Baker Tilly Canada
By Michael Barclay
December 6th, 2017
Canada’s succession planning rules can make it less costly from a taxation standpoint to sell a family business to a third party than to a family member. However, this depends on how the deal is structured.
Typically, when you transfer to a family member, there is some sort of discount and freeze on the shares. For instance, if parents take back preferential shares and the next generation buys common shares at a relatively nominal value, this turns the proceeds for parents into dividend income, as opposed to capital gains. If they use a capital gains exemption, the child ends up paying more tax, but if the parents want better tax treatment for the child, they can forego the capital gains exemption.
There are tax disadvantages to both options, but the priority tends to be setting the next generation up to succeed.
The difference when selling to an independent third party is that you will likely be paid the full value of the property, whereas you usually are not when transferring to a child. In a sense, you’re giving them their inheritance early, providing the potential for stable employment and offering something of lasting value.
With this in mind, there are other significant risks to consider when transferring a business to the next generation. Here is some advice to drastically improve your chances of succession success.
There are often non-active siblings in the next generation that need to be considered when the business is transferred to a sibling. If one child works in the family business and others do not, efforts should be made to ensure that the non-active child is treated fairly. In most cases, the child who takes over the business has worked with the business for several years, contributing to its value. Rather than try to distribute everything equally, you should focus on fair distribution.
Michael Barclay, Partner, Collins Barrow WCM LLP
