If your business-owner client plans to sell their business, they’ll want to do it in a tax-efficient way. A recent blog post by BDO Canada offered tips, whether the business owner is selling shares or assets.
Selling shares
Among its suggestions, BDO said the company’s balance sheet should be reviewed to determine if any assets not required to carry on the business can be sold or removed as a way of decreasing the purchase price of the business and thus reducing capital gains tax on the sale.
Alternatively, the shareholding could be restructured from individuals to a holding company in certain situations, such as when the capital gain from the sale is expected to be in excess of the exemption amount available. A tax expert can assess whether “safe income” can be extracted from the company prior to the sale as a tax-free inter-corporate dividend, the blog said. This would lower the selling price and reduce capital gains.
Removing assets from the business would also help ensure that company shares qualify for the capital gains exemption available for qualified small business corporation (QSBC) shares. That’s because, to qualify as QSBC shares, a corporation’s shares must meet several conditions, including that a certain proportion of the fair market value of the assets is used in an active business. (See the CRA website for details, and note that meeting some of the conditions may take time.)
Further, with QSBC shares, the business owner can avoid the tax on split income (TOSI) on the taxable capital gain from the sale. Even if the capital gains exemption has been fully used, an exclusion from TOSI will be available if company shares qualify as QSBC shares at time of disposition, BDO said.
“Therefore, if the TOSI rules are a concern for any individual shareholders (for example, family members who are not active in the business), it may be advisable to ensure the shares qualify as QSBC shares,” it said.
This exclusion wouldn’t apply to capital gains realized by minors on non-arm’s-length transfers, it added.
Business owners should also consider conducting a due diligence review of tax compliance, because buyers will likely do so, BDO suggested.
Selling assets
Tax planning for an asset sale is about finding tax-efficient ways to distribute sale proceeds to shareholders, BDO said. For example, where assets are sold at a gain, tax-free capital dividends can be paid to shareholders. Other potential options for distributing funds tax-free include a return of paid-up capital or a repayment of shareholder loans.
For full details, see the post by BDO, which also offers tips on purchase and sale agreements.