The majority of Canadian family business owners are not fully aware of the domestic and international tax obligations that will arise in their estate on the shares of their business, resulting in many passing on heavy tax burdens to their surviving family members at the time of their death, according to the Canadian results of PwC’s latest Global Family Business Survey.
The study found one of the top three external issues Canadian family business owners felt they would face in the next 12 months is international and domestic tax implications. A staggering 95% of respondents were unaware of the possible international inheritance tax implications, which is concerning given the large number of business owners who are US citizens, or have children living in the US.
Moreover, less than half (45%) of Canadian owners had their business valued domestically within the past 12 months to gauge their exposure to tax, and 41% said they were unaware of capital gains tax implications to their estate in respect to the shares of their business.
“We’ve found a lot of family business owners don’t realize that their tax obligations grow as their business grows,” says Kathy Munro, partner, high net worth practice, PwC. “With some planning, owners can avoid a lot of headaches and costs by putting a plan in place to fund the future tax and preventing it from growing. This will help reduce the likelihood of their family having to sell the business to meet heavy tax obligations.”
Tax liabilities for children in the US
“It’s remarkable how many Canadians with family in the US don’t realize that US estate laws may apply to them,” says Beth Webel, partner, tax services, PwC. “Without proper tax planning in place, such as a family trust, the US government values their estate and slaps a high tax rate on it at the time of their child’s death.”
With only 5% of respondents indicating they were aware of international inheritance tax obligations, many Canadian owners are at risk of leaving behind staggering costs to their families. In December 2010, President Barack Obama temporarily increased the estate tax exemption to $5 million from $1 million and decreased the top estate tax rate to 35% from 55% on the total market value until the end of 2012.
“Given this relief is temporary, Canadian family business owners with children living in the US should take this opportunity to plan for the impact of ever-changing US tax regimes,” adds Webel.
21-year rule for family trusts
As we enter 2011, many Canadian family trusts are approaching their 21st anniversary and are susceptible to high tax bills triggered by the Income Tax Act’s 21-year rule. The rule generally states that after 21 years, if the trust holds property on that date, it is deemed to have disposed of the property at its current market value and the trust must pay taxes on the capital gain.
However, many business owners don’t know that tax will be payable if the trust still holds the common shares of the business on its 21st anniversary. A trust can usually transfer its assets to Canadian resident beneficiaries without triggering the tax on the gain. To take advantage of this, trustees of a trust should begin planning for the transfer at least a year in advance before the deadline hits.
Estate planning reduces burden on family
One way owners can defer tax on death is to plan their will so that the tax is not payable until their surviving spouse passes away. Another is to opt for an estate freeze, which ensures the tax liability for the owner’s shares in the company will not increase after the freeze is in place.
“This is a great time to complete an estate freeze because business valuations are generally low right now,” says Munro. “If the business grows in value and a freeze is not in place, the family will have to come up with the money to pay the increased tax bill owing at death.”
It may be possible to get part of the growth back if the freeze involves a family trust. If children opt out of the business and the business is sold, the owner may be able to keep all or a portion of the proceeds, including the growth that has accrued after the freeze as long as the trustees agree.
The PwC Global Family Business Survey 2010-2011 covers small and mid-sized family companies in 35 countries. In Canada, 100 family business leaders were interviewed from July to August, 2010. For the full report, go to www.pwc.com/ca/familybusiness.
Let’s Talk series: The 21-year rule is taxing on family trusts
Let’s Talk series: Implications US tax laws can have on Canadian estates
Wealth and Tax Matters: A PwC publication that has developed a loyal following of individuals, business owners and tax practitioners looking for ways to preserve wealth and minimize tax liabilities.
About Private Company Services (PCS)
More than 65% of PwC Canada’s clients are private companies, ranging from high net worth individuals to owner-managed family businesses and large, professionally-managed businesses. PwC’s Private Company Services (PCS) group is a dedicated team of business advisors who help private company owners resolve day-to-day business issues and achieve long-term success. PCS offers the perspective of a third party with professional industry knowledge, business consulting, tax and accounting expertise.
For more information about PwC’s Private Company Services, please visit http://www.pwc.com/ca/en/private-company-services/index.jhtml
PwC Firm Description
PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See http://www.pwc.com/ for more information. In Canada, PricewaterhouseCoopers LLP (www.pwc.com/ca) and its related entities have more than 5,300 partners and staff in offices across the country.
“PwC” is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.
Note to Editors: PwC has changed its name from PricewaterhouseCoopers to PwC in the fall of 2010. ‘PwC’ is written in text with a capital ‘P’ and capital ‘C’. Only when you use the PwC logo is the name represented in lower case.
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
For further information:
|Jessica Draker, PwC
Tel: 416 869 8723
email: [email protected]
|David Rowney, PwC
Tel: 416 365 8858
email: [email protected]