If you are buying a new business or selling an existing one in Canada, it’s important to know that the process will involve more than just signing the dotted line. Not only must all the fine print be read and carefully considered, there are a number of other areas that will need to be attended to as well.
During the course of the buying and selling procedure, details will have to be negotiated and agreed upon between the buyer and seller that involve such areas as liability and tax implications.
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Selling Shares
One of the most important decisions a business seller must make is whether to sell his or her shares or not. On many levels, it is advisable to sell them because there are definite monetary benefits to doing so.
Tax Advantage of Lifetime Capital Gains Exemption
Taxation (or the lack of it) plays a huge role in selling a business. Based on Capital Gains Exemption on Proceeds of Sales of Shares, a seller has a clear advantage to sell shares of a small business because IF a vendor is a Canadian Controlled Private Corporation (CCPC) in which more than 90% of the business income is Active Business Income (ABI), in accordance to the Lifetime Capital Gains Exemption (LCGE) of Qualified Small Business Share (QSBS), each person involved is able to claim an exemption of up to $866,912.00.
How it Works
How the capital gains exemption works is relatively simple as long as you fully understand it. Otherwise, you risk losing the exemption all together. If you sell qualifying business shares for under $866,912.00, you don’t pay taxes on the income received. Otherwise, you will pay taxes on all proceeds over the $866,912.00.
When it comes to selling a business in Canada, the Lifetime Capital Gains Exemption is the one and only tax exemption available.
The Catch
Every year, a score of business sellers pass up the incredible Lifetime Capital Gains Exemption without even knowing it because they are not aware that it exists. The LCGE is one of many tax planning and tax savings tools that are utilized by business law experts in Vancouver. While taking advantage of the tax break is not difficult, it does involve figuring out if your business qualifies or not, among other steps. It’s imperative to turn to a business law expert for guidance.
Corporate Law of Limited Liability Tax Advantage
Selling shares has another definite advantage which is to get out from under the liability that comes with holding shares. As long as the shares belong to the seller, so does the risk. When shares are sold, the liability is transferred as well.
Buyers Should Purchase Assets
Typically, buyers shy away from purchasing shares because they are interested in the assets of the company versus the shares. Shares come with liability and are more about the bones of the company in the marketplace rather than the current status of the business.
When a buyer only wants the assets of the business, such as the physical inventory, equipment, fixtures, trademarks and other intellectual property, and products, the business exists in a different form when purchased. It is then dumped into a new business vehicle that is owned by the buyer. The process is called an asset transfer or asset purchase. This type of business deal does not involve the liability of the business that was present prior to the purchase.
Game Changer
Just about the time you learn the rules of buying and selling a business, you may learn that everything has flipped around. That’s true because every deal that transpires in buying and selling a business is unique. The carryforward of asset depreciation being nearly NIL due to the Undepreciated Capital Cost of the assets is one reason a situation might change. Or, a seller may not wish to sell the business assets in order to prevent a recapture. Non-competition clauses and a myriad of other complicated issues may also play a role in the purchase and selling of a business.
The wisest move a buyer or a seller of a business in Canada can make is to secure the counsel of a Vancouver expert in business law to help ensure the transaction is a winning one.