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Transferring Your Business to the Next Generation

So, there are some common mistakes that people often make when they are transferring a business to the next generation.

The biggest mistake is that business owners will set the value of their business at a dollar and sell it for a nominal value to the next generation because they essentially want to gift it to the next generation. The problem with this is that the Canada Revenue Agency (CRA) will take a look at that transaction and will assess the value of the shares at the actual fair market value of the shares.
So, if the Canada Revenue Agency discovers that the actual fair market value of your business is a million dollars, then they will adjust the selling point of those shares from a dollar to a million dollars, which means that the seller will be hit with the capital gains tax on that amount.

What does this mean for the Purchaser?

But meanwhile, the purchaser, the value of their shares will not move from a dollar. So, they’ll still have shares with an adjusted cost base of $1, which means that down the line, when they sell those shares, they’re going to pay a huge capital gain tax on that as well. So, whatever the difference is between a dollar and the value of the sale of the business in the future.

So, if it’s worth $2 million, at that point, they’ll pay a capital gains tax of just under $2 million, which means that at the end of the day, $3 million in capital gains taxes has been paid, which is double taxation and a huge waste of resources.

So, don’t fall into that trap.

So what is the proper way of transferring your business to the next generation?

The use of an estate freeze and a family trust. An estate freeze permits you to transfer your business from yourself to the next generation, without incurring any capital gains taxes and allows you to retain control over the business, and also allows you to maintain a steady stream of income that’s going to serve you throughout retirement.

Step 1: Create a Family Trust

So the first step is to create a family trust, also known as a discretionary family trust. A family trust is a legal document that will hold shares in your operating company for the benefit of your chosen beneficiaries. So your loved ones, the next generation, or their holding companies, however, you choose to set it up. You or another person of your choosing will act as a trustee and will control the trust. So this way, instead of transferring your shares to the next generation, so that your 20-year-old son or daughter can take those shares, cash it out and then buy that Lambo, you are able to maintain control over the business while allowing them to receive proceeds from the business as they become more and more involved and take on more responsibility in running the family business.

Step 2: Cancel your Common Shares

The second step is that you are going to cancel your existing common shares in the company and exchange them through what’s called a Section 86 rollover for preferred shares. These preferred shares are going to freeze the current value of your business so that you retain the full value of the business and can redeem those shares over time so that you can continue to receive an income from your business.

Finally, you’re going to issue new common shares, which are going to be subscribed for by the family trust that you’ve just set up. So, the family trust can receive dividends from the operating company and then distribute those dividends to the beneficiaries according to your wishes.

The estate freeze family trust is a cost-effective and efficient way for you to transfer the wealth of your business from this generation to the next generation while allowing you to continue to retain control and autonomy over your business.

So, if you have any other questions about the family trust or estate freeze planning, please don’t hesitate to reach out, drop a comment below, and as always, thanks for watching, and please hit subscribe.

What is a trademark?

A trademark is defined as letters, words, sounds, or designs that are used to distinguish one company’s goods and/or services from another. Over time a trademark evolves from representing goods and services to also representing the reputation of the company.

Types of trademarks

Ordinary trademark: includes words, designs, tastes, textures, moving images, mode of packaging, holograms, sounds, scents, 3D shapes, colours, or a combination of these are used to differentiate your goods and/or services from other companies.

Certification mark: can be licensed to multiple people or companies. They are used for the purpose of demonstrating that certain goods/services meet a defined standard.

What isn’t a trademark?

It is important to make sure that you don’t confuse other forms of intellectual property.

• Patents: are for new and useful inventions or for improvements to existing inventions
• Copyright: is used to provide protection for literary, artistic, dramatic, or musical works
• Industrial designs: are visual features of shape, configuration, pattern, or ornament, applied to a finished product
• Integrated circuit topographies: 3D configurations of electronic circuits embedded in products or layout designs

Trade name v. trademark

You should also be aware of the difference between a trade name and a trademark. A trade name is the name of your company and it can be registered provincially or federally. It is possible for a trade name to be registered as a trademark but only it is used to identify goods/services that your company provides.

Registered v. unregistered trademarks

In order to register your trademark it must be entered onto the Register of Trademarks. Once registered, you have the exclusive right to use the trademark for 10 years and it can be renewed every 10 years. It must be noted that if you do not use the trademark for an extended period of time, your registration can be taken off the Register. 

However, it is not mandatory to register your trademark. It is possible that you may acquire rights to use that trademark under the common law, depending on how long you have previously used it. Not registering your trademark can result in expensive legal battles in the case that there is a dispute regarding who has the right to use it.

What to consider before filing an application

When you are deciding to file for a trademark, you should make note of certain things that you cannot trademark, like: names/surnames, descriptive words about your goods/service, place of origin of your goods/service, or words in other languages.

It is also a good idea to search the Canadian Trademarks Database to ensure there is no possibility for your trademark to get confused with someone else’s. This is not a required step, but it could save you time and money down the line if your trademark is similar to an existing one.

In addition to searching trademarks, it is recommended that you search trade names. As mentioned above, they can be used as trademarks and may not be registered.

If you are considering putting together an application for a trademark, you should speak with a legal professional who can help with the application process and ensure your paperwork is in order. If you have any questions you can leave a comment below or call to book a consultation.