Tax issues to consider when selling a business

Selling a business is a long-term plan for many entrepreneurs. It is a major step that requires careful preparation in order to avoid unpleasant tax surprises.

In this article, our tax specialists explain which tax issues to consider when preparing to sell a business.

The importance of due diligence

Due diligence is a process the buyer undertakes during the sale of a business in order to make sure that the seller is complying with national and international tax laws and standards before concluding the purchase.

Bound by confidentiality and non-disclosure agreements, the potential buyer examines the company’s assets, such as equipment and premises. The buyer may also check any and all tax and business documents they deem relevant to the purchase, such as financial statements, human resources, etc.

The seller must open their books to allow the buyer to properly evaluate the state of the business. Therefore, sellers should ensure that their books are in order before beginning the sale process in order to give themselves the best chance of success.

To prepare for due diligence, sellers should correct any administrative gaps in their business. They should also resolve any pending legal proceedings that might discourage potential buyers. Additionally, they may want to renew any contracts that are expiring in order to make the business look as attractive as possible.

Both sellers and buyers would be well advised to obtain the services of business tax accountants in order to avoid potential problems.

Preparing to sell your company’s assets or shares

Whether you decide to sell your company’s assets or shares (or a mix of both), you will need to prepare accordingly in order to optimize your tax benefits.

Preparing to sell shares

Shares are the more advantageous option for sellers. However, before selling, it’s important to determine whether the company has assets that are not essential to its operations.

If there are such assets, it can be very advantageous from a tax perspective to sell or remove them from the company before selling shares. Although this lowers the value of the business and its sale price, the capital gains tax payable on the sale also decreases.

Furthermore, removing non-essential assets increases the chance that the company’s shares will qualify for the capital gains exemption, which amounts to $892,218 in 2021.

A corporate tax specialist can advise you on the best way to dispose of these assets before selling shares.

Preparing to sell assets

Preparing to sell business assets differs slightly from preparing to sell shares. It mainly consists of finding the most tax-efficient way to distribute the proceeds of the sale among the company's shareholders.

For example, if the purpose of the sale is to generate a gain, a tax-free capital dividend can be paid to the shareholder. In a different situation, a more advantageous method might be to pay taxable dividends and spread the payments over time to take advantage of a personal tax deferral.

Purchase and sale agreement considerations

Purchase and sale agreements can vary depending on the type of sale and the company. The seller should focus on the representations and warranties required by the buyer, and limit themselves to speaking about the company’s past performance. They should avoid any speculation on the company’s future performance in order to avoid tax complications.

T2inc can guide you through the process of selling your business

Selling a company can be fairly complex, tax-wise. Having someone who is well-versed in corporate tax issues can help you take advantage of tax benefits when selling your company’s assets or shares.

T2inc's tax accountants offer tax solutions specifically designed for Quebec SMEs. If you are looking for personalized guidance to help you pay fewer taxes on the sale of your business, don’t hesitate to contact our team.