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If you are thinking about selling your business, you are likely focused on finding the right buyer and negotiating a fair price.
However, it is essential not to overlook the tax implications of selling your business. Those tax consequences can impact your profits, credit score, and overall financial health.
Nonetheless, understanding the tax implications and planning accordingly can help you navigate the sale of your business with confidence.
In this article, we will delve into the tax implications of selling a business, so you can better understand what to expect. We will also discuss some tax planning strategies to help you minimize your tax liability and maximize your profits.
When you sell your business, you will likely trigger a capital gain. This is the difference between the sale price and the adjusted cost base (ACB) of the company.
The ACB is the original cost of the business plus any capital improvements and adjustments. The capital gain is taxed as a capital gain tax rate of 50% of the gain at your marginal tax rate. However, the good news is that only half of the capital gain is taxable, and the other half is tax-free.
For example, suppose you purchased your business for $500,000 and later sold it for $1,000,000. Your capital gain would be $500,000, and your taxable capital gain would be $250,000 (50% of the capital gain). If you are in the highest tax bracket, you will pay $125,000 in taxes on the capital gain.
Remember, the capital gain tax is only triggered when you sell the business, not when you transfer it to a family member or corporation.
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You may be eligible for the Small Business Deduction (SBD) as a small business owner. The SBD allows eligible small businesses to pay a lower tax rate on their income.
Currently, the federal SBD rate is 9%, and the provincial SBD rates vary by province. If your business qualifies for the SBD, you can save significant money on taxes.
However, there are some restrictions to the SBD. Some of them are:
When you sell your business, you are considered to have disposed of all the business assets. This is known as a deemed disposition.
A deemed disposition means you must pay taxes on any unrealized capital gains on your business assets. However, there are ways to minimize a deemed disposition's tax impact.
In Canada, a Lifetime Capital Gains Exemption (LCGE) is available for business owners who sell their businesses. This exemption allows business owners to exclude a portion of the capital gains realized on the sale of their business from their taxable income.
The current lifetime capital gains exemption for qualified small business corporation shares is $892,218 (as of 2023).
To qualify for the lifetime capital gains exemption, the business being sold must be a Qualified Small Business Corporation (QSBC) and meet specific criteria outlined by the Canada Revenue Agency (CRA).
The company must also be at least 24 months old and have more than 50% of its assets used in an active business in Canada.
Another strategy is to use a rollover provision. A rollover provision allows you to defer paying tax on the disposition of a business asset.
For example, if you sell a building and use the proceeds to purchase another building, you can defer paying tax on the capital gain until you sell the second building. This can help reduce your tax bill and give you more funds to reinvest in your business.
When selling your business, you can sell the shares of your corporation or the assets of your business. Each option has its tax implications, and it is crucial to understand the differences between them.
A share sale involves selling the shares of your corporation to a buyer. In this scenario, the buyer acquires ownership of the entire corporation, including its assets and liabilities.
From a tax perspective, a share sale is often beneficial for the seller because any capital gains from the sale of shares are taxed as a capital gain, which is subject to the lower capital gains tax rate. Additionally, the seller may be able to use the LCGE to shelter some or all of the capital gains from the sale.
An asset sale involves selling the individual assets of your business, such as
In this scenario, the buyer does not acquire ownership of the corporation but instead purchases the individual assets of the business.
From a tax perspective, an asset sale can be more complicated because the seller may be required to pay taxes on any unrealized capital gains on the assets being sold. Additionally, an asset sale may trigger a recapture of depreciation, which could increase the tax liability of the seller.
It is important to note that the buyer may prefer either a share sale or an asset sale, depending on their own tax situation and the acquisition goals. As a seller, working with a tax professional and a legal advisor is vital to determine the best option for your situation.
When selling a business, there may also be GST/HST implications to consider. Generally, the sale of a business is regarded as a taxable supply for GST/HST purposes, meaning that the seller must charge GST/HST on the sale price.
However, there are some exceptions to this rule, such as when the sale is of a going concern or when the sale is of shares in a corporation.
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Corporate tax is a tax that is applied to the income earned by a corporation. When a business is sold, the corporation may be subject to corporate tax on any gains realized on the sale.
If the business being sold is a Canadian-Controlled Private Corporation (CCPC), the corporation may be eligible for the small business deduction, which can reduce the corporate tax payable. The small business deduction is a tax credit that reduces the amount of corporate tax payable by CCPCs with qualifying income. In 2023, the small business deduction limit is $500,000.
When a business is sold, the business owner may be subject to income tax on any income earned as a result of the sale.
The amount of income tax payable on the sale of a business will depend on a variety of factors, including
In some cases, business owners may be able to use tax planning strategies to minimize the amount of income tax payable on the sale of their business.
For example, business owners may be able to defer the recognition of income on the sale of their business by using the proceeds to invest in a tax-deferred account or by structuring the sale as an installment sale.
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Finally, selling a business can have estate planning implications. When business owners sell their business, they may need to consider how the sale proceeds will impact their estate plan.
For example, if the business owner plans to leave their estate to their children, the sale proceeds may need to be distributed in a specific way to minimize the impact of taxes on their estate.
Business owners should work with their tax advisors and estate planning professionals to ensure that their estate plan is current and consider the tax implications of selling their business.
Selling a business can be exciting, but it comes with several tax implications. Understanding these implications and working with a tax professional can help you minimize your tax liability, maximize your profits, and make your life better financially.
Do not let taxes be an afterthought in your business sale – be proactive and plan ahead. With the right strategy, you can make the most out of your sale and set yourself up for financial success.
So, if you are thinking about selling your business, take the first step and consult with a tax professional today!