Two Sales Assistant At Vegetable Counter Of Farm Shop
Two Sales Assistant At Vegetable Counter Of Farm Shop

Author: Paul Spare, CPA, CA

Your retirement plan is to sell your business.

Fair enough. But will the proceeds be sufficient to support your desired standard of living in retirement?

This is my last post on the subject of succession planning. In my previous post, I presented some of the considerations and options that pertain to passing on a business to heirs that may be children or other family members.

Selling to a third-party outside of family can be more challenging. As my colleague Rick Evans has written before, some businesses, and some industries, simply do not lend themselves to a profitable sale that will support a retirement plan.

A long-term planning horizon is crucial to determine the best way to unlock value from your business, and put all the necessary pieces in place. This takes years – I can’t emphasize that enough.

If you do have a worthy asset to sell …

There are a few different paths to take.

One option is to sell shares in an incorporated business rather than its assets. This will result in a capital gain or loss, only half of which is taxable to the business owner. The after-tax proceeds can be used at your discretion to invest or as income.

Another option is to have the operating business owned by a holding company, and then sell assets or shares of the operating business. This results in sale proceeds being taxed within the corporation. Different tax implications kick in depending on the type of asset being sold, and whether the income generated is active business income or investment income.

Either way, the owner ends up with a corporation that holds the after-tax proceeds of the sale. The choice is to then either close down the corporation or continue it. Both options open up a host of new possibilities in terms of how to derive monetary value, create income and minimize the tax implications for the owner and their heirs.

Look out for the fine print of capital gains

Regardless of what path you take, always be mindful of potholes that could trip up your eligibility to claim the capital gains exemption.

A well-designed succession plan can save you well above $100,000, depending on your individual circumstances.

Over the course of its existence, however, your business can acquire a number of assets that may throw a possible claim for the capital gains exemption offside. For example, only 10 per cent of your business’s assets can be non-active assets. These include surplus cash that may be in GICs or term deposits, and any investment properties that don’t contribute to the growth or operation of the business.

It may take time to liquidate or transfer these assets to ensure that you qualify for the capital gains exemption.

Time is not on your side

Successfully navigating all this requires a trusted team of advisors to maximize your net after-tax proceeds. Otherwise, you could find yourself paying tens, or even hundreds of thousands, of dollars in excessive tax.

As I said in my first post on the subject of succession planning, a robust and comprehensive succession plan is a three-to-five-year exercise, regardless of how you want to exit your business. Take a moment to consider that. If you want to retire in 2019 or 2020, the time to start planning is now.