Sale of shares vs sale of assets Flashcards
Consequences to sales of assets
o Can choose not the buy redundant assets
o Will not be liable for undisclosed liabilities.
o If FV > tax value the value for tax is bumped up. This allows for higher future CCA claims and lower TCG’s
o If purchaser pays more for assets than the net value of identifiable assets, goodwill arises and is eligible for CCA (class 14.1)
o Loss carryovers remain in the corporation and cannot be used by the purchaser
o Two levels of tax – corporate level for sale of assets and personal level by winding up the corporation. This could result in higher tax for the seller and increase complexity.
Consequences to sales of shares
o Able to off load redundant assets
o Able to off load all liabilities such as future tax reassessments or lawsuits.
o The assets remain in the corporation at tax cost
o If purchaser pays more for shares than the net value of identifiable assets, goodwill arises but will not be eligible for CCA
o Non-capital loss carryovers remain in the corporation and may be used against similarly generated income
o More simple process for seller, only tax consequence is the capital gain or loss on the sale of shares.
o Eligible for the lifetime capital gains exemption for a qualified CCPC
Sale of share steps
- Determine CG by taking SP of shares less the ACB of the shares
- 50% inclusion rate for TCG less selling costs
- LCE calculation - do QSBC requirements
- Apply after-tax marginal tax rate to determine personal tax payable.
- Determine after-tax cash kept as the SP less tax paid on sale of shares.
Asset sale steps
- Determine tax impact to the corporation by determining affect on ABI, AII, CDA, RDTOH.
- Determine corporate tax payable on income generated from sale of assets
- Determine after-tax cash in the corporation that is available to redeem shares
- Determine the deemed dividend and CG or loss as a result of the redemption of shares
- Determine period tax payable as a result of the redemption and any bonus paid to the shareholder prior to winding up the company
- Determine after-tax cash retained as the difference between cash used to redeem shares and personal tax payable.
Asset sale step 1 - determine ABI, AII, CDA, RDTOH
In general:
ABI: amounts fully taxable or deductible
AII: ½ capital gains and allowable capital losses
CDA: The other half of gains and losses
NERDTOH: 30 2/3% of AII
Asset sales step 2 – calculate tax payable
o ABI above the business limit x marginal rate o ABI below the limit x marginal rate o AII x marginal rate o Less NERDTOH balance (div refund) o = corporate tax payable
Asset sales step 3 – cash available to redeem shares
o Proceeds from sale of assets o Less corporate tax payable o Less other corporate liabilities o Less bonus paid to shareholder o = cash available to redeem shares
Asset sales step 4 – deemed dividend
o Cash available to redeem shares o Less PUC o =Deemed dividend before CDA o Less CDA o = taxable deemed dividend o If PUC and ACB are unequal then: o Cash available to redeem shares o Less Deemed dividend before CDA o = adjusted proceeds o Less ACB o = Capital gain/loss
Asset sales step 5 – Personal tax payable
o Eligible dividend x personal marginal rate
o Non-eligible dividend x personal marginal rate
o Bonus paid x marginal rate
o TCG or loss x marginal rate
o = Personal tax payable
Asset sales step 6 – After-tax cash available
o Cash available to redeem shares
o Less personal tax payable
o Add bonus paid if applicable
o = after-tax cash kept by shareholder
Order in which to pay out cash from asset sale
o First pay our the CDA account (capital dividends) since they are tax free
o Then designate sufficient dividends as non-eligible to obtain a full refund of the balance in the NERDTOH account
o designate remaining deemed dividends subject to tax as eligible to the extent of the balance in the GRIP account
o Lastly, any remaining dividends will be deemed non-eligible dividends
