Time buys opportunity!
By planning early, you create more opportunities to access strategies for sizeable tax savings, to find the right person to transition the business to and for cash to be generated to pay those exiting the business. As discussed in earlier blog posts in this series, it is never too early for a business owner to create a succession plan. However, the length of time actually needed will increase the more complicated the corporate and family structure.
Let’s start with the dollars and cents of it! A general guideline is to start planning your exit from your business five years before you want to retire. This ensures a plan can be prepared that minimizes tax by using some tax planning strategies like capital gain exemptions and deferrals. Leaving the planning too late can drastically reduce potential tax savings.
Here is an example.
24 months could save you upwards of $200,000 in tax (based on 2015 rates)!
When selling the shares of your business, in order to trigger a capital gains exemption, there are time requirements that must be met. Some of these require the seller to have held the shares for 24 months before the sale. Also most of the assets in the company must be used in active business activities in Canada over that same period therefore assets such as portfolio investments, excess cash, or real estate not used in the business must be moved out the company. As you can see, meeting these conditions alone could require more than two years.
If you plan to sell your business to a third party, you may also need to consider having financial statements prepared by a public accounting firm for three years leading up to the sale. This allows potential buyers to have confidence in what they are buying.
The tax implications are also important for younger business owners to consider. For example, a business owner with teenaged children may wish to consider income splitting with his/her spouse and kids (once they reach the age of majority) to access lower tax rates. One alternative is to set up a family trust as the holder of the company’s shares. This would allow the adult children to receive some of the earnings from the business as beneficiaries of the trust. The adult children would pay tax on those distributions at a lower personal tax rate and then could use those funds to pay for their post-secondary education, as a down payment on a house, or to start their own business. This strategy then acts as part of your succession plan by allowing you to access multiple capital gains exemptions (one for you, one for your spouse and one for each of your kids) in the event you decide to sell your business when you retire therefore compounding the tax savings noted above. Of course tax planning is not a one size fits all solution and will vary for each business, but the planning can create sizeable savings over time.
Taxes aside, you also need time to determine what you want out of your business and who should be your successor. You then need to ensure that your family, friends, advisors and key employees are all aware of your wishes and have had time to process the information and accept your decisions. This all comes before worrying about tax strategies and can be much more difficult to deal with! Visit the Strategy Counts blog next week for more on where you should start.
Latest posts by Kimberly Aitken (see all)
- Buying and Selling a Construction Company - May 20, 2020
- Succession Part IV: Where should I start? - October 16, 2018
- Succession Part III: When should I start planning? - September 20, 2018