While incorporating your business may sound costly, there’s a good reason to do it.
That reason is $1 million – almost $1 million tax free to be exact.
If you have created a business that you can sell for a one million dollars of gains, this gain is tax free if your business was incorporated.
What is the Lifetime Capital Gain Exemption?
What makes it tax free is the Lifetime Capital Gain Exemption (LCGE).
Incorporating can be a substantial advantage when dealing with the capital gains arising from the sale of specific shares in private companies. In Canada, individual residents have the opportunity to utilize the LCGE to protect capital gains incurred from the sale of shares in a qualified small business corporation (QSBC).
As of 2023, the LCGE stands at $971,190. Opting to incorporate your practice could potentially allow you to sell it and safeguard the accrued value from taxation, up to the specified LCGE limit.
For a corporation to qualify as a small business corporation engaged in active business operations upon its sale, it must meet specific conditions. These include rigorous value assessments for assets utilized in the active business during the sale and the 24-month period preceding any share sale, among other criteria.
Strategic planning is key
Adequate advance planning before selling your practice is crucial to ensure the proper structuring of the corporation and fulfillment of the conditions for QSBC status.
If your professional corporation’s shares are owned by family members as well, there may be an opportunity to amplify the LCGE accessible for the disposition of QSBC shares by leveraging each individual’s available LCGE. By implementing such strategic planning, family members would be entitled to a share of the sale proceeds corresponding to the shares they possess.
For sole proprietors contemplating the sale of their practice, claiming the LCGE may be feasible by transferring the majority or entirety of professional assets into a corporation and promptly (24 months period) selling the shares of the newly established professional corporation.
It’s important to note that the ability to sell the shares of your professional corporation could be restricted based on your specific profession. For instance, in professions like dentistry, there is often a market demand for the sale of dental practices, making it a common choice for retiring dentists.
Additionally, the dental profession has witnessed growth through the acquisition of practices by large dental consolidators, contributing to a robust and growing market for the sale and purchase of dental practices.
There are more reasons to incorporate your business.
Read more on our blog or watch our Youtube.
About the author:
Moe Tabesh is an Ottawa accountant who has founded Numetrica, a pioneer in cloud based accounting.
Moe’s journey from a taxi driver supporting himself through university to becoming a successful entrepreneur shapes Numetrica’s ethos of contributing meaningfully to society.
Inspired by superhero narratives, Numetrica transforms traditional accountant stereotypes, fostering a community of small business superheroes.
