1. D&A TAX CONSIDERATIONS FOR THE GRÉGOIRE FAMILY Desharnais & Associates Marc-André Benoit Marianne Boiteau Patrick Lorange January 10th, 2016

2. D&A AGENDA Executive summary Acquisition of PFM –Valuation –Assets v. Shares –Optimal Structure –Financing Corporate taxes Personal taxes Q&A

3. D&A EXECUTIVE SUMMARY It is possible to save $183,000 in taxes using the capital gains deduction on the transaction While there is an acquisition of control, you can transfer most assets tax free Net impact of $66,000 on corporate net income for tax purposes Pay Nick in salary up to $123,000; many tax credits available to Nick

4. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A BUSINESS VALUATION

5. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A BUSINESS VALUATION Conclusion: Equity value of PFM is $9,500,000

6. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A SALE OF ASSETS v. SHARES SALE OF ASSETSSALE OF SHARES Choice of which assets to purchasePotential hidden liabilities Deemed taxable dividend taxed at higher rate Capital gain deduction available Increase UCC balance, more CCA available in future Only purchase 51% to have control

7. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A CAPITAL GAIN DEDUCTION Up to $813,600 available in tax savings To be eligible, PFM must be a Qualifying Small Business Corporation: –Canadian Controlled Private Corporation –90% of assets used to generate active business income 50% of these assets located in Canada Currently, 90% rule not met KEY TAKEAWAY: PURIFY THE ASSETS

8. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A PURIFYING THE ASSETS Incorporate a HoldCo Use S85.1 to rollover assets until 90% rule met –Investments: $1,843K Before: 84% After: 96% 90% rule met, PFM is a QSBC. Can use CGE PFM McShane HoldCo Mr. McShane S85.1 Rollover

9. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A SALE OF ASSETS Details on this calculation available

10. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A SALE OF SHARES McSHANE: PREFER SALE OF SHARES

11. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A FINANCING THE ACQUISITION Price of the company 100%: $9,500 90%: $8,550 Possible arrangement with McShane to defer payment over 5 years (capital gains deferral) Immediate necessary outflow: $1,710,000 Remainder TBD, potential for future salary/dividends

12. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A SOURCES OF FINANCING Arrangement with Catalina (mother): –Estimated cash available: $450,000 Share of capital dividend: $375,000 tax free Share of current year earnings: $75,000 (Part IV tax applies) Potential to securitize a loan using Beauty assets Still requires $1,260,000 Home equity: $230,000 Shareholder loan (at prescribed rate) Bank loan Investment partner

13. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A SOURCES OF FINANCING Conclusion: Even if remaining financing is obtained, high financial risk to meet obligation in five years. Further consideration required: –Could buy a portion of assets? –Buy less than 90% –Find a business partner?

14. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A STRUCTURE PFM BuyCo McShane HoldCo Jessy Grégoire Mr. McShane

15. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A STRUCTURE 1.Jessy purchases $813,000 of common shares from McShane, using financing previously discussed (Allow McShane to use Capital Gain Deduction) 2.Jessy incorporates BuyCo for $1 3.Using S85.1, McShane transfers remaining assets to HoldCo 4.HoldCo sells assets to BuyCo for the following: 1.10% of common shares of BuyCo 2.BOOT of $10K = ACB = Elected Amount 3.Convertible Preferred shares for the remaining

16. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A CONSEQUENCES OF STRUCTURE Allows McShane to use entire Capital Gain Deduction In the future, redeem preferred shares for debt/cash If Jessy needs cash, can manage dividend payments because of the HoldCo (interco dividends not taxable under S112)

17. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A RECAP OF OPTIMAL STRUCTURE PFM BuyCo McShane HoldCo Jessy Grégoire Mr. McShane Incorporates BuyCo, Owns 90% 10% CS Pref Shares Owns 100%

18. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A ACQUISITION OF CONTROL Acquisition of control consequences: 1.Deemed year-end the day before 1 year C/F lost for Net Capital Losses CCA will be prorated 2.Cannot C/F non-capital losses except if: 1.Business is carried on 2.Same or similar line of business 3.Expectation of profit 3.Net Capital Losses (C/Y & C/F) will expire Election available: Deemed disposition of capital assets at FMV in order to use the CL that would otherwise be lost –On non-depreciable assets first to avoid recapture

19. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A INCLUSIONS & DEDUCTIONS Travel expenses: –Can deduct 50% of Meals & Entertainment for Sales Employees –Travelling salesmen (S8(1)(h.1)) can deduct their travel expenses up to commission income TRAVEL EXPENSES < COMMISSIONS

20. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A INCLUSIONS & DEDUCTIONS Monthly meals for employees: –50% deductible if: Benefit conferred to all employees Employment related –Make sure amount is reasonable Assuming reasonable, depends on number of employees $5,000 x 12 mths x 50% = $30,000 INCLUDE $30K BACK IN TAX INCOME

21. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A INCLUSIONS & DEDUCTIONS Tuition expense: Taxable benefit if not primarily for the benefit of PFM –Income inclusion for employees –Deduction not available for PFM « University classes of their choice » Make sure that classes are related to the business (e.g.: management, manufacturing…) –Keep transcripts/university invoices as proof INCOME INCLUSION OF $42,322?

22. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A INCLUSIONS & DEDUCTIONS Company car: –CCA Class 10.1, 30%, UCC capped at $30,000 –In the future, consider buying vehicles of max $30K Standby charge: 2% x (45,000 + GST) x #mths But, potential for Reduced Standby Charge: –Less than 1,667km per month for personal use: MET –More than 50% used for business: MET S.C. x 500/1,667 x #mths income inclusion INCOME INCLUSION REDUCED BY 67%

23. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A INCLUSIONS & DEDUCTIONS Company car (cont.): –Operating charge benefit, lesser of: $0.27 x 500km x #mths; or 50% x Reduced Standby Charge –Recommendation: Keep a detailed travel log Conclusion: –Income inclusions protect you from bad taxes –Helped reduce your tax liability to minimum allowed

24. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A JESSY AND NICK PERSONAL TAX Salary vs Dividends for Nick –Advantages of salary: Increases room for RRSP contribution (CV of RRSP: $42k) Allows CPP/QPP income at retirement –Disadvantages of salary: Taxed at higher rate *Salary must be reasonable in order to be deductible PAY SALARY OF $123,000

25. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A INCOME SPLITTING Nick manages Jessy’s investments. Could potentially earn commission income Spousal RRSP –Jessy may contribute up to 50% of RRSP (keeping in mind her personal contribution limit) –Money needs to remain 3 years in the plan to avoid attribution rules –Can contribute additional $2,000 without penalties

26. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A CHILD CARE EXPENSES Deductible in the hands of the lower income spouse –If incurred to earn income; therefore Nick would have to earn income to get the deduction –Expenses such as day care (need the receipts) Up to $7,000 for child under 6 Up to $4,000 for child between 7 – 16 DEDUCTION OF $15,000

27. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A RESP One of Jessy’s priorities is her children’s education Can set up 3 RESP accounts for her children –Plan allows for income deferral –Money invested in the plan is not deductible –Government puts money into the plan –Money taxed in the hands of the children when withdrawn –Lifetime maximum of $50,000 per child

28. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A MCSHANE’S PERSONAL TAXES Tax opportunities: 1.Invest in another QSBC in the prescribed time in order to defer a portion of the CG 2.CG Reserve available if Jessy makes payments within 5 years (one fifth deductible every year)

29. D&A EXECUTIVE SUMMARY It is possible to save $183,000 in taxes using the capital gains deduction on the transaction While there is an acquisition of control, you can transfer most assets tax free Net impact of $66,000 on corporate net income for tax purposes Pay Nick in salary up to $123,000; many tax credits available to Nick

30. D&A TAX CONSIDERATIONS FOR THE GRÉGOIRE FAMILY Période de questions January 10th, 2016

31. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A APPENDIX A: CASH AVAILABLE

32. FINANCINGPFM DEALCORPORATE TAXPERSONAL TAX D&A APPENDIX B: MCSHANE’S TAXES He wants to remain involved into the business –Keep 10% of his shares Should set up a holding company. Inter-co dividends are paid out tax-free McShane will be able to pay himself dividends whenever he wants. Ensures more flexibility.