It’s important to get your business properly valued before selling it, especially if the purchaser is a close family member. PHOTO BY GETTY IMAGES
By Julie Cazzin with Andrew Dobson
Q: I want to sell our franchise to my oldest son. The profit year after year is $75,000 to $100,000, but sales are more than $2 million. We do not own the building; we lease it from a large company. We only own the equipment inside and the signage. I wish to sell it to my son at the fair market value I myself believe it to be, so the Canada Revenue Agency will not come back sometime in the future and request more capital gains taxes. I assess it to be worth $400,000 to $450,000. The transfer of the franchise rights to my son is free from the franchise owner and the equipment is about $250,000. Will the CRA be OK with this or will there be problems? What do you suggest I do? — Larry
FP Answers: Transferring or selling a business to children can be a strategy for business owners to accomplish intergenerational wealth transfer. Since franchisees are bound by franchise agreements, that is likely the best place to start reviewing any restrictions regarding a sale. A franchise agreement could dictate the terms the franchisee must comply with before selling their franchise. For example, many franchises require pre-approval of new buyers/franchisees in order to allow the franchise to transfer to that new ownership.
CBVs will check items such as equipment depreciation, sales, financial ratios (for example, price to book and price to earnings), goodwill and inventory turnover, among other items. They may also compare your business to similar, recently appraised businesses to fairly value your business.
Obtaining a valuation can ensure you are approaching this part of the transaction fairly. It could also come in useful if you decide to sell your business to a third party or if your son decides not to take over the business.
Your shares may also qualify for the lifetime capital gains exemption, which could allow you to have a capital gain of up to $1,016,836 upon the sale of shares in your business and qualify for an offsetting deduction on your taxes. This could make the sale proceeds tax free.
In order to qualify for the exemption, your business will have to pass several tests, including:
There are a few additional considerations about how a business is taxed upon its sale. For example, you may have insurance policies, a vehicle or accumulated savings you want to extract from the business prior to the sale that may result in tax payable to you.
Even if your share sale qualifies for the lifetime capital gains exemption, there might be a need to pay the alternative minimum tax (AMT). The AMT is levied based on a formula and can apply in situations where someone’s income tax payable is too low in any given year, but they had significant income that was subject to preferential tax treatment.
Post Credit: By Julie Cazzin Published on Financial Post
Post Link: (https://financialpost.com/investing/tax-consequences-selling-small-business-to-son)
