Jamie Kungel, CPA, CA
There are a number of different ways you can exit a business and each strategy has different income tax consequences. To ensure the maximum amount of funds is retained after exiting a business, it is important to align your corporate structure with your exit plan.
Liquidating business assets
The simplest way to exit a business is to liquidate the business assets – but if this is your plan, it will be extremely important to ensure funds can be removed from the company in a tax-efficient manner. Accordingly, your business structure should allow for effective income splitting.
Selling your business
Another exit strategy might be to sell the shares of the operating company to a purchaser who will continue to run the business. Assuming the shares of the company meet the criteria to qualify for the Capital Gains Exemption, each individual who holds the shares has the ability to realize an $824,176 capital gain without paying income tax. The income tax savings from each Capital Gains Exemption used by a resident of B.C. is approximately $197,000, so it pays to make sure your company qualifies for the exemption. In some cases, you can also structure the company to access multiple exemptions. Note that this exemption is only available to individuals and not to corporations.
Transferring your business to the next generation
First, you must determine whether you expect the next generation to actually pay for the shares or whether you simply want any future growth of the business to be attributed to them. The latter approach is quite common, as it allows the first generation to have its shares bought back by the company over a period of time to provide funds for retirement, however there are alternative strategies that are available to minimize the overall tax cost to the first generation.
There are many different exit strategies and business owners should carefully consider which option suits their particular needs – both from a cash flow and income tax perspective. Once you are in the process of exiting a business, it is often too late to change the structure, so it is best to plan in advance. To learn more about how to develop a comprehensive plan to successfully exit your business, go to www.ExitSmart.ca.
Jamie Kungel, CPA, CA is the Regional Tax Leader for MNP LLP. For more information, contact Jamie at 250.734.4303 or firstname.lastname@example.org. Please consult a tax advisor for advice about how the above information should be applied.