One of the most crucial choices you will make as an entrepreneur is whether to sell your company so that you can retire or move on to other challenges. The first step in selling your firm should be to speak with an accountant and a lawyer about the sale’s potential effects on your taxes and estate planning. Next, you should take the necessary actions to improve the worth of your company and raise the selling price. Finding a lawyer or consultant who focuses on mergers and acquisitions will help you determine the best course of action for the sale process. You may have considered selling your business as a part of your long-term business plan as a business owner. Your plans could be influenced by a variety of factors, including retirement planning, fresh business opportunities, or hazy market conditions. People are still purchasing businesses despite the recent economic recession, so now could be a good moment to sell. Whatever the cause, tax issues should be at the front of any seller’s mind once a sale has been decided upon as the exit option.
How to sell a Canadian-incorporated company
In Canada, there are primarily two ways to sell an incorporated firm:
- By selling shares.
- By selling assets.
Whichever way a corporation is sold has a range of short-and long-term tax repercussions. A hybrid sale, which combines aspects of share and asset sales to balance risk and tax expenses, is a third choice that many business owners ignore. Before making a sale or purchase, it is important to understand and carefully analyze the advantages and tax implications of each of these choices for the buyer and seller.
A share sale
In a share sale, the company’s shares are sold to the buyer by the present owner. Due to the advantageous tax ramifications, sellers frequently choose this alternative.
If you, as an individual, sell your company shares, the excess of your proceeds over the shares’ adjusted cost basis less certain selling-related costs results in a capital gain that is only 50% taxable. Additionally, you can normally claim a lifetime capital gains exemption to shield all or part of the gain from tax if these shares qualify as shares of a qualifying small business company.
For QSBC shares, the lifetime capital gains exemption is $883,384 in 2020, and it is only accessible to people who are Canadian residents. The brand and reputation of your company are the main factors that could influence a share acquisition, even if many buyers prefer to buy business assets instead of shares. Tax factors including accessible tax pools, such as investment tax credits and non-capital loss carry-forwards, may also serve as inspiration. However, for the buyer to be entitled to such considerations after the acquisition, the same or similar firm must typically be operated with a reasonable prospect of profit. Therefore, these motivational variables might only be relevant in particular circumstances. A share acquisition exposes the purchaser to further risk because they also take on any outstanding debts, such as tax and legal obligations. To be sure that their acquisition doesn’t have any unanticipated skeletons in the closet, buyers are recommended to perform a thorough due diligence process. As a regular component of a share transaction, protective clauses for tax and legal obligations may also be included in the buy and sell agreement.
As the name suggests, in an asset sale, the buyer acquires ownership of the assets of the company, including its inventory, equipment, and accounts receivable. It’s understandable why many purchasers favor this type of acquisition, which enables the purchaser to select the assets they wish to purchase and restricts their ability to raise the tax cost of the purchased assets to their current market value is another benefit of asset purchases for buyers. Because there is a higher depreciable asset basis or a higher cost to decrease profits on a future disposition compared to the tax cost of the assets within the corporation that would typically apply when a share purchase occurs, this minimizes the buyer’s tax moving ahead. However, bear in mind that taxes on sales and land transfers could be incurred when purchasing assets. The net proceeds from the sale of company assets are typically dispersed to you, the owner, as dividends that are taxable at your appropriate marginal tax rate.
A hybrid sale, which is sometimes neglected, includes the sale of both shares and certain business assets with the ultimate objective of striking an appropriate balance between advantages and tax expenses for both purchasers and sellers. Depending on the sort of business and the situation, this third choice needs to be carefully considered. There are numerous ways to set up a hybrid sale, and the optimal course of action will depend on the particular firm and the unique requirements of the buyer and seller.