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Susan Ward

Consider the Tax Implications When You're Selling a Business

By October 1, 2009

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A lot of business people I know see their small business as their retirement nest egg; eventually, they'll sell their businesses, retire, and live off the proceeds.

So of course, they want to keep as much of the proceeds as possible when they sell. And that means carefully considering the tax implications when selling a business.

Now I am not a lawyer, but it seems to me that the best tax scenario when selling a business is one that allows you to be able to take advantage of the lifetime capital gains exemption of $750,000. But that may not be the case.

Rob Geier, a tax partner with KPMG Enterprise in Burnaby, B.C., discusses this issue in Share sale best strategy for owners (Financial Post).

When it comes to incorporated businesses, he writes, individuals are entitled to a lifetime capital gains exemption of $750,000 on qualified small business corporation shares and other types of property, so when you, as the owner of the business sell your shares of the business, the difference between the cost of the shares and the sale price generally is considered a capital gain for tax purposes.

Even better, if your spouse, or children through a family trust, own shares in the corporation, you effectively increase the number of exemptions accordingly.

But there are certain conditions that must be met for the shares of your corporation to be considered qualified small business corporation shares. (Rob outlines these in his article.)

And where there is significant goodwill involved in the sale of a business, it might be better taxwise for the company and the buyer to agree to an asset sale, even where the capital gains exemption is available to the owner. (In an asset sale, the company pays corporate tax on any taxable income that arises on the sale, then distributes the aftertax proceeds to its shareholders.) That's because, Rob explains, for the vendor, a gain on the sale of goodwill is 50% taxable as active business income, which generally results in less current tax payable than a capital gain, which is also 50% taxable but at a higher rate.

Hmmm... I get two big takeaways from this article. First, I would definitely want to discuss the tax implications of selling my business with a professional such as a lawyer before I did it. And second, as a result of that discussion, I might want to revamp the structure of my business before I sell it, so I can maximize my tax benefits.

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October 19, 2009 at 2:55 pm
(1) Toronto Business Broker says:

Susan, thanks for the comments and resume of Rob’s main issues discussed in his Financial Post article. As a business brokerage, we seldom deal with share sales when it comes to small businesses (e.i. less than $300,000 asking price). Despite the above-mentioned tax implications, the risk and the lack of proper audited and verifiable statements, as well as enough legal due diligence done by buyers, makes share sale too risky for such small businesses. In addition, a good lawyer can always help out a seller reduce the tax burden even in an asset sale. As indicated by you and Rob, the asset sale is preferred by the buyer and share sale is generally preferred by the seller, so this, at the end of the day, becomes a bargaining chip that parties can negotiate on, together with all the other terms of the deal. Thanks for the comments, good article!

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