Are you considering retirement soon or have you received an attractive offer to sell your business? Are you wondering what the best option is: selling the assets or the shares of your company? It is crucial to know that if you meet certain conditions, you could benefit from the capital gains deduction, an opportunity that allows you to exempt the first $824,176 of lifetime profit from tax (this amount is subject to annual revision). This means that the first $824,176 of profit made from the sale of your business could be taxed at a 0% rate.
What is the capital gains deduction?
The capital gains deduction applies to owners of qualified small business corporation shares (QSBCS). However, several criteria must be met to qualify for this exemption. The basic principle is that the shares sold must be qualified small business corporation shares (QSBCS). You may be wondering:
- What is a Qualified Small Business Corporation Share (QSBCS)? A QSBCS is a share held by the taxpayer or a related person for at least 24 months preceding the sale. In addition, more than 90% of the value of this share, at the time of sale, must come from assets primarily used in an actively operated business.
Certain types of assets are not eligible, such as:
- Excess cash not required for the operation of the business
- An investment portfolio or financial products not related to the main business activity
How to optimize eligibility?
If your business holds non-eligible assets, it is often recommended to purify these assets before the sale. Tax strategies can be implemented to restructure your business in a way that maximizes your eligibility for the exemption.
Am I eligible for the deduction if I am not incorporated?
This is a common question, and the answer may surprise you. Even if you are a sole proprietor, Canadian tax law may allow you to benefit from this deduction.
Let’s take the example of Mr. Claude Bouchard, a dentist in Pierrefonds for over 30 years, who is considering selling his practice. As a sole proprietor, he might not immediately qualify for the capital gains deduction. However, by incorporating his dental practice and transferring the assets of his business to this new company, Mr. Bouchard then becomes the holder of the company’s shares.
Thanks to this strategy, he can bypass the 24-month shareholding requirement since he was the owner of the sole proprietorship for many years. He could thus sell the shares of the newly formed company and benefit from the capital gains deduction without delay.
Why consult a tax expert?
The sale of a business represents a pivotal moment in your career and financial future. Each case is unique, and it is essential to consult a tax expert who can guide you through the steps to maximize your gains and minimize your taxes. Our experts can help you understand the tax implications of your decisions, structure your assets, and develop strategies tailored to your objectives.
Don’t wait – contact us today to explore the options available to you and ensure a smooth transition to the next stage of your entrepreneurial journey.
