earnings that need to be distributed. Rather than paying all
the retained earnings out at once, the company could, for
example, be maintained and the funds could be extracted
over time at lower marginal tax rates to minimize the overall
tax exposure.
Family Succession
Selling a Business
Some considerations include:
Selling a business tends to provide the maximum value.
This can be done by selling the shares or the assets
of the business. As many people are aware, there is a
lifetime capital gains exemption available under certain
circumstances. The exemption, which has recently increased
to $800,000 and is expected to increase with inflation after
2014, can be applied to the sale of shares of a business.
However, there are a number of specific rules regarding
the use of this exemption. Appropriate financial and tax
planning will need to be done well in advance of the sale
of the business to ensure any gain on the sale of the shares
qualifies for the capital gains exemption. Sometimes, a
buyer may be willing to pay more for the assets of the
business than for the shares. If this is the case, a hybrid sale
may also be possible to achieve the benefits of both an
asset and share sale.
Potential planning ideas include:
ultiplying the capital gains exemption by having other
M
family members own, directly or indirectly, shares in the
business; and
•
S
real
• eparating theassetsestate or investment assets from
the operating
of the business. When selling the
business, you may want to retain some assets, such
as real estate or other investments, as passive income
earning sources for retirement.
Both ideas need to be contemplated well in advance of the
sale of a business, as it may be difficult to segregate these
assets without adverse tax effects immediately before a sale.
In some situations, there may also be employees who are
interested in purchasing the business. This can provide a
more natural succession, as the employees are more privy
to the ins and outs of the business. The employees could
first purchase a small interest and increase their ownership
over time. This strategy may be more manageable for an
employee than purchasing the business all at once.
Passing a business on to family members is another
common succession plan. Like the other options discussed,
advance planning is necessary to ensure the maximum
benefit is achieved.
U
family
trusts have
• sing a greatertrust. Family transferring athe ability to
provide
flexibility in
business to
the next generation.
M
equity of
assets amongst all the
• aintainingimportant;the familymembers who are not
children is
family
involved in the business should also be considered.
S
estate freeze
• etting up anto the currentcan be used to crystalize the
taxable gain
shareholder(s) and transfer
the future value to the next generation tax free.
P
• urchasing insurance may be beneficial as it can cover
the tax expenses of the parent.
E
moment to begin the
• stablishing the opportunefamily members. In order
ownership transition to the
to increase the commitment and interest of the next
generation in the business, you may want to provide
them with the opportunity to participate in the future
growth of the business well before your planned
retirement.
D
• etermining the individual(s) to take or maintain control
of the business.
A lack of effective communication among family members
can be a root cause of succession failure. A key feature of
any successful succession plan is establishing forums to
allow for communication among family members.
There are a significant number of things to consider when
it comes to succession planning. While it may seem
overwhelming, speaking to your tax and legal advisors, as
well as your financial planner, early in the process of setting
up a business will help minimize the stress involved with
future decisions. It will also ensure the overall tax effects of
starting, operating, and transitioning or selling the business
are reduced as much as possible. The key is to remember
that it is never too early to start your succession plan.
Mark Hoag, CPA, CA, is a partner with KNV Chartered
Accountants LLP, who focuses on working with owner
operated businesses
WINTER 2014
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