Our client incorporated his company 20 years ago with $50,000 of his own money and a bank loan. The business has grown substantially and his shares are now worth over $2 million. As the business grew, the corporation purchased a building. Our client now has about $500,000 in the corporate bank account that he is investing for his retirement. The client is considering selling the business in the next five years before he moves to Florida.
What should the client do to ready the business for a possible sale? What should he sell? What can he do to save income and probate taxes? Can the assets be protected to secure his retirement?
We moved the building and the cash into separate business entities, leaving only the active business in one corporation. This arrangement will provide a level of creditor protection for the assets our client is relying on to fund his retirement and will allow him to sell the shares of the operating business and the building separately.
Under the Income Tax Act, the owners of qualifying small business corporation shares are entitled to an $800,000 life time capital gains exemption on disposition of the shares. To claim the exemption, a number of tests must be met. By moving the investment account and the building out of the operating company, our client will be able to satisfy the income tax test that would not be satisfied if those assets remained in the operating company when he sold the shares of the business.
The capital gain exemption is available only to residents of Canada. We therefore discussed the timing of the sale in relation to his move to Florida, to ensure that he qualifies for the capital gain exemption.
The capital gain exemption also applies to capital gains that flow to individuals through a trust. We set up a trust for our client and included his family members as discretionary beneficiaries of the trust. New equity shares in the operating company were allocated to the trust to allow the capital gains exemptions to be enhanced or multiplied with family members when the operating business is sold. These changes and plans may save the client hundreds of thousands of dollars in taxes.
We also updated our client’s will to provide a fair allocation of the estate among his family members. We used the dual will strategy to help save probate tax on the value of private company shares that will pass to his family.
Our client was able to ready his business for sale using all available tax-planning and creditor-proofing strategies.