Business Lawyer for tax planning, tax structuring and business transactions.

BUSINESS SUCCESSION PLANNING

Experienced legal representation for tax planning, tax structuring and business transactions.

ROLLOVER  -  ESTATE FREEZE  -  REORG  -  HOLDCO  -  CCPC  -  SUCCESSION  -  TAX PRODUCTS

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

Business succession planning seeks to optimize legally-permissible tax strategies to minimize the financial impact of taxes on both the exiting owner and the business itself. Determining the optimial tax strategy for business succession planning is based on an assessment of various factors, including the type of business, its structure (e.g., corporation, partnership), and the nature of the transfer (e.g., family member, employee, or third-party sale).

A. Capital Gains Tax Management

Capital gains tax is often the most significant tax liability when a business is sold. It is the tax on the profit from the sale of a business or its shares.

  • Lifetime Capital Gains Exemption (LCGE): In many countries, there is an exemption that allows owners to sell qualifying small business shares and receive a certain amount of the capital gain tax-free. To take advantage of this, a business must meet specific criteria regarding its structure and the nature of its assets. Strategic, early planning is essential to ensure the business qualifies for this exemption at the time of sale.

  • Asset Sale vs. Share Sale: The tax implications differ significantly depending on what is sold.

    • Share Sale: The owner sells their shares in the corporation. This is generally more tax-efficient for the seller because the proceeds are taxed as a capital gain, which is typically subject to a lower tax rate than ordinary income.

    • Asset Sale: The corporation sells its assets (e.g., equipment, inventory, intellectual property). The corporation is taxed on the sale, and then the owner is taxed again when the proceeds are distributed as a dividend or salary. This often results in a higher overall tax burden for the seller. However, a buyer may prefer an asset sale to gain a higher tax basis for depreciation.

  • Temporary Availability of Capital Gains Exemption via Employee Ownership Trusts (EOTs): For sales by a qualifying business to an employee ownership trust that occur by December 31, 2026, Revenue Canada provides a very significant tax incentive in the form of a $10 million capital gains exemption. This tax-saving opportunity can be a powerful motivator for a business owner looking to retire or exit their business. [more about Employee Ownership Trusts].

B. Tax Deferral and Spreading

Instead of taking a large lump sum and facing a high tax bill in a single year, succession plans can be structured to defer or spread out tax payments.

  • Promissory Notes or Vendor Financing: The buyer pays the seller over several years through a promissory note. This allows the seller to spread the recognition of the capital gain over the payment period, potentially keeping them in a lower tax bracket each year.

  • Installment Sale: Similar to the above, this allows the seller to defer a portion of the tax on the gain until the sale proceeds are received in future years.

C. Strategies for Family Transfers

Transferring a business to a family member has unique tax challenges and opportunities.

  • Estate Freeze: This is a common and powerful strategy to transfer future growth of the business to the next generation while "freezing" the current value in the hands of the senior owner. The senior owner's common shares are converted into fixed-value preferred shares. New common shares are then issued to the children, and any future increase in the company's value accrues to them, thereby minimizing the senior owner's future estate and capital gains tax liability.

  • Gifting: Business interests can be gifted to family members over time. This can be done by using annual gift tax exclusions to transfer a portion of the business each year, thereby reducing the size of the owner's taxable estate without triggering gift tax.

  • Intergenerational Transfers: Recent tax law changes in some jurisdictions, such as Canada's Bill C-208, have made it more tax-efficient to sell a business to a family member, allowing for the application of the capital gains exemption that was previously only available in a sale to a third party.

D. Employee and Management Buyouts

When a business is sold to employees or management, specific tax strategies can facilitate the transaction.

  • Employee Ownership Trust (EOT): Employee Ownership Trusts are a new and attractive option for business succession planning available to Canadian business owners, with certain tax advantages being available until December 31, 2026 (namely, a $10 million capital gains exemption from taxation for business owners who sell a qualifying business to an EOT). EOTs may be used to facilitate the purchase of a business by its employees, without requiring the employees to pay directly to acquire the shares. For business owners, an EOT provides an additional option for business succession planning, which can be particularly advantageous for small and medium business corporations that can optimize the significant tax benefits that are presently available [more about Employee Ownership Trusts].

  • Employee Stock Ownership Plan (ESOP): An Employee Stock Ownership Plan is a qualified retirement plan that buys, holds, and sells company stock for the benefit of employees. Selling to an ESOP can provide significant tax benefits for the owner, including the ability to defer capital gains tax if certain conditions are met. For the business, contributions to the ESOP are often tax-deductible.

  • Management Buyout: The existing management team buys the business. Tax planning in this scenario often involves structuring the transaction so that the business's cash flow can be used to finance the purchase, which can have significant tax implications for both the buyer and seller.

For business succession planning, and other corporate tax strategies, contact our law firm to schedule a confidential initial consultation with a knowledgeable tax planning lawyer at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.

 

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What is a Butterfly Transaction

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