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The Family Business Life Cycle: Creating & Distributing Wealth
- 1. The Family Business Life Cycle Creating and Distributing Wealth Richard (Rick) J. Goossen, BA (Hons), JD, LLM, PhD Business Development Ron Haik, MBA, CFP®, CIM®, FCSI®, CIWM, TEP Wealth Advisor | Client Relationship Manager Karisa Schaitel, CPA, CA, CMA, CFP® Wealth Advisor | Client Relationship Manager Wednesday April 6, 2022
- 2. • Founded in 1994 • Licensed as a Portfolio Manager, Exempt Market Dealer, and Investment Fund Manager with the required provincial securities’ commissions in Canada • Offices in Vancouver, Kelowna, Richmond and Toronto • Manage over $11.6-Billion (2400 families) • Focus – Private Wealth Management of Families, Foundations and Trusts
- 3. • Minimum two advisors on every file • Understanding of the life cycle for different professionals, executives and business owners • Planning first and foremost • Unique assets typically available to High Net Worth Clients
- 4. Introduction: The Challenge “I hated all my labour in which I toiled under the sun because I must leave it to the person who comes after me. And who knows whether they will be wise or a fool?” Writer of Ecclesiastes, about 2,500 years ago
- 6. Introduction: The Challenge Barone Ricasoli in Chianti Classico region of Italy is the oldest family run winery in the world. Francesco Ricasoli, the 32nd Baron of Barone, manages the company.
- 7. Introduction: The Challenge The challenge for a the family business is both: • how to create wealth, and • how to distribute wealth.
- 8. Creating Wealth • Value is created by making the business appealing to potential purchasers (whether other family members, acquirers or financiers) • The goal is to change the typical life cycle of a business and allow it to succeed to future generations
- 9. Creating Wealth The key is to understand where you are in the stages of the Life Cycle of Business & Wealth Creation
- 10. Introduction Building Wealth through the life cycle of a family business: • Creating wealth • Distributing wealth
- 11. Creating Wealth Family Members need to understand the nature of the life cycle of a business And the consequences of changing markets, risk tolerances, capacities, competition, etc., throughout the life cycle
- 12. Creating Wealth Some businesses can “create” wealth by not only having a great product or service, but by being a well-run business There are various components to a well-run business that is appealing (a “turn key operation”)
- 13. Five Aspects of Creating Wealth 1. Good Communication & Transparency 2. Shareholder Agreements 3. Good Governance 4. Entrepreneurial Culture 5. Systems, Not Personalities
- 14. 1. Good Communication & Transparency Most people don’t communicate well—and that includes families And it’s more complicated when money is involved Promises are made and forgotten, circumstances change, there are assumptions, people may not have heard what was actually said, a “fair” approach will vary depending upon your perspective
- 15. 2. Shareholder Agreements They may be well drafted—but are they well understood? Some key provisions relate to dealing with or pre- empting common issues--thus, buy-sell provisions (tied in to life insurance) A company / family in conflict deteriorates value
- 16. 3. Good Governance Establish channels to properly review decisions, reach consensus & resolve conflict An entrepreneur-centric approach will limit the ability to transition a business or sell it for optimal value
- 17. 4. Entrepreneurial Culture The business was likely birthed in innovation—if that spirit dies, the company’s days are numbered Was the entrepreneurial flare that of a person, or was it embedded in the DNA of the organization?
- 18. 5. Systems, Not Personalities Create systems rooted in best practices rather than personalities A company versus a personality cult Success is measured not by how much people need the founder, but by how little they do
- 19. Managing & Distributing Family Wealth 1. Tax Minimization 2. Wealth Management 3. Risk Mitigation 4. Estate Planning 5. Putting it all together
- 20. 1. Tax Minimization • Compensation planning • Personal savings • Corporate savings AAII (Adjusted Aggregate Investment Income) and the impact on savings
- 21. Tax Minimization • Individual pension plan (IPP) • Corporate owned insurance • Charitable giving Individual Pension Plan (IPP) • Eliminate tax on large corporate gains, • Earlier income splitting • Both done while funding your own pension plan
- 22. Tax Minimization • Capital dividend account (CDA) planning • TFSA funding • Gifts • Income splitting
- 23. Tax Minimization • Prescribed rate loans • Capital Surplus Strip • Flow through shares
- 24. Tax Minimization • Estate freeze • Lifetime capital gains exemption (LCGE)
- 25. 2. Wealth Management • Reduce concentration risk • Diversification • Cash Flow
- 26. What We Do - The Nicola Wealth Way †Asset Mix takes into consideration only the primary asset class of the aggregated funds but does not take into consideration the underlying fund’s holdings of other asset classes. For example, the Nicola Wealth Primary Mortgage Fund is allocated in its entirety to “Mortgages” even though it holds some “Cash. Nicola Core Portfolio Fund
- 27. ^
- 29. 3. Risk Mitigation • Cohabitation agreement • Creditor protection • Succession planning • Key person insurance • Shareholders buy out insurance • Corporate owned life insurance for tax planning
- 30. 4. Estate Planning • Wills • Letter of wishes • Secondary wills • Foreign wills • Powers of attorney • Secondary property • Next gen cohab agreements • Family trust • Promissory notes vs mortgages • Philanthropic goals
- 32. Financial Planning = Organization Financial Planning = Strategic Business Plan
- 33. Planning - What's Your Bucket List Priority? Family Legacy Recreational Property Travel Philanthropy Gifts to Children and Grandkids… now, later, or never? How much to give away and when? Altruism or Tax? Lifestyle & Avocations Create a plan before transitioning, selling or investing
- 34. Questions?
- 35. Contact: Rick Goossen: rgoossen@nicolawealth.com Ron Haik: rhaik@nicolawealth.com Karisa Schaitel kschaitel@nicolawealth.com
- 36. Thank You Do not rely on the slide material on its own, because it may be incomplete or inaccurate without additional context and information provided by the oral presentation. This presentation is for educational purposes only. It should not be construed as legal, tax or accounting advice. This presentation does not bind Nicola Wealth to provide, or to continue to provide, any of the concepts or products described in the presentation. This presentation contains the current opinions of the presenter and such opinions are subject to change without notice. This material is distributed for informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Past performance is not indicative of future results. All investments contain risk and may gain or lose value. Returns are net of fund expenses charged to date. This is not a sales solicitation. This investment is intended for tax residents of Canada who are accredited investors. Residency restrictions apply. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities commissions. The Nicola Core Composite returns represent the total returns of Cdn. dollar denominated accounts of all fee-paying portfolios with a Nicola Core mandate. The composite includes clients who are both fully discretionary and nondiscretionary. Historical net of fee composite performance returns are calculated using individual realized time-weighted client returns net of fees and is presented before tax. The Nicola Wealth inclusion policy is based on clients’ weights at calendar month end. The composite returns are asset-weighted based upon ending monthly market value. The Nicola Core mandate may change throughout time. Additional information regarding policies for calculating and reporting returns is available upon request. The composite returns presented represent past performance and is not a reliable indicator of future results, which may vary. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities commissions.
Editor's Notes
- Introduction Hello and welcome to The Family Business Life Cycle: Creating and distributing wealth. My name is Rick Goossen and I’ll be your host today Quick housekeeping before we get started. Please submit any questions using the Ask a Question tool located below the live video feed. If you wish to add subtitles to this video, make sure to click the “CC – Close Caption” button on the Live Video and turn them on. If you have any questions about the platform or need some assistance, please use the ask a question button to connect with our team or alternatively click the question mark at the bottom of the screen for some trouble shooting. I’m excited for today’s discussion with my colleagues Ron Haik & Karisa Schaitel at Nicola Wealth. Both have extensive experience in these matters and we are excited to have them on today’s call
- SLIDE 1Thank you Rick. Ron and I will be discussing topics that come up around the management and distribution of family wealth. Conversations we have with our clients around tax minimization, wealth management, risk mitigation and estate planning.
- SLIDE 2: While this isn’t going to be an exhaustive list here are ways to consider tax efficiency as a business owner. Compensation planning Business owners you can decide on whether or not to pay yourself a dividend, Salary or Combination. Influenced by corporate tax rates and personal cashflow needs. Spouse – is a spouse taking on some duties that would warrant a reasonable salary? Opportunity to get income into their hands utilize their marginal tax rates This would be an area to be reviewed each year Turning 65? More flexibility when paying out income to a spouse as TOSI restrictions are removed(who said getting older was so bad?) Personal savings: RSPs, TFSAs If earning employment income and creating RRSP contribution room consider making RRSP contributions to accumulate assets outside of the corporation for personal expenses. Consider making Spousal RRSP contributions as way to split income prior to age 65. Nuances to consider on timing of withdrawals. Corporate savings Tax deferral by retaining funds and accumulating wealth in your corporation. Over time, may find that the passive income earned may start to reduce the amount of the small business deduction available. The small business limit is reduced to $0 when taxable passive income reached $150k
- SLIDE 3 Individual pension plan (IPP) Approaching this threshold, consider an IPP Contributions to the plan are a deduction for the corporation + admin expenses Maximizes registered retirement savings (higher contribution room than a RRSP and Increased with age) (silver lining #2) Potential additional tax-sheltering strategies at the time of a business sale/retirement Min age 40, likely older, high income ‘earner, history of T4 income Corporate owned insurance If excess funds available in the company, use cheaper corporate after-tax dollars to fund the premiums Investment income earned in an exempt policy does not affect the ability to claim the small business deduction and is another asset class in which to build wealth. Life insurance proceeds (over the cost basis) can be paid out tax-free upon death Charitable giving Can be done personally or corporately Corporate donations are a deduction against income = to the FMV donated Donations made ‘in kind’ /directly to a charity eliminate the tax on the accrued capital gain Non-taxable portion of the capital gain (in this case, full value) credited to Capital Dividend Account and can be paid out tax-free to the shareholder
- SLIDE 4 Capital dividend account (CDA) planning TFSA funding Gifts Income splitting Special notional corporate tax account that tracks tax-free amounts which can be paid out as a tax-free capital dividend to shareholders. Made up of capital gains (offset by capital losses), proceeds of life insurance, dividends from other companies. We like to keep an eye on this account and look for opportunities to withdraw from the corporation tax free. Perpetuates the tax-free nature by funding personal TFSAs We see some clients intentionally trigger capital gains as a way to build up the tax-free amounts if planning to gift/assist children. In doing so, you are prepaying taxes early, however, if the plan was to w/d from the corp, this would mean doing so at capital gains rates. Capital dividends can be paid out to a spouse without income attribution Charitable giving – noted above
- [5:09 PM] Karisa Schaitel SLIDE 5 Prescribed rate loans – often to a spouse or Family Trust If there is tax-paid capital available an individual paying taxes at the highest marginal tax rate lends fund to a spouse our Family Trust to shift income generated on this money to a lower marginal tax rate Current prescribed rate is 1%, locked in for the length of the loan, not affected by future rate increases. In the case of lending to a family Trust with minor beneficiaries, income generated may be used to pay for expenses that directly benefit the beneficiary (private school tuition, sports activities) the income can be taxed in their hands at their lower marginal tax rates. Capital Surplus Strip Tax strategy to withdraw funds from your corporation at capital gains rates vs dividend rates. Types of transactions may be reviewed by CRA, considered, an aggressive tax strategy. Risk tolerance, not suitable for everyone. Cost to execute. Should the capital gains inclusion rate increase, it makes this strategy less compelling. Flow through shares Consideration for an individual that has Personal income at the highest marginal tax bracket Flow-through shares are generally considered to be a speculative investment in a resource company however the definition of what qualifies is expanding beyond oil/gas/mining into areas such as wind farming and sustainable matters and this is a function of recent government budgets. Those who purchase the shares receive a 100% tax deduction for the cost. The CRA permits the underlying companies to pass through Eligible Canadian Exploration Expenses (CEE) and Canadian Development Expenses (CDE) and federal and provincial credits which is how the deductions/credits pass to you – hence Flow Through. Shares are bought through a company that secures the price (removes stock market risk) and provides immediate liquidity. This is suitable where an investor does not want to be invested in the underlying companies and is doing this just for the tax benefits
- [5:10 PM] Karisa Schaitel SLIDE 6 Estate freeze A business succession strategy to cap the value of your shares from a tax perspective, however, allowing you to continue to participate in the future growth of the business. Future growth of the business is passed to the children or others Lifetime capital gains exemption (LCGE) ~$913k Utilized on the sale of qualified small business shares ~$913k, LCGE may be multiplied across beneficiaries if a Family Trust is a shareholder
- Take Diversify. Go beyond stocks and bonds
- Problem list
- Thank Ron and Karisa. We’re now going to begin answering the questions submitted during today’s presentation. As a reminder, you can still submit questions through the Ask a Question tool below the live video feed. Our first question is …..
- Outro Ron and Karisa thank you for presenting today – informative as always. And to you, our attendees - thank you for joining us today. We hope you enjoyed the discussion. If you have any other questions, please contact us here. Once you leave today’s event, you will receive a survey on the presentation, and we would appreciate if you would complete that and provide your feedback. You will also receive a follow-up email within 24-48 hours with a link to view a recording of today’s event. On behalf of Nicola Wealth and our presenters, thank you for joining us today, and have a great rest of your day! Thank you