Planit:Canadian Sale of a Business Case Study
This case study is specific to financial planning in Canada, so has fixed values rather than indices by country. For a similar case study applicable to other countries, please see Planit:UK Sale of a Business Case Study, Planit:Malaysian Sale of a Business Case Study, Planit:Singapore Sale of a Business Case Study or Planit:Entering Other Revenues Case Study.
Example Problem: Sale of a Business:
Rob owns a small business, Bookworms Inc., which he plans on selling when he retires. It is worth approximately $200,000, and he feels that this value will grow with inflation until he sells it. When Robert bought the store it was valued at $25,000.
Note: There is a capital gains exemption of $50,000 remaining on Rob's business.
Solution Using Detailed Pension Information:
Go directly to the Pensions and Other Revenues screen.
- Click on the Add button above the current revenue entries
- Enter an appropriate description in the Description field.
- In the drop-down menu beside Owner change the setting to Client
- The $200,000 value of the business can be entered in the Amount per Year field
- Both the From Year and To Year fields should be set to Robert’s target retirement year, since the sale of the business is a one-time revenue.
- The Index Rate can be left at the client’s default inflation rate, or another value that reflects how the business will increase in value over time.
- Click Save to exit to the summary Pensions screen
To determine the percent taxabale of the sale of Robert's business, you are required to use an excel spreadsheet: Asset Disposition Analysis.
- Enter an appropriate Description such as Business
- Set the Start Year to the current year
- The Current Value of the business was said to be $200,000
- In the first Growth Assumption field (prior to disposition), use the same Index Rate as was input for the Sale of the Business on the Pensions & Other Revenues screen. In this case input 3.0% to reflect the inflation assumption used.
- For the Growth Assumption During Disposition enter 0% since it is a one-time payout
- The Disposition Year will be Rob’s target retirement year, in 3 years
- The Payout Period in Years will just be one: the business will be disposed of all at once
- In the Exemption Remaining field, you should enter the $50,000 that Rob indicated was still remaining on his small business.
- The Capital Gains Inclusion Rate and Marginal Tax Rate can be left at the default.
- The ACB was identified to be $25,000 and can be input into that last field.
- Go to the Results tab and scroll down to Rob’s target retirement year, and identify the corresponding Percent Taxable.
- Click on the Home link on the menu bar, and then follow the link directly to the Pensions and Other Revenues screen.
- Click Edit beside the Sale of a Business line
- Set the Percent Taxable to the amount that was identified in the calculator spreadsheet.
- The Amount on Death can be set to 100%, since the business will likely go to the spouse.
- The Amount on Disability would be 100%, since disability would not affect it.
- The drop-down menu beside Model As should be set to Defer with Retirement since both the start and end date for the sale of the business will be pushed back if Robert delays his retirement.
- Click Save to return back to the summary Pensions screen.