A share sale and an asset sale are the two main ways to sell a private corporation in Canada.
Each approach has tax repercussions for both the buyer and the seller. In general, sellers choose share sales to benefit from the favourable capital gains treatment, but purchasers prefer asset sales to reduce overall risk of liabilities.
Share sale: An individual (or individuals) sells their shares in a private corporation to a buyer directly in a share sale. In a share sale, the business itself is sold, with the buyer taking over 100% of shares and the operation. All assets and liabilities form part of and stay with the business after a standard share sale and are transferred to the new owner. Purchasing shares offers a few benefits over buying assets:
- No title modifications or revaluations following the initial acquisition
- Licenses and permits that cannot be assigned require no consent.
- More widespread and user-friendly than asset acquisitions
The following are some drawbacks:
- Not a “step-up” tax benefit
- Can’t choose assets by hand
- Transfer of Liabilities at Current Value
- There are applicable securities laws.
- Share prices can increase to pay off the business’s current liabilities.
Asset Sale: A company sells part or all of its corporate assets to a buyer (which may include inventory, machinery, buildings, working capital, receivables, intellectual property, contracts, etc.), but the business itself is not sold. The seller keeps ownership of the business as a separate legal entity in an asset transaction. In addition to owning corporate assets without having to assume any related risk, there are further advantages:
- A lack of securities filings;
- Possibility to purchase all or a portion of the assets;
- Prevent any conflicts with the seller’s remaining stockholders;
- Choosing to “step up” such assets’ tax value;
- Option for purchasers to finish their due diligence more quickly and at a lower cost.
However, you could inherit a lot of risks when you buy an asset, which is one of its main disadvantages. If there are any issues of flaws with the assets, you would be responsible.
Hybrid sale: In some circumstances, a hybrid sale, which balances risk and tax ramifications by combining features of both a share sale and an asset sale, might be feasible. A hybrid sale could be a good approach to reconcile the tax goals of the seller and the buyer, depending on the particulars of the business and the transaction. The seller can be able to use their Lifetime Capital Gains Exemption (LCGE) by selling both shares and specific company assets at the same time, while the buyer partially raises the tax expense of acquired assets.
Here’s an illustration: To be eligible for the LCGE, a seller must sell their shares to a buyer at a profit. The buyer receives a stepped-up cost basis in the company assets when the seller sells them in an asset sale with an accumulated gain. The purchaser then conducts a reorganization to combine the separate assets and the shares.
NOTE: This article has been written for general information purposes only and does NOT constitute legal advice. For further questions and/or legal advice please consult a qualified lawyer.