Selling a business: Tax and other implications

Selling a business: Tax and other implications

Running your business fuels your passion and keeps you going through long days. But what happens when that’s no longer the case and you’re looking to sell your business?

You’ve probably been so engaged with your company that you haven’t given it much thought. However, an exit strategy is a crucial consideration—regardless whether you’re selling to a third party or passing the keys to the next generation. Remember to avoid focusing on the deal without considering taxation and other implications.

When selling a business, entrepreneurs are so focused on the sale itself that they overlook the topics relevant to transitioning out of a business:

  • payroll
  • Business Number
  • change of ownership
  • tax implications
  • capital gains deduction and exemption
  • Goods and Services Tax (GST)
  • inventory of and other assets

Payroll, Business Number and GST/HST account

When selling a business with employees, you must close your payroll accounts. You’ll need to remit all Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums and income tax deductions to the CRA.

If your business has a Business Number, contact the Canada Revenue Agency (CRA): you may need to cancel your business number if you’re selling or closing your business. Similarly, if the business you’re selling has a GST/HST account, you must contact the CRA to close it.

(For more information, see our companion article GST basics for Alberta’s small businesses.)

Change of business ownership

A change of ownership will affect your business differently, depending on your business structure. Whether your business is a sole proprietorship, a partnership or a corporation, it’s important to contact your tax service office whenever an owner or member of your board of directors changes.

If you registered your business using each partner’s legal name or a provincially registered partnership operating name, you may need to

  • change your partnership’s legal name
  • register a new business number and CRA business accounts

If you registered your business as a corporation, the Canada Revenue Agency (CRA) requires the correct name and Social Insurance Number (SIN) of each director.

Tax implications

When selling a business, you have two options: you can sell all or part of a business’s shares, or you can sell its inventory and other assets. Therefore, when selling a business or part of a business, you set an amount for the entire business. In certain situations, your sales agreement will set out the price for each asset and a value for your inventory.

When selling your business, you and the buyer can jointly choose to pay no tax on the sale. You can make this choice only if both of these conditions apply:

  • you’re selling a business you established or carried on
  • under the agreement of the sale, the buyer acquires ownership, possession or use of 90% of the property that can reasonably be deemed necessary to carry on the same type of business as the one being sold

If you sell eligible shares, you may qualify for the lifetime capital gains exemption. You’d then pay no taxes on capital gains up to that amount. However, you can’t use this exemption in a sale of assets; proceeds from selling assets are taxed.

Any type of business can sell assets; however, only corporations may sell shares. In a share sale, debts and liabilities are often sold with the rest of the business. The new owner assumes these liabilities. In an asset sale, the vendor may still be responsible for them.

Tax repercussions should not be the sole driver in your succession planning. An experienced accountant will understand the CRA’s requirements and be able to explain fair market value, capital cost allowance and other concepts related to the sale of business assets and property.

Similarly, a skilled corporate lawyer can help you plan for the sale of your business. With our knowledge of business and tax law, look to Lift Legal for guidance and advice when planning to sell your business. Contact us today.

Disclaimer:
The information on this blog and website is provided by Lift Legal for educational purposes only. It is intended to give readers a general understanding of the law, not to provide specific legal advice. Information contained in these pages should not be used in place of competent legal advice from a licensed, practising lawyer in Alberta. Furthermore, by using this blog and website, you understand that no lawyer-client relationship exists between you and Lift Legal.

About Mel Garbe

Mel founded Lift Legal with the goal of delivering cost effective legal services without sacrificing capability by effectively using modern tools to access the types of resources that larger law firms have access to. The result being that Lift Legal provides high level professional services at a greater value.

The Lift Legal team appreciates that we are all facing new and unexpected challenges. We are working hard to ensure that all existing and new clients’ needs are met. We are continuing to operate as we normally do, just remotely. Do not hesitate to reach out to us if we can be of any assistance.