Monday, May 11, 2015

Purchase or Sale of a Business: having your cake and eating too

Canadian-resident individuals can receive up to $800,000 in tax-free capital gains on the sale of qualifying shares of an active business corporation.  Alas! Most buyers prefer to buy amortizable assets rather than non-amortizable shares.  But why be locked into an "either/or" approach?  With good planning, you can combine both approaches and enjoy the best of both worlds.

The trick is for the seller to sell enough shares to use the capital gains exemption without giving the buyer control of the corporation.  The buyer then buys the business assets from the corporation.  The corporation then buys back the shares owned by the buyer.  This leaves the seller with tax-free cash from the sale of the shares and gives the buyer amortizable asset costs that can generate future tax deductions.  The seller also never gives up full control of the corporation, which now has proceeds from the sale of the assets.

Proper proportions have to be maintained when deciding how much value to allocate to the share sale.  Additionally, the corporation will likely have to create special-purpose shares.  By thinking flexibly and with proper planning, both buyer and seller can have the best of both worlds.  At the closing, buyer and seller can have their cake and eat it too!

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.