Succession Planning – Start Planning Before It’s Too Late
ATTENTION: The Department of Finance paper released July 18, 2017 targets the tax advantages of using private corporations and trusts to sprinkle investment income among family members. The federal government is seeking input on proposed tax legislation to curb these advantages. GGFL is responding immediately to this release to see how best to guide our clients. We are committed to keeping you informed on key developments as they occur. Should you have any questions or concerns, please contact your GGFL advisor.
By Casey Murray, CPA, CA, LPA, Principal
Seeing the business that represents your life’s work cease to exist upon retirement can be tantamount to losing a loved one. You worked tirelessly to grow the business and make it a key contributor to the economy and the local community. What makes this loss that much harder to stomach is the knowledge that it could have been easily avoided if succession planning had begun a few years earlier.
Every day 1,000 individuals turn 65 in Canada. What’s more, while in the last 40 years the proportion of seniors in the population has grown by six per cent, in the next 20 it is expected to grow by 10 per cent, at which point seniors could represent one quarter of all Canadians.
Much of the discussion on our aging population surrounds its impact on the healthcare system. Less discussed, however, is the number of businesses fuelling the economy that will cease to exist simply because their aging owners didn’t have a succession plan.
Exit strategies need to be considered or revisited on a regular basis throughout the career of a business owner, but it becomes especially critical as retirement approaches. Most advisors will say the timeline for implementing an effective succession plan is at least five years. Those running their own company know how quickly five years can go by. Rushing a transition may lead to overlooking key considerations and missing out on objectives that should be a part of the plan.
There are many questions to be asked when considering succession planning, but the first one is simple: What is the plan? That is, will the business continue after the owner retires and if so who is running it?
This is typically one of the more difficult questions to resolve. If it is a family business, is the next generation interested in taking over? If so, do they have the experience and know-how to maintain the company’s operations? Does everyone agree on the best candidate? These are important discussions for successful transitions.
Transition to management can be equally challenging, particularly if current ownership and the successors-to-be don’t see eye-to-eye on the company’s future. How will the sale be financed?
Selling the business to a third party takes time, and consideration of what’s appealing to a prospective buyer has to be well thought out in advance.
Once a decision on the ideal future owners and management of the business is made, the next step is to determine the specific details of the transition. The existing ownership structure may, or may not, be ideal for passing on to the next generation or an outright sale.
The use of family trusts can be an effective means of passing ownership when transitioning the business to family.
In the case of a sale, proper planning could help you meet you the criteria to qualify for the Capital Gains Exemption (CGE) available on the sale of the company’s shares. Improper planning could result in the inability to access the CGE, resulting in very unwelcome tax consequences.
Procrastination is the biggest obstacle to effective succession planning, as it tends to takes a backseat to running the day-to-day operations of the business. Starting the succession planning process as early as possible can quite literally be the difference between leaving a legacy that will benefit future generations and your business going the way of the dodo bird.
Speak with your advisor about the different strategies you can implement today to ensure your business lives on long after you’ve left.
Printed in the Construction Comment magazine—December 2014/January 2015