Purchase/Sale of Shares or Assets

Question 1

Purchaser’s perspective

Direct purchase of assets

Answer 1

• Can choose which assets to purchase, thus avoiding acquiring assets not required for the business.
• Will not be liable for undisclosed liabilities because those remain a liability of the corporation.
• Assets are acquired at fair value. If fair value is greater than tax value (UCC or original cost) the value for tax is “bumped up.” This allows for higher future CCA claims and lower future capital gains.
• If the purchaser pays more for the assets than the underlying value of the net identifiable assets acquired, the additional amount paid is purchased goodwill. Purchased goodwill is eligible for CCA claims
• Loss carryovers of the corporation remain in the corporation and thus cannot be used by the purchaser.

Question 2

Purchaser’s perspective

Purchase of Shares

Answer 2

• Loses the ability to pick and choose between assets
• Becomes responsible for all liabilities, including undisclosed liabilities, because the purchaser acquires the shares of the corporation and the liabilities remain with the corporation.
• The assets remain in the corporation at tax cost.
• If the purchaser pays more for the shares than the underlying value of the net identifiable assets of the corporation, goodwill arises; however, it is not purchased goodwill, so it is not eligible for CCA claims
• Non-capital loss carryovers of the corporation remain in the corporation and may be used in the future if income from a same or similar business is generated in the corporation during the carryforward period.

Question 3

Vendor’s perspective

Direct sale of assets

Answer 3

• May be left with assets that the purchaser does not wish to acquire. These assets may be difficult to sell.
• Will be liable for all liabilities that are not acquired by the purchaser, including undisclosed liabilities
• This may result in higher tax, and the complexity will increase the professional fees charged by the accountant.
• The lifetime capital gains exemption may not be claimed on a sale of assets.

Question 4

Vendor’s perspective

Sale of shares

Answer 4

• All assets become the property of the purchaser through the purchaser’s share ownership. The vendor won’t be left with assets that may be difficult to sell.
• All liabilities remain as liabilities of the corporation and become the responsibility of the purchaser through the purchaser’s share ownership.
• Receives cash or other assets in exchange for his or her shares. Assuming that there is only an individual vendor, the only tax consequences would be a realization of a capital gain or loss. Reporting the capital gain is much simpler.
• If a capital gain arises on the sale of shares and the corporation is a qualified small business corporation, the lifetime capital gains exemption may be claimed to exempt from tax all or a significant portion of the capital gain.