Shares or Assets?

There are two methods used to purchase a business. The purchaser can:

  • acquire the underlying assets of that business; or
  • purchase the shares of the corporation that owns the assets and operates the business.

On a purchase of shares, the entire purchase price is allocated to the shares, which then become the capital property of the buyer. All property, debts and obligations of the corporation will stay with the corporation and are assumed by the new shareholder. Because some of these obligations may be hidden, it is important to perform due diligence enquiries, to ensure that the corporation whose shares are being purchased is in the condition which has been represented by the vendor. A sale of shares may create immediate capital gains tax consequences for the vendor, and have long term capital gains tax consequences for the purchaser. These tax consequences may affect negotiations surrounding the purchase price and how it will be paid.

Acquiring the assets of a corporation is more complicated from a tax point of view, since both the purchaser and vendor will try to allocate the price of the assets to their advantage. For the purchaser, it is a good tax strategy to allocate as high a portion of the purchase price as you can reasonably justify, to inventory and capital equipment, which can later be depreciated. The cost of various assets such as buildings, machinery, equipment, computers and vehicles can be depreciated (for tax purposes, this is called a Capital Cost Allowance) and may be deducted from the income of the business over time.

The purchase and sale of a corporation's shares or assets is potentially very complicated and you must get professional advice from an accountant and corporate lawyer before making such an agreement.