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By Julie Cazzin with Andrew Dobson

Q: I wish to promote our franchise to my oldest son. The revenue 12 months after 12 months is $75,000 to $100,000, however gross sales are greater than $2 million. We don’t personal the constructing; we lease it from a big firm. We solely personal the tools inside and the signage. I want to promote it to my son on the honest market worth I personally imagine it to be, so the Canada Income Company won’t come again someday sooner or later and request extra capital features taxes. I assess it to be value $400,000 to $450,000. The switch of the franchise rights to my son is free from the franchise proprietor and the tools is about $250,000. Will the CRA be OK with this or will there be issues? What do you counsel I do? — Larry

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FP Solutions: Transferring or promoting a enterprise to youngsters generally is a technique for enterprise homeowners to perform intergenerational wealth switch. Since franchisees are certain by franchise agreements, that’s possible one of the best place to start out reviewing any restrictions relating to a sale. A franchise settlement might dictate the phrases the franchisee should adjust to earlier than promoting their franchise. For instance, many franchises require pre-approval of latest patrons/franchisees as a way to permit the franchise to switch to that new possession.

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A enterprise proprietor contemplating the sale of their enterprise ought to contemplate acquiring a enterprise appraisal to evaluate the worth previous to the sale. Chartered enterprise valuators (CBVs) are specialists on this discipline and will guarantee what you are promoting is correctly valued, which is necessary for a sale involving a non-arm’s-length member of the family.

CBVs will verify objects equivalent to tools depreciation, gross sales, monetary ratios (for instance, worth to guide and worth to earnings), goodwill and stock turnover, amongst different objects. They could additionally evaluate what you are promoting to comparable, lately appraised companies to pretty worth what you are promoting.

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You made the purpose that figuring out your honest market worth for the enterprise could be necessary for tax functions and that may be a right assertion. You can not promote what you are promoting or one other asset for a low worth to a member of the family to cut back tax. The disposition is mostly thought of to be completed at honest market worth when transferring or promoting property to a non-arm’s-length recipient equivalent to a member of the family.

Acquiring a valuation can guarantee you’re approaching this a part of the transaction pretty. It might additionally are available in helpful in case you resolve to promote what you are promoting to a 3rd occasion or in case your son decides to not take over the enterprise.

Your shares can also qualify for the lifetime capital features exemption, which might let you have a capital achieve of as much as $1,016,836 upon the sale of shares in what you are promoting and qualify for an offsetting deduction on your taxes. This might make the sale proceeds tax free.

So as to qualify for the exemption, what you are promoting must move a number of exams, together with:

• The certified small enterprise company check: What you are promoting should be a Canadian-controlled non-public company.
• The holding interval check: You have to have held the shares for no less than 24 months previous the sale.
• The honest market worth asset check: 24 months previous to promoting what you are promoting, no less than 50 per cent of its honest market worth should be used within the lively enterprise. Additionally, on the time of sale, 90 per cent of the honest market worth of the property should have been used within the lively enterprise.

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There are a number of further concerns about how a enterprise is taxed upon its sale. For instance, you could have insurance coverage insurance policies, a automobile or accrued financial savings you wish to extract from the enterprise previous to the sale which will lead to tax payable to you.

Or your purchaser, whether or not your son or in any other case, might supply to purchase the property of the enterprise, equivalent to tools, goodwill and the lease, as a substitute of the shares. In case your company sells the property of the corporate, the sale wouldn’t be tax free and the corporate would pay capital features tax.

Even when your share sale qualifies for the lifetime capital features exemption, there is perhaps a have to pay the choice minimal tax (AMT). The AMT is levied based mostly on a components and might apply in conditions the place somebody’s earnings tax payable is simply too low in any given 12 months, however that they had vital earnings that was topic to preferential tax remedy.

Be aware that the AMT is a type of recoverable tax that may be carried ahead and claimed sooner or later to cut back tax in a subsequent 12 months. It might not apply to your scenario particularly, however it’s good to no less than point out it for others within the context of this dialogue.

Andrew Dobson is a fee-only, advice-only licensed monetary planner (CFP) and chartered funding supervisor (CIM) at Goal Monetary Companions Inc. in London, Ont. He doesn’t promote any monetary merchandise by any means. He may be reached at adobson@objectivecfp.com.

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