Owner-managers selling their CCPC should consider the effect of new measures that will change the way ECP is taxed.
Whether you’re considering selling your business to the next generation, to key employees, or to third parties, taking precautionary steps now can help you sell your business at relatively lower current corporate tax rates and thus preserve your access to a significant tax deferral that may not be available starting in 2017. In particular, if a significant value of your CCPC is in its ECP (e.g., goodwill), and you have no immediate personal need for the sale proceeds, a tax deferral of approximately 12% may be lost.
Ideally, you should complete the sale of your business before December 31, 2016 to retain this tax deferral. If this is not feasible, an internal sale of your ECP could be considered, depending on the circumstances. ECP may include intangibles, such as goodwill, trademarks, customer lists, and certain licenses, including farm production quotas.
Finance released proposed rules for the taxation of ECP on July 29, 2016 that builds on the ECP changes first introduced with the 2016 federal budget (see TaxNewsFlash 2016-12, “2016 Federal Budget Highlights”). Generally, the new rules will tax a sale of ECP as regular capital gains effective January 1, 2017, subject to certain transitional rules. Currently, gains from the sale of ECP are taxed at 50% of the active business income tax rate.
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