Tax Implications of Selling your Business

Are you thinking about selling your business? The sale of your business can be both exciting and worrisome. It’s necessary that you understand your options and the tax implications of different options available to you. We at IDM are here to guide you through the multiple options available to you and ensure that you get the most after-tax value from the sale of your business. The sale of the corporation’s shares or the sale of the corporation’s assets is two approaches for selling your business.

Share Sale

When selling shares, any gain will certainly be a capital gain, with half of it liable to tax. d Depending on the circumstances, the owners of the shares may be entitled to use their Lifetime Capital Gains Exemption (LCGE). The LCGE permits individuals to realize the first $913,630 of any gain on the sale of Qualified Small Business Corporation (QSBC) shares tax-free. This amount is the 2022 LCGE amount and is indexed to inflation each year.

The company must meet the following criteria to be considered a QSBC and be eligible for the LCGE:

  1. The company must be a Canadian-controlled private corporation (CCPC);
  2. At least 90% of the fair value of the company’s assets must be used in an active business carried out in Canada immediately prior to the sale;
  3. In the 2 years prior to disposing of the shares, the shares must not be owned by anyone other than the seller or a person related to the seller; and
  4. In the 2-year holding period, the company must be a CCPC and at least 50% of the fair value of the assets must be used in an active business carried out in Canada.

The shares must be held by an individual, a personal trust, or a partnership. There are certain conditions that must be accomplished before the LCGE could be used. Planning should be done ahead of time to assure that a company will achieve these conditions.

Asset Sale

A buyer will frequently seek to structure an acquisition as a purchase of business assets (inventory, equipment, goodwill, and so on) since this will allow them to step-up the cost base of the assets purchased. Increased tax depreciation and/or a reduction in any future gains on a subsequent sale can benefit the seller.

The company that sells the business assets will have taxable income that includes the following:

  • Recapture of Capital Cost Allowance (CCA) on the sale of depreciable assets
  • Capital gains on other capital properties, such as land
  • Capital gains on goodwill

The amount of taxes due will be determined by the gains realized and how the amount is dispersed to shareholders (repayment of debt, return of capital, bonus, taxable dividends, capital dividends). The nature of each of these sources of income will have an impact on how the corporation can distribute the sale profits to its shareholders after taxes. Capital gains realized by the company, in general, will allow it to pay capital dividends on the tax-free share of the capital gains realized. Any remaining amount can be distributed as taxable dividends.

Next steps

Pre-Sale Restructuring

For most business owners, it is wise to start arranging for a sale before a buyer comes along. This is because both you and the buyer may optimize the sale’s after-tax worth by planning ahead of time to put your business in the best possible position to sell. Consult a tax advisor as to when is the best time for you to sell your business.

Analysis of Alternatives

As explained previously, there are two common methods for selling a business: share sale and asset sale. The structure of the sale transaction, the price the buyer is willing to pay, and the price the seller must realize is frequently determined by the tax implications for both the buyer and the seller. This analysis includes determining the best way to distribute the income from the sale in order to reduce taxes and maximize the after-tax proceeds.

To learn more, or if you have any questions, please contact  IDM Chartered Professional Accountants.  We have the experience and knowledge to guide and consult you through the sale of your business.