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Business Consolidations Create Complex Tax Issues


​​​​​The growing maturity of Canada’s real estate and construction sector is driving a wave of consolidation across the industry. Yet many companies lack the tax planning expertise needed to help ensure the consolidated entity minimizes its tax burden while remaining accretive to all involved. The result? Higher tax bills and subpar shareholder returns.

Consolidation Pressures Grow

There are a number of reasons we’re seeing more consolidation among Canada’s real estate and construction companies, particularly involving smaller construction, architecture, design and engineering firms. The first is simply a reflection of the growing maturity and sophistication of the Canadian industry overall: companies are actively trying to figure out how to consolidate assets in a way that delivers superior returns and is more accretive to shareholders.

The rising cost and complexity of modern real estate and construction projects is another factor driving consolidation in the sector. For example, governments tendering large, multi-year infrastructure projects are more inclined to hire one company to execute the project in its entirety, rather than engage and coordinate a host of smaller firms handling various project elements. Projects like this — not to mention major commercial or residential developments — require firms with significant financial, technical and operational capacity. Yet even the largest firms are feeling resource constrained.

As a result, these larger players are eager to acquire smaller firms in order to access sorely needed resources and capital. At the same time, many of these smaller players are themselves joining forces in an effort to achieve the scale needed to bid on and execute today’s larger, costlier projects.

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

​ ​ Read other articles in the series.​ ​​

​The Complexities of Consolidation

This wave of consolidation means that business owners and leadership teams often find themselves wrestling with complex issues and equally complex decisions. Faced with tantalizing offers and business valuations from their larger counterparts, owners of smaller firms must evaluate whether to sell or otherwise exit the business — sometimes well before they had planned to. A lack of prior succession and tax planning can make it difficult for owners to make an informed, confident decision.

In such situations, business owners need to consider the tax implications of the potential deal, including how any tax liability will be funded and whether the net proceeds are actually enough to justify the sale itself. Many owners may need to look at the tax implications of being brought on board or given an ownership stake in the new consolidated entity. As well, these deals often require a careful balancing of individual and collective goals. The owner of a specialized construction company, who sees the business as their retirement fund, may be deeply focused on minimizing tax and maximizing the net proceeds. Meanwhile, the prospective buyer could be far more focused on ensuring that the deal is financially sustainable and that the expected capital, people, resources and customers stay put.

Much of the work that goes into making a successful consolidation involves careful tax planning, including developing new tax structures — or restructuring existing ones — across the consolidated entity. Companies are getting very innovative in this regard, in order to cut the tax burden while still delivering value to shareholders. However, these new tax structures aren’t “off the shelf” solutions: they demand highly complex and sophisticated planning, better formulas and modelling, and specialized tax expertise. Companies often discover that this level of tax planning is well beyond their internal capabilities or even those of their trusty local accountant.

Tips for Navigating Consolidation’s Tax Issues

Industry trends mean we’re likely to see even more consolidation in Canada’s real estate and construction sector, as smaller firms join forces to gain scale and stay competitive and larger firms acquire the resources they need to deliver major projects. To help navigate the tax complexities of a consolidation, companies should keep the following tips in mind:

  • Start early. The right tax structure can help companies minimize their tax burden and even fund future tax obligations. But it can take time — even years — to design and implement such structures. Starting as early as possible is vital for achieving optimum results.
  • Plan for the exit. When it comes to asset acquisitions or sales, business owners should always plan with the exit in mind, even at the outset. By ensuring you and your advisors put the right tax structure in place at the start, it’s easier to minimize the tax bill when it’s time to sell.
  • Have reasonable expectations. Paying zero tax on the sale of an asset or business is wishful thinking. A more achievable goal is to pay the minimum tax on the deal. By keeping your expectations reasonable, it will be easier to keep you and your advisors focused on feasible, well-founded solutions.
  • Capitalize on external advisors’ expertise. In today’s world of aggressive tax authorities, tackling complex tax issues on your own — or with your traditional advisors — can be a risky move. Specialized external advisors can provide the experience and expertise your company needs to implement forward-thinking tax planning that stands up to tax authorities’ scrutiny.

Don’t let tax issues derail your plans

A lack of timely tax planning can cause significant, costly problems for consolidating real estate and construction companies. Tax issues can 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:

Eddy Burrello, CPA, CA
T: 647.943.4081
E: [email protected]

Glenn Willis, CPA, CA, CPA, CMA
T: 416.515.3850
E: [email protected]

This is the sixth in a series of MNP perspectives on key tax issues facing Canada’s real estate and construction companies. Other pieces have explored important tax considerations at play in business succession planning, tax cost minimization and doing business across borders.

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