You are thinking of retiring and your business is for sale. Is it at the right price? How was the value of your business determined? Did you look at historical earnings? Did you look at normalized earnings? How did you determine normalized earnings? Did you factor in the implementation of HST into your calculations of normalized earnings? If you are currently paying PST for goods and services and currently are located in Ontario or British Columbia, your normalized earnings may be understated!
In Ontario and British Columbia, the retail sales tax system is changing and the provinces will no longer be charging PST (provincial sales tax) which is also known as RST – retail sales tax. The provinces are merging their sales tax into the federal system and they are changing the name of the federal system of GST and renaming it HST. The HST rate in Ontario and British Columbia will be the equivalent of the federal and provincial sales taxes – 13% in Ontario.
The PST/RST rules are very complicated. Some businesses were required to pay the PST on goods used for their own consumption. If you were an installer and you were required to attach for example a large sign to a permanent structure, the person who installed the sign was required to pay the sales tax and not the end user. Effective July 1, 2010, this changes. Every business who had a PST/RST number and/or GST number will be required to pay HST. HST is a not an expense to a business, businesses collect HST on their sales and remit to the federal government the total tax collected less what it has paid out for goods and services. If your business was required to pay PST and it was an expense, that will change after July 1, you will no longer pay PST, only HST. As a result, some businesses may generate an additional 8% tax savings on the purchase of certain items.
You should contact your accountant to see how the implementation of HST affects your business. If you were subject to PST and that reduced your net income in prior years, you may want to prepare normalized earnings for the previous years and adjust the profit for the last two years. If your selling price was based on a multiple of earnings of the last 3 years normalized earnings, your normalized earnings may have been understated. If your business incurred $10,000 of PST which was expensed in your income statement over each of the last three years and you are listings your business at a price equal to say 3 times normalized earnings, you have under priced the business by $30,000. Even if you don’t change the selling price of your business, you may want to use this information to get investors to pay closer to your asking price rather than trying to low ball the price which you have set for the sale of your business.
Remember, this is only applicable to some and not all businesses on Ontario and British Columbia. Contact your accountant to see how RST/HST affects your business and if your firm will benefit any tax savings.