It’s natural to have a mix of emotions when it’s time to sell your business. On one hand, it’s a well-deserved reward for your hard work. On the other hand, it’s difficult to part with something that’s been a significant part of your life. However, one thing that’s clear is the importance of minimizing the tax burden on the sale. If you’re considering selling a business, Ottawa tax tips can guide you on how to reduce your taxes and maximize your proceeds.

Prepare And Plan

Selling your business is a major financial transaction that requires careful planning. It’s crucial to seek professional advice before you proceed with the sale.

Due to the complicated nature of Canadian taxes, it can take two years or more to set up the sale properly. For business succession planning, Ontario has many professionals who can help. The services of a lawyer, an accountant and a certified financial planner will put you in a position to take advantage of tax savings to reduce your Canada Revenue Agency (CRA) bill. Here are some steps to take and strategies to consider.

Decide what you’re selling

Businesses sell their shares or their assets. They may sell both, but this is less common. Typically, sellers prefer to sell shares while purchasers prefer to buy assets. The tax treatment for each is different.  It’s essential to find out the implications of each and how they will affect your goal.

Capital gains

The profit you make from the sale of your business is considered a capital gain by the CRA. You must pay tax on half of your capital gain. So, if you realize a $500,000 profit from the sale of your business, $250,000 will be taxed at your marginal tax rate.

One tax advantage the CRA offers is the Lifetime Capital Gains Exemption (LCGE) of up to $1,250,000 in 2025. The LCGE applies to:

• The sale of shares, farming, or fishing property
• The shares owned by you or a relative for at least 24 months before the sale of the business
• Companies that are not publicly traded
• Only small business corporations 
• Situations where more than 50% of the business’s assets have been used for active business in Canada for 24 months before the sale

If your business qualifies, the LCGE offers a significant tax benefit.

Tax saving strategies

Other tax-efficient business exit strategies can help reduce your tax bill. Some you can consider are:

• Setting up a trust- With this approach, you can freeze the value of the shares at a low price, which the trust will then purchase.  The intention is for the trust to sell the shares at a higher price in the future. The capital gains and the associated tax are then distributed among the family members who are beneficiaries of the trust. Any funds that the beneficiaries receive from the trust are theirs to keep, and they are not required to return them to you.
• Transition the business to a family member- Legislation allows intergenerational business transfers to qualify for the LCGE if they meet the government’s requirements.

• Offset capital losses- If you’ve had qualifying losses in past years, you may be able to use them to offset the capital gains from the sale of your business.

• Defer taxes by using a capital gains reserve or holding company- You may be able to spread out the capital gains over several years by receiving payments instead of one lump sum. Another option is to use a holding company, which allows you to invest the company’s earnings so you can withdraw them at a later date.

• Donate shares to a registered charity- You must donate the shares by December 31 of the year of the sale of the business.

How Ottawa entrepreneurs can maximize sale proceeds

Ottawa entrepreneurs are the economic lifeblood of the city. Over 90% of Ottawa’s businesses are small, having fewer than 50 employees. Some services these businesses provide are legal, financial, retail, health, construction, and food. One interesting sector in Ottawa that’s seeing incredible growth is the tech sector. 

Small business owners have many reasons for selling, such as retiring, pursuing other opportunities, or life events which make continuing difficult. Putting a succession plan in place to sell your business will help you achieve your goals. Here are some steps to take to make your dream a reality:

1. Plan well in advance. Determine how much you want for your business, what the market is like for businesses like yours, and explore the tax implications and structure your company to maximize your tax savings.
2. Decide who you want to sell your business to and what you want to sell. Do you want a family member to take over or an arm’s-length buyer? Do you want to sell shares or assets?
3. Prepare a due diligence report as a selling tool for prospective buyers.
4. Get guidance through a team of professionals to ensure the sale goes smoothly and you accomplish your goals. A lawyer, an accountant, and a certified financial planner will help you achieve this milestone.
5. Plan for the future. Your future could include ongoing involvement in your business if the buyer agrees, or you may want to take a different direction. Having a plan will make the transition easier.

Put a Plan in Place

When you’re selling a business, Ottawa tax tips will help you keep more of your money. At MDL Financial Group, our certified financial planners offer business owners comprehensive financial planning and access to a team of experts to help you achieve your goals. Book an appointment with us online or by calling 613-416-9649.

We look forward to working with you to achieve this significant milestone!

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