If you own a private corporation and plan on selling your business, it is better for you to start planning 3 years in advance rather than planning a few months before the sale as your choices will be limited if you are thinking of reducing your taxes.
There are two options available to you for selling your business: sale of your shares or sale of your business’ assets.
Option 1 – Sale of shares:
If you are selling your shares, you can apply the Life Time Capital Gains Exemption (LCGE) of $750,000 to Qualified Small Business Corporations shares (QSBC).
All of the following conditions must be met for it to be considered a QSBC:
Option 2 – Asset sale:
In this type of transaction, you will sell the corporation’s assets such as inventory, equipment, accounts receivable etc.
The treatment for tax purposes will be the same as if the company disposed assets in the ordinary course of their business; you are paying corporate tax on the taxable income from the sale of your business. Taxable income includes:
The after tax proceeds can be distributed as taxable dividends to the shareholders or if applicable as capital dividends from the Capital Dividend Account (CDA) of the corporation. CDA holds the tax-free portion of the company’s capital gain or gain on goodwill which is distributed to the shareholders on a tax-free basis.
For more information on Succession Planning and advice on selling your business you can also visit our blog for this story on a well attended seminar last spring.
It is important to analyze the tax implication of both options. Hogg, Shain & Scheck has the experience to walk you through the sale of your business by determining which option is advantageous to you as the seller. Feel free to contact us if you require further assistance.