Owners unknowingly leave high tax burdens on families upon death: PwC
TORONTO, Feb. 16 /CNW/ - 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
"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
"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
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.
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