In Canada, if you want to retire or change your business, you often need to close your business first and then sell it to someone else. However, when closing a business, you must pay attention to taking advantage of tax policies.
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Closing small businesses costs big
When entrepreneur Andrew Sider decided to sell his mobile discussion platform Bunch to online marketplace VarageSale in 2014, he had no idea how complicated the transaction would be in terms of taxes. He originally wanted to do it himself, but after digging through the complicated tax code, he decided to hire an accountant. So Mr. Sider hired an accountant to work with his lawyer to ensure that both taxes and laws were in compliance with Canada Revenue Agency requirements. However, he paid an unbearable price to hire professionals to handle the transaction.
Three options for closing your business
Selling a company is a complex process that requires finding the right buyer at the right time and offering the right price, as well as utilizing tax laws to minimize taxes in the transaction. Small business owners who wish to close their business have three main options:
1. Selling the company (including shares and business, warehouses, equipment and other assets);
2. Sell only the business and keep the corporate 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 policy of lifetime tax exemption.
Selling a company and taking advantage of tax policy is key
The capital gain exemption increases every year and in 2016 it was $824,176. This means that if a business is sold for $1 million, shareholders will only pay $175,824 in taxes. But you have to be a qualified company to use these exemptions, such as the company must be active. Some companies cannot be sold, such as a consulting business for employees, and companies with no assets to sell. When business owners of this type of company decide to suspend the business, they can keep the money in the company, keep the business active, and withdraw it as wages or dividends as needed. Selling only their business, not the company, also allows them to keep the money in the company and withdraw it as needed. In addition, investing money in a company is a way for small business owners to postpone taxes. Business owners who are financial planners, for example, try to keep more money in the company instead of putting money into personal investments, because the investment opportunities of the company are almost unlimited. For example, you can buy real estate in the name of a company, but not in a registered retirement savings plan (RRSP) with a limited amount. Canadians need to convert their retirement savings plans into registered retirement income funds (RRIFs) at age 71, and can only withdraw a fixed amount each year. There are no rules for withdrawing money from company investments.
Tips for closing your store for retirement
Another option for some retiring business owners is to pass the business to family members through an asset freeze, which is a reorganization of the company's share structure. The freeze allows the original business owner to limit the portion of the assets that are subject to capital gain. For example, if the value of the business is $1 million and the assets are frozen, the outgoing business owner will be responsible for the corresponding capital gains. If the value increases to $3 million after the freeze, the new owner will need to pay capital gains tax on an additional $2 million. There are different ways to structure the business, the key is to make sure the value of the asset freeze is enough for your retirement.
Taking advantage of corporate tax deferral
In some cases, it is better to sell a business than to transfer it to a family member. However, there are various taxes to be paid when selling a business. Transactions can also be conducted in various ways to minimize taxes and take advantage of tax-free capital gains. Norman Abbott sold his brake manufacturing company, OE Quality Friction of Mississauga, to an outside buyer in 2008. On the advice of his advisor, Mr. Abbott took advantage of the capital gains exemption and set up a holding company before the sale to defer taxes on part of the sale proceeds. Now, he can withdraw funds from this holding company as personal income as needed. This strategy is conducive to deferring taxes and saving taxes; it also allows Mr. Abbott's personal taxes to remain 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, corporate status, and make full use of the tax deferral, tax exemption, and tax credit policies in the tax law to decide when and how to sell or transfer their business and company.
