Did you know that you can sell shares in a small business corporation tax-free thanks to the capital gains deduction? In fact, every individual resident in Canada can benefit from a total amount of $848,252 in 2018 (indexed annually) as a capital gains deduction on the sale of eligible shares.
However, is it possible for a self-employed person who doesn’t operate his or her business within a corporation to benefit from the same exemption in the event of a sale?
The answer is… yes, it’s never too late to incorporate and benefit from the capital gains deduction when you sell your shares. In fact, it’s possible to plan the transaction so that the sale of the business qualifies for the deduction and, by the same token, is tax-free! Subject to certain conditions, tax laws allow the self-employed person’s business to be transferred to a corporation immediately prior to the sale, in order to benefit from the deduction.
In principle, in order to benefit from the capital gains deduction on the sale of shares in a small business corporation, the shares must be held for at least 24 months prior to the sale. However, there is an exception to this rule when the shares of the corporation are issued in consideration for all or substantially all of the assets required to operate the self-employed person’s business.
Tax planning can result in substantial tax savings. Take, for example, the case of Mrs. Tremblay (fictitious name), who came to see us last year after receiving an offer to sell her “fonds de commerce”. Mrs. Tremblay was self-employed and operated a dry-cleaning franchise.
The offer provided for a sale price of $200,000 for the sale of equipment, clientele, franchise agreement and lease. Considering the tax cost of the assets, the effect of the sale was to create a recapture of depreciation and a capital gain on the sale of the assets. Taxes were estimated at approximately $40,000.
Following the implementation of tax planning to transfer all the assets required to operate the dry-cleaning business to a corporation, Mrs. Tremblay instead carried out a tax-free sale of shares, with no further delay.
In conclusion, it is possible to incorporate immediately before selling your business in order to benefit from the capital gains deduction.
We invite you to contact an Amyot Gélinas, s.e.n.c.r.l. tax specialist, who will be pleased to help you maximize your profit margin when selling your business.
[a-team-showcase id=”3609″]
