If you’ve made the decision to sell your business, it’s important to do some serious planning first to minimize your overall tax hit. Today, we’re focusing on the sale of incorporated businesses.
When you’re selling your incorporated business, you basically have two options:
- You can sell the shares of the corporation.
- You can sell the assets of the corporation.
At a glance, the two options may seem quite similar but, from a tax perspective, they can actually produce dramatically different results.
As a vendor, you’ll probably favour selling your shares because you can use the lifetime capital gains deduction and get a better tax result. But your buyer will usually be on the other page, wanting to purchase the assets.
What is the Lifetime Capital Gains Deduction?
If you sell your shares in your company and meet certain criteria, the first $892,218 of capitals gains you receive on the sale of the shares will be tax free. For example, if you started your business with nothing, paying nothing for your shares and then built up the business and sold it for $1 million, the first $892,218 of that would be tax-free.
But, again, there’s certain criteria, both corporate and personal, that must be met.
Corporate criteria: The LCGD is only available if the company you’re selling is carrying on an active business, primarily in Canada. Additionally, at the time of sale, you also cannot have redundant assets that represent more than 10% of the value of the assets on the balance sheet. A redundant asset is defined as any asset not needed by your business for ongoing operations.
Personal criteria: The LCGD is generally unavailable if you haven’t held your shares for at least 24 months. You may also be ineligible if your past tax history includes a CNIL or an ABIL (Cumulative Net Investment Loss or an Allowable Business Investment Loss). You should confirm this with the CRA before your sale is completed.
Why do buyers prefer to purchase the assets of your business?
Simply put, there’s less risk in buying the assets. If buyers opt to buy the shares in your company, they also take on your risks and liabilities. Even if it’s an issue that came well before the sale, it remains attached to the shares, and now it’s the buyer’s responsibility. This can include lawsuits, product defects, tax reassessments and more.
But if they’re motivated buyers, they can mitigate the risks of buying assets through due diligence, fully exploring areas that may cause problems. They can also defer a portion of the sale price that can be used to cover off liability issues that may come up in the future.We get into much more depth on this topic in the latest episode of our podcast including: negotiating terms of the purchase and sale agreement, professional fees, working capital and more. Check out Episode 9 of the Vaive and Associates Tax Podcast with Rolland Vaive.