Three quarters of Canadian small business owners intend to leave their business within the decade. About one in ten has written down how.
That gap is not carelessness. Succession is the one project with no deadline attached, no client waiting on it, and no consequence for postponing it another quarter. So it moves to the back of the list every year, and the business keeps running, which feels like confirmation that it was safe to wait.
The trouble is that the plan gets made either way. If you do not write one, the Income Tax Act has a default, your family gets whatever the default produces, and none of it happens on a schedule you chose.
What happens to a business owner's shares on death in Canada? For tax purposes the shares are generally treated as disposed of at fair market value immediately before death, which can trigger a capital gain on all the growth accumulated since you acquired them. The resulting tax is owed by the estate, on a timeline set by the filing rules, whether or not anything has been sold.
What did the research actually find?
The Canadian Federation of Independent Business surveyed this and published the results in January 2023.
Over three quarters of small business owners, 76 percent, planned to exit within the following decade. The assets involved came to more than $2 trillion. And 9 percent had a formal succession plan in place.
Retirement was the leading reason for exiting at 75 percent, followed by burnout at 22 percent and a wish to step back from ownership responsibilities at 21 percent. Those last two matter, because they are the ones that arrive without notice.
On the way out, 49 percent expected to sell to an unrelated buyer, 24 percent to a family member, and 23 percent to their employees.
Read those three numbers together. Half are planning a transaction with a stranger, which requires the business to be sellable and the timing to be yours. A quarter are planning to hand it to family, which raises a question we will come back to.
Why does the bill land at the worst possible moment?
Because the tax is triggered by the death, and the money to pay it is inside the thing you just died owning.
A corporation holding twenty years of retained earnings and a book of business is worth a great deal on paper. That value is what the deemed disposition is measured against. The estate owes tax calculated on it, and the estate's most liquid asset is usually the same corporation no one can sell quickly without destroying what makes it worth buying.
So the family faces a bill with a deadline and an asset without a buyer, in the same month they buried you.
The usual outcomes from there are all bad in a different way. Sell the business fast and take whatever a rushed sale produces. Strip cash out of the company to pay the tax, which is itself a taxable distribution. Borrow against the business at the worst possible negotiating position. Or the children who wanted to keep it running find they cannot, because the tax on inheriting it exceeded what they had.
None of that is caused by the tax being unfair. It is caused by the bill and the liquidity arriving at different times.
What about the child in the business and the child who is not?
This is the part that gets left until last, and it is the part that damages families.
Say two children. One has worked in the business for a decade and is the reason it still runs. The other built a life somewhere else. The business is the majority of the estate.
Leave it equally and the child running it now has a sibling as a business partner who never wanted to be one. Leave it to the one inside and the other inherits a fraction of what their sibling did. Sell it and divide the proceeds, and you have ended the thing one of them spent a decade building.
There is no version of "just split it fairly" that works when the main asset cannot be divided and only one person can run it. The estate needs a second pool of money that is not the business, so the business can go to the person in it and the other child still receives their share.
That is what estate equalization means in practice. Your lawyer drafts the will and the shareholder arrangements. The planning question is where the second pool comes from.
Where does permanent life insurance fit?
In two specific places. Worth being exact about what it does and does not do, because it is often described loosely.
It funds the tax bill. It does not avoid it. The tax is owed either way. A permanent policy on the owner's life pays a death benefit at the moment the liability arises, so the estate has cash to settle it without selling the business or stripping the company under pressure. The point is matching the timing, not escaping the amount.
It creates the second pool for equalization. The death benefit goes to the children who are not receiving the business, so the business can pass intact to the one who is.
Where the policy is owned by the corporation, the death benefit above the policy's adjusted cost basis credits the company's capital dividend account, and capital dividends generally flow tax-free to Canadian-resident shareholders. That is the mechanism by which the proceeds reach your family efficiently, and it is a death benefit. It should not be confused with retirement income, which works differently and is generally taxable when it moves from a corporation to a shareholder.
Ownership matters here and is not a detail. Whether the policy is held personally, by the operating company, or by a holding company changes the tax result, who controls it, and whether it is exposed to creditors of the business. That decision belongs in a conversation with your accountant and your lawyer, before anything is purchased.
The insurance need has to be real on its own terms. If there is no tax liability to fund and no one to equalize between, this is the wrong tool.
Why does this stay unaddressed for so long?
Because every other part of the business tells you it is fine.
Succession has no invoice, no renewal date, and no counterparty chasing it. It is also the one file that requires an owner to sit with their own mortality for an afternoon, which is a real reason and not a trivial one.
There is also the sequencing problem. It needs the accountant, the lawyer, and the insurance side in the same conversation, and in most cases each has only ever seen their own third. Whoever calls the meeting has to be the owner, and the owner is busy running the company.
Meanwhile the cost of waiting compounds quietly. The business grows, so the deemed gain grows with it. And insurance is priced on age and health, both of which move in one direction. The years when it is cheapest and easiest to put in place are the years it feels least urgent.
What to ask before the end of this year
Four questions. The first two are for your accountant, and you should know the answers before you talk to anyone about insurance.
What would the tax bill be if I died holding these shares today? A real number, on the current valuation. Most owners have never asked and are surprised by the size.
Where would the money come from? Follow it through concretely. If the answer involves selling the business quickly or pulling cash out of the company, that is the problem stated plainly.
If the business goes to one child, what does the other one receive? If there is no answer that does not involve selling it, you have found the gap.
Does my accountant, my lawyer and whoever handles my insurance know what the other two are planning? In most cases they do not.
We do that first conversation with a Chartered Professional Accountant in the room, looking at your business, your family and your own situation together. Our CPA has spent 20 years designing life insurance policies around exactly this problem: covering a tax bill that lands on an estate, and keeping more of what a family built inside the family's net worth rather than sending it to Ottawa. That experience is in the room from the first meeting, before anything is designed.
Thirty minutes will tell you if any of this applies. No charge, and no obligation to change accountants.
More on how this fits together is on our corporate estate planning page, and the retirement-income version of the same structure is set out on our Insured Retirement Plan page.
For informational purposes only; not tax, legal or accounting advice. Tax treatment on death depends on the specific structure, ownership and valuation involved, and tax rules can change. Policy dividends and cash values are not guaranteed. The insurance need must come first. Where a policy is corporately owned, the death benefit above the policy's adjusted cost basis credits the Capital Dividend Account, and capital dividends flow tax-free to Canadian-resident shareholders; amounts otherwise distributed from a corporation to its shareholder are generally taxable. Confirm treatment with your own accountant and lawyer before acting. RiskX Insurance Brokers Inc. is a licensed insurance brokerage, not an insurer, an accounting firm, or a law firm.
RiskX is a family-owned Canadian brokerage, family-run for over three decades, licensed in Alberta and Ontario. We sell exclusively for no one. Book a free 30 minutes with Gordon Smith, Executive Chairman & Founder, and our CPA: https://ro.am/riskx-founder