Campbell Stewart had hoped his daughter would take over the two A&W restaurants he had built into successful operations in Terrace, B.C., and nearby Kitimat. But when she expressed a desire to run a business free from the restrictions of a franchise, he decided to sell his hamburger joints.
"I sold both franchises at the same time, within less than a year, to a guy who already owns several A&Ws," says Mr. Stewart, who bought his first of two independent B.C. pubs in 2013, shortly before he sold his franchises. "Actually he's a friend of mine, so it was relatively easy to look across the table from each other and seal the deal."
The deal was a share sale, a type of transaction that transfers all parts of the incorporated business for sale to the buyer. While such a deal comes with pros and cons for both buyer and seller, from a tax perspective it's generally better for the seller because of a tax exemption covering up to $800,000 of capital gains from the sale of a qualified small business.
"From an accountant's standpoint, it's better for a seller to do a share deal rather than an asset deal," says Mr. Stewart, referring to a transaction where business assets are sold but the corporate entity stays with the owner. "And I do listen to my accountant."
Mr. Stewart's experience underlines the need for small-business owners to ensure there's a tax strategy behind the sale of their company. But this is often easier said than done, given that many Canadian small businesses don't even have a succession plan.
According to the Canadian Federation of Independent Business, just 40 per cent of small-business owners have a plan for exiting and handing on the reins of their companies. Jacoline Loewen, director at UBS Bank (Canada), says entrepreneurs who don't set down a plan for the sale of their business could miss out on opportunities to cut their tax bill and may even end up increasing their tax liability.
"If you're running a business, then you should be thinking about what would happen if you suddenly had to sell tomorrow," she says. "It's like a fire drill, it makes you realize all the things you need to do to prepare for the sale of your business."
One of these to-do items is deciding what business structure would offer the best tax and financial advantages at the time of sale, Ms. Loewen says.
The capital gains exemption applies only to Canadian-controlled private corporations using at least 90 per cent of its assets in active business in Canada. Owners also need to have held their shares for at least 24 months before the sale.
For owners realizing at least $800,000 in capital gains from the sale of their business, it makes sense to convert a sole proprietorship or partnership into a corporation – something that needs to be done no later than two years before the sale to qualify for the exemption.
Bringing in family members as shareholders multiples the tax savings because each would be entitled to the $800,000 capital gains exemption if they've held shares for at least two years, says Rob Radloff, a chartered accountant and financial planner at Covenant Family Wealth Advisors in Vancouver.
Mr. Radloff notes that some buyers prefer to buy assets instead of shares. In this type of transaction, the company ends up selling the assets, triggering a tax liability. Planning for this possibility long before the sale allows the business owner to factor this tax into the sale price.
"You calculate what your tax would be if you sold shares versus assets, then you use this number in your negotiations," he says. "Maybe you can offer to sell at a slightly reduced price if the buyer agrees to buy shares, or maybe you ask for a bit more if the buyer insists on assets."
Business owners should also think about taking assets such as investments and real estate out of the company, Mr. Radloff says. This helps them ensure they stay on the right side of Canada Revenue Agency capital gains exemption rules, providing they make the transfers well before the two years preceding the sale of the business. It also makes it easier to sell the business because potential buyers won't have to worry about coming up with additional cash to buy these passive assets.
"Generally you want to keep the company pure, as opposed as to having assets that aren't used in active business," he says. "Consider setting up a company to hold your passive assets, which you can transfer tax-free as dividends between corporations."
Investing these assets within a tax-sheltered life insurance policy will allow the business owner to defer tax on the investment income, Mr. Radloff says.
Chuck Corrigan, president of Corrigan Succession Planning in Kitchener, Ont., says entrepreneurs should also plan for capital gains tax that the government will want to collect after they die – whether or not the business has actually been sold.
To ensure their business partner or family members don't get stuck with a hefty tax bill, entrepreneurs can take out capital gains tax insurance, which is basically life insurance with benefits earmarked for the taxman.
"Premiums for this insurance are so minimal," Mr. Corrigan says.
With such complex tax rules around the sale of a business, it's best – and safest – for entrepreneurs to get professional help and to get it sooner rather than later, Mr. Stewart says.
"You're a pretty foolish guy if you're not seeking the best advice," he says. "Talk to your accountant and to the other business experts out there."