From: canadarevenueagency1@yahoo.com   
      
   Sell Now! (How The 2014 Budget May Impact Business Owners' Exit Strategies) :   
   CRA SOTW   
      
   Article by Michael Goldberg   
   Minden Gross LLP   
      
   Although to most of the world the 2014 federal budget ("Budget") may have   
   seemed to be of limited consequence, there are a lot of taxpayers who will be   
   significantly impacted by its content. For example, business owner's exit   
   strategies may become much    
   less tax effective if the proposed changes to the taxation of eligible capital   
   property ("ECP") are enacted. In this regard, while at first glance, a move   
   from the current ECP regime ("Current Regime") to co-ordinate it with the   
   existing capital cost    
   allowance regime seems completely logical and relatively innocuous, it is the   
   change to how ECP is taxed upon its disposition that should cause   
   owner-managers who may be considering selling their businesses to start   
   thinking about selling a lot more    
   seriously.   
      
   The reason for this is that for many clients, ECP and, in particular,   
   goodwill, will be the single biggest asset that they will have to sell, and   
   the shift from the Current Regime of taxing such income at 50% of the active   
   business rate to the    
   traditional capital gains regime applicable to other depreciable property   
   ("New Regime") will result in a significant loss of tax deferral in situations   
   where the owner-manager has no personal need for the full amount of the   
   proceeds of sale.   
      
   To better understand the impact of tax changes assume that an individual named   
   Ely has been carrying on a hat business through a corporation named Ely's Caps   
   Limited ("Ely Cap" for short). Ely wants to sell his interest in Ely Cap but   
   he can't find a    
   purchaser who will buy his shares. However, he has received an offer to buy   
   all of Ely Cap's goodwill for $10,000,000.   
      
   Under the Current Regime, if Ely Cap agrees to accept the offer, the sale   
   would give rise to $10,000,000 of taxable income. Assuming this income will   
   all be subject to the general corporate tax rates in Ontario about $1,325,000   
   of tax will be payable by    
   Ely Cap. In addition, after the end of Ely Cap's current taxation year, the   
   sale will give rise to a $5,000,000 addition to Ely Cap's capital dividend   
   account ("CDA"), which will allow Ely to remove $5,000,000 of cash from Ely   
   Cap for his personal use    
   with no additional taxation.   
      
   Under the New Regime, the full $10,000,000 of proceeds would be taxed at   
   corporate capital gains tax rates, which would give rise to a total corporate   
   tax liability in Ontario of slightly more than $2,300,000. As was the case   
   under the Current Regime,    
   this sale would immediately generate a CDA in Ely Cap of $5,000,000, which   
   could be distributed to Ely tax free.   
      
   Assuming Ely is happy living off the $5,000,000 of CDA and is willing to leave   
   any remaining after-tax proceeds in Ely Cap, then the result of the change   
   from the Current Regime to the New Regime is that Ely Cap would lose its   
   ability to "defer" $1,000,   
   000 of taxes.   
      
   The "cost" of the loss of this deferral should not be understated since, as a   
   practical matter, most owners in Ely's situation and in situations involving   
   more modest sales than Ely's would likely not draw more than the CDA balance   
   out of Ely Cap for a    
   very long time if ever. So, in many cases the loss of the corporate deferral   
   under the New Regime will really amount to an effective 10% tax on Ely Cap,   
   which is nearly 45% more tax than Ely Cap would have paid under the Current   
   Regime.   
      
   Assuming the New Regime becomes law, then it would certainly appear that given   
   the massive transition of wealth that is set to occur over the next number of   
   years this new and previously unannounced 10% tax will likely be a significant   
   revenue generator    
   for the Canada Revenue Agency.   
      
   Of course the New Regime is not yet law and some practitioners might take   
   comfort that the proposal to create the New Regime in the Budget has been put   
   forward as a "consultation" process. However, based on the results of prior   
   "consultation" processes    
   and the streamlined approach to legislation generally taken by the current   
   government, it seems that business owners should view the Budget announcement   
   as fair notice that the New Regime will more than likely be enacted in the   
   manner proposed - without    
   grandfathering. As a result, business owners who were already thinking about   
   selling would be advised to carefully reconsider the timing of their exit   
   because now may be a very good time to sell.   
      
   A prior and more detailed version of this article was published in Tax Notes   
   No. 614, March, 2014 as well as in the Estate Planner No. 230, March, 2014,   
   both published by Wolters Kluwer (CCH) Limited.   
      
   The content of this article is intended to provide a general guide to the   
   subject matter. Specialist advice should be sought about your specific   
   circumstances.   
      
      
      
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