on their “meaningful” contribution (either directly to the business or indirectly through the family home). Spouses will often have to guarantee loans made to businesses (for example where a spouse owns a house and the house is being mortgaged to finance the business) and are therefore at risk. Dividends may be able to be paid on this basis as well. Dividends may also be able to be paid to children over 18 who “meaningfully contribute” However TBD if “part-time” efforts are meant to be ignored for ages 18-24. DRAFT- FOR DISCUSSION PURPOSES ONLY SUBJECT TO SOLICITOR CLIENT PRIVILEGE

3. Converting Income to Capital Gains Planning under the Existing Rules – Inter-Vivos Pipeline Strategy The initial July 18th, 2017 draft legislations targeted what is referred to as a “pipeline,” which is used as part of a strategy for converting dividend income into capital gains. Mr. A Repay note Mr. A Sell at FMV Create capital gain to increase ACB HOLDCO Dividend/share redemption OPCO OPCO Finance announced that it will not move forward with proposals related to converting income into capital gains. Presumably this means that they will not move forward with amendments to 84.1 or new 246.1. Finance will study this further over the next year. Mr. A deliberately triggers gain on Opco shares using s.85 (referred to as an “internal” 85), where Mr. A can elect the amount of proceeds and determine the amount of capital gain. Mr. A does not claim capital gains exemption to offset capital gain. Mr. A sells Opco shares to Holdco in exchange for promissory note. Opco pays dividends to Holdco or shares are redeemed. Holdco uses funds to repay promissory note to Mr. A over time (2-5 years). Opco remains a separate and distinct entity for at least one year. Opco continues to carry on business in the same manner.

4. Post-Mortem Pipeline Mr. A (deceased) Estate Estate Capital gain taxed at 26% Repay note ACB = FMV Disposition OPCO OPCO HOLDCO Assumes that Finance will not move forward with proposed amendments to 84.1 and will not introduce new 246.1. The Estate of Mr. A sells Opco to Holdco in exchange for a promissory note. Opco is not wound up or amalgamated for at least one year. Promissory note is repaid over time (2 to 5 years). OPCO Amalgamate Planning under the Existing Rules - Post-Mortem Pipeline Strategy On death, an individual is deemed to have disposed of assets (usually recognizes capital gain) for FMV and that individual’s estate is deemed to have acquired them for FMV. Where the capital property is shares in a private corporation, there is double-tax: First layer of taxation: capital gain recognized on terminal T1 return; and Second layer of taxation: if estate distributes to beneficiaries, the beneficiaries will pay a tax on the distribution (ie, taxed as if they received a dividend). A common planning strategy to avoid this double tax is to execute a post-mortem pipeline.

5. Estate Planning 101 Mr. X Trust BENEFICIARY CO. OPCO Beneficiaries Mr. X Trust Freeze Common BENEFICIARY CO. OPCO Defer tax on future accrued gain to next generation. Probate savings if Primary/Secondary Wills are implemented. Asset Protection. Purification for capital gains exemption. Flexible structure. May still be possible to dividend sprinkle based on “meaningful contribution.” DRAFT- FOR DISCUSSION PURPOSES ONLY SUBJECT TO SOLICITOR CLIENT PRIVILEGE