The initial tax implications of selling assets of a incorporated company are corporate tax implications, Peter. The shareholder then has to pay the personal income tax insofar as he subsequently wishes to withdraw money from the company.
What is the Lifetime Capital Gains Exemption?
When you sell a company’s stock, you are giving up ownership of the company. The sale of the shares may qualify for the Lifetime Capital Gains Exemption (LCGE). The LCGE allows a tax-exempt capital gain of up to $913,630 on the sale of qualified small business stock.
A small business is defined as a Canadian-controlled private enterprise in which all or most (90% or more) of the fair market value of its assets is primarily used in an active business primarily conducted in Canada by the enterprise or by a related company. company; are stock or debt of associated companies that were small businesses; or a combination of these two types of assets.
According to the Canada Revenue Agency (CRA), the sale must meet the following eligibility requirements:
“at the time of sale, it was a share of the capital of a small business, and it was owned by you, your spouse or joint partner, or a partnership of which you were a member “during that part of the 24 months immediately before the share was disposed of while the share was owned by you, a company of which you were a member, or a person related to you, it was a share of a Canadian-controlled private company and more than 50% of the fair market value of the assets of the company were: “mainly used in an active business primarily conducted in Canada by the Canadian-controlled private company, or by a related company” certain shares or debts of related companies “or a combination of these two types of assets” and during the 24 months immediately before the share was sold, no one owned the share except you, a partnership of which you were a member, or any person n who is related to you”
It is worth noting that a sole proprietor can transfer its tax-deferred sole proprietorship to a corporation. Thus, a sole proprietor may be able to take advantage of the lifetime capital gains exemption by restructuring their business, as well as some of the other potential benefits of incorporation.
There are other complications that can make you less eligible for a tax-free capital gain on the sale of your business if it had been incorporated and you sold the stock, Peter. But hopefully all of the above information reinforces why there isn’t a simple answer to the tax implications of the sale. There are many considerations.
Why the CRA does not provide tax advice
I think it’s worth noting that CRA generally doesn’t provide tax advice to taxpayers. They can provide general information, but even then taxpayers should be very careful about relying on the accuracy of CRA’s answers. Professional advice can be helpful, especially in a major transaction such as the sale of a business, real estate, or other valuable asset. Proactive tax planning before a transaction rather than after tax filing can also help a taxpayer save tax.
Jason Heath is a board-certified financial planner (CFP) who pays only a fee and provides advice only at Objective Financial Partners Inc. in Toronto, Ontario. He doesn’t sell financial products at all.
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This post How are you taxed if you sell a small business?
was original published at “https://www.moneysense.ca/columns/ask-a-planner/taxes-when-you-sell-a-small-business-in-canada/”