Inheriting a family company can be a complex endeavour

The vision and long-term objectives of current and future shareholders are key elements when considering any kind of succession plans (Getty Images/Westend61)

Tax treatments and the uses of various instruments to minimize the tax burden as a family business shifts from one generation to the next vary by company size and whether it’s publicly traded or privately held. Then there’s the next generation’s interest in participating in the firm’s management to consider. “When working with enterprising families,” says Michelle Osry, who leads Deloitte Canada’s family enterprise practice, “we believe it is important to step back before diving into conversations around tax to understand the vision and long-term objectives of current and future shareholders.”

Those decisions should also reflect the governance structures that guide ownership transitions as well as the transition of the management of the business. “In an ideal world, it would be great if the tax planning piece and the governance planning piece happened around the same time, so that they both complement one another,” says Manijeh Colabella, a former tax lawyer and current senior governance consultant at Watson Advisors.

Individuals owning qualified small business shares can claim a lifetime capital gains exemption when the shares are gifted or sold. This exemption is complex and subject to various provisos, including a requirement that the company shares must generally have been owned by the same person for the past 24 months and that at least 90 per cent of the assets must be used for business in Canada at the time of transfer.

Another approach is an estate freeze which is achieved where the owner’s common shares are exchanged for fixed value preferred shares, and new common shares, having a nominal value, are issued. Those shares often are placed in a trust. The benefit of such structures is that they can be used to delay the decision of which family members will receive the shares and when.

Finally, a technical change to the Income Tax Act seeks to fix an unintended consequence of an anti-avoidance measure that had made it less advantageous for parents to sell their shares to their child’s corporation than to an unrelated party. The new rules, described as “a significant change,” aim to level the playing field between sales to children or to grandchildren and arm's length transfers.

ESTATE PLANNING TIPS

Succession planning is critical in business, just as estate planning is essential in your personal life. Read about the ways that taxes will impact the assets you leave behind, and the ways to reduce the tax impact for your heirs.