Episode 133: Canadian Business Succession Planning: What You Need To Know!

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Are you a Canadian business owner wondering how to pass your company on to the next generation without sparking a feud or losing its value?

Succession planning isn’t just about choosing who takes over your Canadian business—it’s about ensuring the transition is smooth, fair, and financially sound for everyone involved. Many Canadian business owners overlook the complexities of dividing ownership between children or partners, leading to tension, forced sales, or unexpected tax burdens. 

In this episode, we tackle the emotional and financial challenges of Canadian business succession planning, showing you how to protect both your legacy and family harmony.

Imagine having a structure in place that not only ensures your business continues to thrive but also fairly compensates all your heirs—even if only one of them takes over the reins. We dive into the strategies that make this possible, focusing on how to use corporate-owned whole life insurance policies to create liquidity, reduce tax burdens, and prevent family conflicts.

What you’ll learn: 

• Discover how to fairly distribute business assets among multiple heirs without forcing a sale.
• Learn how corporate-owned whole life insurance can create tax-free payouts that balance inheritance for non-business-involved family members.
• Understand how to leverage your business’s retained earnings to fund succession plans without hurting cash flow.

Ready to secure your business legacy and family’s future? Join our free self-paced masterclass at https://canadianwealthsecrets.com/masterclass to start planning your seamless succession today!

Resources:

• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX. 

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

Are you a business owner facing the challenges of business succession planning and wondering how to secure your family business without sparking conflicts? In this episode, we dive into legacy planning strategies that address family dynamics, using whole life insurance to create tax-efficient solutions for estate planning. Discover how to overcome business sale challenges, fairly distribute assets, and leverage tax strategies for financial growth, wealth creation, and financial independence. Learn how to turn your business into a powerful tool for asset accumulation, business growth, and long-term wealth management through smart investment strategies.

Transcript:

Jon Orr: Let’s talk about business succession planning. And I think when we think about passing the baton or moving from your operating your business, owning your business, and just saying, what am I going to do as I go into retirement and I’m ready to be done with this business? So obviously option one is you could be selling your business. And I think a lot of folks right now are maybe think that that’s an option, but also maybe you just don’t have a business that’s actually saleable.

or, you know, and so sometimes there’s options of like passing the business from one family member to say one of your offspring. And you’re like, hey, we have say a construction business. We have, you know, a family doctor’s office, you know, that’s running and we have say, you know, you are running it and your child is looking to take that on.

eventually, and it’s like we’re thinking about succession planning. We’re going to talk about that here. And how do we structure that succession planning? And how do we do it so that in a way we can use the money inside the business to kind of make sure that there’s fair, equitable amounts to go to, multiple offsprings when we have more than one person that may want to have some sort of benefit to this business. We’re talking about all of that here. today, how do we plan for that? How do we plan the tax around that as well? Let’s do this.

Kyle Pearce: Yeah, so John, as we dig into this episode, I’m on calls with business owners each and every day and we have amazing, amazing conversations. As you already mentioned, a lot of people either feel their business is saleable or if it is saleable, like they’re hoping for the big sale, right? Now, lifetime capital gains exemption comes into the conversation and how do we minimize taxes if we do sell all of these things?

One of the biggest and most challenging parts is even if your business is saleable, it’s hard to find the right person to buy it. And then even if you find the perfect person to buy this business, they don’t want to pay a lot of money for a job. And this is sort of the conversation I have quite a bit with people and it’s why likely that the vast majority of businesses do not ever sell. They usually just wind down.

or they’re passed on to other family members and those family members continue the business along because the reality is is let’s say your business is earning, I don’t know, $500,000 of net operating income every year or, you know, the EBITDA number is this or it’s that and the multiples say this or that. The reality is is that if it requires work and attention, you have to factor into the fact that a lot of people are going like, do I want to pay money?

to buy a business that may not operate very smoothly without me being directly involved or even worse, yes, when the actual seller leaves, will this business sort of crumble from what under me? And therefore, what we often see is that when we go to sell businesses, you might have just like with a property where you agree on a price.

Jon Orr: There’s key man risk.

Kyle Pearce: And then there’s conditions and then you do the inspection on the property. And then what do you find out? You find out there’s a foundation issue. You find out that there’s a leaky roof. You find out that the electrical panel wasn’t updated or that there’s knob and tube. And then what do you do? You beat up on the price. And this happens all the time in businesses. So when you’re thinking about this, oftentimes I always say to business owners, like, how do you take your business? How do you try to make it maybe more passive where you can do less in it or

And in today’s episode, what we’re really going to dig into is how do we take other members of our family, likely your children, to be able to bring them into the business? Now there is no sale that needs to take place, but rather a more of a passing of the torch, which you can look at as a bit of legacy planning as well. Right? Like if you build a solid business and this could be, if you’re a farmer, that’s a great business. Right. Paul, Paul Beneteau. I know you’re listening right now.

in your tractor, know, passing that on to a family member can be really helpful. But we’re going to talk about some of the more challenging pieces because I think the cookie cutter approach, John, is you have three kids. I have two kids. I build a business and both of my kids want to come into the business and they both want to work hard in the business. And for you, your three daughters want to come into the business. Makes it easy, right? You just pass the torch on, you train them, you help them.

Jon Orr: Super easy.

Kyle Pearce: you work together, it’s a family business, everyone’s happy. But guess what is more likely than not to happen is that, you know, and this this goes for Paul, our farming friend, you know, if if my son Landon was Paul’s son, Landon would be taking over the farm because he loves farming. So he would take over the farm. But Talia, my daughter may not be interested in staying involved in that business. So we we get to this legacy challenge where we start thinking about if I

have a business and only one of my children is coming into this business. Like how am I going to work this so that I don’t create a massive family feud with you know this is fair or not fair that person got this and this person didn’t get that and that’s really where thinking about what are those future next steps going to look like and today we’re going to teach you how we can do this actually fairly easily through the use of some interesting strategies and structures.

Jon Orr: Yeah, because you can imagine like, literally, really what you’re doing is if there is disagreement in the operation of the business is when let’s say, you are ready to be finished, and you want to leave it to your heirs or you want to leave it to say Landon, you’re you’re basically saying Landon, here you go, Talia, you know, sorry, but they’re like you have shares maybe in this business. And Landon is going to be

completely operate in the business, but like, how do you divvy up those shares, right? Because it’s like, does Lanyon get less shares because he’s operating and taking income from the business? Does Talia get more or vice versa because Lanyon is doing all the work to generate the income and generate the profits and generate the revenue and keep that retained earnings inside the business. And then, you know, does she get a share? Like it becomes complicated. If you just straight up say, I’m leaving it to both of you, go ahead and work it out. And we can make that easier, and we can make that easier pretty easily, like you just said.

Kyle Pearce: Yeah. And I think one of the things you had mentioned there is like, you you could do something like this. And I’m picturing, you know, our businesses, John, and you know, my kids are an example. Again, my son is, is more, I would say, you know, into what I’m into, you know, he’s like curious about investing. He’s curious about real estate. He’s curious about businesses. And my daughter may turn out to be that way, but you know what? She really likes the idea of education, which is also like me because I was an educator for a very long time. So I love that.

But if Lannan goes into the business and she doesn’t come into the business at some point, it makes it tough because you don’t just want to sort of sprinkle the shares equally because like what if what if Lannan comes into the business and he finds a way to like 10x the growth of the business? Like so he’s like he is like pivotal in trying to grow this business and maybe even cleaning it up. Maybe maybe he’s able to eliminate expenses or he’s able to do something more efficiently. All of those things. It’s like his

50 % of his, you know, the shares that were given to him are, are great. They’re going to go up in value, of course, but then it’s almost like passively she’s going to benefit from all that hard work that he’s done. So oftentimes it makes a whole lot more sense. If someone’s coming into the business, you try to find a way to figure out what seems fair based at that point in time. And then how do we make sure that we can set both up?

and make sure that we pass it on to them. Now, some people are like, I don’t want my kids to be like silver spooners. And I get it. I’m not here to tell you like we wanna make it easy or anything like that. But I do know in my mind that whatever I end up leaving to my children down the road, whether it’s a little or whether it’s a lot, if I leave a little to one and a lot to another, I have a funny feeling.

that that’s not going to sit very well, right? It’s sort of like a bad ending to the story, right? Like you want to make sure that even though, hey, listen, we love our children almost equal, I’m just kidding, we love our kids equally and we wanna make sure that whatever we do choose to do, that they don’t perceive what we’ve done as being advantageous to one over the other because of whatever stories they might be able to tell themselves.

Jon Orr: All right, let’s dig in. Let’s unpack, say, why this is easy and what we’re going to put into place to make it easy.

Kyle Pearce: Yeah, so what we’re going to be doing right now is we’re going to be trying to figure out, what is reasonable? Now, one thing we can do right off the top is making sure that this is a conversation, right? Like, it’s not a good idea for us to have this conversation right now. My kids are 10 and 12. So having this conversation right now might not be a good idea, right? Because they fight over who’s using a tablet in the household, let alone over who’s going to get what. But.

If we fast forward and we’re talking to adult children and you know, one of the adult children or more than one of the adult children are coming into your business, you want to start having that conversation and thinking about like, how are we going to do this so that it’s fair on both ends, not just both in how we’re going to like divide assets up at some point down the road, but how’s it going to be fair to the person that is coming into the business and is going to be spending time energy.

taking risk, right? Like when you’re going into a family business, there’s a risk there. If you know, the other child’s going and becomes, you know, a government employee at T for employee gets the golden handcuffs gets all of that safety net, then you know, like there’s differences there. So really having a conversation, so that it’s open and transparent, and really trying to ask the children, what do they think?

right? Because sometimes you might not even realize this, but they might actually like, you know, the child that’s not coming into the business might actually say like, well, I mean, I’m not even a part of the business. So like, I, you know, I shouldn’t get anything. And like, if you start there, that makes the conversation a whole lot easier. And then you can decide, what does it look like and sound like as we start to quote unquote, you know, split things up down the road, like specifically for the business, you might want to say, you know what I would love if we end up

passing this business on, I would love to down the road be able to grant this other child, the non working child or the non business owner child with something to show that I love and care about them as well, even though that they didn’t choose to join me in the business. And I think one of the easiest ways we can do that one is we could, you know, take other assets in our, in our estate and sort of reserve those for those children. But I think what’s actually easier

is when you have a business is that you actually start structuring policies inside the business because then you’re actually allowing your money to work in two places at once. We’re gonna look at a whole life insurance policy in this particular instance because I’m able to put in some of the money from the business into this policy which is going to get us a death benefit that’s going to be larger than the money I’m putting in.

Jon Orr: whole life insurance policies.

Kyle Pearce: that will pay out tax free down the road and can go to pay out that other child. So if you envision this, if I work in my business and I own my business until I pass on, right, I know that my child working in the business is going to walk away with the business and something I had funded all the way through will actually pay out so that the other child could actually get the cash from

that bucket. But all the meanwhile, the dollars I put in this policy, because we’re going to design it with an early high cash value could actually be leveraged for growth in the business for buying the building in the business for buying other assets in the business or simply bringing on other staff.

Jon Orr: Right, right, because if you flip the other side, if you didn’t have, a whole life policy that continually builds cash value and they can leverage against that cash value to reinvest in the business, like if you didn’t have that and you did need to divvy up the assets upon death or upon being finished with this business, you have to either sell the business just to buy someone out, right? Like that is like a…

a common option that people are forced to do. Because if it’s like, if you don’t have the structure, then when I do pass it on and I don’t, and I do leave it to one or the other, the chances are you leave it to both and one’s like, well I don’t want it, so let’s sell it and then we’ll take the cash even though the one wants to run it. So that’s not a great option for the one that wants to it. Now if nobody wants to run it, that’s a great option, right? But you’re planning for the case that if one did, you have that luxury, that option to do that. It’s like,

It’s the same could be true for, you know, passing your home on to your children when you pass. It’s like, I could say, pass it on and everything. This is likely happens. You all of sudden inherit it. There’s two or more people, children that now own this asset. And they’re like, what do you do? Well, I have a home. You have a home. We don’t need this home, but maybe one lives in it. And it’s like, I want to still live here. So what do we do? You’ve got to buy me out.

Well, I can’t afford to buy you out, forced to sell. But if you had a whole life policy in that situation, on death, that whole life will pay out and then you can have an arrangement that says, look, the assets were here, we’ve got a house, we’ve got this asset over here, let’s balance it out so that the asset at that time of death goes over here to this person and the cash goes over to this person over here. Boom, problem solved. Same true in the business. And the nice thing, because it’s like the other option, right?

is that if you were the operator of this, so it does turn back to the business side and I’m like, okay, I’m a business owner, I don’t have the structure of a whole life policy funded up to say, my parents’ death and then I’ve all of a sudden been handed this business, if you were going to buy them out as a business, you would go and get a loan.

You would say like, look, let me take on some debt here to buy out my siblings so I can continue running this, which is not awesome because all of a sudden now you’re reducing cashflow and that might not be the move you wanna make. Whereas the alternative here is when you start planning for this yourself so that these aren’t issues down the road is that you use your business’s cashflow, you use this, you know, maybe return to,

retained earnings inside your business, and you fund a whole life policy so that when this happens, you you can have this payout go to the right people and the assets can be distributed equally and fairly so that everyone gets what they want. And we can all sit down together and go like, hey, there’s no hard feelings here. Everyone got what they need. And the beautiful part,

and then you hinted at this is using the same dollar twice because I in a business, it feels like, I’m gonna be sinking, you know, this much cash flow into a whole life policy every year. that doesn’t that hurt my business’s amount to grow and invest in like buy equipment or pay payroll. It’s like you’ve got the option to borrow back or leverage against that cash value to keep your business growing.

And, and yeah, you’re gonna say take on some interest in that meantime. But it’s, it’s, it’s worth that say, down the road peace of mind, but also you get to grow two things at once.

Kyle Pearce: Well, and when we structure something like this, so, you know, up to this point, you know, folks who listen to the podcast know that we love permanent insurance inside the corporate structure to buy more assets. We even have a structure we do by leveraging at a personal level so that you can actually get cash flow and reinvest at a personal level and do a Smith maneuver style investment strategy there. Those are great strategies and structures. But if we’re talking specifically about this use,

The idea here is, you know, using what we know, which is we know there would be interest to leverage against the policy, but you have basically one dollar doing two different things at a time and your bucket, your actual insurance buckets going up in value, just like your loan balance is going up in value and you’re still utilizing that dollar somewhere in the business.

So set another way. Let’s pretend I had a dollar that I needed to grow my business some way somehow. If it was going right into the ad revenue, you know, in the ad bucket, like for advertisement or marketing, or if it was going in for, you know, for employees, that same dollar could go to the policy first, which creates a death benefit that is significantly larger, especially in, you know, right away when we start this thing usually starts 10 to 15 times higher than the dollar you put in.

So if you figure that for a second, I put a dollar in, then I get like $15 of death benefits, so to speak. Why this is important is that we focus on the dollar going in, the dollar comes out, we have to pay some interest. But the goal here is that at death, that the death benefit is so much larger than the loan balance that the net amount that remains is still enough

to accomplish what you’re trying to accomplish in the succession plan. And that’s what we calculate for our business owner clients, right? So whether you own a farm, whether you own a consulting business like we have, whether you own a real estate team, a development company, it doesn’t matter what it is. Basically what you have is you’re getting a dollar through there to create free.

legacy planning is what it is. It’s literally free. Like I know there’s a cost of insurance. I know there’s costs to the insurance, you know, inside the structure. I know that there’s interest, but the net benefit is going to be this large tax free death benefit that is going to pay out in the dollar still went to do what it was going to do anyway. So what you get is money coming down the road to that other child that

you never would have had, had you just send the dollar out to an employee through their salary or sent it to the marketing budget or whatever it was that you wanted or needed to do in the meantime. It truly is a fantastic pass through structure for this. Now where it can also be helpful is let’s say, John, like you and I, we’re both business partners. If one of us were to pass and we don’t have a structure in place and insurance in place, it could be term,

But remember, term gets expensive. Like if you and I do this for a long time, which we anticipate we do, and we hope we don’t die for a very long time, eventually the term insurance is going to cost too much to do this. So what eventually will happen is one of the two of us will pass before the other. I don’t know if you know that, John. That’s going to happen one day. One of us is going to go. But when we do, let’s say it’s me. What ends up happening if there is no insurance in place, now

Jon Orr: Hehe. No, we’re going to go on the same day.

Kyle Pearce: John, you get to be business partners with my estate. And that’s problematic because what happens is exactly what you described in the children’s scenario where you go, the one child wants to keep going. The other child just wants the money. Guess what? The same thing happens here with business partners. So if you’re a business partner, you’re like, well, I don’t have kids and it doesn’t really, you know, whatever. If the other business partner doesn’t want to be in business with your estate, then you need to have either

term insurance if it’s only for a short period of time, but permanent insurance if it’s for a longer period of time. And again, it’s free if we do it the way we’re structuring it here, we can fund money from the business into a policy, leverage it back out immediately out. And I say immediately within a couple of weeks and we can put that dollar to use wherever it has to go. And we can feel confident that the death benefit down the road will eventually pay out, pay out our loan.

Because remember, the cash value is going to be much lower than the death benefit. And that net death benefit, whatever is left, is going to come tax free to the corporation and flow out through the capital dividend account so that we can pay out the other family. And I’m telling you right now, my friends, it is one of the only assets. It is the only asset that is worth one thing while you are alive and is worth more money when you pass.

The only thing that comes close is your primary residence. And it’s still, if you sell the primary residence, even though there’s no capital gains tax, there’s still costs, right? There’s realtor fees, you gotta fix it up. You might get beat up on the price, like all of these things. This is the only asset that you know for certain what is going to happen. And it’s only gonna go up, down the road, which puts this as a very conservative leverage strategy. You cannot get above the cash value.

in terms of your loan and therefore it’s really something that is taking free insurance for succession planning. It’s gotta be the number one thing that people should be doing but unfortunately only very few.

Jon Orr: Yeah. So if you’re looking for a seamless succession plan or, you know, thinking about passing on, say, your assets, this tool in this structure gives you that seamless way. You know, like we talked about the liquidity inside the business. You know, you can continue to have liquidity inside the business and you’re not tying up valuable resources by setting up this structure.

You know, you’re passing on, say, those assets without forcing selling, you know, the sale of those assets, which if you don’t have this structure, really you’re asking for that for sale. And then, you know, you’re really helping, say, the next generation with their next step because you’re also providing them, you know, cash upon death, you know, like there are multiple benefits. We’ve talked about using whole life for many different purposes.

and having this particular structure set up for this reason is in a way a no-brainer. you’re operating a business, running a business, we’ll eventually pass that business on. And even if you’re not planning to pass it on and you’re thinking about selling, it’s still a great structure just to give you the flexibility while you’re running your business. We’ve talked about that many times here on the podcast as well as about how useful this asset is in many different ways.

So that’s my big takeaway, Kyle. You got a lot of flexibility and it clears up a lot of pebbles that might be rattling around in your shoe for the future.

Kyle Pearce: I love it. I love it. So friends, if you are an incorporated business owner, you should be heading on over to Canadian wealth secrets.com forward slash masterclass and you can hop into our self-paced masterclass. It’s completely free. You enter your email, you create a password. It’ll remember where you left off so you can come back to it at any point. Head on in there, get your journey started to understanding. That is what we’re here to do. We’re here to give you understanding. And then from there,

you know, the, balls in your court, you get to decide whether you want to optimize or not. And I get it. We’re busy. We’re all business owners. We’re, really busy here. So make sure that you go and at least do the learning so that you can make the decision that’s best for you. And of course, reach out to us anytime. If you’re ready to hop on for a discovery call over at Canadian, while secrets.com forward slash discovery.

Jon Orr: All right, Canadian wealth seekers, seekers, we’ll see you next time.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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