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Could Tax Issues Throw Your Business Off Track?

28/04/2017


​​​​​​​​​​​​​​​Tax represents one of the most significant costs that any company faces, and real estate and construction firms are no exception. The Canada Revenue Agency and its fellow tax authorities around the world have grown increasingly aggressive in recent years in an effort to maximize tax revenue and prevent tax leakage. More and more, companies find themselves having to mount a strenuous and sometimes costly defence of their aggressive tax planning strategies—and they don’t always emerge victorious.

But tax costs can lead to much more than disagreements with the CRA. Tax-related issues often play a major, influential role in many key decisions faced by real estate and construction company owners and leaders, from succession planning to acquisitions. In many cases, a poor understanding of tax implications or a lack of proper tax planning can lead to some highly unwelcome surprises.

​This article is part of a series on key tax issues facing Canada’s real estate and construction companies.

R​ead other articles in the series.​ ​​

To stay on track, real estate and construction companies should need to better understand where tax issues are likely to complicate or disrupt their business objectives—and develop a plan to mitigate those tax-related risks well in advance.​

Five Key Sources of Tax Risk

We see five key areas where tax-related concerns have the potential to cause real estate and construction companies significant headaches. A company may not encounter every situation, but they’re almost certain to deal with one or more of them eventually.

Succession Planning
Company owners all too often discover that their plans for an orderly succession or business transition are thrown into chaos by a major tax bill that can put retirement visions—and even the business itself—at risk. Adding to the uncertainty are industry factors that can greatly affect a company’s value but are largely out of owners’ control, such as government legislation, currency fluctuations, interest rates and market volatility itself. In the scramble to find the necessary funds to pay the tax owed and finance their succession objectives, owners can find themselves forced to sell off assets in a hurry or even liquidate their company.

Tax Cost Minimization
Canada has experienced an absolutely phenomenal appreciation in real estate values over the past several decades, driven by a combination of market dynamics and ordinary inflation. Properties built for “next to nothing” (relatively speaking) in the 1970s, for example, are now worth many multiples more now. Yet few of these properties are changing hands today. Why? Because the tax costs associated with the sale often leave sellers with less investible capital available to pursue opportunities. And efforts to minimize these tax costs are often too little, too late.

Doing Business Across Borders
Most real estate and construction companies have built their success on the strength of their knowledge of local markets. But once they venture across borders, they can quickly become overwhelmed by foreign rules, regulations, business customs and market dynamics. Managing tax in multiple jurisdictions is one of the most complex aspects of doing business across borders; without proper planning, firms can end up paying higher levels of tax on their combined operations.

Valuations
Valuations often serve as the spark for action in the real estate and construction sector, driving key decisions on whether to sell or not. But determining whether a sale is the right decision requires companies to know what the net proceeds of the transaction are likely to be—and that requires a solid understanding of the tax implications of the sale. Companies and tax authorities can take very different views on how deal proceeds should be taxed, and understanding the risks could be enough to make owners rethink their decision or demand a better price.

Industry Consolidation
The growing maturity and sophistication of Canada’s real estate and construction sector is driving a wave of consolidation across the industry. Larger players are eager to acquire smaller firms in order to add much-needed resources and capital; smaller players themselves are joining forces to achieve the scale needed to tackle today’s bigger, more costly projects. To ensure the consolidated entity minimizes its tax burden and remains accretive to all involved, a well-thought out tax structure is essential. Developing that structure is a complex task, requiring a high level of tax planning sophistication that many companies lack.

Take Action Early to Avoid Tax Surprises

How can real estate and construction companies avoid these tax-related pitfalls—or at least mitigate their impact on their business?

  • Make tax planning a key part of business decision making from the outset. Don’t let tax matters be an afterthought. When making important business decisions—from asset purchase to succession planning—ensure your company addresses tax implications from the start.
  • Start early. Companies can often minimize their tax burden—or fund future tax obligations—through the use of proper tax structures. But it can take time (even years) to properly design and implement those structures. Start now to achieve optimum results. If you wait, it may prove too late to achieve your tax objectives.
  • Have reasonable expectations. Paying zero tax on an asset sale or other transaction is wishful thinking; paying the minimum tax, on the other hand, is a valid and achievable goal. Having reasonable expectations will keep you and your advisors focused on feasible, well-founded solutions.
  • Understand the full picture on tax. Is your company prepared for the tax consequences of a sharp rise in valuations? What if the tax authorities disagree with your position on the tax treatment of a transaction? Understanding the tax risks your company faces can help you take mitigating steps and make better decisions.
  • Capitalize on external advisors’ expertise. In today’s world of aggressive tax authorities, tackling complex tax issues on your own is a risky move. External advisors can provide the experience and expertise your company needs to implement forward-thinking, aggressive tax planning that stands up to scrutiny.

Don’t let tax issues compromise your business goals

A lack of timely tax planning can cause significant, costly problems for real estate and construction companies. Tax issues can upend business transitions, turn great deals into mediocre ones, drive tax costs higher and even lead to conflict with tax authorities. By taking action early to understand the tax issues they face, companies can better prepare to address and overcome those issues—and stay on track with their business goals.

For more information, contact Lee Thiessen, National Leader, Real Estate and Construction at 403.263.3385 or [email protected] or your local MNP Real Estate and Construction Advisor.

This is the first in a series of MNP perspectives on key tax issues facing Canada’s real estate and construction companies. Future pieces will explore important tax considerations at play in business succession planning, tax cost minimization, doing business across borders, valuations and business consolidation.​ Click here for the next article in the series.

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