60 What are the pros and cons of selling the assets of a business vs selling the shares of the corporation?
Rachel Magdanz
When selling a business, the owner has the option to choose between selling the assets of their business or selling the shares of their business. Generally, a buyer will prefer to buy the assets of a business, while the seller will prefer to sell the shares of the business. The following tables present each option in terms of its pros and cons for both the buyer and the seller:
Selling the Assets of a Business
|
|
Seller |
Buyer |
|
|
– The owner has the freedom to set sale prices for assets as they desire. |
– The buyer can purchase the specific assets they want. |
|
Pros |
– This type of sale allows the owner to remain in legal control of the business. |
– The buyer can record depreciated assets at an increased fair value. |
|
|
– Asset sales have the potential to incur a terminal loss which can be used to offset business income. |
– Asset purchases protect the buyer from inheriting any liabilities of the existing business onto themselves. |
|
Cons |
– Asset sales have the potential to create a recapture of CCA, which must be included in income. |
– The transaction for the purchase of assets can be complex and time-consuming. Assets must be reassigned to the new buyer, and if there are numerous assets to negotiate, this can be a lengthy process. |
|
– The seller loses out on the tax benefits available to them through the lifetime capital gains exemption. |
Selling the Shares of the Corporation
|
|
Seller |
Buyer |
|
Pros |
– If the corporation is eligible to use the lifetime capital gains exemption, then they can apply it to capital gains made on the sale of the business shares, as per ITA 80.03(8). The limit of the exemption for 2019 is $866,912 (the amount is indexed to inflation yearly). |
– Through a share purchase, the buyer becomes the owner of the entirety of the business, including all assets and liabilities. This transaction can be much simpler and more straightforward. |
|
|
– Share sales are much simpler. |
|
|
Cons
|
– The owner loses the legal control of the corporation. |
– The buyer will inherit any past legal or tax liabilities of the corporation. |
Interactive content (Author: Jaskirat Sihota, January 2020)
References and Resources:
- ITA – 80.03(8), 110.6(1)
- Article – “Example for the calculation of recapture of CCA and terminal loss” (Author: Government of Canada)
- Article – “What is the capital gains deduction limit?” (Author: Government of Canada)
January 2020
