Purchase & Sale of Business

The purchase or sale of a business entails significant corporate and commercial considerations.

In certain situations, a purchase or sale of a business may take place as a tax-driven transaction. For example, a taxpayer may consider purchasing a business generating losses in order to reduce the taxable income of a profitable business. However, the overwhelming majority of purchase and sale transactions occur for bona fide commercial reasons and not merely for the purpose of reducing tax payable.

The sale of a business may take place either as the sale of the business vehicle (i.e., a corporation or partnership) or its assets.

In the case of a share purchase, a seller transfers shares in a corporation or interest in a partnership that carries on business to the purchaser. Generally, this option is preferable to the seller, as the seller may qualify for preferential tax treatment on the resulting capital gains and be no longer responsible for the past liabilities incurred by the business. The purchaser may take advantage of special provisions in section 88 of the Income Tax Act which may allow the purchaser to “bump” up the tax basis of capital assets held by the acquired corporation to the fair market value.

In the case of an asset purchase, a seller would transfer the corporate assets (such as equipment, customer list, account receivable, etc.) and goodwill (which generally reflects the value of business as ongoing concern) to a purchaser. This option is more preferable to the purchaser, as it acquires the business assets at the fair market price and is free of past liabilities of the corporate seller. Further, an asset purchase enables the purchaser to claim enhanced deductions for tax depreciation (capital cost allowance) of the capital assets acquired at the fair market value, once the purchase price is allocated between tangible and intangible assets, such as goodwill.

In either case, both the seller and purchaser face a multiplicity of tax issues and each party will require advice from a tax lawyer at the pre-transactional planning stage to properly structure the sale or acquisition of the business.

High-Level Check List: Tax Considerations for the Vendor

  • Share Sale v. Asset Sale
  • Apportionment of the sale price between various assets (Land and buildings, equipment, inventory and other non-capital assets, etc.)
  • Transfer or discharge of existing debts and liabilities.
  • Goodwill and other intangible properties.
  • Licenses/ franchise rights and other intangible properties.
  • Employee contracts and benefits. Transfer/termination payments.
  • Transfer of intellectual property.
  • Accounts receivable, earn-ins and deferred sales.
  • Warranties and indemnities.

High-Level Review: Tax Considerations for the Purchaser

  • Share Purchase v. Asset Purchase
  • Forming an acquisition structure to bump up the tax basis of the capital assets.
  • Apportionment of the purchase price between various classes of assets (land, buildings, and depreciable capital properties, inventory, etc.).
  • Financing the purchase price in a tax-efficient way.
  • Assumption of and reserves for existing debts and liabilities.
  • GST/HST and provincial sales taxes.