Whether it’s a well-loved breakfast diner that feels like the hub of the community or a factory that manufactures safety shoes and work gloves, creating and growing a small business is incredibly rewarding and requires a lot of hard work. After toiling long hours to become successful, most owners want the business to continue thriving long after they step away.

A carefully crafted succession plan is important to any successful small business. It can help you clearly identify your company’s goals, protect the business's legacy, plan for the unexpected, and prepare for the financial security of your family and employees. The planning process can feel overwhelming at first, but carefully considering all aspects of your business is time well spent.

GETTING STARTED

There’s no time like the present. Succession planning can clarify how you visualize your future success, even if you just opened the doors to your business. Planning helps you narrow down your goals and objectives, identify the right person to take over one day and prepare for financial setbacks.

Bob Labrecque, a succession planning consultant with Manulife Securities, says business owners often wait too long to begin the planning process, starting when they’re only three or four years away from retirement. “A good succession plan is a five-to-10-year strategy of building the business, and then transferring ownership while it’s in a growth phase – not in a maturity or a declining phase,” he says. “And you want a team of experts in place to help make this happen. An advisor is a key member of this planning team.”

The first step in developing a business succession plan is to self-reflect and ask yourself some critical questions. Consider the following:

1. When would you like to retire or step back from running the business?
2. What kind of future would you like to see for your business?
3. Do you have a successor in mind with a mentoring plan in place?
4. Are there any weaknesses in your current business operations that must be addressed?
5. What is your plan for handling unexpected events, such as illness, financial difficulties, or the retention of top employees?
6. Do you have a team of financial and legal experts to help you with the planning process?

ESTATE PLANNING AND TAXES

Even though running a successful business can occupy your full attention, looking at the bigger picture and how a business succession plan dovetails into your personal plans is essential. An advisor can help determine a company's financial value and opportunities for growth and also help with retirement and estate planning.

A business owner hoping to step down must plan for adequate retirement income to maintain his or her desired lifestyle, put a savings plan in place to cover future expenses such as a child’s education, and set up life and disability insurance plans so loved ones are well cared for in the event of severe illness or death – all while maximizing tax-planning opportunities.

MANAGING EMOTIONS

As you are getting your succession plans down on paper, don’t discount the emotional impact that this major life event might have on you and the entire organization. Labrecque says leaving can be very difficult and emotional for many business owners.

 “Quite often, for a first-generation business owner, this is their baby, and there can be strong protective feelings that nobody else can do what they do.” 

Owners have some crucial decisions to consider:

• Take an honest look at who can lead the business and compile a short list of candidates
• Create a succession team to help navigate the financial, legal, and human resource aspects of the transition
• Explore new opportunities for the organization to ensure continued strength and growth
• Establish a co-lead to allow the current owner to begin stepping back into a lesser role

If the intent is to transition the business within the family, a specialist called a family facilitator might also be helpful. 

“Family transfers are the most complicated because they involve not only the business but the family dynamics,” says Labrecque. “Families also need to have honest discussions about whether children even want to take over the family business. They may want the money and the lifestyle but do they find the work interesting?”

WINDING DOWN

As a business owner prepares for retirement, there might still be an opportunity to stay involved and active but at a slower pace. A step-down approach is possible, where the ownership is transferred, but the owner stays on in a limited capacity for a set duration to help with the transition. After a lifetime of work, the boss can gradually ease into retirement rather than giving up everything all at once.

Succession planning can be a rewarding process that sets the tone for your business's overall success. For more information about getting started on a succession plan, please contact Wiegers Financial & Benefits to speak with one of our experienced advisors. 

TRUSTED SASKATOON RECOGNIZES OUR PARTNERS WHO HAVE BEEN TRUSTED FOR 5 YEARS!

101 Doors and Windows Ltd: Celebrating 5 Years of Trusted Service in Window and Door Manufacturing and Installation in Saskatoon. 

In the heart of 'Toon Town,' a local success story has quietly made waves in the window and door industry. 101 Doors and Windows Ltd, owned by Jesse Singh, Tom Knudtson, and Sebastian Aicher, is marking a significant milestone as it celebrates its 5th anniversary as a Trusted Saskatoon window and door partner.

At the core of 101 Doors and Windows Ltd's ethos lies a simple yet powerful belief: relationships matter. Since their inception, the company has held this principle close to heart. The founders have adeptly cultivated meaningful relationships with their suppliers, resulting in a "preferred client" status with many. This translates into robust buying power and ensures their clients benefit from superior service and top-quality materials.

Industry knowledge and experience are the cornerstones on which 101 Doors and Windows Ltd stands. Jesse, Tom, and Sebastian collectively bring decades of experience. They go beyond being a mere service provider; they encourage potential clients to reach out with any queries regarding window and door performance, installation techniques, or design advice tailored to their homes. Their dedication to personalized support sets them apart in an industry where one-size-fits-all solutions often prevail.

HTH Chartered Professional Accountants has mastered the art of building trust. With many decades of experience under their belts, the team at HTH understands that public practice accounting is not just about numbers; it's about fostering relationships based on trust and understanding. One of the cornerstones of HTH's approach is taking the time to comprehend and reach the client's needs and goals. Whether you're seeking assistance with personal tax matters, a small or medium-sized business owner navigating complex financial landscapes, or a not-for-profit organization seeking financial guidance, HTH offers the same unwavering commitment to providing high-quality service tailored to your needs.

While HTH Chartered Professional Accountants is based in Saskatoon, they serve individuals and businesses across the prairies; they've garnered a reputation for delivering consistent excellence in the accounting field. No matter where their clients are located, HTH is dedicated to ensuring that each interaction is marked by professionalism, reliability, and trustworthiness.

Every year, over 1 million Canadian seniors and retirees pack up and move south for the winter to enjoy the warm weather and avoid the freezing temperatures at home.

However, while warmer climates can be a welcome escape, Canadian snowbirds need to be very careful about how much time they spend in the United States, as overstaying can result in being deemed a U.S. resident for tax purposes and subject you to paying taxes in the United States even if you’re not a U.S. citizen.

The good news is that proper planning and awareness of the correct U.S. residency rules can help you avoid falling into the snowbird tax trap.

NOTE: If you have dual Canadian – U.S. citizenship, you should already be filing a U.S. tax return to report your worldwide income, no matter how much or little time you spend in the U.S., so the options below won’t apply to you.

The Wrong Way to Avoid Being Considered a U.S. Resident

Unfortunately, many Canadian snowbirds have been misinformed that if they simply spend fewer than 183 days in the U.S. in any given year, they will not be considered U.S. residents for tax purposes.

This information is not true, and has caused thousands of Canadians to unknowingly violate U.S. residency rules, often leading to serious financial and emotional stress.

Don’t think you’ll just slip through the cracks. Canadian and U.S. border officials are sharing more information than ever, making it virtually impossible to hide from the IRS.

The Right Way to Avoid Being Considered a U.S. Resident

Canadian snowbirds have three options to avoid being considered U.S. residents for tax purposes by the IRS. The first option is to avoid being considered a U.S. resident for tax purposes in the first place, while the second and third options offer exemptions if you could be considered a U.S. resident.

The three options below are listed from simplest to most complex. The right option for you will depend on your unique situation:

1. The Substantial Presence Test
2. The Closer Connection Exemption
3. The Canada – U.S. Tax Treaty

Option 1: The Substantial Presence Test

The easiest way for Canadian snowbirds to avoid being considered U.S. residents for tax purposes is to make sure you don’t meet the IRS’s Substantial Presence Test. Under the Substantial Presence Test, the IRS considers Canadians to be U.S. residents for tax purposes if you are physically present in the U.S. for:

31 days in the current calendar year; AND
183 days during the three-year period covering the current calendar year and the two preceding calendar years on a weighted basis.

To arrive at your three-year total, you include:

• All days spent in the U.S. in the current calendar year,
• One-third of the days spent in the U.S. in the preceding year, and
• One- sixth of the days spent in the U.S. in the year prior to that

While the test is odd and confusing, it actually allows you spend significantly more than 183 days in the U.S. over the three-year period by giving less weight to days in previous years.

If your total over the three-year period is 182 days or less, you will not be considered a U.S. resident for tax purposes, as you don’t meet the Substantial Presence Test.

However, if your total for the three-year period is 183 days or more, you will be considered a U.S. resident for tax purposes under the Substantial Presence Test, which would require you to seek an exemption under Option 2, and possibly Option 3, below.

TIP: For U.S. residency calculation purposes, a day is considered to be a calendar day, not a 24-hour period! For example, if you enter the U.S. at 11:00 pm one night and return to Canada at 1:00 am the next morning, it counts as spending two days in the U.S. even though you were only there for 2 hours.

Example:

Glenn spends 120 days in the U.S. in 2020 (the current year), 120 days in the U.S. in 2019 and 120 days in the U.S. in 2018, he would calculate his three year total as follows:

120 days in 2020
+ 40 days in 2019 (120 ÷ 3)
+ 20 days in 2018 (120 ÷ 6)
= 180 total days
In this example, Glenn would not be considered a U.S. resident for tax purposes, as he is under the 183- day threshold for the three-year period. He should still consider filing Form 8840 to document this with the IRS.

NOTE: If you spend a fair amount of time in the U.S. each year, you should still consider filing Form 8840 to document and certify to the IRS that you were not substantially present in the U.S. under the Substantial Presence Test. You are not required to have a U.S. tax identification number to file Form 8840.

Option 2: Form 8840 & The Closer Connection Exemption

Even if Option 1 above doesn’t work for you, you can still get an exemption from being considered a U.S. resident for tax purposes if you qualify for and file a Form 8840 with the IRS.

The official name of Form 8840 is the “Closer Connection Exemption Connection Statement for Aliens”.

Essentially, filing Form 8840 allows Canadian snowbirds to stay in the U.S. for up to 182 days every year without being considered a U.S. resident for tax purposes (assuming you meet the criteria and file on time).

In order to qualify to file Form 8840 and receive this exemption, you’ll need to meet ALL of the following criteria:

1. Be present in the U.S. for less than 183 days in the current calendar year
2. Be able to establish a home in Canada in the current calendar year
3. Be able to establish a closer connection to Canada than the U.S. during the calendar year

Form 8840 is a short form that asks you a number of questions to support your claim that you have closer economic and personal ties to Canada than the United States.

Questions cover a broad range of topics including, but not limited to:

• Where your permanent home is
• Where you keep your belongings
• Where your family lives
• Where you’re registered to vote
• Where your driver’s license was issued
• Were your banking and financial accounts are located
• Where you’re covered by a government health plan

Form 8840 must be filed with the IRS no later than June 15 in the year following the year in which you qualified as a U.S. resident for tax purposes under the Substantial Presence Test. If you fail to file on time, you may be considered a U.S resident for tax purposes and subject to other penalties.

If you meet all of the criteria to be eligible for the Closer Connection Exemption and file your Form 8840 on time with the IRS, you will avoid being treated as a U.S. resident for tax purposes.

If you don’t meet all of the criteria for the Closer Connection Exemption, and you are ineligible to file a Form 8840, you must look to Option 3 below as your third and final option for relief from being deemed a U.S. resident for tax purposes.

Option 3: The Canada – U.S. Tax Treaty

Canadian snowbirds that spend 183 days or more in the U.S. in the current calendar year have one last option to avoid being declared a U.S. resident for tax purposes: file a U.S. Nonresident tax return (Form 1040NR) and claim an exemption under The Canada – U.S. Tax Treaty.

In order to claim an exemption under the Canada – U.S. Tax Treaty, Canadians must file a non-resident U.S. tax return Form 1040NR and attach a properly completed Form 8833, called the “Treaty Based Return Position Disclosure”. You will need a U.S. Individual Tax Identification Number (referred to as an “ITIN”) to file these forms with the IRS.

This option is by far the most onerous and complex to complete and will likely require you to incur the time and expense of hiring a U.S. tax professional to assist and advise you.

Form 1040NR and Form 8833 must be filed with the IRS no later than June 15 in the year following the year in which you qualified as a U.S. resident for tax purposes. If you fail to file on time, you may be considered a U.S resident for tax purposes and subject to other penalties.

The Bottom Line

Whenever possible, Canadian snowbirds should avoid being considered U.S. residents for tax purposes.

As mentioned previously, your best options are to ensure you do not meet the Substantial Presence Test or to qualify for the Form 8840 Closer Connection Exemption. Avoid having to rely on the Canada – U.S. Tax Treaty whenever possible.

While filing a Form 8840 Exemption may be a little more work than simply not meeting the Substantial Presence Test, the filing process isn’t particularly difficult or time consuming, and allows you to spend more time in the United States. It’s a common practice, and thousands of Canadian snowbirds file a Form 8840 every year.

Avoiding U.S. tax issues should never be a problem for snowbirds as long as you plan ahead and take the time to understand and follow the IRS rules. Talk to an advisor for more information.