An asset sale is the purchase of individual assets and liabilities of a business. A share sale is essentially a purchase of the entire corporation. Deciding between an asset sale and share sale is a complicated matter because often than not the parties involved would benefit from opposing structures. Typically, a vendor (seller) prefers to sell shares and a purchaser prefers to purchase assets. However, the ultimate preference lies within the tax consequences and potential liabilities of each proposed structure.
It is evident to note that if the business is a sole proprietorship or a partnership, it cannot be structured as a share purchase/ sale transaction as none of the entities own shares.
An asset sale consists of sale of individual assets of a company such as equipment, fixtures, goodwill, trade names, telephone number, inventory, leasehold and licences. The continuing debt obligations remain with the vendor. In this type of transaction, the purchaser is typically able to select only those assets it wishes to buy as well as only be responsible for liabilities it wishes to assume. This is mainly one of the reasons why the purchaser would prefer to purchase assets to avoid acquiring undesirable assets and unknown liabilities.
In order to minimize the purchase price while simultaneously maximizing the tax deductions from the purchase, a purchaser will take deductions to reduce its income in future years. For example, by way of Capital Cost Allowance on depreciable assets and the cost of inventory sold.
The reason why a vendor would not prefer selling only assets is because in an asset sale there are two levels of taxation: (1) at a corporate level; and (2) at a shareholder level-when the corporation distributes the after-tax proceeds to the shareholders as a dividend and the shareholders pay tax on the dividend.
Other effects- employment contracts cannot automatically be assigned to the purchaser under an asset transaction. There are further implications under the Ontario Labour Relations Act 1995 if employees are unionized.
These types of transactions typically would include obtaining consent of a third party in order to convey the assets to the purchaser. As such, it is sometimes important to consider whether a share acquisition would be a better structure since it would allow for the automatic acquisition of such assets without a transfer of title.
By virtue of acquiring shares for a corporation, the purchaser, in simple terms, is acquiring the corporation itself including inter alia its underlying assets, liabilities (known and unknown). This is mainly why the vendor would prefer to sell the shares of the corporation in order to avoid being left with unwanted assets and liabilities in addition to taking advantage of the capital gain exemption- subject to availability under Income Tax Act.
When a shareholder sells shares in a corporation, the proceeds are paid directly to the shareholder; and therefore, it is only taxed at the shareholder level.
In a share purchase transaction, the full purchase price is added to the purchaser’s Adjusted Cost Base (ACB) of the purchased shares. Shares are a type of non-depreciable property and therefore there are no tax deductions available in future years against the income of the purchaser associated with the costs of the shares. The purchaser will be able to regains its ACB on a subsequent disposition of the shares.
In brief, by acquiring the shares, the purchaser will inherit the tax cost of the non-depreciable capital and depreciable capital assets respectively of the corporation and can only continue to claim tax deductions based on the existing tax cost of the assets inside the corporation.
Despite the aforementioned, there are instances in which the vendor may prefer an asset sale such as where the vendor has substantial non-capital or net capital loss carryforward available that can be used against or to offset any income or capital gains arising from sale of the assets of its business. Similarly, a purchaser may prefer a share purchaser, for instance, when the fair market value of the assets is less than its tax costs.
In either case it is imperative that you hire a qualified lawyer with experience in both assets base transactions and share based transaction in order to maximize your benefits in any given matter. Whether you are looking to sell the assets of your business or your shares, we are here to help you. Call one of our business lawyers at Kalfa law to discuss.
You have worked hard for your business, let us make sure you get to enjoy the benefits.
Ghazal Hamedani, Hons BA, LL.B, Associate Lawyer
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