Black Entrepreneur's Journal - Issue 3

Succession Planning: WHAT? WHY? HOW?

Lynne Fisher, National Team Leader, SMART Services

Michelle D. Coleman, CPA, CA, TEP, CEA Partner, Taxation Services

Darrell Huber, CPA, CA Partner, Assurance Services

Business owners are a special breed. As their businesses grow, it’s not uncommon for them to feel proud and somewhat responsible for taking care of their employees, and their employees’ families. And while pride in the business is common, the true impact of a successful business can often be key to creating wealth and prosperity for generations to come. This could be through opportunities for quality higher education, apprenticeships, investments, and travel, as well as funding the founder’s eventual retirement. But much like every valuable asset, the business (and family) needs a version of “insurance” to protect it.

While sometimes a difficult topic for business owners to address, considering what would happen if you, or your company leaders suddenly were not there, is part of being a good “steward”. This can also be a gift to your family and future generations to come in the event of an unplanned situation.

Consider our client, Anna. Anna was the founder of a successful business which she had started to support herself and her children. In the original creation of the company, she named herself as the holder of all voting common shares and issued non-voting shares to her children. Over the years she had invested thousands of hours to grow the business. All of her savings had been poured into the business and each year, profits were reinvested to feed the growing business. She was proud of what she had created and dreamed of the day that her sons and daughter would continue her legacy. She paid herself a fair salary, but hadn’t worried about setting up a retirement plan, or a succession plan yet. After all, she was only 50, a long way from retirement, and according to her advisors, the business was valuable and growing in value every year. It would be her retirement plan, and not only that, would provide wealth, value, and options to her children and grandchildren that she never had – it would create generational wealth.

In January of 2017, Anna decided to check off a box on her “bucket list” and travel to Belize. While there, she experienced a serious accident, and was rushed to hospital. Despite extreme lifesaving measures, Anna passed away from her injuries.

Back home, while her family and employees were dealing with the incredible shock and grief of their loss, business calls began and employees were uncertain of who to direct them to, and who should be in charge.

As Anna was the only director, and cheques required two signatures, the controller panicked about the upcoming payroll and contacted the bank. Immediately the company banker became concerned and called Anna’s eldest child. Now that Anna was gone (and, as sole owner, was the guarantor on the company’s line of credit), how were things being managed? Then, as word began to spread, the business’ customers began to call their sales representatives, asking what was happening. But no one knew.... Anna’s children were overwhelmed.... Anna’s will had been drafted when her children were young and her business still a dream, so it did not include clauses to allow her Executors to easily implement planning opportunities. As she was the sole voting shareholder of her corporation, she did not set up shareholder’s agreement specifying how the shares should be valued.

In addition to the running of a business itself, there were taxes to consider. When a person passes away, they are deemed to dispose of all assets they hold at fair market value, which includes the shares of a private corporation such as Anna’s. If there is a surviving spouse, the assets may transfer at cost, but in Anna’s situation this planning opportunity was not available.

Her Estate was responsible for the taxes on the capital gain arising from the increase in value from the nominal amount she originally paid for her shares when she set up the company and the current two-million-dollar valuation. To make matters worse, without proper planning there was a possibility of double taxation on the value of the corporation as in order to withdraw funds from the corporation, dividends must be paid to the shareholders. Anna’s Executors had to make planning decisions within the first taxation year of Anna’s Estate in order to alleviate one layer of tax. Without proper planning the taxes paid on the value of the corporation were as high as 66%.

So, what could have been done differently? A Business Emergency Plan, LifeBookTM, and the ongoing advice of her advisors to help her in preparing a plan in the event of an unforeseen absence could have helped alleviated some of the stress that Anna’s family and employees dealt with in the wake of her death and would have provided them with a path forward to keep the business running.

MNP offers services to our clients that allows for peace of mind. For example, we work with clients to develop an Emergency Plan for the business that outlines what steps can be taken to keep the business running smoothly when the managing shareholder/director is unavailable. We also work directly with business owners and can provide a LifebookTM report, (produced through ongoing consulting with our succession and tax experts) that helps ensure your Will and other documents will allow the fulfillment of your goals and desired legacy and ensures your personal and business documents are readily accessible for when you, your business, and family, need them most.

Your advisors are critical team members when it comes to preparing your business, family, and employees in the event of an unforeseen absence and/or death. For example, your advisor can help you in:

• Calculating your anticipated taxes on death

• Identifying options to decrease taxes such as the use of donations to receive donation credits

• Exploring using life insurance as a source of funds for either business operations or to pay taxes

• Calculating if there is sufficient liquidity to pay the taxes if insurance is not available

• Creating an Emergency Plan which sets out all of the steps and information necessary to ensure that your business continues to operate in your absence.

All of these considerations, and more, should be explored as part of your planning. We encourage our clients to regularly meet with their advisors and encourage them to hold a group meeting with all of their advisors to

ensure every member is aware of the intricacies of their plan and are all working together (legal, accounting, succession, financial planning) to provide guidance with the same end goal in mind, while allowing for flexibility as life and business situations change.

We also recommend that documents including your Will, Power of Attorney, and Health Directive are reviewed when there are significant life changes (such as marriage, the birth of a child, the entry of the next generation into the family business, etc.), or every five years at a minimum. Documents should be reviewed in concert to confirm they not only allow the personal representatives flexibility in implementing tax planning, but to ensure they agree with each other.

In addition to the above, we recommended having conversations with your intended personal representatives and family members and gathering their input. Anna had thought her children would take over her corporation, but while her sons were active in the business, her daughter wasn’t interested in running it. How would Anna’s Estate be divided to be fair to both her daughter who lived in the United States, and her sons who intended to run the day-to-day operations of the corporation moving forward? Was there an impact to the corporation if there was a US shareholder? Was there additional work required by the Executors? These are all issues that could have all been addressed in advance through proper planning.

If Anna had taken proactive steps to protect her business, employees, and family in the event of her unforeseen absence, it would have given those closest to her a plan to move forward with and given them the space and time needed to process their grief.