The Asset Sale Approach: Unlocking Value and Managing Taxes
In an asset sale, the cumulative value of all assets, including goodwill, is allocated at fair market value. This method can potentially yield a higher valuation for an ongoing, thriving business that demonstrates added value to the purchaser. However, asset sales come with a caveat: sellers face two levels of taxation.
Upon the sale of assets, the corporation is liable to pay taxes on its taxable income, including any gains or losses from the disposition. Moreover, GST and PST may apply in relevant jurisdictions. Notably, if the sale results in business closure, the seller is responsible for employee dismissal and compliance with employment standards.
However, sellers can mitigate double taxation by distributing the net proceeds to shareholders, potentially through a tax-efficient capital dividend. This strategy allows for tax-free treatment of capital gains, reducing the overall tax burden. Careful planning and adherence to regulatory requirements, including filings with the Canada Revenue Agency (CRA), are essential to capitalize on these tax benefits.
The Share Sale Strategy: Capitalizing on Tax Advantages
Alternatively, selling shares of the corporation offers distinct tax advantages for sellers. Capital gains from share sales are subject to tax on only 50% of the gain, potentially resulting in significant tax savings. Moreover, share sales do not trigger GST or PST obligations, streamlining the transaction process.
For owners of Qualified Small Business Corporations, there's an added benefit: the $800,000 lifetime capital gains exemption. This exemption can be particularly advantageous for family businesses with multiple shareholders, as each member may utilize the exemption individually.
Mitigating Risks and Enhancing Salability
Beyond tax considerations, sellers must address potential risks that buyers may perceive, such as undisclosed liabilities or contingent obligations. Increased transparency in financial matters and legal compliance can instill confidence in buyers and elevate the sale price. By proactively addressing these concerns, sellers can enhance the value and salability of their businesses.