The first issue to address when selling your practice is identifying what you are putting up for sale. If assets, are they the assets of the unincorporated practice or those of the corporations? If shares, are they shares of the Professional Corporation or shares of the hygiene service corporation? The distinction can make considerable difference in the after tax dollars left in your pocket.
Selling assets of your practice or your corporation normally results in higher taxes meaning less cash in your pocket. Why? Because all those tax deductions you have claimed on the assets in the previous years may now be taxed as regular income – unlike a capital gain where only 50 per cent is taxed. Regular income may still enjoy the low corporate tax rate (assuming these assets are in a corporation and that the corporation’s income does not exceed the threshold amount). In addition, any capital gain realized will be taxed as well.
What are other advantages and disadvantages of selling assets?
|–||No extra legal and accounting fees in setting up a corporation prior to the sale.|
|–||If you use a corporation, you may continue using it for investment purposes and income split with your family, assuming there are investment assets that are not being sold with the business assets.|
|–||If you use a corporation, you the shareholder may be entitled to receive a tax-free dividend from the corporation.|
|–||You are responsible and liable for collecting and remitting any applicable GST/PST due on the sale. This means Canada Revenue Agency can assess you for any unpaid taxes on the sales.|
|–||If you use a corporation, you may have to incur extra legal and accounting fees to dissolve the corporation should you decide not to continue the corporation.|
On the other hand, selling shares may be ideal if you are eligible to use your $500,000 capital gains exemption to shelter some or all of the gain from the sale of the shares. If you are able to use your exemption, then your potential tax savings could be as much as $116,000. Your accountant can guide you through and plan ahead for such exemption.
What are other advantages and disadvantages of selling shares?
|–||It may be less complicated as you do not have to identify/account for all the assets in your practice or corporation, especially goodwill.|
|–||You would avoid the need to charge and collect GST/PST, which does not apply on the sale of shares.|
|–||You have to incur legal and accounting fees to set up the corporation.|
|–||Your selling price may have to be reduced to compensate the purchaser for a lower tax write off in the future.|
When selling your practice, you will have to choose between having you or a corporation sell the assets, or whether you sell the shares of the corporation.
Understanding what you are selling is important as it has legal and tax implications. More importantly, it affects the true after tax amount you receive. Work closely with your lawyer and accountant to ensure all aspects are in order.
Generally speaking you will likely have more money in your pocket if you sell shares.