7. The points around life insurance outlined below should be included in a shareholder s agreement:

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2 1. Shareholder Agreements should include direction on how the Capital Dividend Account (CDA) is to be used., i.e. Will it be used for the benefit of the estate or to stay with the company. If the shareholder agreement is silent, the surviving shareholders can decide they want to keep the CDA for themselves, and this could cause the estate to incur unexpected tax on disposition. If you use the spousal rollover, the shares roll over to the spouse, and then the CDA dividend can be paid to the spouse and the shares redeemed. This might be possible as a tax free transaction. 2. If all shareholders have one class of shares, this substantially limits the ability for tax planning in the regular course of business but also in the event of a buyout. Ideally, each shareholder has their own class. 3. The purchase of insurance should be valued based on what the business will be worth five years from today, and t based on today s value. 4. Many shareholder agreements are created without sufficient attention to tax implications so be sure to include the lawyers, accountants and financial advisors early on in the discussions. 5. It is important to remain diligent and update the Fair Market Value annually, and update the annual minutes. 6. If some of the shareholders are family members, the Canada Revenue Agency (CRA) has the ability to challenge purchase and sale prices. Example: Mother dies and her son buys her shares for $100,000. CRA later challenges this amount and values her shares at $500,000 and taxes her estate based on the $500,000 even though the actual amount received was $100,000. In this example the taxes owing are greater than the cash received. When family members are involved, it is imperative to have a third party business valuation completed. 7. The points around life insurance outlined below should be included in a shareholder s agreement: Identification of owner, beneficiary and premium payor, and a schedule of insurance is a good idea. A prohibition against assigning the policies as collateral for loans, unless all parties agree should be considered. The consent of the shareholders to medical examinations; and Provisions giving departing shareholders the right to purchase any corporate-owned life policies on their lives (keeping in mind a term insurance policy does t automatically have a value of $1). Alternative strategies if one of the shareholders is uninsurable. Ensure actual ownership of insurance and beneficiary matches shareholders agreement. Ensure actual ownership of insurance and benefits matches shareholder agreement. 8. Unfortunately, shareholder agreements frequently omit references to disability buyout. However agreements that do provide for disability buyout may still have the following problems: The definition of when a shareholder is disabled may be inadequate. Definitions taken from disability buyout policies often provide the best definitions, even where the insurance itself is t acquired. The agreement may provide for a mandatory purchase and sale of shares even where there is disability buyout insurance. In many cases, this can present serious financial issues to the n-disabled shareholders who must obtain financing in order to complete the purchase. 9. Ensure the agreement does t try to force you to do something that is finanically t possible. * Disclaimer: This in way constitutes legal advice, and action should be taken without consulting your own lawyer, accountant, and financial advisor.

3 Your Name: Name of Corporation: Corporate Address: Date of Incorporation or Amalgamation: Shareholders Information: Number of Shareholders: Number of Mirity Shareholders: Particulars: Name and Address of Accountant: Name and Address of Lawyer: Location of Minute Book and Articles of Incorporation or Amalgamation: Are any of the shareholders Holding companies? Particulars of Holding companies Business Details: Nature of Business: Business Ownership: Arm's length (Business Partners are t related) Non-arm's length (or family run) Business Operation: Key person Non-key person Are shares held in a Trust? Is there a Trus t Agreement? Particulars : Business Evaluation At Inception $ Last Year $ This Year $ Purchase Price of Shares $

4 Do any shareholders provide for a rollover of shares to a spouse in a Will? Particulars: Shares issued prior to April 26, 1995: number type. Funded by life insurance prior to April 26, 1995: Particulars if shares reissued: Are shares bequeathed to family members (other than a spouse) in shareholder's Will? Particulars: Classes of Shares: Are all classes of shares the same? If, who owns which classes of shares? Details: Commons issued: Particulars of adjusted cost base (ACB) Particulars of paid up capital (PUC) Preferreds issued: Particulars of adjusted cost base (ACB) Particulars of paid up capital (PUC) Capital Gains Exemption: Availability of capital gains exemption? Has capital gains exemption been claimed? If, how much? $ Do shares qualify? Has the shareholder used any part of the exemption on any other property? Estate Freeze Utilized: Has there been an estate freeze from common shares to preferred shares? If, is there a fixed value of the preference shares? Particulars: Specials issued: Details: Are the preferred shares redeemable?

5 Shareholders Agreement: Does a Shareholders Agreement exist? Are there Buy-Sell provisions in the agreement? Are schedules attached regarding life insurance? Was a Shareholder Agreement in existence on or before April 26, 1995? When was the Shareholders Agreement last revised? How is the value of the business determined? Definition of Triggering Event and Buy-Sell Procedure: Death Disability (is it defined in Shareholders Agreement and consistent with disability insurance definition?) Critical Illness (query as to whether this actually does trigger a buy-out) Bankruptcy Retirement/Withdrawal Expulsion Amicable Buy-Out Dismissal of shareholder as employee Other Buy-Sell Procedure on Death: Criss-Cross Method The surviving shareholders purchase the shares from the estate of the deceased shareholder using the proceeds of the individually owned life insurance (best where there are two shareholders) Criss-Cross Method With Trustee Share certificates and life insurance ownership over to trustee and insurance proceeds administered by trustee (best where there are more than two shareholders) Corporate Share Redemption Method The corporation redeems the shares from the estate of the deceased shareholder using the proceeds of corporate-owned life insurance Shares are grandfathered under s. 112(3) of Income Tax Act Shares are t grandfathered under s. 112(3) of Income Tax Act Promissory Note Method The surviving shareholder(s) purchase the shares from the estate of the deceased shareholder using a promissory te then the corporation pays a capital dividend to the surviving shareholder(s) using the proceeds of corporate owned life insurance Hybrid Method A combination of the Corporate Share Redemption Method and the Promissory Note Method Shares are grandfathered under s. 112(3) of Income Tax Act Shares are t grandfathered under s. 112(3) of Income Tax Act

6 Buy-Sell Provision Upon Death: Obligation to sell - mandatory provision to sell shares to surviving shareholders and price determined on fair market value. Transfer to spouse Auction Basis The price is determined by auction and there may or may t be an obligation to buy/sell Other Clauses Put and call options Personal representative determines amount of shares to be redeemed and/or sold to other surviving shareholders Buy-Sell Provision for Living Buy-Out: Right of First Refusal Before a shareholder may sell to an outside third party he/she must first offer his/her shares to the remaining shareholders (offer will set purchase price) Right of First Refusal piggy back Other shareholders will piggy back on the offer put out to all shareholders Shotgun One shareholder offers to purchase other shareholder(s) shares; other shareholder(s) must sell or purchase offeror's shares on the same terms Compulsory Obligation A mandatory provision where parties are obligated to buy-sell after a specified event at a predetermined price Procedure for Valuation of Shares of Company: Fixed price Shareholders may annually determine value and update minute book Determined by formula By business valuator or independent third party By book value By shotgun clause By right of first refusal How is the Capital Dividend Account (CDA) used? For the benefit of the Estate For the benefit of the surviving shareholders Split between estate and surviving shareholders Put and Call options Optional provision where neither party is obligated to buy/sell but the price is determined in advance

7 Ownership of Insurance: Shareholder-owned Each shareholder owns, pays the premium and is the beneficiary of an insurance policy on the lives of each of the other shareholder(s) (best where there are two shareholders). Trustee-owned Share certificates and life insurance policies held by the trustees and in the event of death, critical illness or disability, the insurance proceeds are received and administered by the trustee in accordance with the agreement (best where there are more than two shareholders). Corporate owned Corporation pays the premium and is the beneficiary of an insurance policy on the lives of each of the shareholder(s). Split-dollar The costs and benefits of the insurance are split between the corporation and each shareholder. Holding company Holding company owns insurance, pays the premiums and is the beneficiary of the policy. Other arrangements. Insurance Provisions: Obligation to purchase life and/or disability insurance and/or critical illness (how will proceeds be dealt with when critical illness occurs and shareholder returns?) Deficiency of proceeds where insurance does t cover purchase price Surplus of insurance proceeds Ownership and designation of policy consistent with agreement Payment of premiums By shareholder By company Procedure upon failure to pay premiums Policy t to be encumbered Direction for policy dividends, if a participating policy Ability to purchase additional insurance where fair market value of shares rises Shareholders to take all necessary steps to place insurance Flow of insurance proceeds to purchase shares Disposition of remaining policies upon death Disposition of policies on termination of agreement Right of surviving shareholder to policy Disability provision where agreement definition is consistent between policy and agreement Structure of buy-out where insurance in place Other provisions

8 Taxation on share disposition Estate should receive the tax advantage Corporation should receive the tax advantage The tax advantage should be split between the estate & corporation General Provisions: Share structure is set out in preamble Grandfathering status is set out in preamble Reference to life insurance funding for grandfathered shares Reference to trustee arrangement and agreement, if applicable Disposal of Shares: Shares t to be encumbered General Purchase and Sale Provisions: Requirement to obtain promissory te before dividend received, if applicable Requirement to pay a dividend out of capital dividend account, if applicable Details of closing, including procedure on purchase and sale transaction and closing procedures Provisions to Amend Agreement: Are there provisions to amend agreement? Is amendment in writing? Other mechanism Purchaser agrees to be bound by terms of agreement Restriction on transfer of shares does t apply to immediate family of shareholder Purchase Price: Determined by fair market value of shares Determined by formula Business valuator or independent third party Book value Fixed price Shotgun clause Right of first refusal Price adjustment clause

9 Endorsement on Share Certificates: Provisions Regarding Assigr, Heirs and Successors: Are shares subject to grandfathering? Is agreement assignable? Are shares subject to provisions of agreement? If, binding on assigrs? Is agreement binding on heirs, successors? Provision for Dispute Resolution: By arbitration By mediation By other method When there is a conflict, is there a provision to obtain independent legal advice? Notice Provisions: Time frame set out In writing Where tice should be sent Is there a provision requiring heirs and successors to comply with request of information by Canada Revenue Agency (CRA) for grandfathering purposes? Schedules to Agreement: Particulars regarding life insurance, disability, and critical illness policies Particulars regarding share structure Trustee Agreement, if applicable Value of shares Other applicable agreements last updated date

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