Electro Cables Inc. Sold: Investment & Tax Planning Guide

Question: What are the tax implications of selling my Electro Cables Inc. manufacturing business?

Answer: Manufacturing sales often involve multiple asset classes with different tax treatment. A share sale may qualify for LCGE (up to $1,016,836 tax-free in 2026). However, if real estate is held in the operating company, it may disqualify QSBC status—a common issue requiring pre-sale reorganization. Asset sales trigger different treatment: equipment sales may cause CCA recapture (taxed as income), real estate may have both recapture and capital gains, and goodwill is taxed as capital gains. For a significant transaction, the difference in tax structures can exceed $200,000.

Question: Do I qualify for the Lifetime Capital Gains Exemption on my Electro Cables Inc. shares?

Answer: LCGE eligibility requires your shares to be "qualified small business corporation" (QSBC) shares. Tests include: (1) Canadian-controlled private corporation at sale; (2) 90%+ of assets used in active business in Canada at sale; (3) 50%+ active business asset test met for 24 months pre-sale; (4) You (or related person) held shares since issuance. Professional verification is essential—errors result in six-figure tax bills.

Question: How should I invest my Electro Cables Inc. business sale proceeds?

Answer: Investment strategy depends on goals, timeline, and tax situation. First, reserve funds for tax payments (capital gains tax due April of following year). Consider: (1) Max out TFSA ($95,000 cumulative room if never contributed) and RRSP (if you have contribution room); (2) Decide on holding company vs. personal structure for remaining funds; (3) Build diversified portfolio appropriate for your risk tolerance and income needs. Avoid common mistakes: investing too quickly (emotional decisions), concentrating in any single investment, lending informally to family. For most business sellers, a balanced portfolio with 3-5 year withdrawal strategy allows time for markets to smooth short-term volatility.

Question: What are the earnout provisions in the Electro Cables Inc. deal and how are they taxed?

Answer: Earnouts are contingent payments based on post-acquisition performance. Common structures include revenue targets, customer retention, EBITDA thresholds, or personal retention requirements. Tax treatment: earnouts tied to the value of shares are generally capital gains when received; earnouts tied to ongoing employment may be taxed as employment income. Key risks: Nexans's post-close operational changes may affect your ability to hit targets; definitional disputes can arise over calculation methodology. Negotiate clear measurement definitions and dispute resolution procedures. Consider the present value of uncertain earnouts—a $1M earnout with 50% probability is worth $500K in planning assumptions.

Question: Should I keep my Electro Cables Inc. proceeds in a corporation or take them personally?

Answer: This decision involves trade-offs. Corporate advantages: lower tax rates on investment income (creates deferral), creditor protection, estate planning flexibility, ability to income split with family shareholders. Personal advantages: simplicity, access to TFSA/RRSP contribution room, principal residence exemption for real estate purchases, no ongoing corporate maintenance costs. The "integration" principle means you'll eventually pay similar total tax either way—corporate structures primarily offer timing control and creditor protection. For significant proceeds, many business sellers use a hybrid: extract enough for immediate needs and registered account contributions, leave the balance in a holding company. Decision should be made with tax and legal professionals.

Question: What estate planning changes should I make after selling Electro Cables Inc.?

Answer: A major liquidity event requires immediate estate planning updates. Within 90 days: (1) Update your will to reflect new liquid assets—trusts may now be appropriate for wealth this significant; (2) Review all beneficiary designations (RRSP, TFSA, insurance, corporate accounts); (3) Update powers of attorney to reflect new financial complexity; (4) Review insurance needs—you may need less life insurance but more liability coverage; (5) If you established a holding company, ensure share structure supports estate planning goals (estate freeze, family trusts). For families with significant wealth, consider family governance discussions—sudden wealth creates dynamics that are better addressed proactively.