Nearly eight in 10 (79%) Canadian family business leaders are speeding up their succession plans due to growing pressures, according to a KPMG Canada survey.
The survey findings reflect responses from 285 family business leaders who were included in KPMG’s larger business survey of 700 small and medium-sized Canadian companies, conducted from Aug. 30 to Sept. 25.
These leaders cited several pressures that were accelerating their succession plans, including the uncertain economic landscape, disruptive technologies, and climate and tax changes. More than seven in 10 (73%) respondents expected to transition their businesses within the next three to five years.
Families making the transition decision need to examine “what should happen to the business, next generation readiness, and how best to preserve family wealth and legacy,” said Yannick Archambault, partner and national leader with KPMG Family Office, in a release.
Regarding tax changes, KPMG alluded to legislative amendments aimed at addressing surplus stripping — the conversion of dividends to capital gains, without a genuine business transfer between family members. The measures, scheduled to apply to transfers on or after Jan. 1, 2024, introduce new requirements for intergenerational business transfers.
To avoid these changes, 70% of survey respondents said they were accelerating their succession plans or putting them into effect before Jan. 1.
“Depending on a number of factors, family business owners who are contemplating passing on the business to their adult children or grandchildren may opt to do so before new tax rules take effect, but that window is closing very quickly,” said Chris Gandhu, partner with KPMG Family Office Leader for Calgary, in the release.
“Decisions of this magnitude are about more than tax relief strategies, but advisors should be having discussions with their clients now to inform them about their options. Whether these family business leaders choose to sell to a third party or pass the torch to the next generation, there are significant business and tax implications to consider at this time.”
The KPMG release also noted that the 2023 federal budget introduced tax rules to facilitate the creation of employee ownership trusts (EOTs), which allow groups of employees to purchase a business over time.
In the fall economic statement on Tuesday, the government proposed exempting from taxation the first $10 million in capital gains realized on the sale of a business to an EOT. The incentive would be in effect for the 2024, 2025 and 2026 tax years.
The temporary measure “should be welcome news,” the KPMG release said, given that in the survey 72% of respondents said EOTs with a capital-gains exemption for owners could have a positive impact on the Canadian economy, fuelling innovation and growth.
Inadequate succession and transition strategies are the single biggest factors, along with financial factors, in the failure of family businesses, Archambault said in the release. “Getting it right is critical,” he said.
In the survey, 71% of respondents had a detailed succession process or plan; 19% had a plan but it wasn’t detailed; and 6% didn’t have a plan at all, saying it was understood who in the family would take over the business.