Tax Considerations For The Purchase Or Sale Of A Business in Ontario

Whether you are thinking about retirement or you are simply ready to move on to something new, selling a business that you have spent years building is not something to undertake lightly. There are many considerations to think of before making the decision to sell, for example:

  • How much is your business worth?
  • Who will you sell it to?
  • What will happen to your employees if you sell the business?

But the most pressing questions will likely involve the tax considerations for the purchase or sale of a business.  Your Richmond Hill business lawyer can provide you with the advice you need to plan the sale of your business to maximize your profit and minimize the tax consequences.

If you are considering the purchase of a business, your considerations will be different and may even work at cross-purposes with those of the seller.

The two main methods for selling a business are the sale of shares of a corporation or a sale of the business’ assets.  The two methods can have vastly different tax consequences for both the purchaser and the seller.

Tax consequences of a share sale

Only an incorporated business can be sold through a share sale. This is a popular way to transfer a small business because it may permit the seller to avoid paying income tax on some or all of the profits earned from the sale through the use of the lifetime capital gains exemption (LCGE).  If you sell your business in 2021, you can earn profits of $892,218 before triggering any capital gains tax. The LCGE can only be claimed in particular circumstances, so planning ahead is important if you intend to take advantage of this exemption.

It may be possible for a seller and buyer to opt out of charging HST/GST on the share sale of a business, provided certain criteria are met.  Whether or not the purchase and sale of your business will qualify for this exemption will depend on the business, what the buyer intends to do with it and what other assets the buyer might need to acquire in order to carry on doing business.

One of our business lawyers can help you determine whether you will qualify for the lifetime capital gains exemption or will be able to opt out of charging or paying HST/GST.

Tax consequences of an asset sale

If a business is not incorporated, an asset sale is the only option for transferring ownership.  Even if the business is incorporated, in some circumstances, an asset sale might work better for both buyer and seller.  For example, the seller may want to sell the business inventory and equipment but keep the land on which the business is situated for a new venture.  If the buyer already has another location in mind, then this method of transfer works well for both parties.

In an asset sale, the tax consequences will depend on the assets that are sold.  The seller may have a recapture or terminal loss of capital cost allowance when certain assets are sold.  GST/HST and land transfer taxes should also be taken into account for the transfer of certain assets.

Contact our Richmond Hill Business Lawyers For Legal Assistance Regarding the Purchase or Sale of a Business in Ontario

If you have questions about the tax considerations for purchase or sale of a business, our Richmond Hill business lawyers can help.  Contact us today to get the advice you need to help you plan for your future.

*Disclaimer: The content in this article is only intended to act as general overview on a legal topic and does not constitute legal advice. Please consult with a lawyer for more specific legal advice.