- New tax rules adding to radically shifting landscape, pushing nearly three-quarters to transition their businesses in the next three to five years -

Nearly eight in 10 (79 per cent) Canadian family business leaders are speeding up their transition and leadership succession plans due to growing pressures both outside and inside the family, finds a new KPMG in Canada survey.

These leaders cited a constantly changing business and economic landscape, disruptive technologies, climate realities and tax changes, as well as complex family dynamics as the drivers of their plans to accelerate the handover of their companies.

The findings reflect the views of 285 family business leaders included in the KPMG Private Enterprise™ Business Survey of 700 small- and medium-sized businesses (SMBs). The survey reaffirmed a significant demographic shift now underway in Canada, with more than seven in 10 (73 per cent) expecting to transition to new leadership within three to five years.

"As a generation of family business founders and owners decide whether or not to step down as CEO, difficult decisions about what should happen to the business, next generation readiness, and how best to preserve family wealth and legacy all need to be carefully examined," says Yannick Archambault, Partner, National Leader, KPMG Family Office. "Successful families that take a multidisciplinary approach to addressing emerging challenges and have been proactively preparing the business, their family and their successors will be in a better position to choose the optimal path forward."

Survey findings

• 79 per cent are accelerating succession plans for multiple reasons
• 73 per cent expect to transition the business to new leadership within the next three to five years
• Seven in 10 (71 per cent) have a detailed succession planning process and/or formal plan to ensure the continuity of their business; 19 per cent have a plan but it's not detailed; six per cent don't have a plan but it's understood who in the family will take over the business

Tax changes intensify sense of urgency

While leaders are dealing with an uncertain economy, emerging technologies and sustainability pressures, new tax legislation has established a timeline for many to transfer the business within the family. These changes, which were introduced in the 2023 federal budget, affect the tax treatment of business transfers to a family member − particularly the ability for owners to claim a lifetime capital gains exemption. Notably, 70 per cent say they are accelerating their succession plans or putting them into effect before January 1, 2024, to avoid the incoming tax changes. The new rules set out more stringent requirements than existing rules for the intergenerational transfer of shares of a family-owned corporation.

"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," says Chris Gandhu, Partner, KPMG Family Office Leader for Calgary. "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."

To sell or not to sell: all options on the table

Sixty-nine per cent say they intend to sell to another company or third-party within the next three to five years (28 per cent agree strongly, 41 per cent agree somewhat).

As Mr. Archambault acknowledges, "it's not always feasible to pass the family business down to the next generation, and some may not wish to follow in their parent's footsteps. An option to selling the business to a third-party and relinquishing control may be to hire a non-family member as CEO and maintain family ownership. When making these decisions, it's critical to consider the effects on family members, family legacy and reputation and ensure the future CEO or buyer is a good steward of the business."

Additional findings:

• 79 per cent say they dream of transitioning the business to a younger generation within the family
• 71 per cent feel the next generation isn't ready for the responsibilities of leading the business forward
• 72 per cent feel employee ownership trusts (EOTs) with a capital-gains exemption for owners could have a positive impact on Canada's economy, spurring innovation and growth

"There is often a perception gap between the next generation and current family business leaders, who may feel the 'Next Gen' is either not interested or not ready to take on the responsibilities of leading the business," says Mr. Gandhu. "Just as large corporations have established processes to prepare their future leaders for increasingly senior roles, family businesses leaders need to have candid conversations with the younger generation early on to gauge their interest and then create a leadership development program that provides the coaching, training and experience needed for a successful transition."

New capital gains tax exemption on employee ownership trusts

The 2023 federal budget released draft legislation to create a specific tax regime for employee ownership trusts (EOTs) as a tool to facilitate employee ownership in Canada. The government's latest Economic Update announced plans to introduce a temporary tax exemption (2024-2026 tax years) that would apply on the first $10 million in capital gains realized on the sale of a business to an EOT under certain conditions. Some leaders support employee ownership as an alternative or complimentary approach to business ownership and succession. This measure should be welcome news, since seven in 10 (72 per cent) feel EOTs with a capital-gains exemption for owners could have a positive impact on the Canadian economy, fueling innovation and growth.

Some family business owners plan to close up shop and walk away within the next three to five years, (with 28 per cent strongly agreeing), since they can't find people willing to take over. "Along with financial factors, inadequate succession and transition strategies are the single biggest factors in the failure of family businesses," Mr. Archambault adds. "Getting it right is critical."

SOURCE: KPMG LLP