Article by Jonathan Wright. Click here for homepage.
Selling a business or real estate can result in a substantial amount of tax. This burden can be particularly large if the real estate is in a rapidly-growing market like Vancouver or your business was built from scratch. Fortunately, there are some little-known rules in the Income Tax Act that may help defer tax where you intend on reinvesting the proceeds of sale in some replacement property.
This update will be released in two parts. Next week’s will address the sale of real estate. In this update we discuss the tax deferral available through the section 44.1 small business rollover.
This provision is designed less for the retiring business owner than for the serial entrepreneur, selling one business and buying another within a relatively short time frame. For the relief to apply, the taxpayer and the shares must meet a number of conditions.
First, the taxpayer must be an individual (i.e. not a holding company) selling the shares of an eligible small business corporation (an “ESBC”).
To paraphrase, an ESBC share is a common share of a Canadian-controlled private corporation the assets of which are used principally in an active business carried on primarily in Canada. There are size limits for the company which most small businesses will meet easily. In addition, certain corporations are excluded from being ESBCs, including professional corporations (like an incorporated doctor or lawyer), corporations carrying on a leasing or rental business or corporations where more than 50% of their value is derived from real estate.
If the shares sold otherwise qualify, there is a further requirement for the ownership period. With certain exceptions, these shares must be owned by the person selling them for at least 185 days.
The last requirement is that the new investment be made another ESBC. The purchase of these shares must be finalized within 120 days after the end of the year in which the original sale was undertaken.
Where all the requirements are met, the capital gain (and resulting tax) is effectively rolled from the shares of the first company to the second, avoiding tax for the time being and thereby increasing the amount that can be reinvested in your new venture.
If you are looking for tax advice about the small business rollover or other tax planning opportunities for you or your business, please do not hesitate to contact the author at firstname.lastname@example.org or 604.678.4459 to book a consultation, or visit our website at wrightlegal.ca.