In Canada, when you want to retire or change your business, you often need to close your business first and then sell it to others.However, when closing a business, you must pay attention to making good use of tax policies
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Closing small businesses costs a lot
When entrepreneur Andrew Sider decided to sell his mobile discussion platform Bunch to online marketplace VarageSale in 2014, he had no idea how tax-complex the deal would be.Originally he wanted to DIY, but after reading through the complicated tax law provisions, he decided to hire an accountant. Mr. Sider hired an accountant to work with his lawyer to ensure tax and legal compliance with Canada Revenue Agency requirements.However, he hired professionals to handle the transaction at an unaffordable price
Three options for closing your business
Selling a company is a complex process that requires finding a buyer with the right price at the right time, and also includes using tax laws to minimize taxes in the transaction.Small business owners who wish to close their business have three main options:
1. Sale of the company (including shares and business, warehouses, equipment and other assets);
2. Only sell the business and maintain the company structure;
3. Cease business operations but retain the company
In practice, the first choice of most business owners is to sell the company directly, so that they can take advantage of the lifetime tax exemption policy.
When selling a company, taking advantage of tax policies is the key
The capital gain exemption increases every year, in 2016 it was $824,176This means that if the business is sold for C$1 million, shareholders will only pay tax of C$175,824But you must be a qualified company to use these exemptions, for example, you must meet the company's activity level Some companies cannot be sold, such as an employee consulting business that has no assets for sale.When business owners of this type of company decide to suspend operations, they can keep the money in the company, keeping the business active, and get it back as wages or dividends as neededOnly sells its business, not the company, and can also deposit money into the company and get it back as needed Additionally, investing money in a company is a way for small business owners to defer taxesBusiness owners who work as financial planners, for example, keep as much money in the company as possible instead of putting money into personal investments. This is because the investment opportunities in the company are almost unlimited. For example, you can buy real estate in the name of a company but not put it into a limited Registered Retirement Savings Plan (RRSP).Canadians are required to convert their retirement savings plan to a Registered Retirement Income Fund (RRIF) at age seventy-one, and then can only withdraw a fixed amount each yearAs for the company's investment, there are no rules for withdrawing money.
Tips for retiring and closing a store
For some retired business owners, another option is to hand over the company to family members by freezing assets. This is the reorganization of the company's share structure.A freeze allows the original business owner to limit the portion of the assets subject to capital gain. For example, if the business is worth C$1 million and the assets are frozen, the outgoing business owner will be liable for capital gains.If the value increases to CAD 3 million after the freeze, the new owner will need to pay an additional CAD 2 million in capital gains tax. There are actually different ways to structure your business, the key is to make sure the value of the frozen assets is enough for your retirement
Take advantage of corporate tax deferrals
In some cases it is better to sell a business than to transfer it to a family memberBut selling a business requires paying various taxesTrading can also be carried out in a variety of ways to minimize tax payments and capitalize on tax-free capital gains Norman Abbott sold his brake manufacturing company, OE Quality Friction of Mississauga, to an outside buyer in 2008 Mr Abbott, on the advice of advisers, took advantage of capital gains exemptions and set up a holding company before the sale to defer tax on a portion of the sale proceedsHe can now withdraw funds from this holding company as personal income as neededThis strategy is conducive to deferring tax payments and saving taxes; it can also keep Mr. Abbott's personal tax in a lower tax bracket, making it easier to pay himself a salary from the holding company For small business owners, it is best to understand their business structure and corporate status, make full use of the tax deferral, tax exemption, and tax credit policies in the tax law, and then decide when and how to sell or transfer their business and company. best for oneself