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  1. 1. RBC Corporate Advisory Services CORPORATE OWNERSHIP PLANNING
  2. 2. SOME OF THE FACTORS TO BE CONSIDERED WHEN EXPLORING BUSINESS SUCCESSION PLANNING ISSUES Background 1. Personal Background Ì Family Members together with their ages, income, residency and citizenship Ì Family dynamics, financial needs Ì Special needs or financial dependency issues Ì Possible changes to financial position of family member Ì Issue specific to the blended family Ì Marriage contract and/or obligations pursuant to agreement or court order Ì Health of client and family, together with issues that revolve around family dynamics Ì Ownership, nature and value of personal assets, together with particulars with respect to beneficiary designations Ì Status of marriages 2. Corporate Background Ì Nature and value of business Ì Strategic vision Ì Corporate stakeholders (key employees, family members, franchisor, distributor etc.) Ì Corporate structure Ì Qualification of business with respect to the enhanced capital gains exemption together with whether it has been used by the relevant parties and family members Ì Situs of business and location of its activities Ì Assets of corporation (example: opco shares, realty, investments, insurance, debt, active busi- ness assets etc.) Ì Guarantees Ì Outstanding shareholders’ loans, CDA and RDTOH particulars 3. Review of Documentation Ì Financial Statements Ì Corporate/Organization Chart
  3. 3. Ì Shareholders’ Agreements > Buy sell Provisions > Allocation of GRIP > Funding of buy sell Ì Insurance Policies > Ownership > Life insured > Date and type of policy > Party responsible for payment of premiums > Beneficiary(ies) > Date of policy Ì Inter Vivos Trusts Ì Insurance Trusts Ì Powers of appointment Ì Domestic Contracts Ì Deeds Ì Wills Ì Powers of Attorney for Property and Personal Care > Association Issues > Residency issues Stages in Business Cycle 1. Current Operating. Focus on current structure. Client wants to retain control, ownership and grow its value Potential issues to consider: Ì Corporate ownership structure Ì Qualification and potential multiplication of enhanced capital gains exemption Ì Shareholders’ Agreement > Planning for changes of share ownership in the event of disability, divorce, death and bankruptcy > GRIP > Valuation issues > Tax implications which arise as a result of provisions in shareholders’ agreement > Liquidity Planning > Financing > Collateral obligation protection
  4. 4. Ì Wealth Preservation > Intervivos trusts > Corporate structure > Life insurance > Ownership of assets > Family law > Contingency Planning – Will Planning Ì Selection of executors; underlying business succession issues revolving around wasting as- sets, non-controlling interests, controlling interests, conflicts, delegation of authority, day to day management of the company, who are to serve as directors, control of income to estate if trusts implemented, powers of trustees, signing authorities, liability of trustees, self dealing issues, tax planning post mortem > Contingency Planning: Incapacity > Powers of Attorney for Property Ì Selection of attorneys for property Ì Residency Ì Association Ì Issues re: the company Ì Jurisdictional issues Ì Contingent appointments > Powers of Attorney for Personal Care Ì Selection of attorney(s) for personal care Ì Contingent appointments > Planning for disability Ì Disability insurance Ì Critical illness 2. Mature Business Client wants to retain control, but is willing to consider shifting some future value. Focus on growth and preservation of value. Potential issues to consider: Ì Corporate structure > Purification and eligibility for capital gains exemption Ì Particulars with respect to assets of company Ì Location of business activities
  5. 5. Ì Share ownership particulars > Capital gains exemption > Holding company planning > Wealth preservation issues Ì Estate freeze or Partial freeze > Inter vivos trust planning Ì 21 year deemed disposition rules Ì Attribution > Business owners desire to retain interest in growth Ì Family dynamics Ì Value of business interest Ì Capital gains deferral Ì Satisfied current value of business and other assets sufficient Ì Gels and ability to effect thaw Ì Comfort in giving up ownership Ì Comfort in potentially creating fiduciary obligations > Assessment of likelihood that value of business will increase > Family law considerations, marriage contracts re: founder and children Ì Issues surrounding net family property freezes Ì Issues surrounding valuations of interests in trusts Ì Impact of family law on the way freeze is structured Ì Changes anticipated re: citizenship or residency of family member > Is business owner ready to have family members participate in equity of the business > Equalization issues > Cost of implementation of strategy (legal and accounting) Ì Purification and eligibility for capital gains exemption Ì Insurance Audit > Update and review of shareholders’ agreements, buy sell provisions, and buy sell cov- erage together with tax implications > Review of coverage with respect to capital gains protection > Review and update of living benefits, such as disability insurance and critical illness Ì IPPs Ì RCAs Ì Planning to retain key employees > Stock > Phantom Stock > EPSPs > RCAs
  6. 6. Ì Holding company planning (if not implemented at an earlier time) Ì Wealth preservation 3. Succession/exit (i) Do Nothing In this instance, business owner does not want to contemplate exit strategy, and simply feels that executor will need to deal with the issues under the terms of his or her Will(s). Potential issues to consider: Ì Value of the business Ì Guarantees Ì Key employees Ì Memoranda to Trustees speaking to various issues involving the company Ì Will Planning to speak to following issues (to name only a few): > Selection of executor and trustee Ì Powers conferred on executor and trustee Ì Executor and trustee liability Ì Powers to implement post mortem tax planning Ì Timing issues Ì Degree to which potential tax plan should be implemented under the terms of a Will Ì Jurisdictional and cross border issues Ì Bonding issues > Potential conflict and self-dealing issues > Who should be given title, duties and management > Signing authority > Who will vote the shares > Who will have control of the corporation > Ownership of shares > Practical and legal considerations with respect to wasting assets > Administrative and legal issues revolving around controlling and non-controlling business interests > Delegation issues > Day to day management of corporation > Control of income to estate Ì Planning for Incapacity > In the event of incapacity, who should be given duties and management > Powers contained in the power of attorney for property > Association issues
  7. 7. (ii) Transfer Down Involves a transfer down to one or more family members. Founder may have to arrange for bridge management until successor ready. As another option, the business owners/family members may retain ownership while outside management runs the corporation. Potential issues to consider: Ì Strategic direction of the business, both short and long term Ì Competition and trends in industry Ì Ascertaining fair market value Ì Structure of estate freeze (see above in Mature Cycle) Ì Lifetime capital gains exemption and deferral Ì Successor Issues > Evaluate business owner’s responsibilities > Prioritize issues > Identification of corporate stakeholders and their goals > Identification of potential successors Ì Who would run the company Ì Who could run the company Ì Educational requirements > Identify a leadership profile > Identify gaps in potential successor > Develop management development plan and identify possible mentors > Identify goals and time line > Factors with respect to business founder’s family Ì Ability of family to communicate Ì Can family work together Ì Desire of various family members to participate in business Ì Identification of those to be involved in the business and those not to be involved in the busi- ness Ì A family member’s title and compensation Ì How would a family members performance be ascertained Ì Who would be in control Ì If more than two capable family members involved, viability of spinning off more than one corporation for each family member Ì Share ownership: restricted to family members involved in business? Ì Can non-active members own non-voting shares Ì Stability of marriages
  8. 8. Ì Family law implications with respect to manner in which transition of ownership structured Ì What do documents set out would happen in the event business founder died or lost capacity prematurely Ì Estate freeze (see above Mature) Ì Capital gains planning (iii) Sell/Divest May sell or divest to a family member, employee or third party. Issues to potentially consider: Sale Ì Issues Arising From Sale > Ascertaining value > Who is purchasing > Third party financing > Leveraged buy out > Earn out > Escro > Share exchange > Asset/Share sale > Hybrid > Freeze > Asset Sale: Ì Allocation of Purchase Price Ì Allocation of Consideration Ì Replacement Property Rules Ì IPPs Ì Retiring allowance Ì Use of reserve > Share sale > $750,000 capital gains exemption > Bump > Safe Income > Deferral if proceeds invested in another ESBC > Role of holding company > Insurance review Ì Preservation of Estate Ì Equalization Issues Ì Funding
  9. 9. RBC Corporate Advisory Services are offered by RBC’s wealth management division, which provides comprehensive wealth planning services to affluent and high-net-worth families, businesses and other organizations worldwide. RBC Corporate Advisory Services are designed for owners of medium to large businesses, who are seeking assistance in reducing business risk, minimizing personal and corporate taxes, and in coordinating their personal estate and business succession plans. Unique to RBC, the RBC Corporate Advisory Services team includes several of Canada’s foremost tax, legal and insurance experts.
  10. 10. Helping you meet tHe cHallenges of success As a business owner, your main priority is ensuring the success of your business. And as your business grows, you face an increasing number of issues that can affect the success of your business, both now and in the future. These may include: n Greater and more complex business risks n Larger corporate and personal tax liabilities n Multi-faceted business succession issues Finding the time to implement strategies to address these concerns – especially when they’re outside your normal day-to-day business operations – can be a challenge. Your RBC advisor can help with RBC Corporate Advisory Services™. RBC Corporate Advisory Services provides access to a highly specialized team of tax, legal and insurance experts, who will create an in-depth business risk plan customized to your needs. Your customized business risk plan will help ensure that you have the right insurance-based strategies in place to reduce risk, manage taxes, and optimize your business succession plan. So you can focus on your important business priorities, confident that you have a plan to deal with both expected – and unexpected – risks. R B C C o R p o R at e a d v i s o R y s e R v i C e s | 2
  11. 11. WHy insurance? Succeeding in a competitive business environment means you deal with risk every day. However, there are risks above and beyond the ones you face on a day-to-day basis. In many cases, an insurance-based strategy may be the most convenient, effective and cost-efficient solution to address these types of risks. Need / issue Potential solution Reduce the impact of high income taxes affecting net Corporate asset transfer insurance cash flows and growth protect your business from a decline in revenue Key person insurance resulting from a loss of corporate intelligence safeguard open liabilities on capital and business Creditor proofing insurance avoid forced partnering with a deceased partner’s Buy/sell insurance family Refinance the family business to maintain ownership shareholder Funding insurance prevent erosion of estate to repay debt obligations Business Loan/Collateral Based insurance address the depreciated value of assets due estate preservation insurance to capital gains taxes on death provide your family with ready access to capital to cover Basic Life insurance probate and estate taxes 3 | R B C Co R p o R at e a d v i s o R y s e R v i C e s
  12. 12. a disciplined process for maximum confidence RBC Corporate Advisory Services follows a highly disciplined, nine-step process to creating your customized business risk plan. Recognizing that your business, personal and family needs are all closely intertwined, the team also takes an integrated, holistic approach. The team assesses your current corporate structure, both your personal estate and business succession planning needs, as well as your personal and business insurance needs. The result is a personalized business risk plan designed to help you: n Reduce or mitigate the risks unique to your business and your personal situation n Minimize your personal and corporate taxes n Exit your business efficiently, while maximizing assets for your retirement or legacy n Transfer your estate to your family neatly, while minimizing the impact of taxation Access to the expertise you need, when you need it More complex situations often require more specialized expertise. that’s why RBC Corporate advisory services takes a team approach that emphasizes collaboration and coordination across multiple specialties. as your business risk plan is developed, you benefit from the extensive tax, legal and insurance expertise brought together by RBC Corporate advisory services from within the global RBC network. this multi- disciplinary approach also extends to your tax and legal advisors outside RBC, whose input is actively sought in the creation and implementation of your plan. the result is a well-considered business risk plan truly tailored to your individual situation by some of the best minds in the business. R B C C o R p o R at e a d v i s o R y s e R v i C e s | 4
  13. 13. 9. Service and 1. Risk analysis review report 8. Delivery and 1. Current corporate implementation structure review 7. Insurance & Tax Proposal 6. Quality 9 Nine-step business risk planning 3. Cost sensitivity 4.Tax benefit reviewt control assessment 5. Underwriting and financial inspection 5 | R B C Co R p o R at e a d v i s o R y s e R v i C e s
  14. 14. tHe rBc corporate advisory services nine-step approacH Step 1: Risk analysis report Addressing your concerns at different life stages and business phases Your business will progress through multiple phases that each present specific risks and opportunities. In this first step, we will identify your current business phase, the risks normally faced at that phase, and the strategies available to address them. We will recommend ways to align your personal and corporate strategies to maximize efficiency, value and wealth. In addition, we will consider issues that are unique to your situation, and not particular to a certain life or business stage, such as cross-border planning or philanthropy. n as you approach retirement age, business succession planning including your exit strategy will likely become a key priority. succession n personal concerns at this stage may include maximizing retirement income, planning your estate to minimize taxes, and equalizing your estate between your beneficiaries. n your concerns evolve as your business matures and may include Mature corporate restructuring, and implementing an estate freeze to reduce capital gains taxes. n at this stage, your personal concerns also evolve and may include planning ahead for retirement and funding trusts for your children. n Business concerns in the earlier stages may include partnership/liquidity early arrangements, collateral obligation protection and creditor protection. n personal concerns may include managing debt and ensuring adequate income replacement if your ability to earn income is disrupted. R B C C o R p o R at e a d v i s o R y s e R v i C e s | 6
  15. 15. Step 2: Corporate organization and insurance review Addressing your concerns at different life stages and business phases Business owners are typically focused on managing the business. As a result, many tend to structure their business and insurance coverage based on the specific needs of the moment. During this second step, we will consider how you can best manage your tax liabilities over the long term by assessing your current corporate structure and insurance coverage versus the range of available options. Step 3: Cost sensitivity analysis Maximizing your value In the third step, we assess your current insurance costs and indentify any gaps in coverage. Is the protection you have adequate and appropriate? It is the most cost-effective, tax-efficient solution? To help answer these questions, we will conduct a thorough, actuarial-based analysis of offers from various insurance companies comparing the cost versus the tax or risk- reduction benefit. Acting as an independent insurance agent, we are able to source insurance solutions from all the leading insurance companies to identify the greatest value. Step 4: Tax benefit assessment Optimizing tax efficiencies Owning insurance in a corporate setting can be a very powerful planning tool that can provide required liquidity and significantly reduce taxes. In this step, we conduct a comprehensive analysis to maximize the tax efficiencies of your insurance coverage, and align it with other tax strategies, such as restructuring your organization. Step 5: Underwriting and financial inspection report Helping you put your best foot forward We guide you through the insurance application process, helping you obtain the best possible offer. Through our relationships with senior executives at Canada’s top insurance companies, we are able to deliver both a timely turnaround and appropriate assessment of your application. 7 | R B C Co R p o R at e a d v i s o R y s e R v i C e s
  16. 16. R B C C o R p o R at e a d v i s o R y s e R v i C e s | 8
  17. 17. Step 6: Quality control Contact us for Strict insurance standards for additional peace of mind more information We further risk by: n Dealing exclusively with major insurance carriers with a proven track record of honouring their policies. RBC Corporate advisory services helps n Only accepting insurance strategies that are not currently medium to large business owners reduce under review or, in our opinion, likely to be reviewed by the Canada Revenue Agency (CRA). business risk, manage higher taxes and n Projecting returns based on guarantees only – rather than implement business succession strategies the common industry practice of projecting returns actually subject to market and interest rate fluctuations. with insurance-based solutions. For more n Locking in policy fees. information, or to arrange an introduction to RBC Corporate advisory services, please Step 7: Insurance and tax proposal contact your RBC advisor. A foundation for risk and tax management now and in the future Your custom-crafted insurance and tax proposal is a written document that forms the basis of your business risk plan. It summarizes the findings of the first six steps and provides actionable recommendations. Step 8: Delivery and implementation Putting the plan into action We put your plan in place with the assistance of our insurance specialists and your tax and legal advisors. Step 9: Service and review Keeping your plan on course We coordinate and implement future action items, provide an annual review, and discuss potential changes to your plan as needed. 9 | R B C Co R p o R at e a d v i s o R y s e R v i C e s
  18. 18. RBC dominion securities inc.*, RBC phillips, Hager and North investment Counsel inc., phillips, Hager and North investment Management Ltd., Royal Mutual Funds inc. and Royal Bank of Canada are separate corporate entities which are affiliated. *Member CipF. insurance products are offered through RBC ds Financial services inc., a subsidiary of RBC dominion securities inc. RBC ds Financial services inc. is licensed as a financial services firm in the province of Quebec. ®Registered trademark of Royal Bank of Canada. Used under licence. RBC dominion securities is a registered trademark of Royal Bank of Canada. Used under licence. ©Copyright 2010. all rights reserved. vps57579
  19. 19. For more information on your wealth management needs, please speak with an RBC advisor. > Visit our website at VPS44999 xxxxx (05/2010)