Succession planning and tax planning: two of a kind

Small business owners have a lot on their plates. A smaller team means in many cases that the owners have to wear multiple hats, playing several different roles at once. Once the company increases in profitability, the work doesn’t stop; the challenges just change and evolve. Given that small business owners tend to be so busy, it’s no wonder then that 58% of them do not have a succession plan. 78%[1] of small business owners state that they enjoy their work too much to think about what will happen when they have to leave. And while the topic of succession and tax planning can sometimes be difficult to discuss, the benefits of having a plan in place are massive, particularly in the event of an unexpected health emergency.

As we’ve discussed in a previous blog post, creating a wealth management strategy for the future isn’t a one-time event, instead, it’s a process that needs to be ongoing as things change in your personal and professional life. Similarly, succession planning isn’t a task that stands alone- it’s a process that is most effectively conducted alongside effective tax planning.

How do succession planning and tax planning align?
Deciding who will take over your business is highly intertwined with tax implications. Certain structures result in capital gains, others dividend rates, and in other instances regular income may be fully taxed.

It’s important to think about the tax implications of your succession plans before committing to a certain route. Each structure has far-reaching tax impacts and cannot always be fixed.

Family succession planning
When family members are taking over the business, people often think the tax consequences are the same as if they were selling to a third party. Unfortunately, this isn’t the case. Certain tax rules limit tax planning abilities, making it critical to thoroughly vet your family succession plan through a trusted business advisor. For instance:

– Subsection 84.1 of the Income Tax Act can have negative tax consequences in transactions involving sale of shares to family members
– The benefit of the Lifetime capital gains exemption can be limited in a family sale and needs to be a consideration for family successions
– Retaining voting interests can be an appealing option to assist in passing over the family business to the next generation and help to offset tax implications

The influence of time
Succession is a process, and can be structured as such to take advantage of the time period for tax. Deferring tax is a valuable method for preserving wealth over the long term.

Given the parallel subject matter, many individuals choose to conduct their estate planning at the same time as their succession planning. In this case, the tax implications of certain structures need to be considered, including:

– Holding company structures
– Family trust owning shares of corporations
– Asset vs share sale
– Results on estate values

Succession planning involving a sale
There are lots of traps when selling a business. Understanding these traps and knowing how to deal with them can help to mitigate risk. For example:

– Subsection 55(2) converts dividends to capital gains
– Subsection 84.1 converts capital gains to dividends
– Certain rules surrounding the calculation of shares qualify for the qualified small business corporation test

When Succession planning is combined with a sale there are numerous tax-advantageous planning methods available. Planning for the sale allows your organization to reap the full benefits, rather than scrambling to organize the details after the fact.

Choose a trusted business advisor
Succession planning is emotional. After all, we’re talking about selling or handing over an incredibly important part of your life- one that has taken time, care, and effort to build. This is why it’s critical to work with a business advisor, someone who has the emotional distance necessary to see the big picture clearly and realize all the tax implications of your decisions.

A business advisor will also be able to help you make plans to mitigate damage if the succession plan fails- for instance, determining what kind of loss you can claim if your shares decrease following the succession.

The team at Zeifmans has decades of experience helping small to mid-sized businesses get started, grow, and eventually change hands to successors. Being a multi-generational family-run business ourselves, we’re adept at creating succession planning strategies that not only benefit our clients’ companies, but their families as well.

To speak to one of our trusted business advisors, reach out to our team today.

[1] The Motley Fool, “Most Small Business Owners Lack a Succession Plan”,


Q&A with Partner, Jennifer Chasson

Q&A with Partner, Jennifer Chasson

With over 25 years of experience and 100+ successful transactions under her belt, Partner, Jennifer Chasson, brings invaluable expertise to the table. Whether it’s guiding as an advisor, mentor underwriter, ...