By: Jayson Schwarz`and Konstantine Chaztidimos.

When you are about to either buy or sell a business you need to think about whether you are going to buy the shares of the Company in which you have the interest or buy its assets pursuant to the Bulk Sales Act.

The assets usually include the physical plant and equipment of the company, the name, goodwill, receivables, etc. This decision on which way to go will impact the tax positions of both sides and dictate the legal form which the transaction will take.  A share sale is usually preferable from the vendor’s perspective while asset purchases are normally more attractive to buyers.  These opposing preferences are created by two primary issues; legal liability and tax consequences.

Legal liability is the main issue to be canvassed by prospective purchasers.  Purchasers must be aware that on acquiring the shares of a corporation, they are buying an entire company along with its full slate of assets and liabilities.  This “warts and all” approach means that the corporation’s complete past history is also included in the bargain.  If, for example, there is anything in the corporation's past that could trigger a lawsuit – be it tax, product, environmental or employee liability – the purchaser may have bought this headache along with the business.  These risks can be minimized, however, by engaging a lawyer to perform what is known as “due diligence”.  Due diligence involves procedures such as checking for registered claims or potential liabilities and confirming compliance with the relevant taxing authorities.  An agreement which addresses any possible future issues and which specifies how they will be handled would then be prepared by the lawyer.  Be advised, however, that a contract is only as good as its contracting parties.  If one of the parties defaults on its responsibilities the only practical recourse available to the other is to sue; a generally costly and unwelcome undertaking.  

The second issue to consider in deciding what form the commercial transaction will take is the tax consequence to each of the parties.  When individuals sell shares of a Canadian controlled private corporation, any gain on the sale is deemed a capital gain for income tax purposes and, hence, is only fifty (50%) percent taxable.  Moreover, all individual taxpayers are allowed a tax-exempt lifetime maximum of $750,000.00 on this form of taxable gain.  Thus, it is clear to see how vendors would prefer the share sale approach, particularly if they qualify for any or all of this $750,000.00 lifetime exemption.

Conversely, if the transaction is structured as an asset sale, there will be two levels of taxation that attach to the vendor:

Prior to the shareholder distribution, there is also typically some amount of ordinary income taxable in the hands of the corporation.  Specifically, where equipment has been depreciated on the books of the vendor to an amount less than that allocated to it on the sale there will be a recapture of capital cost allowance on that depreciable property.  There may also be profit realized on the sale of the inventory.  As such, asset sales tend to result in more taxes and less net proceeds going to the vendor.

Buying shares means that the purchaser will be stuck with the depreciated cost in the company’s books of the depreciated asset irrespective of the value paid for the shares. If, however, the transaction proceeds by way of asset purchase, such deductions would be based on the purchase price allocated to the asset.

Generally Purchasers prefer asset purchases and Vendors prefer selling shares. The balance is reached through negotiation and careful drafting.  So be careful and find the right lawyer to help you navigate through these dangerous waters.

It should be noted that this article only touches on but a few of the issues inherent in the asset versus share sale discussion.  For a thorough understanding on the intricacies of either form of transaction we recommend you seek the professional advice of a lawyer and accountant to ensure that your contemplated transaction is structured to maximize your interests.

Perhaps the most difficult part of writing these articles relates not to the actual writing, but thinking of a topic to address. Please mail, deliver or fax letters to the magazine or to us, use the web site (www.dansonschwarz.com), email ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ), or phone us at 888-609-8888 and give us your questions, concerns, critiques and quandaries. We will try to deal with them in print or electronic form.