Tax-Effective Business + Personal Succession Planning

Neufeld Legal PC: Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

Succession planning is intended to facilitate a structured and orderly transfer of ownership of your business to your partners, other family members or your heirs, including the effective use of Trusts and other legal strategies. Developing a well conceived corporate exit strategy is an invaluable undertaking that far too many business owners fail to commit adequate time and resources to, and all too often without appropriate legal counsel. Creating an appropriate business succession plan requires not only a thorough understanding of business and tax laws, but also a sensitivity to business/family relationships, strengths and weaknesses of the particular business and long-term financial needs of the owner (or other individuals who are in need of an appropriate successor).

The benefits of effective business succession planning can include:

• undertaking critical analysis of the business to best determine its leadership and financial needs now and in the coming years

• develop a corporate leadership guidebook, including comprehensive position descriptions, needs analysis and plans to bridge potential gaps and deficiencies

• relationship building that will enable the various interested parties to better collaborate and advance the corporate enterprise when the transition is being undertaken

• provide capable direction, stability and expectations for all key stakeholders: employees, customers, shareholders and vendors

• allow for the retention of key management and employees who might otherwise leave if not appropriately brought into the future plans for the business enterprise

• prevent family disputes and the associated costs involved in such disputes and the negative impact on the business [more about intergenerational business transfers and tax planning].

From the perspective of tax minimization, business owners presently looking at implementing a business succession plan should seriously consider the viability of an employee ownership trust, which has only recently been made available by the Canadian federal government and initially has been assigned considerable tax advantages, which may well expire after its initial phase-in on December 31, 2026.

The benefits of high-wealth inheritance planning can include:

• Tax Minimization, even without an inheritance tax, high-wealth Canadians are subject to significant tax implications upon death.

  • Capital Gains: The deemed disposition upon an individual's death, will result in most assets (i.e., real estate (excluding a primary residence), stocks, and other investments) being treated as if they were sold at their fair market value, with any increase in value since the asset was acquired (capital gain) is taxable, such that strategic planning needs to be considered and properly implemented to mitigate these adverse tax consequences.

  • Registered Accounts: Funds in registered accounts like RRSPs and RRIFs are fully taxable as income in the year of death, unless they are tax-efficiently transferred to a qualifying beneficiary.

  • Trusts: Living trusts can be used to hold assets, and any increase in the value of the assets occurs within the trust, potentially deferring or reducing the tax burden.

• Reducing Probate's Impact, probate fees in certain provinces can be consequential (i.e., Ontario, British Columbia), while they are largely inconsequential in other provinces (i.e., Alberta), such that appropriate advance planning should be undertaken to ascertain how best to navigate one's personal probate strategy to realize the optimal outcome, especially where certain probate-avoidance strategies can have serious unintended consequences.

• Ensuring Testamentary Wishes are Followed, given the complexity of most high-wealth individuals' inheritance plans, their structure must go far beyond a simple will, and instead involves a range of significant interwoven legal documents. This includes controlling asset distribution (and asset protection), managing ongoing investments (including assets held in trust), business succession arrangements, and preventing (or at least minimizing) family disputes.

• Smooth and Efficient Wealth Transfer, which includes having sufficient liquidity for taxes and other payment obligations, business succession arrangements, and organized pre-planning that relieves the stress and limits the legal liability associated with managing the estate and providing for future generations.

For knowledgeable and experienced legal representation for succession planning and trusts, contact lawyer Christopher R. Neufeld at Chris@NeufeldLegal.com or call 403-400-4092 (Calgary, Alberta) / 905-616-8864 (Toronto, Ontario).

Keys to a Business Succession Plan Business succession planning is a complex but crucial process designed to ensure the smooth transition of ownership and/or management of a business when the current ownership is ready to exit, or circumstances have effectively necessitated a transition in business ownership, on account of death or disability. Read more.

Keys to a Personal Wealth Succession Plan A personal wealth succession plan is a comprehensive strategy for managing and distributing your assets during your lifetime and after your death, while minimizing taxes, maximizing value for beneficiaries, and ensuring your wishes are carried out, which goes beyond a last will & testatment. Read more.

Business Succession Planning - Contingency Arrangements Business succession planning isn't just about planning for the optimal outcome, it is also about establishing contingency arrangements in the event the original plan cannot be implemented as originally intended or its actual implementation (as impacted by how the business situation has changed over time) would run counter to the planner's overarching objectives. Read more.

Mistakes when developing a Business Succession Plan To develop a successful business succession plan, it is important to avoid common mistakes that have been previously made by other business owners with respect to their own failures in business succession planning. As such, it is worthwhile to review and understand those common mistakes when developing a business succession plan, . .  . Read more.

 

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