Difficulties in selling your business

February 28,2018

Difficulties in selling your business

 

Let’s take some time to go over some of the difficulties in selling your business and utilizing the lifetime capital gains exemption (LCGE). Every Canadian taxpayer is eligible for the LCGE. As of 2018, it’s roughly $848,252 of tax-free money that could be paid to you if you sell qualified shares of your corporation. So, what does that mean?

 

If you sell off shares in your corporation to someone within Canada and your capital gain is under $848,252, the entire amount would be tax-free. That means you are saving up to $424,126 in tax (current as of 2018 capital gains inclusion rate).

 

However, there are certain criteria that you need to meet before you sell your business in order to be eligible. A couple of those are:

 

Within the last two years, 50% of the assets within your company need to be used for active business income. What does that mean? Money, GICs, real estate—all of these are assets within your corporation, if they’re not being used actively, they’re going to throw you out of that eligibility criteria.

 

The other critical criteria is that within the six months prior to the sale, 90% of the assets need to be utilized actively within the company. That means that if you have real estate, GICs, mutual funds, and even sometimes cash, and if it can’t be determined that it is required for active business operations, you will not meet this criteria.

 

How do you get around this? You could sell off your assets or pull them out of your company, but you will be paying taxes on these transactions and you are likely at a high marginal tax rate at that time. As a result, it’s not going to be the most efficient way to transfer the money or assets out in order to meet the LCGE criteria.

 

There are a lot of different ways we can get around this. Business Critical assesses multiple details and scenarios. Do you have an operating company structure? Do you have a holding company as well as an operating company? Should we set up a trust fund? How do we purify your corporation? There are many variables to look at. Business Critical can work with you to maximize your net worth, utilize your LCGE, and capitalize on tax strategies and efficiencies.

 

To find out more about how to structure your business to be eligible for the LCGE, schedule a call with us or email philip@businesscritical.info.