By Don Simpson, CPA, CA, BDO Canada LLP
Ensuring all taxes are accounted for can save you big money when deciding to pack it in
Planning for the day you choose to hang up your nail gun to either move onto another venture or settle into retirement is an exercise that you should be actively managing. Otherwise, the tax department could be a significant beneficiary of all your hard work. Being proactive about succession planning today can save you time and money tomorrow.
This is often the most cost-effective way to participate in the construction industry where you are operating primarily as a one-person operation, with maybe a few employees and some sub trade assistance here and there. As simplistic as the business may be, when it comes time to close the business, you may have a few challenges that will have to be planned for to avoid significant tax consequences.
Vehicles and equipment are often purchased as business assets. Through their use over time, we depreciate the assets on our business schedule to get a tax deduction for the consumption of the assets in the course of our activities. We also get to claim a GST Input Tax Credit for the GST paid on the purchase of the items we use primarily in our business pursuits. When it comes time to close the business, the Canada Revenue Agency requires that you essentially sell all of your business assets to yourself at fair market value. If you have depreciated the assets over time such that at cessation they have a fair market value that is in excess of the value they are on the books for, you will have to pay tax on that difference in value and then self-assess and remit GST on the full fair market value. Depending on the amount and type of equipment that you accumulated over the years, this can add up to a significant cash cost in a hurry.
An idea worth considering is to watch the assets that we add to the business in the last few years of operations. If you are looking at a new truck in the last few years of planned operations, consider not adding it to the schedule of business assets to get depreciation or to get the GST back. Instead, hold it personally and charge a reasonable auto allowance to the business based on kilometres actually travelled.
Consider selling off the excess assets that you do not use on a regular basis over a number of years preceding your cessation to spread the income inclusion out over time and use someone else’s cash to fund the GST repayment. These are only a couple of examples, but the concept is that if you plan for the orderly wind up, rather than shut the doors and see what happens, you will be in a much happier place at the end of the day.
Often in business, there are good reasons to incorporate your operations to conduct your activities. When it comes time to cease activity, there will be a number of different options to consider, including:
- Do you sell your business assets to either yourself or a third party and draw a retirement stipend from the company?
- Can you sell the company and all of its assets to someone else?
- If you sell the company, will it be to family, a worker within the business or to someone completely outside of the current operations?
The answer to these questions leads to completely different planning opportunities and the timeframes to put these plans into action can take over five years to execute.
Selling the assets to either yourself or an outsider and then drawing a retirement stipend is not overly complex. Similar to the sole proprietorship described above, there are some cash outflows to be aware of for GST – possibly RST – and corporate tax on any assets that have a fair value in excess of the tax pools of the assets that are held within the company. If you are selling to people outside of your organization, this is not as big a concern as you will have their cash to pay the bills. However, if you did not plan on these costs, your retirement fund may not be as large as you had hoped.
If you are looking to sell the company as a package, there are a number of items to keep an eye on. Do you have any excess cash, investments or assets that you desire to keep? You will have to get them out of the business before you sell and in the case of cash and investments, you may have to get them out of the business at least 24 months before a sale occurs. The further out that you plan for your business sale, the better you can plan for the tax implications. Your best-case scenario is zero per cent tax on the sale of Qualified Small Business Corporation (QSBC) shares where the company only holds pure business assets (subject to a limit test and possible alternative minimum tax). If you are not proactive in managing your plan, the tax could be as high as 50.4 per cent to pull all of your cash, investments and personal assets out in a hurry, and then 25.2 per cent on the value of the shares because you did not meet the QSBC test.
In addition to managing tax costs, whether you are considering selling the business to a family member or to an employee or group of employees already working in the business, you must consider how you plan to transfer your business knowledge to them. Sometimes this will happen naturally, but in most cases, you will have to actively involve the successor in all business matters and processes. If you do not develop a plan to transfer this knowledge it can be exceedingly difficult for your successor to be able to continue your business with the focus and perspective that you had developed over the years. Again, the more time that you devote to the transfer of knowledge to your successor, the greater the opportunity for success for everyone.
If you are simply selling the business to the highest bidder, as there is no one within your organization that can or wants to take your seat as owner, there are still a number of planning opportunities to help you achieve greater success than simply hanging a “for sale” sign on the door. You need to manage your financial statement presentations over a number of years, as a purchaser will be asking for three to five years of financial statements and tax returns to perform their due diligence. Ensuring that you are employing the best business practices through that period of possible review to show the appropriate business trends and asset management policies will display the true worth of your business. This will pay off in the end when you can provide a financial picture of health that any business operator would be desirous of taking over.
Too often, I have a client that walks into my office and states, “I am done,” and too many times I reply, “I wish you had told me sooner.” Tax is a part of business as there are many government services that we all must help fund. Through proper planning, you can manage and mitigate your share of that obligation to be your minimum contribution required by legislation. The alternative as stated above can be as high as 50.4 per cent of your life’s work – or more if we have to attend to GST and RST contributions – to the government. Planning does have a cost, but for most people – whether self-employed or incorporated – not planning has a much higher cost.
Don Simpson, CPA, CA, is a partner with BDO Canada LLP, a tax, accounting and advisory firm with seven offices in Manitoba servicing all areas of the province, and a combined talent pool of more than 4,000 people across all of Canada supporting the local team.
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