Benefit of Incorporation: BUSINESS SUCCESSION

Contact Neufeld Legal PC for your incorporation legal work at 403-400-4092 or Chris@NeufeldLegal.com

Business succession is strategically advantageous through an incorporated corporation, as it faciliates the efficient transfer ownership and, in many cases, in a tax-advantageous manner. Unlike a sole proprietorship or a partnership where the business is legally tied to the individual, a corporation is a separate legal entity.

A. Simplified Ownership Transfer through Share Sales

The ownership of a corporation is represented by shares. This makes transferring ownership a much simpler process. Instead of selling a complex collection of assets (like equipment, real estate, and intellectual property), the owner can simply sell their shares in the company. This is a much cleaner and more efficient process.

B. Tax Advantages for Shareholders

For Canadian-controlled private corporations (CCPCs), selling shares can offer significant tax benefits to the owner.

• Lifetime Capital Gains Exemption (LCGE): This is a major benefit. If the shares of the corporation qualify as "Qualified Small Business Corporation Shares," a shareholder can claim a lifetime capital gains exemption on the proceeds of the sale. This means a significant portion of the capital gain from the sale of the business can be received tax-free.

• Capital Gains on Share Sales vs. Asset Sales: In a share sale, the capital gain is realized by the shareholder personally, which may be eligible for the LCGE. In an asset sale, the corporation itself realizes the gain and pays corporate tax, and then the proceeds must be distributed to the shareholder, which could lead to further taxation. This makes a share sale a much more tax-efficient option for the seller.

• Intergenerational Business Transfers: The Canadian government has specific tax rules designed to facilitate the transfer of a business to a family member, making it possible for a sale to a child to be treated similarly to a sale to a third party, and avoiding the "deemed dividend" rules that could otherwise apply. This allows the parent to potentially benefit from the capital gains deduction.

C. Business Continuity

Because a corporation has perpetual existence, the business can continue to operate seamlessly through a change of ownership. The business's contracts, relationships with suppliers and customers, and its legal identity all remain intact. This provides stability and reduces the risk of disruption during a succession.

D. Estate Planning and Family Trusts

A corporate structure, especially with different classes of shares, offers powerful tools for estate planning. A business owner can "freeze" the value of their shares, transfer the future growth of the company to the next generation (e.g., through a family trust), and manage the tax burden on their estate. This allows for a smooth transfer of wealth and business control.

E. Employee Ownership Trusts (EOTs)

Recent changes in Canadian tax law have introduced Employee Ownership Trusts (EOTs), which provide a new option for business succession. An EOT allows a business to be sold to its employees through a trust, offering significant tax advantages to the selling owner, including a new capital gains exemption of up to $10 million for qualifying sales. This provides a way to reward employees and keep the business local while ensuring a tax-efficient exit for the owner. [more on Employee Ownership Trusts]

For businesses seeking the potential benefits associated with incorporation, which can be financially significant if properly integrated into one's commercial enterprise, contact our law firm to engage the professional services of an experienced incorporation lawyer. Contact our law firm to schedule a confidential consultation at 403-400-4092 or via email at Chris@NeufeldLegal.com.

* Please note that the flat rates associated with a standard incorporation are strictly limited to a basic incorporation (provincial or federal) and does not involve other matters that might be corrollary to the incorporation process or might be atypical for a standard incorporation, including but not limited to related legal or tax advice, engagement with other governmental bodies or professional bodies, licensing, drafting of pertinent business contracts (i.e., shareholders' agreements), negotiations, disputes, financing, coordination with other companies or other legal structuring.

Limited Liability: The legal principle of limited liability means that a corporation is a separate legal entity from its shareholders, with this legal separation providing the shareholders with a virtual legal shield that protects the shareholders' personal assets from the debts and liabilities of the corporation. Read more.

 

Perpetual Existence: Perpetual existence, with respect to a corporation, means that the corporation's legal existence is not tied to the lives of its shareholders, directors, officers, or employees, and instead the corporation exists as a separate legal entity and can continue to operate indefinitely. Read more.

 

Tax Rates: Alberta is widely recognized as a tax-advantaged jurisdiction for corporations, with a fiscal environment designed to attract investment and foster economic growth. The tax benefits for corporations in Alberta are a key component of what is often referred to as the "Alberta Advantage." Read more.

 

Tax Deferral: Tax deferral is one of the most significant advantages of incorporating a business, enabling a corporation to delay the payment of personal income tax on its earnings, which can provide a number of benefits to the corporate shareholders. The legal concept is based on the two-tiered tax system in Canada. Read more.

 

Succession Planning: Business succession is strategically advantageous through an incorporated corporation, as it faciliates the efficient transfer ownership and, in many cases, in a tax-advantageous manner. Unlike a sole proprietorship or a partnership where the business is legally tied to the individual, a corporation is a separate legal entity. Read more.