GUEST COLUMN: Selling the shop

Things to consider if you are selling your business to someone outside the family.

If you plan on selling your business to someone outside your family, there are several strategies available to minimize tax from the sale – many of which allow you to claim the capital gains exemption to reduce taxes.

Selling shares versus assets – One of your most critical decisions is whether to sell your business shares or your business assets. This is because the capital gains exemption can only be claimed on capital gains resulting from the sale of business shares – not from the sale of business assets.

If your prospective purchaser is interested in the shares, make sure that your shares will qualify for the exemption. To qualify, at least 90 per cent of your business assets should be active assets used in your day-to-day business activities at the time of the sale. Assets such as investment portfolios, which are not used in day-to-day business activities, are considered non-active. Purifying your shares by converting non-active assets into active assets, or by moving non-active assets out of your company can help get you above the 90 per cent threshold, if required.

If your prospective purchaser would be interested in the shares, but your business is not currently incorporated, consider doing so in advance of the sale to take advantage of the capital gains tax exemption.

If your prospective purchaser is only interested in purchasing your business assets, not your shares, consider asking for a higher price to compensate for the additional tax that you will likely incur from losing the exemption.

There are many other strategies to help minimize tax on the sale of your business. Here are just a few:

Make a charitable gift – Consider using some of the sale proceeds to make a charitable gift either directly to a registered charity, or to your own charitable foundation in the year of sale. The donation tax credits can help reduce the tax on the capital gain from the sale of the business.

Establish an estate freeze – If the sale is not imminent and you expect the value of the business to increase, then consider reorganizing the company (e.g. estate freeze) so that some, or all, of the future capital gain can accrue to other family member shareholders. This can have the effect of multiplying the use of the capital gain exemption if the shares qualify.

However, keep in mind that the future capital gain allocated to the family members would no longer belong to you.

Pay yourself a retiring allowance – Another strategy to consider before selling your company is paying yourself a retiring allowance. If you had years of service prior to 1996, then all or a portion of the retiring allowance can be transferred to your registered retirement savings plan (RSP) on a tax-deferred basis without affecting your unused RSP deduction limit. However, if it’s a share sale and you continue working for the purchaser, the payment will not qualify as a retiring allowance.

Do it right – The sale of your business and the strategies you choose to minimize taxes need to be carefully evaluated before being implemented. Speaking to a qualified advisor will help ensure that you are making the right choices and following the right procedures in order to qualify for tax benefits.

Kirbey Lockart is an investment advisor with RBC Dominion Securities. This article is provided for information purposes only. Please consult with a professional financial advisor before implementing a strategy.

Just Posted

Historic tourney win for Vernon Christian School volleyball

Royals become first A Division team to win Best of the West senior boys tournament in Kelowna

Vernon boy Mel Arnold’s ‘biggest little supporter’

While other kids were reading Dr. Seuss, Alex Mulder was studying Canada’s prime ministers

Armstrong couple has deep roots in town

The Maws have been married for more than 60 years

Boil water notice lifted for some residents on the west side of Okanagan Lake

Two-hundred and seventy property owners in the Westshoe Estates Subdivision can now safely drink their water again

Writer-in-residence inspires next generation

Yvonne Blomer has been selected as the Kalamalka Press Writer-in-Residence at Caetani Cultural Centre

Scheer says Canada more divided than ever, as NDP and Bloc hold cards close

While Liberals were shut out of two key prairie provinces, they took two-thirds of the seats in Ontario

Investor alert: ‘Split games’ pyramid scheme circulating in B.C.

British Columbia Securities Commission issues warning about scheme selling virtual shares

Federal NDP may support B.C. with major projects, Carole James says

SkyTrain Surrey extension, Massey Tunnel need Ottawa’s help

Street-hockey movie filmed in Okanagan to fight homelessness stigma

The hockey game in Kelowna was filmed to bring more attention to the homelessness crisis

‘Issue-by-issue parliament’: Expert says Liberals need to placate NDP to be effective

Scandals, social issues, racism defined 2019 federal election, SFU prof says

Misconduct investigations spike by 65% across B.C.’s municipal police forces: report

Reports overall up 15 per cent while complaints made by public down seven per cent

Man allegedly uses gun to rob Salmon Arm bank

Police investigating video footage, asking for information, tips from public

RCMP seize cocaine, over $5,000 CAD and loaded handgun from Oliver residence

The seizure was a result of a CDSA search warrant, which was executed on Oct. 9

100 lb pumpkin stolen a second time from Oliver business

According to security footage, a man and woman took the pumpkin on Oct. 20 at 8:20 p.m.

Most Read