When a business is sold, the parties must decide whether the buyer acquires the corporation’s shares or selected business assets. Both structures can transfer control of the same operation, but they do not transfer the same property, risk or tax cost.
The seller and buyer often begin with opposite preferences. Negotiations should therefore focus on after-tax value, assumed liabilities, financing and contractual protection rather than only the stated purchase price.
Share sale: continuity of the corporation
In a share sale, the buyer takes control of the corporation together with its assets, contracts, employees, tax balances and known or unknown liabilities. Commercial relationships may be easier to preserve, but due diligence, representations and indemnities become essential.
For the seller, the proceeds generally arise from the disposition of shares. If all conditions are met, the capital gains deduction may be considered. The corporation’s asset composition and history should be reviewed well before closing.
Asset sale: select what is transferred
In an asset sale, the buyer can choose the inventory, equipment, contracts, intellectual property or goodwill to acquire. The buyer generally obtains a new tax cost for the assets, which can increase future deductions.
For the selling corporation, the price may generate several forms of income, including inventory profit, recapture, capital gains and income connected with other assets. When the funds are later paid to the shareholder, a second level of tax must be included in the model.
Negotiate purchase-price allocation and liabilities
The price assigned to each asset affects the seller’s tax and the buyer’s deductions. The allocation should be reasonable and consistent in the agreements, entries and returns of both parties.
Sales taxes, receivables, employees, licences, contracts and leases do not all transfer in the same way. A tax-efficient structure that prevents the transfer of an essential permit is not a successful transaction.
- Historical liabilities retained or assumed by the buyer.
- Future tax cost of the acquired assets.
- Corporate and personal tax required to deliver funds to the seller.
- Commercial consents required for contracts and licences.
Compare the scenarios on the same basis
The seller should compare personal net proceeds and the payment schedule. The buyer should compare price, future deductions, inherited risk and financing cost. Differences may be addressed through a price adjustment, escrow, indemnities or a hybrid structure.
The decision should be made before the letter of intent. A pre-closing corporate reorganization may sometimes be relevant, but it must have a genuine commercial purpose and allow enough time for implementation.
Model the transaction before choosing the structure
There is no universal answer. A share sale may be attractive to the seller and too risky for the buyer; an asset sale may simplify the acquisition while increasing the seller’s tax. The correct result depends on the actual numbers and contracts.
Impôts Ici can compare both options, prepare the tax allocation and work with the transaction’s legal advisers. To analyze an offer or proposed acquisition, contact our team.
