Business owners: In trusts you can trust to find tax savings...

Trusts are wonderful tools for the wealthy, but business owners should use them, too. They can be worthwhile for amounts of money or assets of $150,000 – even less in some circumstances. The cost of setting up a simple testamentary trust – a trust set out in a will that takes effect when you die – can be an initial $2,000 to $3,000, mainly for legal fees.

The classic family trust is a form of living, or inter-vivos, trust, one that takes effect while you’re still alive. A testamentary trust forms part of a will and so takes effect only after you are gone. Which one you choose depends on how willing and able you are to give up ownership of some of your assets now.

“If you have enough, you might be okay with giving it up today,” says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. But if think you might need your savings, you’ll take the prudent approach and pass on whatever is left in a will, she says.

Perhaps the simplest trust is one you set up during your lifetime for the education of your children or grandchildren. Often people will put enough money into a registered education savings plan to take advantage of the federal government grants, and then put money into a trust with the children as beneficiary.

An education trust is more flexible than an RESP, Ms. Marshall says. One of the children or grandchildren might decide to go to a technical school or theatre school that is not approved by the Canada Revenue Agency; an education trust will allow them to. The trust money can be used to pay for the child’s living expenses or even to buy a car.

Given the large number of people in second or third marriages, spousal trusts are growing in popularity as a way to protect the interests of the children from a first marriage, experts say.

Often in a second marriage, a person will naturally want to provide for the new spouse but will worry about disinheriting children from a first marriage, says Keith Masterman, associate vice-president, trusts, at TD Waterhouse in Toronto. Rather than leaving everything to a second spouse, who may in turn leave it to his or her own family, Mr. Masterman advises clients set up a spousal trust as long as he or she lives. When the second spouse dies, the assets will go to the client’s children from the first marriage.

In this case, the choice of trustee becomes complicated, Mr. Masterman points out, because choosing either a child or the second spouse would put either in a conflict of interest. This can be resolved by hiring a professional trustee.

But trusts have other advantages.

For example, spousal trusts, like family trusts, can be used to split income, thereby lowering income taxes. By setting up a spousal trust, you are creating a second taxpayer because trusts are a separate legal entity. So, if you split your income with your spouse now, you can continue to do so after you are gone by setting up a trust and having the trust foot part of the tax bill.

You can spread your largesse around, using “sprinkler” trusts to split your income with your spouse, your children and their children, giving the trustee the discretion to allocate income from the trust however he or she sees fit – that is, to best tax advantage.

Naturally, the Canada Revenue Agency will scrutinize such arrangements closely, so the trust has to be set up properly, Ms. Marshall cautions. While parents retain control of the monies lent to the trust, “you have to look at whose money is generating the income.” It must belong to the children.

Keep it private

If privacy or probate is an issue, consider a trust.

When you die and your will is probated, your assets and your beneficiaries are on the public record. Anyone can see your will by paying a small fee. The details of a trust, in contrast, are confidential.

“Anyone” might include family members with an axe to grind or even charities hoping to approach your beneficiaries.

“Certain charities look at the affluent,” says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. “They want to follow up with the beneficiaries looking for donations.”

Another reason some people choose trusts is to avoid probate fees, which vary from province to province and are comparatively high in Ontario.

Family successions: managing the emotions.....

You’re about to retire, and the ambitious daughter you hoped would be an ideal successor announces she wants out of the business. Your brother jumps at the opportunity to run the company, but you don’t feel he’s got what it takes. Resentment boils over, and family turmoil threatens to sink your firm.

This is a typical scenario at many family-owned companies, according to Theodore Homa, Senior Partner, BDC International Consulting Services.

“Emotional issues can create a volatile dynamic in family businesses,” Homa says. “These entrepreneurs often have made personal sacrifices to keep their companies afloat, so it’s hard for them to separate business and personal relationships,” he says. “In the end, those emotions can get in the way of making decisions that are good for the business.”

Unresolved family issues, such as sibling rivalry, put a strain on business successions. According to the Canadian Federation of Independent Business, 33% of family businesses survive in the first generation and only 15% survive the second.

Homa provides these pointers to help business owners proactively manage emotional issues in family successions:

•Give yourself a lot of lead time to plan and execute – realistically at least 2 years. Family business transitions take much longer than one realizes.
•Formalize your family succession plan to avoid disagreements down the road. Maintain an open dialogue with family members about your plans and get them involved. Keeping them out of the loop can simply sow family discord.
•Create trust in your decisions, especially when it comes to the transfer of leadership. When you choose who will take over the helm, communicate a clear action plan to family members and employees. Reassure them that you have the mentoring and training in place to develop your successor in all aspects of the business.
•Define roles and responsibilities and even put them in writing. For instance, a family member might be a stakeholder in the business, but that doesn’t mean that he or she automatically has the right to be involved in daily operations. By clarifying these roles, especially in areas such as what is the purview of management in running the business on a daily basis versus what is required for governance of the business, you can avoid unnecessary misunderstandings.
•To address potential conflicts in the hiring of relatives, be sure you have clearly defined job profiles that outline exactly what you need in terms of experience, skills and education. After all, you don’t want to feel obliged to hire family members to do a job if you believe they are ill-equipped. At the same time, you don’t want to pressure family members to accept jobs that they aren’t suited to or interested in.

Seek external advice to resolve issues objectively. Experienced consultants can give you a third-party perspective that is invaluable. You can also turn to an advisory board, or even a formal board of directors, to provide a neutral point of view and help you through the various steps of the transition.

Q & A: Minimizing taxes due to share transfers

QUESTION:

I want to gradually transfer my shares to my 18-year-old son. How can I transfer these shares to minimize personal and corporate income tax?

ANSWER:

You should ask a tax expert such as an accountant, but I can provide a general overview of the tax system. In this case, your corporation will likely be unaffected from a tax point of view by any transfer of shares if you hold all the shares. The transfer becomes largely a personal tax issue for you and your son.

Transferring shares to your son can be done in two ways – as gifts or as sales. In both cases the shares must be assigned a value, which can be determined by an accountant or lawyer who specializes in this field. This value will be affected by the earnings of your company and whether the shares have been paying you dividends, among other issues.

If you give the shares to your son, there may be tax implications for you. If the shares are deemed as having been "sold" at the time, you may be taxed on your capital gains. However, for any income incurred by these shares, your son will be taxed.

If you sell the shares to your son, the effects would be roughly the same, but the numbers may change for each of you. Your personal capital gains tax may be lower, and your son's capital cost base will be higher, so this may be a way of deferring his tax owed to the future.

You plan to transfer shares gradually, but there will be a point where your son has a sizeable financial interest in the company. If you hope that he will one day take over management of the company, ensure you've taken the standard steps involved in succession planning. Is he competent or willing to take over, and do you have a proper training program to ensure the company will not be damaged by the succession?

Also, there may be a need for an interim manager to run the company until your son is ready. If that is the case, this manager may also want some financial stake in the company, such as a percentage of shares.

Business owners: Why Family Trusts are not just for millionaires...

If you’re like most business owners, you probably think of trusts as powerful financial tools used by the ultra-rich. Well, you’d be wrong. They are powerful financial tools, but they’re not just for the rich. They’re used by all kinds of financially savvy business people who know about the benefits they offer and save a lot of money using them to their advantage.

You don’t have to have millions of dollars to take advantage of those benefits. As a business owners, the setup fees of a trust is usually worth while as you can save up to $32,000 per $100,000 of profit. You can set up a simple trust for a few thousand dollars plus annual trustee and administration fees.

In addition, if you have 2 wills drafted (personal & corporate) the corporate will allow you to avoid probate and save you thousand of dollars.

The goal of this posting is simply to make you more aware of trusts and what they can do for you and your estate plan. Keep in mind that trusts can be very complex and that you definitely need the help of a professional to know how a trust would help you in your specific situation.

If you have any questions on the above, please contact me at hugues.boisvert@andrewsrobichaud.com

Two wrong reasons for not having an estate plan...

You may be wondering, if estate planning is so important, why doesn’t everyone have an estate plan? The answer is part human nature and part misconception.

Human nature prevents us from talking, even thinking about our own mortality. We don’t like to say to ourselves: “Someday I will die or become incapacitated.” For the sake of our loved ones however, we have to deal with this. And because it can happen anytime, we should deal with it now, regardless of age.

People also wrongly believe that estate planning is only for the super-rich. The word “estate” somehow implies great wealth. But the fact is, an estate can be a house and several thousand dollars or a mansion and several million.

It’s simple. Whatever your age, whatever the size of your estate, a proper estate plan will ensure that it is passed along as you desire, with minimum taxes and with no complications or delays for your heirs.

Example of how you can save $26,000 or more in taxes if you use a Family Trust

Example of the Operation of A Family Trust

Scenario 1: Income Splitting

Mr. X establishes a trust for the benefit of himself, his spouse, Mrs. X, and their three children, A, B and C. A and B are over 18 years of age and attending university. C is a minor living at home.

The participating shares of Opco, Mr. X’s active business corporation, are owned 100% by the trust.

After salaries are paid to Mr. X, Opco is earning $100,000 before tax and $82,000 after tax.

Based on current tax rates, if Mr. X wishes to pay out the net after corporate tax income of $82,000 to himself to enable him to use it personally, he would pay additional taxes of over $26,000 if he were the sole shareholder of the company.

Using the family trust arrangement and paying the income earned by the trust equally to the adult beneficiaries (except Mr. X.), the trust’s dividend could be split evenly between Mrs. X, A, and B. The tax liability on the dividend would thus be taxed as follows:

Mr. X = O in dividend (he is paid via salary)

Mrs. X, A and B all take a Dividend of $27,334 each for a total of $82,000. Hence, if Mrs. X, A, and B have no other sources of income, they would pay no taxes at all on this amount.

Note, that dividends allocated to the minor child would be subject to tax at top marginal rates with no personal tax credits applicable, pursuant to the “Kiddie Tax” provisions.

By using a family trust arrangement, Mr. X has just saved the family unit about $26,000 in tax.

Scenario 2: Capital Gains Splitting

Mr. X has received an offer to sell the shares of Opco (which are "qualified small business corporation shares") for $2,000,000. The shares were acquired for a nominal amount ($100). If Mr. X were to receive the sale proceeds as sole shareholder of the business, his tax liability might be computed as follows:

Proceeds $ 2,000,000
Cost (100)
Capital Gain 1,999,900
Capital Gains Exemption (750,000)
Capital Gains Subject to Tax $ 1,240,900
Taxable Capital Gain $ 620,450
Tax $ 310,225

Under the family trust arrangement, the trust would receive the total $2,000,000 proceeds. The trust's capital gain could be paid out to trust's beneficiaries (if desired by the trustee) and the beneficiaries could shelter the gain with their own $750,000 capital gains exemptions. In this case up to the entire $310,225 in tax calculated above could potentially be saved (subject to alternative minimum tax
considerations).

Note that this benefit can be achieved even if the beneficiary is a minor child, since the "Kiddie Tax" does not apply to capital gains.

Any trust income not actually paid or payable to a specific beneficiary in a given year would be taxable in the trust at the highest marginal tax bracket (thus eliminating the benefits of using the trust).

Amounts will be paid or payable to a beneficiary in the year under the following scenarios:

1. An expense report detailing the year’s expenses incurred by the parent on behalf of a beneficiary is submitted by the parent to the trustee. The trustee initials the report to evidence the exercise of his discretion pursuant to the terms of the trust agreement, and a trust cheque is issued to the parent before the end of the year.

2. The parent requests the trustee in writing to make certain payments to a third party for the benefit of the beneficiary. The trustee initials the written request to evidence the exercise of his discretion and makes the payments to the third party before the end of the year.

3. The trustee declares an income distribution using a trustee’s minute and either issues a trust cheque payable to the beneficiary before the end of the year, or issues a demand promissory note to the beneficiary as evidence of payment before the end of the year.

4. Where the amount of trust income earned is not known in the year (e.g., where a trust owns units in a mutual fund trust) the trustee resolves to make an income distribution to a beneficiary equal to a certain percentage of the undistributed income earned by the trust in the year using a trustee’s minute, and issues a demand promissory note to the beneficiary as evidence of payment before the end of the year.
Under the most recent guidelines released by Canada Revenue Agency, the trust can pay for, or reimburse a wide variety of expenses for a child as long as the payment of the expense clearly benefits the child. Such expenses may include (but are not necessarily limited to):

• Education and tuition expenses
• Recreation expenses and equipment
• The child’s share of restaurant meals and family grocery bills
• Clothing
• Medical and dental expenses
• Spending allowances
• Toys
• Car expenses, including per kilometre reimbursements for driving to and from the child’s activities
• A proportionate share of vacation costs

Asset purchases (e.g., cars, boats, vacation properties) and mortgage payments which cannot or will not be legally registered in a child’s name are problematic and we generally suggest that they not be reimbursed by the trust.

In all cases, receipts should be retained that document the fact that trust funds were spent on the beneficiary’s behalf.

Family Trust Audits Highlight Need for Proper Trust Records

Today, I would like to share an excellent article written by BDO Canada - As usual, please let me know if you have any questions.

Family Trust Audits Highlight Need for Proper Trust Records

A family trust can provide significant benefits as the
legalities and benefits of ownership can be separated. A
discretionary trust allows the benefits of ownership to flow
to beneficiaries while the trustee maintains control and ownership
of trust property and can ultimately decide on who will receive the
property at a later date. Due to this, family trusts are a powerful tool
in terms of income splitting and capital gains splitting, including
multiplying access to the capital gains exemption.

As is often the case, beneficial tax planning vehicles often carry a
greater recordkeeping and compliance burden, and family trusts are
no different. In particular, one of the key benefits of a discretionary
family trust is the ability to allocate income in different shares to
different beneficiaries, or to retain the income in the trust. For a
discretionary family trust, it is important to note that the default
position is that all of the income belongs to the trust and will be
taxed there if no further action is taken. If it is beneficial to have
income taxed in the hands of a beneficiary, that income can be
allocated in one of two ways:

• It can be paid to them during the year, or the trustee(s) can
declare that the income is payable to the beneficiary at the end
of the year. In other words, the income belongs to the beneficiary.

• It can be allocated by way of a special tax rule called the
preferred beneficiary election (under this election, it is possible to
allocate income to a beneficiary of the trust that is mentally or
physically infirm or disabled without giving them a right to that
income).

Most likely due to the popularity of family trusts and the tax
benefits they provide, the Canada Revenue Agency (CRA)
implemented an audit project on these trusts. The CRA’s audit work
on trusts is focused on the following:

• Has the trust been properly formed? If your trust was set up in writing by a lawyer, this should not be a significant issue.

• Where trust income has been allocated, was the income actually
paid or is there a bona fide obligation to pay that income to a
particular beneficiary? The CRA will be looking for documentation
such as trustee resolutions that allocate the trust’s income, proof
of payment for income paid during the year and promissory notes
or other proof that the trust has made the income payable to the
individual beneficiaries.

• Where the trustees make payments to third parties, was the
payment made for the benefit of the beneficiary? It is also
possible to “pay income” to a beneficiary by making payments
to third parties for the benefit of that beneficiary. In this case,
the trustee will need to document the payments made and
also provide evidence that the payment benefited a particular
beneficiary. For example, if a parent is reimbursed for expenses
incurred on behalf of a child who is a beneficiary, receipts for the
expenses should be retained to prove the child benefited from the
payment and not the parent.

In addition to these particular issues that arise for family trusts, the
CRA will also be reviewing the records of the trust in the same way
it does for other taxable entities to determine whether income has
been calculated and reported properly. So, you should ensure that
bank and investment accounts are set up as needed and proper
records are maintained. Also, your trust agreement and the property
used to settle the trust should be kept in a safe place.

Business owners: 5 myths that you MUST know about Family Trusts...

Over the past 2 years, I've been blogging extensively about the various advantages of using a Family Trust for business owners and owners/managers - On a daily basis, I spent a considerable amount of time educating people on the benefits of using such structure. Today, I would like to share an excellent article written by Chaya Cooperberg published in the Globe & Mail.

The Truth about Family Trusts.

The perception of family trusts as vehicles for only the extremely wealthy is one of the misperceptions about trusts that Ms. Blades wants to put to rest. Here are her top five myths and realities about the structure.

Myth #1: They are inflexible.

Reality: Trusts can be quite versatile and are often the best option to provide for disabled beneficiaries or for children of blended marriages. The terms of the trust can vary. There can be a fixed-interest trust, where an amount is invested and the beneficiary gets the money. Or a trustee can be appointed to pay it out. You can also stagger the payments so that funds are paid out when the beneficiary reaches certain age milestones.

Myth #2: They are mainly used to avoid estate taxes and probate costs.

Reality: Trusts can offer significant tax benefits and avoid probate costs, but they also have other benefits like asset protection, investment management, and protection for disabled family members or the client if they become incapacitated.

“It’s always a cost benefit analysis with a trust,” says Ms. Blades. “You would never just look at the financial benefits such as how much tax is saved; you would also look at the beneficiary benefits. You need to do the analysis to see when and where it is worthwhile.”

Myth #3: They are only for the very wealthy.

Reality: Trusts can be set up for anyone with specific needs and are useful vehicles for passing funds to children or grandchildren. There are multimillion-dollar trusts and there are much smaller trusts.

Myth #4: You lose control.

Reality: Trusts are customized vehicles designed in line with your wishes and ensure that cash is ultimately transferred to beneficiaries as desired. While you no longer own the money, you can say when and how you want it used. Your control comes in under the terms and conditions you’re drafting.

Myth #5: Trusts are complicated and onerous to manage.

Reality: The provisions of a trust can be as simple or as complex as you want or need. To set up a trust, you would first need to meet with a will and estate planner or a lawyer to draft the agreement. It is also important to get separate tax advice from an accountant to ensure the trust is a worthwhile vehicle for you. If you make the trust a part of a will – this type of trust is called a testamentary trust – the cost will be built into the cost of the will. If you create a trust that takes effect while you are alive – known as a living trust or inter vivos trust – it will cost at least $1,000 to set up and establish. For a large trust, you will need to appoint a trustee to oversee it and manage investments held within the trust. This comes with a typical annual fee of 1 per cent.

Corporate Reorganization - Estate Freeze

I previously wrote about an estate freeze happening during the course of a corporate reorganization. Today, I would like to share a great article written by Tim Cestnick from the Globe and Mail:

SECTION 86, Income Tax Act - Estate Freeze

THE CONCEPT

What in the world is an estate freeze?

It's the process of taking certain assets you own today and freezing them at their current values. The idea is that the future growth of those assets will accrue to anyone you choose – your children or other heirs, for example. So, why would anyone consider a freeze? There are a few potential benefits.

Cutting the tax bill on death. When a freeze is completed, all future growth between the date of the freeze and your death will accrue in the hands of your heirs. That future growth will otherwise be taxed in your hands at the time of your death, if not sooner, if the freeze isn't done.

Deferring the ultimate tax bill. By passing the future growth in the asset's value to your heirs, you can defer income tax on that growth until a much later time. Although your heirs will eventually pay tax, these taxes may not be due, for example, until your heirs pass away. Establishing the tax bill on death. By freezing the value of an asset today, you'll be able to establish, pretty accurately, what your tax bill will be upon death. This makes planning for those taxes much easier. You could, for example, consider buying life insurance to cover the tax liability.

Utilizing the capital gains exemption. A freeze may allow you to take advantage of the lifetime capital gains exemption where you own shares of a qualified small business corporation or qualified farm or fishing property. This exemption could shelter up to $750,000 of capital gains on these types of assets.

Splitting income with family members. In the process of completing a freeze, you'll be placing certain assets (often private company shares) in the hands of your heirs, either directly or indirectly through a trust. These assets can provide regular income to your heirs that will be taxed in their hands – not yours.

Protecting assets from creditors. It may be possible to protect certain assets from creditors by transferring their ownership to your heirs or, better still, a family trust, as part of a freeze.Protecting assets from spouses. If your kids (or you) own valuable and growing assets prior to marriage, it may be possible to use a freeze to minimize the claims of future spouses or ex-spouses through planning that can be done prior to marriage. Reducing probate fees. A freeze will restrict the growth of the frozen assets in your hands. This means that you'll generally own less in your hands at the time of your death than you would have without the freeze, which will minimize probate fees.

Minimizing annual taxes. Freezing assets typically requires a corporation to be set up. Corporations that carry on an active business are entitled to very low rates of tax (about 18 per cent) on the first $400,000 of active business income. It may be possible to take advantage of these rates, depending on the assets you're freezing.

Maintaining control over the property. You can enjoy the first nine benefits without having to give up control over or use of the assets during your lifetime.

THE CANDIDATES

An estate freeze is most commonly undertaken by those who own active businesses. The shares of a growing private company can give rise to a substantial tax bill at the time of death, and where there's a desire to pass the business to the kids or other heirs, a freeze can facilitate this nicely since you'll be able to issue new growth shares (common shares) to anyone you'd like. Other assets can be frozen as well, but it's not as commonly done.

Before undertaking an estate freeze, you should be confident in a couple of things: (1) That you're happy with the amount of growth you've received to date, and you're happy to see the future growth accrue to someone else; (2) That there will be sizable growth in the assets in the future.

If there isn't going to be much future growth in the assets you're freezing, then there won't be much growth to have taxed in the hands of your heirs; it may not be worthwhile freezing in this case.

* Published in the Globe and Mail, July 3rd, 2008

As business lawyer, I suggest this option to a lot of my clients - with an estate freeze and a corporate reorganization they can save a substantial amount of money. As usual, if you have any questions, please do not hesitate to contact me.

Succession Planning: Taming your tax liability

Further to my previous entries on succession planning, family trust, estate freeze here is a great article written by Alexandra Lopez-Pacheco from the Financial Post.

As usual, If you have any questions, please do not hesitate to contact me.

&&&&&&

Taming your tax liability

To ensure the best possible conditions when a business owner is ready to pass the helm to the next generation, succession planning can maximize the company's value from the start. That's why it's never too early to begin the process, although typically many wait until three to five years before they plan to retire - and even more wait until it's too late. Developing a long-term strategy that will ensure a company's sustainability, independent of the owner, and over years enrich the skills, abilities and experience of those chosen to be the next leaders makes the company more valuable, as well as provide more retirement funds for the owner.

Part of this process is a solid tax strategy. The longer a company engages in astute tax planning to minimize its tax bill, the more money will stay in the business, as well as in the owner and his family's pockets, leaving more funds available for the next generation to buyout the owner.
According to tax specialist Paul Woolford, partner with KPMG's enterprise services, most small businesses are doing a pretty good job with accounting, but a large percentage of them are not taking advantage of all the tax-minimizing strategies available to them. And no wonder, every time there's a new federal or provincial government budget, the rules seem to change. This is where, of course, a good tax accountant comes in. They not only know the current tax rules but also keep up with new ones. "There are ways to achieve what you want in minimizing the tax bill, but you also have to be very careful to abide by the appropriate rules, and that's something that comes into play when you're looking at estate planning and succession planning," Mr. Woolford says.

When putting together a business tax plan, keep in mind it is necessary to review all possible variations and combinations available to tailor a strategy that will meet the specific needs of the company, its owners and often, his or her family. Many accountants contend business owners should put together their succession plan before the tax plan. What's more, small businesses are often about close interconnections between the owner, his family and the company. From effective use of tax exemptions and deductions, including the $750,000 capital gains allowance, to income-splitting and family trusts - there are many options available to considerably shave down the tax bill if an accountant can see all the pieces of the puzzle.

"I look at the corporation and the shareholders, and look to minimize and defer tax on both levels, and that's often one way of keeping the tax liability down or keeping more money in the company or in the individual's bank account," Mr. Woolford says.

As profit increases and the business becomes more complex, so too can the tax planning. "There are always levels of planning, from the basic planning to the complex planning to the high net-worth situation," Mr. Woolford says. "The idea is to put in a structure. It could be a family trust with beneficiaries that may include your spouse and adult children, for example. There are ways you can pay dividends to that family trust and have that trust allocate those dividends to individuals who may be in a lower tax bracket."

A good plan will cut the tax bill and, if incorporated into the succession planning process, it will also address specific needs related to ownership transfer. For example, if an owner knows he wants to sell the company to his adult child, he might prefer to keep the company's value down to lower the tax liability at the time of transfer. On the other hand, if he is planning to sell to a third party, achieving the highest possible valuation might be a better strategy.

When Bill and Bev Wostradowski were ready to turn over the company they established in in 1978 - Lake Country Building Centre, a building supply business in Lake Country, B.C. - to their son and daughter, they solicited help from their lawyer and their accountant, Bill Corbett, tax and succession planning partner at KPMG in Kelowna, B.C. "We had very good advice from Bill and our lawyer, and we put faith in them that they were going to steer us in the right direction," says Mr. Wostradowski, who is a member of the Canadian Association of Family Enterprise. He used the organization's resources and links to educate himself on the process.

The Wostradowskis chose an estate freeze - literally freezing the value of the shares the couple owned, and issuing common shares to the two adult children who had chosen to carry on with the business, Sherri Williams and Kevin Wostradowski. "That way, the growth and value accrues to the next generation," Mr. Corbett says. It also reduced the senior Wostradowskis' tax liability. Step two was to set up voting shares for the retiring couple.

"My wife and I sold our equity shares in the building supply business to our children and they were to pay us over a period of time, but we still retained voting shares. Then over five years, we gave out a few of the voting shares each year to the point that the children now own them all," Mr. Wostradowski notes. This ensured the couple had enough control should any conflict arise between their son and daughter during the transition.

They also set up holding companies for each of their successors names. By making the holding companies the shareholders, the main business can pay Sherri and Kevin through lower-taxed dividends to their holding companies rather than to them individually. And, in an example of how tax and succession planning can be integrated, this structure also allowed Sherri and Kevin to manage their own share of the profits as they wished. "One could be a saver, the other a spender, and since each had their own holding company, there would be no conflict," Mr. Corbett says.

Another component of succession planning is estate planning, which involves strategies to minimize or defer tax. Not very many people think of consulting their accountant before writing their will - but that's exactly what they should be doing. "An area that sometimes is overlooked is having two wills: a separate will that would hold the shares of your private corporation and then a normal will that contains everything other than your private shares," Mr. Woolford says. "If they only have a single will, then the shares of the private corporation could be subject to probate fees."

Another way of minimizing probate fees is to name beneficiaries wherever possible - for everything from RRSPs to life insurance - or make the intended beneficiary a joint tenant, which would simply mean that upon the death of the owner, the assets would immediately become theirs.

"It is pretty good idea to name your company as a life insurance policy beneficiary," Mr. Woolford says. That ensures there will be tax-free money available to protect a business's sustainability in the case of the owner's untimely death.

These days, the senior Wostradowskis are enjoying the fruit of their five-year-long investment in their succession planning. "The kids are all in a position that they can look out for their families and have their turn at the business, and my wife and I have enough money to travel and enjoy our life. That's all we were interested in," Mr. Wostradowski says.