What are the tax consequences of selling a small business I invested in to my son?

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By Julie Cazzin with Andrew Dobson

Q: I need to promote our franchise to my oldest son. The revenue yr after yr is $75,000 to $100,000, however gross sales are greater than $2 million. We don’t personal the constructing; we lease it from a big firm. We solely personal the tools inside and the signage. I want to promote it to my son on the honest market worth I actually consider it to be, so the Canada Revenue Agency won’t come again someday sooner or later and request extra capital positive aspects taxes. I assess it to be price $400,000 to $450,000. The switch of the franchise rights to my son is free from the franchise proprietor and the tools is about $250,000. Will the CRA be OK with this or will there be issues? What do you counsel I do? — Larry

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FP Solutions: Transferring or promoting a enterprise to kids generally is a technique for enterprise house owners to perform intergenerational wealth switch. Since franchisees are sure by franchise agreements, that’s possible one of the best place to start out reviewing any restrictions relating to a sale. A franchise settlement may dictate the phrases the franchisee should adjust to earlier than promoting their franchise. For instance, many franchises require pre-approval of latest consumers/franchisees in an effort to enable the franchise to switch to that new possession.

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A enterprise proprietor contemplating the sale of their enterprise ought to contemplate acquiring a enterprise appraisal to evaluate the worth previous to the sale. Chartered enterprise valuators (CBVs) are consultants on this area and will guarantee your enterprise is correctly valued, which is vital for a sale involving a non-arm’s-length member of the family.

CBVs will verify gadgets similar to tools depreciation, gross sales, monetary ratios (for instance, value to guide and value to earnings), goodwill and stock turnover, amongst different gadgets. They might additionally examine your enterprise to related, just lately appraised companies to pretty worth your enterprise.

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You made the purpose that figuring out your honest market worth for the enterprise can be vital for tax functions and that could be a appropriate assertion. You can’t promote your enterprise or one other asset for a low worth to a member of the family to cut back tax. The disposition is usually thought of to be completed at honest market worth when transferring or promoting property to a non-arm’s-length recipient similar to a member of the family.

Acquiring a valuation can guarantee you’re approaching this a part of the transaction pretty. It may additionally are available helpful if you happen to resolve to promote your enterprise to a 3rd get together or in case your son decides to not take over the enterprise.

Your shares may qualify for the lifetime capital gains exemption, which may let you have a capital acquire of as much as $1,016,836 upon the sale of shares in your enterprise and qualify for an offsetting deduction on your taxes. This might make the sale proceeds tax free.

With the intention to qualify for the exemption, your enterprise must go a number of assessments, together with:

• The certified small enterprise company check: Your corporation have to be a Canadian-controlled personal company.
• The holding interval check: You could have held the shares for a minimum of 24 months previous the sale.
• The honest market worth asset check: 24 months previous to promoting your enterprise, a minimum of 50 per cent of its honest market worth have to be used within the lively enterprise. Additionally, on the time of sale, 90 per cent of the honest market worth of the property should have been used within the lively enterprise.

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There are a number of extra issues about how a enterprise is taxed upon its sale. For instance, you could have insurance coverage insurance policies, a car or collected financial savings you need to extract from the enterprise previous to the sale that will end in tax payable to you.

Or your purchaser, whether or not your son or in any other case, may supply to purchase the property of the enterprise, similar to tools, goodwill and the lease, as an alternative of the shares. In case your company sells the property of the corporate, the sale wouldn’t be tax free and the corporate would pay capital positive aspects tax.

Even when your share sale qualifies for the lifetime capital positive aspects exemption, there could be a have to pay the choice minimal tax (AMT). The AMT is levied primarily based on a formulation and may apply in conditions the place somebody’s revenue tax payable is simply too low in any given yr, however they’d vital revenue that was topic to preferential tax remedy.

Notice that the AMT is a type of recoverable tax that may be carried ahead and claimed sooner or later to cut back tax in a subsequent yr. It could not apply to your state of affairs particularly, but it surely’s good to a minimum of point out it for others within the context of this dialogue.

Andrew Dobson is a fee-only, advice-only licensed monetary planner (CFP) and chartered funding supervisor (CIM) at Goal Monetary Companions Inc. in London, Ont. He doesn’t promote any monetary merchandise in anyway. He will be reached at [email protected].

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