Bob Gauvreau explains why structuring a business as a corporation can provide significant tax advantages when selling, compared to a sole proprietorship. He outlines the Canadian Lifetime Capital Gains Exemption (LCGE) that applies to shares of a qualified small business corporation, showing how a $500,000 sale could avoid roughly $250,000 in tax versus a sole proprietorship taxed at about 25%. He clarifies that a sole proprietorship can be rolled into a corporation to qualify for the exemption, but stresses the need to consult a qualified CPA or tax expert to ensure the transaction is properly structured and to capture the potential savings.
Chapters
Let's talk about how an incorporated entity may be more beneficial when you want to sell it versus a sole proprietorship. And a lot of people ask, is it better for me to be incorporated versus a sole proprietorship? And really the answer is going to be it depends. Does it make it easier for me to sell my business? Not likely easier to sell it, but there definitely are some benefits if you structure your exit properly. One such example would be if you are one individual owner of a business, you're selling it for $500,000. In Canada, there's a lifetime capital gains exemption which only applies if you own shares of a qualified small business corporation or a qualified farming enterprise, but typically a qualified small business corporation, which means you've got a corporation that's set up and you own the shares of it. If you sell that corporation or the shares of that corporation, you would qualify for your lifetime capital gains exemption, which means you wouldn't pay tax on that sale. If you sell as a sole proprietor, you would be paying tax on that sale, likely at a tax rate of about 25%. So if you imagine $1 million, so the lifetime capital gains exemptions somewhere between $850,000 and $950,000 right now. Let's just assume it's $1 million for simplicity. That's $250,000 of tax savings by having an incorporation set up versus a sole proprietorship. So as you can tell, it's got substantial benefits related to having a corporation set up. Now, there could be a misconception related to this. If you have a sole proprietorship and you're looking at selling it, you can quickly roll that sole proprietorship business into a corporation and you can sell those shares and get access to your lifetime capital gains exemption. So if you're looking at selling, you want to make sure that you talk with a qualified CPA and tax expert because you could be saving yourself a quarter million dollars if you sell the business in the right structure. So that would be the primary benefit of selling a business as a corporation versus being a sole proprietorship.
