Selling or Buying a Business: Properly Measuring the Tax Impact

Selling or buying a business is a transaction with tax consequences you should be aware of so you can lower your resulting tax bill.

A business sale can be conducted in a number of ways:

Each of these options has different tax consequences for the seller and buyer.

Furthermore, certain specific measures apply to the realization of a capital gain during the sale of a business to a family member.

Selling the shares of a business

Generally, sellers who dispose of their business’s shares to a buyer tend to favour this strategy since it’s generally more advantageous for them, from a tax perspective.

As long as the required conditions are met, they can benefit from a lifetime capital gains exemption of $1,016,836 up to and including June 24, 2024 and of $1,250,000 after that date. Owners who wish to sell their business and generate retirement income should certainly explore this tax benefit.

However, it should be noted that this exemption is subject to the measures announced in the April 16, 2024 Federal Budget, with which Revenu Québec harmonized.

One of the measures that must be respected is that shares sold should be qualified as small business corporation (QSBC) shares. These shares must also be owned by one or more individuals rather than a corporation, which may not benefit from this exemption.

Sale of assets

The sale of assets involves the transfer of property belonging to a business which includes, for example:

The total of these and other assets is added to the business revenue, which is then taxed based on the type of revenue earned.

As a result, the sale of assets may not be as profitable for a business owner who does not benefit from the capital gains exemption. In order to offset this loss, the aggregate sale price may be increased.

The buyer benefits by:

The buyer must also make a decision that will have tax implications: sell the assets in their own name or through a corporation. Based on each situation and the amounts at stake, the second option is generally preferable since the profits generated are subject to corporate income tax rates that range from 12.2% for the first $500,000 of taxable income and 26.5% for the surplus rather than the generally higher marginal tax rate that applies to individuals.

Hybrid model

Under this solution, the buyer and seller can decide to combine the sale of shares and assets. This hybrid transaction is advantageous since it strikes a balance by allowing both parties to make the most of tax benefits. The owner therefore sells a portion of their business’s shares to benefit from the capital gains exemption and the buyer maximizes the tax cost resulting from the purchase of assets.

Though this method may seem ideal, it’s less common because it’s riskier and more complex with regard to tax regulations. Therefore, caution is the order of the day and consulting a tax expert in the field is strongly recommended.

From one generation to another: new measures

Owners who are thinking of transferring control of their business to one or more members of their immediate family will benefit from new measures that make this transition easier.

Previously, selling shares to an arm’s length third party rather than a family member was generally more beneficial for tax purposes. The Income Tax Act stipulates that entrepreneurs are exempt from capital gains tax if they sell their business to a third party, but are taxed at a rate of up to 48.7% if a family member buys it.

New tax rules for intergenerational transfers of family businesses came into effect on January 1, 2024. In certain circumstances, they allow parents to benefit from a capital gains tax exemption when selling to their children, which was practically impossible before this date. However, to achieve this, all parties should know and respect the applicable rules.

GST and QST

Lastly, it should be mentioned that selling either all or some of a business’s assets is generally subject to GST and QST and the seller and buyer may jointly elect to avoid the application of these taxes to the transaction. One of the conditions to be met is that the buyer must acquire at least 90% of the assets that may reasonably be considered necessary to carry on the business.

Generally, the sale of a corporation’s shares is not subject to either GST or QST.

Making the best decision

Selling or buying a company is certainly one of the most important business transactions that an entrepreneur can enter into. This is why it’s important to plan this transaction and appropriately evaluate its tax impact so you can optimize your benefits.

A tax expert can efficiently guide you through the process and evaluate sales and purchase strategies that best suit your situation. This will allow you to make the best decision possible.