Selling Your Business? Smart Tax Planning Starts Here
Strategies to Reduce Your Tax Burden When Exiting Your Business
Contents
Introduction
Thinking of selling your business?
It’s an exciting step, but one that comes with tax implications that can make or break your financial windfall.
Planning early is essential.
But don’t worry, we’ve got the strategies to help you keep more of your hard-earned money.
Client Story
We recently advised a client on the sale of his food distribution company for a $12 million exit without paying any taxes. Mike, the owner inherited the family business from his parents and grew it 10 fold in 15 years exiting to a larger operator based in the U.S.
Since we were anticipating this sale for some time, Mike was able to set-up a family trust structure where he could take advantage of the lifetime Capital Gains Exemption (LCGE) 4 times with his kids and wife as beneficiaries. This shielded $3.9 million in taxes. The remaining $8 million was reinvested in other businesses Mike owned that qualified for the capital gains deferral!
This transaction resulted in Mike walking away tax free and we couldn’t be happier!
There are many opportunities to optimize your tax position when selling a business. We have listed a few below with examples. It’s important to remember that early planning is critical and will facilitate many strategies.
The Lifetime Capital Gains Exemption
Today’s Opportunity: Lisa owns a bakery that qualifies as a Qualified Small Business Corporation (QSBC). When she sells her shares, Lisa can claim the Lifetime Capital Gains Exemption (LCGE), which shields up to $1,016,836 (in 2024) of her gains from taxes.
How It Works: If your business is a QSBC, you could save a significant chunk on taxes when you sell. To qualify, at least 90% of the company’s assets must be used in an active business in Canada, and you must own the shares for at least 24 months.
Pro Tip: Planning is critical. If your business doesn’t qualify now, restructuring could help meet the criteria before selling.
Capital Gains Deferral
Today’s Opportunity: Raj sells his IT company but wants to reinvest in another business venture. By structuring the sale as a share-for-share exchange or reinvesting the proceeds into another eligible business, Raj can defer paying taxes on the capital gains.
How It Works: If you reinvest the proceeds of your sale into a similar business or venture within a specific time frame, you can defer the tax bill until later. This means more money in your pocket to grow your next venture.
Pro Tip: Work closely with a tax advisor to ensure the reinvestment meets the requirements for deferral.
Selling to Family Members
Today’s Opportunity: Jamie wants to sell his family-owned construction company to his children. Thanks to recent updates in tax laws, Jamie can now sell the business directly to his children and claim the LCGE, avoiding the punitive tax treatment that previously applied.
How It Works: The Bill C-208 changes allow intergenerational business transfers to qualify for the same tax treatment as selling to a third party.
Pro Tip: Ensure the transfer is structured correctly to meet the legislation’s requirements and avoid triggering higher taxes.
Today’s Opportunity: Erin sells her marketing firm to her employees through an Employee Share Ownership Plan (ESOP). Not only does this reward loyal staff, but it can also provide her with tax benefits.
How It Works: ESOPs allow a gradual sale of shares, which can help spread out taxable gains over several years, reducing the immediate tax impact.
Pro Tip: This works well for businesses where the owner wants to maintain involvement during the transition.
Use of a Holding Company
Today’s Opportunity: Paul transfers the shares of his business to a holding company before selling to an outside buyer. This creates flexibility for income splitting and potentially deferring taxes on gains.
How It Works: A holding company can act as a tax-efficient vehicle to manage the proceeds from the sale, allowing for greater control over when and how you draw income.
Pro Tip: Plan ahead—setting up a holding company requires time and strategic planning.