As a business owner, you may have considered making the sale of your business part of your long-term business strategy. There are a number of approaches that can underpin your approach, including retirement planning, new opportunities. Despite the recent economic downturn, some people still buy businesses. This may be a good time to sell. Regardless of your motivation, if you determine that the sale is your exit strategy, you should take the time to think about the tax impact of your choice.
The benefits and tax implications for both the buyer and the seller differ depending on the method used. They need to be thoroughly examined and understood before any sales or purchase steps are taken.
Sale of shares
If you sell your shares in the business as an individual, the portion of the proceeds of disposition that exceeds the adjusted cost base of the shares and certain expenses incurred to sell the shares is a capital gain, taxable at 50%. In addition, In the case of Eligible Small Business Shares (SBBA), you can generally claim the capital gains deduction to avoid paying tax on all or part of the gain. The current CSBA capital gain reduction exemption is set at $892,218 for 2022. Only individuals who are Canadian residents are eligible for this exemption.
In order for the shares of your Canadian-controlled private corporation to be considered SBLA, your company must meet three criteria:
- At the time of sale, at least 90% of the fair market value of the corporation’s assets must be derived from assets used in an active business, primarily in Canada (either by the corporation or by a related corporation), shares or debt securities of a connected small business, or a combination thereof;
- In the 24 months prior to the sale, more than 50% of the fair market value of the corporation’s assets was derived from assets used primarily in an active business carried on primarily in Canada. invests in shares or debt securities of a qualifying related corporation or consisting of a combination of those two classes.
- No person other than the seller, or any person or partnership related to the seller, shall have owned the shares during the 24-month period immediately preceding the sale.
Keep in mind that the sale of shares usually results in a lower acquisition price than the sale of assets because of the buyer’s higher level of risk. The seller must therefore assess the tax advantages in relation to the selling price as a whole.
Sale of assets
In this type of sale, the buyer acquires the company’s assets, including inventory, equipment and accounts receivable. The advantages of this method are obvious: the buyer can choose the assets he wishes to acquire and limit his exposure to risk.
Another advantage is that the buyer can increase the tax base of the acquired assets up to the current market value. It reduces its tax liability, since the depreciable base or cost from which it will calculate the gain on the disposal of assets will be greater than the tax base on the assets of a business that would generally apply in the case of a purchase of shares. Please note that sales taxes and duties on real estate transfers may apply to the purchase of assets.
Tax implications can make the sale of assets less attractive to a seller. Indeed, the seller is subject to two levels of taxation: that paid by the company on the sale of the assets when it realizes a capital gain in relation to the tax base and that paid by the owner on the distribution of the net proceeds.
Tax implications can make the sale of assets less attractive to a seller. Indeed, the seller is subject to two levels of taxation: that paid by the company on the sale of the assets when it realizes a capital gain in relation to the tax base and that paid by the owner on the distribution of the net proceeds.
Trading between the sale of assets or shares generally allows the selling price to be set at the halfway point of each party’s claims, essentially taking into account the value of the available capital gains deduction that would otherwise have been a significant item in the case of a sale of shares divided between the two parties.
Hybrid sale
There are different ways to structure a hybrid sale, the preferred one depending on the company in question as well as the needs of the buyer and seller.
Under one of the commonly used hybrid methods, the company’s shares are sold, creating a gain on which the seller can claim the capital gains deduction if the shares qualify for the deduction. Then you sell the assets of the company for which there is an accumulated gain, which allows the buyer to get a higher acquisition cost for them. The buyer can then consolidate the shares and assets by reorganizing. Note that the specific steps required to successfully complete this type of sale are more complex than those presented in this article.
When it comes to selling your business, planning and foresight will help you achieve your goals and reduce your tax burden. The teams of tax professionals you will find on Openfair support owners during the sale of their business. We provide strategic advice before, during and after the transaction.
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.webp)
