09 Oct Selling Your Business: Tax and Planning Strategies

Posted at 13:43h in Business, Business Finances, business tax, Latest News, Tax Planning and Compliance by 09 Oct

Sale of a Business: Planning Considerations

For Canadian business owners, selling a business is a major milestone that requires careful advance planning to maximize after-tax proceeds and ensure a successful transaction. Focusing on planning prior to the sale, this article highlights some of the most important tax and structuring strategies to consider.

 

Choosing the Right Sale Structure

The first critical decision is whether to sell the shares of the corporation or its assets. A share sale is generally more tax-efficient for the seller, as it may allow access to the Lifetime Capital Gains Exemption (LCGE) and avoids double taxation that can arise with asset sales. Buyers, however, often prefer asset sales for liability and tax reasons. Early discussions with the Clearline tax team, your other advisors and potential buyers are essential to align interests and optimize the sale structure.

 

Qualifying for the Lifetime Capital Gains Exemption (LCGE)

The LCGE can shelter up to $1.25 million of capital gains per individual on the sale of qualified small business corporation (QSBC) shares. To qualify:

  • The corporation must be a Canadian-controlled private corporation (CCPC).
  • At least 90% of the corporation’s assets must be used in an active business at the time of the sale, and more than 50% throughout the preceding 24 months.
  • Shares must not have been owned by anyone other than the seller or related persons during the 24 months before the sale.

To ensure eligibility, owner-managers should “purify” the corporation by removing excess cash, investments, or passive assets that could taint QSBC status. Restructuring can be done to purify existing corporations as well as creating a structure for ongoing purification.  You can enhance the tax efficiency on a sale by multiplying the LCGE among family members by implementing an estate freeze or family trust.

 

Enhancing Value and Saleability

Operational improvements can significantly increase the attractiveness and value of the business. Strengthen management teams and internal systems to reduce reliance on the owner and increase buyer confidence. Diversify the customer and supplier base to reduce risk. Conduct internal due diligence on financial statements, tax compliance, and legal matters to identify and resolve issues before going to market.

 

Tax-Efficient Extraction of Surplus

Before the sale, consider extracting surplus cash or retained earnings in a tax-efficient manner. This may include paying out tax-paid retained earnings as dividends or using a holding company to receive intercorporate dividends or sale proceeds, which may defer personal tax and facilitate post-sale planning.

 

Special Pre-Sale Considerations

For non-arm’s length sales, such as those to family or a holding company, ensure the transaction is structured to avoid the recharacterization of capital gains as taxable dividends, which could deny access to the LCGE. If the business is being transferred to family, you will want to review the transactions with the Clearline tax team to ensure the sale qualifies for capital gains treatment using the new intergenerational transfer rules.

 

Conclusion

Early and proactive planning is essential for owner-managers considering a business sale. By focusing on corporate purification, LCGE qualification, operational improvements, and tax-efficient surplus extraction, business owners can significantly enhance their after-tax outcomes. Engaging the Clearline tax team, legal, and financial advisors well in advance is the best way to ensure all opportunities are realized and risks are managed.