How We Guided a Business Owner Through Their Corporate Exit Strategy and a Personal Financial Tax Plan

A corporate exit is one of the most significant financial events in an owner's life. It’s even more complex when the owner wants to scale down, not stop working completely.

We recently guided a client of 17 years through this exact journey. They needed to sell their successful corporation and, at the same time, transition into a new sole proprietorship with fewer responsibilities. Our role was to manage this complex transition, integrating their corporate tax filing, corporate records, and personal tax returns.

The Client: A Niche Business and a New Goal

Our client owned a very successful seasonal tourism business. This was a highly niche operation and included capital assets like residential buildings.

After decades of commitment, they wanted to scale down their responsibilities but still maintain an income. Their goal was to sell the corporation and use the opportunity to follow their dreams by starting a smaller, similar business they could run themselves.

The Challenge: A Complex Sale with High Stakes

We faced three significant challenges:

• Finding a Buyer: This was not a typical business. We needed to find a buyer who not only had the financial means but also the niche skillset and passion required to run the business.

• Minimizing Tax: The sale had major tax implications. We needed a plan to minimize the impact of capital gains from selling shares and to efficiently withdraw cash funds from the corporation.

• A Phased Transition: The owner wanted to release operational control slowly, aligned with reducing share ownership. It was essential to maintain a controlling financial interest (to declare dividends) and ensure the plan was reversible if things didn't go as planned.

  
  

The Solution: A 3-Year Transitional Exit Strategy

Our client identified a promising buyer: a current employee who had the passion and aptitude but lacked the funds. This required a creative solution.

We designed a transitional exit plan to transfer shares and control over a 3-year period.

We chose to structure this as a share sale rather than an asset sale. This strategy was beneficial for several reasons:

• It allowed our client to take advantage of the qualified business shares (QBS) capital gain exemption.

• It allowed ownership to be transferred over several years without threatening the business's operations.

• It kept the process reversible.

Here is how we structured the transition:

• Handling Assets: As the new owner didn't need the real estate, the first step was to sell the buildings. This crystallized the value of those assets in cash, allowing that value to be excluded from the sale.

• Integrating Tax Planning: We designed a plan to withdraw funds from the company using the optimal balance of dividends and salary. We integrated corporate and personal tax planning, such as maxing out RRSP contributions funded by the share sale and taking advantage of tax-free capital dividends.

• Legal Structure: It was essential to work with a lawyer to execute a ‘Section 51 share exchange’ before the sale. This created a different class of shares for our original owner. During the transition, this allowed them to extract funds via dividends on their original share class only.

• Supporting the Future: We gained a new client in the process. We transferred the business's bookkeeping to Xero and used Hubdock to capture receipts, moving them to a modern, cloud-based system. We now meet quarterly to review management financials using Fathom.

• A New Beginning: Finally, we set our original client up with their new sole proprietorship, including cloud-based bookkeeping.

Key Takeaways

• Transitions Take Time: Complex transitions require trust and a deep understanding of a client's life and financial goals. Our role is to be there to support them when change is needed.

• Integrate the Whole Story: It is essential to make recommendations that integrate both corporate and personal tax strategies.

• Trust Earns New Business: New clients often come from the recommendation of existing ones. Acting ethically instills trust.

  
  

Business is a long-term journey. We partner with clients to provide trusted advice for every stage of your business's life cycle, from growth to transition.

Schedule a Consultation