What are the tax consequences of selling a small business I invested in to my son?

Article content material

By Julie Cazzin with Andrew Dobson

Q: I wish to promote our franchise to my oldest son. The revenue 12 months after 12 months is $75,000 to $100,000, however gross sales are greater than $2 million. We don’t personal the constructing; we lease it from a big firm. We solely personal the tools inside and the signage. I want to promote it to my son on the truthful market worth I personally consider it to be, so the Canada Revenue Agency is not going to come again someday sooner or later and request extra capital positive aspects taxes. I assess it to be price $400,000 to $450,000. The switch of the franchise rights to my son is free from the franchise proprietor and the tools is about $250,000. Will the CRA be OK with this or will there be issues? What do you recommend I do? — Larry

Article content material

Article content material

FP Solutions: Transferring or promoting a enterprise to kids could be a technique for enterprise homeowners to perform intergenerational wealth switch. Since franchisees are certain by franchise agreements, that’s seemingly one of the best place to start out reviewing any restrictions concerning a sale. A franchise settlement may dictate the phrases the franchisee should adjust to earlier than promoting their franchise. For instance, many franchises require pre-approval of latest consumers/franchisees so as to enable the franchise to switch to that new possession.

Article content material

A enterprise proprietor contemplating the sale of their enterprise ought to contemplate acquiring a enterprise appraisal to evaluate the worth previous to the sale. Chartered enterprise valuators (CBVs) are consultants on this discipline and will guarantee your corporation is correctly valued, which is essential for a sale involving a non-arm’s-length member of the family.

CBVs will test gadgets equivalent to tools depreciation, gross sales, monetary ratios (for instance, value to ebook and value to earnings), goodwill and stock turnover, amongst different gadgets. They could additionally evaluate your corporation to comparable, just lately appraised companies to pretty worth your corporation.

Article content material

Article content material

You made the purpose that figuring out your truthful market worth for the enterprise could be essential for tax functions and that may be a right assertion. You can’t promote your corporation or one other asset for a low worth to a member of the family to cut back tax. The disposition is mostly thought-about to be accomplished at truthful market worth when transferring or promoting belongings to a non-arm’s-length recipient equivalent to a member of the family.

Acquiring a valuation can guarantee you’re approaching this a part of the transaction pretty. It may additionally are available helpful when you determine to promote your corporation to a 3rd occasion or in case your son decides to not take over the enterprise.

Your shares can also qualify for the lifetime capital gains exemption, which may will let you have a capital acquire of as much as $1,016,836 upon the sale of shares in your corporation and qualify for an offsetting deduction on your taxes. This might make the sale proceeds tax free.

As a way to qualify for the exemption, your corporation should go a number of checks, together with:

• The certified small enterprise company take a look at: Your small business have to be a Canadian-controlled personal company.
• The holding interval take a look at: You should have held the shares for not less than 24 months previous the sale.
• The truthful market worth asset take a look at: 24 months previous to promoting your corporation, not less than 50 per cent of its truthful market worth have to be used within the lively enterprise. Additionally, on the time of sale, 90 per cent of the truthful market worth of the belongings should have been used within the lively enterprise.

Article content material

There are just a few extra issues about how a enterprise is taxed upon its sale. For instance, you’ll have insurance coverage insurance policies, a automobile or collected financial savings you wish to extract from the enterprise previous to the sale which will lead to tax payable to you.

Or your purchaser, whether or not your son or in any other case, may supply to purchase the belongings of the enterprise, equivalent to tools, goodwill and the lease, as an alternative of the shares. In case your company sells the belongings of the corporate, the sale wouldn’t be tax free and the corporate would pay capital positive aspects tax.

Even when your share sale qualifies for the lifetime capital positive aspects exemption, there is likely to be a must pay the choice minimal tax (AMT). The AMT is levied based mostly on a formulation and might apply in conditions the place somebody’s revenue tax payable is just too low in any given 12 months, however they’d important revenue that was topic to preferential tax remedy.

Notice that the AMT is a type of recoverable tax that may be carried ahead and claimed sooner or later to cut back tax in a subsequent 12 months. It could not apply to your scenario particularly, nevertheless it’s good to not less than point out it for others within the context of this dialogue.

Andrew Dobson is a fee-only, advice-only licensed monetary planner (CFP) and chartered funding supervisor (CIM) at Goal Monetary Companions Inc. in London, Ont. He doesn’t promote any monetary merchandise in any way. He might be reached at adobson@objectivecfp.com.

Article content material