You started your business from scratch and built it into a successful enterprise.
Perhaps you want to retire and spend time with your family or maybe you want to move on to something different.
Either way the value built up in your business will result in a tax a tax bill.
Luckily the Income Tax Act provides you the opportunity to save on taxes when you sell your business through the capital gains exemption.
$750,000 Capital Gains Exemption
If you are the owner of a small business corporation, you may be able to take advantage of the capital gains exemption on the sale of your business.
The exemption is $750,000 of the gross capital gain (or $375,000 of the taxable capital gain – only 1/2 of capital gains are taxable in Canada) which is the proceeds you receive from selling your business minus what you paid for it.
Like many things in the Income Tax Act, there are conditions that have to be met to qualify for the capital gains exemption.
Qualified Small Business Corporation
To claim the capital gains exemption, the business must be a qualified small business corporation. This means that certain conditions must be met in the 2 years before the sale and at the time of the sale:
- During the 24 months before the shares are sold, you or your spouse (or common law partner) must have owned the shares for the entire period, and
- During the 24 months before the sale that at least 50% of the assets of the business must be used in an active business in Canada.
- This means that if more than 50% of the assets are investments in stocks or bonds or in a foreign business, the business does not meet the conditions.
- At the time of the sale 90% or more of the assets must be used in an active business in Canada.
If you are thinking of selling your business you might want to call on your accountant to figure out if you’ll qualify!
Not A Corporation?
What if you run a sole proprietorship? Only the sale business corporation shares qualify for the capital gains exemption. However, there are special rules that allow you to convert your business to a corporation in order for you to take advantage of the exemption.
This involves setting up a corporation and moving the assets into it.
The rules can get complex, but with proper planning you can benefit from the $750,000 lifetime exemption.
Multiply The Capital Gains Exemption
Every Canadian resident is entitled to the lifetime exemption. If you have a business corporation and have issued shares to your spouse and children, you may be able to grow beyond the $750,000 exemption and save even more income tax.
Planning for the multiplication is best done well in advance of the sale since the shares must be held long enough to appreciate beyond their original cost.
Final Thoughts
If you’re considering selling your business, you do need to prepare in advance. A properly prepared financial plan that addresses the tax implications of the sale can help you save thousands of dollars in taxes.
