Why Sellers Prefer to Sell Shares & Buyers Prefer to Buy Assets

Obviously the seller wants to receive the highest amount possible from the sale of the business. The federal governments retention of the $500,000 small business capital gains deductions is a strong incentive for shareholders to sell company shares rather than business assets. This is one of the few tax shelters available to small businesses and could be reduced or eliminated at any time. The basis of the programme is that if individuals sell the shares of their businesses, they could be exempt from tax on up to two thirds of their capital gain on the sale. The maximum amount of exemption would be $500,000, assuming that the seller has not already used up the $100,000 personal tax portion of the $500,000 in the past.

There are two levels of taxation when a company sells assets. In the first instance, the company receives the proceeds and is responsible for the payment of applicable taxes at the time the sale closes. Once the taxes have been paid, the company distributes the funds to its shareholders, which as individuals are subject to normal income tax considerations. On the other hand, if an individual receives money from the sale of shares, there is only one level of taxation.

There are a number of reasons why buyers would rather purchase assets than shares. The first one involves potential liabilities, as buyers inherit all of the target company’s liabilities. In addition, the company may have a reduced cost base for depreciating capital assets of the business, whereas if the sale is an asset purchase, the buyer can claim depreciation as an income tax deduction. As previously mentioned, the buyers focus is on the tax consequences in the years following the sale as the buyer wants to ensure that capital cost allowances or depreciation will continue to be available to them as deductions for tax purposes. On the other hand, if the buyer purchased shares, the buyer is saddled with the sellers undepreciated capital cost of each class of assets. It is fairly easy to see why, from a taxation point of view, buyers would prefer to purhcase assets at fair market value, as by claiming higher capital cost allowances the purchase price can be written off over a shorter period of time.

Other advantages to purchasing shares include continuation of the goodwill of the business and the continuation of existing trade credit. Similarly, business licences and some leases may not require a third partys consent to assignment. As an additional administrative benefit, many government -related registrations, such as workplace safety and insurance, income tax and PST and GST, remain in place, as do telephone numbers and other standing accounts.