July 15, 2021

4 succession planning tips for small-business owners

By Susan Yellin and Sun Life Staff

Thinking about handing over the reins to your business? These tips will help you create an effective and tax-efficient succession plan.

For most Canadians, the last year has been a challenge. If you’re a Canadian small-business owner, it’s probably been even more challenging. 

Kudos to you if you’ve managed to survive and even thrive. But maybe the stress of keeping afloat during the pandemic has made you think about retiring. Because you’re in charge, you may have greater flexibility around when and how that will happen. But is now a good time to sell your business and retire?

Chris Poole, CFP®, CLU®, CHS™ is a Toronto-based Sun Life Financial Certified Financial Planner. His advisor practice focuses on helping business owners understand their own situations better. 

“The pandemic has backed each of us into our own corner. And everyone has had to figure their own way out,” Poole says. “Some Clients have sold, some have expanded and some have paused otherwise slam-dunk deals because of COVID.” 

“Something unexpected can always spook a business sale from happening. Business owners need to be ready for their selling opportunity whenever it presents itself,” he adds. “These deals don’t always circle back around. If your business is ready to sell, and you’re personally ready to let it go, why wait?” When the right deal comes along, you’ll want to know you’re in a position to close the deal quickly.

How can you get your business to ready to sell? 

These 4 tips can help:

  1. Think before selling or transferring.
  2. Make a financial plan.
  3. Consider a tax strategy.
  4. Get customized solutions.

Tip #1: Think before selling or transferring your business to family 

Consider whether you want to retire completely or work part-time. Do you want to sell your business outside the family or give it to an adult child?  After you sell, what will you do with your time?

“It’s not usually a snap-your-fingers approach,” says Poole. “The best approach is to open a conversation early with your financial advisor. And keep your accountant close by for support and reference.” 

A qualified advisor can help you better understand your succession planning options. Especially given your own unique business and family situation. If you’re considering selling to a family member or key employee, make sure to include them in your discussions. 

“When succession planning with Clients, I often mediate between family members and business partners,” says Poole. “There can be many emotions and expectations when selling a business or giving shares to an adult child. There are also many layers of opportunity and risk that can be easily overlooked. We help clients express their expectations while highlighting the moving parts for everyone involved.” 

good advisor can show you several big-picture succession planning paths going forward. This will help you better understand the possible short- and long-term implications of each route. And help you chart the path that’s right for you.  That lets you consider what you like and don’t like about each route. 

“It’s easy to get excited about the numbers and forget to talk about the details. Like what will happen to your employees, your customers and your life’s work after you sell? But when you’re selling your business, thinking about all this can also be very important,” adds Poole. 

Tip #2: Make a financial plan

A solid financial plan is the cornerstone of a successful succession process. Do you intend to sell your business to someone outside the family? If so, clean up the balance sheet (called doing a “corporate purification”) and get a business valuation. 

“When tax planning, it’s important to weigh the merits of an asset sale vs. a sale of shares. This is a tool for negotiation between the buyer and seller,” says Poole. “Often, for tax and liability purposes, the seller wants to sell shares, but the buyer wants to buy assets. So, negotiations on the price and on the type of sale can result in different fiscal outcomes for you. Only a sale of shares can give you access to the lifetime capital gains exemption.”

What’s the lifetime capital gains exemption (LCGE)?  

A “capital gain” occurs when you sell an asset (e.g. shares in a company) for more than you paid. As such, it’s taxable. But the government exempts the capital gains tax on shares of a “qualified small business corporation.” This is true up to a certain limit. The limit moves each year along with the Consumer Price Index. This way, the government encourages Canadians to grow the economy by starting their own businesses. 

In 2021, the lifetime exemption is $892,218 per person. So, when you sell shares of your qualifying business, you can lower the taxes payable at the time of sale. Depending on your province, the exemption could save you up to $198,000 to $240,000 per individual, says Poole. 

“Suppose you and your spouse are equal shareholders in a company that you started from scratch. And that company is now worth $2 million. Because of the LCGE, you could save more than $400,000 in taxes payable when you sell. Again, your business must be a qualified small business corporation for its sale to qualify your shares for the LCGE,” he notes.  

What’s a qualified small business corporation (QSBC)?  

The government has rules about what kind of companies can let you take advantage of the LCGE. Here are some important points to consider when qualifying:

Rule Detail
Resident status At least 50% of the shareholders must be Canadian residents.
Personal share ownership The operating company’s shares must be owned personally and not by another corporation such as a holding company.*  

(*A holding company may qualify under certain circumstances. If you own your business through a holding company it’s best to discuss this issue with your tax advisor).
Use of assets

When you sell, 90% or more of the fair market value of your company’s assets must be mainly used in an active business in Canada. No more than 10% of the fair market value of your company’s assets can be in passive assets, including: 

  • cash in the bank, 
  • non-registered investments, 
  • real estate not actively used in the business, or 
  • certain types of life insurance policies with cash surrender values. 
Active business assets, 24 months before sale Throughout the 24 months before you sell, at least 50% of the fair market value of your company’s assets must have been mainly used in an active business in Canada.
Owning shares, 24 months before sale Throughout the 24 months before you sell, shareholders must generally have owned any shares they want to claim the LCGE for when they sell. This rule prevents shareholders with no LCGE room from avoiding the tax by selling to people who have room.

“The key is the time you need to prepare the corporation properly for sale,” says Poole. “To qualify your company’s shares for the LCGE going forward usually needs two years of planning. At least. Longer is even better. We’ve seen businesses owners nearly get burned because they simply had too much cash in the bank. They didn’t realize it posed a problem for their QSBC eligibility. The Canada Revenue Agency can consider unused business cash as a passive asset. And put your business offside under the rules.” 

Here are 3 possibilities that may help maintain QSBC eligibility:

  1. Pay a dividend to your shareholders. 
  2. Transfer certain assets into a well-built holding corporation. 
  3. Reinvest the excess amount in tools and machinery for the business.

Either way, getting your business shares onside under the rules can sometimes be as easy as transferring funds. But it’s the 24-month waiting time required afterwards that can cause all the headaches.

Tip #3: Consider a tax strategy when selling your business

There are many different ways to minimize leverage a tax-preferred strategy. Naturally, you want to realize the full value from the sale of your business, says Poole. But you probably don’t want to impoverish your children when it’s time to buy you out. Under current tax rules, it’s sometimes more tax efficient to sell to an outsider rather than your own children. So, your plans may depend first on understanding how much you truly need. Then second, on minimizing not only your own tax bill, but also your children’s short- and long-term tax costs.

In some circumstances, you can make a gift of business shares to your children. You can do this by using a tactic known as an estate freeze, and an Income Tax Act rollover. It’s best to follow this strategy with professional tax advice from an accountant. 

This approach lets you do two things: 

  • You can transfer the expected future growth of your business to your children. 
  • And you can keep all previously built-up business value in your own hands. 

This way, you can take back preferred shares in the business. This has two important benefits. 

  • The preferred share dividends can contribute to your retirement income. 
  • By giving the preferred shares enhanced voting rights, you can keep some control over your business. 

When you perform an estate or share freeze, you can also “crystallize” your LCGE. That means activating the total exemption now. Then deferring further capital gains taxes until later – when you die. This approach lets you calculate the expected future tax bill related to your shares. With that information, you can prepare in advance with additional layers of financial planning, says Poole. 

You can then draft your estate plan to gift the frozen shares and other assets. You can do this by drawing up a corporate as well as a personal will. The corporate version will indicate who inherits your remaining business shares when you die. You can then use corporate cash flow to buy a corporately owned insurance policy on your life now. You likely want a policy with enough money to pay the anticipated capital gains tax liability when you die. This policy could also pay enough to cover any other projected business needs at that time. 

Most, if not all, of the death benefit from a corporate-owned life insurance policy can be posted to the corporation’s Capital Dividend Account (CDA). The corporation can then pay a tax-free capital dividend to its surviving shareholders. To the extent that some of the death benefit can’t be posted to the corporation’s CDA it can be paid to the surviving shareholders as a taxable dividend. While those shareholders will have to include the taxable dividend in income, the dividend tax credit can help reduce their final tax bill. Through the CDA mechanism, a corporation can pay most, if not all, of the life insurance death benefit tax-free to the surviving shareholders.

This is a smart way to help pay the taxes that your personal estate will eventually owe. You could also take out a policy on your life, personally. And have the payout go directly to your estate to help offset your taxes. However, a corporate-owned policy might be more cost-effective. Why? Life insurance premiums are not deductible for you or your corporation. However, your corporation likely pays taxes at a lower rate than you, so it won’t have to generate as much income after tax to pay the premiums as you would have to. At your death, it will receive the death benefit tax-free, the same as your personal beneficiary would, and can flow it out completely or mostly tax-free to your personal beneficiary.

There are a few noteworthy considerations to this approach, overall. Your advisor can help you sort out the best options for your own situation.

Tip #4: Get customized solutions from professionals

“There are other tax-preferred strategies when selling a business,” says Patrick Fitzgerald, CFP®, RHU, an Ottawa-based Sun Life advisor. To help find the best tax strategy for you, work with a: 

  • financial advisor, 
  • accountant and 
  • lawyer. 

Together you can decide whom, if anyone, can benefit from the lifetime capital gains exemption. Since every business is different, each situation will need its own solution. Consider your business’ corporate structure and whether there are any family trusts. And make sure wills and powers of attorney are up to date. 

 “A number of resources are open to entrepreneurs,” Fitzgerald says. “Discuss what you could include in your succession plan.”

If you’re considering transferring your business to only one of your children, tell the others. Let them know you’ve made plans to be equitable with all of them.* 

(*Equitable doesn’t mean “equal,” but rather “fair.”)

A sound and open discussion with your Sun Life Financial advisor will benefit everyone. And, an advisor can show you several succession planning options. This will help you understand the implications of each choice and help you make the right decisions.



This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Unless specifically stated, the values and rates presented are not guaranteed. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.

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