Easy Exit: Business Succession in a Nutshell

Getting into the world of business is a meticulous task, but so is getting out of it Whether you’ve just hit the ground running on your business or if you’ve been at it for a long time, there is no better time to plan your exit strategy than now.  Although the process may seem taxing, we’ve answered a few questions you may have about planning your business succession strategy. 

1. Who do I talk to about this?  

Deciding on how to go about the transition requires careful planning, and you need to consult no less than people who are well equipped to help you out. First, talk to your key advisors such as bankers and financial partners. You could also use some advice from your accountant and lawyers. If your company has an advisory board, better consult them as well. You may also hire a specialist or a consultant, depending on how you choose to go about your business succession plan. 

2. Who should I choose as a successor? 

There are several ways to go about this, and your decision will ultimately be your personal choice. You may pass on your business to a family member or to your top executives or managers. You may also choose to sell it to an outsider. Whichever path you choose, you can also decide on how much you want to be involved in the business after you pass it on. That is, if you want to be involved at all. 

3. When should I inform my successor about my plans? 

While a surprise inheritance may be heartwarming, it’s not the same with inheriting a business. Getting a successor ready—whether it’s a family member or someone from your company—requires careful planning and training. As soon as you’ve chosen a successor, better get started on getting them ready for the big shoes they’re about to fill. This includes helping them equip themselves with the necessary skills, knowledge and qualifications necessary to run your business. 

4. How do I plan the transition itself? 

The transition will be twofold—transferring ownership and handing over the business itself. As far as transferring ownership is concerned, you need to consider legal and financial details. These include valuation, financing and taxation. You also need to consider if you wish to keep your current legal structure (corporation, sole prop, partnership, etc.) or if you (or your successor) would like to change it.  You also need to plan how to prepare various stakeholders in the business for the transition. How will you prepare your customers, clients, and employees? What would be their level of involvement? Make sure that you put different strategies in place in order to ensure transparency and consistency in communicating changes in your business, especially something as drastic as succession. 

5. Now that I have a business succession plan ready, can I go back to business as usual? 

Not really. Your business and your customers’ needs may change over time. This means that you need to keep reviewing and adjusting your plan as your business also evolves. 

Sole Proprietorship or Incorporation

 Should I incorporate? That really depends on your situation and needs. Before making a decision, please consider the advantages and disadvantages of a sole proprietorship versus corporation.

Setup Costs:  
Sole Proprietor: Setting up your business is pretty simple and costs are low.  

Corporations: High Setup Costs

Administrative Costs:
Sole Proprietor: Costs are usually less than that of Corporation 

Corporation: More administrative work is required including annual reports with the corporate registry and corporate tax returns.

Business Losses:  
Sole Proprietor: If your business loses money, the losses can be written off against your other income 

Corporation: Business losses can’t be written off against other income of the shareholders.  

Control:
Sole Proprietor: As a proprietor, you are in control of all the decision making and receiving all of the profit 

Corporation: An incorporation can be a complicated business structure, ensure you set up classes of shares and decide who are your shareholders and how much control they have.

Liability:
Sole Proprietor: Unlimited liability, you are liable for all your debts and liabilities of your business. If your business is sued, all the business and personal assets are at risk 

Corporation: Limited Liability, this means the liability of the shareholders are usually limited to the amount that they have invested in their shares in the corporation. The personal assets of the shareholders are protected from lawsuits against the corporation.

Taxes: 

Sole Proprietor: Depending on the province or territory, the lowest personal income tax rate paid by a proprietorship ranges from 19% to 26% and this increases with income to the highest marginal tax rate ranging from 39% to 54.8%. If your business is profitable, you will usually be paying higher taxes than if you were incorporated.  

Corporation: A Canadian Controlled Private Corporation pays a lower tax rate on the first $500,000 of active business income because of the small business deduction, depending on the province or territory the tax rate ranges from 11% to 29%. This tax advantage is mainly a deferral of taxes until the profits are paid to the shareholder. If all the profits are paid out to the shareholder, it will be taxed entirely as income of the shareholder.  

Sounds complicated doesn’t it?  

Selling the business 

Sole Proprietors: When you sell your business, you can sell assets and goodwill, any gains will be included in your personal tax return. There is no capital gains exemption.  

Corporation: On the sale of shares of a qualifying small business corporation, there’s a lifetime capital gains exemption that is currently $813,600. There are a lot of differences between a sole proprietor and corporation, it’s important to get your business set up properly, please seek professional advice.  

Ontario 2017 Budget

Ontario Finance Minister Charles Sousa delivered the province’s 2017 budget on April 27, 2017. The province’s 2017 budget is balanced, with projected balanced budgets for 2018 and 2019.

Corporate Income Tax Measures

No changes to corporate taxes were announced.

Corporate Income Tax Rates- As of January 1, 2017
Ontario Combined Federal & Ont
General 11.5% 26.5%
M&P 10.0% 25.0%
Small Business* 4.5% 15.0%
*on first $500,000 of active business income
  • Review of tax planning strategies involving private corporations: Ontario intends to review tax planning strategies involving private corporations
    • Income splitting with family members
    • Passive investment portfolio inside a corporation
    • Converting regular business income to capital gains
  • Employer Health Tax Exemption: Changes to prevent the multiplication of Employer Health Tax exemption for CCPCs.
  • Small Business Deduction limit: Parallel changes made to the federal small business deduction by the same amount the federal business limit is reduced

Personal Income Tax Measures

No changes to personal taxes were announced.

Personal Combined Federal/Provincial Top Marginal Rates
2017
Interest and regular income 53.53%
Capital gains 26.76%
Eligible dividends 39.34%
Non-eligible dividends 45.30%
  • Caregiver Tax Credit: This new non-refundable 5.05% credit is available in respect of relatives who are infirm dependents, including adult children of the claimant or of the claimant’s spouse or common‐law partner
  • Ontario Seniors’ Public Transit Credit: Ontario Seniors’ Public Transit Tax Credit for all Ontarians aged 65 or older.
  • Property and land tax measures: Adjust the rules on land transfer tax including preventing qualifying purchasers from claiming their spouse’s interest for the first‐time homebuyers refund if the spouse is not a Canadian citizen or permanent resident of Canada.

Please don’t hesitate to contact us if you have any questions.

The Importance of a Buy Sell Agreement

Having a buy sell agreement is important business partners. A buy-sell agreement should outline the contingencies for different outcomes, trigger events and  be put in place to protect you. Often Buy-sell arrangements are also insured.

What are the trigger events for a buy-sell agreement?

  • Disability
  • Conflict
  • Debt
  • Retirement
  • Death

Contact us for a complimentary review.

Federal Budget 2017: Business

Finance Minister Bill Morneau delivered the government’s 2017 federal budget on March 22, 2017. The budget expects a deficit of $23 billion for fiscal 2016-2017 and forecasts a deficit of $28.5 billion for 2017-2018. Find out what this means for businesses.

Small Business

  • No changes to income tax rates
  • No changes to capital gains inclusion rate

Tax Planning using private companies

While no specific measures are mentioned, the government will review the use of tax planning strategies involving private corporations “that inappropriately reduce personal taxes of high-income earners.” including:

  • Income Splitting: Reducing taxes by income splitting with family members who are subject to lower personal tax rates.
  • Regular income to Capital Gains: Converting income to capital gains (instead of income being taxed as dividends)
  • Passive income inside Corporation: Since corporate income tax rates are generally lower than personal tax rates, this strategy can facilitate the accumulation of earnings by owners of private corporations.

For Professionals

The government eliminated a tax deferral opportunity for certain professionals. Accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors will no longer be able to elect to exclude the value of work in progress in computing their income. This will be phased-in over two taxation years, starting with taxation years that begin after this budget.

Please don’t hesitate to contact us if you have any questions.

Retirement and Debt

With 70 percent of Canadians aged 55 to 64 still carrying debt, here are some strategies to ask you advisor about that may help you make the most of your retirement goals

The Benefits of Consolidation

When putting together your financial plan, there is no question about the benefits of consolidation. The importance of having a financial plan is the ability to coordinate, consolidate and be able to implement your plan to achieve your goals.

6 Steps to Retirement Success

Retirement planning can be challenging, we’ve outlined what we feel are 6 steps to retirement success. Talk to us about a complimentary comprehensive review of your retirement plan.

Vitality

In the 1940’s, insurance companies realized women live longer than men, hence the introduction of gender specific rates. In the 1980’s, the same industry found that non-smokers lived longer than smokers, therefore the introduction of smoker rates. Now for the first time in Canada a policyholder holds the power in their hands (and on their wrist) to control their insurance premiums. Sabre Strategic Partners is proud to partner with Manulife in their very exciting launch of Manulife Vitality. See the video or connect with our team for more.