Some of the most valuable business assets that can be sold are the intangibles such as goodwill and customer lists. These types of assets are presently classified as €Cumulative Eligible Capital€ (CEC). When sold, there is often a large gain on these assets because their value has been built up over time and there is very little, or no, original cost. The corporate tax rates applicable to this type of gain for 2017 onwards will change significantly.
Half of the gain is currently tax-free, and can be distributed to the corporation€s shareholders, still tax-free, as a capital dividend. This will not change. The tax changes relate to the taxable half of the gain.
For sales occurring before 2017, the taxable half of the gain on CEC sales would be considered €business income€. It may be eligible for the small business deduction which equates to a corporate tax rate around 15%. Even where the small business deduction is not available, the rate would only be approximately 27%. Specific rates vary by province/territory.
In 2017, these assets will be converted from this special CEC class to a regular asset class thereby creating €capital gains€ rather than €business income€ upon sale. The initial corporate tax rate on the taxable half of the gain for these assets is approximately 51%, but again, ranges by province/territory. The cash left in the corporation after taxes will be significantly less if the sale occurs in 2017 or later.
All is not lost, however, since a large portion of the 51% in corporate taxes will be refunded when the cash is paid out to the individual shareholder as a taxable dividend. Once all of the sale proceeds have been distributed to the individual shareholder, the after-tax cash remaining will be roughly the same whether the asset sale occurred in 2017 or prior.
In other words, realizing the gain prior to 2017 will leave more cash available to the corporation. This deferral of taxes will be particularly beneficial where the shareholder does not require all of the sale proceeds immediately for personal use. The funds left in the corporation can often be invested for many years.
Action Item: If you would like to retain the proceeds of a sale in the corporation for the long term, consider whether a close before the end of 2016 is preferential. Also consider whether planning should be undertaken to trigger the gains now.