Don’t Let The Tax Tail Wag The Dog

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by Lisa Collins, QC, TEP | Mar 17, 2015

I haven’t met a business owner that didn’t want to save taxes. And I am a firm believer in arranging business affairs to pay as little tax as possible (legitimately). However, sometimes people take great pains to save a dollar in tax, without realizing that what they are doing may cause them a lot more pain down the line. I refer to it as letting the “tax tail wag the dog”.

When we let the desire to save taxes drive the agenda for business succession, things can go off track badly. It can result in a narrow focus when what is really needed is a whole picture view of a family’s business, financial situation and family circumstances.

The problem is that when some people think of the succession of a business or a family’s wealth, they think it is primarily an exercise in saving taxes. In fact, it is primarily an exercise in transitioning the management and operation, and perhaps eventually, the ownership of a business to the next generation. We just want to be sure that we are minimizing taxes in the process.

There are many legal and other aspects that are an important part of any succession plan and they need to be integrated. This is why it is critical that a business family’s accountant, lawyer and financial planner be on the same page and work together. The problem is that often they are working in silos and don’t have the whole picture to operate from. Having the whole picture is left to the business owner who is then expected to know what needs to be done and direct the various players. Many business owners feel ill equipped to play that role and frankly, don’t want it.

A few years ago I began working with business owners, Peter and Irene, who had already restructured their business at the recommendation of their accountant. The business ownership structure had been changed (without triggering tax) and a family trust had been set up. The problem was Peter and Irene did not understand what the new structure was to accomplish and in fact were not even making use of it. Moreover, their estate plan did not reflect the change in ownership structure. Their financial advisor was not even aware of the restructuring and the impact that it could have on Peter and Irene’s personal financial plan. They were also really struggling with transitioning the operation and management of the business to their son and daughter. It was a classic case of a tax saving strategy setting the agenda for the family and losing site of what else was important.

I worked with Peter and Irene and their accountant, lawyer and financial advisor to develop a game plan that was refocused on what they wanted to accomplish. It had a number of recommendations relating to tweaking their ownership structure, winding up the family trust, putting in place a new estate plan and helping with the transition of management and operations to their son and daughter.

In the end Peter and Irene were happy to be saving some tax, but they came to realize that it was one of the by-products of a successful transition of their business to the next generation. It was no longer a case of the tax tail wagging the dog. The family dog was happy too!