How to find and prepare the right successor in the next generation for your Family Business

How to find and prepare the right successor in the next generation for your Family Business

How do you find and prepare the right successor in the next generation for your Family Business? You choose a successor leader of the family who has earned the trust and respect of the other family members.

Why do Family Businesses fail from one generation to the next?

At my first family office meeting with the P. Family, I asked them what they thought were the main reasons for a business family to fail from one generation to the next? I explained that the two most common reasons are: lack of communication and unprepared heirs.  

Lack of Communication

Mrs. P. and the adult children agreed that better communication was a top family priority. Mr. P., a renowned speaker and writer, was taken aback by this revelation, and was determined to address it. I then recommended that the family have a weekly meeting on Zoom from wherever they were located at the agreed-upon time of Wednesday’s at 12:00 noon. The weekly agenda would have two topics: the family and the business.

The next day Mrs. P. wrote to me with many thanks for creating a framework for the family to have better communication.

Sometimes the simplest suggestion can resonate and have the most lasting impact.

Unprepared Successor and Heirs

At the second meeting of the P. Family, we considered the issue of how to prepare the successor and the heirs. For a family to preserve its wealth it must, like any business enterprise, create wealth, particularly in the form of the family’s human and intellectual capital, while exercising excellence in its stewardship of the financial capital.

We discussed how human capital can be enhanced through the following practices: 

  • Dignity of Meaningful Work: this is important for an individual’s sense of self-worth; and the family can assist each family member in finding the work that most enhances that person’s pursuit of happiness. All such work is of equal value to the family and to the growth or the family’s human capital, regardless of its financial reward.
  • Highest Educational Standard: such a goal ensures that every family member understands, at the highest educational standard possible for that individual, the workings of the family governance system and his/her role in it.
  • Without intellectual capital and with all the money in the world, undereducated family members will not make enough good decisions over a long period of time to outnumber their bad decisions.  There is a need to provide a forum and support for educating family members in their own personal development, but also to be responsible owners of family assets and possibly the family enterprise. Intellectual skills are necessary, such as how to read a balance sheet, understand key elements of the legal structure and relevant agreements governing the family assets and family enterprise, how to be an effective board member, and how to ask the right questions of executives running the enterprise.

What makes a succesfull business family?

We also discussed the characteristics of successful business families:

  • Meaningful connection to each other;
  • Meaningful connection to the business;
  • Functioning governance structure;
  • Trusted and respected family leader; and
  • Appropriate engagement with family, shareholders and business.  

As the meetings with the P. Family continued, it became clear that Mr. P. was handing over more and more responsibility to his daughter, M., to run the family business, as his health was deteriorating.  Unfortunately, this was a case of a father’s unconditional love blinding him to his daughter’s lack of education, inadequate preparation and incompetence.  As M. took over more of the business, she terminated the senior advisors that Mr. P. had hired in favour of her own peers, whom she could control.

In her pursuit of the wrong God in furtherance of ambition, without the counterbalance of prioritizing the management of threats and the protection of assets, M. put the family’s business and legacy at risk.

Eventually, the family business failed.  

Fortunately, Mr. P. had set aside surplus investments which now provided the family with the wherewithal to persevere without the family business.

Lessons to take away: 

  • sometimes the simplest solution, such as a weekly family Zoom meeting, can resonate and have lasting impact; 
  • choose a successor leader of the family who has earned the trust and respect of the other family members; and
  • a critical issue for families to consider is the extent to which members of the younger generation are meant to be owners of assets or custodians/stewards of assets for future generations.  In the P. Family, M. styled herself the owner and not the custodian/steward, which proved to be the undoing of the family business.

 

As a tax lawyer at Gardiner Roberts LLP and a partner in the complementary family office of Omega WealthGuard Inc., I have helped successful families remove obstacles to preserving wealth and harmony.  I work with the family to identify how to leave a legacy and preserve values for succeeding generations.  With my background in law, I start with asset protection, tax and estate planning.  However, over the years these services have expanded to include leadership development, strategic planning, organizational development, effective decision making, governance structures, family dynamics, business savvy, experiential education, coaching and so on.

Gardiner Roberts LLP & Omega WealthGuard Family Office
+1-416 6251 832
https://www.omegawealthguard.com
[email protected]

Lorne Saltman

Lorne Saltman

Gardiner Roberts

grllp.com

What tax matters are important when emigrating?

What tax matters are important when emigrating?

What tax matters are important when emigrating from Canada?

When you take up residence in another country, have you obtained advice on tax matters both on departure and on any risks of having continuing connections with your former residence?

While it is possible with proper planning to minimize tax on expatriation to another country, it is equally important to reduce exposure to the risk of continued residence-based taxation in the former country.

When my client Michael told me he was planning to leave Canada and needed tax advice, I prepared to give him some advice he was not expecting. He had heard from some friends that they had emigrated to The Bahamas because there is no income or estate tax there. But Michael’s wife was pushing him to go to England where their teenage children might get a superior education.

He was surprised to find out that on leaving Canada he will be deemed to have disposed of all of his assets, subject to certain exceptions, for proceeds of disposition equal to the then fair market value of each such asset, resulting in capital gains tax (at a rate of 25%, effectively).  Some have called this Canadian rule, “Golden handcuffs”. Several other countries have adopted similar departure taxes, including Spain and South Africa.

When Michael explained that he wanted to support the arts from his new home, I suggested a plan that could accomplish his goal and save tax on departure. I suggested we register a private charitable foundation with the Canada Revenue Agency, which he could run from his new home.

The object of this charity to support the arts was one that the CRA has found acceptable in the past. He could then make a tax-free gift of his publicly-listed securities to this foundation, which would reduce the value of his assets on departure. He would also be entitled to a donation tax credit based on the value of the donated securities, which in turn could be used to shelter taxable income for his year of departure.

While he liked the idea of going to The Bahamas and not to have to worry about paying local income tax or estate tax, I explained that he should not forget about his connections with Canada and the special risks associated with those continuing connections. When Michael said that he liked the summers in Canada and so would retain his cottage here, I cautioned him about his Canadian tax exposure.

The Income Tax Act (Canada) (the “ITA”) would deem Michael to be a resident of Canada if he sojourned in Canada for more than 183 days in any year, even though he may have acquired a residence for tax purposes elsewhere.

Under Canada’s tax treaties with ninety-four other jurisdictions, including the U.K. but not with The Bahamas, [ As Canada considers The Bahamas to be a tax haven, it does not have a double tax treaty with that country, but it does have a Tax Information Agreement that provides for tax information to be exchanged between The Bahamas and Canada.

In addition, the Agreement provides that a Canadian multinational with a subsidiary that carries on an active business, such as a hotel, in The Bahamas, is able to repatriate profits by way of tax-free dividends.

However, the Agreement does not provide Bahamian individuals with relief in the area of exposure to Canadian tax residence. ] there is a set of “tie-breaker rules” to determine if a person is a dual-resident, and which jurisdiction has the right to tax him/her on worldwide income on the basis of his/her having the closer connection with that jurisdiction.

In addition, I explained that the courts have broadly interpreted the rule in the ITA that a reference to a person resident in Canada includes a person who was at the relevant time ordinarily resident in Canada. In other words, the question is where the person in his/her settled routine of life regularly, normally or customarily lives.

One must consider the degree to which the person in mind and fact settles into, maintains, or centralizes his/her ordinary mode of living, with its accessories in social relations, interests and conveniences, at or in the place in question.

I told Michael that if he keeps the cottage in Canada and habitually returns to it from a non-treaty jurisdiction like The Bahamas, he is likely to be found to be a resident of Canada. In contrast, if he lives in England and maintains his “centre of vital interests” there and not in Canada, he is likely not to be found to be a resident of Canada under the Canada-U.K. Income Tax Convention.

In the end, Michael moved to England; we set up the foundation; and he uses the liquid funds in the charity to support the arts in Canada and elsewhere. https://www.grllp.com

RFF Lawyers is a tax law “boutique” firm in Portugal, specialized in tax and business law, both for corporate and institutional entities and individual clients. Rogério and his team at RFF Lawyers seek to foster lasting relationships - of confidence and trust - and to provide the proper legal solutions meeting the specific needs of each client, whether individual or corporate. 

Rogério Fernandes Ferreira

Rogério Fernandes Ferreira

RFF Lawyers

rfflawyers.com

Investing in U.S. Real Estate from A Canadian Perspective

Investing in U.S. Real Estate from A Canadian Perspective

If you are investing in U.S. real estate, you can avoid common pitfalls and take full advantage of opportunities by using appropriate structures to preserve your assets and do so on a tax-effective basis.

Investing in U.S. Real Estate and holding them

I recently advised my client, David, about an opportunity he was offered to invest in a U.S. real estate project.  We started by identifying the structuring objectives:

  • minimize U.S. taxation on income and exit gains
  • avoid exposure to U.S. estate or gift tax
  • avoid U.S. tax reporting obligations
  • ensure Canadian tax credit for U.S. taxes paid

Cross-border tax concerns arise on a current basis if the investment in U.S. real estate produces income or capital gain, and there is the possibility of having both U.S. and Canadian tax apply to the same realization.

In addition, if a Canadian resident dies owning property with a U.S. situs in law, such as real estate located in the United States, he/she may be subject to U.S. estate tax at an escalating scale up to a maximum rate of 40%.

Under the Internal Revenue Code, a gift of U.S. situs property may also give rise to gift tax on a similar scale to the estate tax.

While a Canadian resident faces tax on death as well under the ITA, this is a tax on capital gains deemed to have been realized on the assets of the deceased at the time of death, not a tax on the gross value of an estate’s assets at the time of death. In addition, the maximum tax rate in Ontario on such capital gains is, effectively, about 26.5%.

Under the Canada/U.S. Tax Convention for the Avoidance of Double Taxation (the “U.S. Treaty”), there is some relief from double taxation at death resulting from the foregoing taxes, but the relief is inadequate.  Moreover, there is no relief under the U.S. Treaty for any U.S. gift tax that may become payable by a Canadian resident transferring U.S. situs property.

Accordingly, we started with considering U.S. taxation of income from U.S. real estate: investment income subject to withholding tax, and business income subject to ordinary tax rates.  Capital gains are taxed in the U.S. when a Canadian investor realizes a capital gain on the disposition of U.S. real estate, including equity ownership in a U.S. real property holding company or partnership.

Typically instead of using an LP, a U.S. investor in real estate will use an LLC, or limited liability company.  It is treated as a flow-through entity (like a partnership) for tax purposes to a U.S. taxpayer, but at the same time provides limited liability protection without restrictions on participating in the management and control found with an LP.

For Canadian investors, a direct investment in an American LLC can be problematic.  First, it can give rise to double taxation, because the CRA does not treat the LLC as a flow-through entity but as a separate foreign corporation, which in certain circumstances of earning passive investment income can result in current Canadian tax on so-called foreign accrual property income, or “FAPI”, imposed on the Canadian investor.

In addition, the Canadian member of an LLC will be exposed to U.S. estate and gift tax in relation to the value of the membership interest.

By structuring the investment in the LLC through a regular U.S. taxable corporation, those exposures are minimized.  Moreover, if the LLC (or U.S. corporation) is considered to be carrying on an active real estate business (e.g. having more than 5 employees engaged full-time in the conduct of the U.S. business), the Canadian investor could invest in the U.S. corporation through a Canadian holding company to minimize both Canadian and U.S. tax on repatriated profits.

investing in u.s. real estate

Lorne Saltman

Gardiner Roberts LLP
+1-41-6625-1832
www.grllp.com
[email protected]

Protecting real estate after death through a Canadian NPO

Protecting real estate after death through a Canadian NPO

Protecting real estate after death through a Canadian NPO

If you are considering acquiring a domestic vacation property, you can avoid common pitfalls and take full advantage of opportunities by using appropriate structures to preserve your assets and do so on a tax-effective basis.

Structuring Real Estate

My client, David, was concerned that with the growth in the future value of summer vacation properties near Toronto, Canada, there will also come increased tax liability associated with such a vacation property. David asked how to structure the ownership of this property, so that the transfer ultimately to his heirs could be done with minimal cost in terms of tax and administration.

I explained that on the death of each Canadian resident, he or she is deemed for income tax purposes to have disposed of all property, including ones such as this Canadian vacation property, and to have realized proceeds of disposition equal to the then fair market value of such property.  Similar rules apply in respect of a gift of the property during his lifetime.  In other words, capital gains tax may become payable on such transfers.

Furthermore, when his Will would be probated, the value of this Canadian vacation property will be taken into account in calculation of the applicable probate fee (1.5% of the value of the assets covered by the Will).  Moreover, the filed Will would become a public document.

If he were to use a trust to hold this Canadian vacation property, the trust would be deemed to have disposed of this property every 21 years for proceeds of disposition equal to the then fair market value.

Canadian NPO

Instead, I recommended that David establish a non-share capital, not-for-profit corporation (“NPO”).  David and his spouse would run the NPO like a recreational club.  To be cautious the NPO would lease the vacation property to David and his spouse, and they would pay a minimum rental at least equal to the operating expenses.

As the NPO will continue after they die, there will be no capital gains tax on either death (the life interests merely expire).  In addition, there would be no probating of Wills necessary.  Their children as the successor directors and members would continue to run the NPO.

If the NPO were to sell the property, there would be no capital gains tax payable.  The proceeds could be invested in another property to be used as a club and the tax deferral could continue.

If the proceeds were distributed, say, on a winding-up of the NPO, the member(s) would be considered to have realized capital gains on any increase in value above the initial cost when the property was purchased. https://www.grllp.com/

Lorne Saltman

Lorne Saltman

Gardiner Roberts

Acquiring a Vacation Home in the US

Acquiring a Vacation Home in the US

If you are acquiring a vacation home in the USA, you can avoid common pitfalls and take full advantage of opportunities by using appropriate structures to preserve your assets and do so on a tax-effective basis.

Vacation home in USA

My client, David, recently told me that as a so-called “snowbird” going to Florida each winter, he wanted to acquire a vacation property there. I advised him that a Canadian resident who dies owning property with a U.S. situs in law, such as the Florida Property which is real estate located in the United States, may be subject to U.S. estate tax at an escalating scale up to a maximum rate of 40%.

Accordingly, unless proper tax planning is undertaken by a Canadian resident investing in U.S. situs property, there can be an onerous tax burden on death or from making a gift.

Canadian Discretionary Family Trust

Instead, I suggested he consider establishing a Canadian Discretionary Family Trust instead of a US Family Trust to hold the American vacation property.  Thus, on the death of either David or his spouse, there will be no exposure to U.S. estate tax.  In addition, if the Trust sells the property for a capital gain, the Trust is viewed as a flow-through vehicle for U.S. tax purposes, and so the long-term capital gains rate of about 23% would apply to the individual Canadian beneficiaries.  Because the top rate in Ontario for capital gains is about 26.5% and a foreign tax credit will be available to offset Canadian tax, only 3.5% tax would be payable in Canada.

investing in u.s. real estate

Lorne Saltman

Gardiner Roberts LLP
+1-41-6625-1832
www.grllp.com
[email protected]