Canadian-resident individuals can receive up to $800,000 in
tax-free capital gains on the sale of qualifying shares of an active business
corporation. Alas! Most buyers prefer to
buy amortizable assets rather than non-amortizable shares. But why be locked into an
"either/or" approach? With
good planning, you can combine both approaches and enjoy the best of both
worlds.
The trick is for the seller to sell enough shares to use the
capital gains exemption without giving the buyer control of the corporation. The buyer then buys the business assets from
the corporation. The corporation then
buys back the shares owned by the buyer.
This leaves the seller with tax-free cash from the sale of the shares
and gives the buyer amortizable asset costs that can generate future tax
deductions. The seller also never gives
up full control of the corporation, which now has proceeds from the sale of the
assets.
Proper proportions have to be maintained when deciding how
much value to allocate to the share sale.
Additionally, the corporation will likely have to create special-purpose
shares. By thinking flexibly and with
proper planning, both buyer and seller can have the best of both worlds. At the closing, buyer and seller can have their
cake and eat it too!
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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.