Here are some very important things you need to know before you do that. The thing with selling or transitioning your business, is that you must, at all costs, explore and look at the fine details or else it could be extremely expensive tax wise.
First, you’ve got to consider if are you incorporated? I know it’s a no brainer and most likely many of you out there have a corp., but if you are not incorporated, well now you’re selling something that is going to be completely taxed in the year that you are doing it. So, if you’re not incorporated and you’re selling this for a significant sum around $50,000, $100,00 or higher, then you should certainly consider incorporating your business and implementing that strategy ahead of time.
⭐Link to IPP (Individual Pension Plan) video – https://robtetrault.com/whats-an-ipp-individual-pension-plan-and-who-is-it-for/
Now hypothetically, assume you’re incorporated, and you are selling a bunch of different things.
You could sell the shares of the company, sell the assets and/or sell the inventory. There’s a whole bunch of different ways you could structure this. Now, these get a little bit complicated but let me present to you the nuts and bolts of it.
Let’s assume that you are selling the actual shares of your operating company. Let’s call it a Canadian operating company. You want to sell the shares. I would ask you why would you want to sell the shares?
For most people, selling the shares will allow you to access Canada’s small business capital gains exemption. It’s over $800,000 for all Canadians right now provided that you’re a participant in the business. There are some tax tests to make sure that you do meet the test for participation. We’re not going to cover that today, but let’s assume you do in this situation. That can be a whole chunk of money that comes into your pocket outside of the corporation tax rate.
Now the buyer needs to be willing to buy your shares and not the asset. That would be a big advantage for you. You can benefit from the tax of the small business capital gains exemption, but you also have to remember that there are some rules with respect to cash and passive assets. The important factor is the cash inside of your business. You should absolutely make sure that the year you’re selling your business, you have either consulted with a Portfolio Manager or your accountant to make absolutely sure that you meet this test.
The worst thing on earth would be for you to sell this business, assume you’re getting the exemption and then you don’t get it. The cash test is an important one. Generally speaking, it’s in the current year that you need to have less than a percentage of cash and you also need to be able to go back three years.
The cash test is a big one and you need to make sure you do meet that test.
Second of all, if you’re selling the actual assets, you’re not selling the shares. Now, we got to figure out how much of that is going to be taxable. What is the cost based on all of those assets and how much of that is going to be taxable? The key for that is you will want your average cost base or your ACB to basically be as high as possible. You’re going to get into a situation where there’s going to be some more taxes to pay in that case, but depending on how you’ve structured the business, depending on how much cost base you’re able to add to that and depending on some of the creative work you’re able to do on the accounting side, you might be able to reduce your taxes a bit.
Once you have these dollars, you’ll want to have the portfolio structured in a tax efficient manner in order to receive the dollars that get sold out either into your personal name or into the corporate name. You’re either going to want to have a significantly tax efficient portfolio personally or in the corporation, and that’s the kind of stuff we do here at Tetrault Wealth Advisory Group – CG Wealth Management.
How do we do that you may be asking yourself? We focus on dividends. A dividend tax credit is huge for business owners. We focus on RoC or Return of Capital. That’s usually done through a REiT (Real Estate Investment Trust) or Alternate Investments like that.
On the fixed income side, you can get some pref. shares. They also end up paying dividends. It’s classified for the dividend tax credit as well, so the focus has to be tax efficiency once you sold the business and make sure to consider all those factors before you sell it because, once you sold it, it’s too late.
Please consult with a Tax Specialist for further information and to help you determine if these strategies are suitable to you.
⭐Link to IPP (Individual Pension Plan) video – https://robtetrault.com/whats-an-ipp-individual-pension-plan-and-who-is-it-for/
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