Business owner selling his business – Saving him $100K+ in taxes

The challenge

One of my business owner clients was approached by a large competitor and offered a large lump sum to acquire his business.

When he approached me with this news, he was ecstatic, and rightfully so! This was going to have a big impact on his retirement plans. 

As his financial planner, I’m his advocate and I need to help him think of questions that he isn’t asking.

One of these questions was what will his tax bill be for his business sale? Is there anything we can do to help minimize the taxes?

After bringing this up with him, he went to his accountant and showed me the projected tax bill. It was going to be large…but why?

The solution

As a small business owner he should have access to the lifetime capital gains exemption – this means he can qualify from not paying tax on up to $900K (approx.) of capital gains of the sale of his business.

This can only happen if the buyer of his company is buying his corporation (the shares) and not just the assets. Typically, buyers only want to buy the assets of the corp and not the actual corporation because the corporation comes with liabilities (maybe past upset clients, supplier, etc.). 

When I reviewed this share sale strategy compared to the asset sale strategy with my client and showed him how he would be saving well over a $100,000 in taxes, he was thrilled.

The result

When he talked to the buyer and requested that they do a share purchase instead of asset purchase, they went with it, and now my client has all that extra tax savings in his hands instead of the CRA’s hands, just from changing the structure of his business buy sell and working with his accountant to purify his company so it could qualify for the capital gains exemption.

The common mistake that almost happened here is that business owners will only discuss the business sale details with their accountants, and sometimes accountants will work with the information presented to them instead of presenting a different alternative to negotiate with. That’s where a financial planner comes in, a good financial planner will work with a client’s accountant to find the best tax savings strategies now and in the future.

If you are looking at selling or buying a business, please talk to a certified financial planner who can work with your accountant to help ensure you have it set up in the best possible way. It can save you so much money now and in the future.

*The above-scenario is for illustrative purposes only, and is not investment advice.