Selling a business is a major financial event for most entrepreneurs, and maximizing the value of the sale is often the top priority. To ensure you get the best deal while minimizing taxes, there are several important steps and strategies you should consider.
1. Determine the Optimal Sale Structure: Asset vs. Share Sale
One of the first decisions you’ll need to make is whether to structure the sale as an asset sale or a share sale. Each approach has different implications for both the buyer and the seller.
Asset Sale: In this structure, the buyer purchases individual assets (such as inventory, equipment, and intellectual property) and assumes certain liabilities. For the seller, an asset sale may result in tax consequences such as recapture of depreciation (CCA) and capital gains, depending on the assets sold.
- Tax Tip: The tax impact of an asset sale depends on the nature of the assets. Assets like goodwill or shares may receive more favorable tax treatment than physical assets subject to CCA recapture.
Share Sale: In a share sale, the buyer acquires ownership of the corporation by purchasing its shares. For sellers, a share sale is often more tax efficient, especially if they can take advantage of the Lifetime Capital Gains Exemption (LCGE), which can shelter up to $971,190 (for 2024) of capital gains on the sale of shares in a qualified small business corporation.
2. Leverage the Lifetime Capital Gains Exemption (LCGE)
If your business qualifies as a Canadian-Controlled Private Corporation (CCPC), you may be eligible to use the LCGE. This exemption allows you to reduce or eliminate the capital gains tax on the sale of shares, which can be a significant benefit.
- Key Consideration: Ensure your business meets the criteria for the LCGE, including the "active business" requirement, which stipulates that at least 90% of the company’s assets must be used in an active business in Canada.
3. Tax-Efficient Payout Structures
The way you receive payment for your business can have a significant impact on your tax liability. A lump-sum payment may trigger a large tax bill, whereas spreading payments over several years (installment sale) can allow for better tax planning by deferring income to future years.
- Earnouts and Vendor Take-Back Loans: Including an earnout or vendor financing (vendor take-back loan) as part of the sale agreement can defer some of the capital gains and spread out the tax impact over multiple years, especially if the total gain exceeds the LCGE limit.
If family members have shares in the business, you can potentially use income-splitting strategies to distribute capital gains across multiple shareholders. This can reduce the overall tax burden by taking advantage of lower tax brackets or LCGE limits for each shareholder.
5. Consider Post-Sale Tax Planning
Once the sale is complete, further tax planning may be required to manage the proceeds effectively. For instance, setting up an Individual Pension Plan (IPP) or investing in tax-efficient vehicles like TFSAs can help you minimize taxes on your sale proceeds and plan for retirement.
6. Involve a Team of Advisors
A successful business sale requires input from various professionals, including accountants, tax advisors, and business valuators. Engaging these experts early in the process can help you structure the sale for maximum tax efficiency and ensure you get the best deal possible.
Conclusion
Selling your business is not just about finding a buyer; it's about structuring the sale in a way that maximizes your after-tax proceeds. By carefully considering the sale structure, leveraging tax benefits like the LCGE, and employing income-splitting or installment strategies, you can enhance the value of your sale while minimizing the tax impact. Always consult with your CPA and legal advisor to ensure you’re making informed decisions based on your unique situation.
