Article submitted by Guest Blogger Kyle McKay

Unfortunately, the capital gains exemption is often not available because the corporate structure does not allow for it, even though the business owner relied on sound legal advice at the time the structure was set up. In addition, if the business has certain types of assets, the shares of the corporation may not qualify for the exemption.  Assets as common as inter-corporate receivables can effectively eradicate this valuable tax incentive. While the capital gains exemption is a generous concession provided by the government, the rules for qualifying are tremendously complex, and it is all too easy to fall offside. Prudent business owners seek advice from a tax lawyer or tax accountant at least 2 years before a sale to implement any corporate reorganizations that may be required to make the capital gains exemption available.

Another reason the capital gains exemption may not be available is if the transaction is an asset sale as opposed to a share sale. Buyers often prefer to buy assets to take advantage of tax pools that may be available and to avoid hidden liabilities. The “asset versus share sale” decision should be discussed at an early part of the negotiation, with the involvement of a tax lawyer. For example, suppose a business is valued at $2 million. The sellers may pay tax of $300,000[3] on an asset sale, for example, but not pay any tax at all on a properly structured share sale. Clearly, this is a substantial amount of money, and should play into the negotiation of the purchase price. Alternatively, a transaction can often be structured to allow the seller to obtain the capital gains exemption through a share sale while providing the buyer with the benefit of future tax deductions in respect of assets.[4]

The capital gains exemption is one of the more important aspects of tax planning for shareholders of private companies. Consulting with a tax advisor at the earliest possible stage is a wise investment.

Disclaimer:
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

VR Business Brokers would like to thank Robert Worthington for his contribution as a Guest Blogger on our site. Robert, a tax lawyer and Associate at Shea Nerland Calnan LLP, advises businesses and their shareholders in structuring both domestic and international investments and business operations. He has implemented corporate reorganizations for a variety of businesses and provided tax advice on public and private financing transactions. He is a member of the Canadian Tax Foundation and International Fiscal Association, and is a frequent speaker at seminars and conferences on topics regarding taxation. If you would like to discuss the capital gains exemption or any tax matter, please do not hesitate to contact  Robert directly at rworthington@snclaw.com or (403) 299-9600.

[1] This assumes, among other things, the capital gain would be subject to the top marginal tax rate of 39% and that alternative minimum tax does not apply. Tax on an asset sale will depend on variety of factors, including the tax attributes of the corporation and whether sale proceeds are paid out to the individual shareholder.

[2] A discretionary family trust is a common structuring device for shareholders of private companies and will be discussed in another blog.

[3] See note 1 above.

[4] These types of “hybrid sales” require the acquiescence of both parties, in addition to competent tax advice.

Your business is a part of your legacy and a part of you. It’s very likely your business is the most valuable asset you own. There’s also a good chance you’ll want to pass it on to one or more members of your family. Succession planning, however, raises a number of difficult questions. What will become of your business when you retire and how does your business fit into your retirement plan? Even if you think you’re years away from slowing down, the need to address these questions is a pressing one – you need to put an exit strategy in place today.

Perhaps you intend to pass your business on or maybe you’d be content to sell to the highest bidder? If you’re not a sole proprietor, perhaps you’d like your interest to be bought by co-owner(s), partner(s), other shareholder(s) or certain key employees and use the sale proceeds to fund your retirement or create an estate?

There are countless factors to consider as you develop a strategy to leave your business and it’s essential you have a plan to convert the value of your business to cash when the time comes. There are a few basic ways of doing that.

Selling the business as a going concern to an outsider
While finding a potential buyer for a successful business is seldom difficult, finding the right buyer – that is, someone who either has enough cash or access to financing to be able to afford the purchase – is often more difficult.

Selling a business is not straight forward. It’s critical you work with experienced, professional advisors to weigh the myriad of tax, legal and accounting considerations.

Eventually you’ll have to address a number of questions;

- If your business is incorporated, will you sell your shares or the assets?

- Can you use your capital gains exemption?

- Will you have to remove non-active investments from your business in order to qualify for the capital gains exemption?

- Will you have to extract operating assets such as accounts receivable to reduce the purchase price?

- Are you willing to accept a promissory note or mortgage to finance the sale?

- What is your business actually worth?

Passing on your business
You may have relatives, co-owners or key employees who want to take over when you’re ready to retire. Facilitating this kind of transfer can be the most satisfying option, but it can also be the most complicated, particularly if other family members are excluded from the process. You’ll need to establish a value for your business and develop the confidence your successor(s) will be successful without you. This may require involving these individuals in ownership concerns sooner rather than later.

No matter how you choose to dispose of your business, it’s critical you make provisions for its disposition in your will. This is especially important if you plan on passing the business on to a family member. You’ll need to clearly delineate the means by which they will acquire the business. Will they purchase your share in it, with the proceeds going to your estate? Will they inherit ownership or a share in the business?

And what about other members of your family? Have you ensured the distribution of your estate is equitable? To avoid disputes, you’ll want to ensure everyone – including those who won’t be brought into the business – is taken care of in some way.

Managing the proceeds of your sale
Should you sell your business, you’ll likely find yourself with a large sum of money in hand. The question is, how can those proceeds be invested to balance the need to minimize future tax concerns and still deliver respectable returns? We can help you construct a properly diversified portfolio with the proceeds based on your objectives and tolerance for risk.

VR Business Brokers would like to thank Joel Bray CFP for his contribution as a Guest Blogger on our site. Joel is a financial planner and Division Director with Investors Group in Calgary, Alberta, where he has been named Financial Planner of the Year for 2011, 2012 and 2013 for the Calgary Centre Region. Joel can be reached at Joel.Bray@investorsgroup.com or (403) 229-0555.

In a global economy, it’s rarely simple to create a successful nonprofit in today’s bottom-line oriented business system, especially when competing against the for-profit sector, which often out scales nonprofits in resources and financial advantages. That’s not to say making nonprofits successful isn’t possible. Charities are often the only companies actually looking out for the bottom 10 percent of society, and keeping them alive and healthy is critical to maintaining societal and moral standards. If you’re considering starting a nonprofit, or are already involved in one, here are four TED Talks to watch in order that will spark some innovation and keep your passions flowing. 

TED.com synopsis: “Economics writer Tim Harford studies complex systems — and finds a surprising link among the successful ones: they were built through trial and error. In this sparkling talk from TEDGlobal 2011, he asks us to embrace our randomness and start making better mistakes.”

TED.com synopsis: “Activist and fundraiser Dan Pallotta calls out the double standard that drives our broken relationship to charities. Too many nonprofits, he says, are rewarded for how little they spend — not for what they get done. Instead of equating frugality with morality, he asks us to start rewarding charities for their big goals and big accomplishments (even if that comes with big expenses). In this bold talk, he says: Let's change the way we think about changing the world.”

TED.com synopsis: “Why do we turn to nonprofits, NGOs and governments to solve society's biggest problems? Michael Porter admits he's biased, as a business school professor, but he wants you to hear his case for letting business try to solve massive problems like climate change and access to water. Why? Because when business solves a problem, it makes a profit — which lets that solution grow.”

TED.com synopsis: “Here's a stat worth knowing: In the UK, 63% of men who finish short-term prison sentences are back inside within a year for another crime. Helping them stay outside involves job training, classes, therapy. And it would pay off handsomely — but the government can't find the funds. Toby Eccles shares an imaginative idea for how to change that: the Social Impact Bond. It's an unusual bond that helps fund initiatives with a social goal through private money — with the government paying back the investors (with interest) if the initiatives work.”

VR Business Brokers in Alberta would like to thank Kyle McKay for his contribution to this important topic on Social Change. 

Kyle McKay is a entrepreneurial enthusiast who has started and operated two successful small businesses. He enjoys writing about business related subject and trends. He currently works with two leading franchises You Move Me and 1-800 Got Junk.