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Are you selling an incorporated business?


There are two ways to sell (or buy) a profitable incorporated business, an asset sale and a share sale. Knowing which way is most advantageous to you can make a significant difference in the net proceeds to you if you are selling a business, or the net cost if you are buying one.

First, you could sell the shares of your company. Rather than selling the individual assets that your company owns, you sell your corporate shares. Once you sell your company’s shares, the purchaser will automatically control the business operations and its assets.

In general, a vendor will prefer to sell shares for several reasons:

1. A share sale is a simpler transaction. An asset sale would require that you sell each individual asset creating individual capital gains and losses on each item. Some of the income could also be recaptured capital cost allowance (tax depreciation), which must be fully included income.

2. After the assets have been sold, you would need to wind up the empty company, incurring further legal and accounting fees.

3. A share sale will create capital gain income, which is only 50% taxable. Furthermore if your company meets the criteria for a qualified small business corporation you could be eligible to utilize your $500,000 lifetime capital gains exemption on the sale of your shares. This means you may not have to pay any income tax on the first $500,000 of gain from the business sale. This exemption is not available to a corporation that sells its assets.

4. Sometimes a business will have a history of operating losses. These losses can be used to offset the business’s operating income of future years, only if the buyer purchases shares. If assets are purchased the buyer will not have access to these losses.

5. Finally, selling the land and building held in a corporation may also trigger the payment of land transfer taxes. If corporate shares were sold instead, the corporation would still own the land and no transfer taxes would apply.

Alternatively, you could sell the assets of your company. This would include selling the company’s tangible assets, such as inventory, equipment, vehicles, furniture and fixtures, as well as the intangible assets, such as customer lists and goodwill, that would be necessary for the prospective buyer to continue the business operations.

In general the purchaser will prefer to buy the assets of the company rather than the shares for several reasons:

1. The purchaser can choose which assets of the company he wants to buy. If the company owns assets that are not vital for business operations, the buyer can exclude them from the purchase, reducing the overall purchase price.

2. Since most companies that are for sale have been in operation for some period of time, the assets have generally been depreciated for tax purposes. This means their tax value is often less than their market value. When the individual assets are purchased, it allows the buyer to “bump up” the tax value of those assets to their current market value. Since the assets then have a higher tax value, there are more deductions for capital cost allowance available to offset future income.

When you purchase a company’s shares you also purchase the history of the company. Since a company is a separate legal entity, if there are any lawsuits, tax reassessments or other liabilities that relate to the period before you purchased the shares, the company, which you now own, will still be responsible for them.

If you purchase shares it is important that you become aware of any potential liabilities you may be purchasing inadvertently. In general with an asset purchase you are not responsible for any of the company’s liabilities.

Strategies are available that allow the best of both sides. The vendor can sell shares (and utilize the capital gains exemption) while the purchaser can minimize exposure to potential liabilities and be able to claim full depreciation on the fair market value of the assets. This strategy makes sense for larger deals where the benefit from tax savings justify the additional professional fees incurred.

While each situation needs to be evaluated based on the specific assets involved, generally a seller will want to sell shares and a purchaser will want to buy assets. When determining a purchase price this often means that a buyer may be willing to pay more for the company’s assets than for its shares. But, if the seller can access the lifetime capital gains exemption he may only be willing to sell shares, and so the negotiations begin!

By Wendy Lewis, CA. Originally published in Comox-Valley Record. For more information on this topic, please contact the MNP office nearest you or Wendy at 250.338.5464.