You might want to sell your business for a wide variety of reasons, even if you’ve experienced success. Perhaps you found a more lucrative opportunity — or you don’t feel aligned with its purpose anymore. Or maybe you want to retire after all your challenging, but rewarding, years as a business owner. Whatever your reason, you should be aware of the tax implications of selling a business in Canada. We’ll cover capital gains and deductions for the two methods of business sales (asset and share sale). Read on to learn more!
Table of contents
- How much tax do you pay if you sell a business?
- Two Methods of Selling a Business in Canada
- Selling a Business in Canada: Tax Implications
- Selling a Business in Canada: Other Implications
How much tax do you pay if you sell a business?
Your total tax bill really depends on a lot of factors. Your personal tax bracket and your provincial address will weigh on your total tax paid, which can be anywhere between 0% to 27%. Keep in mind this is just a general guideline. Taxation can be a fickle thing, especially when selling a business in Canada.
How much did your business appreciate with your hard work over the years? Any increase in value is taxable via capital gains. In fact, the increase in value can be unexpected! However, you can also factor in losses on business assets to lower your taxable gains. But still, Canadian business owners tend to pay a pretty penny when they sell — usually in the 6 to 7 figures.
The amount of tax you pay will also depend on how you sell. Let’s check out the two methods of selling a business below.
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Two Methods of Selling a Business in Canada
You can sell your Canadian business by selling assets or shares. Each option has its pros and cons. Often times, the seller doesn’t have a ton of bargaining power. Usually the purchaser is the one who extends an offer to buy assets or shares, and the buyer can accept or reject.
An asset sale isn’t exactly a business sale. Here, a business owner will sell some or all of their company’s assets to a buyer, but they won’t sell the company itself. Sold assets might include:
- Business contracts and clients
- Intellectual property
- Subscriptions and SaaS products
- Real estate property
Even if the original owner sells most of their assets to the new owner, the company remains the original owner’s. With this in mind, the intent is to dissolve the company. This responsibility lies with the seller, not the buyer, and is an additional step in the process.
Why would a buyer want assets and not shares? Often this strategy is used when the buyer is concerned about assuming undisclosed or disclosed liabilities, such as lawsuits or debts. By only purchasing the assets, they are not simultaneously buying liabilities. From there, they can do as they wish with the acquired assets.
Business owners can sell all shares of their corporation directly to another party. The new owner now takes possession of the business as well as any assets and liabilities linked to it. Of course, negotiations might include exceptions, such as excluding certain assets they don’t want or removing responsibility for liabilities. A new owner might insist a business owner pay off some debts before they take ownership, for example.
With a share sale, the seller doesn’t have to worry about dissolving the company because it’s transferred to the new owner. Keep in mind that if your business has shareholders other than you, the complexity of the sale may increase.
This is a unique model where a business owner will sell assets first, then sell shares as dividends in a hybrid sale. The goal here is to maintain eligibility for the Lifetime Capital Gains Exemption (LCGE) while optimizing the sale. However, you should proceed with caution and an expert wealth manager before trying this maneuver. It’s been known to catch the CRA’s attention and incite an audit.
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Selling a Business in Canada: Tax Implications
Now that you know how a business is sold logistically, let’s explore each tax implication you’ll face when you sell your business in Canada.
Asset Sale – Capital Gains Tax
Capital gains tax is the proceeds of your asset sale minus the original cost. You’ll pay tax on the capital gain or loss on the assets sold.
Here’s a quick equation:
- Sale price — purchase price = net proceeds
- Net proceeds x 50% = taxable amount
Remember, any capital losses reduce the amount of capital gains. You might be bothered by a loss on an asset, but it’s good for tax purposes!
Share Sale – Capital Gains Deduction
With a share sale, you’ll pay capital gains tax on the sold shares. Here’s the equation:
- Sales price — purchase price = net proceeds
- Net proceeds x 50% = taxable amount
Now, what if the original business owner started the company themselves? That means the purchase price is $0. However, that figure would be higher if the business owner had originally purchased the company from someone else.
Is there a lifetime exemption for capital gains in Canada?
The Lifetime Capital Gains Exemption (LCGE) is a great mitigator of your business sale’s tax burden. It’s a tax break allowing business owners a tax-free capital gain of up to $913,630 on qualified shares. The idea is to provide financial relief to individuals who start companies, provide employment and generally increase economic activity in Canada.
However, you’ll need to meet a few criteria to qualify:
- You disposed of qualified small business corporation shares (QSBCS). In other words, you sold your shares, not assets.
- You, a spouse/common-law partner, or a relative owned the business at the time of sale.
- Within two years of the sale, 50% of the assets’ value was used in Canada to conduct business, were shares or debts of related corporations, or a combination.
- Neither you nor a qualified party owned the business 24 months before the sale.
Note that the exemption has the word “lifetime” in it. This is because it applies to a business owner’s entire lifetime of selling shares. If you reach the total LCGE limit, the next time you sell shares you won’t be eligible for the deduction again. Some reach the limit in their first share sale, whereas others may reach the limit through multiple share sales.
What about GST/HST?
If you have a GST/HST account before you sell your business, you’ll have to close the account with the Canada Revenue Agency (CRA). In many cases, your new business buyer will have to pay GST/HST on the sale. However, you can avoid this in negotiations. Generally, both parties can agree to avoid sales tax by filing the necessary paperwork.
The original business owner and the new buyer can agree to avoid GST/HST payable on the sale. Here’s how you can be eligible:
- You’re selling a business you originally established or took over.
- The buyer agrees to take ownership of at least 90% of the property necessary to carry on the business.
The laws and compliance surrounding sales tax in a business sale can be complex, so professional assistance may be needed.
Selling a Business in Canada: Other Implications
Before getting excited about the sale price of your business, it’s important to consider the taxes and after-tax proceeds. However, there are other implications to consider on a qualitative level as well.
Before selling, consider the possibilities with other avenues. For example, could you partner with someone else? Access a business loan or private debt? Evolve and scale? Or business liquidation? Oftentimes, these alternatives might be more attractive. Not to mention, it’s difficult to find a buyer of a business so you may have to consider other options.
Not sure if it’s the right time to sell? Experts advise us to look out for these signs that it’s time to sell:
- You can’t keep up with your business or industry;
- You’re bored, unmotivated, distracted, or
- You see more lucrative, rewarding opportunities elsewhere.
In addition, once your business is sold a lot can happen. Do you feel comfortable giving someone the reins to your brand? Are you worried about what will happen to your employees in an acquisition? If so, you may want to think more carefully about your business sale.
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