Selling your corporation or your business Part 2

Here is the 2^nd part of our blog series:

When selling your business you should look at your valuation and see if your asking price fits in the range of similar businesses being bought and sold on the market.  With the advancement of the internet, it is very easy to search businesses for sale that are similar to yours to see if you are in the ball park asking price.   The asking price may or may not be Fair Market Value and that is up to you. However, the closer it is to Fair Market Value (or less), the easier the corporation/business will be to sell.  If someone just wants to purchase the assets and not the shares, then your tax consequences are higher so you may want them to pay more.  Alternatively, you could give a discount on the sale price if they were to buy the shares vs. the assets.  At the end of the day, it is a sale between you and someone else and whatever price and method you come to agreement with is your decision! 

However, if you are going to sell the business at Arm’s Length, such as to another Corporation owned by you and/or family members, to a trust, or to a family member, then you must sell/transfer it at Fair Market Value to the Arm’s Length party.  Fair Market Value is just a fancy word to determine what it is worth if you sold it on the market today! 

Another thing to mention here is that when you sell your business, it is best to close your current business number with CRA and let the new business owner open a new one.  This would include GST, Payroll, Corporate Tax, and Import/Export accounts you have open.  Along that same line, the minute book must be updated through the sale according to the business sale/purchase contract details.  You may want to keep your minute book and have the new business owner create a new one. 

One more topic to discuss in selling your business is to remember that you can get creative in your deal.  For example, the buyer could give you part cash and part other assets, such as Real Estate, Vehicles, other businesses or anything else that may be of value to you.  Also, if the purchaser does not have all the funds to purchase the business at the agreed price, and they can’t get financing, you could finance the balance of the sale over a set period of time.  These are just a couple examples of getting creative and the ideas could go on and on.  Remember though, it is always best to seek professional advice in doing any business purchases, sales or transfers.  We are here to help so don’t hesitate to contact us!

Selling your corporation or your business Part 1

There is so much to consider in regards to this topic and as usual I will make mention that each person’s/corporation’s scenario is different and the knowledge in this article should be used in conjunction with good planning with professionals.  As always, you can ask me questions anytime by contacting me through the contact information listed on the blog or our website www.kustomdesign.ca.

Let’s start by looking at the basics of selling your corporation.  We already spoke about the Capital Gains exemption on the sale of qualified small business shares and in the last blog, we even went into what makes the shares of your corporation qualified for this $750,000 lifetime Capital Gains Exemption that you have access to.  This is only on the sale of the shares of your corporation, so in essence, this is a sale of the actual entity (corporation).  Selling your business this way brings very favorable tax consequences due to the $750,000 Capital Gains Exemption and if the corporation that is sold is owned by a trust then the trust has its own $750,000 Capital Gains exemption as does all the beneficiaries of the trust.  So in the case of a corporation owned by a trust being sold,  there could be millions of dollars in tax free capital gains eligible to the trust and beneficiaries of the trust where the profits from the business sale would be split.

The other way to sell a corporation is to sell the assets.  If there is no gain on the assets from the current value on the books, then there is no tax issue.  However, if there is a gain being made on the sale of the assets then there could be tax owing.  The other factor in selling the business is Goodwill.  This is the value of the business other than the physical assets, such as the branding of the company, the repeat client base and other non physical value of the business.  This basically comes down to how much the buyer of the business is willing to pay for all the sweat equity that you’ve done in building the business. 

We will continue the 2^nd and last part of this blog series soon! Please check back with us before the end of the week. 

Maximizing the use of your corporation Part 4

Maximizing the use of your corporation isn’t all about tax savings.  There are many other things to look at in your corporation such as building a good team and using leverage.  Looking at leverage, businesses seem to have to biggest option of creating sweat equity and you can leverage relationships as well as assets and even credit of the company.  Businesses can build their own credit rating and use assets, including accounts receivable, to leverage for financing.

One last thing that we will look at in this blog on maximizing your corporation is the Capital Gains Exemption.  Every Canadian taxpayer has a $750,000 lifetime Capital Gains Exemption.  This exemption is on qualified small business shares, as well as qualified farming and fishing property.  Here we will just talk about the qualified small business shares which are the shares of your corporation.  So in essence if you sell the shares of your corporation you, and each other shareholder, can make up to $750,000 in capital gains on the sale tax free!  If you don’t use this exemption before you pass away it is gone forever!  So what is it that makes the shares qualified?  Here are the factors:

1.      Must be a CCPC (Canadian Controlled Private Corporation)

2.      The Corporation’s assets must be used at least 90% for Active Income. 

3.      At least 50% of the Corporation’s Assets must have been used to carry on active business in CANADA.

4.      The shares must have been owned by you or a relative for a 24-month period prior to the sale.

5.      The shares can’t be acquired as payment for other shares, stock dividends, or the disposition of a property.

In the case of a trust each of the beneficiaries have the $750,000 Capital Gains Exemption as well as the trust has $750,000 of it’s own Capital Gains exemption on the sale of small business shares.  So it is very beneficial to have the a trust own the shares of the corporation(s).  This leads us into the final part of our series on corporations “Selling, closing, or passing on your corporation”  See you next blog!

Maximizing the use of your corporation Part 3

In the last couple blogs we’ve been discussing some of the ways you can maximize the use of your corporation.  At this time I’d like to remind you that although we’ve covered a lot of information on corporations in this large blog series, we cannot cover it all via blog.  If you have questions on what I am covering or anything I am not covering do not hesitate to contact me.  Also remember that educational articles, such as this one, should be used in conjunction with good planning!

The next thing to discuss in maximizing the use of your corporation is further lesson on dividends.  We have been discussing dividends in this blog series, as well as other blogs, and you can see by now how beneficial it can be to use dividends to save tax.  Remember that corporations can issue dividends to shareholders as long as the corporation has positive retained earnings (sum of profits less dividends declared since the corporation’s inception).  One of the main concepts in tax is to get the lowest overall tax paid between all family members and entities owned and controlled by the family.  So now if we combine that concept with dividends you are looking at big tax savings.  The ideas combined here are to keep all family members at the lowest tax brackets possible using tax favorable types of income. (dividends in this case).  Some of the main options to look at in this maximization of tax savings are to add other family members as shareholders of the corporation(s) or to ensure all your family members are beneficiaries of the family trust if you have one.  Either way you are now able to split dividends amongst family members giving you more options for income splitting and tax savings, with no additional liability.  In the case of the trust you can also split capital gains among beneficiaries. 

Another thing to talk about in looking at dividends from your corporation is Capital Dividends.  Capital Dividends are issued tax free by the corporation and received tax free by the shareholders.  Capital dividends arise out of Capital Gains in a corporation.  When a corporation has a capital gain it only pays tax on 50% of the gain, which is the same as when an individual has a capital gain.  So in essence Capital Dividends are issued out of the 50% non taxable profit arising out of a capital gain in a corporation.  Again, Capital Dividends are non taxable!

Maximizing the use of your corporation Part 2

Here is part 2 of our blog series, “Maximizing the use of your corporation.” This part is about the strategies you can use to minimize taxes in your passive income.

Passive income is taxed much higher in a corporation than active income, so strategy and planning is key to minimize taxes in passive income investing through corporations.  Some examples of strategies that can be used in your plan include:

1.      Using Trusts (See my blogs on Trusts for many options and benefits)

2.      Having a Consulting Corporation that you work for and consulting with the investment/passive income corporation.  Here your Consulting Corporation bills (active income) the Investment income corporation, thus lowering the passive income and raising the active income.

3.      Using Capital Dividends.  These are Dividends based on the 50% of Capital Gains in a corporation that is not taxable.  Not only is the 50% of the Capital Gain not taxed in the corporation, the Capital Dividends are also not taxable in the recipient’s hands.

4.      Creating enough work from your Passive income corporation to have multiple people working for you.  Best off to have at least 6 full time people(As per prior precedent setting court cases), or get a ruling from CRA.

You are probably by now beginning to see that there are so many options available to you in your planning, structuring and implementation of your corporate structure.  The use of Holding Companies, Trusts and other entities in your structure can be very effective in maximizing your corporation.  There are ways to limit types of income to more favorable types of income, change the type of income you are receiving or distributing, flow capital gains through to beneficiaries (trusts), minimize tax on active and passive income, make tax on capital gains zero and much, much more!  Yes, you heard me right!  Email me if you have a question!

Maximizing the use of your corporation Part 1

There are many factors to discuss in the topic of “Maximizing the use of your corporation”.  Educational articles should never replace good planning!  Knowledge is empowering but Wisdom to apply the knowledge is key!  Always combine planning with education.  Our goal at Kustom Design is to give you the best of both of these in the areas of tax, accounting and finance! 

One area to look at in maximizing the use of your corporation is the Small Business Deduction.  The Small Business Deduction is how a corporation typically pays much lower tax than individuals.  However, there is a limit (Small Business Deduction Limit).  Currently the Small Business Deduction is claimable by most Corporations in Canada and has a limit of up to $500,000 net income.  In laymen’s terms you can earn up to $500,000 Net Active Business Income in a corporation before you pay large tax rates.  Currently in Alberta you only pay 14% total Corporate Tax (Federal & Provincial) on net income up to $500,000 in your corporation.  Once you make over $500,000 net in an Alberta corporation you could be looking at your tax rate going from 14% to upwards of 39%.  So our goal is of course to pay the lowest tax for as long as possible.  We have many options, which could include:

1.      Structuring multiple corporations (non related) to split profits

2.      Using trusts in your structure

3.      Paying bonuses and other forms of remuneration to owners, employees etc.

There are always ways to save tax as you will see with Kustom Design!

In talking about the Small Business Deduction we also discussed net active business income.  Gross income is the full amount of income you take in to your business and net income is after all of your expenses, leaving the net income or net profit/loss.  In the case of the Small Business Deduction we are talking about net active income.  So now that we understand the word net, we must also understand active income.  The 2 main income categories are active and passive income.  Active income typically means you or someone else has to work for the money.  Passive income typically means that you are making money whether you work or not. Passive income is great and residual passive income is the best!  In the case of the Small Business Deduction we are talking about active income.  So that deduction will not apply to passive income, such as investment income, Capital Gains and rental income.