Your best bet is to capitalize on the $750,000 capital-gains exemption on the sale of shares in a qualified small-business corporation rather than selling the company’s assets. This approach could save you up to $174,000, depending on which province you live in — and provided that you and your company qualify.
Your company qualifies if it meets several criteria, including the requirement that at least 90% of its assets must be used principally in an active business carried on primarily in Canada. But even if your corporation doesn’t currently qualify for the deduction, you might be able to “purify” it. Generally, this involves removing non-business assets (such as cash or investments) from the firm prior to the sale, provided that non-business assets total no more than 50% of all assets.
Once you’ve determined that the shares you’re selling do qualify — or can be made to — consider whether you personally qualify for the capital-gains deduction. Previous uses of the capital-gains deduction or investment-related expenses in excess of investment income claimed on your personal tax return will restrict access to this deduction.
You might also need to consider the implications of various attributes of the sale.
If you help finance the purchase with vendor take-back financing, careful consideration of the loan’s terms could allow you to reduce or at least defer your tax burden by recognizing the capital gain over a period of up to five years. Similarly, take care in structuring any earn-out arrangement, whereby part of the sale price is dependent on future earnings and paid out over time. Finally, if you are required to sign a non-competition agreement as part of the sale, new proposed rules in the Income Tax Act need to be considered to minimize the tax implications associated with these types of agreements.