Many Canadian business owners tend to defer succession planning opting to address it at a later date. However, with over 56% of family business owners expected to retire in the next decade, and fewer than 25% having a formal plan in place, the cost of inaction is rising. Avoiding succession planning doesn’t just risk business failure; it also jeopardizes family harmony and financial legacies.
The Succession Reality in Canada
The numbers tell a compelling story:
- 56% of Canadian family business owners will retire within 10 years.
- 43% plan to sell their business within that timeframe.
- Fewer than 1 in 4 have a written succession plan.
- Only 30% of family businesses transition successfully to a second generation.
- Less than 10% survive to a third generation.
Without planning, family businesses risk joining the ranks of those that never make it past the founder.
What Succession Planning Is—and Isn’t
Succession is not a one-time event. Rather, it’s a process that involves family, ownership, management, and values. It isn’t just about tax planning, nor is it a solo exercise for the founder. Good succession planning should reflect:
- Fairness (not necessarily equality),
- A blend of family values and sound business judgment, and
- Planning across ownership, leadership, and estate considerations.
Common Exit Strategies
Succession comes in many forms. Below are some of the most common ways to exit a business, along with key questions to consider that may help you determine which strategy is the right fit for your situation:
1. Transitioning to Family
- Who will lead the business?
- How do you treat inactive family members?
- How do you structure control and ownership tax-efficiently?
- Is a family council needed?
2. Selling to a Partner or Employee
- How will the purchase be structured and financed?
- What agreements are necessary?
- Are there tax-planning opportunities?
3. Selling to Third Parties
- How do you find a buyer?
- What’s the business really worth?
- How can the sale be financed?
4. Winding Down
- Can parts of the business be sold?
- How do you value and tax those assets?
5. Other Options
- Explore hybrid or creative exits tailored to unique family or market dynamics.
The Tax Planning Landscape
Ignoring tax planning can be costly. Key strategies that owners should consider include:
1. Retirement Compensation
- Retiring allowances and consulting contracts offer ways to stagger income over time.
- Non-compete payments that were once tax-free are now taxable under certain rules.
2. Planning for Taxes on Death
- On death, Canadians face a deemed disposition of assets at fair market value.
- A properly structured estate can reduce taxes, use spousal rollovers, and avoid double taxation.
3. Capital Gains Exemption
- The lifetime capital gains exemption (currently $1,250,000 per person) can eliminate significant tax on the sale of qualified small business corporation (QSBC) shares.
- Planning to meet QSBC rules is essential, as is spreading ownership among family members where possible.
4. Reducing Probate
- Probate fees can erode estate value. Consider tools like multiple wills, gifts, joint ownership, and alter-ego or joint partner trusts to reduce exposure.
5. Corporate Insured Life Annuities (CILA)
- As a sophisticated estate and cash flow planning tool, CILAs combine life insurance and annuity income to generate cash flow, reduce estate taxes, and enhance capital dividend account (CDA) credits.
Final Thoughts
Succession is not optional – it’s inevitable. Whether your goal is to pass the business to your children, sell it to your management team, or gradually wind it down, the key to a successful transition is early, thoughtful planning with clear goals and professional guidance. Your business represents a lifetime of work. With the right strategy, it can support your retirement, maintain family harmony, and increase the likelihood of it lasting into the next generation. To talk further about your unique situation, please contact a Cardinal Point financial advisor.