Business Adviser

Ready to sell your business? Plan ahead to reduce your tax bill

By Serena Lefort
Partner, KPMG Enterprise/Toronto

Sooner or later most entrepreneurs will consider selling their business, whether it’s because they’re ready to retire or they just want to move on to new challenges. If you’re thinking about selling your business, whatever the reasons, you’ll want to keep the tax implications in mind as you negotiate the sale with your purchaser. Careful planning can significantly increase the amount of your sale proceeds that wind up in your pocket after taxes are paid.

When you’re selling your incorporated business, there are two general approaches that you can take—you can sell your shares of the corporation, or the corporation can sell the assets of the business.

If you sell your shares
If you sell your shares of the business, the difference between your cost of the shares and the amount you receive will generally be considered a capital gain for tax purposes. At the top marginal tax rate (on income that falls into the top federal tax bracket), you will generally pay between about 20% and 24% tax on a capital gain, depending on your province.

Every individual is entitled to a lifetime capital gains exemption of up to $750,000 on qualified small business corporation shares. Generally, your shares qualify if at least 90% of the assets are used in carrying on an active business in Canada and more than 50% have been used in this way in the past two years. If your spouse also owns shares in the corporation, you can effectively double the available exemption. If your children also own shares, directly or through the use of a family trust, the number of exemptions available potentially increases.

If the company sells assets
If your company sells assets, the company will pay corporate tax on the taxable income that may arise on the sale. Taxable income includes recaptured capital cost allowance on the sale of depreciable assets, capital gains on other capital properties and gains on the sale of goodwill. Once taxes are paid, then the company distributes the after-tax proceeds to the shareholders in the form of a taxable dividend. You may also receive amounts that you won’t have pay tax on, such as capital dividends (the tax-free portion of the corporation’s capital gain or gain on goodwill) and repayment of any shareholder loans you made to the corporation.

The overall tax rate of selling your company’s assets and distributing the money really depends on a number of things including whether the distributions are entitled to the preferential “eligible” dividend tax credit rate, if your company has tax losses and the types of gains inside the company.

To the extent that you don’t need all the proceeds immediately, because corporate tax rates are generally lower than individual tax rates, a significant deferral of tax can be achieved with an asset sale.

For the purchaser, the purchase of assets (for example goodwill) typically creates future tax deductions that reduce the purchasers future tax burden – which is not the case if the purchaser buys your shares. Depending on the asset mix in your company, it may be mutually beneficial for your company and your purchaser to agree to an asset sale.

After the assets are sold, you may choose to wind up the corporation or reinvest in another business or portfolio investments.

These are only a few of the issues you’ll need to think about. Because the tax consequences of selling a business are complicated, detailed professional advice can help ensure all the tax implications are carefully considered. Proper planning can help minimize the tax you’ll have to pay, leaving more money in your pockets to help you embark on your next big adventure.

Business Adviser is published by KPMG Enterprise™ specifically for owners and executives of private companies. KPMG Enterprise is devoted exclusively to serving the needs of private companies in Canada. For further information about how KPMG Enterprise can help private companies, visit kpmg.ca/enterprise.