Banka: Deciding whether to purchase assets or shares

Why someone might purchase only the assets of a business is to avoid adopting the tax problems of an incorporated business.

In deciding to purchase an existing business, is it better to purchase the assets or the shares of the business?

Most business purchases are acquiring the assets.

Why someone might purchase only the assets of a business is to avoid adopting the tax problems of an incorporated business.

For example, perhaps the corporate tax payments are not paid, or the GST/HST or payroll taxes haven’t been paid.

The purchaser should not be liable for those payments and part of the purchase process should be to receive some sort of confirmation from the Canada Revenue Agency that they have been paid in full.

If you are paying more for the assets than what they are listed for in the books, then the excess is considered goodwill and that goodwill can be amortized for tax purposes.

For financial statement purposes the life of the goodwill could be considered to be infinite and if that is the case, it need never be amortized.

This classification of goodwill as infinite would need to be addressed every year to make sure that the assumption is valid from year to year.

If conditions change, then the goodwill can be written down in a future period to reflect what is actually occurring with the business.  If you purchase the assets, you may be able to structure the purchase agreement so that you only purchase the assets that you want to purchase and leave the rest behind.

You could also increase the value of the assets purchased (limited to the purchase price)  to amortize them over a longer period of time.  Amortization and the associated capital cost allowances for tax purposes are calculated on the new purchase value of the old assets and not on the old undepreciated capital cost amount.

Don’t forget that some assets are subject to GST/HST when they are bought or sold, and if a property is involved, it will probably be subject to provincial property purchase tax in B.C.

You would not be subject to any hidden or forgotten agreements that the original owner may have entered into under the old business.

If a previous employee decided to sue the business, you would not be liable for that. You would also not be responsible for any debts that the previous owner may have entered into.

Probably the best reason to purchase the assets of a business is that it’s easier to finance  because the assets can be used as collateral.

Sometimes purchasing the shares of a corporation might be the better route especially if there are items held by the corporation that are non-transferrable.

Some examples might be a non-transferrable permit or a lease contract, or some sort of proprietary patent.

As well, usually higher prices are asked by the vendor for the sale of assets than for the sale of shares. A vendor would want to know whether there would be fewer taxes payable if they sell the assets or the shares, which is the point at which an accountant’s advice is sought.

The accountant can simulate the sale of the corporation under both scenarios so that the vendor would know how much money he can expect to receive in his pocket.  Usually a vendor would receive more for the assets than what they are actually worth on the books, which may require a recapture of capital cost allowance previously deducted resulting in taxes payable.

If the vendor wants to sell the shares of a corporation, these shares must be considered to be qualified small business corporation shares in order for the vendor to take advantage of the lifetime capital gains deduction, if it hasn’t already been used up.

If you are purchasing the shares of a corporation as a corporation,  there may be some consequences with respect to carry forwards and deemed dividends of the corporation you are purchasing. Only certain kinds of losses may be carried forward and only under certain conditions. If you are considering purchasing the shares of a business,   make sure there is a clause in effect that will provide indemnity by the seller against any future legal action or liability that might be as a result of some previous action taken by the seller.

Kelowna Capital News