1. Family Succession Jack Bernstein Aird & Berlis LLP Toronto, Ontario 416.865.7766 jbernstein@airdberlis.com

2. Aird & Berlis LLP 2 Family Succession OBJECTIVES Minimize family disputes Preserve business and facilitate growth Smooth transition Retention of employees Confidence of bankers, suppliers

3. Aird & Berlis LLP 3 Non-Tax Considerations Maturity Business acumen Family relationship Creditors of children Family Advisory Committee

4. Aird & Berlis LLP 4 Methods of Transferring Business 1.Gift 2.Sale 3.Freeze

5. Aird & Berlis LLP 5 GIFTSALE Family Law ProtectionNo Family Law Protection Facilitates Equalization Provides Parents With Capital

6. Aird & Berlis LLP 6 Consider $500,000 exemption if qualified small business corporation 10 year reserve

7. Aird & Berlis LLP 7 Capital Gains Exemption Up to $500,000 for qualified farm property and small business corporations (SBC) Taxpayer or related parties must own shares of SBC for 24 months and more than 50% of value of assets of SBC or holding company used in active business carried on primarily in Canada during that period Consider qualifying company as small business corporation

8. Aird & Berlis LLP 8 Hotchpot Clause Previously gave $500,000 of shares to 1 child Assume 2 children: value of estate$ 1,500,000 gift to child during lifetime$ 500,000 will deems estate$ 2,000,000 each child to receive$ 1,000,000 child who receives prior gift gets$ 500,000 other child receives from estate$ 1,000,000

9. Aird & Berlis LLP 9 TRAP 84.1 Deemed dividend, not capital gain OPCO HOLDCO Child Parent Common Sale

10. Aird & Berlis LLP 10 Estate Freeze Transfer future growth Retain right to current value Control possible

11. Aird & Berlis LLP 11 86 Reorganization Need Articles of Amendment No election if s. 86 If elect under s. 85 can crystallize Same PUC Use price adjustment clause Family law issues Separate voting shares recommended Advantage to redeeming parent

12. Aird & Berlis LLP 12 P/S  Redeemable at fair market value of exchanged shares  Price adjustment clause Beware  Attribution  Kiddie tax Should trust for children have age 18 restriction? Should parent transfer freeze shares to a trust? Family Law Issues Problem with US children Parent Children or Trust Opco C/SP/S

13. Aird & Berlis LLP 13 Holdco Parent P/S Opco Beneficiary = children and Holdco Objective to prevent build up of redundant cash in OPCO C/S

14. Aird & Berlis LLP 14 Holding Company Useful if only one shareholder to freeze Facilitates tax free dividends (protect retained earnings) P/S  Same PUC  Price adjustment clause Must file election

15. Aird & Berlis LLP 15 Parent Children or Trust Holdco C/S P/S Opco C/S 85 rollover to Holdco Age 18 restriction? Should Parent transfer to a Trust? Family Law considerations

16. Aird & Berlis LLP 16 Inter-Corporate Transfer Useful if client not transferring all assets or Opco not small business corporation P/S  S. 85 election  Same PUC  Price adjustment  If dividends > 10% votes Avoids corporate attribution Parent Children Opco C/S Newco P/S other assets (eg. real estate)

17. Aird & Berlis LLP 17 Parent Children Holdco C/S Opco P/S Useful if Holdco to make other investments and children to benefit from capital gains exemption

18. Aird & Berlis LLP 18 Control Unanimous shareholders agreement Retractable shares Voting preferred shares Issue common shares to trust for children

19. Aird & Berlis LLP 19 Trust Choice of settlor Choice of trustees Choice of beneficiaries

20. Aird & Berlis LLP 20 Reversing the Freeze 1.Use of discretionary trust with parents and children (association) 2.Convertible shares

21. Aird & Berlis LLP 21 Use of Trust to Reverse Freeze If exclude child, potential action for breach of trust Parent Opco P/SC/S Discretionary Trust for Parent and Children

22. Aird & Berlis LLP 22 Convertible Shares Parent Opco Freeze P/S C/S Trust for Children and possibly Parent Trust for Parent Voting shares and convertible P/S (1:1 for common)

23. Aird & Berlis LLP 23 Partnership 97(2) rollover for frozen partnership interest What value is contributed by children No rulings ever issued Beware 103(1.1) Parent Children Partnership 97(2)

24. Aird & Berlis LLP 24 Refreeze Original freeze at $5 million Company now worth $3 million Benefits of refreezing  Reduce C/G on death Technical interpretation June 3, 1997, document 9229905 S. 86 of P/S to new P/S retractable for $3 million Provided decrease in value of P/S not result of stripping corporate assets, no benefit on common shareholders

25. Aird & Berlis LLP 25 Protect Business 1.Terms on shareholders loans 2.Restrict retraction of shares - becomes redeemable 3.Long term lease of building 4.Piggyback clause for inactive children 5.Life insurance for children 6.Wills for children

26. Aird & Berlis LLP 26 Shareholder Agreements Imperative that children be required to enter into shareholder agreement which would include among other things:  Composition of the board of directors  Present and future officers of the corporation (who is to become the president on death of the parent - can have more than one president)  Salaries and bonuses - parent determines during lifetime and on death equal for the children in the business?

27. Aird & Berlis LLP 27 Shareholder Agreements (cont’d)  Limited marriage contract to protect business by either having spouse agree that shares of business not family property or alternatively that any settlement under family law legislation will not be satisfied with the shares of the corporation Life insurance on lives of children to fund buy- out on death Life insurance on life of parent to ensure that surviving parent has assets after death and to provide for equalization with other children

28. Aird & Berlis LLP 28 Shareholder Agreements (cont’d) Buy-out provisions after death of parent  Right of first refusal  Shotgun clause  Auction clause

29. Aird & Berlis LLP 29 Shareholder Agreements (cont’d) Option to buy on insolvency, marital breakdown if son-in-law or daughter-in-law in business, disability, breach of contract, if Family Law Act application launched against company Forced sale Piggy-back clauses Matched bid Butterfly option

30. Aird & Berlis LLP 30 Doc. # 1837203