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Bill C-208, which received royal assent last summer, amended the Income Tax Act to provide significant tax relief for intergenerational transfers of small businesses.iStock.com

The ongoing pandemic and recent family legal battle over control of Rogers Communications Inc. are serving as wake-up calls for family businesses in Canada to get a succession plan in place.

Almost two-thirds of all private sector firms in Canada are family-owned, according to the latest data from Statistics Canada – generating about half of the nation’s private-sector economic growth.

While most family businesses pale in comparison to the size and scope of the Rogers telecommunications empire, estate planning experts say the decision about whether, or how to pass the business along to the next generation can be just as difficult.

“This is an age-old problem,” says Tom Junkin, senior vice president of personal trust services at Fiduciary Trust Company of Canada in Calgary. “If you’re going to leave the business to one of your children, will the other children be treated fairly? How do you balance things out? Or, if you want to leave the business in the hands of several children, can they work together?”

In light of that challenge during the age of COVID-19, a recent survey from the Business Development Bank of Canada shows a spike in the number of Canadian businesses opting for mergers and acquisitions due to a lack of available talent. At the same time, one in four Canadian business owners say they expect to sell or close their businesses within the next five years.

“The younger generations seem to have different ambitions than the baby boomer generation had. Running the family restaurant may not be the thing that they want to do,” Mr. Junkin says.

“Kids aren’t tied to living in the same place as their parents anymore,” he adds, attributing the trend to family members being more global now.

Creating a trust to maintain control

Families that want to keep their businesses in the family can learn from the court ruling that favoured the Rogers’ family control over the corporation, Mr. Junkin says. He notes that Ted Rogers, company founder and patriarch, was obsessed with family control of the business, which led to the creation of a trust that would control the voting shares.

Mr. Junkin says creating a trust can be much simpler for smaller family businesses without the same governance structure that demands an appointed chairman.

“In a typical family passing of a mom and pop business that’s been successful but isn’t on [the Rogers] scale, the family trust might hold shares, but family members may be the trustees. They just need to agree,” he says.

The key is to ensure the terms of the trust are very clear when it comes to decision-making and that each family member understands their roles.

One common mistake he sees is overlooking the fact that a trustee might be in a conflict of interest situation – especially when it comes to selling the business.

“When you act as the trustee of a trust, you have a duty to act in the best interest of the beneficiaries of the trust,” Mr. Junkin says. “Frequently, in a family situation, a family member is the trustee and they are also one of the beneficiaries of the trust. They have a conflict.”

They can’t just do what they see to be best for themselves, he adds. They have to take into consideration all of the beneficiaries and do what’s best for all of them.

Another common mistake is not allowing surviving family members the flexibility to adjust to changes, Mr. Junkin says. In the case of Rogers, it was the ability to adopt new technology beyond its cable TV roots. For small businesses, it might be the ability to adapt to the realities of the pandemic.

“If the family business was a restaurant or a sports venue and you had tied the trustees’ hands [from making changes], they might not have been able to respond to COVID-19 because nobody saw that coming,” he says.

Levelling the field for buying company shares

The current challenges Canadian business owners face in trying to keep their businesses in the family appear to have gotten the attention of the federal government. Bill C-208, which received royal assent this past summer, amended the Income Tax Act to provide significant tax relief for intergenerational transfers of small businesses.

The bill includes changes aimed at placing the children of business owners on equal footing to non-family members when buying their family businesses.

“Family members [such as children] were placed at a severe disadvantage to buy shares of family businesses from their parents. That has now been fixed,” says Kevin Burkett, portfolio manager at Burkett Asset Management Ltd. in Victoria.

However, after first announcing it would delay implementation of the bill for unknown reasons, the government later affirmed it was indeed law, but said it would introduce legislative amendments to safeguard against any tax avoidance loopholes such as “surplus stripping.” Those are transactions that allow for dividends to be converted to capital gains to lower taxes – without an actual transfer of the business.

Ottawa has yet to introduce those amendments, but Mr. Burkett expects the changes will diminish the tax benefits from the original bill.

“You have the loosest version of that legislation in the act today that is going to be refined and modified to be more restrictive,” he says.

A ‘window of opportunity’

In the meantime, Mr. Burkett says he’s advising clients who own family businesses to create or revise their succession plans before the amendments come into effect.

“Currently, there’s a window of opportunity for business owners to undertake succession planning without these further constraints we expect to be introduced,” he says.

“If you undertook a business succession plan last year prior to the bill’s introduction, you may be in a window of opportunity that you can go back and make necessary adjustments.”

The federal government had originally set Nov. 1 as the date for the amendments to be introduced but the deadline has come and gone.

Mr. Burkett expects them to come any day.