Tax Structure When Buying an Incorporated Business

A very quiet and painful spring 2020 comes to an end in BC.  As the BC economy reopens pieces at a time, the impact of the Vancouver covid-19 pandemic lockdown on different sectors of the economy will become more evident.

For young or mature business owners, this past spring was a time of inner reflection.  There was plenty time for planning, whether to acquire existing business to bolster one’s market share or exit an existing business and spend more time pursuing activities that are closer to our hearts. With the reopening of the BC economy this summer, business owners will be provided the opportunity to pursue the future goals contemplated during the lockdown.

But what are the tax and legal considerations in buying a business?

There are two methods to acquire a business:  buy the shares of the company or buy the desired assets of the company.

Share Purchase

A share purchase is simply when the buyer buys the shares of the corporation from the current shareholder.  From a tax perspective, share purchase is relatively straightforward for both parties.  The presale assets, liabilities, and all relevant tax values of the company are inherited by the new shareholder. If the company continues in the same line of business, the non-capital losses carry forward and can be used to offset future operating gains under the new ownership.  Due to the relative simplicity of a share purchase, professional fees could be lower. The downside of a share purchase is the legal responsibility for future tax reassessments, past environmental pollution, or any other non-tax legal claims also pass onto the new shareholder.

The most significant benefit of a share purchase transaction is for the vendor.  The lifetime capital gains exemption of $ 866,912 can be used to reduce the taxable capital gain. Understanding this sizeable tax benefit to the vendor on a share purchase will impact negotiated price.

Asset Purchase

The other way to acquire a business is to buy only the desired assets, which could be almost all the assets of the business. This method requires that assets being acquired be valued based on the current negotiated price with any excess of purchase price over the fair market value of tangible assets allocated to goodwill.  Hence, the buyer gets to record the acquired assets at the price paid, getting the benefits of capital cost allowance on the higher “bumped up” asset values in the future.

For the vendor, the sale of assets creates more accounting and legal work. The sale of the assets is by the company, not the shareholder. Hence, the company reports the gains and losses.  Then there is also personal tax consequence from the distribution of company’s retained earnings as dividends.

The bottom line is sale of assets is not the preferred choice for the vendor so the buyer can expect to pay more. 

Contact a Vancouver Professional Business Accountant For Business Tax & Consulting

A professional accountant can assist in a number of ways during a business purchase negotiation.   Firstly, the tax savings of each method for both parties can be quantified.  Also, the advisor can perform the required due diligence work pertaining to the purchase, so the purchaser has peace of mind, particularly in the case of a share purchase. If the transaction is an asset purchase, the accountant can advise on how to best allocate the purchase price to the assets acquired, for optimal business tax planning.  

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