Sale of a Business: Sell the Shares or Buy the Assets?

IN THE PRESENCE OF DIVERGING INTERESTS

Generally, the seller wants to sell his shares while the buyer wants to acquire the assets of the selling corporation. This column summarizes the important considerations from both parties’ perspectives. 

FROM THE SELLER’S PERSPECTIVE, WHO PREFERS TO SELL HIS SHARES:

• The sale of shares will result in the realization of a capital gain of which only half will be taxable (50% of the gain);
• The seller will be able to benefit from the capital gain exemption of $913 630 (updated amount for the year 2022), so long as his sold shares constitute qualified small business corporation shares, which can be multiplied with his spouse and children if a family trust has been established in advance; and
• The sale of the corporation’s assets may result in a recovery of the amortization claimed by the corporation in the past, which will create taxable revenue.

FROM THE BUYER’S PERSPECTIVE, WHO PREFERS TO PURCHASE THE ASSETS:

• The acquisition of shares in the corporation (change of control) will result in a deemed taxation year-end upon the sale of the shares, making it necessary to immediately file an income tax return for the corporation within the prescribed time period;
• The buyer will be able to amortize the cost of the assets acquired according to the rates permitted by tax laws and thus claim the amortization deductions to which he is entitled with respect to these assets against his income, while the purchase price of the shares is not amortizable; and 
• By buying the seller’s shares, the buyer effectively assumes responsibility for the corporation’s existing debts and obligations, including tax debts. Therefore, the buyer of a corporation’s shares acquires not only the corporation’s shares, but also its liabilities (and its skeletons in the closet…). 
• Prior to each transaction, an analysis of the legal and fiscal impacts is essential for determining the optimal structure of the business purchase or sale transaction that you wish to achieve. The negotiated purchase price will sometimes vary depending on the form of the transaction chosen by the parties. We will advise you and guide you in such matters and assist you in the planning and negotiation of your business sale or purchase transaction.

Prior to each transaction, an analysis of the legal and fiscal impacts is essential for determining the optimal structure of the business purchase or sale transaction that you wish to achieve. The negotiated purchase price will sometimes vary depending on the form of the transaction chosen by the parties. We will advise you and guide you in such matters and assist you in the planning and negotiation of your business sale or purchase transaction.