You have worked hard to build a successful Toronto small business and you have found a buyer who is willing to buy the shares of your company.
You have the cheque in your hand and you are deciding what you should do next. Before you start spending your hard-earned money, you better save some money to pay off your tax bill that’s due next April.
Now you may be thinking: “Wait, what tax bill?!? I thought selling my company was supposed to be tax free. That’s what I keep hearing on TV.”
While the first $813, 600* of selling your Toronto small business shares are tax free, you will be subject to the Alternative Minimum Tax.
You may be asking: “What is this Alternative Minimum Tax? And why have I never heard of it before?”
The Alternative Minimum Tax is basically the government’s way of ensuring Canadians pay tax even though many can take advantage of various tax deductions and credits. Many Toronto small business owners have never heard of it before because it only applies in relatively rare and unique circumstances. Below I will offer an example of a case in which the Alternative Minimum Tax may apply.
In order to estimate your potential tax bill, do the following:
1. Take your gain (up to $813,600) x 30%
2. Take the result from 1 and subtract $40,000.
3. Take the result from 2 and multiply by 15%
4. Take the result from 3 and multiply by 1.35 (to add provincial taxes)
As example, say you have an $800,000 gain on the sale of your company shares. Your conservative tax estimated bill would be calculated as follows:
($800,000 X 30% – 40,000) x 15% x 1.35 = $40,500
Therefore, you will need to have to keep this cash available to pay off CRA on April 30th, the year after you sell your business.
If you have continued income over the next 7 years, the $40,500 will be used as a reduction for future tax bills. However, you can only claim the reduction if your regular tax bill is in excess of your AMT bill each year. To demonstrate this, I will continue from the example given above. Say you got a consulting contract from the purchaser of your business for $200,000 for 2016, which generates a $60,000 tax bill. You would only owe $19,500 in 2016 as the $40,500 is used as a “credit” against the $60,000 worth of tax that you owe in 2016. In other words, under the “regular” tax system you would have paid $0 in 2015 and $60,000 in year 2 for total taxes of $60,000. Under the AMT system, you paid $40,500 in 2015 and $19,500 in 2016 for total taxes of $60,000. While this example oversimplifies what can be an extremely complex process, it illustrates that the AMT is generally a prepayment of tax.
If you have no income over the 7 years following the sale of shares, the $40,500 becomes your tax bill on the sale of your company and will not be credited to you.
Therefore, it is very important to factor in this tax bill when selling your Toronto small business. Please contact me to discuss options on how to manage this tax cost.
William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.
* Yes, the $813,600 is an odd number. Here is how it arises: The 2014 Budget raised the capital gain exemption for Toronto small business shares from $750,000 to $800,000 and the $800,000 is now indexed for inflation. The 2015 figure is $813,600 ($800,000 x 1.7% inflation factor prescribed by tax law).
On August 11, 2015, the Ontario government released more details regarding the Ontario Retirement Pension Plan (“ORPP”). As it is my job as an Oakville Chartered Professional Accountant to understand the ways that the ORPP and other government initiatives can affect my clients, I have been asked to clarify the consequences and details of the ORPP. Some of the details that were released to the public include:
Some have viewed this as a “job-killing” tax, similar to the Canada Pension Plan (CPP) and Employment Insurance (EI). Like the CPP and EI, the cost increases as the number of employees increase (discouraging new hires) and as salaries increase (discouraging raises). There is also time and/or monetary costs in dealing with the administrative burden of the ORPP or the equivalent setup by the company.
However, as an Oakville Chartered Professional Accountant, I can help you find the benefits of the ORPP for your company. Companies can use the introduction of the ORPP to:
Given these new requirements, it is important you think of your pension strategy in the coming months in order to be ready for when the changes take effect in either 2018 or 2019. Please contact me to discuss your situation with an Oakville Chartered Professional Accountant.
William Khalilieh is an Oakville Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.