Unlocking the Value

of your Business

Financial exit strategies

for the business owner

How many of you know someone who is struggling with passing on

management and ownership of a business to the next generation?

While there are many reasons, a common obstacle is the lack of a

secure retirement income for the owner.

The purpose of this presentation is to discuss some concepts available to

draw value from the business to provide a secure retirement income for the
current managers, without jeopardizing the future of the business for the
successors.

Or to put it another way, some of the options for ensuring that the value a
business owner has locked up in the business can be ‘unlocked’ to
meet his or her retirement income needs.

1
 Disclaimer

ž The following information is being presented on the

understanding that it is intended for information
purposes only. Neither Sun Life Financial nor the
presenter has been engaged for the purpose of
providing legal, accounting, taxation, or other
professional advice.
ž No one should act upon the examples/information
without a thorough examination of the legal/tax
situation with their own professional advisors, after
the facts of the specific case are considered.

This presentation is for educational or informational purposes only.

It is not intended to provide anyone with legal, taxation, accounting or

other professional advice and no one should act upon the information
presented here without a thorough review of the specific facts with the
appropriate professional advisory team.

2
 Agenda

ž The Problem
ž The Issues
ž Solutions
ž Case Study

We’ll cover:
•The nature of the problem
•The issues for the business owner and for potential business
successors
•A number of possible solutions
•A case study that illustrates one of these possible solutions

There are many possible solutions but time limits us to a detailed

discussion of one, with a quick highlight of a few others.

3
 You can’t have one
without the other

Secure
retirement income

Successful
succession

How will you know when Mom or Dad is ready to move on? One signal might
be a change from ‘Business Week’ to ‘Field & Stream’ magazine subscriptions.
There are many indicators that the business owner is ready to move on to
the next stage of life and away from the business. These include:
•having passionate outside interests
•being able to shift to the role of mentor for his successors
•being able to delegate authority, and
•the support of business peers, friends, spouse and family
Often the roadblock to passing the business on to the next generation is being
uncomfortable with the answer to the question, “Where will my retirement
income come from?”

4
 A Typical Scenario: Today

savings minimal

house $200,000

business $1,000,000

L et’ s set the stage for the case study we’ l l l ook at later. The family is in their mid-
forties.
•There’ s not much in the w ay of savings outside the business.
•Their home is worth $200,000
•The f amily business i s worth about $1million

The owners are drawing dividends rather than salary for tax reasons. Does anyone
know of business owners drawing all their income in the form of dividends?

PERS O N A L N E T W O R T H BUSI N E SS BA L A N C E SH E E T
House 200,000 H ard assets 6,000,000
Other personal assets 0 Goodwill-FM V l ess book value 1,000,000
RRSP 0 Total assets 7,000,000
Business value 1,000,000
Total A ssets 1,200,000 Total l i abilities 6,000,000
Shareholder’ s equity (@FM V ) 1,000,000
Total D ebt 0 Total l i abilities & S/H equity 7,000,000
N et Worth 1,200,000

5
 The Problem

Asset rich and

Cash ‘poor’

So - you’ r e a millionair e - at least on paper . Sounds gr eat and it is!

However, this family is asset rich and cash poor. Sound familiar?

Of course, it could be an issue if the owner b ecomes disabled or dies and

the business is lar gely dependent on the owner for its value.

L et’ s ignor e that for n ow, how ever. L et’ s look 20 year s down the r oad as
the owner approaches the age when r etir ement would nor m ally be
consider ed.

6
 A typical scenario:
At retirement

savings minimal

house $300,000

business $2,200,000

W ell - 20 years have now gone by. The children are grown up and one has expressed
an interest in being involved in the business.

I f w e assume assets have grown at a net 4% after taxes and income withdraw als, this is
what the situation looks like assuming no changes are made. T hey’ r e still asset rich
and cash poor .

H ere’ s the issue. H ow ar e M om and Dad going to get their hands on an adequate
r etirement income while:
•A l so paying income out of the business to meet the needs of the child who’ll be
taking over the reins?
• N ot compromising corporate cash flow needs?
•Ensuring they are fair to childr en not involved in the business?

PERS O N A L N E T W O R T H BUSI N E SS BA L A N C E SH E E T
House 300,000 H ard assets 18,000,000
Other personal assets 0 F M V l ess book value 2,200,000
RRSP 0 Total assets 20,200,000
V alue of business shares 2,200,000
Total A ssets 2,500,000
Total l i abilities 18,000,000
Shareholder’ s equity (@FM V ) 2,200,000
Total D ebt 0
N et Worth 2,500,000 Total l i abilities & S/H equity 20,200,000
7
 Unlocking the
value of the business

W hat can w e do to change ‘bricks and mortar’ (or ‘ click s and bytes’ in the
futur e) into a safe and secur e r etir ement incom e?

W e w ant M om and D ad to feel comfortable taking retirement without forcing

the next generation to pay out funds from the business that might be needed for
growth and expansion.

W hat’s needed is som e prudent asset diver sification starting today.

8
 Asset diversification

ž Minimize Investment Risk

ž Secure Your Retirement Income
ž Simplify Estate Equalization
ž Protect Assets
ž Set a Good Example

W hat do we mean by prudent asset diver sification?

W hat we’ r e going to try to do is give you som e suggestions for :

•minimizing investment ri sk
•securing your retirement income
•simplifying estate equalization between the children
•protecting assets and
•setting a good example for the next generation

9
 Options: If we wait

ž Consulting fees or ongoing salary

ž Buy out funded by debt or business
ž Where does the money come from?
ž Leveraging your shares
ž Do you want to take on debt?

W hat happens if you wait, I.e. you don’ t plan and take advantage of early diversification?
That leaves us with these options:

Ongoing consulting fees

• Can the business afford it while still providing an income to your successors and
potenti ally to executives needed to replace you?

Buyout of your shares by the children who will take over. Y ou can ask your successor(s) to
pay any amount up to fair market value for your ownership interest. There are various ways
of structuring this. However:
W her e will they get the cash or debt to make the payments?
•A re you willing to put this strain on them and the business?

Leveraging your shares. W hether you hang on to your common shares or do an estate freeze
in exchange for fixed value pref erred shares, you could go to the bank to see if you could
arrange a line of credit or loan of some sort. But
•Do you want to acquir e debt in retirement?
•Will it be feasible? W i l l y ou find a lender?
•Will this erode the estate for family members who don’ t participate in the business?

So let’ s take a look at some of the options we have if we take action today. I n the case
of our case study family, this means they ar e in their f orties.

10
 Options: If we start today

ž Salary CPP and RRSP

ž Bonus and invest
ž Company pension (IPP)
ž Retirement compensation arrangement (RCA)
ž Pre-funding buy out at retirement

L et’ s take a look at some ideas if we start today.

•If you aren’ t already, draw some salary to finance CPP and RRSP
contr ibutions
• Bonus out corporate income in excess of the amount eligible for the small
business tax rate and invest the after-tax proceeds outside of the business
•Contribute to a company pension - specifically an individual pension plan (IPP)
only for you
•Fund a R etir ement compensation ar r angement (RCA ) which is a trust governed
by specific rules under the Income Tax A ct designed to hold retirement assets
targeted to specific employees
• Pr e-fund a buy-out at r etir ement by your childr en.

L et’ s take a look at the salary option fir st

11
 Salary to create RRSP and
CPP

$ 9,000 CPP income

Owner $27,000 RRSP income

$37,600 +
salary $ 5,000 OAS income

=
Business $41,000 retirement income

Let’ s take a look at the salary option first.

This will allow a CPP contribution and an RRSP contribution. We used $37,600 in our
example because this will maximize the CPP retirement benefit.
I f a 45 year old does thi s for 20 years, it will cr eate r oughly $9,000 of CPP retirement
incom e at age 65.
This same $37,600 of salary income would allow the owner to contribute r oughly $6,700
to an R R SP. Over a 20 year period, this could cr eate enough capital to pr ovide a j oint
life annuity paying r oughly $27,000 (1) . Y ou could draw a higher salary to increase the
RRSP contribution. This i s simply one example.
I f w e add the O ld Age Security to the mix, this will provide another $5,000 of income.
Remember also that if total income exceeds $53,000, the O A S will be gradually clawed
back .

[Optional Comment] Note al so that $41,000 of income in 20 year s time is really only
$27,000 of i ncome in today’s dollar s if you assume an inflation rate of 2%. Not a king’ s
ransom!

(1) $6,700 for 20 years in advance at 8% in RRSP creates approximately $320,000 for transfer into a joint life annuity
with 60% paid to the surviving spouse after the death of the business owner provides roughly $27,000 per year of
income based on annuity rates in early 2000

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 Bonus and invest after-tax
receipt

$50,000 personal tax

Owner
(Formerly Revenue Canada )

$100,000
bonus A. $50,000 other investments
Or
B. $50,000 loan back to business

Business

So what else can we do? Consider paying bonus income - let’ s assume the business
has taxable income in excess of the cur r ent $200,000 small business limit - say
$300,000.

W e need to get below the $200,000 ceiling so consider a bonus of $100,000. Of course
our friendly tax collector will take almost hal f , leaving about $50,000.

T his is money that can be used to build a pool of per sonal r etirement capital .
Options for this include investing or lending back to the company as a shareholder loan.

W here the m oney is loaned back to the business, of course, w e will not have achieved
the same level of asset diver sification as with the other options. The degree of saf ety of
this capital will depend upon the longer term performance of the business and where this
loan stands in compari son to other creditors.

W here the money i s invested in personally held investments, the tax payable on the
investment income will limit its growth. These investments may also be subj ect to
cr editor s when personally held.

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 (Individual) Pension Plan

ž Rules of Thumb
ž Owner/manager (or key exec.)
ž Over 53 years old
ž Base salary of $100,000+

A nother option that applies in some cases is the Individual Pension Plan or
I PP . I t ’ s an option for an owner/manager or key executive who has a salary
of $100,000 and is in his/her ear ly 50’s.

It works in these cases because it allows mor e tax defer r ed $$ to be set aside
than an RRSP. A s a pension plan, it enjoys cr editor p r otection.

However it is costly to set up and administer and is subject to all the

constraints of your p r ovincial pension laws.

Because of their complexity, cost and limited applicability , I P P s ar en’t a

com m on option.

14
 Retirement compensation
arrangement

Pre-Retirement Years

‘Contribution’ RCA
Refundable
$100,000 Trust
tax $50,000
Business Investments
$50,000

Y et another possibility is a R etirement Compensation A r r angem ents (RCA).

U sing the same $100,000 available fr om my pr evious example, her e’ s what
happens:

•The business gets a $100,000 tax deduction for the contribution to the RCA trust
•The trustee r eceives $100,000 and pays a r efundable RCA tax equal to 50%
($50,000) of the contribution to Canada Customs and Revenue A gency (CCRA ).
•The r emaining 50% ($50,000) can be invested by the trust.
•A ny taxable incom e earned by the trust on these investments is also subject to a
50% r efundable tax

W H E N SH O U L D Y O U U S E A N R C A ?
•The business has income in excess of $200,000
•M aximum contributions have been made to regi stered plans (Pension,RRSP,DPSP)
•There’ s a desire to protect assets from creditors by moving them outside of the
business

15
 Retirement compensation
arrangement

At Retirement

RCA Refund of
Trust refundable
Income Paid
tax
to Retired
“cash in
Owner
investments”

A t r etir ement , the tr ustee cashes in or leverages the investments to pay an income to the
beneficiar y/retiree. F or every two dollar s paid by the tr ust to the employee, one dollar
of r efundable tax will be r efunded to the R C A t r u st. T his r efund can also be flowed out
to the r etiree.

A n RCA f or a business owner is really an alter native to bonusing this excess cor por ate
income to the shareholder and investing the after-tax remainder as we discussed earlier.

The main difference between the two strategi es is that the tax paid by the R C A i s
r efundable at some future date whereas the personal tax paid by the owner is not
refundable.

There are two main concer ns with R C A s:

• N o inter est is earned on the refundable tax which m eans it loses buying power while its
being held by CCRA
• R C A s are complex and require pr ofessional advice to create and maintain in order to
avoid pitfalls in the T ax A ct and Pension Benefits legislation.

F or these reasons, RCAs are infrequently used by private businesses and usually
only considered where the annual contribution will be at least $50-$100,000.

16
 The buy-out: where’s the $?

The Owner Family successors

or Others

Business Bank

W hich br ings us to what is too often the only or m ost significant sour ce of
r etir ement capital for the business owner: the business.
W hat are our options for unlocking this business value?
1. Sell to a partner, key employees or third parties OR sell to family successor s.
Among the per tinent questions to ask in this scenario are:
• A r e ther e buyer s out ther e?
• W hat is the R E A L value of the business?
• W her e will money come fr om to buy out the owner?
• Cash
• T ake back debt
• I nternal leveraging by the business (in the case of share redemption, for
example)
H ow secure is this? I s it dependent upon the talents of the buyers?
I s this a reasonable risk to take with one’ s retirement capital?
We are falling back into the trap of not using proper asset allocation and asset
diversification strategies with our retirement capital.

17
2. F amily succession
This is often tops on the wish list for the leader of a family owned business.
However, when w e put this desire under the micr oscope of financial secur ity
planning for the current owner, it rai ses a number of questions.
L et’ s assume ther e is an appr opr iate successor and the business family issues
have been adequately dealt with . What, then, are some of the concer n s?

•Will your successors be forced into debt to finance your retirement income?
•Is it fair or financially viable to continue to take a salary from the business if
your ef f orts are scaled back or you are out of the picture entirely?

So, let’ s assume that you have not been able to accumulate sufficient retirement
capital outside of the business to meet your retirement income needs.

H ere’s a case study showing one strategy for accumulating capital within the
business to allow for a full or partial buyout by your successors.

18
 Family succession:
a case study

ž Goals
ž Current situation
ž Identified issues
ž Potential solution
ž Recommended course of action

Goals
•Create a secur e source of r etirement income
• T r ansfer owner ship to the next generation at retirement
•A ppropriate estate equalization for family members not involved in the business

Current situation
• M ajority of wealth tied up in the business
• M inimal salary being paid to owner and spouse

I ssues (gap)
• R R SP and CPP/OAS will not pr ovide the desired level of r etirement income
• A ssets are tied up in the business which is exposed to creditors and law suits
• I nadequate asset diver sification (all the eggs are in one basket)
• G r owing capital gains tax pr oblem as business grows
• Potential family issues down the road as w e try to manage M om and D ad’ s retirement
income, business succession and equitable treatment of children not involved in business

Potential solution
Put additional money aside over the next 20 year s in order to
1.create an appropriate source of r etirement capital and
2. allow a sm ooth transfer of owner ship and management of the business at retirement

Specific Recommendation
L et’s take a look at our suggested cour se of action
19
 Today: Current Situation

Owner

Common
shares
$1,000,000

Business

H er e is our client again. The father is the sole shar eholder of a business
wor t h r oughly $1,000,000 .

A decision was made to pay salar ies sufficient to maximize eligibility for
Canada Pension and make the maximum R R SP contr ibutions this level
of salary will allow.

H owever , cor p orate income in excess of that eligible for the small
business rate thr eshold incom e incr eased fr om $200,000 to $300,000 per
2000 federal budget is not sufficient to war r ant the expense and r isk of a
r etir ement compensation ar r angement.

20
 Today: Create Holdco

Before Owner

Common
shares
$1,000,000

Business

The first thing our business is going to do is to cr eate a holding company. This
sets up a place to put money where it will be safe from creditors.

The owner will then transfer his shar es in the business to the holding company in
exchange for shar es in the holding company .

This can be done on a tax-fr ee basis.

T echnical N ote on C r editor P r otection:

If the business is sued or closed down by its creditors, the shares of the business will
lose their value, but other assets in the holding company won’ t be af f ected.

21
 Today: Create Holdco

After Owner
Common shares
$1,000,000

Holdco
Common shares
$1,000,000

Business

Our owner now owns $1,000,000 of common shares in Holdco which in turn owns
$1,000,000 of common shares in the Business.

W e can now pay tax-fr ee dividends fr om the business to H oldco. H oldco can
invest these pr oceeds as it sees fit or loan them back to the Business.

W e now have a vehicle in which we can start to implement our supplemental

r etir ement savings and futur e succession strategy.

Other advantages of a holding company include:

• I ncom e splitting (today)
• C r editor p r otection fr om business cr editor s for other assets in the
holding company
• E state fr eezing in the future

Extr a Planning Point :

Our clients might also consider doing an estate fr eeze r ight now to give M om
som e gr owth shar es and utilize her capital gains deduction in the futur e.

22
 Today: Move assets up to Holdco

Owner

A. $30,000 invested by Holdco Holdco

or
$30,000
B. $30,000 loan back to Dividend
business
Business

A s I mentioned, now that w e have our holding company in place, it’ s time to start
moving money up into H oldco.

A s I alluded to earl i er, it’ s possible to pay the tax-paid surplus of the Business up to
Holdco as an inter corporate dividend with no tax payable by H oldco.

I f w e use a $30,000 dividend as an example , the Business declares and pays the
$30,000 dividend up to Holdco. There is no tax payable on the $30,000. H oldco
then
• I nvests thi s money or ,
• L oans it back to the business, if the business needs it for working
capital purposes.

23
 Investment Objectives

ž Diversification
ž Asset protection
ž Allocation
ž Risk management
(death/disability)

A ssuming that H oldco is going to hang on to this m oney and invest it, the
question is ‘ invest in what? ’ .

There are numerous vi able options. By moving money outside the business into
alternative investments, w e have begun to accomplish the following goals:
• A ccumulating r etir ement capital , and
• A sset diver sification aw ay from the business
• A sset pr otection

Now we have to look at some other principles of investment, retirement

accumulation and f i nancial security strategy:
• A sset allocation .
• R isk managem ent (death and disability)

C r editor N ote I I
The holding company will not avoid creditors if the owner has signed personal
guarantees.

24
 Investment Options

ž Asset allocation
ž Mutual and segregated funds
ž Individual stocks and bonds
ž Risk management
ž Life insurance
ž Combining the two
ž Exempt cash value life insurance

So, w e have a business owner who can now diver sify away from his main source of
retirement capital - his business - a ‘ small cap’ investment,. There are several
options:

Asset allocation
If the business is consider ed to be on the higher end of the r isk / r eturn profile,
the owner may want to al l ocate these dollars to r elatively low r isk investments.

A n appropriate selection of mutual or segr egated funds, or individual stock s and

bonds can be selected to suit the owner’ s appetite for risk.

Risk M anagement
Of course, w e can’ t forget the need to p r otect the business and the family against
the risk of the business owner not being able to run the business due to death or
illness. This is generally accomplished with life, disability and cr itical illness
insurance since these risks can’ t generally be avoided or assumed.

Combining the two

W hi l e protection against death can be met with insurance that pr ovides only a
death benefit (e.g. ter m , T -100 or U .L . with minimum deposits), there is an
oppor tunity to combine asset diver sification and r isk managem ent with exempt
life insurance such as univer sal life.

25
 Universal Life

ž Term insurance plus side fund

Tax
exempt
line
Term Side
Insurance Fund

Universal life insurance i s like buying term insurance and investing the r emainder
of the deposit in a side fund . Charges are deducted to pay for the insurance component
and administrative costs. A ny extra money i s ‘ i nvested’ i n the side fund.

The side fund can be invested in guaranteed accounts, or indexed accounts linked to
various stock market or bond indices.

With universal life, the side fund can gr ow ‘ exempt’ from personal taxation . There
are limits to how much can be stored in this side fund. This limit is governed by the so-
called ‘ exempt test’ under the Income Tax A ct.

There is no per sonal taxation on this side fund until such time as the money is
withdrawn from the pol i cy. A t that time, some or all of it will be taxable. However, if
the side fund remains in place until death, it is r eceived tax-fr ee as par t of the death
benefit . In essence, death turns a tax-defer r al into a per m anent tax savings.

Flexibility
One of the major benefits of universal life is its f l exibility:
• D eposits can be adjusted to cash f l ow variations of the business/business owner
•The investment mix can be changed (GIA , index linked)
• T ype and amount of insurance can be changed contractually

26
This f l exibility al l ows universal l i f e to meet changing needs over the life of the business
owner .
• Per sonal - E state cr eation (income replacement)
- E state pr eservation (e.g capital gains tax on shares/other investments)
• Business - K ey per son protection (and potential supplemental executive compensation)
- Buy-sell funding (at death and potentially at retirement)

Our client needs to provide capital at death to fund a buy-out of shares from the estate, and
needs to save supplemental capital for r etirement - he chooses to do both using univer sal
life insurance. I’ m sure this must come as a great surprise to you!

Dividends w i l l be paid to H oldco on a tax-fr ee basis. These dividends will be used to make
deposits to a univer sal life policy. The excess over what is necessary to pay for the
insurance element of the pol i cy will be saved in the side fund . We’ll show you how this can
be used at retirement momentarily .

The policy specifics ar e as follows:

• $2,200,000 coverage, univer sal life
• Joint second to die on owner and spouse (both age 45)

27
 Selecting the amount to
deposit
Minimum Higher
Deposit Deposit

Annual deposits made Until death For 20 yrs

Annual deposit is $8,060 $28,000

Initial death benefit $2,200,000 $2,200,000

Assumed rate of return 7% 7%

Basic death benefit at age 65 $2,200,000 $2,200,000

Cash value at age 65 11,800 1,058,000
Total death benefit at age 65 $2,211,800 $3,258,000

Univer sal life allows you to make a range of deposits. T hese can be the minimum needed
to keep the policy in for ce to as much as the I ncom e T ax A ct will allow.

Our business owner can buy $2,200,000 of life insurance for $8,060 per year . This is
the expected value of the business at retirement. This would create a minimal amount
of cash value by age 65 ($11,800 assuming a r eturn of 7% ) . The total death benefit
at age 65 would be $2,211,800 .

A t the other end of the spectrum, Holdco could deposit $28,000 per year f or 20 year s
(until the owner is age 65). The death benefit would gr ow to $3,258,000 by age 65. It
would al so create a cash value (included in the death benefit) of $1,058,000 at age 65.

O u r owner decides to deposit an amount of $28,000 per year (less than the
maximum of $60,000).

I ssue (discuss only if questioned):

W i l l i nsurance cash values cause the loss of the $500,000 capital gains deduction? This is
possible if the cash value (or whatever instrument Holdco invests in) grows to an amount that
equals the f air market value of the shares in the Business.
It would be prudent to crystal l i ze enough capital gain to use the $500,000 capital gains
deduction if this w as likely to be the case.

28
 Age 65: Estate Freeze

Before Owner
Common shares
$3,258,000

Holdco CSV
$1,058,000
Common shares
$2,200,000

Business

So, what have we accomplished so far ?

1. A t age 45, we cr eated a holding company to own the shares of the
business.
2. From age 45 to 65, we paid tax-fr ee dividends from the business up to
H oldco which H oldco has ‘invested’ in univer sal life insurance

N ow, our owner is 65 . It is evident that one child will be the successor . The
other i s not involved in the business.

H oldco now has a value of $3,258,000 based on its two pr incipal assets:
•The business, which now has a value of $2,200,000
•The insurance policy cash value of $1,058,000

[Click to implement the estate freeze]

29
 Age 65: Estate Freeze

After Owner Successor

A Pref. B Pref. Common
Shares Shares shares
$2,200,000 $1,058,000 $0

Holdco CSV
$1,058,000
Common shares
$2,200,000

Business

W e create two classes of special pr efer r ed shar es

•The P r efer ence A shares have a total r edemption value of $2,200,000
(the value of the business).
•The P r efer ence B shares have a total r edemption value of $1,058,000
(the cash value of the life insurance).

T hen, the owner t r ades all of his com m on shar es, on a tax-fr ee basis, for
these new p r efer ence shar es.

H oldco then issues new com m on shar es, which have no value, to the
successor child.

30
 Age 65 - 84

Owner Successor
Annual redemption of
Pref. Shares: $51,000

Holdco Annual
withdrawal
Common shares from
$2,200,000 insurance
policy
Business

For the twenty year s fr om age 65 on, the owner will redeem $51,000 worth of
the Pr efer ence A shar es per year . The redemption proceeds will be financed by
annual after -tax withdrawals fr om the insurance policy owned by H oldco.

Note that by collaterally assigning the policy to a lending institution for a series of
loan advances, it is conceivable that a larger annual redemption could be
financed. Why? Because these loan advances may not attract taxation like cash
withdraw als from the policy would.

T her e ar e other factor s that must also be consider ed when leveraging an

insurance policy. Y ou should consult your advisor befor e pr oceeding.

31
 Retirement income summary

ž CPP $ 9,000
ž RRSP (annuity) 27,000
ž Income created by salary 36,000
ž OAS (net of claw-back) 0
ž Total income (Gov’t and RRSP) 36,000

Annual redemption of preference A shares 51,000

Total retirement income $87,000

So, here’ s the final analysis on our business owner ’ s r etir ement income.

The $37,600 of annual salary has cr eated r etir ement income of $36,000. This is
comprised of the Canada Pension Plan of $9,000 and a life annuity fr om the R R SP
of $27,000 .

T he O ld Age Secur ity would be clawed back. T her efor e, the total income fr om
government and R R SP sour ces will be this same $36,000.

I f w e add the pr oceeds fr om the redemption of shares, now w e’ v e got total

r etir ement income for our owner of $87,000 .

Planning N ote
Remember that $87,000 in year 2020 dollar s would r epr esent $59,000 in today’s
dollar s, again using an assumed inflation rate of 2%

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 Age 85: assumed date of death

ž Value of Owner’s preference shares $3,258,000

ž Pref A shares redeemed age 65-84 (1)
$1,020,000
ž Pref A Shares redeemed at age 85 (death) $1,180,000
ž Pref B Shares redeemed at age 85 (death) $1,058,000
ž Total shares redeemed (2) $3,258,000

( 1 ) $51,000 per year for 20 years

(2) $Roughly $200,000 of death proceeds left over

A ssuming the last death is at age 85 , the total death pr oceeds would be
$2,440,000 . This number w ould be much higher but for the fact that we
withdr ew over $1,800,000 from the policy over the last 20 years (which boiled
down to $1,020,000 after paying tax on the insurance policy withdrawals)

T he $2,440,000 can be used to to r edeem the r emainder of the Pr efer ence A

shar es and Pr efer ence B shar es. These redemption proceeds can be used to
equal i ze the estate to the other child and/or to cover other estate costs or bequests.

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 What has been accomplished?

ž Asset protection (assets moved to Holdco)

ž Future retirement capital enhanced
ž Funding in place for buy out at death
ž Business passed (virtually) unencumbered
ž Non-active children looked after

So, what have we accomplished?

By moving dividends up to H oldco and investing them

•Created immediate asset pr otection by moving money out of the business into the
holding company
•Created an immediate, and hopefully growing fund that will be available to provide a
sour ce of r etir ement income for M om and D ad.

By choosing Life insurance

Created a contingent fund that could be used by successors in the event of the
pr ematur e death of the owner to purchase the business and simultaneously to
provide an equitable estate to the other chi l dren.

U sed the cash value of the insurance pol i cy to

• partially buy out the owner during his r etir ement year s and
•purchase the r est of the shar es at death with the tax-fr ee death pr oceeds.

The net r esult will be r etir ement income to the cur r ent owner s, the ability to pass
on the business to family successor s unencumber ed and to appropri ately look after
family member s who ar e not involved in the business.

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 Permutations and Combinations

ž Myriad scenarios
ž Need to plan now
ž Need to involve the relevant advisors
ž Unlocking business value may be the key

W e’ve just laid out one strategy for meeting the dual needs of business succession
and financial security for the business owner.

N eedless to say, ther e ar e myr iad scenar ios for accomplishing this, each as
unique as the business and business family involved.

The m ost impor tant messages I hope you will take aw ay:

• Star t planning and act now . If we wait until near retirement, our options for smooth
business succession and financial security in retirement will generally be much more
limited.

• I nvolve competent advisor s and insist that they work together as a team.
Succession and retirement strategies for the business owner often involve the
simultaneous input of tax, legal, financial planning and other speci alists.

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 Unlocking the Value
of the Business

Financial exit strategies

for the business owner

C onsider again this p r oposition:

The key to a secure retirement and smooth business succession may be the
owner’ s ability to implement a strategy to unlock the value of his business at
retirement.

Please take a minute to complete the evaluation sheet and return it to us.
Y our comments will be used to ref i ne and improve this presentation.
Thank you for coming.

[I f appr opr iate] Please dr op by our b ooth where w e have some additional
information on succession planning.

Finally I’d like to encourage you to meet with one of our independent
producers/brokers who special i ze in working with business owners and their
advisors. Together you can f i nd the most suitabl e method to “ Unlock the
Value of Your Business” .

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Thank You!

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