What do I need to work out for tax when I sell a business?

When a Canadian business is sold, the tax outcome depends on more than the headline price. The Canada Revenue Agency (CRA) points to several items a seller should work out, and the sale agreement can settle some of them. If you sell by transferring assets, these four questions, drawn from the CRA’s page, are a starting list. A share sale raises different questions, so confirm which structure you have.

How the price is allocated

The CRA says that in some cases the sales agreement sets a price for each asset, a value for the inventory and, if applicable, an amount attributed to goodwill. Section 68 of the Income Tax Act looks through the paper: where an amount can reasonably be regarded as being in part the consideration for the disposition of a particular property, for the provision of particular services or for a restrictive covenant, the part that can reasonably be so regarded is treated that way irrespective of the form or legal effect of the agreement.

Recapture, terminal loss and goodwill

The CRA says that, depending on your situation, you may have a recapture or a terminal loss of capital cost allowance (CCA) on the sale of your assets. It also says that, starting January 1, 2017, goodwill is included in Class 14.1. Ask your accountant how the amount put on goodwill affects your own result and the buyer’s capital cost allowance.

The GST/HST election

The CRA says a seller may be able to jointly elect with the purchaser to have no GST/HST payable on the sale, using Form GST44, but that the election cannot be made if you sell only one or more assets of your business, or if you are a registrant and the purchaser is not. Even with the election, you still charge GST/HST on taxable services you will render to the purchaser, taxable supplies of property by lease or licence, and taxable sales of real property to a purchaser who is not a registrant. The purchaser files the form by the due date of its next GST/HST return in which tax would otherwise have been payable.

Records and closing accounts

The CRA also says that if the business has a GST/HST account you must contact your tax services office to close it, and that if the business has employees you must close your payroll account. Keep the signed agreement, the allocation schedule and the filed election together. See what records to keep after selling.