Sarah started her nail spa shop from scratch in the early 1990s, after 20 years of hard work, the business has grown tremendously, and the shop is worth roughly about $500,000 today. Sarah is in her late fifties now and wants to sell her shop. What are the tax liabilities and how can she get most out of the sale? Many business owners like Sarah, after working their whole life in the business, with no other pension income, they are counting on the sale of the business to support their retirement life.
The good news is, in Canada, there is $816,000 lifetime capital gain deduction for each individual, who realize a capital gain upon disposition of the shares of a qualified small business corporation. (This limit is indexed annually as of 2015).
However, not all sales can be qualified for the deduction, you need to plan your sale ahead of time, and do it right. The followings are the 4 keys to help business owners achieve tax free sale of the business:
- Only disposition of shares of the small business corporation can be qualified to tax free sale. It means the business must be an incorporated business. Consult Ada Jing Zhang Professional Corp for sale of a sole proprietorship.
- It must be the sale of shares. If the business only sold the assets, it cannot be qualified.
- During the 24 months preceding the disposition: the share belonged only to the taxpayer or persons related to him/her and more than 50% of the FMV of the assets of the corporation were used in an active business
- At the time of the disposition: 90% of the FMV of the assets of the corporation are used in an active business.
Each business has its own situation, if you are planning to sell your business in the next couple of years, please contact Ada Jing Zhang Professional Corp. for complete evaluation and professional tax advice.