How This New Business Succession Planning Rule Could Affect You

Owners of small, family-owned businesses are celebrating new tax rules that came into effect while barbeques were getting fired up. Bill C-208 was passed on June 29, 2021, and promised to facilitate inter-generational transfers for small business owners, including the owners of family farms or fishing properties.

However, since this legislation is relatively new, details still need to be ironed out, and some accountants expect further amendments. So, if you’re considering selling your business to a family member, there are many aspects to understand, including the financial benefits, tax options, and developing a plan that will enable you to walk away. 

Plan Early

Maybe you want to sell your business to free up cash for another venture or want to retire and enjoy good times with friends and family on a warm beach in the winter. Even if you don’t want to sell yet, starting the discussion early with family members is essential.

Sharing your thinking can minimize family drama if one sibling is chosen over another to take over the family business. Instead of assuming that one or more of your relatives are on board, open a conversation about who’s interested.

If you can name a successor and show them the ropes early, it will make the transition more manageable when you finally decide to hand over the reins. Discussing the transition in advance will also allow you to plan how to minimize taxes associated with the sale of the business. 

Taxes Are Complicated

You’ve worked hard to accumulate wealth over several decades. So why lose it to improper tax planning? Remember, if a business transition happens suddenly due to the owner’s death or an urgent health issue, there may be fewer options to save on taxes.

There are several taxation options to consider as part of a good transition plan, including:

Incorporate: According to the Government of Canada’s Business Development Bank, the profits from the sale of an unincorporated business don’t qualify for the lifetime capital gains exemption. Unincorporated businesses also generally can’t engage in an estate freeze.

Fair market value: Selling for less than fair market value could disadvantage both the parent (at the time of the sale) and eventually the new owner when they seek to sell the business themselves.

Lifetime capital gains exemption: Sometimes, it applies to small business owners when they sell a farm, a fishery property, or even private qualifying shares. (The change in taxation rules will make this benefit available to more family-owned businesses).

Estate freeze: It involves locking in the company’s current value and issuing shares to the family members who intend to take over. It can help reduce your taxes and ensures any future growth is taxable in the hands of the new owner. It’s a standard method used for intergenerational transfers.

When considering the sale or intergenerational transfer of your business, you should consult with a tax-planning professional and experts such as accountants, lawyers, business brokers, and banks who can help you figure out a path through a thicket of regulations.

It’s tempting to scribble out a bill of sale on a napkin, “I sell the business to Suzie for $1,” but this isn’t going to pass muster with the Canada Revenue Agency.

Questions for an entrepreneur to ask themselves before selling a company to family:

• Who in your family has the drive, aptitude, skills, interest, and commitment?
• Will one person or multiple family members take over the business?
• Will I ask for an up-front price or receive payments?
• Who will be disappointed by the transition plan?
• How and when will the transition take place?
• What do I need to do to be released from my day-to-day responsibilities?

Also, remember that your walking-away timeline should consider how a smooth transition can best serve the business, what you want to do, and how that meshes with the chosen successor’s plans.

Early planning will allow you to figure out a strategy for taxes and other succession issues. You’ll then be able to go on your next great adventure, secure in the knowledge that the future of your business is in safe hands.

Get in touch with us today!

With over twenty-five years of experience in accounting, ACT Services will help you with your business succession planning needs. Our specialties include tax planning, management consulting, business advisory, financial statements, bookkeeping, personal tax, and payroll services.

To learn more about the services we have to offer, please click here. If you have any questions about tax and accounting, call (613) 738-7712 or email us at support@actservice.ca.