EXTRACTING CAPITAL GAINS FROM COMPANY

How to extract capital gains tax free when company sells its business is a common question that many shareholders ask. If you carry on business through a company, it is important to understand that you cannot distribute any capital gains out of the company tax free. This can only be done when the company is winding up. If you sell your business for a nice profit of, lets say, $600,000, naturally, the first thing you think of is how you can use this and how best to extract the cash from the company. The important question that needs to be answered is whether or not you wish to retain the old company.

If you’re going to wind up the company, you should first have passed a special resolution of shareholders to this effect, before you can distribute the capital gains tax free, i.e. to extract the cash from the company. If you want to continue using the company, you will not be able to extract the capital gains from the company. You could treat the withdrawal as a loan to you. However this can be an expensive exercise as you will  have to be charged use of money interest (UOMI) interest at prescribed interest rates. This will prevent the overdrawn current account to be treated as a deemed dividend.

Often we see clients who have sold their businesses and have extracted the cash from the company as they have not been aware of these rules. This can occur a year or more after the transaction took place and the interest bill referred to above can be quite significant. If you are thinking about selling your business, please remember to talk to us before you withdraw the sales proceeds from your company. This rule does not apply to Look Through Companies (LTC’s) because they are treated as partnerships for tax purposes.