By: Gregory Prekupec and Rahul Gupta 

Understanding the Tax Implications of Asset Vs. Share Deals 

When buying or selling a business, one of the most critical decisions is whether to structure the transaction as an asset sale or a share sale. Each approach has distinct tax consequences for both buyers and sellers. Understanding these implications can help businesses maximize tax efficiencies and avoid unexpected liabilities.

Seller Considerations: Why Share Sales Are Often Preferred

1. From a tax perspective, sellers typically prefer selling shares rather than assets. The reason is simple: capital gains taxation. Under Canada’s capital gains tax regime, only 50% of a capital gain is taxable. Additionally, individual sellers may be eligible for the Lifetime Capital Gains Exemption (LCGE), which allows them to shelter $1,250,000.00 of capital gains on the sale of shares in a qualified small business corporation.
2. By contrast, selling assets can lead to a higher tax burden. Some proceeds may be fully included in income, and if the business distributes these proceeds to shareholders, further tax can apply. This results in double taxation: once at the corporate level and again when the funds are distributed to shareholders.
3. Another challenge with asset sales is the potential recapture of previously claimed depreciation, which is fully taxable. This can result in a significantly higher tax liability for the seller than if they had sold shares instead.

Buyer Considerations: Why Asset Purchases are Often Preferred

1. Buyers typically prefer acquiring assets rather than shares because it provides them with greater tax benefits and flexibility. In an asset sale:
   • The buyer gets a stepped-up tax cost on the acquired assets, allowing for greater future tax deductions through capital cost allowance (depreciation).
   • The buyer can select which assets to acquire and avoid unwanted liabilities, which may not be possible in a share sale where all assets and liabilities transfer with the company.
   • However, buyers must consider additional costs such as sales tax and land transfer tax, which may apply to asset purchases but not share purchases.

2. One scenario where a buyer may prefer a share purchase is when the company being acquired has favourable tax attributes, such as non-capital losses, that the buyer can use to reduce taxable income post-acquisition. Additionally, purchasing shares may allow a buyer to preserve valuable contracts, licenses, or regulatory approvals, which might not be easily transferable in an asset deal.

Key Tax Considerations in Asset Purchases

1. If a business is sold as an asset sale, different tax rules apply to various types of assets:

• Accounts Receivable: If the buyer and seller elect under ITA Section 22, the seller can claim a loss for bad debts, and the buyer can deduct uncollected amounts as income losses.
• Inventory: Gains on inventory are taxed as ordinary income, not capital gains, which is less favourable for the seller.
• Capital Property (e.g., land, buildings, equipment): Capital gains apply, with only 50% of the gain being taxable. For depreciable assets, there may also be recaptured depreciation, which is fully taxable.
• Intangible Assets (e.g., goodwill, trademarks, customer lists): These assets are now included under Class 14.1 for tax purposes, allowing for a capital cost allowance of 5% annually.

Key Tax Considerations in Share Purchases

1. When a company is sold as a share sale, tax planning strategies can optimize the seller’s position, including:

• Utilizing the Lifetime Capital Gains Exemption (LCGE) to shelter up to $1,250,000.00 of capital gains.
• Safe Income Planning, where dividends are structured to reduce taxable capital gains.
• Capital Dividends, which can be paid tax-free to shareholders in certain cases.

Purchase Price Allocation: A Critical Favour

1. One often overlooked aspect of business transactions is how the purchase price is allocated among the various assets being acquired. This allocation has major tax implications for both buyers and sellers. Sellers typically prefer to allocate more value to capital property to take advantage of lower capital gains tax rates, while buyers favour allocations that maximize future deductions (e.g., depreciable assets with high capital cost allowance rates).
2. The Canada Revenue Agency (CRA) requires that the allocation be reasonable, so careful planning is necessary to avoid disputes.

Other Important Tax Considerations

1. Beyond the primary tax issues, several additional considerations can impact business transactions:

• GST/HST Implications: While share sales are generally not subject to GST/HST, asset sales can be. However, an election under Excise Tax Act Section 167 can often eliminate GST/HST on the sale of a business’s assets.
• Earn-Out Arrangements: If part of the purchase price is based on future business performance, the seller may need to carefully structure the agreement to avoid unexpected income tax consequences.
• Non-Resident Sellers: If a non-resident is selling taxable Canadian property, the buyer may be required to withhold and remit tax to the CRA unless the seller obtains a clearance certificate under ITA Section 116.

Final Thoughts

1. Structuring a business sale as an asset or share deal requires careful tax planning. Sellers typically prefer share sales due to capital gains advantages, while buyers often favour asset purchases for tax efficiency and liability control. However, there are exceptions where share purchases can be advantageous for buyers, such as when acquiring valuable tax attributes.
2. Given the complexity of tax laws and the financial implications involved, seeking professional legal and tax advice is essential. Our firm specializes in guiding businesses through corporate transactions, ensuring the best outcomes for all parties involved. Contact us today to discuss your business transition strategy and how we can help you navigate these important decisions.