Can I split my business into two companies before selling?

Splitting a business before a sale usually means moving one part of it, such as a building, an investment portfolio or a separate line of business, into a second company so that the buyer takes only the part it wants. The split is a series of real transfers, each with tax, contract and approval consequences, which is why it is easier to plan well before a buyer is waiting.

The transfer is a disposition for tax

Moving property from one company to another is a disposition. The Income Tax Act lets a taxpayer who transfers eligible property to a taxable Canadian corporation for consideration that includes shares of that corporation make a joint election with it, so the transfer happens at an agreed amount instead of fair market value. The election has conditions and a prescribed form, so an accountant should map the steps and their order before anything is signed.

The exemption tests look at the company you sell

If you hope to claim the lifetime capital gains exemption on the shares you sell, the Act tests who has owned those shares over a look-back period and what the company holds. It generally asks whether all or substantially all of the company’s asset value is in assets used principally in an active business carried on primarily in Canada. Shares issued in a restructuring raise the holding-period issue covered in our page on owning shares only briefly.

Contracts and registrations follow the entity

A contract, lease, licence or loan stays with the company that signed it, so moving operations means finding out which agreements can move and who must consent. Each contract’s wording decides that. The CRA says a change of owners, partners or directors may require different actions, such as registering a new business number and new program accounts. If the property moved is all or substantially all of a company’s property, corporate law can also require a shareholder vote, as our page on dissent rights on an asset sale explains.