Acquiring a privately held business in Ontario can be accomplished through an asset or share transaction, depending on both tax and non-tax considerations. Generally speaking, purchasers prefer to buy assets and a vendor prefers to sell shares. This varies depending on the circumstances of the transaction and the bargaining power of each party.
An asset transaction allows the purchaser to select only those assets and liabilities that it wants to acquire. The remaining liabilities, unless they are expressly assumed, remain the responsibility of the vendor. This allows for flexibility and since liability is fixed, there is no uncertainty to the purchaser as to the nature and extent of the liabilities they will inherit. There are of course, certain exceptions as to the liabilities the purchaser has to undertake e.g. collective agreements of unionized employees.
A purchaser wants to minimize the purchase price and maximize tax deductions from the assets in future years. A purchaser will often prefer to structure the transaction as an asset purchase and take the tax deductions against income in future years i.e. through a capital cost allowance on depreciable assets; cost of inventory. In comparison to a share transaction, shares are non-depreciable property, there is no tax relief associated with the cost of the shares.
A share deal involves acquiring the corporation itself, with all of the underlying assets and its liabilities. Ownership of the corporation’s shares result in direct ownership of all of the corporation’s assets and undertakings, whether known or unknown. Therefore, the purchaser must complete due diligence searches and obtain representations and warranties from the owners of the corporation’s shares to safeguard against potential claims in the future. It is common for the parties to negotiate indemnity agreements, where the vendor will agree to pay for any unforeseen liabilities that may arise after the sale for a specified duration of time.
A vendor is usually concerned about the immediate income tax consequences in the year of sale and prefers a share sale as capital gains are taxed more favourably. There are conditions that must be satisfied at the time the shareholder sells his or her shares and throughout the preceding 24-month period that a corporation must satisfy to qualify for the tax deduction.
Additionally, when the shareholder sells shares in a company, the proceeds are paid directly to the shareholder and are only taxed at the shareholder level. This is in comparison to an asset sale where there are two levels of taxation.
These are only basic considerations and may not apply to every situation. Apart from negotiating the purchase price, employment issues and indemnities; structuring the sale or purchase of a business depends on numerous factors.
Purchasing a Business in Ontario