(As originally published in FEI Canada F.A.R. member e-newsletter, March 2017)
Effective tax planning for family businesses
By: Bruce Sprague, Canadian Tax Leader with EY’s Private Client Services practice
While tax planning is something that’s always top of mind in my world, it can often be a topic that gets overlooked by many family business leaders. With shifting priorities, evolving family dynamics and managing relationships and revenue, the topic of tax can be an area that gets sidelined for immediate issues and concerns.
But the ever-changing tax landscape can have a significant impact on strategic planning for family businesses. Whether the focus is on investments, financing and liquidity, or plans for growth or expansion, tax law factors heavily in the decision-making process. With tax authorities seeking to maximize revenues, it’s more important than ever to ensure to understand the tax implications of your business decisions, as well as the structure, processes and policies related to tax controversy and risk management.
Different tax planning strategies may be suited to your company’s unique needs and circumstances. Here are a few points you may want to consider as you develop your strategy to enhance growth while reducing your tax burden.
The tax and legal issues you and your family face are extremely complex. Personal taxation has never been so multifaceted, and failing to consider all the elements could prove costly to your family and your business. A holistic approach to your tax planning will help mitigate problems, both now and for future generations.
An effective tax structure can free up working capital in the business and allow you to take advantage of market opportunities and enhance your asset portfolio. Whether you’re restructuring the business, making an acquisition, refinancing or simply focused on mitigating risk, you’ll need to identify the most efficient tax structures.
Your estate plan can accommodate a number of tax-saving strategies to reduce or defer the amount of tax payable by your estate and increase the amount available to your heirs. Some of the most common planning strategies include using a trust created in your will to split investment income, naming beneficiaries for investment accounts, making charitable donations in your will and bequesting appreciated assets to your spouse — or a qualifying spousal trust — to defer tax on the accrued capital gains.
As family businesses grow and the number of dependents increases, the tax implications of an estate transfer can be hard to navigate. By proactively managing your tax planning and giving careful consideration to succession planning options, you can potentially reduce your tax burdens and exposure to tax controversy and costly litigation.
Good trust management will enable the family to spread its risks and manage other investments as efficiently as possible.
An essential part of any business plan for a family business is to formulate a full or partial exit strategy. In the absence of a divesture plan, if you were to experience a long-term illness or death, you may leave the business without a viable successor. If the business is to succeed through the next generation, a contingency plan is crucial.
The successor overseeing the family business, as well as other family members, must understand the values and operations of the business early on. With this understanding, backed by a solid succession plan, the transition of the business to the next generation can be made smooth and efficient for all concerned.
The creation and implementation of tax-efficient business structures demands a proactive approach. It’s important to evaluate all the relevant commercial, legal and financial factors and constraints in light of your unique circumstances, giving you peace of mind and letting you concentrate on improving what matters most to you — your business.