Business ownership transfer: 3 options for a smooth tax transition


Are you planning to transfer ownership?

Dominique Renaud | Tax specialist | Desjardins Group

For many people, selling their business means paying taxes. Do you know what your options are, so you can come out ahead?

Let's take a look at 3 tax planning options that might be right for you, depending on your situation.

1. Estate freeze: to integrate an interested successor

What is it?
It's a tax reorganization that allows a business owner to legally transfer ownership and a future increase in value of their business (or a portion of it) for the benefit of designated persons (generally adult children who are interested in the business) so they can enjoy a future increase in the business's value.

Is it right for you?
It's a good option if you:
  • Have an interested successor
  • Want to interest a key employee in taking over
  • Expect that your business will appreciate significantly in value in the future
  • Are planning to transfer ownership in the long term, internally or externally
Pros:
  • Maximizes the capital gains exemption when the company is sold 
  • Makes it easier to gradually integrate a potential buyer
  • Offers the opportunity to interest a key employee
  • Crystalizes the market value of the shares of the initiator of the freeze (the transferor), which means potential buyers will know the need for financing when the business is transferred
Cons:
  • Doesn't resolve the issue of the accumulated increase in value on the shares the transferor owns on the date of the freeze
  • It's not worthwhile if the beneficiaries of the trust are not active in the business and if the business owner wants to split income (because of Morneau's reform)
  • There are fees involved
  • The transferor will have to hold voting shares that allow them to maintain control of the company
  • It's not worthwhile if the owner is planning to transfer ownership in the short-term
2. Family trust: to transfer a business while maintaining control of it

What is it?
It's a tax reorganization by which a business owner transfers ownership to beneficiaries (generally family members) while maintaining control of the business, by the fact that they will be appointed trustee or will appoint as trustee someone they trust. This reorganization generally comes with an estate freeze.

Is it right for you?
It's a good option if you:
  • Don't have a successor who is interested in the business
  • Want to ensure financial security for certain family members who vary in their ability to manage their assets (e.g., minors, spendthrifts)
  • Anticipate a significant future increase in the value of the business and want your family members to benefit from it, while maintaining control of the business
Pros:
  • Maximizes the capital gains exemption when the company is sold
  • Contributes to the future increase in the value of the business
  • Ensures the financial security of the beneficiaries
  • Keeps the business under the indirect control of the trust settlor 
Cons:
  • Administration and set-up are fairly complex
  • It's not worthwhile if the beneficiaries of the trust are not active in the business and the business owner wants to split income (because of Morneau's reform)
  • Fees are involved
3. Management company:  to protect capital from the company's creditors

What is it?
It's a company where cash, securities and real estate investments, etc., are almost exclusively kept.

Is it right for you?
It's a good option if you want to:
  • Secure investments held in another operating company that is subject to potential lawsuits because of its activities
  • Sell another operating company and get a capital gains exemption
  • Interest a successor in your business, but don't want them to be entitled to investments you already hold
Pros:
  • Protects capital from the company's creditors
  • Materializes the capital gains exemption for the shareholder when the operating company's shares are sold
  • Enables a third party to buy company shares
  • In the event of death, it guarantees that the deceased gets a capital gains exemption
Cons:
The management company must not be created to include personal investments

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