Canada: Selling a business, preserve lower tax rates now

Canada: Selling a business, preserve lower tax rates

Owner-managers who are thinking about selling their “Canadian-controlled private corporation” need to consider the effect of new measures that will change the way “eligible capital property” (ECP) is taxed.

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Whether considering selling the business to the next generation, to key employees, or to third parties, taking precautionary steps now can help sell the business at relatively lower current corporate tax rates and thus preserve access to a significant tax deferral that may not be available starting in 2017. In particular, if a significant value of a Canadian-controlled private corporation is in its ECP (e.g., goodwill), and the owner-manager has no immediate personal need for the sale proceeds, a tax deferral of approximately 12% may be lost. 

Ideally, completing the sale of the business before 31 December 2016 will retain this tax deferral. If this is not feasible, an internal sale of 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. 

Changes effective 2017

Canada’s Finance Department released proposed rules for the taxation of ECP on 29 July 2016 that builds on the ECP changes first introduced with the 2016 federal budget. Generally, the new rules will tax a sale of ECP as capital gains effective 1 January 2017, subject to certain transitional rules. Currently, gains from the sale of ECP are taxed at half of the active business income tax rate. 

 

Read a September 2016 report [PDF 100 KB] prepared by the KPMG member firm in Canada

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