Tax Implications of Selling a Business

Selling a business is a significant milestone for entrepreneurs, but amidst the excitement, it’s crucial not to overlook the tax implications that may come with it. This article will explore the key tax implications of selling your business in Canada, including determining taxable gain, capital gains tax, recapture of capital cost allowance, and GST considerations. 

Capital Gains Tax

Capital gains tax is a tax on the profits earned from selling certain assets, including businesses. This is one of the most significant implications to consider.

Tax Rates for Capital Gains in Canada

The tax rates for capital gains in Canada differ from those for regular income. Currently, if you’re an individual who owns a business, 50% of the capital gain upon selling is taxable at your marginal rate. 

Lifetime Capital Gains Exemption

One potential benefit for Canadian business owners is the lifetime capital gains exemption (LCGE). This allows eligible individuals to shelter a portion of their capital gains from taxation.

Determining Taxable Gains Tax

To determine your taxable gains tax, it’s essential to understand the concept of taxable gain. Taxable gain refers to the profit from the sale. Several factors influence the calculation of this value, including:

1. Adjusted Cost Base (ACB)

The ACB represents the original cost of acquiring the business or asset, adjusted for factors like capital expenditures and depreciation. It includes the purchase price, legal fees, and other expenses directly related to the acquisition. Additionally, it accounts for any capital improvements made to the business or assets over time.

2. Proceeds of Disposition

This refers to the amount received from selling the business or its assets. It includes the cash received, the fair market value of any property or assets acquired in the transaction, and any assumed liabilities by the buyer. These proceeds form the basis for calculating the gain or loss on the sale.

3. Eligible Capital Property

Certain types of intangible assets are subject to specific rules for taxable gain calculations. Examples of eligible capital property include goodwill, customer lists, and franchise rights. 

Example of Determining Capital Gains Tax

Suppose you’re an individual who sells your business for $500,000, and the adjusted cost base is $200,000. The taxable gain would be the difference between the proceeds of disposition ($500,000) and the adjusted cost base ($200,000), resulting in a taxable gain of $300,000.

The tax you pay depends on your tax bracket. If your marginal tax rate is 30%, the capital gains tax owed would be $150,000 (50% of $300,000) multiplied by 30%, resulting in a capital gains tax of $45,000.

Other Tax Implications

While capital gains tax is one of the most important factors to keep in mind when selling a business, there are other considerations to be aware of:

Recapture of Capital Cost Allowance (CCA)

CCA allows businesses to deduct the cost of capital assets over time. However, upon selling these assets, a portion of your previously claimed CCA may need to be “recaptured” and included as taxable income in the year of the sale.

Goods and Services Tax (GST)

The Goods and Services Tax (GST) is added to most goods and services in Canada. Generally, if your business is a GST registrant and exceeds the annual threshold, GST will be applicable. In most cases, if you collect GST from your buyer, you must remit this to the government. However, there are some exceptions.

Sell Your Business With Confidence

These are just a few of the tax implications to keep in mind if you’re considering selling your business. This process can be complex — we get it. At Zinati Realty, we can help you understand all things taxation and help you sell your business with confidence. Contact us today to learn more.