The Key Tax Implications of Selling a Business in Surrey

For many business owners in Surrey, the decision to sell is the culmination of decades of hard work. Whether you run a logistics company in Campbell Heights, a construction firm in Newton, or a tech startup near City Centre, handing over the keys is a life-changing event.

However, without the right strategy, a significant portion of your retirement nest egg could disappear to the Canada Revenue Agency (CRA).

Even if you have a general understanding of the tax implications, the landscape has shifted dramatically in the last year, with new rules on capital gains and Alternative Minimum Tax (AMT) that specifically target high-value transactions.

Here is what you need to know to protect your hard-earned equity.

The Great Tug-of-War: Asset Sale vs. Share Sale

The most fundamental tax decision you will face is how to structure the deal. There are two ways to sell an incorporated business: you can sell the shares of the corporation, or the corporation can sell its individual assets.

In a Share Sale, you sell your ownership stock to the buyer. This is generally the gold standard for sellers because it allows you to access the Lifetime Capital Gains Exemption (more on that below), which can make a massive chunk of your profit tax-free. It also creates a clean break; once the shares are gone, the legal liabilities of the company typically go with them.

In an Asset Sale, your corporation sells things like equipment, client lists, and inventory. The corporation pays tax on the income generated from the sale, and then you have to pay a second layer of personal tax when you withdraw that cash as a dividend. Buyers often prefer this because it allows them to "step up" the tax cost of the assets, giving them higher depreciation write-offs in the future.

Maximizing the New Lifetime Capital Gains Exemption (LCGE)

If you can structure your deal as a share sale, you unlock one of the most powerful tax breaks in the Canadian tax code: the Lifetime Capital Gains Exemption (LCGE). As of June 25, 2024, the federal government increased this limit to $1.25 million.

This means that if you sell your shares for a $2 million profit, the first $1.25 million could be completely tax-free. For a husband-and-wife team owning a trucking company in Surrey, for example, you could potentially double this exemption, sheltering up to $2.5 million of gain from tax.

However, qualifying is not automatic. Your business must be a "Qualified Small Business Corporation" (QSBC). This requires meeting strict tests:

1. The Holding Period Test: You must have owned the shares for at least 24 months prior to the sale.
2. The Asset Test: At the time of sale, 90% or more of your company's assets must be used for "active business" in Canada.

This "90% rule" is where many profitable Surrey businesses fail. If your company has accumulated too much cash, holds a rental property that isn't part of operations, or has a large investment portfolio, you might be disqualified.

This is why we often perform a "purification" strategy years before a sale, moving those passive assets out of the operating company to ensure you stay onside for the exemption.

Navigating the Higher Capital Gains Inclusion Rate

For gains that do not qualify for the exemption, or for amounts that exceed the $1.25 million limit, you face a new reality. Effective June 2024, the federal government increased the capital gains inclusion rate.

Previously, only 50% of your capital gain was taxable. Under the new rules, the inclusion rate rises to 66.67% (two-thirds) for all capital gains realized by a corporation. For individuals, the rate remains 50% on the first $250,000 of gains in a year but jumps to 66.67% for every dollar above that threshold.

Consider a sale where you have a $2 million gain that doesn't qualify for the LCGE.

• The first $250,000 is taxed at the 50% inclusion rate.
• The remaining $1.75 million is taxed at the 66.67% rate.

This change effectively increases the tax rate on your exit. It makes timing your sale and splitting income with family members (where legal and appropriate) more critical than ever.

The Silent Wealth Killer: Alternative Minimum Tax (AMT)

While most headlines focused on the capital gains rate, a quieter change in 2024 may hurt business sellers even more: the overhaul of the Alternative Minimum Tax (AMT).

The AMT is a parallel tax calculation designed to ensure high-income earners pay at least a "minimum" amount of tax. If the AMT calculation is higher than your regular tax calculation, you pay the AMT amount.

Under the new 2024 rules:

• The AMT tax rate has increased from 15% to 20.5%.
• The exemption amount has risen to approximately $173,000.
• Crucially, 30% of capital gains sheltered by the LCGE are now included in the AMT calculation.

In the past, claiming the capital gains exemption rarely triggered AMT. Now, selling your business and claiming that full $1.25 million exemption could trigger a significant AMT bill in the year of sale.

While AMT is technically a refundable tax that you can recover over the next seven years, many retirees generally have lower income after selling their business. If you don't have enough tax payable in future years to recover the AMT, that "temporary" tax becomes a permanent cost.

Securing Your Financial Legacy in the Lower Mainland

Selling a business in Surrey involves navigating a minefield of federal tax changes and local economic realities. From the heavy equipment yards of Port Kells to the professional offices of Guildford, every business has a unique tax profile that requires a bespoke exit strategy.

You only sell your business once. It is imperative to look beyond the top-line offer price and focus on the "after-tax" number that actually hits your bank account.

By planning early, purifying your assets for the exemption, navigating the new inclusion rates, and modeling out the AMT impact, you ensure that your years of hard work benefit you and your family, not the tax department.

Located in Surrey (Cloverdale), British Columbia, since 1971, HWG, Chartered Professional Accountants proudly helps clients throughout the Lower Mainland and across Canada.

Our team of chartered professional accountants provides helpful business and personal tax services. Our continued growth proves the success of our client relationships.