Why selling your Business in 2021 vs 2022 may net you 14% more After-tax
By Anthony Tolomizenko, BSc, CPA, MBA
There are many factors that must be considered in timing the sale of a private business. Some of these include:
- Company’s financial forecast
- Company’s recent financial results
- General economic conditions, and more importantly, the industry sector outlook
- The owners’ financial situation as well as his or her personal situation including health and the ability to stay-on during the transition period.
Historically, income tax considerations were not a key factor in timing the sale of a business. That is because the tax environment was relatively stable in the past. This is about to change.
Due in part to the numerous COVID stimulus programs introduced by the Canadian Government, the Federal Government now owes more than $1.1 trillion in debt. This has led to many tax experts suggesting that Canadian taxpayers should prepare for tax increases. (A reduction in government spending is not likely.) Areas that may be subject to tax increases include:
- Personal and Corporate tax rates
- Increase in GST/HST
- Tax on principal residences
- Capital gains inclusion rate increasing from 50% to 75%
- Elimination of Capital Gains Exemption on Small Business Shares.
Of all the above points, the last two will have an enormous negative impact on business owners who sell their companies after the changes are implemented.
As an example, if a business owner were to sell his or her shares in their company today for proceeds of $30 million, personal income tax on the sale would total approximately $7.2 million (given certain assumptions – the most notable one being that the original tax cost of the shares is nominal). If next year in the 2022 federal budget the capital gains inclusion rate increases to 75%, and the capital gains exemption is eliminated, then tax on that very same transaction would increase to $11.2 million. That means the business owner would be worse off by $4 million.
Business owners should never rush to sell their businesses. However, given today’s political tax climate, owners who are contemplating the sale of their business in the next 12 months might consider expediting their plans so as to not get nailed by government tax increases.