The Canadian legislator gives small business owners several benefits, including a gift, which could reach up to $237,865 in tax savings. Therefore, the question I was asking myself was, can self-employed individuals also benefit from this tax savings as well?

Undeniably, the answer to this question is yes. Indeed, if you are a self-employed worker, you can benefit from a tax break – capital gains exemption – when selling your business. However, you must meet several criteria and conditions, including those related to share eligibility. That is, you must be in possession of the shares of your company, so incorporation is necessary, to be able to use this deduction.

According to Olivier Brabant, Director of Taxation, at HNA LLP.: « Many self-employed workers believe that it is necessary to incorporate 2-3 years before selling their professional practice to benefit from the capital gains deduction. This is completely false; you can incorporate it immediately before selling and still benefit from this deduction. »

To better understand the mechanics, here is an example: Michael is an IT consultant, and he has been running his business as a self-employed worker for 20 years. Unfortunately, he has health problems and is thinking of retiring immediately. Michel, president of the association of IT consultants, met a young, professional & dynamic person, who would be interested in acquiring Michael’s company. The latter seeks to reduce his tax burden and according to his online readings, he would like to take advantage of this so-called capital gains deduction. 

In this example, the first step is to incorporate a company for Michael’s benefit. Indeed, he will receive shares in his new company, a necessary condition for access to this deduction. Next, we will roll over/transfer his assets, which are under his personal name, to his new company. The transfer of assets is only a change in book value, so there is no tax to pay now.

Michael does not have to wait two to three years before taking his deduction and by extension, his retirement. Embedded within the Income Tax Act (ITA), there are provisions that allow Michael to comply with the share detention criteria thereby enabling him to circumvent any waiting periods.