Mother and daughter

Tax plans for owner-managed business

  • Joseph Pagliaroli, Author |

As a tax partner at KPMG Enterprise, I focus on owner-managed businesses, helping them transition to the next generation as tax-efficiently as possible. In Canada right now, with many company founders preparing to leave the business, there's a significant amount of wealth being transferred over to the next generation.

Often, this transition isn't fully thought through. That's where we can help. We can set up tax plans so that they're efficient at the time of the transfer while ensuring the founder maintains full control. We also structure the tax situation to minimize the tax liability of the founder's estate, ensuring there's sufficient funds left to pay the taxes, minimizing the burden left behind on the family members. That's a big component of what I do.

We also help when the next generation isn't able to take on the business. Sometimes they aren't at all interested in what their parents did. They've set their own career path. Or perhaps the children don't have the capability or the technical grasp of what their parents did to run the business, and the parents don't feel comfortable passing on the business to their children.

In these cases, we handle transfers of ownership away from the family. Often the founder will exit the business gradually by divesting their interest to a private equity shop, or to a competitor. The founder might still be employed by the company, helping it maintain its reputational brand, or there might be an outright sale. At that point, we assist with divestiture planning, working together with our corporate finance group to promote the company on the open market and find a buyer.

When negotiating transitions within the family, maintaining family harmony is critical. We always tell our clients, if multiple family members are shareholders, they need some sort of shareholders' agreement. Working with their lawyer, we assist with the main provisions that need to be in that agreement. We determine what mechanisms should be in place to deal with any disagreements that could result in buying out another shareholder, and what the tax consequences would be. We also put in contractual arrangements in case a shareholder passes away.

I urge all my clients to set up an estate plan. They often haven't considered this, and they often don't even have a will. I try to get them thinking about what will happen when they pass away: what taxes will be owed, how they'll be paid, and by whom. They also need to think about who will receive the property.

Once the estate plan is in place, it's important to let the family know the details. This can help prevent surprise or disagreements when the property is divided up. Making sure the family communicates, and that they understand what's going to happen when the parents are gone, helps keep the family dynamics under control.

Finally, it's important to seek legal advice when experiencing milestone events such as marriage and divorce. Whatever life cycle our clients and their companies are at, we ensure their tax situation is always optimal.