Asset vs. Share Deals – A Taxing Decision (But We’ll Make It Less Painful)

Asset vs. Share Deals – A Taxing Decision (But We’ll Make It Less Painful)

Mar 10, 2025 | Blog

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.
                  Asset vs. Share Deals – A Taxing Decision (But We’ll Make It Less Painful)

                  A Quick Guide for Managing Transactional Risk

                  Mar 3, 2025 | Blog

                  By: Gregory Prekupec and Rahul Gupta 

                  Introduction

                  When drafting commercial agreements, it’s crucial to consider how risk is allocated between the parties to ensure your client’s interests are protected and that they don’t fall victim to outdated or unexamined precedents. A strong understanding of risk allocation allows lawyers to clearly articulate their clients’ post-closing obligations and potential liabilities.

                  Key Methods of Risk Allocation

                  Risk allocation in commercial contracts can take many forms. Below is a non-exhaustive list of common mechanisms:

                  • Indemnification
                  • Limitations on Liability
                  • Termination Rights
                  • Force Majeure
                  • Contractual Remedies
                  • Product Conditions & Warranties
                  • Insurance Coverage
                  • Payment Terms
                  • Guarantees

                  Now, let’s break down these risk allocation tools in more detail.

                  Indemnification

                  Definition: An indemnity clause requires one party to compensate the other for specific costs or liabilities, such as lawsuits, damages, or legal fees. This is often paired with a duty to defend and a hold-harmless obligation.

                  Purpose: A well-drafted indemnity clause can:

                  • Shift financial burdens onto the indemnifying party.
                  • Cover expenses not protected under common law (e.g., legal fees).
                  • Minimize uncertainty regarding future liabilities.
                  • Reduce litigation risks.
                  • Handle third-party claims effectively.

                  Enforcement: Courts generally enforce indemnity clauses unless they are deemed unreasonable or unconscionable (e.g., due to vague language, significant bargaining power disparities, or absurd results).

                  However, practical issues such as jurisdictional enforcement (i.e., enforcing a judgment in a foreign jurisdiction) and prolonged litigation can affect their utility.

                  Best Practices:

                  • Scope: Who is indemnified? (e.g., shareholders, employees, affiliates, capital providers)
                  • Nexus Language: What events trigger indemnification? (e.g., are the events “related to,” “caused by,” or “solely resulting from”?)
                  • Recoverable Damages: Define whether indemnification includes only incurred costs or also future/unpaid expenses.
                  • Exceptions: Consider excluding indemnification for gross negligence, willful misconduct, or failure to mitigate damages.
                  • Limitations: Use minimal thresholds, upward caps, and time limits to control exposure.
                  • Procedures: Specify the notice period, control the indemnifying party has over the litigation, and required cooperation of the indemnified party.

                  Limitations on Liability (“LL”) Clauses

                  Definition: LL clauses define and limit a party’s exposure under a contract.

                  Purpose:

                  • Capping damages (e.g., a multiple of fees paid under the contract).
                  • Excluding liability for indirect, consequential, or punitive damages.
                  • Avoiding application of tort-based remedies.

                  Enforcement: Courts generally uphold LL clauses if they are:

                  • Clear and specific (ambiguous language can be interpreted against the obligor).
                  • Explicit about covered and excluded liabilities (e.g., negligence).

                  Best Practices:

                  • Ensure the LL clause aligns with the indemnification provisions.
                  • Consider carve-outs for fraud, gross negligence, or intentional misconduct.
                  • Avoid conflicts with any “cumulative remedies” provisions.

                  Termination Rights

                  Definition and Categories: Termination Rights allow a party to end a commercial agreement. There are two types of termination rights:

                  1. Termination for Cause: Allows a party to end the contract due to specific breaches (e.g., non-payment, insolvency).
                  2. Termination for Convenience: Enables a party to exit the contract without cause (often requires notice, transition cooperation, or termination fees).

                  Considerations:

                  • Negotiation Power: Unilateral termination rights create leverage for a party and increases pressure on the counterparty.
                  • Consequences of Termination: Define penalties, required transition periods, and other obligations upon exit.

                  Force Majeure (“FM”)

                  Definition: “Superior force” in French.

                  Purpose: Allows a party to be excused from their contractual obligations if certain events occur which are negotiated to be beyond that party’s control (e.g., COVID-19, health emergencies, natural disasters, wars, civil unrest).

                  Best Practices:

                  • Events not covered by the FM clause will not be deemed as such. Specificity and intentionally are key to drafting effective FM clauses.
                  • A party should be able to terminate the agreement of disruptions over an FM event continue over a certain period of time.
                  • Prescribe which obligations remain despite any such termination (e.g., confidentiality)

                  Contractual Remedies

                  Definition and Categories: A list of contractually available reliefs to a party in a commercial agreement. There are four types:

                  • Equitable Remedies: Courts may order specific performance, injunctions, or rectification.
                  • Cumulative Remedies: Allows parties to pursue all available remedies beyond the contract.
                  • Exclusive Remedies: Limits remedies to those explicitly listed in the contract.
                  • Liquidated Damages: Pre-determined penalties for breaches. They are useful when damages are difficult to quantify.

                  Purpose: To create greater certainty by either expanding or minimizing the level of liability as a result of a breach of the agreement.

                  Best Practices:

                  • Ensure cumulative and exclusive remedies provisions don’t conflict.
                  • Confirm liquidated damages are compensatory and not punitive.
                  • Consider prohibiting or permitting equitable relief based on the circumstances of all parties.

                  Product Conditions & Warranties

                  Definition: Provincial laws provide for implied warranties on the sale of goods within the actual agreement. Parties to such agreements can manage risk by subscribing to or contracting out of these implied warranties.

                  Best Practices:

                  • Clearly state whether implied warranties apply or are excluded.
                  • Define the scope of express warranties to avoid unintended liabilities.

                  Insurance

                  Definition and Purpose: Parties can manage risk by negotiating for certain insurance requirements to ensure either party has the monetary capability to comply with its commercial obligations under an agreement.

                  Best Practices:

                  • Assess the need for additional insurance before mandating coverage. Do internal resources provide enough protection for ensuring contractual compliance?
                  • Ensure insurance aligns with indemnification obligations.

                  Payment Terms

                  Definition and Categories: The timing of when payment is required for the goods or services being contracted for can help to manage risk. There are two types:

                  • Deferred Payments: Favourable to buyers but risky for sellers.
                  • Advance Payments: Reduce seller risk but may require concessions to the buyer.

                  Best Practices:

                  • Define triggers for payment acceleration or deferral.
                  • Include late-payment penalties or early-payment discounts.

                  Guarantee

                  Definition: Guarantees are used to ensure payment or performance will be made on time by requiring a separate entity (e.g., the directors of a party, the parent corporation, etc.) guarantee or ensure the same.

                  Purpose: The inclusion of a third-party increases the chances that the counterparty will receive payment on time or performance.

                  Best Practices:

                  • Scope of Guarantee: Define if it is full or limited.
                  • Enforceability: Ensure the guarantor has the means to fulfill obligations.
                  • Exclusions & Expiry: Define conditions for termination of the guarantee.
                  Asset vs. Share Deals – A Taxing Decision (But We’ll Make It Less Painful)

                  Franchise Law and Intellectual Property Law in Canada: Two Peas in a Pod

                  Feb 25, 2025 | Blog

                  By: Gregory M. Prekupec and Rutendo Muchinguri

                   

                  The legal concept of a franchise focuses on two key aspects: there must be a granting of rights by a Franchisor to a Franchisee to operate a business, and there must be a corresponding payment by the Franchisee to the Franchisor for the granting of such rights. Rights that are granted are, amongst other things, usually associated with a trademark, tradename, symbol, or logo that is owned or licenced by the Franchisor. It is at this point that Franchise Law and Intellectual Property (“IP”) Law intersect.

                  In Ontario, the Arthur Wishart Act (“AWA”)[1] states that a Franchisor has an obligation to provide a franchise disclosure document (“FDD”) that discloses all material facts to the Franchisee in terms of Section 5 of the AWA. Section 1 of the AWA defines material facts as any information about the business, operations or control of the Franchisor, or the franchise system that would be reasonably expected to have a significant effect on the value or price of the franchise to be granted. The franchise system includes the use or association with a trademark, a logo or a trade name.[2]

                  A general rule of common law that one cannot grant rights they do not own or have the right to grant.[3] It follows therefore, that before a Franchisor can grant any rights to the Franchisee, they must have the legal right to do so. At this point, IP Law, due to its close relation to Trademarks, becomes relevant in assessing whether potential Franchisors actually hold the rights required to grant them to the Franchisee. If the Franchisor has a registered or unregistered a trademark as part of its franchise system and the Franchisor intends to grant such rights as part of the FDD, it is crucial that the registration or recognition of the trademark, symbol, or logo be confirmed and indisputable as understood in the Trademarks Act.[4]

                  If there is no prior review of the Franchisor’s IP, particularly if it is an unregistered trademark, there are legal and financial risks to the Franchisor:

                  • If the Franchisor decides to register the tradename or trademark and there are any issues with the Franchisor’s chosen trademark/name or logo in future, this may mean that the Franchisor cannot grant its intended trademark/name to the Franchisee, as this may be regarded as a material change as understood in the AWA. In this event, the Franchisor must provide a written statement of material change to the potential Franchisee as soon as this change occurs, before the FDD is signed or any payment has been made[5].
                  • If the Franchisor fails to disclose the status of the trademarks/name or provide a written statement of material change, the Franchisee has the right to rescind the franchise agreement for lack of or improper disclosure without any penalty or obligations. The repercussions of rescission are severe on the Franchisor – the Franchisor must refund any money received from the Franchisee, including the Franchise Fee, re-purchase all inventory from the Franchisee, and compensate the Franchisee for any losses incurred.[6]
                  • If a dispute arises with regard to the IP rights of the Franchisor, the Franchisor has a legal obligation to disclose this dispute to other potential Franchisees in its FDD package – thus eroding the goodwill of the Franchisor’s brand.

                  It is no coincidence that the IP and Franchise departments in a law firm usually work closely – the two areas of law are, indeed, two complimentary peas in a pod. An IP review of the franchise system prior to the preparation of the FDD is therefore crucial – proceeding without such a review can have adverse consequences on the Franchisor and its business and result in non-compliance with the AWA and financial ruin.

                  [1] Arthur Wishart Act (Franchise Disclosure), 2000 S.O. 2000, c3.

                  [2] Section 1 of the AWA.

                  [3] Nemo dat quod non habet.

                  [4] Trademarks Act, RSC 1985, c T-13.

                  [5] Section 5 of the AWA.

                  [6] Section 6(6) of the AWA.

                  Asset vs. Share Deals – A Taxing Decision (But We’ll Make It Less Painful)

                  BioSteel left “unquenched” in quest for injunction before Ontario Court

                  Oct 29, 2024 | Blog

                  “May Cheng, Nicolas Auger

                  In a recent Ontario Court decision, BioSteel Inc. v. Cizzle Brands Ltd., 2024 ONSC 5515, Justice Parghi denied BioSteel Inc. and DC Holdings (“BioSteel”) an interlocutory injunction to stop Cizzle Brands Ltd. and Cizzle Brands Inc. (“Cizzle”) from using similar packaging for its sports hydration drinks. This ruling, released on October 18, 2024, following an August hearing, underscores important nuances in intellectual property law and the challenges brands face in protecting their trade dress.

                  Background: BioSteel’s Unsuccessful Bid to Block Cizzle’s Competing Product

                  The conflict began after BioSteel entered creditor protection under the Companies’ Creditors Arrangement Act (CCAA) in September 2023. DC Holdings emerged as the successful bidder for BioSteel’s assets, including the intellectual property associated with its popular sports hydration drinks. Former BioSteel executive, Mr. Celenza, subsequently launched a rival hydration brand, Cizzle, alongside other former BioSteel team members. Cizzle’s new line of CWENCH drinks debuted in May 2024, sporting vibrant packaging that closely resembled BioSteel’s established look, albeit with the distinct CWENCH brand name.

                  These visual similarities drove BioSteel to seek an injunction, arguing that Cizzle’s packaging could confuse consumers and harm BioSteel’s market share and brand reputation. Yet, despite these apparent likenesses, the court ruled against granting the injunction.

                  BioSteel Sports Drink Rainbow Twist 12 Pack in Canada

                   

                   

                   

                   

                   

                  BioSteel Sports Drink in Rainbow Twist, 12 Pack

                  “Image courtesy of BioSteel Canada. Available at BioSteel – Canada“

                  CWENCH Sports Drink Rainbow Swirl in Canada

                   

                   

                   

                   

                   

                  CWENCH Sports Drink in Rainbow Swirl

                  “Image courtesy of CWENCH Hydration. Available at CWENCH Hydration – Canada“

                  Legal Analysis: Why BioSteel’s Injunction Was Denied

                  At the heart of the decision lies the three-prong RJR Macdonald test, used to assess injunction requests. Here’s how the court applied each prong:

                  1. Strong Prima Facie Case
                    BioSteel’s bid for an injunction faltered on the first prong, an unusual outcome in such cases. Justice Parghi concluded that BioSteel had not demonstrated a “strong prima facie case” or even a “serious issue to be tried” under the tort of passing-off. Typically, injunctions are denied at the second stage of the test, where the difficulty often lies in proving “irreparable harm.” However, the judge was not convinced that BioSteel’s brand recognition extended beyond its trademark to encompass the specific “get-up” or trade dress of its packaging.
                  2. Goodwill and Brand Association
                    While BioSteel argued that its packaging was synonymous with its brand goodwill, Justice Parghi found insufficient evidence linking the packaging design to BioSteel’s market reputation independently of its BIOSTEEL trademark. This absence of compelling evidence weakened BioSteel’s claim that Cizzle’s CWENCH packaging misrepresented their brand, thus failing to establish a case of passing-off.
                  3. Impact of Injunction Denial
                    As a result of the court’s decision, Cizzle may continue marketing its CWENCH drinks in their current packaging until trial. BioSteel still has the opportunity to present additional evidence at trial and may consider appealing the injunction denial. In the meantime, the competitive landscape remains unaltered, with both brands contending for market share in the hydration drinks sector.

                  Implications for Brand Protection and Trade Dress Claims

                  The BioSteel Inc. v. Cizzle Brands Ltd. decision highlights the complexities brands face in securing legal protection for trade dress elements, such as packaging design. The case underscores the need for clear evidence linking trade dress to brand goodwill, separate from trademark recognition. Brands pursuing passing-off claims may benefit from extensive consumer perception data that illustrates a direct association between trade dress and brand identity.

                  As the broader litigation continues, BioSteel must build a stronger evidentiary foundation if it hopes to successfully claim trade dress infringement. For now, the court’s decision offers a cautionary tale: securing an injunction based on trade dress requires more than surface-level similarities—it demands a compelling argument supported by evidence that consumers unmistakably associate the trade dress with the brand’s goodwill.

                  Asset vs. Share Deals – A Taxing Decision (But We’ll Make It Less Painful)

                  Fundamental Changes under the Ontario Business Corporation Act: A Brief Summary

                  Oct 18, 2024 | Blog

                  Gregory M. Prekupec, Rutendo Muchinguri

                  The Ontario Business Corporations Act (OBCA), RSO 1990, cB.16, governs how corporations in Ontario should operate. Understanding the key provisions of the OBCA is essential for corporate governance and for those drafting documents related to commercial transactions. One of the most critical sections for Ontario corporations to be aware of is Section 168, which addresses Fundamental Changes.

                  What are the Fundamental Changes Under the OBCA?

                  Section 168 of the OBCA outlines specific actions that require more than a simple majority of shareholder approval—these actions are known as Fundamental Changes. These decisions significantly impact the corporation and must be authorized through a special resolution, requiring at least a two-thirds majority of shareholder votes during a specially called meeting.

                  Examples of Fundamental Changes in Ontario Corporations

                  The following actions are considered Fundamental Changes under the OBCA, and thus require special shareholder approval:

                  1. Changing the company’s name
                  2. Adding or removing business restrictions
                  3. Modifying the maximum number of authorized shares
                  4. Creating new classes of shares
                  5. Changing the designation, rights, or privileges of shares
                  6. Altering issued or unissued shares
                  7. Dividing a class of shares
                  8. Authorizing directors to divide unissued shares
                  9. Changing the minimum or maximum number of directors
                  10. Amending the issue, transfer, or ownership rights of shares

                  Special Resolutions for Fundamental Changes

                  For any of the above fundamental changes to be validly implemented, the corporation’s Articles of Incorporation must be amended. According to Section 168(5) of the OBCA, these amendments require a special resolution—a vote that must pass with at least two-thirds of shareholder approval during a special meeting called specifically to address the proposed changes.

                  Why Understanding Fundamental Changes is Crucial

                  Corporations in Ontario must ensure that any action classified as a fundamental change is properly authorized by their shareholders. Failure to follow the proper procedure, including securing a special resolution, can lead to legal complications and invalidate the proposed amendments.

                  After the special resolution is passed, the corporation can proceed with the process of amending its Articles to reflect the approved changes.

                  Conclusion

                  Understanding the requirements for fundamental changes under the OBCA is vital for any corporation operating in Ontario. Ensuring compliance with these regulations protects the corporation’s legal standing and ensures that significant decisions are made with the appropriate level of shareholder approval.

                  Asset vs. Share Deals – A Taxing Decision (But We’ll Make It Less Painful)

                  Champagne Problems: The Case of Pantone 137 XGC

                  May 29, 2024 | Blog

                  Elizabeth S. Dipchand, Harneet Gill

                  LVMH Faces Setback in Veuve Clicquot Trademark Dispute

                  LVMH, a prominent French luxury goods company, was dealt a blow to its Veuve Clicquot enforcement strategy in a recent decision coming out of the EU Court overturning the earlier decision of the European Union Intellectual Property Office (EUIPO).

                  EU Court Ruling: Colour Alone Isn’t Enough for Trademark Protection

                  The exclusivity of the orange colour used for the packaging of the Veuve Clicquot champagne bottles was at the heart of the issue. The judgement, in favour of discount retail chain, Lidl, emphasizes that colour does not necessarily constitute a sufficient element to hold a trademark exclusively without the other trappings of use in association with the claimed goods or services.

                  The Legal Battle Over Veuve Clicquot’s Orange Packaging

                  LVMH’s use of the orange in association with Veuve Clicquot dates back decades and acquired distinctiveness in the EU in 2006. LVMH argued that Lidl’s Champagne packaging was confusingly similar to Veuve Clicquot’s label. Lidl, in turn, appealed the registration of the trademark arguing a lack of distinctiveness. The EU Court declared that LVMH did not have sufficient evidence to establish that the orange colour is a distinctive sign of a specific brand amongst European consumers – this was specifically the case in Greece and Portugal.

                  Lidl’s Challenge to Veuve Clicquot’s Trademark: Lack of Distinctiveness

                  While this battle over branding colour is not the first – Christian Louboutin and Yves Saint Laurent had a decade-long dispute over the right to produce scarlet soled shoes – this decision has opened the floodgates for additional disputes regarding the orange hue. Veuve Clicquot has been issuing legal warnings to other wine companies, over the last 20 years, for the use of this orange shade.

                  Implications for Other Brands: Can Colour Be Protected as a Trademark?

                  This decision also brings to mind many other companies whose brand identities are centered around a colour. Tiffany, Aston Martin, and Hermès with their blues, greens, and oranges. While companies may employ a myriad of strategies to entice their consumers, this judgement clearly illustrates that a colour may not necessarily be protected without taking consistent and coordinated steps to do so.

                  For deeper insights on colour trademarks and their implications, reach out to Elizabeth S. Dipchand at edipchand@dipchand.com.

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