“It’s not how much money you make, but how much money you keep…” Robert Kiyosaki

 

When it comes to selling a business, we often think about it like a real estate transaction. We require a seller and a buyer, we sometimes need a professional to facilitate the transaction, and the facilitator should maximize the sale price in an ideal circumstance. Selling a business can draw parallels with this example with one unique difference, unlike a real estate transaction, planning, and specifically tax planning can have a significant impact on the outcomes when selling a business. In the words of Robert Kiyosaki, it is about your after tax or net return, it is about ‘how much you keep’ not ‘how much you make’.

 

When selling your business, there a lot more to consider in terms of cash than the purchase price. Your real bottom line is the after-tax funds you retain after the sale. Planning ahead of time may offer you not only more flexibility in negotiating the terms of the sale, but provide you with more after-tax cash.

 

The following are a few of the items you should consider when selling your business:

 

• Does your business qualify for the Lifetime Capital Gains exemption or LCGE ($800,000 (2014 threshold and indexed annually thereafter). To qualify, you may need to remove assets not used in the business prior to sale and may need some lead time to do so.
• If your business is not incorporated but there is a prospective purchaser, you may be able to incorporate and then sell the shares of the new corporation in order to use some or all of your LCGE. This may allow you to reduce or eliminate any capital gains tax that you may have to pay.
• If you plan to sell in the future and expect the value of your business to increase, there may be some steps you can take today to reduce the taxes you will pay on the eventual sale of your business. Consider implementing an estate freeze so that some or all of the future growth of your business can accrue to other family members and gains can be offset with their capital gains exemptions.
• To the extent that you will pay tax on the gain, i.e. the gain is not completely reduced by your LCGE, taking back a promissory note and having the purchaser
• Pay the proceeds over a number of years, assuming you have an adequate guarantee of payment and an attractive interest rate on the note.
• Consider whether a portion of the capital gain which is otherwise taxable could be received as a dividend which will be taxed in the future, in effect deferring the income tax. Consideration could be given to using some of the funds which will otherwise ultimately be taxable to purchase an insurance policy. This strategy involves more complicated planning best done by a seasoned tax professional.
• If you sell the assets rather than the shares in your corporation, you will not be able to claim the LCGE upon the sale. You should consider negotiating a higher sale price to reflect the additional tax you will incur on the sale, and to reflect the benefit that the purchaser will receive due to the higher tax cost of the assets.
• Where the purchaser is another company, instead of receiving you could consider taking back shares of the purchaser as consideration as it may be possible to receive the purchaser’s shares in exchange for your shares without paying any immediate income tax.
• Consider having a financial plan prepared or updated for you to determine if the after-tax sale proceeds are enough for you and your family to meet your retirement and estate planning goals. Our financial planner would be more than happy to help.

 

There are many additional strategies that may be available to you when selling your business that may help you save income tax. Speak to a member of the Menard Kinkaid team, along with your tax advisor regarding the strategies above or more advanced strategies available to you in your circumstances.