What are tax implication of buying shares of an existing corporation?
By Hank Bulmash | June 9, 2011
What are the tax implications of buying the shares of an existing corporation versus an asset purchase?
Hank Bulmash answered:
This is a complex question, and your reader should get competent professional advice before buying either the assets or the shares of a corporation.
When large complicated businesses are sold (public companies for example), almost all the sales are for the shares of the company. But when smaller private companies are sold, most purchasers would prefer to buy the assets of the company.
There are three main reasons for this:
- By buying only the assets you want, you don't end up with redundant assets that might be costly.
- By buying the assets, the cost basis of the asset is bumped up to its fair market value, which will increase the depreciation that the purchaser can claim. If shares are bought, the original value of the asset is maintained, and there is no bump up to fair market value.
- Finally (and most importantly), when you buy the shares of a company the liabilities of the company are also purchased, including unrecorded and perhaps unknown liabilities. What I mean is this: if you buy the shares of a company and the company is audited a year after the purchase for the period before the purchase, the company (and the new owner) is liability for amounts owed to CRA. The same would be true to liabilities to other claimants (including customers and employees). So buying the shares is significantly risker than buying assets.
On the other hand, vendors would often prefer to sell shares because:
- The shares might be eligible for the $750,000 capital gains exemption. So taxes on the sale of shares might be lower. Even without the capital gains exemption, the tax on the sale of shares might be lower than an asset sale.
- There will be no CCA (tax depreciation) recapture on the sale as there would be on an asset sale, so the gain will be taxed at capital gains rates, not normal business rates as is the case when CCA is recaptures. Again the vendor's taxes might be lower on an asset sale.
- Sometimes vendors simply want to sell the company because it leaves them with a simpler outcome. They don't have to deal with a corporation that they no longer have a use for.
So, as a general rule, the purchaser would prefer an asset purchase and a vendor would often prefer a share sale.