Planning on Selling a Business?

Allan Madan, CA
 Dec 3, 2013
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Selling your business can be a long thought-out process. Having a plan of attack and understanding the different approaches can help save valuable time and money.

How do I sell my Business?

Tax saving tips when selling stockYou can sell your business using sale of asset or sale through stock.

Depending on which method to use, certain taxes can be avoided. Let’s take a look at some things to consider when selling a business.

Selling Shares of a Small Business

Capital gains deduction

A major benefit of a stock sale to the seller is the capital gain exemption. If you are a qualified small business corporation (QSBC), then you are entitled to a life time capital gains exemption of $800,000 (effective 2014).

Capital gains exemption rules:

  1. Must be a Canadian controlled private corporation (CCPC)
  2. At the time of the sale 90% of assets were used to generate active business income in Canada
  3. The shares must have been owned by the seller 24 months prior to the sale
  4. For 24 months prior to the sale more than 50% of the corporate assets (fair market value) must have been used in active business carried on primarily in Canada

If your company meets theses requirements, your first $800,000 in capital gains will be tax free. Once you reach this limit you will still be entitled to the capital gain deduction. Capital gains are 50% tax free so you will only have to include half of the income generated from your sale in your tax return. Capital gains advantages will not apply for a sale through assets.

Benefits of multiple family shareholders

Do you have multiple shareholders? If your shareholders include your spouse or children, a sale through stock would benefit your family most. Each individual could claim capital gains, saving 50% in tax on the sale. Also each shareholder is entitled to the $800,000 capital gain exemption if it is a QSBC. Not only are tax savings generated by capital gains, you can also take advantage of the many tax credits available on your personal tax return.

Easier transaction administratively

In a share sale the buyer is purchasing the corporation as it sits today. To show this transaction has occurred all that is needed is disclosure in the financial statements as well as proper journal entries related to the sale of stock. When buying through assets there are many different calculations you must make such as remaining CCA on each asset which can become long and complicated transactions.

No liabilities

An advantage of a stock sale is the buyer becomes the new owner of the corporation. With this transfer the buyer assumes all of the firm’s current and long term liabilities. As a seller you must make sure that the buyer is aware of all outstanding debt to protect yourself.

Examples of liabilities to disclose:

  1. Prior year taxed owed
  2. Amounts due to shareholders
  3. Contract disputes
  4. Product warranty issues
  5. Outstanding and future lawsuits
  6. Environmental concerns

By disclosing these and other liabilities, it ensures protection from potential lawsuits if theses debts cannot be paid by the new owner.

Selling Assets of a Company

Still posses ownership of the corporation

Are you starting a new business? Then an asset sale may benefit most. During an asset sale the corporation does not cease to exist. If new assets are needed to start the company liquidating old ones can help get you on your way. If you chose a stock sale instead you would have to start a new company. In addition you would have to pay associated legal fees to incorporate your new business that would otherwise be saved via an asset sale.

How do I determine my company’s selling price?

CCA on Property Plant and Equipment

If you choose to liquidate your assets over selling of shares you must ask for a higher selling price. When selling assets taxes can be high due to capital cost allowance (CCA) rates. The Canada revenue agency (CRA) has its own form of calculating depreciation for tax purposes in the form of CCA. Each asset is given a specific rate and is depreciated yearly according to those rates. If the assets are not fully depreciated at the time of the sale tax savings will be minimal.

Example of Asset Sale

Asset Type

Tax Value

Selling Price

Recapture

Notes

Furniture & Fixtures $10,000 $11,000 $1,000 100% of gain is taxable
Goodwill $0 $89,000 $44,500 50% of gain is taxable

Total

$10,000

$100,000

$45,400

In the example above we have an asset (furniture & fixtures) which has an un-depreciated capital cost (UCC or tax value) of $10,000. This is the amount of money the asset has yet to be depreciated.

Since goodwill’s an intangible asset, its tax value is called cumulative eligible capital (CEC or tax value) and represents the amount paid for intangible assets. In the example above, goodwill has a tax value of $0, since it was internally generated by the seller and not acquired.

Assume that the business is being sold for $100,000, and the buyer is willing to pay $11,000 for the furniture and fixtures, and $89,000 for the goodwill. In this case the following income (i.e. recapture) will be realized on the sale:

  • • $1,000 of recapture on the sale of the furniture and fixtures
  • • $44,500 of recapture on the sale of goodwill

The seller will therefore have to include a total of $45,500 in income. Important to note, you must take recapture into account when negotiating your selling price so you will be able to pay these additional taxes.

Conclusions

Save on taxes when selling your business

Considering selling your corporation? Remember two methods can be used. By selling shares, you can save money through the capital gain exemption. When choosing not to sell your assets, recapture will not be triggered allowing more tax savings. As the seller you will always want to sell stock while the buyer will want to buy your assets. Make sure to speak to your accountant so you are not paying unnecessary taxes.

askqs

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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