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MAXIMIZING THE SALE OF YOUR BUSINESS

An owner of an incorporated business has two options when selling a business: to sell the assets of the business or to sell the shares of the corporation. Selling shares rather than assets can have significant tax advantages.  One of the few remaining tax incentives is the $500,000.00 exception for capital gains realized on the disposition of qualifying shares of a small business corporation. To qualify for the exemption, three tests must be met: 

1. At the time of sale, the shares must be shares of a 'small business corporation';
   1. A 'small business corporation' is defined to be a Canadian controlled private corporation, all or substantially all, of the assets of which are used at that time principally in an active business carried on primarily in Canada by the corporation or a related corporation. 'All or substantially all' is generally interpreted to mean 90% or greater while 'principally' or 'primarily' is interpreted to mean more than 50%. The requirement for 90% of active business assets is based on the fair market value of the assets. An 'active business' excludes personal service businesses and various investment businesses;
2. The shares must have been owned by the seller throughout the 24 months preceding the sale;
3. More than 50% of the fair market value of the corporation's assets must be attributable to assets used primarily in an active business carried on primarily in Canada by the corporation throughout the 24 months preceding the sale.

In order to meet the three tests outlined above, it is often necessary to purify the corporation by removing non-business assets such as cash or investment assets. It is also important to ensure that any restructuring required does not run afoul specific anti-avoidance rules. While the rules and anti-avoidance provisions can be somewhat complex, the tax benefit of the $500,000.00 exemption often justifies the time and effort involved. Prior to selling your business, it is prudent to meet with your accountant and lawyer to discuss the benefits and costs associated with selling shares.

By Rob Warrender
July 6, 2005