QUESTION: I live in Ontario and I've been a franchise owner for the past ten
years. I am 62 years old and ready to sell my franchise and take it easy
for a while! However, I have no idea what the tax implications are when
selling a small business. I am not incorporated. Does a capital gains
exemption apply here? My second question is: When the business is sold and
I start using some of this money (from the sale of the business) to live on,
does this money become taxable income? Thank you for any assistance.
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david ingram replies:
if the business is incorporated and you have had it for two years or more
AND, AND, AND the purchaser will buy the company, you can sell your
franchise business for a profit of up to $500,000 tax free.
The problem is that most people will not buy the corporation for many
reasons some of which are:
1. They are assuming all the liabilities that may or not be known at the
time of sale. If someone has a lawsuit pending (but not filed) from when
they slipped on the front sidewalk, the new purchaser has assumed that risk
which even you might not know about at the time of sale.
2. For the purchaser to pay you that $500,000 tax free, they have to have
made $1,000,000 and already paid $500,000 tax to have $500,000 left over (a
simplification to be sure but the theory is correct).
3. The purchaser has less write-offs for the internal assets because they
are assumed at your depreciated value within the company.
If someone will pay you for the corporation and remember that a $500,000
profit is the most that can be TAX FREE, you can incorporate a 2 year old
business the day before you sell it.
-----------------
However, it is not likely to happen.
What you will do is decide on what the adjusted cost base of your business
is based upon your capital input and any retained earnings. You will sell
it for a price and 50% (one half) of the difference will be the profit and
taxable on line 127 of your tax return at standard rates which for the sake
of argument (not accurate but not far off) will be:
24% on first $35,000
30% on next $35,000
35 to 40% on next 45,000
44% over $115,000
The number of brackets and the amounts will vary depending upon which
province you are living in.
---------
The amount of money that represents the ACB of the business is tax free.
--------------------------------
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