Taxation on the sale of a business

Question 1

Taxation on the sale of a business – Share sale (Taxation)

Answer 1

In a share deal, a shareholder sells the shares of the corporation which carries on a business. The business continues operating within the same legal entity, and only the ownership of the shares has changed.
* Unwanted assets can be removed from the corporation prior to an acquisition of control, but you need to consider the tax implications.
* The change in ownership of the shares causes an acquisition of control of the corporation and a deemed year end.
* On the acquisition of the shares of a corporation, the cost of non-depreciable capital property may be “bumped” to its fair market value at the time of the acquisition of control upon a vertical amalgamation or a windup. This only applies to non-depreciable capital property (e.g., land, securities).
* From a tax perspective, the vendor will report a capital gain or loss based on the proceeds of disposition received, less their adjusted cost base of the shares. If an individual (including a trust) is disposing of the shares, there may be an opportunity to claim the lifetime capital gains exemption.

Reference: ITA 110.6, 111, 249

Question 2

Taxation on the sale of a business – Asset sale (Taxation)

Answer 2

In an asset deal, the vending corporation will sell the assets to the purchaser. The purchaser will carry on the business in a new legal entity of their choice. The parties can select which assets are to be sold, and which liabilities are to be assumed.
* As the assets are changing ownership, the purchaser will have a cost base in the assets equal to the purchase price which is paid to acquire them. This allows the purchaser to increase the tax basis of the assets to their fair market value, and obtain a tax write-off on the full amount of the purchase price, including goodwill.
* From a tax perspective, the vending corporation will have proceeds of disposition equal to the purchase price. The vending corporation will then pay corporate tax on the gains realized and be left with cash inside the corporation, which they will retain.
* The cash will then need to be distributed to the ultimate shareholders by way of dividends and return of capital. This provides a significant opportunity for tax deferral, as the corporation can choose when to distribute the cash to the shareholders.

Reference: ITA 13(1), 38, 20(16)