Sale Of A Business? Consider The Tax
For business owners in the Burlington, Oakville, Mississauga vicinity, if you own a corporation that carries on an active business, you may be in a position at some point to consider the sale of your business. Considering the tax implications and planning for the ultimate sale is imperative.
This guide sets out some of the important tax issues that you should consider. For a complete reference guide please refer to the document at the end of the article.
Share sale vs. Asset sale
The sale of an incorporated business can be accomplished either through the sale of the corporation’s assets or the sale of shares of the corporation. Either decision requires consideration of many tax and non-tax issues.
The vendor of an incorporated business would prefer to sell shares, while the purchaser would prefer to buy assets. For the vendor, the tax cost may be less in the case of a share sale. For the purchaser, an asset purchase will result in a greater cost base for the underlying assets of the business, and a greater cost base on which to claim depreciation.
A non-tax reason that a purchaser would rather purchase assets is the potential liabilities that may exist in the corporation, which would remain if the purchaser acquired the shares of the corporation. By buying the assets of an existing corporation instead, and carrying on the business in a new corporation, the purchaser will only inherit those liabilities that it specifically assumes.
An asset sale may be subject to taxes which would be payable by the purchaser.
In either case, whether on a sale of shares or assets, there are opportunities for the vendor to minimize tax.
Minimizing tax on a share sale
There are several methods to reduce or defer the tax that the vendor will pay on a sale of shares.
Capital Gains Exemption
Many sale transactions are structured around the vendor’s ability to claim the capital gains exemption in respect of the disposition of shares of a qualified small business corporation (QSBC shares).
In order to qualify for the enhanced capital gains exemption, an individual must dispose of a share of a qualified small business corporation or QSBC. A QSBC share of an individual is defined to be a share of the capital stock of a corporation and must meet certain criteria. Please refer to PDF Reference Guide below for all the details.
Payments from available Tax Pools
Another method of minimizing tax is to remove value from the corporation prior to the sale where the tax cost of the removal is less than the tax cost of the capital gain that would otherwise arise.
The following are some examples of how this might be accomplished:
- Shareholder loans
- Capital dividend account
- Safe income
Another strategy used to defer tax (and, if the deferral is long enough, to save tax) is to have the corporation pay to the vendor(s) a retiring allowance prior to the sale. The payment of a retiring allowance would decrease the value of the corporation and would therefore decrease the purchase price that would be subject to tax.
Capital Gain Rollover
Under the income tax legislation, an individual can defer all or a portion of a capital gain when the individual disposes of shares of an eligible small business corporation and uses the proceeds to invest in new shares of another eligible small business corporation (sometimes referred to as replacement shares). This deferral is affected by the cost base of the replacement shares being reduced by the amount of the capital gain deferred.
Defer Payment of the Purchase Price
Deferring the payment and receipt of the purchase price is another way to defer tax. Note, however, that to the extent that a vendor agrees to defer the receipt of the purchase price, the vendor is financing the acquisition. In such cases, the vendor should ensure that any unpaid amounts are properly secured.
Capital gains reserve
As a general rule, tax is payable when the business is sold, regardless of when the purchase price is paid. In certain circumstances, a reserve may be available to the vendor. The effect of the reserve is to spread out the capital gain over more than one taxation year.
Rollover for shares
Subsection 85(1) of the Income Tax Act provides for a rollover when the vendor receives consideration that includes shares of the purchaser (where the purchaser is a corporation). This is a deferral of payment since the vendor would receive no cash until the shares are sold or redeemed. If the vendor receives freely tradable shares of the purchaser corporation, the tax liability would be realized when the vendor sells the shares on the open market (public company) or as the shares are redeemed by the purchaser corporation.
Minimizing tax on an Asset Sale
There are a few methods to reduce the tax that the vendor (in this case, the corporation) will pay on an asset sale.
- Allocation of Purchase Price
- Defer Payment of the Purchase
There are several tax planning opportunities when you are considering a sale of your business. There may be additional investment and wealth strategies beyond those discussed here, depending on the particular circumstances of the vendor and the purchaser. In all cases, professional legal and accounting advice, as well as proper planning and documentation, are essential.
Although this material has been compiled from sources believed to be reliable, we cannot guarantee its accuracy or completeness. All opinions expressed and data provided herein are subject to change without notice. The information is provided solely for informational and educational purposes and is not intended to provide, and should not be construed as providing individual financial, investment, tax, legal, or accounting advice. Professional advisors should be consulted prior to acting on the basis of the information contained herein.
Assante advisory services are offered through Assante Capital Management Ltd. and Assante Financial Management Ltd. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. Assante is an indirect, wholly-owned subsidiary of CI Financial Corp. (“CI”). The principal business of CI is the management, marketing, distribution and administration of mutual funds, segregated funds and other fee-earning investment products for Canadian investors through its wholly-owned subsidiary CI Investments Inc. Wealth planning services may be provided by an accredited Assante advisor or by the professionals of the Wealth Planning Group of United Financial, a division of CI Private Counsel LP.
© 2013 Assante Wealth Management. All rights reserved.