Early tax planning key for business succession as Canada's population ages

Early succession planning is critical for Canadian owner-managers to seamlessly transfer their business to the next generation while minimizing tax risks—particularly as the country’s population rapidly ages.

Nearly one-fifth (18.9 per cent) of Canada’s population was aged 65 or older as of July 1, 2023; this figure is expected to rise to between 21.4 per cent and 23.4 per cent by 2030, according to Statistics Canada.

As more business owners become part of this demographic, Canada can expect to see an increase in ownership transitions among closely held companies to younger generations or arm's-length parties.

It can be a challenging or uncomfortable conversation, but owners who are thinking about their company’s future should start evaluating their succession options early. Generally, delaying succession planning until a share transfer—or planning only in anticipation of death—leaves fewer options and often results in higher taxes.

What succession strategy is best for your business?

Identifying the optimal succession plan depends on numerous factors, including:

• Tax attributes of the corporation and of the shares held by owners
• Available and required capital
• Family dynamics and relationships
• Goals of the owners and the successors
• The successors’ current involvement in the business
• Risk tolerance and flexibility to adapt to changing circumstances

Here is a look at some succession planning strategies that address these considerations:

Planning issues to watch for 

Potential tax savings could be lost if key planning considerations are overlooked. Some potential risks include: 

Tax on split income (TOSI)

TOSI rules discourage taxpayers from shifting income to family members in a lower tax bracket—such as paying dividends to a minor—by taxing affected income at the highest marginal tax rate.

Changes to shareholding structures may trigger the application of these rules, but there are many exceptions—including when business owners are aged 65 or older.

Loans

A common tool in succession planning, loans allow money to shift between various entities and accommodate circumstances where capital may not be immediately available to complete a transaction.

However, loans are subject to certain taxation rules that could affect planning. Interest, and by extension taxable interest income, may be imputed on low- or zero-interest loans. Shareholder loan rules also require individuals and entities who receive a loan due to a shareholder-company relationship to include the principal of the loan in their income for tax purposes, unless an exception applies.

Non-resident successor

Complexities could arise if an individual or entity that is not a Canadian resident gets involved in succession planning. Certain tax planning options may not be available as a result, and there may be additional tax requirements—like withholding tax—and reporting obligations.