Could Tax Issues Throw Your Business Off Track?
By Brian Laveck, MNP
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 (CRA) 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.
In many cases, a poor understanding of tax implications or a lack of proper tax planning can lead to highly unwelcome surprises.
To stay on track, real estate and construction companies should develop a better understanding of where tax issues are likely to complicate or disrupt their business — and develop a plan to mitigate those 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.
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 a 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 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.
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 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.
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 acting early to make tax planning a key part of decision making and having a thorough understanding of the tax issues they face, companies can better prepare to address and overcome those issues, and stay on track with their business goals.
Brian Laveck, CPA, CA is a Partner and is MNP’s Regional Leader of the Real Estate and Construction team located in Kelowna
This article first appeared in the Fall 2017 issue of SICA's Construction Review Magazine. To read the entire magazine click here.
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