Good tax planning is essential to a successful exit

“In this world nothing can be said to be certain, except death and taxes.”

— Benjamin Franklin There is some disagreement about who first uttered these time-worn words. Some say it was Mark Twain, others say Daniel Defoe. But we can all attest to the wisdom and universal appeal of the phrase. What isn’t certain, happily, is the amount of taxes we are required to pay, and when we have to pay them.

The Income Tax Act is both complicated and everchanging, so staying abreast of how the Act applies to your unique situation is essential to ensuring you minimize your tax burden and avoid any reporting violations that could result in penalties and other costs. For a small business owner, this is particularly true as the Act addresses many common issues, such as employing children in the business, the accumulation of investment income and, ultimately, the sale of the business.

There is 50 per cent of the capital gain on the sale of a business that will be subject to capital gains tax, as would the gain on the sale of most other investments. So, as an example, if the business is sold for a gain of $1 million, the owner will be taxed on $500,000 at their personal rate. At a combined Federal and Provincial tax rate of up to 54 per cent in Nova Scotia, that could result in taxes owing of up to $270,000!

However, if the business qualifies as a small business corporation (QSBC) the owner will be entitled to use all or part of the Lifetime Capital Gains Exemption that could reduce or eliminate the income tax on the sale of the shares. Effective Jan. 1, 2018, the Lifetime Capital Gains Exemption increased to $ 848,252, so every Canadian resident who disposes of (QSBC) shares in 2018 can shelter up to $848,252 of any capital gains on those shares from tax. So, in this example, the taxable gain would be the difference between the actual gain of $1 million and the exemption of $848,252, or $151,748, resulting in taxes owing of up to $81,943, a far cry from $270,000. (This is an over-simplified example for illustration purposes only. To understand your own circumstances and options you will need to consult a professional tax advisor.)

To qualify as a QSBC, a company must be a Canadiancontrolled private corporation and at least 90 per cent of its assets must be used in an active business in Canada. There are additional conditions that must be met for up to two years before the sale, and other complications may arise if there are investments in related companies.

Organizing your personal and business affairs to generate the most favourable tax position possible requires advance planning and the advice of a trusted tax professional. This is especially true for a small business owner contemplating retirement. There are many strategies and techniques available to minimize taxes. Taking full advantage of the Lifetime Capital Gains Exemption is just one.