Bill highlights succession planning issues facing businesses
Although a private member’s bill aimed at making the intergenerational transfer of companies less restrictive is a step in the right direction, it will likely be one of the tools that small business owners can consider, rather than a “silver bullet,” Calgary business lawyer Cameron MacCarthy tells The Lawyer’s Daily.
MacCarthy, partner with Shea Nerland Law, says he is not surprised that Bill C-274 has been referred to a standing committee rather than being passed. The bill, tabled by Quebec MP Guy Caron, aims to amend the Income Tax Act to help business owners avoid a higher tax when selling their companies to their children, the article notes.
“I think that like many private member's bills the objective of the bill is to flag an issue and raise awareness for it," explains MacCarthy.
"Usually it’s kind of a catalyst to try and find a solution to a problem that to many seems to be very real.”
At the moment, when a business owner sells their company to an non-arm’s length party, such as their children, the proceeds from the sale are treated as a dividend. On the other hand, as the article notes, the sale of the business outside of the family receives favorable capital gains treatment. As such, from a tax perspective, it can be more advantageous to sell a family business to outsiders.
MacCarthy tells The Lawyer’s Daily that the bill highlights a conversation that he and his Shea Nerland associate, Rami Pandher, have been having with their clients for years — the fact that succession planning is complex and should not be left until the last minute.
“You’ve spent the better part of your adult life building a business and pouring everything into it and you want to retire at some point. How are you going to monetize all the equity that you built up in that business?” said MacCarthy.
“Quite frankly, a lot of people do not have succession plans, or even know how to start thinking about succession plans. Typically, they come to us and say, ‘well I want to retire next year.’ And we say ‘well, who is going to buy the business?’” he adds.
In terms of small businesses in the service, manufacturing and technology industries, in MacCarthy’s experience a family member may not always be the best choice for succession. But for family-owned and operated farms and fisheries, for example, a relative may be the ideal option, as the nature of those businesses usually requires more family involvement, he explains.
Ultimately, MacCarthy believes that while the proposed changes is a signal that parliament is paying attention to this important issue, it is not likely to result in a “silver bullet” to make the intergenerational transfer of company any easier.
“Business succession is a highly complex issue and it’s not just solved with a tax limit,” he explains.
“And that’s why I kind of look at this as adding to the arsenal of what small business owners can consider when they’re looking at succession opportunities. Certainly knowing that you’re not going to have a huge, negative tax burden by selling to a son or a daughter. … I don’t think that the tax amendment is necessarily a complete solution to what is I think a truly real and material issue.”
MacCarthy is optimistic that dialogue in parliament surrounding the bill may bring up additional issues for taxpayers and their advisers, such as the possibility of abusive planning and unclear policies leading to disputes with the Canadian Revenue Agency (CRA.)
“Making a simple change like this inevitably will open the door for people to try and take advantage of that change, so a lot of commentators will say ‘but the general anti-avoidance rule will solve that problem,’” he explains, noting that the issue is whether any amendment is implemented in a way to make clear its intention since the government often relies on the general anti-avoidance rule in order to restrict what they perceive as abusive planning when the policy behind an amendment is unclear.
Ultimately, MacCarthy tells The Lawyer’s Daily that the bill is a step in the right direction and he hopes small business owners aren’t discouraged by the fact that it has now gone back to a committee.
As he explains, “there are other options that are currently available and this isn’t a situation where they’re kind of sitting, hands tied, waiting for the government to do something."