1. 2004 Buy/Sell Arrangements

2. 2004 XYZ Inc. Fair Market Value (FMV) = $2,000,000 Owners:  John owns 50% of shares ACB of John’s shares $10,000 PUC of John’s shares $10,000  Mary owns 50% of shares ACB of Mary’s shares $10,000 PUC of Mary’s shares $10,000 Company Profile

3. 2004 Company Profile Growth rate of company2% Personal marginal tax rate on income50% Personal marginal tax rate on dividends33% Capital gains inclusion rate50% Assume John died last night Assume Mary sells the business in 10 years

4. 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 Agreement Premiums 50% XYZ Inc.

5. 2004 Alternative 1. Alternative 1. Criss-cross with personally owned insurance $1,000,000 To purchase shares 2 John’s estate As per Buy-Sell returns shares to Mary 3 $1,000,000 Death Benefit 1 Mary

6. 2004 Alternative 1. Alternative 1. Criss-cross with personally owned insurance Taxation 1.Premiums paid with after-tax dollars by owners 2.Any capital gains on “sold” shares belong to deceased’s estateAdvantages 1.The simplest of all alternatives 2.Surviving owner(s) have an increased ACB 3.Insurance proceeds protected from corporate creditors’ claimsDisadvantages 1.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.

7. 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 Agreement Premiums 50% XYZ Inc.

8. 2004 Alternative 2. Alternative 2. Criss cross with corporate owned insurance As per Buy-Sell Returns shares to Mary Mary Now owns 100% of XYZ Inc. 3 5 $1,000,000 Death Benefit 1 XYZ Inc. $1,000,000 Promissory note To purchase shares 2 John’s estate Mary XYZ Inc. declares a capital dividend of $1,000,000 4

9. 2004 Alternative 2. Alternative 2. Criss cross with corporate owned insurance Taxation 1.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 deceasedAdvantages 1.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 sharesDisadvantages 1.Insurance proceeds subject to claims from company’s creditors

10. 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 Agreement Premiums 50% XYZ Inc.

11. 2004 Alternative 3. Alternative 3. Share redemption with corporate owned insurance As per Buy-Sell returns shares XYZ Inc. For cancellation 3 $1,000,000 Death Benefit 1 XYZ Inc. $1,000,000 To purchase shares 2 John’s estate

12. 2004 Alternative 3. Alternative 3. Share redemption with corporate owned insurance Taxation 1.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 dividendAdvantages 1.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 issueDisadvantages 1.No increase in the ACB for the surviving shareholder 2.Insurance proceeds subject to claims from the company’s creditors

13. 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.

14. 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 Agreement Premiums 50% XYZ Inc.

15. 2004 $500,000 Promissory 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/Sell returns 50% of shares to Mary 5 7 Hybrid Method with corporate owned insurance $500,000 To purchase shares 2 John’s estate $1,000,000 Death Benefit 1 XYZ Inc. XYZ Inc. declares a capital dividend of $500,000 6

16. 2004 Alternative 4. Hybrid method with corporate owned insurance Taxation 1.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 dividendAdvantages 1.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 upDisadvantages 1.Insurance proceeds could be subject to claims from the company’s creditors 2.Somewhat complicated arrangement