How to Sell Your Business Tax Free

It’s never too early to early to think about your exit plan, but it can definitely be too late.

Many entrepreneurs start a business as a passion project. They want to see their dream materialize and find lasting success. However, it’s important to see beyond the dream from the very beginning of any business venture, and think about your exit plan.

Wait. Why would you think about exiting? You just started the business. You’ve been working toward this goal for many years! You’ve only just begun your journey and I want you to think about the end of the road?! Preposterous.

What’s even more preposterous, however, is finding that success, selling your business and being unable to sustain the lifestyle you worked so hard to achieve because you failed to prepare a comprehensive exit plan.

Yes, that can happen. Just ask my friend. We’ll call him Joe. Joe is an incredibly smart, driven man. He built his business from the ground up and reaped the rewards of successful entrepreneurialism, accumulating a great deal of wealth. Unfortunately, Joe missed some important steps in establishing and maintaining his business. The end result was a very large tax bill when it came time to sell. In fact, his tax liabilities were so great, Joe said farewell to a good chunk of his means to retire comfortably.

Joe’s not alone. Many entrepreneurs go headlong into a business venture that they intend to stick with for the long term without putting much thought into the endgame.

There isn’t much I can do to help Joe now, but perhaps I can help you avoid the same unnecessary expense. If you’re thinking of starting a business, already in the process of establishing a business or buying a new business, here’s some high-level advice I would have given to Joe if only I’d known him sooner. And even if you’re years into business ownership, the following is sound (and still actionable) business advice if you want to develop an exit plan that holds up at tax time.

Structure your business with a mind to eventually exit.

This is probably the most important factor in minimizing tax exposure when exiting a business through a share sale. You see, when you sell a business in Canada, the profit is subject to capital gains tax, which can be a substantial liability. The good news is, approximately the first $800,000 ($883,384 for 2020) of capital gain may be tax-exempt (ge. the lifetime capital gains exemption). If you structure your business so that the profit, and therefore the exemption, can be spread across your business in addition to family trusts, you can significantly minimize any capital gains tax you might owe. For an already established business, this would be accomplished through a reorganization or restructuring.

Always work with a professional.

While you might be an expert in the nature of your own business matters, odds are you aren’t an expert in corporate accounting and financial management. In order to structure your business to optimize return on investment and minimize tax exposure, you should retain the services of a trusted advisor…or several.

Make sure you do your homework when it comes to finding professional advisors. You are trusting them with your future and possibly your children’s future, and their children’s future, and so on. In my personal experience, word of mouth is the best way to ensure you are working with someone who shares your goals and holds your best interests. Ask around for referrals, being sure to approach colleagues and peers who have similar business situations and plans.

Additionally, the tax landscape and legislation can be fairly fluid. This is especially true if you have cross-border business activity. You need an advisor who stays current on legislation and trends and can help you revisit your exit plan, if needed.

Leave your ego at the door.

Oftentimes, entrepreneurs achieve success through an abundance of confidence in their abilities/products. Makes perfect sense. But it’s important to recognize that you aren’t infallible and neither are your gut instincts. Once your professional advisors are in place, allow yourself to trust their guidance. Business longevity requires multiple skillsets and perspectives. Be open to advice and don’t let your ego get in the way of informed decision-making.

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So, while it may be too late for Joe, you now have fair warning and a chance to make some important changes in your current or impending business operations. Thinking about your exit plan in the infancy of your business may seem counter-productive, but it’s the best way to ensure that you get to enjoy all the fruits of your labour and avoid sharing too much with the Canada Revenue Agency.

Shiraz Ahmed
Financial Advisor & Associate Portfolio Manger
Sartorial Wealth of Raymond James Ltd.

The information above is from sources believed to be reliable, however, we cannot represent that it is accurate or complete and it should not be considered personal tax or legal advice. We are not tax or legal advisors and we recommend that clients seek independent advice from a professional advisors on legal and tax-related matters. Securities-related products and services are offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a Member-Canadian Investor Protection Fund.