The business transfer process can often pose some major intergenerational challenges that can compromise its success.
Generally, transferors and transferees are not from the same generation and have different values and ways of doing things. Being aware of these differences and setting up communication and governance mechanisms can help bridge the intergenerational gap.
This is a key issue, studies have shown that there is a wide gap between people born before 1965 (traditionalists and baby-boomers, who are on the verge of disposing of their business) and those born after (generation X and Y).
Different values
Traditionalists and baby-boomers tend to have a Cartesian management style and consider work as a principal value. Gen Xers and Gen Yers have a more human management style and attach more importance to the work-personal life balance.
For them, work is but one of many components, it’s a source of knowledge. The value of work is not measured in how many hours they put in, as is the case of the previous generation, but as a function of their contribution to the business.
Additionally, authority doesn’t impress Gen Xers and Gen Yers as it did their parents. They’ve been used team work from a young age and prefer group management and decision-making. It’s been noted that, on average, three transferees take over from a single transferor.
The previous generations, on the other hand, tend to work in isolation, more likely to call on external professionals for advice.
The gap is so wide that, for the first time in Québec, the generational influence is stronger than the heredity influence, that is, that Gen Xers and Gen Yers are more influenced by their own generation’s values and behaviours than those of their parents.
This, understandably, leads to a certain degree of disappointment with entrepreneur parents who’d like their children to be more like they are. It can also lead to considerable misunderstanding on both sides and create tension.
A three-step approach
Preparing a succession plan is a key step to anticipate ways of smoothing the generational differences and ensuring that transferors and transferees have a common vision.
A succession plan, which should cover a span of at least five years to completion, helps prepare the transfer and covers various transfer issues: financial, tax, legal, strategic and generational, among others.
Our experts work in intervention groups composed of a wide range of specialists who can analyze these issues and recommend solutions as part of an integrated approach.
We propose a three-step approach for the generational issues:
- Make the transferor, transferee(s) and employees aware of generational differences during more focussed presentations and meetings.
- Pinpoint the risks of intergenerational differences and the more sensitive areas to focus on, in terms of management, finance, human resources, business development and company activities.
- Determine the required actions to bridge the generational gaps.
For example, consider a baby-boomer transferor who’s always decided everything on his own and doesn’t discuss things with those around him. We’ll help him set up communication and governance practices (by creating a management committee and a board of directors, among others) that are better suited to the values and ways of doing things of the Gen Xers and Gen Yers who’ll be taking over.
We’ll also outline everyone’s responsibilities so that the transferor, transferees and key employees can each have their say and play a role in line with their skills. If necessary, we’ll set up development plans to better equip the transferees, which helps to reassure the transferor.
Here’s an important hint: as a business owner in the process of a transfer, focus on “how’s it going?” rather than “how much is it worth?”, in other words, on personal well-being and engagement rather than the financial considerations.
Reassuring the transferor
Right from the start, our team ensures that it talks with the transferor to pinpoint the main concerns regarding the transfer process and proposes a number of solutions in the transfer plan. Generally, the best way to reassure the transferor is to use an approach where responsibilities and ownership are gradually transferred.
These are the five areas where transferors generally show the greatest resistance:
- Entrepreneurial mourning, the feeling of losing everything and getting old. With a progressive transfer, the owner will continue to feel useful and the transition to retirement will be easier.
- Their uncertainty about the successors’ abilities. One solution is to evaluate the successors’ abilities and prepare a development plan to offset any entrepreneurial weaknesses.
- Their uncertainty about the project’s financial feasibility. Will the successors be able to ensure the business’s profitability and assume new debt to pay the transferor?
- Concerns about the successors’ borrowing capacity. Will they be able to get the necessary financing for the transaction?
- Tax considerations regarding the ownership transfer. Will the transferor be entitled to the capital gain exemption?
If you’re planning to transfer your business, our experts can help.
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How the push for digital tax consensus could upend transfer pricing as we know it.
After a slow and tentative start, the OECD’s push for a solution on how to allocate and tax the profits from digital business is gathering momentum.
Following consultations, initial proposals from earlier in the year have now been crystallised into a twin-pillar framework and series of detailed options within it (referred to in this article as the ‘OECD programme of work’).
The G20 has endorsed The Organisation for Economic Co-operation and Development’s (OECD’S) roadmap for resolving the ‘tax challenges arising from the digitalisation of the economy’ (BEPS Action Plan One) and is committed to working toward a consensus-based long-term solution by the end of 2020.
While global consensus is clearly preferable to today’s fragmented approach to taxing digitally-derived revenue, the OECD’s search for a solution could end up heightening the risk of double taxation for all businesses rather than just Big Tech giants.
And under the reallocation of profits and minimum tax proposals that have emerged following a recent round of consultations, the arm’s length principle that has governed transfer pricing for decades could become obsolete, with all the upheaval that would result.
So, what does the OECD have in mind and what are the implications? Will the proposals survive the political realities of sovereign state control over tax policy, and the entrenched national interests that go with it?
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Updated on October 11, 2023
The franchise business model is very popular with Quebec entrepreneurs. The world of franchises does have special tax characteristics however.
This article presents a number of aspects that franchisors and franchisees should know to maximize their tax situation.
Tax treatment of advertising funds
For a new entrepreneur, the franchise business model offers the possibility of joining a network and brand that the general public is already familiar with. As a result, some advertising is often carried out for the franchisees by a central service coordinated by the franchisor.
Generally, the franchisees pay an annual contribution that is goes into an advertising fund. This fund is then used by cover advertising activities on behalf of the group.
Is the franchisee’s contribution to the advertising fund a deductible expense? What about the franchisor who receives the contribution?
The franchise agreement often provides information to better understand the franchisee’s and franchisor’s control of the advertising fund. The Canada Revenue Agency expressed its opinion in a technical interpretation (9819787 Redevances à recevoir, Fonds de publicité) to clarify the appropriate tax treatment for franchisors and franchisees.
The franchisor has no control over the contributions
When neither the franchisor nor the franchisee controls the advertising fund, contributions to the advertising fund are deductible expenses for the franchisees, since they are incurred to earn income. The expense is therefore deductible in the year it is paid or payable.
In the franchisor’s case, if the franchisor made a contribution to the advertising fund, the contribution is deductible, as it is for the franchisee. Since control of the advertising fund is not among the franchisor’s various obligations towards the franchisees, it can be concluded that, even though the franchisor receives the contributions, the franchisor is independent of the fund and the expense is deductible.
For the same reason, the contributions will not be included in the franchisor’s income, since they are not owned by the franchisor. It should be noted that, from an accounting stand point, transactions affecting the advertising fund are generally recognized exclusively on the balance sheet and have no impact on earnings.
The franchisor has control over the contributions
If, based on the facts of the franchise agreement, the franchisor controls the advertising fund, the franchisees’ contributions must be included in the franchisor’s income. Accordingly, if there is a surplus at year-end for future services, the franchisor could set up a reasonable allowance for advertising services to be provided after year.
Additionally, unlike the situation where the franchisor does not control the funds, the franchisor’s contributions are only deductible when the expenses are actually incurred. The franchisor’s contributions are, in fact, amounts reserved for future expenses and are therefore not deductible at the time the contribution is made. The tax treatment for the franchisees’ contributions is the same as in the first situation.
Royalties and management fees
Royalties and management fees are not exclusive to the franchise sector, but they are often an integral part of the franchise agreement.
Royalties are amounts which franchisees pay to the franchisor for the use of certain assets (e.g. trademarks, patents). For the franchisee, the royalty payment is a deductible expense and, for the franchisor, it is taxable income.
In a franchise situation, management fees are often charged for certain services which the franchisor provides to the franchisees (e.g. negotiations with suppliers, inventory management). Since management fees are often used in a corporate group context, the tax authorities often challenge them, particularly in non-arm’s length transactions.
Generally, for an expense to be deductible from a taxpayer’s income, it must be reasonable and incurred to earn income. The first criterion is usually easy to satisfy in a franchise context, because the franchisees’ business objective is to earn income to increase the business’s value for shareholders.
However, the Income Tax Act does not define what constitutes a reasonable expense. The tax authorities positions and case law in this respect provide a number of factors that can be considered in a reasonableness analysis. As a rule, the tax authorities consider management fees to be reasonable if they are representative of the fair market value of the services provided.
If the fair market value of the service is easily comparable, it can serve as a basis to support the reasonableness requirement. Additionally, when the franchisee and franchisor deal at arm’s length, it is more difficult to allege that the transactions would have been carried out at values that differ significantly from the fair market value, since the franchisee and franchisor have different economic interests, that is their respective business’s profitability.
Franchisors often offer a format where they take care of a number of administrative tasks. Combining these tasks often results in significant savings for the franchisees and allows them to focus on their current operations.
The franchisor can charge fees to the franchisees plus a maximum mark-up of 15%, which is usually considered to be reasonable.
The reasonableness of management fees is a question of fact that must be analyzed on a case-by-case basis to ensure that the franchisee can deduct the expense. Special care is required if the separate economic interests of the parties or whether they are dealing at arm’s length is not clear. Additionally, the franchisor should ensure that it has up-to-date documentation to justify the management fees charged.
This article was written in collaboration with Marie-Danielle Roy.
19 Aug 2019 | Written by :
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Under the commodity tax regime, an individual is entitled to claim an input tax credit (ITC) with respect to the purchase of goods and services only if they are used in connection with commercial activities (i.e., in the provision of taxable and/or zero-rated supplies).
A holding corporation whose sole activity is to hold investments could, therefore, not claim ITCs on its expenses since it does not carry on commercial activities because financial services are considered to be an exempt activity.
However, Section 186 of the Excise Tax Act (ETA) provides that a holding corporation that does not make any taxable supplies may claim ITCs on goods and services to the extent it is considered that they were acquired for consumption or use in relation to the shares of capital stock or indebtedness of another corporation that is at that time related to it, if that other corporation carries out commercial activities exclusively (i.e. 90% or more).
Application of this provision has led to considerable discussion with respect to the question of whether a good or a service acquired by a holding corporation can reasonably be considered to be acquired for consumption or use in relation to the shares of capital stock or indebtedness of another corporation.
