Always Be Sellable: Why Your Business Structure Should Be Ready for a Sale You're Not Planning
A few months ago, an accountant brought me in to help with a client's corporate structure. Their client owned a successful business and was starting to think about eventual sale - not imminent, but on the horizon within 5-10 years.
The business owner had been working with an insurance advisor who'd positioned a whole life policy in the operating company. At the time, it made sense - using corporate dollars to build coverage with cash value accumulation. But now they were looking at the bigger picture and realizing the policy was creating problems:
First, the cash value was passive assets sitting in the operating company, eating into the active business asset ratio needed for the Lifetime Capital Gains Exemption.
Second, if they actually sold the business, what happens to the insurance? A buyer doesn't want to purchase your life insurance policy - they need to insure themselves, not you. And extracting the policy from the corporation after the fact would trigger significant tax consequences.
The insurance served its purpose. But its positioning meant it was now limiting their options. Moving it would be expensive. Leaving it created problems for any potential sale. This was exactly the type of structural issue that should have been anticipated years earlier when the policy was first established.
We worked through their options, but it would have been much simpler - and less costly - if someone had been thinking about these connections from the start.
You Don't Know When You'll Sell
Here's what I've observed working with Ontario business owners: very few actually sell according to their original timeline.
Some sell earlier than expected because:
An unsolicited offer comes in that's too good to refuse
Health issues force an unexpected transition
Partnership dynamics change and someone wants out
Family circumstances shift priorities
Market conditions create a window that won't stay open
Others sell later than planned because:
The business becomes more valuable than expected and they want to maximize it
They can't find the right buyer at the right price
They realize they're not ready to stop working
Succession planning takes longer than anticipated
The business owners who navigate these situations best aren't the ones who predicted the timing perfectly. They're the ones whose structure was ready regardless of when the opportunity or necessity emerged.
What "Always Be Sellable" Actually Means
This isn't about actively marketing your business or constantly seeking buyers. It's about structuring your corporate affairs so that if an opportunity emerges - or if circumstances require a sale - you're not scrambling to fix problems that should have been addressed years earlier.
Being sellable means:
Maximum optionality - You can say yes or no to opportunities based on whether they serve your goals, not because your structure limits your choices.
Protected tax advantages - Your Lifetime Capital Gains Exemption (LCGE) remains available and maximized rather than accidentally eliminated through poor planning.
Clean corporate structure - Buyers can understand your business without navigating unnecessary complexity, and you can execute a sale efficiently.
Flexibility in transaction structure - You can structure a sale in whatever way optimizes the outcome rather than being locked into specific approaches by your current setup.
No expensive pre-sale scrambling - You're not paying professionals premium fees to rush fixes that should have been implemented gradually over years.
This is fundamentally about maintaining optionality. You might never sell. You might sell next year. The point isn't to predict when - it's to ensure you're never stuck saying "I wish I'd structured this differently three years ago."
The Lifetime Capital Gains Exemption: Use It or Lose It
For most Ontario business owners, the LCGE represents the single largest tax advantage available when selling. In 2025, the exemption is $1.25 million in tax-free capital gains on qualifying small business shares.
But here's the challenge: LCGE eligibility is surprisingly fragile. Well-intentioned corporate planning decisions can quietly eliminate your qualification without anyone noticing until you're preparing to sell.
What Qualifies for LCGE
To use the LCGE when selling your business, your shares must be Qualified Small Business Corporation (QSBC) shares. The requirements are specific:
At the time of sale:
The corporation must be a Canadian-Controlled Private Corporation (CCPC)
At least 90% of the corporation's assets must be used in an active business in Canada
You must have owned the shares for at least 24 months before the sale
During the 24 months before sale:
More than 50% of the corporation's assets must have been used in active business throughout that period
No one else (other than you or a related person) can own the shares
Notice the different thresholds: 90% active assets at sale, but only 50% during the preceding 24 months. This is a critical distinction that many business owners miss.
How Business Owners Lose LCGE Without Realizing It
The Passive Asset Accumulation Problem
As your business succeeds and generates more profit than you need personally, cash accumulates in your corporation. You invest it - which is smart tax planning. But those investments are passive assets, not active business assets.
The 90% active asset test at sale means you have very little room for passive investments. Here's how quickly this becomes a problem:
Year 1: Your $2M business has $100K in investments (5% passive - fine)
Year 2: Business at $2M, investments at $250K (11% passive - LCGE now at risk)
Year 3: Business at $2.2M, investments at $400K (15% passive - LCGE lost if you sold today)
You didn't make a mistake. Your investments did exactly what they were supposed to - they grew. But that growth creates a major problem if a sale opportunity emerges.
The Insurance Positioning Challenge
This is where life insurance sometimes gets positioned as a solution - "it's not really an investment, it's insurance with cash value." But for LCGE purposes, corporate-owned life insurance is generally valued at fair market value for the passive asset test (which in practice is usually approximated by cash surrender value). So you've solved one problem (how to deploy corporate dollars) while potentially creating another (passive assets that threaten LCGE qualification).
The No-Cash-Value Alternative:
Some insurance policies can be designed with minimal or no cash surrender value - typically universal life policies with level cost of insurance and minimal investment component. This approach keeps the policy value low for LCGE testing purposes.
However, this comes with trade-offs:
Worse policy economics - you're paying for pure insurance cost without building equity
Lost flexibility - no accumulated cash value to borrow against or access if needed
No compound growth benefit within the policy
Higher annual costs in later years as insurance costs increase
Essentially, you're choosing between LCGE protection and policy efficiency. For business owners anticipating a sale, this might be the right trade-off. For those planning long-term ownership, the economics matter more.
And here's the additional trap with cash value policies: that insurance is now stuck in your operating company. If you sell the business, the buyer doesn't want your life insurance policy - they need to insure themselves, not you. Extracting the insurance before the sale triggers taxable disposition. You've essentially trapped an asset in a corporation you're trying to sell.
The Corporate Structure Challenge
When business owners create multiple corporations - perhaps a holding company, or a separate corporation for real estate, or different business lines - the structure needs careful planning to preserve LCGE eligibility.
Proper structure can involve family trusts, holding companies, or direct personal ownership - each with specific advantages and requirements. Family trusts can be particularly valuable for estate planning and income splitting while maintaining LCGE eligibility, but they introduce additional complexity and costs, and come with the 21-year deemed disposition rule that requires planning around.
The key is working with advisors who understand how to structure these arrangements to preserve LCGE while achieving your other planning goals.
The Pre-Sale Purification Scramble
When business owners discover their LCGE qualification is at risk right before a sale, they often attempt "purification" - moving passive assets out of the operating company to get back above the 90% active business asset threshold.
This can work, but it's expensive and stressful when done under time pressure:
Professional fees for restructuring
Potential tax triggering on asset transfers
Limited options if timing is tight
Risk of errors when rushing
Possible delay in closing the sale
Far better to maintain LCGE eligibility continuously rather than scrambling to restore it when a buyer appears.
Maintaining LCGE Eligibility: Purification as Ongoing Practice
The solution isn't to avoid investing corporate cash - that would be poor financial planning. The solution is treating purification as an ongoing practice rather than a pre-sale emergency.
The Holding Company Strategy (Done Properly)
For Ontario business owners with growing passive investments, a properly structured corporate arrangement can help:
Common Structure Options:
Direct personal ownership - You personally own operating company shares directly
Holdco structure - A holding company holds some operating company shares and passive investments, while you personally own other operating company shares
Trust structure - A family trust can hold operating company shares as an intermediary, but requires proper setup to maintain LCGE eligibility, additional costs, and planning for the 21-year deemed disposition rule
The fundamental requirement: you (or a qualifying trust) must own or control the operating company shares that you want to claim LCGE on. A holding company cannot claim LCGE - it's not an individual. So whatever structure you use needs to preserve the right ownership chain.
Why Proper Structure Matters:
Your directly-owned (or properly trust-held) operating company shares can maintain 90%+ active business assets
Passive investments can be held in a separate entity (typically a holdco)
Estate planning and creditor protection benefits from the multi-entity structure
Tax-efficient dividend flow between related corporations
The Critical Timing Point:
These structures need to be established before they're needed. You can't easily restructure to create new share classes with value after the fact without triggering tax consequences. If you set up a holdco to own 100% of operating company shares and then later try to create new personal shares, those new shares typically have minimal value and don't help with LCGE on the accumulated business value.
The ownership structure that will allow LCGE needs to exist from the start - or be established through proper reorganization before significant value has accumulated.
This is exactly where professional expertise matters. The structure isn't necessarily complex once established, but setting it up properly requires careful planning with tax advisors who understand QSBC rules and can navigate the various structure options (direct ownership, holdco arrangements, trust structures) based on your specific situation.
When to Address This
The timing matters:
Ideally when you first incorporate, if you anticipate significant passive asset accumulation
Or when passive assets in operating company reach 5-10% of total assets (giving you time to restructure before the 90% threshold becomes a problem)
Legal and accounting fees typically $5,000-12,000 for proper implementation depending on structure
Ongoing administrative requirements (separate tax returns, minute books, potential trust filings)
You don't want to wait until passive assets hit 15-20% of your operating company and then try to fix it. The earlier you address the structure, the simpler and less expensive it is.
Corporate-Owned Life Insurance: The Positioning Problem
Many Ontario business owners hold life insurance within their corporations for good reasons - building coverage with corporate dollars, estate planning benefits, creditor protection. But insurance positioning affects both LCGE qualification and your options when selling.
The Passive Asset Problem
For LCGE purposes, corporate-owned life insurance is generally valued at fair market value for the passive asset test, which in practice typically approximates to cash surrender value. The cash value counts toward your passive asset calculation when testing the 90% threshold at sale.
This creates the trap I described in the opening example: insurance serves important purposes, but accumulating cash value in your operating company threatens LCGE eligibility.
The "Trapped Insurance" Problem
Even if you solve the LCGE issue through purification, you face another problem: what happens to the insurance when you sell?
If selling shares of the operating company:
Insurance transfers to the buyer with the business
Buyer doesn't want life insurance on your life - they need coverage on themselves
You lose access to the policy and its cash value
Insurance value gets wrapped into purchase price negotiations awkwardly
If you try to extract insurance before sale:
Moving insurance from the corporation triggers disposition at fair market value. This creates a taxable capital gain on the difference between adjusted cost base and fair market value of the policy.
However, the actual tax consequences depend on how you move it:
In-kind dividend to another related corporation: This can work if there's sufficient "safe income" (essentially, retained earnings that can support the dividend without triggering taxes). Without safe income, you're triggering tax on the transfer.
Sale or transfer to you personally: Creates taxable disposition based on fair market value vs. adjusted cost base.
The tax cost depends heavily on policy structure, cash value accumulation, and available safe income. It can range from minimal (if structured well with safe income available) to very expensive (if significant capital gains have accrued and no safe income exists).
Timing is also a complication - you're dealing with these issues while a buyer is waiting for the transaction to close.
The insurance policy has effectively become trapped in a corporation you're trying to sell. This is exactly what happened in the case from the opening - the policy was positioned without considering how it would affect a future sale or LCGE qualification.
The Alternative: Proper Positioning From the Start
Early Structure Options:
If you anticipate potential business sale and need life insurance:
Option 1: Personal ownership - Pay premiums personally with after-tax dollars. Benefits are tax-free, policy is never trapped in corporate structure. Cleaner for eventual sale, but higher after-tax cost.
Option 2: Holdco ownership from the start - If you have a properly structured holdco arrangement, position insurance there rather than in operating company. Removes fair market value from operating company's passive assets, provides flexibility if you sell operating company.
Option 3: Term insurance in operating company - If you're not ready for a holdco structure yet, term insurance provides coverage without cash value accumulation. No passive asset problem, no trapped value complications, and premiums are typically much lower. The coverage can be converted to permanent insurance later if needed, or you can transition to a holdco structure when the time is right. If you're not ready to establish a holdco, you're likely not ready for permanent insurance in your operating company either.
The Challenge of Moving Insurance Later:
If insurance is already in your operating company and you want to move it:
Transfer triggers disposition at fair market value
Tax cost depends on policy structure, accrued gains, and available safe income
Permanent life insurance with significant cash value accumulation can be very expensive to move without proper planning
Term insurance is simpler (typically minimal or no cash value) but often less relevant to this discussion
This is why the positioning decision matters at establishment. Moving insurance later is possible but requires careful tax planning and can be costly. Getting it right from the start avoids expensive problems.
Practical Guidance:
If you're establishing corporate life insurance and anticipate potential business sale:
Discuss LCGE implications with your tax advisor before positioning
Consider whether holdco ownership makes sense (if you have or will have proper holdco structure)
If policy must be in operating company, evaluate minimal cash value design vs. traditional accumulation
Understand the trade-offs: LCGE protection vs. policy economics
Don't just accept default positioning without understanding long-term implications
If you already have insurance in your operating company:
Calculate what safe income is available if you needed to move it
Estimate the tax cost of moving it now vs. dealing with it later
Evaluate whether the tax cost justifies fixing the problem proactively
Understand your options if a sale opportunity emerges unexpectedly
Factor this into your overall sale-readiness planning
Individual Pension Plans: Extracting Value Before Sale
Individual Pension Plans can be powerful retirement savings vehicles for established business owners, and they offer a strategic way to extract value from your operating company before a sale.
IPP Basics Relevant to Sale Planning
An IPP is a defined benefit pension plan for business owners, allowing contributions that often exceed RRSP limits, particularly for business owners over 40 with strong employment income history.
Key characteristics:
Contributions are based on your employment history and salary
Maximum benefit is capped based on years of service and earnings
Contributions are tax-deductible to your corporation
Reduces retained earnings in your operating company
The pension is held in a separate trust (not a corporate asset)
Important Foundation: Before considering an IPP, you should generally maximize RRSP contributions first. If you haven't been taking sufficient salary to max out your RRSP room, increasing salary and maximizing RRSP contributions is typically the first step. IPPs become relevant once you're consistently maxing out RRSP contributions and want to save even more on a tax-deferred basis.
IPP as a Pre-Sale Strategy
Why This Matters for Business Sales:
If you're planning to eventually sell your business, an IPP offers a way to move money from your operating company into retirement savings while:
Maximizing tax-deferred savings beyond RRSP limits
Reducing corporate retained earnings (which can help with overall financial picture)
Creating a larger retirement nest egg with pre-sale income
Taking advantage of employment relationship while you still have it
What Happens to the IPP When You Sell:
The IPP is a separate trust, not an asset of your corporation that transfers with a business sale. When you sell your operating company, you have several options:
Commute the pension and transfer to locked-in retirement account - Calculate the commuted value, close the employment relationship that supported the IPP, transfer to LIRA, proceed with business sale. This is the cleanest break.
Turn on the pension - Begin receiving pension payments from the IPP instead of commuting it. This can provide retirement income while you manage the sale transition.
Transfer to a new sponsor corporation - In some cases, you can transfer the IPP to a new sponsoring corporation (potentially a holding company), maintaining the pension structure while closing the operating company employment relationship. This requires careful structuring and professional guidance.
The buyer has no involvement with your IPP in any scenario. They're not inheriting pension obligations unless you have employees enrolled in the plan (which is rare for owner-only IPPs and generally not advisable).
Strategic Timing:
10+ years before anticipated sale:
IPP can be very valuable
Maximizes tax-deferred retirement savings over extended period
Takes full advantage of employment relationship and potential past service credits
Large contributions can be made based on years of service
5-7 years before sale:
Still potentially valuable but requires analysis
Setup costs need to be justified over shorter horizon
Can extract significant value from operating company before sale
Good option if you're already maxing RRSP contributions consistently
2-3 years before sale:
Setup costs may not justify benefits
Administrative burden during transition period
Consider alternatives like continued RRSP maximization
IPP might still make sense depending on age, salary history, and accumulated past service
After sale:
Cannot establish IPP without employment relationship
This opportunity closes permanently once you sell
IPP and Employee Considerations
If you have employees enrolled in your IPP (which is uncommon but possible):
Those pension obligations would need to be addressed in sale negotiations
Buyer may need to maintain pension plan or fund buyouts
Significantly complicates sale structure
Generally not advisable to include employees in owner's IPP for exactly this reason
Most IPPs for business owners are single-member plans covering only the owner, avoiding these complications entirely.
Practical Application:
If you're an Ontario business owner thinking about eventual sale:
Ensure you're consistently maxing out RRSP contributions before considering IPP
If you are maxing RRSP and want more tax-deferred savings, evaluate whether IPP makes sense given your realistic timeline
Understand your options at sale (commute and transfer, turn on pension, or potentially transfer to new sponsor)
Consider how it reduces retained earnings in operating company
Remember this option closes after you sell
An IPP can be an effective tool in your pre-sale planning, but like everything else, it requires thinking about how the pieces connect - and it only makes sense once you've maximized simpler alternatives like RRSP contributions.
The Coordination Problem: Why These Pieces Get Planned in Isolation
Here's what I observe regularly: business owners work with competent professionals who each handle their specific domain well, but nobody ensures all the pieces work together.
The typical pattern:
Your accountant optimizes current-year taxes and structures salary/dividends efficiently
Your lawyer drafts shareholder agreements and handles corporate minute books
Your insurance advisor recommends appropriate coverage and positions it in your corporation
Your investment advisor manages your corporate investment portfolio
Each is doing good work within their scope. But:
Current-year tax optimization doesn't always account for long-term sale readiness
Corporate minute books can be current without preserving LCGE eligibility
Insurance recommendations focus on coverage needs without considering sale implications
Investment management happens without thinking about active vs. passive asset ratios
Then one day you consider selling, and everyone rushes to figure out how the pieces fit together - usually discovering problems that should have been addressed years earlier.
This is exactly what happened in the case from the opening. The insurance was positioned in the operating company as a standard approach. But nobody was thinking about how that decision would affect a future sale or LCGE qualification. Good advice in isolation, but problematic when connected to the bigger picture.
What Integrated Planning Looks Like
When business sale readiness is maintained continuously:
Annual coordination ensures:
Active vs. passive asset ratios are monitored in your operating company
Corporate structure continues to preserve LCGE eligibility
Insurance positioning still makes sense given your evolving timeline
Retirement savings strategy (RRSP, IPP) aligns with business plans
Shareholder agreements reflect current intentions
Strategic decisions account for connections:
Insurance placement considers both protection needs and LCGE implications
Investment strategy recognizes the active vs. passive asset distinction
Corporate structure changes maintain rather than eliminate tax advantages
Retirement planning coordinates with potential sale timeline
Documentation stays current:
Corporate structure and share ownership clearly recorded
Decisions are documented (helpful if CRA questions anything)
Safe income calculations maintained for potential insurance transfers
All advisors have access to current information
This doesn't require monthly meetings or constant tinkering. It requires annual review with awareness of how the pieces connect.
Moving Forward
You might sell your business next year. You might run it for another two decades. You might never sell - perhaps you'll transition it to family or wind it down gradually.
The point isn't predicting which path you'll take. The point is ensuring your structure supports whatever path makes sense when the time comes.
"Always be sellable" doesn't mean always be selling. It means maintaining optionality, protecting tax advantages, and ensuring you're never stuck leaving value on the table because nobody was paying attention to how the pieces fit together.
Your business represents years of work, risk, and value creation. Making sure you can actually realize that value - on your timeline and your terms - requires annual review with awareness of how corporate structure, insurance positioning, investment strategy, and retirement planning all connect.
If you're uncertain about your LCGE status, have growing passive assets without proper structure, or realize nobody is coordinating these moving parts, it's time for integrated planning support. This isn't about constant tinkering - it's about ensuring someone is paying attention to how the pieces fit together and whether you're maintaining the optionality you'll want when circumstances change.
Maintain clear records of your corporate structure, share ownership, asset transfers, and why decisions were made - good documentation makes any future transaction or restructuring simpler.
The accountant who brought me in to help with that purification situation did their client a real service. They recognized this wasn't just an accounting question or just an insurance question - it required looking at how all the pieces connected. That's the kind of integrated thinking that protects value and maintains options.
If you're an Ontario business owner and want to review whether your structure is sale-ready, that's exactly the type of integrated planning work I do. You can learn more at StillFP.com.
Mitchell A. Shields, CFP®, CLU®, TEP is the founder of Still Water Financial Partners, a financial planning firm dedicated to helping Ontario business owners achieve clarity and confidence in their financial lives. He believes maintaining optionality is one of the most valuable planning disciplines successful business owners can practice. Learn more at StillFP.com
This article is provided for educational purposes only and does not constitute personalized financial, legal, or tax advice. Business sale planning involves complex considerations that vary significantly based on individual circumstances. Please consult with qualified professionals regarding your specific situation.