Early Action, Lasting Benefits: 5 Reasons to Begin Tax Planning for Your Business Sale

Picture this: you're staring at a cheque, your heart sinking as you see the daunting $1 million written out to the Canada Revenue Agency (CRA). It's a substantial amount, a significant chunk of your hard-earned money. Now, imagine a different scenario – one where you could sidestep that heart-wrenching moment and take action five to ten years ahead to avoid this colossal payout. The prospect of evading pain often motivates us more than seeking pleasure. So, does writing that million-dollar cheque to the government after selling your business qualify as true pain? While I may not have the answer, I've heard the stories of those who've experienced it firsthand. And when asked if they'd have done anything to escape that fiscal blow, their response is emphatically "in a heartbeat."

But here's the intriguing twist – what if you had the power to rewrite that scenario? What if proactive planning could spare you from the agony of that hefty cheque? How much pain would you consider unbearable if faced with a substantial tax bill? The answers may vary, yet the underlying sentiment remains the same – avoiding financial pain can be a powerful motivator for taking action. Early preparation might be the antidote to this distressing situation in business sales and taxes. So, let's delve into strategic foresight and financial preparation, exploring how proactive measures can transform the painful prospect of writing that cheque into a thing of the past.

In a recent conversation with a prospective client, he shared his excitement about finalizing the details of selling his business. However, when I asked him when the deal was closing, he mentioned it would take around 3-6 months. It became evident that he hadn't considered the potential tax implications of the sale, assuming that his Lifetime Capital Gains Exemption (LCGE) would automatically apply. As we delved deeper, we discovered that his passive income within the business exceeded the LCGE threshold, putting him at risk of a substantial capital gains bill. This scenario emphasizes the importance of proactive tax planning and avoiding the pitfalls of being a Hail Mary Tax Planner.

For those unfamiliar with the term, a "Hail Mary pass" is commonly used in American football to describe a long, desperate pass made in the final moments of a game when a team is trailing and needs a significant gain to score and potentially win. The pass is typically launched into the air, often with multiple receivers and defenders in close proximity, hoping one of the receivers will catch the ball and secure a game-changing play. The term "Hail Mary" is derived from the prayer recited by Catholics, as it reflects the desperate nature of the past and the reliance on sheer luck or divine intervention for its success.

1. Missed LCGE Opportunities:

   Waiting until the last minute leaves little room to assess your eligibility for the LCGE and take the necessary steps to qualify. Many assumptions can lead to missed opportunities for substantial tax savings. If you don’t qualify for the LCGE, you’re looking at the first $971,000 of the sale (2023 limits) of your business being subject to tax. Understand the rules surrounding eligibility for LCGE.

2. Limited Solutions:

   Rushing through tax planning restricts your ability to explore diverse strategies (Individual Pension Plan, Family Trust, Corporate Insured Retirement Plan (CIRP), and strategic philanthropy and identify the most effective ones. Strategic tax planning requires careful analysis, consideration of various scenarios, and customized solutions to optimize your tax position.

3. Stress and Uncertainty:

   Last-minute tax planning adds unnecessary stress and uncertainty to an already complex process. With limited time, you may make hasty decisions without fully comprehending the potential consequences, putting your financial well-being at risk.

4. Inflexibility in Structuring:

   Lack of time restricts your options to effectively adapt your financial and business decisions to minimize capital gains and other tax obligations. Early tax planning provides the flexibility to structure transactions and investments optimally.

5. Estate Planning Challenges:

   Estate planning and tax planning are critical in providing clarity and security for your financial future. When you have a clear understanding of the sale price of your business but remain uncertain about how much you will ultimately keep, it becomes challenging to determine the longevity of your wealth. Will the proceeds sustain you for ten years or a lifetime? Will you have surplus funds that you can designate as never-spend money, or will the day come when you need to reenter the workforce? Effective estate and tax planning can help answer these questions, allowing you to make informed decisions about your financial resources, protect your wealth, and ensure a sustainable and fulfilling future. By working with experienced professionals, you can develop comprehensive strategies that align with your goals, minimize tax obligations, and provide peace of mind for the years ahead.

Conclusion:

Being a last-minute Tax Planner can have costly consequences, including missed opportunities for tax savings, limited flexibility, increased stress, and potential penalties. By starting early and engaging with experienced professionals, you can develop a comprehensive tax strategy aligned with your long-term goals. Proactive tax planning empowers you to make informed decisions, minimize your tax liability, and secure your financial future. Don't wait until it's too late – take control of your tax obligations and maximize your financial outcomes.