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:
the corporation must be a Canadian-controlled private corporation (CCPC)
at least 90% of the fair value of the company’s assets is being used in an active business carried out in Canada immediately prior to the sale; and
prior to disposing the shares, the shares must be owned for at least 2 years by you,
In that 2 year holding period, at least 50% of the fair value of the assets must be used in an active business carried out in Canada.
Each shareholder is allowed an exemption.
If you have children who own directly or indirectly (trust), they may be entitled to claim the exemption.
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:
recaptured Capital Cost Allowance (CCA) on the sale of the depreciable assets
capital gains on other capital properties
gains on the sale of goodwill
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.
It is important to analyze the tax implication of both options. Hogg, Shain & Scheck are experienced in tax accounting and can 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.