My question is: Canadian-specific
QUESTION: I am selling my business and have decided to carry some vendor
financing. The price is 175,000 the purchaser is putting 50,000 down and I
will carry the balance with a demand loan for six to ten years??? My
question is do I pay capital gains on the 50,000 or do I have to claim the
entire amount even though I wont recieve it for some time. Secondly if I
have to pay up front do the payments I will recieve during the next few
years become deductions. I should hope they are not taxed again. Thank-you
Tom Hastie
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david ingram replies:
If you sell the business as a corporation or an active farm, you are
entitled to up to $500,000 capital gains tax free which would mean none of
it is taxable.
If you have already used up the $500,000, the capital gains tax would be
paid on the profit proportion of the $50,000 and then the balance can be
spread over 5 years even if you carry the paper for 10 or even 25 years.
Let's pretend that the cost price of the business was $75,000 and you have
made exactly $100,000 profit.
In the first year you would pay tax on $50,000/$175,000 x's $100,000. In
each of the next four years, you would pay tax on ($125,000/4)/$175,000 x's
$100,000.
Hope this helps.
In the US, the tax would be spread over the life of the contract and you
would pay tax on the proportion of the capital gains to the amount of
principal paid down every year.
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