How do I plan the tax on exiting my business?

Planning the tax on an exit, which the guide to how a business sale is taxed outlines, starts with answering a short list of questions early, with an accountant, while there is still time to change the answers. What is being sold, shares or assets? Who has owned the shares, and for how long? How will the price be paid over time? Which CRA accounts have to close afterward? Some have look-back periods.

Shares, assets and the capital gains deduction

The CRA says a seller with taxable capital gains from qualified small business corporation shares may be eligible for the capital gains deduction. Subsection 110.6(1) of the Income Tax Act defines those shares. The shares must be owned by the individual, a spouse or common-law partner, or a related partnership, and throughout the preceding 24 months not owned by anyone else, unless that person is related. Throughout that period the company must also have been a Canadian-controlled private corporation meeting asset tests tied to an active business carried on primarily in Canada, subject to the substitution rules in the definition. Ask whether the business would pass them.

Spreading the gain over several years

Where the price is received over a number of years, the CRA says you may be able to claim a capital gains reserve. It states that generally the longest period for most reserves is four years, so the gain is reported over five, with a longer period for certain listed transfers, such as some transfers to a child. It also says that generally you cannot claim a reserve if you sold the property to a corporation you control in any way. That matters if a holding company is part of the plan.

GST/HST and closing accounts

The CRA says a seller may be able to elect jointly with the purchaser so that no GST/HST is payable on the sale of a business, if the conditions it lists are met, and that GST/HST is still charged on certain supplies. It adds that the election cannot be made if only one or more assets are sold, or if the seller is a registrant and the purchaser is not. The CRA also says a seller with employees must close its payroll account and contact the tax services office about a GST/HST account.

What to bring to the first meeting

• A share ownership history for the last 24 months and beyond.
• A list of what the business owns, and whether anything sits outside the active business.
• The payment structure being discussed, cash at closing against amounts paid later.
• Whether the buyer is registered for GST/HST.
• The CRA accounts the business holds.