Findings from Creating a lasting legacy, the 2012/13 Canadian supplement to the Global Family Business Survey show that succession, specifically the tax implications of transitioning ownership of a business, is keeping family business leaders up at night. What’s more, many of this year’s respondents believe they are at a disadvantage when it comes to tax, precisely because they are a family business. That is not surprising, says Jason Safar, Canadian Private Company Services tax leader, PwC, who works exclusively with family business leaders. “For business families in particular, it’s not just about the individual. An owner’s personal wealth and the wealth of his or her family are directly tied to the business and so tax becomes a much more complex issue.”
But does that perception of disadvantage reflect the reality? In another study recently produced by PwC*, 185 countries were examined along three metrics of taxation—the tax rate, the number of hours it takes to comply with tax regulations and the number of tax payments per year—all in terms of how small to mid-size private companies are impacted. Canada ranked eighth out of the 185 countries in terms of ease of taxation.
The reality is, there are several tax advantages to being a family business and a privately-owned Canadian company versus a foreign-controlled multinational. For example, the Income Tax Act gives Canadian private companies a preferential tax rate on the first $500,000 of taxable income via the small business deduction. And the Scientific Research & Experimental Development tax credits are also more favourable to homegrown business. Perhaps most important for family business owners, a set of tax advantageous rules has been established to facilitate passing the family business from one generation to the next. So where is this perception coming from? Often, family businesses simply aren’t aware of these tax advantages or don’t structure their tax strategy in a way that will allow them to capitalize on the opportunities available. The key is to plan.
Steps to creating an effective tax strategy:
“One of the key differentiators—and competitive advantages—family business owners have is their focus on the big picture,” says Safar. “They are doing what they need to do to be profitable not just today but 5, 10, 15 years out. Applying that same approach to tax planning will ensure you are taking advantage of all the options available to you as a family business and give you control over the process.”
*PwC produced a study in conjunction with the World Bank called Paying Taxes 2013: The Global Picture
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