How can I sell my business gradually to a key employee over several years?

A staged sale to a key employee needs a written agreement that sets how many shares move, when, and at what price. There are two ways to move them. The employee buys shares from you directly in stages, or the company buys back shares from you. The tax and corporate rules differ between the two, so ask an accountant and a lawyer before you commit to one.

When the employee buys from you over time

The CRA says that if you receive the proceeds over a number of years, you may be able to claim a capital gains reserve, which usually lets you report a portion of the gain based on proceeds not yet received. Generally, the maximum period for most reserves is four years, so the gain is included in income over five years. The CRA provides a nine-year reserve period for listed dispositions, including one under a qualifying business transfer, so ask your accountant whether any applies to your schedule. The CRA also says you generally cannot claim a reserve if you sold the property to a corporation you control in any way.

When the company buys your shares

Under the Canada Business Corporations Act, s.34(1), a corporation may purchase its own shares subject to s.34(2) and its articles. Section 34(2) bars a payment if there are reasonable grounds for believing the corporation is or would be unable to pay its liabilities as they become due, or that the realizable value of its assets would fall below its liabilities and stated capital of all classes. This is subject to the exceptions in ss.35 and 36, which carry their own conditions. Provincial companies follow their own statute, such as Ontario’s Business Corporations Act.

A tax difference to ask about

Under Income Tax Act s.84(3), when a corporation resident in Canada redeems, acquires or cancels its own shares, it is deemed to pay a dividend equal to the amount by which the amount paid exceeds the paid-up capital, subject to exceptions in that section. That treatment differs from a sale of shares to the employee. Ask your accountant to model both routes.